**UnitedStates**

**Securities and Exchange Commission**

 

**Washington, D.C. 20549**

 

**Form 10-Q**

 

**(MarkOne)**
| ** ** | **x****Quarterly Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|------------|-------------------------------------------------------------------------------------------------------------|

 
| ** ** | **For  the Quarterly Period Ended****March 31, 2008** |
|------------|------------------------------------------------------------|

 

**or**

 
| ** ** | **o****Transition Report Under Section 13 or  15(d) of the Securities Exchange Act of 1934** |
|------------|--------------------------------------------------------------------------------------------------------|

 
| ** ** | **For the transition period from                      to                    ** |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Commission file number:********1-13463**

 

**EndeavourInternational Corporation**

(Exact name of registrant as specified in its charter)

 

| **Nevada**                                                           | ** ** | **88-0448389**                       |
|----------------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation  or organization) |       | (I.R.S. Employer Identification No.) |

 

**1001 Fannin Street, Suite 1600,Houston, Texas 77002**

(Address of principal executive offices)       (Zip code)

 

**(713) 307-8700**

(Registrant’s telephone number, including area code)

 

**None**

(Former name, former address and former fiscal year, if changed sincelast report.)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. x  Yes   o   No

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large accelerated filer  o                     |   | Accelerated filer x          |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated filer o                        |   | Smaller reporting  company o |
| (Do not check if a  smaller reporting company) |   |                              |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).    o Yes   x  No

 

Asof May 7, 2008, 127,602,822 shares of the registrant’s common stock wereoutstanding.

 

** **

----

** **

**Endeavour International Corporation**

** **

**Index**

** **
| Part I: Financial Information                                                                  |   |
|-----------------------------------------------------------------------------------------------------|--------|
| Item 1: Financial Statements                                                                        |   |
| 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 | 18     |
| Item 3: Quantitative and Qualitative Disclosures About  Market Risk                                 | 29     |
| Item 4: Controls and Procedures                                                                     | 30     |
| Part II.  Other Information                                                                    |   |
| Item 1A: Risk Factors                                                                               | 30     |
| Item 6: Exhibits                                                                                    | 30     |
| Signatures                                                                                          | 31     |

 

*Quantitiesof natural gas are expressed in this report in terms of thousand cubic feet(Mcf) and million cubic feet (MMcf).  Oilis quantified in terms of barrels (Bbls) and thousands of barrels (Mbbls).Natural gas is compared to oil in terms of barrels of oil equivalent (BOE),thousand barrels of oil equivalent (MBOE) or million barrels of oil equivalent(MMBOE).  One barrel of oil is the energyequivalent of six Mcf of natural gas. With respect to information relating to our working interest in wells oracreage, “net” oil and gas wells or acreage is determined by multiplying grosswells or acreage by our working interest therein.*

 

----

 

**Part I:  Financial Information**

**Item1:  Financial Statements**

**Endeavour International Corporation**

**Condensed Consolidated BalanceSheet**

**(Unaudited)**

**(Amounts in thousands, except share data)**

 
| ** **                                                                                             | ** ** | **March 31, 2008** | ** **  | **December 31, 2007** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------------------|-------------|---------------------------------|------------|
| **Assets**                                                                                             |       |                         |        |                            |       |
| Current Assets:                                                                                        |       |                         |        |                            |       |
| Cash and cash equivalents                                                                              | ** ** | **$**                        | **20,459**  |                            | $          | 16,440 |   |
| Restricted cash                                                                                        | ** ** | **22,000**                   |        | 22,000                          |       |
| Accounts receivable                                                                                    | ** ** | **36,505**                   |        | 33,291                          |       |
| Prepaid expenses and other current assets                                                              | ** ** | **53,559**                   |        | 46,516                          |       |
| Total Current Assets                                                                                   | ** ** | **132,523**                  |        | 118,247                         |       |
|                                                                                                   |       |                         |        |                            |       |
| Property and  Equipment, Net                                                                           | ** ** | **331,073**                  |        | 335,023                         |       |
| Goodwill                                                                                               | ** ** | **283,324**                  |        | 283,324                         |       |
| Other Assets                                                                                           | ** ** | **9,650**                    |        | 11,029                          |       |
| Total Assets                                                                                           | ** ** | **$**                        | **756,570** |                            | $          | 747,623 |   |
|                                                                                                   |       |                         |        |                            |       |
| **Liabilities  and Stockholders’ Equity**                                                         |       |                         |        |                            |       |
| Current Liabilities:                                                                                   |       |                         |        |                            |       |
| Accounts payable                                                                                       | ** ** | **$**                        | **22,798**  |                            | $          | 31,036 |   |
| Accrued expenses and other                                                                             | ** ** | **59,633**                   |        | 50,013                          |       |
| Total Current Liabilities                                                                              | ** ** | **82,431**                   |        | 81,049                          |       |
|                                                                                                   |       |                         |        |                            |       |
| Long-Term Debt                                                                                         | ** ** | **251,923**                  |        | 266,250                         |       |
| Deferred Taxes                                                                                         | ** ** | **147,942**                  |        | 135,552                         |       |
| Other Liabilities                                                                                      | ** ** | **99,577**                   |        | 69,623                          |       |
| Total Liabilities                                                                                      | ** ** | **581,873**                  |        | 552,474                         |       |
|                                                                                                   |       |                         |        |                            |       |
| Commitments and Contingencies                                                                          |       |                         |        |                            |       |
|                                                                                                   |       |                         |        |                            |       |
| Series C Convertible Preferred Stock  (Liquidation preference: $127,788)                          | ** ** | **125,000**                  |        | 125,000                         |       |
|                                                                                                   |       |                         |        |                            |       |
| Stockholders’ Equity:                                                                             |       |                         |        |                            |       |
| Series B preferred stock (Liquidation  preference: $2,838)                                        | ** ** | **—**                   |        | —                          |       |
| Common stock; shares issued and outstanding  – 127,714,297 at 2008 and 127,006,440 shares at 2007 | ** ** | **128**                      |        | 127                             |       |
| Treasury stock (186,439 shares at 2008)                                                                | ** ** | **(246**                     | **)**       | —                          |       |
| Additional paid-in capital                                                                             | ** ** | **241,677**                  | ** **  | 241,539                         |       |
| Accumulated other comprehensive loss                                                                   | ** ** | **(1,781**                   | **)**       | (923                            | )          |
| Accumulated deficit                                                                                    | ** ** | **(190,081**                 | **)**       | (170,594                        | )          |
| Total Stockholders’ Equity                                                                        | ** ** | **49,697**                   |        | 70,149                          |       |
| Total Liabilities and Stockholders’ Equity                                                        | ** ** | **$**                        | **756,570** |                            | $          | 747,623 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

1

----

 

**Endeavour International Corporation**

**Condensed Consolidated Statementof Operations**

**(Unaudited)**

(Amounts in thousands, except per share data)

 
| ** **                                                                | ** ** | **Three Months Ended March 31,** | ** **  |
|---------------------------------------------------------------------------|------------|------------------------------------------------------|-------------|
| ** **                                                                | ** ** | **2008**                                             | ** **  | **2007** | ** ** |
|                                                                      |       |                                                 | ** **  |   |   |
| Revenues                                                                  | ** ** | **$**                                                | **61,255**  | ** ** | $ | 42,790 |   |
|                                                                      |       |                                                 | ** **  |   |   |
| Cost of Operations:                                                       |       |                                                 | ** **  |   |   |
| Operating expenses                                                        | ** ** | **10,020**                                           | ** **  | 10,711 |   |
| Depreciation, depletion and amortization                                  | ** ** | **21,403**                                           | ** **  | 19,213 |   |
| General and administrative                                                | ** ** | **4,751**                                            | ** **  | 5,367 |   |
|                                                                      |       |                                                 | ** **  |   |   |
| Total Expenses                                                            | ** ** | **36,174**                                           | ** **  | 35,291 |   |
|                                                                      |       |                                                 | ** **  |   |   |
| Income From Operations                                                    | ** ** | **25,081**                                           | ** **  | 7,499 |   |
|                                                                      |       |                                                 | ** **  |   |   |
| Other Income (Expense):                                                   |       |                                                 | ** **  |   |   |
| Commodity derivatives:                                                    |       |                                                 | ** **  |   |   |
| Realized gains (losses)                                                   | ** ** | **(3,150**                                           | **)**       | 11,072 |   |
| Unrealized losses                                                         | ** ** | **(29,642**                                          | **)**       | (15,696 | ) |
| Interest income                                                           | ** ** | **366**                                              | ** **  | 604 |   |
| Interest expense                                                          | ** ** | **(8,207**                                           | **)**       | (4,773 | ) |
| Other                                                                     | ** ** | **(770**                                             | **)**       | (559 | ) |
|                                                                      |       |                                                 | ** **  |   |   |
| Total Other Expense                                                       | ** ** | **(41,403**                                          | **)**       | (9,352 | ) |
|                                                                      |       |                                                 | ** **  |   |   |
| Loss Before Income Taxes                                                  | ** ** | **(16,322**                                          | **)**       | (1,853 | ) |
| Income Tax (Benefit) Expense                                              | ** ** | **470**                                              | ** **  | 1,290 |   |
|                                                                      |       |                                                 | ** **  |   |   |
| Net Loss                                                                  | ** ** | **(16,792**                                          | **)**       | (3,143 | ) |
| Preferred Stock Dividends                                                 | ** ** | **2,695**                                            | ** **  | 2,844 |   |
|                                                                      |       |                                                 | ** **  |   |   |
| Net Loss to Common Stockholders                                           | ** ** | **$**                                                | **(19,487** | **)** | $ | (5,987 | ) |
|                                                                      |       |                                                 | ** **  |   |   |
| Basic and Diluted Loss per Common Share                                   | ** ** | **$**                                                | **(0.15**   | **)** | $ | (0.05 | ) |
|                                                                      |       |                                                 | ** **  |   |   |
| Weighted Average Number of Common Shares  Outstanding - Basic and Diluted | ** ** | **127,537**                                          | ** **  | 120,304 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

2

----

 

