Tableof Contents

 

 

 

**United StatesSecurities and Exchange Commission**

 

**Washington, D.C. 20549**

** **

**Form 10-Q**

** **

**(Mark One)**

**x****Quarterly Report Pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934**

** **

**For the Quarterly Period Ended****June 30, 2008**

** **

**or**

** **

**o****  Transition Report UnderSection 13 or 15(d) of the Securities Exchange Act of 1934**

** **

**For the transition periodfrom            to           **

** **

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

** **

**Endeavour International 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 since  last 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

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of “accelerated filer,” “large accelerated filer,” and“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):

 

| Large  accelerated filer o | Accelerated  filer x | Non-accelerated  filer o | Smaller  reporting company o |
|----------------------------|---------------------------|--------------------------|-----------------------------------|

 

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

 

Asof August 7, 2008, 127,768,005 shares of the registrant’s common stockwere outstanding.

 

 

 

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**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 | 17     |
| Item 3:  Quantitative and Qualitative Disclosures About Market Risk                                  | 29     |
| Item 4:  Controls and Procedures                                                                     | 29     |
| Part II. Other Information                                                                      |   |
| Item 1A: Risk Factors                                                                                | 30     |
| Item 4:  Submission of Matters to a Vote of Security Holders                                         | 30     |
| Item 6: Exhibits                                                                                     | 31     |
| Signatures                                                                                           | 32     |

 

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Tableof Contents

 

**Part I:  Financial Information**

**Item1:  Financial Statements**

 

**Endeavour International Corporation**

**Condensed Consolidated BalanceSheets**

**(Unaudited)**

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

 
| ** **                                                                                             | ** ** | **June 30, 2008** | ** **  | **December 31, 2007** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-----------------------------|-------------|---------------------------------|------------|
| **Assets**                                                                                             |       |                        |        |                            |       |
| Current Assets:                                                                                        |       |                        |        |                            |       |
| Cash and cash equivalents                                                                              | ** ** | **$**                       | **29,379**  | ** **                      | $          | 16,440 |   |
| Restricted cash                                                                                        | ** ** | **22,000**                  | ** **  | 22,000                          |       |
| Accounts receivable                                                                                    | ** ** | **39,502**                  | ** **  | 33,291                          |       |
| Prepaid expenses and other current assets                                                              | ** ** | **75,083**                  | ** **  | 46,516                          |       |
| Total Current Assets                                                                                   | ** ** | **165,964**                 | ** **  | 118,247                         |       |
|                                                                                                   |       |                        | ** **  |                            |       |
| Property and  Equipment, Net                                                                           | ** ** | **320,981**                 | ** **  | 335,023                         |       |
| Goodwill                                                                                               | ** ** | **284,549**                 | ** **  | 283,324                         |       |
| Other Assets                                                                                           | ** ** | **8,909**                   | ** **  | 11,029                          |       |
| Total Assets                                                                                           | ** ** | **$**                       | **780,403** | ** **                      | $          | 747,623 |   |
|                                                                                                   |       |                        | ** **  |                            |       |
| **Liabilities  and Stockholders’ Equity**                                                         |       |                        | ** **  |                            |       |
| Current Liabilities:                                                                                   |       |                        | ** **  |                            |       |
| Accounts payable                                                                                       | ** ** | **$**                       | **24,286**  | ** **                      | $          | 31,036 |   |
| Accrued expenses and other                                                                             | ** ** | **116,711**                 | ** **  | 50,013                          |       |
| Total Current Liabilities                                                                              | ** ** | **140,997**                 | ** **  | 81,049                          |       |
|                                                                                                   |       |                        | ** **  |                            |       |
| Long-Term Debt                                                                                         | ** ** | **238,969**                 | ** **  | 266,250                         |       |
| Deferred Taxes                                                                                         | ** ** | **107,617**                 | ** **  | 135,552                         |       |
| Other Liabilities                                                                                      | ** ** | **182,321**                 | ** **  | 69,623                          |       |
| Total Liabilities                                                                                      | ** ** | **669,904**                 | ** **  | 552,474                         |       |
|                                                                                                   |       |                        | ** **  |                            |       |
| Commitments and Contingencies                                                                          |       |                        | ** **  |                            |       |
|                                                                                                   |       |                        | ** **  |                            |       |
| Series C Convertible Preferred Stock  (Liquidation preference: $125,000)                          | ** ** | **125,000**                 | ** **  | 125,000                         |       |
|                                                                                                   |       |                        | ** **  |                            |       |
| Stockholders’ Equity:                                                                             |       |                        | ** **  |                            |       |
| Series B Preferred stock (Liquidation  preference: $2,852)                                        | ** ** | **—**                  | ** **  | —                          |       |
| Common stock; shares issued and outstanding  – 127,932,598 at 2008 and 127,006,440 shares at 2007 | ** ** | **128**                     | ** **  | 127                             |       |
| Additional paid-in capital                                                                             | ** ** | **242,322**                 | ** **  | 241,539                         |       |
| Treasury stock (190,440 shares at 2008)                                                                | ** ** | **(252**                    | **)**       | —                          |       |
| Accumulated other comprehensive income                                                                 | ** ** | **116**                     | ** **  | (923                            | )          |
| Accumulated deficit                                                                                    | ** ** | **(256,815**                | **)**       | (170,594                        | )          |
| Total Stockholders’ Equity                                                                        | ** ** | **(14,501**                 | **)**       | 70,149                          |       |
| Total Liabilities and Stockholders’ Equity                                                        | ** ** | **$**                       | **780,403** | ** **                      | $          | 747,623 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

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**Endeavour International Corporation**

**Condensed Consolidated Statementof Operations**

**(Unaudited)**

(Amounts in thousands, except per share data)

