**United States**

**Securitiesand Exchange Commission**

**Washington,D.C. 20549**

 

**Form 10-Q**

 

**(Mark One)**
| **ý**                                               | **Quarterly  Report Pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934** |
|----------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
| ** **                                               | ** **                                                                                              |
| **For the Quarterly Period Ended****June 30, 2005** |
|                                                     |                                                                                                    |
| **or**                                                   |
| ** **                                               | ** **                                                                                              |
| **o**                                                    | **Transition  Report Under Section 13 or 15(d) of the Securities Exchange Act of  1934**      |

** **

**For the transition periodfrom                to                        **

 

**Commissionfile number:********1-13463**

 

**EndeavourInternational Corporation**

(Exact name of registrant as specified in itscharter)

 
| **Nevada**                                                            | ** ** | **88-0448389**                        |
|-----------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation  or organization) |       | (I.R.S.  Employer Identification No.) |
|                                                                  |       |                                  |
| **1000  Main Street, Suite 3300, Houston, Texas**                |       | **77002**                             |
| (Address of principal  executive offices)                             |       | (Zip code)                            |

 

**(713) 307-8700**

(Registrant’s telephone number, includingarea code)

 

**None**

(Former name, former addressand former fiscal year, if changed since last report.)

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  ý  Yes   o   No

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).   ý Yes   o  No

 

As of August 4, 2005,74,317,259 shares of the registrant’s common stock were outstanding.

 

 

----

 

**EndeavourInternational Corporation**

 

**Index**

** **
| Part I:                     |                                                                                                |
|----------------------------------|-----------------------------------------------------------------------------------------------------|
|                             | Item  1: Financial Statements                                                                       | 1 |
|                             |                                                                                                | Condensed Consolidated Balance Sheets | 1 |
|                             |                                                                                                | Condensed Consolidated Statements of Operations | 2 |
|                             |                                                                                                | Condensed Consolidated Statements of Cash Flows | 3 |
|                             |                                                                                                | Notes to Condensed Consolidated Financial Statements | 4 |
|                             | Item 2: Management’s Discussion and Analysis of Financial Condition  and Results of Operations | 14 |
|                             | Item 3: Quantitative and Qualitative Disclosures about Market Risk                                  | 16 |
|                             | Item 4: Controls and Procedures                                                                     | 17 |
| Part II.  Other Information | 18                                                                                                  |
|                             | Item  1: Legal Proceedings                                                                          | 18 |
|                             | Item 6:  Exhibits                                                                                   | 19 |
| Signatures                       | 19                                                                                                  |

 

----

 

**Item1:  Financial Statements**

** **

**Endeavour International Corporation**

**Condensed Consolidated Balance Sheets**

**(Unaudited)**

(Amounts in thousands, except share data)

 
| ** **                                                                                           | ** ** | **June 30, 2005** | ** **  | **December 31, 2004** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------------------|-------------|----------------------------|------------|
| **Assets**                                                                                           |       |                   | ** **  |                       |       |
| Current Assets:                                                                                      |       |                   | ** **  |                       |       |
| Cash and cash equivalents                                                                            | ** ** | **$**                  | **96,108**  | ** **                 | $          | 8,975 |   |
| Accounts receivable                                                                                  | ** ** | **4,073**              | ** **  | 4,286                      |       |
| Prepaid expenses and other current assets                                                            | ** ** | **3,594**              | ** **  | 3,814                      |       |
| Total Current Assets                                                                                 | ** ** | **103,775**            | ** **  | 17,075                     |       |
|                                                                                                 |       |                   | ** **  |                       |       |
| Equity Interests in Entities with Oil and  Gas Properties                                            | ** ** | **—**             | ** **  | 3,688                      |       |
| Property and  Equipment, Net                                                                         | ** ** | **53,278**             | ** **  | 50,228                     |       |
| Goodwill                                                                                             | ** ** | **27,811**             | ** **  | 20,119                     |       |
| Restricted  Cash                                                                                     | ** ** | **4,346**              | ** **  | 2,507                      |       |
| Other Assets                                                                                         | ** ** | **11,346**             | ** **  | 8,120                      |       |
| Total Assets                                                                                         | ** ** | **$**                  | **200,556** | ** **                 | $          | 101,737 |   |
|                                                                                                 |       |                   | ** **  |                       |       |
| **Liabilities  and Stockholders’ Equity**                                                       |       |                   | ** **  |                       |       |
| Current Liabilities:                                                                                 |       |                   | ** **  |                       |       |
| Accounts payable                                                                                     | ** ** | **$**                  | **3,635**   | ** **                 | $          | 2,909 |   |
| Accrued expenses                                                                                     | ** ** | **6,719**              | ** **  | 7,106                      |       |
| Current portion of long-term debt                                                                    | ** ** | **—**             | ** **  | 2,138                      |       |
| Other                                                                                                | ** ** | **8,611**              | ** **  | 223                        |       |
| Total Current Liabilities                                                                            | ** ** | **18,965**             | ** **  | 12,376                     |       |
|                                                                                                 |       |                   | ** **  |                       |       |
| Long-Term Debt                                                                                       | ** ** | **81,250**             | ** **  | 2,150                      |       |
| Deferred Taxes                                                                                       | ** ** | **13,840**             | ** **  | 18,012                     |       |
| Other Liabilities                                                                                    | ** ** | **10,524**             | ** **  | 8,979                      |       |
| Total Liabilities                                                                                    | ** ** | **124,579**            | ** **  | 41,517                     |       |
|                                                                                                 |       |                   | ** **  |                       |       |
| Minority Interest                                                                                    | ** ** | **—**             | ** **  | 3,248                      |       |
|                                                                                                 |       |                   | ** **  |                       |       |
| Commitments and Contingencies                                                                        |       |                   | ** **  |                       |       |
|                                                                                                 |       |                   | ** **  |                       |       |
| Stockholders’ Equity:                                                                           |       |                   | ** **  |                       |       |
| Preferred stock (Liquidation  preference:  $2,379)                                              | ** ** | **—**             | ** **  | —                     |       |
| Common stock; shares issued and outstanding  – 74,272,759 at 2005 and 69,995,165 shares at 2004 | ** ** | **74**                 | ** **  | 70                         |       |
| Additional paid-in capital                                                                           | ** ** | **151,152**            | ** **  | 133,919                    |       |
| Accumulated other comprehensive loss                                                                 | ** ** | **(4,313**             | **)**       | (528                       | )          |
| Deferred compensation                                                                                | ** ** | **(9,542**             | **)**       | (6,570                     | )          |
| Accumulated deficit                                                                                  | ** ** | **(61,394**            | **)**       | (69,919                    | )          |
| Total Stockholders’ Equity                                                                      | ** ** | **75,977**             | ** **  | 56,972                     |       |
| Total Liabilities and Stockholders’ Equity                                                      | ** ** | **$**                  | **200,556** | ** **                 | $          | 101,737 |   |

 

See accompanying notes to consolidated financial statements.