**Endeavour International Corporation**

**Condensed Consolidated Statementof Cash Flows**

**(Unaudited)**

**(Amounts in thousands)**

 
| ** **                                                                       | ** ** | **Three Months Ended March 31,** | ** **  |
|----------------------------------------------------------------------------------|------------|------------------------------------------------------|-------------|
| ** **                                                                       | ** ** | **2008**                                             | ** **  | **2007** | ** ** |
| Cash Flows from Operating Activities:                                            |       |                                                 | ** **  |   |   |
| Net loss                                                                         | ** ** | **$**                                                | **(16,792** | **)** | $ | (3,143 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |       |                                                 | ** **  |   |   |
| Depreciation, depletion and amortization                                         | ** ** | **21,403**                                           | ** **  | 19,213 |   |
| Deferred tax expense (benefit)                                                   | ** ** | **(3,144**                                           | **)**       | 261 |   |
| Unrealized (gain) loss on derivatives                                            | ** ** | **29,642**                                           | ** **  | 15,696 |   |
| Amortization of non-cash compensation                                            | ** ** | **544**                                              | ** **  | 1,884 |   |
| Amortization of loan costs and discount                                          | ** ** | **3,156**                                            | ** **  | 427 |   |
| Non-cash interest expense                                                        | ** ** | **869**                                              | ** **  | — |   |
| Other                                                                            | ** ** | **632**                                              | ** **  | 15 |   |
| Changes in assets and liabilities:                                               |       |                                                 | ** **  |   |   |
| (Increase) decrease in receivables                                               | ** ** | **(3,213**                                           | **)**       | 25,427 |   |
| (Increase) decrease in other current assets                                      | ** ** | **4,158**                                            | ** **  | 2,829 |   |
| Decrease in accounts payable and accrued  expenses                               | ** ** | **(8,115**                                           | **)**       | (16,298 | ) |
| Net Cash Provided by Operating Activities                                        | ** ** | **29,140**                                           | ** **  | 46,311 |   |
|                                                                             |       |                                                 | ** **  |   |   |
| Cash Flows From Investing Activities:                                            |       |                                                 | ** **  |   |   |
| Capital expenditures                                                             | ** ** | **(19,581**                                          | **)**       | (13,480 | ) |
| (Increase) decrease in restricted cash                                           | ** ** | **—**                                           | ** **  | (20,096 | ) |
| Net Cash Used in Investing Activities                                            | ** ** | **(19,581**                                          | **)**       | (33,576 | ) |
|                                                                             |       |                                                 | ** **  |   |   |
| Cash Flows From Financing Activities:                                            |       |                                                 | ** **  |   |   |
| Repayments of borrowings                                                         | ** ** | **(90,000**                                          | **)**       | (30,000 | ) |
| Borrowings under debt agreements                                                 | ** ** | **88,000**                                           | ** **  | — |   |
| Financing costs paid                                                             | ** ** | **(3,294**                                           | **)**       | — |   |
| Other financing                                                                  | ** ** | **(246**                                             | **)**       | (110 | ) |
| Net Cash Used in Financing Activities                                            | ** ** | **(5,540**                                           | **)**       | (30,110 | ) |
|                                                                             |       |                                                 | ** **  |   |   |
| Net Increase (Decrease) in Cash and Cash  Equivalents                            | ** ** | **4,019**                                            | ** **  | (17,375 | ) |
| Effect of Foreign Currency Changes on Cash                                       | ** ** | **—**                                           | ** **  | 718 |   |
| Cash and Cash Equivalents, Beginning of  Period                                  | ** ** | **16,440**                                           | ** **  | 39,814 |   |
|                                                                             |       |                                                 | ** **  |   |   |
| Cash and Cash Equivalents, End of Period                                         | ** ** | **$**                                                | **20,459**  | ** ** | $ | 23,157 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

3

----

 

**Endeavour International Corporation**

**Notes to Condensed Consolidated FinancialStatements**

**(Unaudited)**

** **

## ***Note 1 – General***

## *** ***

Endeavour International Corporation (a Nevada corporation formed in2000) is an independent oil and gas company engaged in the acquisition,exploration and development of energy reserves. Our goal is to become a leading upstream company with an explorationfocus primarily in the North Sea.  Westrive to achieve this position through acquisitions, licensing rounds andexploration drilling.

 

As used in these Notes to Condensed Consolidated Financial Statements,the terms “Endeavour”, “we”, “us”, “our” and similar terms refer to EndeavourInternational Corporation and, unless the context indicates otherwise, itsconsolidated subsidiaries.  Theaccompanying condensed consolidated financial statements of Endeavour should beread in conjunction with the consolidated financial statements and notesincluded in our Annual Report on Form 10–K for the year ended December 31,2007.

 

### ***Basis ofPresentation and Use of Estimates***

 

The accompanying unaudited condensed consolidated financial statementshave been prepared on the accrual basis of accounting in accordance withaccounting principles generally accepted in the United States of America (“USGAAP”) and have been presented on a going concern basis, which contemplates therealization of assets and satisfaction of liabilities in the normal course ofbusiness.  These accounting principlesrequire management to use estimates, judgments and assumptions that affect thereported amounts of assets and liabilities as of the date of the financialstatements, and revenues and expenses during the reporting period.  Management reviews its estimates, includingthose related to the determination of proved reserves, estimates of futuredismantlement costs, income taxes and litigation.  Actual results could differ from thoseestimates.  In the opinion of management,all normal recurring adjustments considered necessary for a fair presentationhave been included in these financial statements.  Certain amounts for prior periods have beenreclassified to conform to the current presentation.

 

Management believes that it is reasonably possible the followingmaterial estimates affecting the financial statements could change in thecoming year: (1) estimates of proved oil and gas reserves, (2) estimatesas to the expected future cash flow from proved oil and gas properties, (3) estimatesof future dismantlement and restoration costs, (4) estimates of fairvalues used in purchase accounting and (5) estimates of the fair value ofderivative instruments.

 

### ***Loss PerShare***

 

Basic loss per common share is computed by dividing net loss to commonstockholders by the weighted average number of common shares outstanding forthe period.  Diluted loss per shareincludes the effect of our outstanding stock options, warrants and sharesissuable pursuant to 

 

4

----

 

**Endeavour International Corporation**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

 

convertible debt, convertible preferred stock and certain stockincentive plans under the treasury stock method, if including such instrumentsis dilutive.

 

For each of the periods presented, shares associated with stockoptions, warrants, convertible debt, convertible preferred stock and certainstock incentive plans are not included because their inclusion would beantidilutive (i.e., reduce the net loss per share).

 

The common shares potentially issuable arising from these instruments,which were outstanding during the periods presented in the financial statements,consisted of:

 
| ** **                           | ** ** | **March 31,** | ** ** |
|--------------------------------------|------------|--------------------|------------|
| **(Amounts in thousands)** | ** ** | **2008**           | ** ** | **2007** | ** ** |
|                                 |       |               |       |   |   |
| Options and stock-based compensation | ** ** | **—**         |       | 139 |   |
| Warrants                             | ** ** | **—**         |       | 60 |   |
| Convertible debt                     | ** ** | **33,502**         |       | 16,185 |   |
| Convertible preferred stock          | ** ** | **50,000**         |       | 50,000 |   |
|                                 |       |               |       |   |   |
| Common shares potentially issuable   | ** ** | **83,502**         |       | 66,384 |   |

 

### ***NewAccounting Developments***

 

In January 2008 we adopted two new interpretations issued by theFinancial Accounting Standards Board. Both interpretations pertain to fair value measurement in financialreporting.  The first interpretationdefines fair value, outlines a structure for measuring fair value and requiresexpanded financial statement disclosures about fair value measurements.  It is applicable to all financial assets andliabilities that are being measured and reported on a fair value basis.  The second interpretation allows entities theoption of fair value measurement for certain eligible financial instruments andother financial assets and liabilities. The results of our adoption and application of these standards arepresented in Note 10.

 

In March 2008, the Financial Accounting Standards Board issued anew statement that requires expanded disclosures of entities’ hedgingactivities and derivative instruments. This statement is effective for fiscal years and interim periodsbeginning after November 15, 2008. We are currently reviewing this new standard.

 

## ***Note 2 – Stock-Based CompensationArrangements***

 

We grant restricted stock and stock options, including notionalrestricted stock and options, to employees and directors as incentivecompensation.  The notional restrictedstock and options may be settled in cash or stock upon vesting at our option;however, it has been our practice to settle in stock.  The restricted stock and options generallyvest over three years and the options 

 

5

----

 

**Endeavour International Corporation**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

 

have a five-year term.  Thevesting of these shares and options is dependent upon the continued service ofthe grantees with Endeavour.  Upon theoccurrence of a change in control, each outstanding share of restricted stockand stock option will immediately vest. For the first quarter of 2008, we included non-cash stock-basedcompensation of $0.3 million in both general and administrative (“G&A”)expenses and capitalized G&A expenses. For the first quarter of 2007, we included non-cash stock-basedcompensation of $1.4 million and $0.5 million in G&A expenses andcapitalized G&A expenses, respectively. At March 31, 2008, total compensation costs related to awards notyet recognized was approximately $7.4 million and is expected to be recognizedover a weighted average period of less than three years.

 

### ***StockOptions***

 

The fair value of each option award is estimated on the date of grantusing the Black-Scholes option-pricing model. Expected volatility is based on an average of historical volatility ofcommon stock prices of Endeavour and our peer companies where there is a lackof relevant Endeavour volatility information for the length of the expectedterm.  The expected term is the averageof the vesting period and the term of the option.  We use historical data to estimate optionexercises and employee terminations within the valuation model. The risk-freerate for the expected term is the yield on the zero-coupon U.S. treasurysecurity with a term comparable to the expected term of the option.  We do not include an estimated dividend yieldsince we have not paid dividends on our common stock historically.