 
| ** **                                             | ** ** | **For the Three Months  Ended June 30,** |        | **For the Six Months  Ended June 30,** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------------------------------|-------------|-----------------------------------------------------------------|------------|
| ** **                                             | ** ** | **2008**                                                          | ** **  | **2007**                                                        |       | **2008** | ** ** | **2007** | ** ** |
| Revenues                                               | ** ** | **$**                                                             | **86,342**  | ** **                                                      | $          | 31,621 |   | **$** | **147,596** | ** ** | $ | 74,411 |   |
|                                                   |       |                                                              | ** **  |                                                            |       |   | ** ** |   |   |
| Cost of Operations:                                    |       |                                                              | ** **  |                                                            |       |   | ** ** |   |   |
| Operating expenses                                     | ** ** | **13,969**                                                        | ** **  | 9,728                                                           |       | **23,988** | ** ** | 20,438 |   |
| Depreciation, depletion and amortization               | ** ** | **23,720**                                                        | ** **  | 15,247                                                          |       | **45,123** | ** ** | 34,461 |   |
| General and administrative                             | ** ** | **4,836**                                                         | ** **  | 5,160                                                           |       | **9,587** | ** ** | 10,527 |   |
| Total Expenses                                         | ** ** | **42,525**                                                        | ** **  | 30,135                                                          |       | **78,698** | ** ** | 65,426 |   |
|                                                   |       |                                                              | ** **  |                                                            |       |   | ** ** |   |   |
| Income From Operations                                 | ** ** | **43,817**                                                        | ** **  | 1,486                                                           |       | **68,898** | ** ** | 8,985 |   |
|                                                   |       |                                                              | ** **  |                                                            |       |   | ** ** |   |   |
| Other Income (Expense):                                |       |                                                              | ** **  |                                                            |       |   | ** ** |   |   |
| Derivatives:                                           |       |                                                              | ** **  |                                                            |       |   | ** ** |   |   |
| Realized gains (losses)                                | ** ** | **(14,494**                                                       | **)**       | 3,943                                                           |       | **(17,644** | **)** | 15,015 |   |
| Unrealized losses                                      | ** ** | **(130,686**                                                      | **)**       | (12,612                                                         | )          | **(160,328** | **)** | (28,308 | ) |
| Interest income                                        | ** ** | **325**                                                           | ** **  | 582                                                             |       | **691** | ** ** | 1,186 |   |
| Interest expense                                       | ** ** | **(5,330**                                                        | **)**       | (4,155                                                          | )          | **(13,536** | **)** | (8,928 | ) |
| Other                                                  | ** ** | **(520**                                                          | **)**       | (1,321                                                          | )          | **(1,291** | **)** | (1,880 | ) |
|                                                   |       |                                                              | ** **  |                                                            |       |   | ** ** |   |   |
| Total Other Expense                                    | ** ** | **(150,705**                                                      | **)**       | (13,563                                                         | )          | **(192,108** | **)** | (22,915 | ) |
|                                                   |       |                                                              | ** **  |                                                            |       |   | ** ** |   |   |
| Loss Before Income Taxes                               | ** ** | **(106,888**                                                      | **)**       | (12,077                                                         | )          | **(123,210** | **)** | (13,930 | ) |
| Income Tax Benefit                                     | ** ** | **(42,864**                                                       | **)**       | (1,873                                                          | )          | **(42,394** | **)** | (582 | ) |
|                                                   |       |                                                              | ** **  |                                                            |       |   | ** ** |   |   |
| Net Loss                                               | ** ** | **(64,024**                                                       | **)**       | (10,204                                                         | )          | **(80,816** | **)** | (13,348 | ) |
| Preferred Stock Dividends                              | ** ** | **2,709**                                                         | ** **  | 2,844                                                           |       | **5,405** | ** ** | 5,688 |   |
|                                                   |       |                                                              | ** **  |                                                            |       |   | ** ** |   |   |
| Net Loss to Common Stockholders                        | ** ** | **$**                                                             | **(66,733** | **)**                                                           | $          | (13,048 | ) | **$** | **(86,221** | **)** | $ | (19,036 | ) |
|                                                   |       |                                                              | ** **  |                                                            |       |   | ** ** |   |   |
| Basic and Diluted Loss per Common Share                | ** ** | **$**                                                             | **(0.52**   | **)**                                                           | $          | (0.11 | ) | **$** | **(0.68** | **)** | $ | (0.16 | ) |
|                                                   |       |                                                              | ** **  |                                                            |       |   | ** ** |   |   |
| Weighted Average Number of Common Shares  Outstanding: |       |                                                              | ** **  |                                                            |       |   | ** ** |   |   |
| Basic and Diluted:                                     | ** ** | **127,626**                                                       | ** **  | 123,661                                                         |       | **127,581** | ** ** | 121,133 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

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**Endeavour International Corporation**

**Condensed Consolidated Statementof Cash Flows**

**(Unaudited)**

**(Amounts in thousands)**

 
| ** **                                                                       | ** ** | **For the Six Months Ended June  30,** | ** **  |
|----------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|-------------|
| ** **                                                                       | ** ** | **2008**                                                        | ** **  | **2007** | ** ** |
| Cash Flows from Operating Activities:                                            |       |                                                            | ** **  |   |   |
| Net loss                                                                         | ** ** | **$**                                                           | **(80,816** | **)** | $ | (13,348 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |       |                                                            | ** **  |   |   |
| Depreciation, depletion and amortization                                         | ** ** | **45,123**                                                      | ** **  | 34,461 |   |
| Deferred tax benefit                                                             | ** ** | **(58,277**                                                     | **)**       | (940 | ) |
| Unrealized loss on derivatives                                                   | ** ** | **160,328**                                                     | ** **  | 28,308 |   |
| Amortization of non-cash compensation                                            | ** ** | **1,196**                                                       | ** **  | 2,735 |   |
| Other                                                                            | ** ** | **7,372**                                                       | ** **  | 933 |   |
| Changes in assets and liabilities:                                               |       |                                                            | ** **  |   |   |
| (Increase) decrease in receivables                                               | ** ** | **(2,824**                                                      | **)**       | 37,498 |   |
| Increase in other current assets                                                 | ** ** | **(4,907**                                                      | **)**       | (16,602 | ) |
| Increase in accounts payable and accrued  expenses                               | ** ** | **4,759**                                                       | ** **  | 5,368 |   |
| Net Cash Provided by Operating Activities                                        | ** ** | **71,954**                                                      | ** **  | 78,413 |   |
|                                                                             |       |                                                            | ** **  |   |   |
| Cash Flows From Investing Activities:                                            |       |                                                            | ** **  |   |   |
| Capital expenditures                                                             | ** ** | **(32,168**                                                     | **)**       | (41,707 | ) |
| Increase in restricted cash                                                      | ** ** | **—**                                                      | ** **  | (20,133 | ) |
| Net Cash Used in Investing Activities                                            | ** ** | **(32,168**                                                     | **)**       | (61,840 | ) |
|                                                                             |       |                                                            | ** **  |   |   |
| Cash Flows From Financing Activities:                                            |       |                                                            | ** **  |   |   |
| Repayments of borrowings                                                         | ** ** | **(105,000**                                                    | **)**       | (40,000 | ) |
| Borrowings under debt agreements                                                 | ** ** | **88,000**                                                      | ** **  | 7,000 |   |
| Dividends paid                                                                   | ** ** | **(5,313**                                                      | **)**       | — |   |
| Financing costs paid                                                             | ** ** | **(4,282**                                                      | **)**       | — |   |
| Other financing                                                                  | ** ** | **(252**                                                        | **)**       | (157 | ) |
| Net Cash Used in Financing Activities                                            | ** ** | **(26,847**                                                     | **)**       | (33,157 | ) |
|                                                                             |       |                                                            | ** **  |   |   |
| Net Increase (Decrease) in Cash and Cash  Equivalents                            | ** ** | **12,939**                                                      | ** **  | (16,584 | ) |
| Effect of Foreign Currency Changes on Cash                                       | ** ** | **—**                                                      | ** **  | 2,617 |   |
| Cash and Cash Equivalents, Beginning of  Period                                  | ** ** | **16,440**                                                      | ** **  | 39,814 |   |
|                                                                             |       |                                                            | ** **  |   |   |
| Cash and Cash Equivalents, End of Period                                         | ** ** | **$**                                                           | **29,379**  | ** ** | $ | 25,847 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

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**Endeavour International Corporation**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

## *** ***

## ***Note 1 –General***

## *** ***

EndeavourInternational Corporation (a Nevada corporation formed in 2000) is anindependent oil and gas company engaged in the acquisition, exploration anddevelopment of energy reserves.  Our goalis to become a leading upstream company with an exploration focus primarily inthe North Sea.  We strive to achieve thisposition through acquisitions, licensing rounds and exploration drilling.