 

1

----

 

**EndeavourInternational Corporation**

**Condensed Consolidated Statements of Operations**

**(Unaudited)**

(Amounts in thousands, exceptper share data)

 
| ** **                                                                   | ** ** | **Three Months  Ended June 30,** |       | **Six Months  Ended June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                              | ** ** | **2004**                            |       | **2005** | ** ** | **2004** | ** ** |
| Revenues                                                                     | ** ** | **$**                                 | **9,091**  | ** **                          | $          | — |   | **$** | **16,793** | ** ** | $ | 8 |   |
|                                                                         |       |                                  | ** ** |                                |       |   | ** ** |   |   |
| Cost of Operations:                                                          |       |                                  | ** ** |                                |       |   | ** ** |   |   |
| Operating expenses                                                           | ** ** | **2,958**                             | ** ** | —                              |       | **5,374** | ** ** | 1 |   |
| Depreciation, depletion and amortization                                     | ** ** | **2,243**                             | ** ** | 376                                 |       | **4,461** | ** ** | 508 |   |
| Equity loss from entities with oil and gas  properties                       | ** ** | **—**                            | ** ** | 77                                  |       | **79** | ** ** | 134 |   |
| General and administrative                                                   | ** ** | **4,373**                             | ** ** | 2,950                               |       | **8,525** | ** ** | 5,483 |   |
| Total Expenses                                                               | ** ** | **9,574**                             | ** ** | 3,403                               |       | **18,439** | ** ** | 6,126 |   |
|                                                                         |       |                                  | ** ** |                                |       |   | ** ** |   |   |
| Loss From Operations                                                         | ** ** | **(483**                              | **)**      | (3,403                              | )          | **(1,646** | **)** | (6,118 | ) |
|                                                                         |       |                                  | ** ** |                                |       |   | ** ** |   |   |
| Other (Income) Expense:                                                      |       |                                  | ** ** |                                |       |   | ** ** |   |   |
| Consideration given in excess of fair value  of identifiable assets acquired | ** ** | **—**                            | ** ** | —                              |       | **—** | ** ** | 10,779 |   |
| Interest income                                                              | ** ** | **(626**                              | **)**      | (160                                | )          | **(944** | **)** | (244 | ) |
| Interest expense                                                             | ** ** | **1,182**                             | ** ** | —                              |       | **1,965** | ** ** | 254 |   |
| (Gain) loss on sale of oil and gas  interests                                | ** ** | **(14,944**                           | **)**      | 895                                 |       | **(14,944** | **)** | (355 | ) |
| Gain on collection of promissory notes                                       | ** ** | **—**                            | ** ** | (1,848                              | )          | **—** | ** ** | (1,848 | ) |
| Other (income) expense                                                       | ** ** | **(237**                              | **)**      | 1                                   |       | **(661** | **)** | 208 |   |
|                                                                         |       |                                  | ** ** |                                |       |   | ** ** |   |   |
| Total Other (Income) Expense                                                 | ** ** | **(14,625**                           | **)**      | (1,112                              | )          | **(14,584** | **)** | 8,794 |   |
|                                                                         |       |                                  | ** ** |                                |       |   | ** ** |   |   |
| Income (Loss) Before Minority Interest                                       | ** ** | **14,142**                            | ** ** | (2,291                              | )          | **12,938** | ** ** | (14,912 | ) |
| Minority Interest                                                            | ** ** | **—**                            | ** ** | 4                                   |       | **(470** | **)** | 7 |   |
|                                                                         |       |                                  | ** ** |                                |       |   | ** ** |   |   |
| Income (Loss) Before Income Taxes                                            | ** ** | **14,142**                            | ** ** | (2,287                              | )          | **12,468** | ** ** | (14,905 | ) |
| Income Tax Expense                                                           | ** ** | **2,885**                             | ** ** | —                              |       | **3,864** | ** ** | — |   |
|                                                                         |       |                                  | ** ** |                                |       |   | ** ** |   |   |
| Net Income (Loss)                                                            | ** ** | **11,257**                            | ** ** | (2,287                              | )          | **8,604** | ** ** | (14,905 | ) |
| Preferred Stock Dividends                                                    | ** ** | **39**                                | ** ** | 39                                  |       | **79** | ** ** | 346 |   |
|                                                                         |       |                                  | ** ** |                                |       |   | ** ** |   |   |
| Net Income (Loss) to Common Stockholders                                     | ** ** | **$**                                 | **11,218** | ** **                          | $          | (2,326 | ) | **$** | **8,525** | ** ** | $ | (15,251 | ) |
|                                                                         |       |                                  | ** ** |                                |       |   | ** ** |   |   |
| Net Income (Loss) Per Common Share:                                          |       |                                  | ** ** |                                |       |   | ** ** |   |   |
| Basic                                                                        | ** ** | **$**                                 | **0.15**   | ** **                          | $          | (0.03 | ) | **$** | **0.12** | ** ** | $ | (0.26 | ) |
| Diluted                                                                      | ** ** | **$**                                 | **0.13**   | ** **                          | $          | (0.03 | ) | **$** | **0.11** | ** ** | $ | (0.26 | ) |
|                                                                         |       |                                  | ** ** |                                |       |   | ** ** |   |   |
| Weighted Average Number of Common Shares  Outstanding:                       |       |                                  | ** ** |                                |       |   | ** ** |   |   |
| Basic                                                                        | ** ** | **74,159**                            | ** ** | 69,271                              |       | **73,786** | ** ** | 59,173 |   |
| Diluted                                                                      | ** ** | **93,095**                            | ** ** | 69,271                              |       | **76,094** | ** ** | 59,173 |   |

* *

See accompanying notes to consolidated financial statements.

 

2

----

 

**EndeavourInternational Corporation**

**Condensed Consolidated Statements of Cash Flows**

**(Unaudited)**

(Amounts in thousands)