 

The estimated fair value of each option granted was calculated usingthe Black-Scholes model.  The followingtable summarizes the weighted average of the assumptions used in the method.

 
| ** **                    | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------|------------|------------------------------------------------------|------------|
| ** **                    | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
|                          |       |                                                 |       |   |   |
| Risk-free rate                | ** ** | **3.18**                                             | **%**      | 4.7 | % |
| Expected years until exercise | ** ** | **4.25**                                             | ** ** | 4 |   |
| Expected stock volatility     | ** ** | **46**                                               | **%**      | 43 | % |
| Dividend yield                | ** ** | **—**                                           | ** ** | — |   |

 

6

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**Endeavour International Corporation**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

 

Information relating to stock options,including notional stock options, is summarized as follows:

 
| **(Amounts in thousands, except per share data)** | ** ** | **Number of  Shares  Underlying  Options** | ** ** | **Weighted  Average  Exercise  Price per  Share** | ** ** | **Weighted  Average  Contractual  Life in Years** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------------|------------|---------------------------------|------------|
| Balance outstanding – January 1, 2008                                 |       | 5,569                                           |       | $                                                      | 2.86       |                                                        | 2.15       |                            |       |   |
| Granted                                                                         |       | 1,140                                           |       | $                                                      | 1.32       |                                                        |       |                            |       |   |
| Forfeited                                                                       |       | (233                                            | )          | $                                                      | 3.51       |                                                        |       |                            |       |   |
| Expired                                                                         |       | (90                                             | )          | $                                                      | 4.20       |                                                        |       |                            |       |   |
|                                                                            |       |                                            |       |                                                   |       |                                                        |       |                            |       |
| Balance outstanding – March 31, 2008                                  |       | 6,386                                           |       | $                                                      | 2.54       |                                                        | 3.2        |                            | $          | 49 |   |
| Currently exercisable – March 31, 2008                                |       | 3,759                                           |       | $                                                      | 2.86       |                                                        | 1.0        |                            | —     |   |
|                                                                                 |            |                                                 |            |                                                        |            |                                                             |            |                                 |            |  |  |

 

The weighted average grant-date fair value of options granted for thethree months ended March 31, 2008 was $0.54 per option.

 

### ***RestrictedStock***

 

At March 31, 2008, our employees and directors held 4.3 millionrestricted shares of our common stock that vest over service periods of up tothree years.  The restricted stock awardswere valued based on the closing price of our common stock on the measurementdate, typically the date of grant. Compensation expense is recorded on a straight-line basis over therestricted share vesting period.

 

Status of the restricted shares as of March 31, 2008 and thechanges during the three months ended March 31, 2008 are presented below:

 
| **(Amounts in thousands, except per share data)** | ** ** | **Number of Shares** | ** ** | **Weighted  Average Grant  Date Fair  Value per  Share** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------|------------|-------------------------------------------------------------------------|------------|
| Balance outstanding – January 1, 2008                                 |       | 4,552                          |       | $                                                                       | 2.72       |   |
| Granted                                                                         |       | 1,219                          |       | $                                                                       | 1.28       |   |
| Vested                                                                          |       | (1,015                         | )          | $                                                                       | 3.16       |   |
| Forfeited                                                                       |       | (486                           | )          | $                                                                       | 3.25       |   |
|                                                                            |       |                           |       |                                                                    |       |
| Balance outstanding – March 31, 2008                                  |       | 4,270                          |       | $                                                                       | 2.15       |   |
|                                                                            |       |                           |       |                                                                    |       |
| Total grant date fair value of shares  vesting during the period                |       | $                              | 2,751      |                                                                    |       |   |
|                                                                                 |            |                                |            |                                                                         |            |  |  |

 

7

----

 

**Endeavour International Corporation**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

 

**Note 3 – Debt Obligations**

 

Our debt consisted of the following at theindicated dates:

 
| ** **                                                         | ** ** | **March 31,** | ** **  | **December 31,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------|-------------|-----------------------|------------|
| **(Amounts in thousands)**                               | ** ** | **2008**           | ** **  | **2007**              | ** ** |
|                                                               |       |               |        |                  |       |
| Senior notes, due 2012                                             | ** ** | **$**              | **81,250**  |                  | $          | 81,250 |   |
| Senior bank facility, variable rate, due  2011                     | ** ** | **118,000**        |        | 110,000               |       |
| Convertible bonds, due 2014                                        | ** ** | **40,869**         |        | —                |       |
| Junior credit facility, due 2011                                   | ** ** | **25,000**         |        |                  |       |
| Second lien term loan, variable rate, due  2011                    | ** ** | **—**         |        | 75,000                |       |
| ** **                                                         |       | **265,119**        |        | 266,250               |       |
| Less: debt discount                                                | ** ** | **13,196**         |        | —                |       |
|                                                               |       |               |        |                  |       |
| Long-term debt                                                     | ** ** | **$**              | **251,923** |                  | $          | 266,250 |   |
|                                                               |       |               |        |                  |       |
| Standby letters of credit outstanding for  abandonment liabilities | ** ** | **$**              | **40,901**  |                  | $          | 40,788 |   |

 

### ***Additional information concerning variable interest rates paid***

 

The interest rates paid on our variable ratedebt obligations during the three months ended March 31, 2008 are shown inthe following table:

 
| **(Amounts in thousands, except per share data)** | ** ** | **Interest Rates Paid** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------|------------|
|                                                                            |       |                              |       |
| Senior bank facility                                                            |       | 4.62% - 5.58                      | %          |
| Second lien term loan                                                           |       | 11.91                             | %          |
| Junior Facility                                                                 |       | 6.74                              | %          |

 

### ***Convertible Bonds***

 

In January 2008, we completed the refinancing of certain debt withthe following:

 
|   | · | Repayment of the outstanding balance of $75  million under our second lien term loan, plus accrued interest;                                                 |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | · | Issuance of $40 million under a private  offering of 11.5% guaranteed convertible bonds to a company controlled by the  Smedvig Family Office of Norway; and |
|   | · | Issuance of $25 million under a junior  credit facility.                                                                                                     |

 

8

----

 

**Endeavour International Corporation**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

 

The $40 million Convertible Bonds due 2014  bear interest at a rate of 11.5% per annum,compounded quarterly, and are unconditionally guaranteed by us on a seniorunsecured basis.  Interest is compoundedquarterly and added to the outstanding principal balance each quarter.  Interest is not payable in cash, but isinstead payable in kind upon maturity of the bonds.  The bonds are convertible into shares of ourcommon stock at an initial conversion price of $2.36 per $1,000 ofprincipal.  The conversion price will beadjusted in accordance with the terms of the bonds upon occurrence of certainevents, including payment of common stock dividends, common stock splits orissuance of common stock at a price below the then current market price.

 

Upon the fourth anniversary, the holders have the right to redeem theBonds if the weighted average closing price of our common stock for 30 daysprior to that anniversary is less than the conversion price, as adjusted. Ifthe holders do not exercise this right, the right lapses and the conversionprice is reset to the then current market price of our common stock if suchprice is lower than the conversion price, as adjusted.

 

We are required to register the shares of common stock issuable uponconversion of the bonds with the Securities and Exchange Commission.  If we do not comply with the requiredregistration rights, the bonds will bear an increased interest rate.

 

If we undergo a “change of control” as defined, the holders of thebonds have the right, subject to certain conditions, to redeem the bonds andaccrued interest.  The bonds may becomeimmediately due upon the occurrence of certain events of default, as defined.

 

### ***Embedded derivatives***

 

Two derivatives are associated with the conversion and change incontrol features of the Convertible Bonds. The initial value of these derivatives was $13.5 million and wasrecorded as an other long-term liability with the offset to debt discount.  At March 31, 2008, the fair market valueof these derivatives is $12.8 million. We also recorded $0.7 million in other income as a decrease in the fairmarket value for these instruments.

 

### ***Junior Facility***

 

We also borrowed $25 million under a Junior Facility Agreement (the “JuniorFacility”), dated January 22, 2008. Indebtedness under the Junior Facility will bear interest at LIBOR plus3.5% (LIBOR plus 5.5% after the first year). Amounts borrowed under the Junior Facility will be repaid in semi-annualpayments beginning December 31, 2009 and must be repaid in full in October 2011.

 

Outstanding loans may be prepaid at our option without penalty afterthe earlier of (i) the day after the period extending from January 22,2008 to and including one month after the Effective Date (as defined in theJunior Facility) or (ii) the day on which the lenders’ availablecommitments are reduced to zero.  Oncerepaid, amounts under the Junior Facility may not be re-borrowed.  The Junior Facility contains customarycovenants, which limit our ability to incur indebtedness, except for permittedhedging arrangements; create certain liens; dispose of our assets and makedividend or other distribution with respect to equity securities.  In addition, the Junior Facility containsvarious financial and technical covenants.

 

The amounts outstanding under the Junior Facility may becomeimmediately due upon the occurrence of a change of control, failure to payobligations under other financial indebtedness 

 

9

----

 

**Endeavour International Corporation**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

 

when due, certain events of default, breach of financial covenants andother events as defined in the agreement.

 

### ***Second Lien Term Loan repayment***

 

Simultaneously with entering into the Junior Facility and 11.5%convertible bonds, discussed above, we terminated the Second Lien CreditAgreement and repaid all of the $78.6 million in outstanding indebtednessincluding accrued interest, related fees and expenses of approximately $4.3million.  The amount outstanding underthe Second Lien Credit Agreement was scheduled to mature in 2011.

 

## ***Note 4 - Property and Equipment***

 

Property and equipment included thefollowing:

 
| **(Amounts in thousands)**                  | ** ** | **March 31,  2008** | ** **  | **December 31,  2007** | ** ** |
|-------------------------------------------------------|------------|--------------------------|-------------|-----------------------------|------------|
| Oil and gas properties under the full cost  method:   |       |                     |        |                        |       |
| Subject to amortization                               | ** ** | **$**                    | **305,654** |                        | $          | 298,765 |   |
| Not subject to amortization:                          |       |                     |        |                        |       |
| Acquired in 2008                                      | ** ** | **9,717**                |        | —                      |       |
| Acquired in 2007                                      | ** ** | **31,992**               |        | 31,992                      |       |
| Acquired in 2006                                      | ** ** | **96,945**               |        | 97,922                      |       |
| Acquired prior to 2006                                | ** ** | **27,636**               |        | 27,615                      |       |
| ** **                                            |       | **471,944**              |        | 456,294                     |       |
|                                                  |       |                     |        |                        |       |
| Other oil and gas assets                              | ** ** | **4,875**                |        | 4,875                       |       |
|                                                  |       |                     |        |                        |       |
| Computers, furniture and fixtures                     | ** ** | **3,423**                |        | 2,634                       |       |
| Total property and equipment                          | ** ** | **480,242**              |        | 463,803                     |       |
|                                                  |       |                     |        |                        |       |
| Accumulated depreciation, depletion and  amortization | ** ** | **(149,169**             | **)**       | (128,780                    | )          |
|                                                  |       |                     |        |                        |       |
| Net property and equipment                            | ** ** | **$**                    | **331,073** |                        | $          | 335,023 |   |

 

The costs not subject to amortization relate to unproved properties andproperties being made ready to be placed in service, which are excluded fromamortized capital costs until it is determined whether or not proved reservescan be assigned to such properties.  Wecapitalized $1.2 million and $2.0 million in interest related to explorationactivities for the quarters ended March 31, 2008 and 2007,respectively.  We capitalized $2.0million and $2.2 million in certain employee costs directly related toexploration activities for the quarters ended March 31, 2008 and 2007,respectively.  For the quarter ended March 31,2008 and 2007, we included 

 

10

----

 

**Endeavour International Corporation**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

 

approximately $0.3 million and $0.5 million, respectively, ofstock-based compensation in capitalized G&A expenses in property andequipment.