 

Asused in these Notes to Condensed Consolidated Financial Statements, the terms “Company”,“Endeavour”, “we”, “us”, “our” and similar terms refer to Endeavour InternationalCorporation and, unless the context indicates otherwise, its consolidatedsubsidiaries.  The accompanyingconsolidated financial statements of Endeavour should be read in conjunctionwith the consolidated financial statements and notes included in our AnnualReport on Form 10–K for the year ended December 31, 2007.

 

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

### ** **

Theaccompanying unaudited condensed consolidated financial statements have beenprepared on the accrual basis of accounting in accordance with accountingprinciples generally accepted in the United States of America (“US GAAP”) andhave 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.

 

Managementbelieves that it is reasonably possible that the following material estimatesaffecting the financial statements could change in the coming year: (1) estimatesof proved oil and gas reserves, (2) estimates as to the expected futurecash flow from proved oil and gas properties, (3) estimates of futuredismantlement and restoration costs, (4) estimates of fair values used inpurchase accounting and (5) estimates of the fair value of derivativeinstruments.

 

### ***Loss Per Share***

### ** **

Basicloss per common share is computed by dividing net loss to common stockholdersby the weighted average number of common shares outstanding for theperiod.  Diluted loss per share includesthe effect of our outstanding stock options, warrants and shares issuablepursuant to convertible debt, convertible preferred stock and certain stockincentive plans under the treasury stock method, if including such instrumentsis dilutive.

 

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**Endeavour International Corporation**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

 

Foreach of the periods presented, shares associated with stock options, warrants,convertible debt, convertible preferred stock and certain stock incentive plansare not included because their inclusion would be antidilutive (i.e., reducethe net loss per share).

 

Thecommon shares potentially issuable arising from these instruments, which wereoutstanding during the periods presented in the financial statements, consistedof:

 
| ** **                                     | ** ** | **June 30,** | ** ** |
|------------------------------------------------|------------|-------------------|------------|
| **(Amounts in thousands)**           | ** ** | **2008**          | ** ** | **2007** | ** ** |
|                                           |       |              |       |   |   |
| Warrants, options and stock-based compensation | ** ** | **1,253**         |       | 36 |   |
| Convertible debt                               | ** ** | **34,000**        |       | 16,185 |   |
| Convertible preferred stock                    | ** ** | **50,000**        |       | 50,000 |   |
|                                           |       |              |       |   |   |
| Common shares potentially issuable             | ** ** | **85,253**        |       | 66,221 |   |

 

### ***New Accounting Developments***

### ** **

InJanuary 2008 we adopted two new interpretations issued by the FinancialAccounting Standards Board.  Bothinterpretations pertain to fair value measurement in financial reporting.  The first interpretation defines fair value,outlines a structure for measuring fair value and requires expanded financialstatement 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.

 

InMarch 2008, the Financial Accounting Standards Board issued a newstatement that requires expanded disclosures of entities’ hedging activitiesand derivative instruments.  Thisstatement is effective for fiscal years and interim periods beginning after November 15,2008.  We are currently reviewing thisnew standard.

 

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

## *** ***

Wegrant restricted stock and stock options, including notional restricted stockand options, to employees and directors as incentive compensation.  The notional restricted stock and options maybe settled in cash or stock upon vesting, at our option, however it has beenour practice to settle in stock.  Therestricted stock and options generally vest over three years and the optionshave a five year term.  The vesting ofthese shares and options is dependent upon the continued service of thegrantees to Endeavour.  Upon the occurrenceof a change in control, each share of 

 

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**Endeavour International Corporation**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

 

restrictedstock and stock option outstanding on the date on which the change in controloccurs will immediately vest.  For thesecond quarter of 2008, we included non-cash stock-based compensation of $0.4million and $0.3 million in general and administrative expenses and capitalizedgeneral and administrative expenses, respectively.  For the second quarter of 2007, we includednon-cash stock-based compensation of $0.4 million and $0.5 million in generaland administrative expenses and capitalized general and administrativeexpenses, respectively.  For the sixmonths ended June 30, 2008 and 2007, we included non-cash stock – basedcompensation of $0.7 million and $0.5 million, and $1.9 million and $1.1million in general and administrative expenses and capitalized general andadministrative expenses, respectively. At June 30, 2008, total compensation costs related to nonvestedawards not yet recognized was approximately $6.4 million and is expected to berecognized over a weighted average period of less than two years.

 

### ***Stock Options***

 

Thefair value of each option award is estimated on the date of grant using theBlack-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.

 

Theestimated fair value of each option granted was calculated using theBlack-Scholes Method.  The followingtable summarizes the weighted average of the assumptions used in the method.

 
| ** **                    | ** ** | **For the Six Months Ended June 30,** | ** ** |
|-------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                    | ** ** | **2008**                                                            | ** ** | **2007** | ** ** |
|                          |       |                                                                |       |   |   |
| Risk-free rate                | ** ** | **3.2**                                                             | **%**      | 4.7 | % |
| Expected years until exercise | ** ** | **4.25**                                                            | ** ** | 4 |   |
| Expected stock volatility     | ** ** | **46.0**                                                            | **%**      | 42.4 | % |
| Dividend yield                |       | **—**                                                          | ** ** | — | ** ** |

 

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**Endeavour International Corporation**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

 

Informationrelating to stock options, including notional stock options, is summarized asfollows:

 
| **(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                                                                         |       | 1,175                                           |       | $                                                      | 1.32       |                                                    |       |                            |       |   |
| Forfeited                                                                       |       | (365                                            | )          | $                                                      | 3.21       |                                                    |       |                            |       |   |
| Expired                                                                         |       | (576                                            | )          | $                                                      | 4.15       |                                                    |       |                            |       |   |
|                                                                            |       |                                            |       |                                                   |       |                                                    |       |                            |       |
| Balance outstanding – June 30, 2008                                   |       | 5,803                                           |       | $                                                      | 2.40       |                                                    | 3.2        |                            | $          | 1,566 |   |
| Currently exercisable – June 30, 2008                                 |       | 3,353                                           |       | $                                                      | 2.67       |                                                    | 1.0        |                            | $          | 316 |   |

 

Theweighted average grant-date fair value of options granted for the six monthsended June 30, 2008 was $0.52 per option.

 

### ***Restricted Stock***

### ** **

AtJune 30, 2008, our employees and directors held 4.3 million restrictedshares of our common stock that vest over the service period of up to threeyears.  The restricted stock awards werevalued based on the closing price of our common stock on the measurement date,typically the date of grant, and compensation expense is recorded on astraight-line basis over the restricted share vesting period.