 
| ** **                                                                                | ** ** | **Six Months Ended June 30,** |       |
|-------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                | ** ** | **2005**                           | ** ** | **2004** |   |
| Cash Flows from Operating Activities:                                                     |       |                               | ** ** |   |   |
| Net income (loss)                                                                         | ** ** | **$**                              | **8,604**  | ** ** | $ | (14,905 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities: |       |                               | ** ** |   |   |
| Depreciation, depletion and amortization                                                  | ** ** | **4,461**                          | ** ** | 508 |   |
| Consideration given in excess of fair value  of identifiable assets acquired              | ** ** | **—**                         | ** ** | 10,779 |   |
| Deferred tax benefit                                                                      | ** ** | **(341**                           | **)**      | — |   |
| Gain on collection of promissory notes                                                    | ** ** | **—**                         | ** ** | (1,848 | ) |
| Amortization of non-cash compensation                                                     | ** ** | **3,482**                          | ** ** | 2,868 |   |
| Fair market value adjustment of stock  options                                            | ** ** | **(392**                           | **)**      | 658 |   |
| Gain on sale of assets                                                                    | ** ** | **(14,944**                        | **)**      | (355 | ) |
| Other                                                                                     | ** ** | **915**                            | ** ** | 590 |   |
| Changes in assets and liabilities:                                                        |       |                               | ** ** |   |   |
| Decrease in receivables                                                                   | ** ** | **116**                            | ** ** | 1,786 |   |
| (Increase) Decrease in other current assets                                               | ** ** | **913**                            | ** ** | (405 | ) |
| Increase in accounts payable and accrued  expenses                                        | ** ** | **6,475**                          | ** ** | 596 |   |
| Net Cash Provided by Operating Activities                                                 | ** ** | **9,289**                          | ** ** | 272 |   |
|                                                                                      |       |                               | ** ** |   |   |
| Cash Flows From Investing Activities:                                                     |       |                               | ** ** |   |   |
| Capital expenditures                                                                      | ** ** | **(10,179**                        | **)**      | (2,640 | ) |
| Acquisitions, net of cash acquired                                                        | ** ** | **(1,437**                         | **)**      | (66 | ) |
| Investment in Limited Partnership                                                         | ** ** | **(156**                           | **)**      | (936 | ) |
| Proceeds from sale of assets                                                              | ** ** | **19,465**                         | ** ** | 741 |   |
| Increase in restricted cash                                                               | ** ** | **(1,876**                         | **)**      | — |   |
| Net Cash Provided by (Used in) Investing  Activities                                      | ** ** | **5,817**                          | ** ** | (2,901 | ) |
|                                                                                      |       |                               | ** ** |   |   |
| Cash Flows From Financing Activities:                                                     |       |                               | ** ** |   |   |
| Proceeds from borrowings                                                                  | ** ** | **81,250**                         | ** ** | — |   |
| Repayment of borrowings                                                                   | ** ** | **(4,006**                         | **)**      | (1,751 | ) |
| Purchase and retirement of common and  preferred stock                                    | ** ** | **—**                         | ** ** | (5,031 | ) |
| Proceeds from warrant and stock option  exercises                                         | ** ** | **669**                            | ** ** | — |   |
| Financing costs paid                                                                      | ** ** | **(3,648**                         | **)**      | — |   |
| Proceeds from common and preferred stock  issued and issuable                             | ** ** | **—**                         | ** ** | 46,399 |   |
| Other financing                                                                           | ** ** | **(70**                            | **)**      | — |   |
| Net Cash Provided by Financing Activities                                                 | ** ** | **74,195**                         | ** ** | 39,617 |   |
|                                                                                      |       |                               | ** ** |   |   |
| Net Increase in Cash and Cash Equivalents                                                 | ** ** | **89,301**                         | ** ** | 36,988 |   |
| Effect of Foreign Currency Changes on Cash                                                | ** ** | **(2,168**                         | **)**      | — |   |
| Cash and Cash Equivalents, Beginning of  Period                                           | ** ** | **8,975**                          | ** ** | 57 |   |
|                                                                                      |       |                               | ** ** |   |   |
| Cash and Cash Equivalents, End of Period                                                  | ** ** | **$**                              | **96,108** | ** ** | $ | 37,045 |   |

 

See accompanying notes to consolidated financial statements.

 

3

----

 

**Endeavour International Corporation**

**Notes to Condensed Consolidated Financial Statements**

**(Unaudited)**

 

## ***Note 1 – Summary of Significant Accounting Policies***

 

### ***General***

 

Endeavour International Corporation is an international oil and gasexploration and production company primarily focused on the acquisition,exploration and development of energy reserves in the North Sea.  As used in these Notes to ConsolidatedFinancial Statements, the terms the “Company”, “Endeavour”, “we”, “us”, “our”and similar terms refer to Endeavour International Corporation and, unless thecontext indicates otherwise, its consolidated subsidiaries.  The accompanying consolidated financialstatements of Endeavour should be read in conjunction with the consolidatedfinancial statements and notes included in our Annual Report on Form 10-Kfor the year ended December 31, 2004.

 

### ***Basis of Presentation and Use of Estimates***

 

The accompanying financial statements have been prepared, withoutaudit, pursuant to the rules and regulations of the Securities andExchange Commission (“SEC”), and, accordingly, certain information normallyincluded in financial statements prepared in accordance with accountingprinciples generally accepted in the United States has been condensed oromitted.

 

The financial statements herein reflect all normal recurringadjustments that, in the opinion of management, are necessary for a fairpresentation.  Certain amounts for priorperiods have been reclassified to conform to the current presentation.  In preparing financial statements, managementmakes informed judgments and estimates that affect the reported amounts ofassets and liabilities as of the date of the financial statements and affectthe reported amounts of revenues and expenses during the reporting period.  Changes in facts and circumstances may resultin revised estimates and actual results may differ from these estimates.

 

### ***Income (Loss) Per Share***

 

Basic loss per common share is computed by dividing net lossattributable to common stockholders by the weighted average number of commonshares outstanding for the period.  Dilutedloss per share includes the effect of our outstanding stock options, warrantsand shares issuable pursuant to convertible debt and certainstock incentive plans under the treasury stock method, if including suchinstruments is dilutive.

 

4

----

 

**EndeavourInternational Corporation**

**Notes toCondensed Consolidated Financial Statements**

**(Unaudited)**

 
| ** **                                             | ** ** | **Three Months Ended  June 30,** |       | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(Amounts in thousands, except  per share data)**     | ** ** | **2005**                              | ** ** | **2004**                            |       | **2005** | ** ** | **2004** | ** ** |
| Net income (loss) to common stockholders               |       |                                  |       |                                |       |   |   |   |   |
| Basic                                                  | ** ** | **$**                                 | **11,218** |                                | $          | (2,326 | ) | **$** | **8,525** |   | $ | (15,251 | ) |
| Add Effect of:                                         |       |                                  |       |                                |       |   |   |   |   |
| Convertible debt                                       | ** ** | **1,199**                             |       | —                              |       | **—** |   | — |   |
| Certain stock incentive plans                          | ** ** | **43**                                |       | —                              |       | **—** |   | — |   |
| Diluted                                                | ** ** | **$**                                 | **12,460** |                                | $          | (2,326 | ) | **$** | **8,525** |   | $ | (15,251 | ) |
|                                                   |       |                                  |       |                                |       |   |   |   |   |
| Weighted Average Number of Common Shares  Outstanding: | ** ** | ** **                            | ** ** | ** **                          |       | ** ** | ** ** | ** ** | ** ** |
| Basic                                                  | ** ** | **74,159**                            |       | 69,271                              |       | **73,786** |   | 59,173 |   |
| Add Effect of:                                         | ** ** | ** **                            | ** ** | ** **                          |       | ** ** | ** ** | ** ** | ** ** |
| Stock options                                          | ** ** | **1,016**                             | ** ** | **—**                          |       | **1,100** | ** ** | **—** | ** ** |
| Warrants                                               | ** ** | **1,129**                             | ** ** | **—**                          |       | **1,208** | ** ** | **—** | ** ** |
| Convertible debt                                       | ** ** | **16,185**                            | ** ** | **—**                          |       | **—** | ** ** | **—** | ** ** |
| Certain stock incentive plans                          | ** ** | **606**                               |       | —                              |       | **—** |   | — |   |
| Diluted                                                | ** ** | **93,095**                            |       | 69,271                              |       | **76,094** |   | 59,173 |   |

 

For the six months ended June 30, 2005, 14.4 million common sharespotentially issuable related to convertible debt andcertain stock incentive plans were excluded from diluted weighted averageshares outstanding as their effects were anti-dilutive (i.e., increase the netincome per share).  At June 30,2004, 2.8 million common shares potentially issuable,relating to outstanding options and warrants, were excluded from dilutedweighted average shares outstanding as their effects were anti-dilutive (i.e.,reduce the net loss per share).