 

## ***Note 5 – Derivative Instruments***

 

### ***Commodity derivatives***

 

From time to time, we may utilize derivative financial instruments withrespect to a portion of our oil and gas production or a portion of our variablerate debt to achieve a more predictable cash flow by reducing our exposure toprice fluctuations.  These transactionsare likely to be swaps, collars or options and to be entered into with majorfinancial institutions or commodities trading institutions.  Derivative financial instruments are intendedto:

 
|   | · | reduce our exposure to declines in the market prices of crude oil and  natural gas that we produce and sell; |
|--------|--------|--------------------------------------------------------------------------------------------------------------|
|   | · | reduce our exposure to increases in interest rates; and                                                      |
|   | · | manage cash flows in support of our annual capital expenditure  budget.                                      |

 

We have various oil and gas derivative instruments intended to satisfycertain obligations under our financing agreements that funded the acquisitionand stabilize cash flows from the acquired assets.  Hedge accounting has not been elected forthese instruments and during the first quarter of 2008 and 2007, we recorded$30.3 million and $15.7 million, respectively, in other expense related to thenet unrealized losses for these instruments. In addition, we realized $(3.2) million and $11.1 million in gains(losses) on the settlement of instruments that closed during the first quarterof 2008 and 2007, respectively.  The fairmarket value of these derivative instruments is included in our balance sheetas follows:

 
| **(Amounts in thousands)**      | ** ** | **March 31, 2008** | ** **  | **December 31,  2007** | ** ** |
|-------------------------------------------|------------|------------------------------|-------------|-----------------------------|------------|
| Prepaid expenses and other current assets | ** ** | **$**                        | **—**  |                        | $          | 4,018 |   |
| Other assets – long-term             | ** ** | **—**                   |        | 1,957                       |       |
| Accrued expenses and other                | ** ** | **(30,996**                  | **)**       | (22,210                     | )          |
| Other liabilities – long-term        | ** ** | **(46,185**                  | **)**       | (30,635                     | )          |
|                                      |       |                         | ** **  |                        |       |
| ** **                                |       | **$**                        | **(77,181** | **)**                       | $          | (46,870 | ) |

 

At March 31, 2008, we had the following derivative instrumentsoutstanding that are not accounted for as hedges:

 

11

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**Endeavour International Corporation**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

 
| ** **                                  | ** ** | **Remainder  of 2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|----------|------------|----------|------------|----------|------------|-----------|------------|
| **Oil (1):**                                |       |                        |       |     |       |     |       |     |       |      |       |
| Fixed Price Swap (Mbbl)                     |       | 680                         |       | 697      |       | 573      |       | 487      |       | 2,437     |       |
| Weighted Average Price ($/Barrel)           |       | $                           | 68.87      |     | $          | 69.08    |       | $        | 68.39      |      | $          | 66.01 |   | $ | 68.25 |   |
|                                        |       |                        |       |     |       |     |       |     |       |      |       |
| **Gas (2):**                                |       |                        |       |     |       |     |       |     |       |      |       |
| Fixed Price Swap (MMcf)                     |       | 2,008                       |       | 1,387    |       | 1,032    |       | 627      |       | 5,054     |       |
| Weighted Average Price (£/Mcf)         |       | £                      | 5.17       |     | £     | 5.58     |       | £   | 5.35       |      | £     | 5.13 |   | £ | 5.32 |   |
|                                        |       |                        |       |     |       |     |       |     |       |      |       |
| Costless Collar (MMcf)                      |       | 900                         |       | —   |       | —   |       | —   |       | 900       |       |
| Weighted Average Ceiling Price (£/Mcf) |       | £                      | 4.26       |     | —     |     | —     |     | —     |      | £     | 4.26 |   |
| Weighted Average Floor Price (£/Mcf)   |       | £                      | 3.32       |     | —     |     | —     |     | —     |      | £     | 3.32 |   |

 

----

(1)  Oilderivatives are in reference to Platt’s Dated Brent prices.

 

(2)  Gasderivatives are designated in therms and have been converted to Mcf at a rateof 10 therms to 1 Mcf and are in reference to the Heren National Balance Pointprices.  The exchange rate at March 31,2008 was $1.99 to £1.00.

 

As of March 31, 2008, our outstanding commodity derivativescovered approximately 50% of our anticipated production for the remainder of2008.

 

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.

 

### ***Interest Rate Swap***

 

We also have an interest rate swap for a notional amount of $37.5million whereby we pay a fixed rate of 5.05% and receive LIBOR.  The interest rate swap is accounted for as ahedge.

 

12

----

 

**Endeavour International Corporation**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

 

## ***Note 6 – Asset Retirement Obligations***

 

Our asset retirement obligations relate to obligation of the futureplugging and abandonment of oil and gas properties.  The following table provides a rollforward ofthe asset retirement obligations for the three months ended March 31, 2008and 2007:

 
| ** **                                                                 | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **(Amounts in thousands)**                                       | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Carrying amount of asset retirement  obligations as of beginning of period | ** ** | **$**                                                | **38,422** |   | $ | 32,503 |   |
| Accretion expense                                                          | ** ** | **875**                                              |       | 739 |   |
| Impact of foreign currency exchange rate  changes                          | ** ** | **549**                                              |       | 247 |   |
|                                                                       |       |                                                 |       |   |   |
| Carrying amount of asset retirement obligations  as of end of period       | ** ** | **$**                                                | **39,846** |   | $ | 33,489 |   |

 

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

 

Cash paid during the period for interest andincome taxes was as follows:

 
| ** **                           | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
|                                 |       |                                                 |       |   |   |
| Interest paid                        | ** ** | **$**                                                | **8,712**  |   | $ | 6,808 |   |
|                                 |       |                                                 |       |   |   |
| Income taxes paid                    | ** ** | **$**                                                | **5,690**  |   | $ | 2,050 |   |

 

## ***Note 8 – Comprehensive Loss***

 

Excluding net loss, our source of comprehensive loss is due to the netunrealized loss on derivative instruments and marketable securities, which areclassified as available-for-sale.  Thefollowing summarizes the components of comprehensive loss:

 

13

----

 

**Endeavour International Corporation**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

 
| ** **                                                                | ** ** | **Quarter Ended March 31,** | ** **  |
|---------------------------------------------------------------------------|------------|--------------------------------------------|-------------|
| **(Amounts in thousands)**                                      | ** ** | **2008**                                   | ** **  | **2007** | ** ** |
|                                                                      |       |                                       |        |   |   |
| Net income (loss)                                                         | ** ** | **$**                                      | **(16,792** | **)** | $ | (3,143 | ) |
|                                                                      |       |                                       | ** **  |   |   |
| Unrealized loss on interest rate swap  derivative instrument, net of tax  | ** ** | **(980**                                   | **)**       | (170 | ) |
| Unrealized (loss) on marketable securities                                | ** ** | **—**                                 | ** **  | (36 | ) |
| Reclassification adjustment for income  (loss) realized in net loss above | ** ** | **122**                                    | ** **  | — |   |
|                                                                      |       |                                       | ** **  |   |   |
| Net impact on comprehensive income (loss)                                 | ** ** | **(858**                                   | **)**       | (206 | ) |
|                                                                      |       |                                       | ** **  |   |   |
| Comprehensive income (loss)                                               | ** ** | **$**                                      | **(17,650** | **)** | $ | (3,349 | ) |

 

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

 

### ***RigCommitments***

 

We are part of a consortium, with several other operators in theNorwegian Continental Shelf, which has entered into a contract for the use of adrilling rig over a multi-year period. The contract commits us to 100 days (for two wells) for drillingservices by a semi-submersible drilling rig for $38 million between mid 2008and 2009.

 

In 2006, we entered into a rig commitment for 220 days over a one-yearperiod beginning in May 2007 for the United Kingdom sector of the NorthSea for a heavy-duty harsh environment jack-up. In January 2007, a $22 million escrow payment was made under therig commitment.  This escrow payment isincluded in “Restricted cash” on our Balance Sheet.  The escrow will be released in the final twomonths of the commitment, which we currently anticipate to be complete by2009.  We have utilized 73 days of thisrig commitment and expect to utilize the remaining 147 days of this commitmentbeginning in the third quarter of 2008 through 2009 depending on wellscheduling.

 

Also in March, we entered into a $51.9 million agreement with AppliedDrilling Technology International for a semi-submersible drilling rig in thefourth quarter of 2008 and mid 2009.

 

### ***Contingencies***

 

Hess Limited, the operator of the AH001 facility, supporting productionfrom Ivanhoe, Rob Roy, Hamish (collectively, IVRRH), Renee and Rubie fields hasadvised us that there has been a mis-measurement of the volumes of oil producedfrom the IVRRH fields.  At March 31,2008, we are estimating a net liability of $2.8 million as a result of themis-measurement.

 

14

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**Endeavour International Corporation**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

 

## ***Note 10 – Fair Value Measurements***

 

Effective January 1, 2008, we adopted the new guidance for fairvalue measurements for financial assets and liabilities measured on a recurringbasis.  This new standard defines fairvalue as the price that would be received to sell an asset or paid to transfera liability in an orderly transaction between market participants at themeasurement date.  It also clarifies thatfair value should be based on assumptions that market participants would usewhen pricing an asset or liability, including assumptions about risk and therisks inherent in valuation techniques and the inputs to valuations.  This includes not only the credit standing ofcounterparties involved and the impact of credit enhancements but also the impactof our own nonperformance risk on our liabilities.  According to this new standard, fair valuemeasurements are classified and disclosed in one of the following categories asfollows:

 
| Level 1: |   | Fair value is based on actively-quoted market prices, if available.                                                                                                                                                                                                                                                                                                                                   |
|----------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| Level 2: |   | In the absence of actively-quoted market prices, we seek price  information from external sources, including broker quotes and industry  publications. Substantially all of these inputs are observable in the  marketplace during the entire term of the instrument, can be derived from  observable data, or supported by observable levels at which transactions are  executed in the marketplace. |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| Level 3: |   | If valuations require inputs that are both significant to the fair  value measurement and less observable from objective sources, we must  estimate prices based on available historical and near-term future price  information and certain statistical methods that reflect our market  assumptions.                                                                                                |

 

We apply fair value measurements to certain assets and liabilitiesincluding commodity and interest rate derivative instruments, marketablesecurities and embedded derivatives relating to conversion and change incontrol features in certain of our debt instruments.  We maximize the use of observable inputs andminimize the use of unobservable inputs when measuring fair value.