 

Statusof the restricted shares as of June 30, 2008 and the changes during thesix months ended June 30, 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                                 |       | 4,577                      |       | $                                                                       | 2.72       |   |
| Granted                                                                         |       | 1,686                      |       | $                                                                       | 1.31       |   |
| Vested                                                                          |       | (1,228                     | )          | $                                                                       | 2.84       |   |
| Forfeited                                                                       |       | (762                       | )          | $                                                                       | 3.01       |   |
|                                                                            |       |                       |       |                                                                    |       |
| Balance outstanding – June 30, 2008                                   |       | 4,273                      |       | $                                                                       | 2.07       |   |
|                                                                            |       |                       |       |                                                                    |       |
| Total grant date fair value of shares vesting during the period                 |       | $                          | 3,035      |                                                                    |       |   |
|                                                                                 |            |                            |            |                                                                         |            |  |  |

 

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**Endeavour International Corporation**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

 

**Note 3 –Debt Obligations**

## *** ***

Ourdebt consisted of the following at the indicated dates:

 
| ** **                                                        | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
|-------------------------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| **(Amounts in thousands)**                              | ** ** | **2008**          | ** **  | **2007**              | ** ** |
|                                                              |       |              |        |                  |       |
| Senior notes, 6% fixed rate, due 2012                             | ** ** | **$**             | **81,250**  |                  | $          | 81,250 |   |
| Senior bank facility, variable rate, due 2011                     | ** ** | **113,000**       |        | 110,000               |       |
| Convertible bonds, due 2014                                       | ** ** | **42,044**        |        | —                |       |
| Junior credit facility, due 2011                                  | ** ** | **15,000**        |        | —                |       |
| Second lien term loan, variable rate, due 2011                    | ** ** | **—**        |        | 75,000                |       |
| ** **                                                        |       | **251,294**       |        | 266,250               |       |
| Less: debt discount                                               | ** ** | **12,325**        |        | —                |       |
|                                                              |       |              |        |                  |       |
| Long-term debt                                                    | ** ** | **$**             | **238,969** |                  | $          | 266,250 |   |
|                                                              |       |              |        |                  |       |
| Standby letters of credit outstanding for abandonment liabilities | ** ** | **$**             | **41,006**  |                  | $          | 40,788 |   |

 

### ***Additional information concerninginterest rates***

 

Average interest rates on our debt obligations at June 30,2008 and December 31, 2007 are shown in the following table:

** **
| ** **             | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------------|------------|-----------------------------|------------|---------------------------------|------------|
|                   |       |                        |       |                            |       |
| Senior bank facility   | ** ** | **4.1**                     | **%**      | 6.2                             | %          |
| Junior credit facility | ** ** | **6.4**                     | **%**      | —                          |       |
| Second lien term loan  | ** ** | **—**                  |       | 11.9                            | %          |

 

### ***Convertible Bonds***

### ** **

InJanuary 2008, we completed the refinancing of certain debt with thefollowing:

 

·                  Repayment of the outstandingbalance of $75 million under our second lien term loan, plus accrued interest;

·                  Issuance of $40 millionunder a private offering of 11.5% guaranteed convertible bonds to a companycontrolled by the Smedvig Family Office of Norway; and

·                  Issuance of $25 millionunder a junior credit facility.

 

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**Endeavour International Corporation**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

 

The$40 million Convertible Bonds due 2014 bear interest at a rate of 11.5% perannum, compounded quarterly, and are unconditionally guaranteed by us on asenior unsecured 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.

 

Uponthe fourth anniversary, the holders have the right to redeem the Bonds if theweighted average closing price of our common stock for 30 days prior to thatanniversary is less than the conversion price, as adjusted.  If the holders do not exercise this right,the right lapses and the conversion price is reset to the then current marketprice of our common stock if such price is lower than the conversion price, asadjusted.

 

Ifwe undergo a “change of control” as defined, the holders of the bonds have theright, subject to certain conditions, to redeem the bonds and accruedinterest.  The bonds may becomeimmediately due upon the occurrence of certain events of default, as defined.

 

### ***Embedded derivatives***

 

Twoderivatives are associated with the conversion and change in control featuresof the $40 million 11.5% convertible bonds. At June 30, 2008, the fair market value of these derivatives is$21.6 million, reflecting an $8.8 million increase during the second quarterthat was recorded in other expense.

 

### ***Junior Facility***

 

Wealso 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.  During the second quarter 2008, we repaid $10million of the Junior Facility.

 

Amountsborrowed under the Junior Facility may be prepaid at our option withoutpenalty..  Once repaid, amounts under theJunior Facility may not be re-borrowed. The Junior Facility contains customary covenants, which limit ourability to incur indebtedness, except for permitted hedging arrangements;create certain liens; dispose of our assets and make dividend or otherdistribution with respect to equity securities after one year.  In addition, the Junior Facility containsvarious financial and technical covenants.

 

Theamounts outstanding under the Junior Facility may become immediately due uponthe occurrence of a change of control, failure to pay obligations under otherfinancial indebtedness 

 

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**Endeavour International Corporation**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

 

whendue, certain events of default, breach of financial covenants and other eventsas defined in the agreement.

 

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

 

Simultaneouslywith entering into the Junior Facility and 11.5% convertible bonds, discussedabove, we terminated the Second Lien Credit Agreement and repaid all of the $78.6million in outstanding indebtedness including accrued interest, related feesand expenses of approximately $4.3 million. The amount outstanding under the Second Lien Credit Agreement wasscheduled to mature in 2011.

 

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

## *** ***

Propertyand equipment included the following:

 
| **(Amounts in thousands)**                 | ** ** | **June 30,  2008** | ** **  | **December 31,  2007** | ** ** |
|------------------------------------------------------|------------|-------------------------|-------------|-----------------------------|------------|
| Oil and gas properties under the full cost method:   |       |                    |        |                        |       |
| Subject to amortization                              | ** ** | **$**                   | **313,997** | ** **                  | $          | 298,765 |   |
| Not subject to amortization:                         |       |                    | ** **  |                        |       |
| Acquired in 2008                                     | ** ** | **17,390**              | ** **  | —                      |       |
| Acquired in 2007                                     | ** ** | **31,992**              | ** **  | 31,992                      |       |
| Acquired in 2006                                     | ** ** | **93,853**              | ** **  | 97,922                      |       |
| Acquired prior to 2006                               | ** ** | **26,918**              | ** **  | 27,615                      |       |
| ** **                                           |       | **484,150**             | ** **  | 456,294                     |       |
|                                                 |       |                    | ** **  |                        |       |
| Other oil and gas assets                             | ** ** | **4,875**               | ** **  | 4,875                       |       |
|                                                 |       |                    | ** **  |                        |       |
| Computers, furniture and fixtures                    | ** ** | **3,804**               | ** **  | 2,634                       |       |
| Total property and equipment                         | ** ** | **492,829**             | ** **  | 463,803                     |       |
|                                                 |       |                    | ** **  |                        |       |
| Accumulated depreciation, depletion and amortization | ** ** | **(171,848**            | **)**       | (128,780                    | )          |
|                                                 |       |                    | ** **  |                        |       |
| Net property and equipment                           | ** ** | **$**                   | **320,981** | ** **                  | $          | 335,023 |   |

 

Thecosts not subject to amortization relate to unproved properties and propertiesbeing made ready to be placed in service which are excluded from amortizedcapital costs until it is determined whether or not proved reserves can beassigned to such properties.  Wecapitalized $1.0 million and $2.0 million in interest related to explorationactivities for the quarters ended June 30, 2008 and 2007,respectively.  For the six months ending June 30,2008 and 2007, $2.2 million and $4.0 million, respectively, was capitalized ininterest related to exploration.  Wecapitalized $2.1 million and $2.0 million in certain employee costs directlyrelated to exploration 

 

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**Endeavour International Corporation**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

 

activitiesfor the quarters ended June 30, 2008 and 2007, respectively.  We capitalized $4.1 million and $4.2 millionin certain employee costs directly related to exploration activities for thesix months ended June 30, 2008 and 2007, respectively.  For the quarter ended June 30, 2008 and2007, we included approximately $0.3 million and $0.5 million, respectively, ofstock-based compensation in capitalized General and Administrative (“G &A”) expenses in property and equipment.