 

### ***Recent Accounting Pronouncements***

 

In December 2004, the Financial Accounting Standards Board issueda revised Statement of Financial Accounting Standard No. 123 (revised2004), *Share-Based Payment* (“SFAS 123R”), which replaces SFAS123 and supersedes APB Opinion No. 25. SFAS 123R requires all share-based payments toemployees, including grants of employee stock options, to be recognized in thefinancial statements based on their fair values.  The pro forma disclosures previouslypermitted under SFAS 123 will no longer be analternative to financial statement recognition. In April 2005, the SEC delayed the effective date of SFAS 123R to fiscal years beginning after June 15,2005.  As a result SFAS123R will be effective for the Company beginning in the first quarter of 2006.  The guidance also provides for classifyingawards as either liabilities or equity, which impacts when and if the awardsmust be remeasured to fair value subsequent to thegrant date.  We plan to adopt SFAS 123R on January 1, 2006.

 

At the time of adoption, companies can select from various transitionmethods, two of which would allow for restatement of certain priorperiods.  Management anticipatesselecting the

 

5

----

 

**EndeavourInternational Corporation**

**Notes toCondensed Consolidated Financial Statements**

**(Unaudited)**

 

transition methodin which prior period financial statements would not be restated. The adoptionof SFAS No. 123R is not expected to have asignificant effect on our financial condition and will not affect ourconsolidated cash flows.  The futureimpact on our consolidated results of operations of the adoption of SFAS 123R cannot be predicted as certain of our deferredcompensation plans are treated as liabilities and are currently accounted forusing the variable method of accounting. However, had we adopted SFAS 123R in prior periods, the impact of that standardwould have approximated the impact of SFAS 123 asdescribed in the disclosure of pro forma net loss and loss per share above.

 

## ***Note 2 – Stock-Based Compensation Arrangements***

 

We account for stock-based compensation plans for employees, includingdirectors, using the intrinsic value method. Under this method, we record no compensation expense for stock optionsgranted when the exercise price of options granted is equal to or greater thanthe fair market value of our common stock on the date of grant.

 

For non-employees, we apply the fair value method in accounting forstock-based grants using the Black-Scholes Method.

 

During 2003, we granted 700,000 options to then-current directors.  While all the options granted had an exerciseprice higher than the market value of the stock on the date of grant, asubsequent modification of these options has triggered variableaccounting.  We are required to recordcompensation expense if the modified option price is lower than the marketprice of the stock at the end of a reporting period until the options expire orare exercised.  For the three monthsended June 30, 2005 and 2004, we recorded non-cash general andadministrative expenses of $0.1 million and $(0.5) million, respectively,related to these options.  For the sixmonths ended June 30, 2005 and 2004, we recorded non-cash general andadministrative expenses of $(0.4) million and $0.7 million, respectively,related to these options.

 

Had compensation expense been determined under fair value provisions,our net income (loss) and net income (loss) per share would have been thefollowing:

 

6

----

 

**EndeavourInternational Corporation**

**Notes toCondensed Consolidated Financial Statements**

**(Unaudited)**

 
| ** **                                                                                                  | ** ** | **Three Months Ended  June 30,** |       | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(Amounts in thousands, except per share data)**                                                           | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                        |       |                                  | ** ** |                                |       |   |   |   |   |
| Net income (loss) to common stockholders,  as reported                                                      | ** ** | **$**                                 | **11,218** | ** **                          | $          | (2,326 | ) | **$** | **8,525** |   | $ | (15,251 | ) |
| Add:                                                                                                        |       |                                  | ** ** |                                |       |   |   |   |   |
| Stock-based compensation expense as  reported                                                               | ** ** | **1,159**                             | ** ** | 701                                 |       | **1,755** |   | 2,667 |   |
| Less:                                                                                                       |       |                                  | ** ** |                                |       |   |   |   |   |
| Total stock-based compensation expense  determined under fair-value-based method for all awards, net of tax | ** ** | **(1,339**                            | **)**      | (2,572                              | )          | **(2,680** | **)** | (3,379 | ) |
|                                                                                                        |       |                                  | ** ** |                                |       |   |   |   |   |
| Pro forma net income (loss)                                                                                 | ** ** | **$**                                 | **11,038** | ** **                          | $          | (4,197 | ) | **$** | **7,600** |   | $ | (15,963 | ) |
|                                                                                                        |       |                                  | ** ** |                                |       |   |   |   |   |
| Income (Loss) per share – as reported:                                                                 |       |                                  | ** ** |                                |       |   |   |   |   |
| Basic                                                                                                       | ** ** | **$**                                 | **0.15**   | ** **                          | $          | (0.03 | ) | **$** | **0.12** |   | $ | (0.26 | ) |
| Diluted                                                                                                     | ** ** | **$**                                 | **0.13**   | ** **                          | $          | (0.03 | ) | **$** | **0.11** |   | $ | (0.26 | ) |
|                                                                                                        |       |                                  | ** ** |                                |       |   |   |   |   |
| Income (Loss) per share – pro forma:                                                                   |       |                                  | ** ** |                                |       |   |   |   |   |
| Basic                                                                                                       | ** ** | **$**                                 | **0.15**   | ** **                          | $          | (0.06 | ) | **$** | **0.10** |   | $ | (0.27 | ) |
| Diluted                                                                                                     | ** ** | **$**                                 | **0.13**   | ** **                          | $          | (0.06 | ) | **$** | **0.10** |   | $ | (0.27 | ) |

 

These pro forma amounts may not be representative of future amounts sincethe estimated fair value of stock options is amortized to expense over thevesting period and additional options may be issued in future years.  The estimated fair value of each optiongranted was calculated using the Black-ScholesMethod.  The following summarizes theweighted average of the assumptions used in the method.

 
| ** **                    | ** ** | **2005**   | ** ** | **2004** | ** ** |
|-------------------------------|------------|------------|------------|----------|------------|
|                          |       |       | ** ** |     |       |
| Risk free rate                | ** ** | **3.9**    | **%**      | 4.0      | %          |
| Expected years until exercise | ** ** | **5.0**    | ** ** | 7.0      |       |
| Expected stock volatility     | ** ** | **48**     | **%**      | 33       | %          |
| Dividend yield                | ** ** | **—** | ** ** | —   |       |

 

7

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**EndeavourInternational Corporation**

**Notes toCondensed Consolidated Financial Statements**

**(Unaudited)**

 

## ***Note 3 – Acquisitions and Dispositions***

 

### ***Acquisition of OER Oil AS***

 

In November 2004, we purchased a 76.66% majority interest in OER Oil AS (“OER”), a privatelyheld Norwegian exploration and production company based in Oslo, Norway (the “OER Acquisition”). The purchase price of the OER Acquisition was NOK (Norwegian kroner) 172.5million, approximately $27.6 million, plus $0.8 million in professionalexpenses for legal and accounting services.