 

Financial assets and liabilities are classified based on the lowestlevel of input that is significant to the fair value measurement.  The following table summarizes the valuationof our investments and financial instruments by pricing levels as of March 31,2008:

 

15

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**Endeavour International Corporation**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

 
| **(Amounts in thousands)**  | ** ** | **Quoted Market  Prices in Active  Markets - Level 1** | ** ** | **Significant Other  Observable Inputs  - Level 2** | ** ** | **Significant  Unobservable  Inputs - Level 3** | ** ** | **Total Fair  Value** | ** ** |
|---------------------------------------|------------|--------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------|------------|
| Oil and gas derivative contracts (1): |       |                                                                                 |       |                                                          |       |                                                           |       |                       |       |
| Oil and gas swaps                     |       | $                                                                                    | —     |                                                          | $          | (74,017                                                        | )          | $                          | —     |   | $ | (74,017 | ) |
| Oil and gas collars                   |       | —                                                                               |       | (3,164                                                        | )          | —                                                         |       | (3,164                     | )          |
| Interest rate swaps (1)               |       | —                                                                               |       | (1,710                                                        | )          | —                                                         |       | (1,710                     | )          |
| Embedded derivatives                  |       | —                                                                               |       | —                                                        |       | (12,790                                                        | )          | (12,790                    | )          |
|                                  |       |                                                                                 |       |                                                          |       |                                                           |       |                       |       |
| Total derivative liabilities          |       | $                                                                                    | —     |                                                          | $          | (78,891                                                        | )          | $                          | (12,790    | ) | $ | (91,681 | ) |

 

----

(1)           Valuations for oiland gas derivatives and interest rate swaps are based on quotes received frommajor financial or commodity trading institutions.

 

The following is a reconciliation of changes in fair value of netderivative assets and liabilities classified as Level 3:

 
| **(Amounts in thousands)**                                                                                   | ** ** | **Three Months Ended March 31,  2008** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
|                                                                                                                   |       |                                                       |       |
| Balance at beginning of period                                                                                         |       | $                                                          | —     |   |
| Total gains or losses  (realized/unrealized):                                                                          |       |                                                       |       |
| Included in earnings                                                                                                   |       | 670                                                        |       |
| Purchases, issuance and settlements (net)                                                                              |       | (13,460                                                    | )          |
| Transfers in and/or our of Level 3 (net)                                                                               |       | —                                                     |       |
|                                                                                                                   |       |                                                       |       |
| Balance at end of period                                                                                               |       | $                                                          | (12,790    | ) |
|                                                                                                                   |       |                                                       |       |
| Changes in unrealized gains (losses)  relating to derivative assets and liabilities still held at March 31,  2008 |       | $                                                          | 670        |   |

 

## ***Note 11 – Subsequent Events***

## *** ***

Subsequent to March 31, 2008, we executed three costless oilcollars based on Dated Brent and five natural gas collars, based on Heren NBP,all of which are effective from January 1, 2009 through December 31,2009.  The first oil contract is for100,008 barrels, with a ceiling price of $124.00 per barrel and a floor priceof $100.00 per barrel; the second contract is for 100,008 barrels, with aceiling price of $122.00 per barrel and a floor price of $100.00 per barrel;and the third contract is for 200,004 barrels, with a ceiling price of $120.75per barrel, and a floor price of $100.00 per barrel.

 

The first natural gas contractcovers 700 MMcf, with a ceiling price of $18.03 per Mcf and a floor price of$12.54 per Mcf. The second natural gas contract covers 100 MMcf, with a ceiling

 

16

----

 

**Endeavour International Corporation**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

 

price of $16.96 and a floorprice of $12.54; the third natural gas collar covers 150 MMcf, with a ceilingprice of $17.91 and a floor price of $12.54; the fourth collar covers 250 MMcf,with a ceiling price of $18.21 and a floor price of $12.94, and the fifth collarcovers 200 MMcf, with a ceiling price of $18.51 and a floor price of $13.13.

 

17

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# **Item 2:  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

Unless the context otherwise requires, references to “Endeavour,” “we,”“us” or “our” mean Endeavour International Corporation or any of ourconsolidated subsidiaries or partnership interests.  The following discussion should be read inconjunction with our unaudited Condensed Consolidated Financial Statements andrelated notes thereto included elsewhere in this Report.  The following discussion also includes non-GAAPfinancial measures, which may not be comparable to similarly titled measurespresented by other companies. Accordingly, we strongly encourage investors to review our financialstatements in their entirety and not rely on any single financial measure.

 

### ***Overview***

### ** **

We are an international oil and gas exploration and production companyfocused on the acquisition, exploration and development of energyreserves.  To date, we have invested asignificant amount of our resources on various development, acquisition andexploration projects.

 

As oil prices continue to climb to record levels and gas prices in ourmarkets have recovered from last year, our realized price before derivativesincreased over 60% from the first quarter of 2007 to the first quarter of 2008.  This substantial increase in prices helpedrevenue grow from $42.8 million in the first three months of 2007 to $61.3million in the same period of 2008.  Bykeeping cash expenses reasonably flat from 2007 to 2008, the cash flow fromthis higher revenue allowed us to pay down an additional $2.0 million in debtwhile spending $19.6 million in capital expenditures during the first quarterof 2008 and increasing cash from year end by $4.0 million.  At March 31, 2008, we held $20.5 millionin cash and another $22.0 million in cash restricted for drilling rigcommitments.

 

Even with the substantial growth in revenue, net income can besignificantly affected by various non-cash items, such as unrealized gains andlosses on our commodity derivatives, currency impact of long-term liabilitiesand deferred taxes.  Net loss to commonshareholders for the first three months of 2008 was $19.5 million, or $0.15 pershare, reflecting the significant unrealized loss on the mark-to-market ofcommodity derivatives.  For the firstthree months of 2007, net loss to common shareholders was $6.0 million, or$0.05 per share.  The net loss for 2007reflects a smaller unrealized loss on the mark-to-market of commodityderivatives.  Net loss as adjusted for2008 would have been $2.0 million, or $0.02 per share without the effect ofderivative transactions and currency impacts of deferred taxes as compared tonet income as adjusted of $3.0 million, or $0.03 per share, in 2007.  Net loss and net loss as adjusted for 2008include $4.3 million in interest expense, including $2.1 million in cash,related to the early repayment of the Second Lien Term Loan.  Adjusted EBITDA increased to $42.6 million in2008 from $37.2 million in 2007.

 

Discretionary cash flow was $36.3 million for the first three months of2008 compared to $34.4 million for the same period in 2007, reflecting theincrease in revenues over the periods. Cash flows provided by operating activities decreased to $29.1 millionfor the three months ended 

 

18

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March 31, 2008 as compared to $46.3 million for the three monthsended March 31, 2007 primarily due to decreases in net cash provided bychanges in operating assets and liabilities partially offset by highercommodity prices.

 

### ***Resultsof Operations***

 

Our revenues are sensitive to changes inprices received for our products.  Ourproduction is sold at prevailing market prices that fluctuate in response tomany factors that are outside of our control. Given the current tightly balanced supply-demand market, smallvariations in either supply or demand, or both, can have dramatic effects onprices we receive for our oil and natural gas production.  While the market price received for oil andnatural gas varies among geographic areas, oil trades in a worldwide market,whereas natural gas, which has a limited global transportation system, issubject to local supply and demand conditions. Consequently, price movements for all types and grades of crude oilgenerally move in the same direction, while natural gas price movements havehistorically followed local market conditions. The majority of our natural gas is sold in the UK market.  UK natural gas prices are influenced byEuropean natural gas markets, liquefied natural gas (“LNG”) supply and newNorwegian gas supply.  With the advent ofmore LNG facilities, natural gas price movements will also become more globalin nature with a likely convergence between European and North American markets.

 

For the first quarter of 2008 and 2007, wehad sales volume of 8,800 BOE per day and 10,150 BOE per day, respectively.  Our physical daily production wasapproximately 10,100 BOE and 9,800 BOE for 2008 and 2007, respectively.  Thedecrease in sales volume is primarily attributable to timing of tanker liftingspartially offset by production from Enoch (which recorded first sales in thethird quarter of 2007) and the contribution of the gas from the completion ofthe gas project at Njord in the fourth quarter of 2007.  Even with the delay in tanker liftings forthe first quarter of 2008, we still expect full year 2008 production to rangefrom 8,600 to 9,000 BOE per day.

 

The following table shows our average sales volumes, sales prices andaverage production costs for the periods presented.