 

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

## *** ***

Fromtime to time, we may utilize derivative financial instruments with respect to aportion of our oil and gas production or a portion of our variable rate debt toachieve a more predictable cash flow by reducing our exposure to pricefluctuations.  These transactions arelikely to be swaps, collars or options and to be entered into with major financialinstitutions or commodities trading institutions.  Derivative financial instruments are intendedto:

 

·                  reduce our exposure to declines in the marketprices of crude oil and natural gas that we produce and sell;

·                  reduce our exposure to increases in interestrates; and

·                  manage cash flows in support of our annualcapital expenditure budget.

 

Wehave various oil and gas derivative instruments intended to satisfy certainobligations under our financing agreements that funded the Talisman acquisitionand to stabilize cash flows from the acquired assets.  Hedge accounting has not been elected forthese instruments and during the second quarter of 2008, we recorded $152.2million in other expense related to the net unrealized losses for thesecontracts.  In addition, we realized$(14.5) million and $3.9 million in gains (losses) on the settlement ofinstruments that closed during the second quarter of 2008 and 2007,respectively.  The fair market value ofthese derivative instruments is included in our balance sheet as follows:

 
| **(Amounts in thousands)**      | ** ** | **June 30, 2008** | ** **   | **December 31,  2007** | ** ** |
|-------------------------------------------|------------|-----------------------------|--------------|-----------------------------|------------|
| Prepaid expenses and other current assets | ** ** | **$**                       | **—**   | ** **                  | $          | 4,018 |   |
| Other assets – long-term             | ** ** | **—**                  | ** **   | 1,957                       |       |
| Accrued expenses and other                | ** ** | **(79,445**                 | **)**        | (22,210                     | )          |
| Other liabilities – long-term        | ** ** | **(119,612**                | **)**        | (30,635                     | )          |
|                                      |       |                        | ** **   |                        |       |
| ** **                                |       | **$**                       | **(199,057** | **)**                       | $          | (46,870 | ) |

 

AtJune 30, 2008, we had the following derivative instruments outstandingthat are not accounted for as hedges:

 

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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)                   |       | 453                         |       | 697      |       | 573      |       | 487      |       | 2,210     |       |
| Weighted Average Price ($/Barrel)         |       | $                           | 68.87      |     | $          | 69.08    |       | $        | 68.39      |      | $          | 66.01 |   | $ | 68.18 |   |
|                                      |       |                        |       |     |       |     |       |     |       |      |       |
| Costless Collar (Mbbl)                    |       |                        |       | 400      |       | —   |       | —   |       | 400       |       |
| Weighted Average Ceiling Price ($/Barrel) |       | $                           |       | $        | 121.88     |     | —     |     | —     |      | $          | 121.88 |   |
| Weighted Average Floor Price ($/Barrel)   |       | $                           |       | $        | 100.00     |     | —     |     | —     |      | $          | 100.00 |   |
|                                      |       |                        |       |     |       |     |       |     |       |      |       |
| **Gas**(2)**:**                           |       |                        |       |     |       |     |       |     |       |      |       |
| Fixed Price Swap (MMcf)                   |       | 1,338                       |       | 1,387    |       | 1,032    |       | 627      |       | 4,384     |       |
| Weighted Average Price ($/Mcf)            |       | $                           | 10.68      |     | $          | 11.17    |       | $        | 10.71      |      | $          | 10.27 |   | $ | 10.78 |   |
|                                      |       |                        |       |     |       |     |       |     |       |      |       |
| Costless Collar (MMcf)                    |       | 600                         |       | 1,400    |       | —   |       | —   |       | 2,000     |       |
| Weighted Average Ceiling Price ($/Mcf)    |       | $                           | $8.67      |     | $          | $18.13   |       | $        | —     |      | $          | — |   | $ | 15.29 |   |
| Weighted Average Floor Price ($/Mcf)      |       | $                           | $6.75      |     | $          | $12.76   |       | $        | —     |      | $          | — |   | $ | 10.96 |   |

 

----

(1)    Oil derivativesare in reference to Platt’s Dated Brent prices.

(2)    Gas derivativesare designated in therms and have been converted to Mcf at a rate of 10 thermsto 1 Mcf and are in reference to the Heren National Balance Point prices.  The exchange rate at June 30, 2008 was$1.99 to £1.00.

 

Asof June 30, 2008, our outstanding commodity derivatives coveredapproximately 50% of our anticipated production for the remainder of 2008.

 

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

 

Wealso have an interest rate swap for a notional amount of $37.5 million wherebywe pay a fixed rate of 5.05% and receive LIBOR. The interest rate swap is accounted for as a hedge and is valued at $1.0million at June 30, 2008.

 

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**Endeavour International Corporation**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

 

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

## *** ***

Ourasset retirement obligations relate to obligation of the future plugging andabandonment of oil and gas properties. The following table provides a rollforward of the asset retirementobligations for the six months ended June 30, 2008 and 2007:

 
| ** **                                                                 | ** ** | **For the Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| **(Amounts in thousands)**                                       | ** ** | **2008**                                                            | ** ** | **2007** | ** ** |
| Carrying amount of asset retirement obligations as of beginning of  period | ** ** | **$**                                                               | **38,422** |   | $ | 32,503 |   |
| Accretion expense                                                          | ** ** | **1,776**                                                           |       | 1,505 |   |
| Impact of foreign currency exchange rate changes                           | ** ** | **624**                                                             |       | 1,022 |   |
|                                                                       |       |                                                                |       |   |   |
| Carrying amount of asset retirement obligations as of end of period        | ** ** | **$**                                                               | **40,822** |   | $ | 35,030 |   |

 

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

## *** ***

Cashpaid during the period for interest and income taxes was as follows:

 
| ** **                           | ** ** | **For the Six Months Ended June  30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2008**                                                        | ** ** | **2007** | ** ** |
|                                 |       |                                                            |       |   |   |
| Interest paid                        | ** ** | **$**                                                           | **10,525** |   | $ | 11,064 |   |
|                                 |       |                                                            |       |   |   |
| Income taxes paid                    | ** ** | **$**                                                           | **6,028**  |   | $ | 2,050 |   |

 