 

### ***Purchase of Minority Interest in OER***

 

In January 2005, we purchased the remaining 23.34% minorityinterest, representing 1,299,772 shares, in OER forconsideration of NOK 6.98 per share and 1.68 sharesof our common stock per share of OER.  The aggregate consideration paid of $10.7million was approximately $1.4 million in cash and 2,183,617 shares of ourcommon stock.  As a result of thispurchase, goodwill increased by $7.7 million.

 

### ***Acquisition of NSNV, Inc.***

 

On February 26, 2004, we acquired NSNV, Inc.(“NSNV”), through a merger with a newly createdsubsidiary of the Company, resulting in NSNV becominga wholly-owned subsidiary of the Company (the “NSNVAcquisition”).  NSNVwas a private company owned by William L. Transier,John N. Seitz and PGS Exploration (UK) Limited (“PGS”), a United Kingdomcorporation that is a provider of geophysical services.  The former shareholders of NSNV received an aggregate of 12.5 million of our common sharesin the merger, representing approximately 18.9% of our outstanding common stockimmediately after the closing of the NSNV Acquisition.

 

The NSNV Acquisition was accounted for as apurchase of assets and not a business combination.  Therefore, the consideration given wasallocated to the fair value of the identifiable assets and liabilities acquiredwith the excess, approximately $10.8 million, expensed.

 

### ***The Restructuring***

 

Simultaneous with the consummation of the NSNVAcquisition and a private placement of our common stock for aggregate grossproceeds of $50 million, we restructured various financial and stockholderrelated items (the “Restructuring”).  Withthe Restructuring we sold substantially all of our United States oil and gasassets, eliminated outstanding convertible notes and eliminated all of the Series Aand C preferred stock as well as nearly all of the Series B PreferredStock.

 

8

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**EndeavourInternational Corporation**

**Notes toCondensed Consolidated Financial Statements**

**(Unaudited)**

 

### ***Sale of Knox Miss. Partners, L.P.***

 

During the first quarter of 2004, we sold all of our limitedpartnership units in Knox Miss. Partners, L.P (“KnoxMiss”) for $5.0 million and received $500,000 in cash and a $4.5 millionshort-term note that was secured by a pledge of the limited partnershipinterest.  The short-term note was paidin full during 2004.  We recorded a gainon the sale of Knox Miss of $1.2 million during the first quarter of 2004.

 

### ***Sale of Partnership Interests in Thailand Project***

 

During the second quarter of 2005, we sold our partnership interests inThailand to a private entity for net proceeds of approximately $19 million.  We recorded a gain on the sale of theseinterests of approximately $15 million.

 

## ***Note 4 – Convertible Senior Notes***

 

During the first quarter of 2005, we issued $81.25 million aggregateprincipal amount of convertible senior notes due 2012.  The notes bear interest at a rate of 6.00%per annum, payable in January and July.  The notes are convertible into shares of ourcommon stock at an initial conversion rate of 199.2032 shares of common stockper $1,000 principal amount of notes, subject to adjustment, which representsan initial conversion price of approximately $5.02 per share.  In connection with the issuance of thesenotes, we paid $3.6 million in financing and other costs.

 

9

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**EndeavourInternational Corporation**

**Notes toCondensed Consolidated Financial Statements**

**(Unaudited)**

 

## ***Note 5 - Property and Equipment***

 

Property and equipment included the following:

 
| **(Amounts in thousands)**                            | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Oil and gas properties under the full cost  method:   |       |                    | ** ** |                        |       |
| Subject to amortization                               | ** ** | **$**                   | **20,668** | ** **                  | $          | 20,081 |   |
| Not subject to amortization:                          |       |                    | ** ** |                        |       |
| Acquired in 2005                                      | ** ** | **6,335**               | ** ** | —                      |       |
| Acquired in 2004                                      | ** ** | **26,749**              | ** ** | 26,749                      |       |
| ** **                                            |       | **53,752**              | ** ** | 46,830                      |       |
| Other oil and gas assets                              | ** ** | **4,875**               | ** ** | 4,875                       |       |
|                                                  |       |                    | ** ** |                        |       |
| Computers, furniture and fixtures                     | ** ** | **954**                 | ** ** | 635                         |       |
| Total property and equipment                          | ** ** | **59,581**              | ** ** | 52,340                      |       |
|                                                  |       |                    | ** ** |                        |       |
| Accumulated depreciation, depletion and  amortization | ** ** | **(6,303**              | **)**      | (2,112                      | )          |
|                                                  |       |                    | ** ** |                        |       |
| Net property and equipment                            | ** ** | **$**                   | **53,278** | ** **                  | $          | 50,228 |   |

 

The costs not subject to amortization relate to unproved propertieswhich are excluded from amortized capital costs until it is determined whetheror not proved reserves can be assigned to such properties.  We capitalized $1.9 million and $1.3 millionin certain employee costs directly related to exploration activities for thequarter ended June 30, 2005 and 2004, respectively.  We capitalized $3.5 million and $1.8 millionin certain employee costs directly related to exploration activities for thesix months ended June 30, 2005 and 2004, respectively.

 

## ***Note 6 – Derivative Instruments***

 

In January 2005, we entered into an oil commodity swap where wepay market IPE Brent and receive a fixed price thatranges from $46.20 per barrel in the initial month to $40.00 per barrel at theend of the contract.  The contract covers600 barrels per day from February 2005 through December 2006.  The contract requires us to provide certaincollateral.  For the three and six monthsended June 30, 2005, we realized $0.4 million and $0.5 million,respectively, as a reduction to revenue related to settlements for thiscontract.  We did not exclude anycomponent of the hedging instrument’s gain or loss when assessingeffectiveness.

 

At June 30, 2005, the net deferred loss recognized in accumulatedother comprehensive income was $3.5 million, net of tax.  Based on current prices, we anticipate a lossof $2.3 million, net of tax, will be transferred out of accumulated othercomprehensive income and recognized within earnings over the next 12 months.

 

10

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**EndeavourInternational Corporation**

**Notes toCondensed Consolidated Financial Statements**

**(Unaudited)**

 

We discontinue hedge accounting prospectively when (1) wedetermine that the derivative is no longer effective in offsetting changes inthe fair value or cash flows of a hedged item (including hedged items such asfirm commitments or forecasted transactions); (2) the derivative expires; (3) itis no longer probable that the forecasted transaction will occur; (4) ahedged firm commitment no longer meets the definition of a firm commitment; or (5) managementdetermines that designating the derivative as a hedging instrument is no longerappropriate.

 

## ***Note 7 – Supplemental Cash Flow Information***

 

As described above, in the first quarter of 2005, we purchased theminority interest in OER for a combination of cashand common stock.  During the firstquarter of 2004, we had noncash investing activitieswith the acquisition of NSNV for 12.5 million sharesof our common stock with a total purchase price of approximately $25million.  Therefore, the NSNV Acquisition increased current assets by $1 million,oil and gas property by $11.4 million, other assets by $8.3 million, currentliabilities by $2.5 million other liabilities by $3.5 million and equity by $25million through a noncash transaction that was notreflected in the statement of cash flows. However, $65,811 of acquisition costs reflected in “investing activities”in the statement of cash flows represents the cash expenses paid in connectionwith the NSNV Acquisition, less the cash of NSNV on the date the NSNVAcquisition was consummated.  Noncash investing activities and financing activities werealso incurred with the transactions involved in the Restructuring.  In the first quarter of 2004, we exercised acall option and issued 835,000 shares of our common stock to RAM Trading Ltd.in full payment of the option.