 

19

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| ** **                           | ** ** | **Quarter Ended March 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------|------------|
| ** **                           | ** ** | **2008**                                   | ** ** | **2007** | ** ** |
| ** **                           | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| **Sales volume (1):**                | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| **Oil and condensate sales (Mbbl):** | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| United Kingdom                       | ** ** | **265**                                    |       | 397 |   |
| Norway                               | ** ** | **96**                                     |       | 131 |   |
| Total                                | ** ** | **361**                                    |       | 528 |   |
|                                 |       |                                       |       |   |   |
| **Gas sales (MMcf):**                |       |                                       |       |   |   |
| United Kingdom                       | ** ** | **2,035**                                  |       | 2,259 |   |
| Norway                               | ** ** | **599**                                    |       | 54 |   |
| Total                                | ** ** | **2,634**                                  |       | 2,313 |   |
|                                 |       |                                       |       |   |   |
| **Total sales (MBOE):**              |       |                                       |       |   |   |
| United Kingdom                       | ** ** | **604**                                    |       | 773 |   |
| Norway                               | ** ** | **196**                                    |       | 140 |   |
| Total                                | ** ** | **800**                                    |       | 913 |   |
|                                 |       |                                       |       |   |   |
| **BOE per day**                      | ** ** | **8,796**                                  |       | 10,148 |   |

 
| **Realized Prices (2):**                         |       |   | ** ** |       |   |
|--------------------------------------------------|------------|--------|------------|------------|--------|
| **Oil and condensate price ($per Bbl):**         |       |   | ** ** |       |   |
| Before commodity derivatives                     | ** ** | **$**  | **89.84**  | ** ** | $      | 53.54 |   |
| Effect of commodity derivatives                  | ** ** | **$**  | **(17.57** | **)**      | $      | 5.96 |   |
| Realized prices including commodity  derivatives | ** ** | **$**  | **72.27**  | ** ** | $      | 59.50 |   |
|                                             |       |   | ** ** |       |   |
| **Gas price ($per Mcf):**                        |       |   | ** ** |       |   |
| Before commodity derivatives                     | ** ** | **$**  | **10.93**  | ** ** | $      | 6.28 |   |
| Effect of commodity derivatives                  | ** ** | **$**  | **1.22**   | ** ** | $      | 3.43 |   |
| Realized prices including commodity  derivatives | ** ** | **$**  | **12.15**  | ** ** | $      | 9.71 |   |
|                                             |       |   | ** ** |       |   |
| **Equivalent oil price ($per BOE):**             |       |   | ** ** |       |   |
| Before commodity derivatives                     | ** ** | **$**  | **76.53**  | ** ** | $      | 46.85 |   |
| Effect of commodity derivatives                  | ** ** | **$**  | **(3.94**  | **)**      | $      | 12.12 |   |
| Realized prices including commodity  derivatives | ** ** | **$**  | **72.59**  | ** ** | $      | 58.97 |   |

 

----

|   | (1) | We record oil revenues on the sales method,  i.e. when delivery has occurred. Actual production may differ based on the  timing of tanker liftings. We use the entitlements |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

20

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|   |   | method to  account for sales of gas production.   Our physical daily production was approximately 10,100 BOE and 9,800  BOE for 2008 and 2007, respectively. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                              |
|   | (2)    | The average  sales prices include gains and losses for derivative contracts we utilize to  manage price risk related to our future cash flows.                    |

 

During the three months ended March 31, 2008, we realized $3million in losses on the settlement of commodity derivatives, compared to $11million in gains for the same period in 2007. In the first quarter of 2008, we also recognized $30 million in losseson the mark-to-market of our commodity derivatives versus a loss of $16 millionfor the same period in 2007.

 

**Expenses**

 

Operating expenses decreased to $10.0 million during the first quarterof 2008 as compared to $10.7 million in the first quarter of 2007.  Operating costs per BOE decreased from $11.73per BOE in the first quarter of 2007 to $12.52 per BOE in the first quarter of2008.

 

G&A expenses decreased to $4.8 million during the first quarter of2008 as compared to $5.4 million for the corresponding period in 2007.  This decrease resulted from changes innon-cash stock-based compensation as a result of current year forfeitures andlower consulting fees.  The decreaseswere partially offset by increases resulting from compensation expense, andoccupancy costs.  The compensationexpense increase reflects salary expense related to increases in staffing and$0.2 million related to retiring employees. Components of G&A expenses for these periods are as follows:

** **
| ** **                             | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|
| **(Amounts in thousands)**   | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
|                                   |       |                                                 |       |   |   |
| Compensation                           | ** ** | **$**                                                | **4,937**  |   | $ | 4,188 |   |
| Consulting,  legal and accounting fees | ** ** | **1,111**                                            |       | 1,400 |   |
| Other expenses                         | ** ** | **198**                                              |       | 149 |   |
| Total gross cash G&A expenses      | ** ** | **6,246**                                            |       | 5,737 |   |
|                                   |       |                                                 |       |   |   |
| Non-cash stock-based compensation      | ** ** | **544**                                              |       | 1,877 |   |
| Gross G&A expenses                 | ** ** | **6,790**                                            |       | 7,614 |   |
| Less: capitalized G&A expenses     | ** ** | **(2,039**                                           | **)**      | (2,247 | ) |
| Net G&A expenses                   | ** ** | **$**                                                | **4,751**  |   | $ | 5,367 |   |

 

Interest expense increased to $8.2 million for the three months ended March 31,2008 as compared to $4.8 million for the corresponding period in 2007 and isprimarily associated with our early retirement of the Second Lien Term Loan of$4.3 million.

 

21

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**Income Taxes**

 

The following summarizes the components oftax expense (benefit):

 
| **(Amounts in thousands)**                 | ** ** | **UK**      | ** **  | **Norway** | ** ** | **U.S.**   | ** ** | **Other**  | ** ** | **Total**  | ** ** |
|------------------------------------------------------|------------|-------------|-------------|------------|------------|------------|------------|------------|------------|------------|------------|
| Three Months Ended  March 31, 2008              | ** ** | ** **  | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss) before taxes                       | ** ** | **$**       | **(19,565** | **)**      | **$**      | **7,925**  | ** ** | **$**      | **(2,312** | **)**      | **$**      | **(2,370** | **)** | **$** | **(16,322** | **)** |
| ** **                                           | ** ** | ** **  | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current tax expense                                  | ** ** | **1,470**   | ** **  | **2,144**  | ** ** | **—** | ** ** | **—** | ** ** | **3,614**  | ** ** |
| Deferred tax expense (benefit)                       | ** ** | **(10,230** | **)**       | **4,323**  | ** ** | **—** | ** ** | **122**    | ** ** | **(5,785** | **)**      |
| Foreign currency losses on deferred tax  liabilities | ** ** | **11**      | ** **  | **2,630**  | ** ** | **—** | ** ** | **—** | ** ** | **2,641**  | ** ** |
| Total tax expense (benefit)                          | ** ** | **(8,749**  | **)**       | **9,097**  | ** ** | **—** | ** ** | **122**    | ** ** | **470**    | ** ** |
| ** **                                           | ** ** | ** **  | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss) after taxes                        | ** ** | **$**       | **(10,816** | **)**      | **$**      | **(1,172** | **)**      | **$**      | **(2,312** | **)**      | **$**      | **(2,492** | **)** | **$** | **(16,792** | **)** |
|                                                 | ** ** | ** **  | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Three Months Ended  March 31, 2007              | ** ** | ** **  | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss) before taxes                       |       | $           | (468        | )          | $          | 887        |       | $          | (2,616     | )          | $          | 344 |   | $ | (1,853 | ) |
|                                                 |       |        |        |       |       |       |       |       |       |       |       |
| Current tax expense (benefit)                        |       | 1,653       |        | (620       | )          | (3         | )          | **—** |       | 1,030      |       |
| Deferred tax expense (benefit)                       |       | (2,307      | )           | 1,330      |       | **—** |       | **—** |       | (977       | )          |
| Foreign currency losses on deferred tax  liabilities |       | 660         |        | 577        |       | **—** |       | **—** |       | 1,237      |       |
| Total tax expense                                    |       | 6           |        | 1,287      |       | (3         | )          | **—** |       | 1,290      |       |
|                                                 |       |        |        |       |       |       |       |       |       |       |       |
| Net income (loss) after taxes                        |       | $           | (474        | )          | $          | (400       | )          | $          | (2,613     | )          | $          | 344 |   | $ | (3,143 | ) |

 

The change in income tax expense from a $1.3million to $0.5 million for the first three months of 2007 and 2008,respectively, is primarily the result of higher deferred tax benefits onincreased unrealized losses on derivatives, partially offset by increasedincome resulting from higher commodity prices and the effect of foreigncurrency changes on the deferred tax liabilities as a result of thestrengthening of the Norwegian kroner versus the U.S. dollar.

 

In the first quarter of 2008 and 2007, we didnot record any income tax benefits in the U.S. as there was no assurance thatwe could generate any U.S. taxable earnings, resulting in a full valuationallowance of deferred tax assets generated.

 

As our deferred tax liabilities aredenominated in their respective currencies, we revalue those deferred taxliabilities to the applicable foreign currency exchange rate at the end of eachperiod.  Those foreign currency gains andlosses are included in income tax expense as shown above.

 

**Reconciliation of Non-GAAP Measures**

** **

Net income can be significantly affected by various non-cash items,such as unrealized gains and losses on our commodity derivatives, currencyimpact of long-term liabilities and deferred taxes.  Given the significant impact that non-cashitems may have on our net income, we use various measures in addition to netincome, including non-financial performance indicators and non-GAAP measures askey metrics to manage our business. These key metrics demonstrate the company’s ability to maintain or growproduction levels and reserves, internally fund capital 

 

22

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expenditures and service debt as well as provide comparisons to otheroil and gas exploration and production companies.  These measures include, among others, debtand cash balances, production levels, oil and gas reserves, drilling results,discretionary cash flow, adjusted earnings before interest, taxes,depreciation, depletion and amortization (“Adjusted EBITDA”) and adjusted netincome.

 

Net Income (Loss) as Adjusted, AdjustedEBITDA and Discretionary Cash Flow are internal, supplemental measures of ourperformance that are not required by, or presented in accordance with,generally accepted accounting principles (GAAP).  We use these non-GAAP measures as internalmeasures of performance and to aid in our budgeting and forecastingprocesses.  We view these non-GAAPmeasures, and we believe that others in the oil and gas industry view these, orsimilar, non-GAAP measures, as commonly used analytic indicators to compareperformance among companies.  We furtherbelieve that these non-GAAP measures are frequently used by securitiesanalysts, investors, and other interested parties in the evaluation of issuers,many of which present these measures when reporting their results.  We believe these non-GAAP measures provideuseful information to both management and investors to gain an overallunderstanding of our current financial performance and provide investors withfinancial measures that most closely align to our internal measurementprocesses.  Since the application ofmark-to-market accounting has the effect of pulling forward into currentperiods non-cash gains and losses related to commodity derivatives relating to futuredelivery periods, analysis of results of operations from one period to anothercan be difficult.  We believe thatexcluding these unrealized non-cash gains and losses related to commodityderivatives and currency exchange changes provides a more meaningfulrepresentation of our economic performance in the reporting period and istherefore useful to us, investors, analysts and others in facilitating theanalysis of our results of operations from one period to another.  These measures should not be considered asmeasures of financial performance under GAAP, and the items excluded from thesemeasures are significant components in understanding and assessing financialperformance.

 

These non-GAAP measures should not beconsidered in isolation or as an alternative to net income, operating income,or any other performance measures derived in accordance with GAAP or asalternatives to cash flows generated by operating, investing or financingactivities as a measure of our liquidity. Because Net Income (Loss) as Adjusted, Adjusted EBITDA and DiscretionaryCash Flow are not measurements determined in accordance with GAAP and thussusceptible to varying calculations, Net Income (Loss) as Adjusted, AdjustedEBITDA and Discretionary Cash Flow as presented may not be comparable to othersimilarly titled measures of other companies.