## ***Note 8 –Comprehensive Loss***

## *** ***

Excludingnet loss, our source of comprehensive loss is due to the net unrealized loss onderivative instruments accounted for as a hedge and marketable securities,which are classified as available-for-sale. The following summarizes the components of comprehensive loss:

 

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**Endeavour International Corporation**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

 
| ** **                                                                                              | ** ** | **For the Three Months  Ended June 30,** | ** **  | **For the Six Months  Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|-------------|-----------------------------------------------------------------|------------|
| **(Amounts in thousands)**                                                                    | ** ** | **2008**                                                          | ** **  | **2007**                                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                                              | ** ** | ** **                                                        | ** **  | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Netloss                                                                                                 | ** ** | **$**                                                             | **(64,024** | **)**                                                           | $          | (10,204 | ) | **$** | **(80,816** | **)** | $ | (13,348 | ) |
|                                                                                                    |       |                                                              | ** **  |                                                            |       |   | ** ** |   |   |
| Unrealized gain on interest rate swap derivative instrument, net of  tax of none and none, respectively | ** ** | **460**                                                           | ** **  | 381                                                             |       | **(506** | **)** | 211 |   |
| Unrealized gain (loss) on marketable securities                                                         | ** ** | **1,226**                                                         | ** **  | (29                                                             | )          | **1,226** | ** ** | (65 | ) |
| Reclassification adjustment for income (loss) realized in net loss  above                               | ** ** | **211**                                                           | ** **  | (26                                                             | )          | **319** | ** ** | (26 | ) |
|                                                                                                    |       |                                                              | ** **  |                                                            |       |   | ** ** |   |   |
| Net impact on comprehensive income (loss)                                                               | ** ** | **1,897**                                                         | ** **  | 326                                                             |       | **1,039** | ** ** | 120 |   |
|                                                                                                    |       |                                                              | ** **  |                                                            |       |   | ** ** |   |   |
| Comprehensive income (loss)                                                                             | ** ** | **$**                                                             | **(62,127** | **)**                                                           | $          | (9,878 | ) | **$** | **(79,777** | **)** | $ | (13,228 | ) |

 

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

 

### ***Rig Commitments***

 

Weare part of a consortium, with several other operators in the NorwegianContinental Shelf, which has entered into a contract for the use of a drillingrig over a multi-year period.  Thecontract commits us to 100 days (for two wells) for drilling services by asemi-submersible drilling rig for $38 million during the last half of 2008 and2009.

 

In2006, we entered into a rig commitment for 220 days over a one-year periodbeginning in May 2007 for the United Kingdom sector of the North Sea for aheavy-duty harsh environment jack-up.  InJanuary 2007, a $22 million escrow payment was made under the rigcommitment.  This escrow payment isincluded in “Restricted cash” on our Balance Sheet.  We have utilized 73 days of this rigcommitment and expect to utilize the remaining 147 days of this commitment fromlate 2008 through 2009 depending on well scheduling.

 

Alsoin March 2008, 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.

 

Weexpect to apply the $22 million escrow toward the first of two drilling slotson the semi-submersible rig discussed above. We expect to utilize that rig during the fourth quarter of 2008.

 

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**Endeavour International Corporation**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

 

### ***Contingencies***

 

InNovember 2006, we purchased various oil and gas properties, including theIvanhoe, Rob Roy, Hamish (collectively, IVRRH), Renee and Rubie fields. HessLimited, the operator of the facility, supporting production from IVRRH fields,has advised us that there has been a mis-measurement of the volumes of oilproduced from the IVRRH fields.  Duringthe second quarter of 2008, we increased the estimate of our net liability ofthe mis-measurement by $1.2 million to $4.1 million.  As the settlement of the mis-measurementliability is covered under the purchase agreement for these assets, theincrease in our net liability was recorded as an increase to goodwill.

 

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

 

EffectiveJanuary 1, 2008, we adopted the new guidance for fair value measurementsfor financial assets and liabilities measured on a recurring basis.  This new standard defines fair value as theprice that would be received to sell an asset or paid to transfer a liabilityin an orderly transaction between market participants at the measurementdate.  It also clarifies that fair valueshould be based on assumptions that market participants would use when pricingan asset or liability, including assumptions about risk and the risks inherentin valuation techniques and the inputs to valuations.  This includes not only the credit standing ofcounterparties involved and the impact of credit enhancements but also theimpact of 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 isbased on actively-quoted market prices, if available.

 

Level  2:         In the absenceof actively-quoted market prices, we seek price information from externalsources, including broker quotes and industry publications.  Substantially all of these inputs areobservable in the marketplace during the entire term of the instrument, can bederived from observable data, or supported by observable levels at whichtransactions are executed in the marketplace.

 

Level  3:         If valuationsrequire inputs that are both significant to the fair value measurement and lessobservable from objective sources, we must estimate prices based on availablehistorical and near-term future price information and certain statisticalmethods that reflect our market assumptions.

 

Weapply fair value measurements to certain assets and liabilities includingcommodity and interest rate derivative instruments, marketable securities andembedded derivatives relating to conversion and change in control features incertain of our debt instruments.  Wemaximize the use of observable inputs and minimize the use of unobservableinputs when measuring fair value.

 

Financialassets and liabilities are classified based on the lowest level of input thatis significant to the fair value measurement. The following table summarizes the valuation of our investments andfinancial instruments by pricing levels as of June 30, 2008:

 

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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** | ** ** |
|--------------------------------------|------------|--------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------|------------|
| Marketable securities                |       | $                                                                                    | 7,931      |                                                                    | $          | —                                                         |       | $                          | —     |   | $ | 7,931 |   |
| Oil and gas derivative contracts:    |       |                                                                                 |       |                                                                    |       |                                                           |       |                       |       |
| Oil and gas swaps                    |       | —                                                                               |       | (179,904                                                                | )          | —                                                         |       | (179,904                   | )          |
| Oil and gas collars                  |       | —                                                                               |       | (10,164                                                                 | )          | (8,989                                                         | )     | (19,153                    | )          |
| Interest rate swaps                  |       | —                                                                               |       | (1,039                                                                  | )          | —                                                         |       | (1,039                     | )          |
| Embedded derivatives                 |       | —                                                                               |       | —                                                                  |       | (21,600                                                        | )          | (21,600                    | )          |
|                                 |       |                                                                                 |       |                                                                    |       |                                                           |       |                       |       |
| Total derivative liabilities         |       | $                                                                                    | 7,931      |                                                                    | $          | (191,107                                                       | )          | $                          | (30,589    | ) | $ | (213,765 | ) |

 

Thecommodity derivative contracts were measured based on quotes from ourcounterparties, which are major financial institutions or commodities tradinginstitutions. Such quotes have been derived using models that consider variousinputs including current market and contractual prices for the underlyinginstruments, quoted forward prices for natural gas and crude oil, volatilityfactors and interest rates, such as a LIBOR curve for a similar length of timeas the derivative contract term.  Theinputs for the fair value models for our swaps and Brent oil collars are allobservable market data and these instruments have been classified as Level2.  Although we utilize the same optionpricing models to assess the reasonableness of the fair values of our gascollars, an active futures market does not exist for our UK gas options.  We base the inputs to the option models forour UK gas collars on observable market data in other markets to verify thereasonableness of the counterparty quotes. These UK gas collars are classified as Level 3.