 

## ***Note 8 – Comprehensive Loss***

 

Excluding net loss, our source of comprehensive loss is from the netunrealized loss on commodity derivative instruments and marketable debtsecurities, which are classified as available-for-sale.  The following summarizes the components ofcomprehensive loss:

 

11

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**EndeavourInternational Corporation**

**Notes toCondensed Consolidated Financial Statements**

**(Unaudited)**

 
| ** **                                                       | ** ** | **Three Months Ended  June 30,** |       | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(Amounts in thousands)**                                       | ** ** | **2005**                              | ** ** | **2004**                            |       | **2005** | ** ** | **2004** | ** ** |
|                                                             |       |                                  | ** ** |                                |       |   | ** ** |   |   |
| Net income (loss)                                                | ** ** | **$**                                 | **11,257** | ** **                          | $          | (2,287 | ) | **$** | **8,604** | ** ** | $ | (14,905 | ) |
|                                                             |       |                                  | ** ** |                                |       |   | ** ** |   |   |
| Unrealized loss on commodity derivative  instruments, net of tax | ** ** | **(564**                              | **)**      | —                              |       | **(3,508** | **)** | — |   |
| Unrealized loss on marketable debt  securities                   | ** ** | **(288**                              | **)**      | (108                                | )          | **(276** | **)** | 174 |   |
| Reclassification adjustment for loss  realized in net loss above | ** ** | **244**                               | ** ** | —                              |       | **394** | ** ** | 207 |   |
|                                                             |       |                                  | ** ** |                                |       |   | ** ** |   |   |
| Net impact on comprehensive income (loss)                        | ** ** | **(608**                              | **)**      | (108                                | )          | **(3,390** | **)** | 381 |   |
|                                                             |       |                                  | ** ** |                                |       |   | ** ** |   |   |
| Comprehensive income (loss)                                      | ** ** | **$**                                 | **10,649** | ** **                          | $          | (2,395 | ) | **$** | **5,214** | ** ** | $ | (14,524 | ) |

 

## ***Note 9 – Commitments and Contingencies***

 

### ***General***

 

The oil and gas industry is subject to regulation by federal, state andlocal authorities.  In particular, gasand oil production operations and economics are affected by environmentalprotection statutes, tax statutes and other laws and regulations relating tothe petroleum industry.  We believe weare in compliance with all federal, state and local laws and regulationsapplicable to the Company and its properties and operations, the violation ofwhich would have a material adverse effect on us or our financial condition.

 

### ***PGS Commitment***

 

We have a three-year product and service commitment to PGS in returnfor the right to use 79,200 square kilometers of 3-D seismic and related datain the North Sea region, including the 3D Mega Merge and North Sea DigitalAtlas databases.  Under the agreement, weare required to purchase products and services from PGS, or affiliates, thathave an aggregate invoice value over three years of at least $4.5 million for aperiod of three years ending on December 15, 2006 as follows:

 
| **(amounts in thousands)**                        | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|------------|------------|
| Through December 15, 2005                    |       | $          | 2,500      |   |
| December 16, 2005 to December 15,  2006 |       | 2,000      |       |
|                                              |       |       |       |
| Total PGS commitment                              |       | $          | 4,500      |   |

 

12

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**EndeavourInternational Corporation**

**Notes toCondensed Consolidated Financial Statements**

**(Unaudited)**

 

At June 30, 2005, approximately $3.4 million of the commitmentremains outstanding.

 

### ***Legal Proceeding***

 

In March 2004, the GHK Company, LLC, GHK/Potato Hills Limited Partnership, and Brian F. Egolf (collectively “Plaintiffs”) commenced an actionagainst Endeavour International Corporation (“Endeavour”), f/k/a ContinentalSouthern Resources, Inc. (“CSOR”), as well as BWP Gas, L.L.C. (“BWP”) and HBA Gas, Inc. (“HBA”) in state court in Oklahoma City, Oklahoma.  In the petition, Plaintiffs allege that in2003, at a time when CSOR intended to acquire amajority of the membership interests in BWP, that BWP entered into an agreement to assign to Plaintiffs 2.5million common shares of Endeavour stock upon compliance by Plaintiffs withcertain contractual obligations including but not limited to completion andinitial commercial production of the Mary #2-34 well, along with thepresentation of a development plan and the commencement of the next explorationor development well in the Potato Hills Deep Prospect.  Plaintiffs allege in their petition that BWP, HBA and Endeavour are alteregos of each other and jointly and severally liable to Plaintiffs for failingto deliver to Plaintiffs the Endeavour common stock.  Plaintiffs seek delivery of the stock as wellas a temporary restraining order and a primary and permanent injunction (i) enjoining all dilutions of Plaintiffs’ rightspertaining to Endeavour stock; (ii) enjoining Endeavour from all futurestock issuances and transfers of assets not in the ordinary course of businessand (iii) prohibiting the alienation or encumbrance of the Endeavour stockthat is allegedly in HBA’s possession.  In April 2004, the defendants removedthe action from the state court to the United States District Court for theWestern District of Oklahoma.  In October 2004,the United States District Court granted a motion to remand to state courtfiled by the Plaintiffs and remanded the matter to the District Court ofOklahoma County, Oklahoma.  In June 2005,BWP and HBA filed voluntarypetitions for relief under Chapter 11 of the United States Bankruptcy Code inthe United States Bankruptcy Court for the Eastern District ofPennsylvania.  In July 2005,Endeavour filed a Notice of Removal to the federal courts based among otherthings on the fact that the case of the Plaintiffs relates to the pendingbankruptcy proceedings of BWP and HBA.  The Plaintiffs have indicated they willcontest this removal.  While the outcomecan not be predicted at this time, management believes it has good and validdefenses in this litigation and intends to litigate vigorously.

 

13

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**EndeavourInternational Corporation**

 

# **Cautionary Statement forForward-Looking Statements**

 

The information contained in this Quarterly Report on Form 10-Qand in other public statements by the Company and Company officers or directorsincludes or may contain certain forward-looking statements. The words “may,” “will,” “expect,” “anticipate,” “believe,” “continue,”“estimate,” “project,” “intend,” and similar expressions used in this Reportare intended to identify forward-looking statements within the meaning of Section 27Aof the U.S. Securities Act of 1933 and Section 21E of the U.S. SecuritiesExchange Act of 1934. You should not place undue reliance on these forward-lookingstatements, which speak only as of the date made. We undertake no obligation topublicly release the result of any revision of these forward-looking statementsto reflect events or circumstances after the date they are made or to reflectthe occurrence of unanticipated events. You should also know that suchstatements are not guarantees of future performance and are subject to risks,uncertainties and assumptions. These factors include, but are not limited to,those risks described in detail in the Company’s Annual Report on Form 10-Kunder the caption “Risk Factors” and other filings with the Securities andExchange Commission. Should any of these risks or uncertainties materialize, orshould any of these assumptions prove incorrect, actual results may differmaterially from those included within the forward-looking statements.