 

Net Income (Loss) as Adjusted, AdjustedEBITDA and Discretionary Cash Flow have limitations as an analytical tool, andyou should not consider these measures in isolation, or as a substitute foranalysis of our financial statement data presented in the consolidatedfinancial statements as reported under GAAP. For example, Net Income (Loss) as Adjusted, Adjusted EBITDA andDiscretionary Cash Flow may not reflect:

 
|   | · | our cash expenditures, or  future requirements, for capital expenditures or contractual commitments; |
|--------|--------|------------------------------------------------------------------------------------------------------|
|   | · | changes in, or cash  requirements for, our working capital needs;                                    |

 

23

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|   | · | unrealized gains (losses) on  derivatives;                                                                          |
|--------|--------|---------------------------------------------------------------------------------------------------------------------|
|   | · | non-cash foreign currency gains  (losses);                                                                          |
|   | · | our interest expense, or the  cash requirements necessary to service interest and principal payments on our  debts; |
|   | · | our preferred stock dividend  requirements; and                                                                     |
|   | · | depreciation, depletion and  amortization.                                                                          |

 

Because of these limitations, Net Income(Loss) as Adjusted, Adjusted EBITDA and Discretionary Cash Flow should not beconsidered as measures of cash available to us to invest in the growth of ourbusiness.  We compensate for theselimitations by relying primarily on our GAAP results and by using Net Income(Loss) as Adjusted, Adjusted EBITDA and Discretionary Cash Flow onlysupplementally.

 

As required under Regulation G of theSecurities Exchange Act of 1934, provided below are reconciliations of netincome (loss) to the following non-GAAP financial measures:  net income as adjusted, Adjusted EBITDA anddiscretionary cash flow.

 
| ** **                                                                     | ** ** | **Three Months Ended March 31,** | ** **  |
|--------------------------------------------------------------------------------|------------|------------------------------------------------------|-------------|
| **(in thousands, except per share)**                       | ** ** | **2008**                                             | ** **  | **2007** | ** ** |
| Net loss                                                                       | ** ** | **$**                                                | **(16,792** | **)** | $ | (3,143 | ) |
|                                                                           |       |                                                 | ** **  |   |   |
| Depreciation, depletion and amortization                                       | ** ** | **21,403**                                           | ** **  | 19,213 |   |
| Deferred tax expense (benefit)                                                 | ** ** | **(3,144**                                           | **)**       | 261 |   |
| Unrealized (gain) loss on instruments                                          | ** ** | **29,642**                                           | ** **  | 15,696 |   |
| Amortization of non-cash compensation                                          | ** ** | **544**                                              | ** **  | 1,884 |   |
| Amortization of loan costs and discount                                        | ** ** | **3,156**                                            | ** **  | 427 |   |
| Non-cash interest expense                                                      | ** ** | **869**                                              | ** **  | — |   |
| Other                                                                          | ** ** | **632**                                              | ** **  | 15 |   |
|                                                                           |       |                                                 | ** **  |   |   |
| **Discretionary cash flow**                                                    | ** ** | **$**                                                | **36,310**  | ** ** | $ | 34,353 |   |
|                                                                           |       |                                                 | ** **  |   |   |
| Net income (loss) to common shareholders,  as reported                         | ** ** | **$**                                                | **(19,487** | **)** | $ | (5,987 | ) |
| Unrealized (gains) losses on derivatives (net  of 50% tax)                     | ** ** | **14,821**                                           | ** **  | 7,848 |   |
| Currency impact of deferred taxes                                              | ** ** | **2,641**                                            | ** **  | 1,237 |   |
|                                                                           |       |                                                 | ** **  |   |   |
| **Net income (loss), as adjusted**                                             | ** ** | **$**                                                | **(2,025**  | **)** | $ | 3,098 |   |
|                                                                           |       |                                                 | ** **  |   |   |
| Weighted average number of common shares  outstanding – basic and diluted | ** ** | **125,537**                                          | ** **  | 120,304 |   |
|                                                                           |       |                                                 | ** **  |   |   |
| **Earnings per share, as adjusted**                                            | ** ** | **$**                                                | **(0.02**   | **)** | $ | 0.03 |   |

 

24

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| ** **                                               | ** ** | **Three Months Ended March 31,** |        |
|----------------------------------------------------------|------------|------------------------------------------------------|-------------|
| **(in thousands, except per share)** | ** ** | **2008**                                             | ** **  | **2007** |   |
|                                                     | ** ** | ** **                                           | ** **  |   |   |
| Net income (loss) to common shareholders,  as reported   | ** ** | **$**                                                | **(19,487** | **)** | $ | (5,987 | ) |
|                                                     |       |                                                 |        |   |   |
| Unrealized (gains) losses on derivatives                 | ** ** | **29,642**                                           |        | 15,696 |   |
| Net interest expense                                     | ** ** | **7,841**                                            |        | 4,169 |   |
| Depreciation, depletion and amortization                 | ** ** | **21,403**                                           |        | 19,213 |   |
| Income tax expense (benefit)                             | ** ** | **470**                                              |        | 1,290 |   |
| Preferred stock dividends                                | ** ** | **2,695**                                            |        | 2,844 |   |
|                                                     |       |                                                 |        |   |   |
| **Adjusted EBITDA**                                      | ** ** | **$**                                                | **42,564**  |   | $ | 37,225 |   |

 

### ***Liquidityand Capital Resources***

 

The following table summarizes our net cash flows from operating,investing and financing activities for the periods indicated.  For additional details regarding thecomponents of our primary cash flow amounts, see the Condensed ConsolidatedStatements of Cash Flows under Item 1 of this report.

 
| ** **                                | ** ** | **For the Quarter Ended March 30,** | ** **  |
|-------------------------------------------|------------|--------------------------------------------------------------|-------------|
| **(Amounts in thousands)**      | ** ** | **2008**                                                     | ** **  | **2007** | ** ** |
|                                      |       |                                                         |        |   |   |
| Net cash provided by Operating Activities | ** ** | **$**                                                        | **29,140**  |   | $ | 46,311 |   |
| Net cash used in Investing Activities     | ** ** | **$**                                                        | **(19,581** | **)** | $ | (33,576 | ) |
| Net cash provided by Financing Activities | ** ** | **$**                                                        | **(5,540**  | **)** | $ | (30,110 | ) |

 

The net cash flows provided by (used in) operating activities areprimarily impacted by the earnings from our business activities.  The cash flows provided by operatingactivities decreased to $29.1 million for the three months ended March 31,2008 as compared to $46.3 million for the three months ended March 31,2007 primarily due to decreases in cash flows used by changes in net operatingassets and liabilities partially offset by higher commodity prices.

 

The cash used in investing activities represents expenditures forcapital projects and asset purchases, as discussed in “Drilling Program” below,and increases to restricted cash under escrow for our rig commitments for2007.  The cash provided by (used in)financing activities generally consists of borrowings and repayments of debt,proceeds from the issuance of equity securities and payment of financing costs.

 

In January 2008, we completed the refinancing of certain debt withthe following:

 
|   | · | Repayment of the outstanding balance of $75  million under our Second Lien Term Loan, plus accrued interest;                                                 |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | · | Issuance of $40 million under a private  offering of 11.5% guaranteed convertible bonds to a company controlled by the  Smedvig Family Office of Norway; and |

 

25

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|   | · | Issuance of $25 million under a junior  credit facility. |
|--------|--------|----------------------------------------------------------|

 

The $40 million Convertible Bonds due 2014 bear interest at a rate of11.5% per annum, compounded quarterly, and are unconditionally guaranteed by uson a senior unsecured basis.  Interest iscompounded quarterly and added to the outstanding principal balance each quarter.  Interest is not payable in cash, but isinstead payable in kind upon maturity of the bonds.

 

We also borrowed $25 million under the Junior Facility.  Indebtedness under the Junior Facility bearsinterest at LIBOR plus 3.5% (plus 5.5% after the first year).  Amounts borrowed under the Junior Facilitywill be repaid in semi-annual payments beginning December 31, 2009 andmust be repaid in full in October 2011.

 

Outstanding loans under the Junior Facility may be prepaid at ouroption without penalty after the earlier of (i) the day after the periodextending from January 22, 2008 to and including one month after theEffective Date (as defined in the Junior Facility) or (ii) the day onwhich the lenders’ available commitments are reduced to zero.  Once repaid, amounts under the JuniorFacility may not be re-borrowed.  TheJunior Facility contains customary covenants, which limit our ability to incurindebtedness, except for permitted hedging arrangements; create certain liens;dispose of our assets and make dividend or other distribution with respect toequity securities.  In addition, theJunior Facility contains various financial and technical covenants.

 

The amounts outstanding under the Junior Facility may becomeimmediately due upon the occurrence of a change of control, failure to payobligations under other financial indebtedness when due, certain events ofdefault, breach of financial covenants and other events as defined in theagreement.

 

Simultaneously with entering into the Junior Facility and issuing theConvertible Bonds, discussed above, we terminated the Second Lien Term Loan andrepaid all of the $78.6 million in outstanding indebtedness including accruedinterest, related fees and expenses of approximately $4.3 million.  The amount outstanding under the Second LienTerm Loan was scheduled to mature in 2011.

 

**Drilling Program**

 

We anticipate spending approximately $90 million during 2008 to fundoil and gas exploration and development in the North Sea.  An estimated $40 million will be allocated todrilling at least five exploration prospects in the North Sea.  Approximately 60 percent of this explorationbudget will be spent in Norway with the balance dedicated to drilling in theUK.

 

In Norway, the Galtvort well began drilling in April 2008 and is anear-field prospect operated by StatoilHydro Petroleum AS in which we have a7.5 percent interest in the well.  Wewill also participate in the drilling of three other exploration wells on theNorwegian Continental Shelf as part of our 2008 drilling campaign.  We will operate our first well in Norway withthe drilling of the Jade well, in which Endeavour holds a 65 percentinterest.  The area is the site of thetwo Agat natural gas discoveries and the test will set out to identifyadditional reserves in support of commercial development.  The other two wells include the Noatun C, aprospect in north of the 

 

26

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Njord field, and the Brage North, an exploration target in the Bragefield.  We hold a 2.5 and 4.44 percentinterest, respectively, in the blocks.