 

Thefollowing is a reconciliation of changes in fair value of net derivative assetsand liabilities classified as Level 3:

 
| **(Amounts in thousands)**                                                                                  | ** ** | **For the Six Months Ended June  30, 2008** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
|                                                                                                                  |       |                                                                      |       |
| Balance at beginning of period                                                                                        |       | $                                                                         | —     |   |
| Total gains or losses (realized/unrealized):                                                                          |       |                                                                      |       |
| Included in earnings                                                                                                  |       | (13,918                                                                   | )          |
| Purchases, issuance and settlements (net)                                                                             |       | (13,460                                                                   | )          |
| Transfers in and/or out of Level 3 (net)                                                                              |       | (3,211                                                                    | )     |
|                                                                                                                  |       |                                                                      |       |
| Balance at end of period                                                                                              |       | $                                                                         | (30,589    | ) |
|                                                                                                                  |       |                                                                      |       |
| Changes in unrealized  gains (losses) relating to derivative assets and liabilities still held at  June 30, 2008 |       | $                                                                         | (12,952    | ) |

 

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**Endeavour International Corporation**

# ** **

# **Item 2:**          Management’s Discussion andAnalysis of Financial Condition and Results of Operations

 

Unlessthe context otherwise requires, references to “Endeavour,” “we,” “us” or “our”mean Endeavour International Corporation or any of our consolidatedsubsidiaries or partnership interests. The following discussion should be read in conjunction with ourunaudited Condensed Consolidated Financial Statements and related notes theretoincluded elsewhere in this Report.  Thefollowing discussion also includes non-GAAP financial measures, which may notbe comparable to similarly titled measures presented by other companies.  Accordingly, we strongly encourage investorsto review our financial statements in their entirety and not rely on any singlefinancial measure.

 

### ***Overview***

### ** **

Weare an international oil and gas exploration and production company focused onthe acquisition, exploration and development of energy reserves.  To date, we have invested a significantamount of our resources on various development, acquisition and explorationprojects.

 

Asoil prices continue to climb to record levels and gas prices in our marketshave recovered from last year, our realized price before derivatives more thandoubled from the second quarter of 2007 to the second quarter of 2008.  This substantial increase in prices helpedrevenue grow from $74.4 million in the first six months of 2007 to $147.6million 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 $15.0 million in debt while spending$32.1 million in capital expenditures during the first six months of 2008 andincreasing cash from year end by $12.9 million. At June 30, 2008, we held $29.4 million in cash and another $22.0million in cash restricted for drilling rig commitments.

 

Evenwith the substantial growth in revenue, net income can be significantlyaffected by various non-cash items, such as unrealized gains and losses on ourcommodity derivatives, currency impact of long-term liabilities and deferredtaxes.  Net loss to common shareholdersfor the first six months of 2008 was $86.2 million, or $0.68 per share,reflecting the significant unrealized loss on the mark-to-market of commodityderivatives.  For the first six months of2007, net loss to common shareholders was $19.0 million, or $0.16 pershare.  The net loss for 2007 reflects asmaller unrealized loss on the mark-to-market of commodity derivatives.  Net income as adjusted for the six months of2008 would have been $0.7 million, or $0.01 per share without the effect ofderivative transactions and currency impacts of deferred taxes as compared tonet loss as adjusted of $0.4 million, or $0 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 $95.1 million in2008 from $56.6 million in 2007.

 

Discretionarycash flow was $75.0 million for the first six months of 2008 compared to $52.1million for the same period in 2007, reflecting the increase in revenues overthe periods.  Cash flows provided byoperating activities decreased to $71.9 million for the six months ended June 

 

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30,2008 as compared to $78.4 million for the six months ended June 30, 2007primarily due to decreases in net cash provided by changes in operating assetsand liabilities partially offset by higher commodity prices.

 

### ***Results of Operations***

### ** **

Our revenues are sensitive to changes in pricesreceived for our products.  Ourproduction is sold at prevailing market prices which 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 second quarter of 2008 and 2007, we hadsales volume of 10,222 BOE per day and 7,758 per day BOE, respectively.  Sales volumes of 10,222 per day BOE reflect asignificant contribution from sales at our IVRRH field that covered physicalproduction for the first six months of 2008. We record oil revenues on the sales method, i.e. when delivery hasoccurred.  Physical production may differbased on the timing of tanker liftings. We use the entitlements method to account for sales of gas production.  Duringthe six months ending June 30, 2008 and 2007, we had sales volumes of9,509 BOE per day and 8,946 BOE per day, respectively.  We continue to expect full year 2008production to range from 8,600 to 9,000 BOE per day.  During the third quarter of 2008, many of ourfields have scheduled downtime to perform planned maintenance activities, whichwill result in both lower physical production and sales volumes.

 

Thefollowing table shows our average sales volumes, physical volumes, sales pricesand production costs for the periods presented:

 

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| ** **                           | ** ** | **For the Three Months  Ended June 30,** | ** ** | **For the Six Months  Ended June 30,** | ** ** |
|--------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                           | ** ** | **2008**                                                          | ** ** | **2007**                                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                 |       |                                                              |       |                                                            |       |   |   |   |   |
| **Sales volume:**                    | ** ** | ** **                                                        | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Oil and condensate sales (Mbbl):** |       |                                                              |       |                                                            |       |   |   |   |   |
| United Kingdom                       | ** ** | **332**                                                           |       | 224                                                             | ** ** | **598** |   | 621 |   |
| Norway                               | ** ** | **246**                                                           |       | 124                                                             | ** ** | **342** |   | 255 |   |
| Total                                | ** ** | **578**                                                           |       | 348                                                             | ** ** | **940** |   | 876 |   |
|                                 |       |                                                              |       |                                                            |       |   |   |   |   |
| **Gas sales (MMcf):**                | ** ** | ** **                                                        | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| United Kingdom                       | ** ** | **1,644**                                                         |       | 2,091                                                           | ** ** | **3,679** |   | 4,351 |   |
| Norway                               | ** ** | **467**                                                           |       | 55                                                              | ** ** | **1,065** |   | 109 |   |
| Total                                | ** ** | **2,111**                                                         |       | 2,146                                                           | ** ** | **4,744** |   | 4,460 |   |
| ** **                           | ** ** | ** **                                                        | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total sales (MBOE):**              | ** ** | ** **                                                        | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| United Kingdom                       | ** ** | **606**                                                           |       | 573                                                             | ** ** | **1,211** |   | 1,346 |   |
| Norway                               | ** ** | **324**                                                           |       | 133                                                             | ** ** | **520** |   | 273 |   |
| **Total**                            | ** ** | **930**                                                           |       | 706                                                             | ** ** | **1,731** |   | 1,619 |   |
| **BOE per day**                      | ** ** | **10,222**                                                        |       | 7,758                                                           | ** ** | **9,509** |   | 8,946 |   |
|                                 |       |                                                              |       |                                                            |       |   |   |   |   |
| **Physical production  volume:**     | ** ** | ** **                                                        | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total production (MBOE):**         | ** ** | ** **                                                        | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| United Kingdom                       | ** ** | **6,123**                                                         |       | 7,478                                                           | ** ** | **6,678** |   | 7,840 |   |
| Norway                               | ** ** | **2,791**                                                         |       | 1,569                                                           | ** ** | **2,843** |   | 1,515 |   |
| Total                                | ** ** | **8,914**                                                         |       | 9,047                                                           | ** ** | **9,521** |   | 9,355 |   |