 

# **Item 2:  Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

Unless the context otherwise requires, references to the “Company”, “Endeavour”,“we”, “us” or “our”, mean Endeavour International Corporation or any of ourconsolidated subsidiaries or partnership interests. The following discussionshould be read in conjunction with our Condensed Consolidated FinancialStatements and related Notes thereto included elsewhere in this Report.

 

## ***General***

 

During the first quarter of 2004, we completed a series of mutuallyinterdependent transactions that significantly expanded our scope and provideda new focus, primarily on international oil and gas exploration.  As a result of the 2004 transactions, all ofour producing operations were sold as well as our exploration activities inMississippi.  We retained our equityinterests relating to Thailand and Louisiana through the end of the first quarterof 2004; however our equity interests in Louisiana were sold in May 2004and our partnership interests in Thailand were sold in April 2005.

 

During the fourth quarter of 2004, we purchased a 76.66% majorityinterest in OER oil AS (“OER”),a privately held Norwegian exploration and production company based inOslo.  In the first quarter of 2005, wepurchased the remaining minority interest in OER.

 

14

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**EndeavourInternational Corporation**

 

## ***Results of Operations***

 

As a result of our acquisition of producing oil and gas properties inNorway, we had revenues of $9.1 million and $16.8 million for the three and sixmonths ended June 30, 2005, respectively, with sales volumes of 2,020barrels of oil equivalent per day for the second quarter of 2005 and 1,948barrels of oil equivalent per day for the six months ended June 30, 2005.  Our Norwegian operations are also responsiblefor nearly all of the increases in operating expenses, DD&Aexpense and income taxes.

 

The increases in general and administrative (“G&A”)expenses were driven primarily by the significant increase in operationsthrough the acquisition of NSNV at the end of February 2004and our Norway operations at the end of November 2004, partially offset bythe fair market value adjustment of stock options under variable planaccounting.  Components of G&A expenses for these periods are as follows:

 
| **(Amounts in thousands)**                     | ** ** | **Three Months Ended  June 30,** |       | **Six Months Ended   une 30,** | ** ** |
|------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                     | ** ** | **2005**                              | ** ** | **2004**                            |       | **2005** | ** ** | **2004** | ** ** |
|                                           |       |                                  | ** ** |                                |       |   | ** ** |   |   |
| Compensation                                   | ** ** | **$**                                 | **2,444**  | ** **                          | $          | 1,249 |   | **$** | **4,971** | ** ** | $ | 1,502 |   |
| Consulting,  legal and accounting fees         | ** ** | **1,006**                             | ** ** | 657                                 |       | **1,912** | ** ** | 1,032 |   |
| Occupancy  costs                               | ** ** | **417**                               | ** ** | 128                                 |       | **703** | ** ** | 152 |   |
| Other expenses                                 | ** ** | **574**                               | ** ** | 572                                 |       | **932** | ** ** | 769 |   |
| Total gross cash G&A  expenses             | ** ** | **4,441**                             | ** ** | 2,606                               |       | **8,518** | ** ** | 3,455 |   |
| Non-cash stock-based compensation              | ** ** | **1,727**                             | ** ** | 2,075                               |       | **3,859** | ** ** | 3,148 |   |
| Fair market  value adjustment of stock options | ** ** | **97**                                | ** ** | (448                                | )          | **(392** | **)** | 658 |   |
| Total gross non-cash G&A  expenses         | ** ** | **1,824**                             | ** ** | 1,627                               |       | **3,467** | ** ** | 3,806 |   |
| Gross G&A  expenses                        | ** ** | **6,265**                             | ** ** | 4,233                               |       | **11,985** | ** ** | 7,261 |   |
| Less: capitalized G&A  expenses            | ** ** | **(1,892**                            | **)**      | (1,283                              | )          | **(3,460** | **)** | (1,778 | ) |
| Net G&A  expenses                          | ** ** | **$**                                 | **4,373**  | ** **                          | $          | 2,950 |   | **$** | **8,525** | ** ** | $ | 5,483 |   |

 

Interest expense increased to $2.0 million for the six months ended June 30,2005 as compared to $0.3 million for the corresponding period in 2004 primarilydue to the issuance of our convertible senior notes during the first quarter of2005.

 

## ***Income Taxes***

 

Our tax expense, relating solely to our Norwegian operations, of $2.9million and $3.9 million for the three and six months ended June 30, 2005,respectively, includes $0.4 million and $1.2 million, respectively of foreigncurrency gains attributable to tax liability balances.  For the three and six months ended June 30,2005, our Norwegian operations had income before taxes of $4.2 million and $7.3million, respectively, as compared to a net income before taxes of $14.1million and $12.5 million, respectively, for the total company.  During the each of the periods presented for 2005and 2004, we did not record any income tax benefits on our non-Norwegianoperations as there was no assurance that we could generate any taxableearnings, and therefore recorded

 

15

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**EndeavourInternational Corporation**

 

valuationallowances on the full amount of deferred tax assets generated.  The gain from the sale of our partnershipinterests is offset by other current year tax losses in the U.S.

 

## ***Liquidity and Capital Resources***

 

In the first quarter of 2005, we issued $81.25 million in convertiblesenior notes due 2012.  Interest expenseon the senior notes is expected to be approximately $4.9 million annually andwe anticipate being able to fund interest payments from cash flows fromoperating activities.

 

We anticipate exploration and development expenditures in 2005 to be $43million.  These expenditures include $26 millionin the United Kingdom, $6 million in Norway, $1 million in the Netherlands, $2million on other exploration expenditures and $8 million in capitalized employeecosts and interest.  We may increase ordecrease our planned activities for 2005, depending upon drilling results,potential acquisition candidates, product prices, the availability of capitalresources, and other factors affecting the economic viability of suchactivities.

 

In addition, we sold our partnership interests in Thailand in April 2005for net proceeds of approximately $19 million. Proceeds from the sale and capital expenditures originally targeted forThailand will be used to accelerate North Sea drilling activity in 2005.

 

## ***Drilling Program***

 

During the third and fourth quarters, we expect to operate twoexploration wells that will test three of four identified prospects on Block31/26b in the Central Graben region of the UK sectorof the North Sea.  The Turnberry prospect will spud first followed immediately bythe exploration well to test the Turriff and Tulliallan prospects. Block 31/26b is part of License P1183 in which we acquired a 60 percentinterest during the 22nd Seaward Licensing Round in 2004.

 

Also during the third quarter, we will participate in the drilling ofthe Fiacre prospect located in Block 23/11(N) where we will hold a 20 percentworking interest as part of a farm-in agreement with Dana Petroleum plc.  Additionally, a fourth well in theexploration program is the Prometheus prospect on Blocks 42/21 and 42/22 in theSouthern Gas Basin.  We will hold a 22.5percent working interest in the well, which is expected to be drilled duringthe third quarter.

 

## ***Disclosures About ContractualObligations and Commercial Commitments***

 

As discussed above, we issued $81.25 million in convertible seniornotes due 2012.  As of June 30,2005, there have been no other material changes in our contractual obligations.