 

We plan to drill three exploration and appraisal wells and onedevelopment well in the United Kingdom sector of the North Sea during thesecond half of this year.  The Teslaexploration well on Block 22/24c will test for hydrocarbons in one of ourprimary areas of focus.  We hold a 25percent interest in the license.  We alsoplan to drill a well to further appraise the Cygnus discovery, in which we holda 12.5 percent interest.  Anotherappraisal well is planned on the Rochelle discovery in which we hold a 55.6%interest.  We are scheduled to drill andoperate a development well on one of the two R blocks, Renee and Rubie, laterthis year.

 

The timing and order of this program will be determined by the completionof ongoing technical work, partner approvals and rig scheduling for individualprospects.  We may increase or decreaseour planned activities for 2008 or high grade our exploratory prospects,depending upon drilling results, potential acquisition candidates, productprices, the availability of capital resources and other factors affecting theeconomic viability of such activities. We believe we have a production base that generates significant cashflow to fund our future growth plans and ongoing operations.

 

In March, we were awarded interests in two production licenses on theNorwegian Continental Shelf, a 25 percent interest in PL453S and a 20 percentinterest in PL457.  Total acreage for thetwo awards approximates 538,000 acres, which brings our total acreage to1,423,000 acres.  We also entered into anagreement to farm down our interest in the Galtvort and Gygrid prospects.

 

## ***Rig Commitments***

## *** ***

We are part of a consortium, with several other operators in theNorwegian Continental Shelf, which has entered into a contract for the use of adrilling rig over a multi-year period. The contract commits us to 100 days (for two wells) for drillingservices by a semi-submersible drilling rig for $38 million between mid 2008and 2009.

 

In 2006, we entered into a rig commitment for 220 days over a one-yearperiod beginning in May 2007 for the United Kingdom sector of the NorthSea for a heavy-duty harsh environment jack-up. In January 2007, a $22 million escrow payment was made under therig commitment.  This escrow payment isincluded in “Restricted cash” on our Balance Sheet.  The escrow will be released in the final twomonths of the commitment, which we currently anticipate to be complete by2009.  We have utilized 73 days of thisrig commitment and expect to utilize the remaining 147 days of this commitmentbeginning in the third quarter of 2008 through 2009 depending on wellscheduling.

 

Also in March, we entered into a $51.9 million agreement with AppliedDrilling Technology International for a semi-submersible drilling rig in thefourth quarter of 2008 and mid 2009.

 

27

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**2008 Outlook**

 

We expect production for 2008 to range from 8,600 to 9,000 BOE per day, withapproximately 50%– 55% of that production as gas.  For 2008, we expect realized prices beforederivatives to be $0.30 - $0.40 per Mcf less than the National Balance Pointprice for gas and $4.00 - $5.00 per Bbl less than the Dated Brent price foroil.  For the three months ended March 31,2008, our production averaged 8,800 BOE per day.  According to the salesmethod of accounting, oil revenues are recognized when production is sold to apurchaser at a fixed or determinable price, when delivery has occurred andtitle has transferred, and collectibility of the revenue is probable.

 

Oil prices continue to be impacted by supply and demand on a worldwidebasis, while natural gas prices are more impacted by regional economic andweather patterns.  While oil pricescontinue to remain strong, natural gas prices in the UK have begun to recoverfrom the levels seen year to date. Warmer weather conditions and increases in the supply of natural gasavailable from Norway had impacted the nine month gas prices.  We have commodity derivative instruments tosecure our realized prices for a portion of our oil and gas production through2011.  See Note 5 to the CondensedConsolidated Financial Statements in this report for more discussion of ourcommodity derivative instruments.

 

We expect operating costs per BOE to be in the range of $14 to $15 perBOE for 2008.  Commodity prices can alsoaffect our operating cash flow through an indirect effect on operatingexpenses.  Commodity prices can alsoaffect our operating cash flow through an indirect effect on operating expenses.  Significant commodity price increases, asexperienced in recent years, can lead to an increase in drilling anddevelopment activities.  As a result, thedemand and cost for people, services, equipment and materials may alsoincrease, causing a negative impact on our cash flow.

 

### ***DisclosuresAbout Contractual Obligations and Commercial Commitments***

 

See “Drilling Program” for a discussion of our rig commitments andplanned expenditures.

 

# **Cautionary Statement for Forward-Looking Statements**

 

The information contained in this Quarterly Report on Form 10-Qand in other public statements by Endeavour and our officers or directorsincludes or may contain certain forward-looking statements.  The words “may,” “will,” “expect,” “anticipate,”“believe,” “continue,” “estimate,” “project,” “intend,” and similar expressionsused in this Report are intended to identify forward-looking statements withinthe meaning of Section 27A of the U.S. Securities Act of 1933, as amended,and Section 21E of the U.S. Securities Exchange Act of 1934, asamended.  You should not place unduereliance on these forward-looking statements, which speak only as of the datemade.  We undertake no obligation to publiclyupdate these forward-looking statements to reflect events or circumstancesafter the date they are made or to reflect the occurrence of unanticipatedevents.  You should also know that suchstatements are not guarantees of future performance and are subject to risks,uncertainties and assumptions.  Thesefactors include, but are not limited to, those risks described in detail belowand in the our Annual Report on Form 10-K

 

28

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for the year ended December 31, 2007 under the caption “RiskFactors” and other filings with the Securities and Exchange Commission.  These risk factors include, among others, ourability to replace reserves and sustain production; the level of ourindebtedness; the availability of capital on an economic basis to fund reservereplacement costs; uncertainties in evaluating oil and natural gas reserves ofacquired properties and associated potential liabilities; unsuccessfulexploration and development drilling; and production interruptions that couldadversely affect our cash flow.  Shouldany of these risks or uncertainties materialize, or should any of theseassumptions prove incorrect, actual results may differ materially from thoseincluded within the forward-looking statements.

 

# **Item 3:  Quantitative andQualitative Disclosures about Market Risk**

 

#### **Foreign Exchange 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 to effects that foreign exchange rate movementshave on our costs and on the cash flows that we receive from foreignoperations.  We operate a centralizedcurrency management operation to take advantage of potential opportunities tonaturally offset exposures against each other. To date, we have addressed our foreign currency exchange rate risksprincipally by maintaining our liquid assets in interest-bearing accounts,until payments in foreign currency are required, but we have not reduced thisrisk by hedging to date.

 

#### **Commodity Price Risk**

#### ** **

We produce and sell crude oil and naturalgas.  Realized pricing is primarilydriven by the prevailing worldwide price for crude oil and regional gas spotmarket prices that 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.  We may engagein oil and gas hedging activities to realize commodity prices that we considerfavorable.  For additional informationregarding our derivative instruments, see Note 5 to the Condensed ConsolidatedFinancial Statements.

 

#### **Interest Rate Risk**

#### ** **

We are exposed to changes in interest rates.  Changes in interest rates affect the interestearned on cash and cash equivalents and the interest rate paid on borrowingsunder debt.

 

At March 31, 2008, we had an interest rate swap for a notionalamount of $37.5 million whereby we pay a fixed rate of 5.05% and receivethree-month LIBOR through November 2009. A 250 change in basis points on LIBOR would result in a $0.3 millionchange in our annual interest expense, given our floating rate debt at March 31,2008 and interest rate swap.

 

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# **Item 4:  Controls and Procedures**

 

### ***Evaluationof Disclosure Controls and Procedures***

 

As of the end of the period covered by this Report, our managementcarried out an evaluation, with the participation of our chief executiveofficer (the “CEO”) and chief financial officer (the “CFO”), of theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rule 13a-15(b) or 15d-15(b) of theSecurities Exchange Act of 1934, as amended). Based on that evaluation, the CEO and CFO concluded:

 

(i)                                     thatour disclosure controls and procedures are designed to ensure that informationwe are required to disclose in our reports filed or submitted under theSecurities Exchange Act of 1934, as amended, is (a) recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms, and (b) is accumulated and communicated to our management,including the CEO and CFO, as appropriate, to allow timely decisions regardingrequired disclosure; and

 

(ii)                                  thatour disclosure controls and procedures were effective as of March 31, 2008.

 

### ***Changesin Internal Control over Financial Reporting***

 

There was no change in our system of internal control over financialreporting during the last fiscal quarter that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

# **Part II. Other Information**

 

# **Item 1A:  Risk Factors**

 

There have been no material changes in our risk factors since December 31,2007.  For a detailed discussion of ourrisk factors, please read, Item 1A “*RiskFactors*,” in our Annual Report on Form 10-K for the year ended December 31,2007.

 

# **Item 6:  Exhibits**

 

The exhibits marked with the asterisk symbol (*) are filed or furnished(in the case of Exhibits 32.1 and 32.2) with this Form 10-Q.

 

The exhibits marked with the dagger symbol(†) are management contracts and compensatory plans or arrangements.

 
| 3.1(a) | Amended and Restated Articles of Incorporation (Incorporated by  reference to Exhibit 3.2 of our Quarterly Report on Form 10-Q  (Commission File No. 001-32212) for the quarter ended June 30,  2004.) |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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| 3.1(b) | Certificate of Amendment dated June 1, 2006 (Incorporated by  reference to Exhibit 4.2 of our Registration Statement on Form S-3  (Commission File No. 333-139304) filed on December 13, 2006.) |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2    | Amended and Restated Bylaws (Incorporated by reference to  Exhibit 3.4 to our Current Report on Form 8-K (Commission File  No. 001-32212) filed on November 6, 2006.)                                |
| 31.1 * | Certification of William L. Transier, Chief Executive Officer,  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                          |
| 31.2 * | Certification of J. Michael Kirksey, Chief Financial Officer,  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                           |
| 32.1 * | Certification of William L. Transier, 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 J. Michael Kirksey, Chief Financial Officer,  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                      |

 

 

# **Signatures**

# ** **

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

**Endeavour International Corporation**

 

 
| Date: May 12, 2008 | /s/ J. Michael Kirksey        |                            | /s/ Robert L. Thompson |
|-------------------------|-------------------------------|---------------------------------|------------------------|
|                    | J. Michael Kirksey            | Robert L. Thompson              |
|                    | Executive Vice President and  | Senior Vice President and       |
|                    | Chief Financial Officer       | Chief Accounting Officer        |
|                    | (Principal Financial Officer) | (Principal Accounting  Officer) |
|                         |                               |                                 |                        |  |  |

 

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