 

# **Item 3: Quantitative and Qualitative Disclosures about Market Risk**

 

#### **Foreign CurrencyExchange Risk**

 

The international scope of our business operations exposes us to therisk of fluctuations in foreign currency markets.  As a result, we are subject to foreigncurrency exchange rate risk due

 

16

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**EndeavourInternational Corporation**

 

to effects thatforeign exchange rate movements of those currencies have on our costs and onthe cash flows that we receive from foreign operations.  We operate a centralized currency managementoperation to take advantage of potential opportunities to naturally offsetexposures against each other.  To date,we have addressed our foreign currency exchange rate risks principally bymaintaining our liquid assets in interest-bearing accounts in U.S. dollars,until payments in foreign currency are required, but we have not reduced thisrisk by hedging to date.

 

#### **CommodityPrice Risk**

 

We produce and sell crude oil and natural gas.  Realized pricing is primarily driven by theprevailing worldwide price for crude oil and spot market prices applicablewhich have been volatile and unpredictable for several years.  As a result, our financial results can besignificantly impacted as these commodity prices fluctuate widely in responseto changing market forces.  At June 30,2005, we had an oil commodity swap where we pay market IPEBrent and receive a fixed price that ranges from $44.65 per barrel in theinitial month to $40.00 per barrel at the end of the contract covering 600barrels per day through December 2006.  At June 30, 2005, a $1.00 change in theBrent oil price would result in a $0.3 million change in revenues through 2005and 2006.

 

#### **Interest RateRisk**

 

Our newly issued convertible senior notes bear interest at a fixed rateof 6%.  We do not currently use interestrate derivative financial instruments to manage exposure to interest ratechanges, but may do so in the future.

 

Since the filing of our 2004 Annual Report on Form 10-K, therehave been no material changes, other than those discussed above, in reportedmarket risk as it relates to foreign currencies, interest rates and commodityprices.

 

# **Item 4:  Controlsand Procedures**

 

## ***Evaluation of Disclosure Controls andProcedures***

 

As of the end of theperiod covered by this report, our management carried out an evaluation, withthe participation of our co-chief executive officers (the “CEOs”) and our chiefaccounting officer (the “CAO”), of the effectivenessof our disclosure controls and procedures required by Rule 13a-15 of theSecurities Exchange Act of 1934.  Basedon that evaluation, the CEOs and CAO believe:

 

(i)            thatour disclosure controls and procedures are designed to ensure that informationrequired to be disclosed by us in the reports that we file or submit under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms, and thatsuch information is accumulated and communicated to our management, includingthe CEOs and CAO, as appropriate to allow timelydecisions regarding required disclosure; and

 

17

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**EndeavourInternational Corporation**

 

(ii)           that our disclosure controls and procedures are effective.

 

## ***Changes in Internal Controls over FinancialReporting***

 

There has been nosignificant change in our internal controls over financial reporting during theperiod covered by this report that has materially affected, or is reasonablylikely to materially affect, our internal controls over financial reporting.  In reaching thisconclusion, management, with the participation of the CEOs and CAO, included in its assessment of internal controls overfinancial reporting all consolidated entities except those falling under OER oil AS.  EndeavourInternational Corporation acquired OER oil AS on November 23,2004.  OER oilAS’s internal control over financial reporting related to total assets of $63.3million and total revenues of $3.7 million as of and for the year ended December 31,2004.  As permitted by the SEC’spublished guidance, we excluded these entities from our assessment as they wereacquired late in the year, and it was not possible to conduct our assessmentbetween the date of acquisition and the end of the quarter.

 

# **Part II. Other Information**

# **Item 1:  Legal Proceedings**

 

In March 2004, the GHK Company, LLC, GHK/Potato Hills Limited Partnership, and Brian F. Egolf (collectively “Plaintiffs”) commenced an actionagainst Endeavour International Corporation (“Endeavour”), f/k/a ContinentalSouthern Resources, Inc. (“CSOR”), as well as BWP Gas, L.L.C. (“BWP”) and HBA Gas, Inc. (“HBA”) in state court in Oklahoma City, Oklahoma.  In the petition, Plaintiffs allege that in2003, at a time when CSOR intended to acquire amajority of the membership interests in BWP, that BWP entered into an agreement to assign to Plaintiffs 2.5million common shares of Endeavour stock upon compliance by Plaintiffs withcertain contractual obligations including but not limited to completion andinitial commercial production of the Mary #2-34 well, along with thepresentation of a development plan and the commencement of the next explorationor development well in the Potato Hills Deep Prospect.  Plaintiffs allege in their petition that BWP, HBA and Endeavour are alteregos of each other and jointly and severally liable to Plaintiffs for failingto deliver to Plaintiffs the Endeavour common stock.  Plaintiffs seek delivery of the stock as wellas a temporary restraining order and a primary and permanent injunction (i) enjoining all dilutions of Plaintiffs’ rightspertaining to Endeavour stock; (ii) enjoining Endeavour from all futurestock issuances and transfers of assets not in the ordinary course of businessand (iii) prohibiting the alienation or encumbrance of the Endeavour stockthat is allegedly in HBA’s possession.  In April 2004, the defendants removedthe action from the state court to the United States District Court for theWestern District of Oklahoma.  In October 2004,the United States District Court granted a motion to remand to state courtfiled by the Plaintiffs and remanded the matter to the District Court ofOklahoma County, Oklahoma.  In June 2005,BWP and HBA filed voluntarypetitions for relief under Chapter 11 of the United States Bankruptcy Code inthe United States Bankruptcy Court for the Eastern District ofPennsylvania.  In July 2005,Endeavour filed a Notice of Removal to the federal courts based among otherthings on the fact that the case of the Plaintiffs relates to the pending bankruptcyproceedings of BWP and HBA.  The Plaintiffs have

 

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**EndeavourInternational Corporation**

 

indicated theywill contest this removal.  While theoutcome can not be predicted at this time, management believes it has good andvalid defenses in this litigation and intends to litigate vigorously.

 

# **Item 6:  Exhibits**

 

The following exhibits are included herein:

 
| 31.1 * |   | Certification of William L. Transier, Co-Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.                  |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2 * |   | Certification of John N. Seitz, Co-Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.                        |
| 31.3 * |   | Certification of Robert L. Thompson, Chief Accounting Officer, pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.                     |
| 32.1 * |   | Certification of William L. Transier, Co-Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2 * |   | Certification of John N. Seitz, Co-Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.       |
| 32.3 * |   | Certification of Robert L. Thompson, Chief Accounting Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.    |
| *      |   | Filed herewith.                                                                                                                                                                       |

 

 

# **Signatures**

 

Pursuant to the requirements of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

**Endeavour International Corporation**

 
| Date: August 5, 2005 | /s/ William L. Transier                                         |                       | /s/ John N. Seitz |   |
|---------------------------|-----------------------------------------------------------------|----------------------------|-------------------|--------|
|                      | William L. Transier                                             | John N. Seitz              |
|                      | Co-Chief Executive Officer                                      | Co-Chief Executive Officer |
|                      |                                                            |                       |
|                      | /s/ Robert L. Thompson                                          |                       |              |
|                      | Robert L. Thompson                                              |                       |
|                      | Vice President and Chief Accounting Officer                     |                       |
|                      | (Principal Financial Officer and Principal  Accounting Officer) |

 

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