 

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| ** **                                      | ** ** | **For the Three Months  Ended June 30,** | ** ** | **For the Six Months  Ended June 30,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                      | ** ** | **2008**                                                          | ** ** | **2007**                                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                            |       |                                                              |       |                                                            |       |   |   |   |   |
| **Realized Sales Prices:**                      |       |                                                              |       |                                                            |       |   |   |   |   |
| **Oil and condensate price ($ per Bbl):**  |       |                                                              |       |                                                            |       |   |   |   |   |
| Before commodity derivatives                    | ** ** | **$**                                                             | **105.45** | ** **                                                      | $          | 65.34 | ** ** | **$** | **99.44** | ** ** | $ | 58.23 |   |
| Effect of commodity derivatives                 | ** ** | **$**                                                             | **(20.57** | **)**                                                           | $          | 0.25 | ** ** | **$** | **(19.42** | **)** | $ | 3.69 |   |
| Realized prices including commodity derivatives | ** ** | **$**                                                             | **84.88**  | ** **                                                      | $          | 65.59 | ** ** | **$** | **80.02** | ** ** | $ | 61.92 |   |
|                                            |       |                                                              | ** ** |                                                            |       |   | ** ** |   |   |
| **Gas price ($per Mcf):**                       |       |                                                              | ** ** |                                                            |       |   | ** ** |   |   |
| Before commodity derivatives                    | ** ** | **$**                                                             | **12.01**  | ** **                                                      | $          | 4.13 | ** ** | **$** | **11.41** | ** ** | $ | 5.25 |   |
| Effect of commodity derivatives                 | ** ** | **$**                                                             | **(1.23**  | **)**                                                           | $          | 1.80 | ** ** | **$** | **0.13** | ** ** | $ | 2.64 |   |
| Realized prices including commodity derivatives | ** ** | **$**                                                             | **10.78**  | ** **                                                      | $          | 5.93 | ** ** | **$** | **11.54** | ** ** | $ | 7.89 |   |
|                                            |       |                                                              | ** ** |                                                            |       |   | ** ** |   |   |
| **Equivalent oil price ($per BOE):**            |       |                                                              | ** ** |                                                            |       |   | ** ** |   |   |
| Before commodity derivatives                    | ** ** | **$**                                                             | **92.82**  | ** **                                                      | $          | 44.79 | ** ** | **$** | **85.29** | ** ** | $ | 45.95 |   |
| Effect of commodity derivatives                 | ** ** | **$**                                                             | **(15.58** | **)**                                                           | $          | 5.59 | ** ** | **$** | **(10.20** | **)** | $ | 9.27 |   |
| Realized prices including commodity derivatives | ** ** | **$**                                                             | **77.24**  |                                                            | $          | 50.38 | ** ** | **$** | **75.09** | ** ** | $ | 55.22 |   |

 

----

(1)   We record oilrevenues on the sales method, i.e. when delivery has occurred.  Actual production may differ based on thetiming of tanker liftings.  We use theentitlements method to account for sales of gas production.

(2)   The averagesales prices include gains and losses for derivative contracts we utilize tomanage price risk related to our future cash flows.

 

Duringthe six months ending June 30, 2008, we realized $17.6 million in losseson the settlement of commodity derivatives, compared to $15.0 million in gainsfor the same six month period in 2007. For the six months ending June 30, 2008, we also recognized $160.3million in losses on the mark-to-market of our commodity derivatives that werenot accounted for as hedges with $28.3 million in losses for the same period in2007.  In the second quarter of 2008, werealized $14.5 million in losses on the settlement of commodity derivatives,compared to $3.9 million in gains for the same period in 2007.  In the second quarter of 2008, we alsorecognized $130.7 million in losses on the mark-to-market of our commodityderivatives with $12.6 million in losses for the same period in 2007.

 

**Expenses**

 

Operatingexpenses increased to $13.9 million for the second quarter of 2008 as comparedto $9.7 million in the second quarter of 2007. For the six months ending June 30, 2008, operating expensesincreased to $24.0 million as compared to $20.4 million for the same period in2007.  Operating costs per BOE increasedfrom $13.78 per BOE in the second quarter of 2007 to 15.02 

 

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perBOE in the second quarter of 2008, and from $12.62 per BOE for the six monthsending June 30, 2007 to $13.86 per BOE for the six months ending June, 30,2008.  The increases in operatingexpenses are primarily due to the increases in sales volumes and an increase inthe proportion of sales and costs from one of our higher operating cost fields.

 

Generaland administrative (G&A) expenses decreased to $4.8 million during thesecond quarter of 2008 as compared to $5.2 million for the corresponding periodin 2007.  G&A expenses decreased to$9.6 million during the six months ended June 30, 2008 as compared to$10.5 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 $0.3 million for retiringemployees.  Components of G&Aexpenses for these periods are as follows:

** **
| ** **                             | ** ** | **For the Three Months  Ended June 30,** | ** ** | **For the Six Months  Ended June 30,** | ** ** |
|----------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| **(Amounts in thousands)**   | ** ** | **2008**                                                          | ** ** | **2007**                                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                   |       |                                                              |       |                                                            |       |   |   |   |   |
| Compensation                           | ** ** | **$**                                                             | **4,175**  | ** **                                                      | $          | 3,751 | ** ** | **$** | **9,112** | ** ** | $ | 7,939 |   |
| Consulting, legal and  accounting fees | ** ** | **1,258**                                                         | ** ** | 1,730                                                           | ** ** | **2,369** | ** ** | 3,130 |   |
| Occupancy costs                        | ** ** | **578**                                                           | ** ** | 445                                                             | ** ** | **989** | ** ** | 725 |   |
| Other expenses                         | ** ** | **281**                                                           | ** ** | 378                                                             | ** ** | **69** | ** ** | 247 |   |
| Total gross cash G&A expenses      | ** ** | **6,292**                                                         | ** ** | 6,304                                                           | ** ** | **12,539** | ** ** | 12,041 |   |
|                                   |       |                                                              | ** ** |                                                            |       |   | ** ** |   |   |
| Non-cash stock-based compensation      | ** ** | **652**                                                           | ** ** | 851                                                             | ** ** | **1,196** | ** ** | 2,728 |   |
| Gross G&A expenses                 | ** ** | **6,944**                                                         | ** ** | 7,155                                                           | ** ** | **13,735** | ** ** | 14,769 |   |
| Less: capitalized G&A expenses     | ** ** | **(2,108**                                                        | **)**      | (1,995                                                          | **)**      | **(4,148** | **)** | (4,242 | ) |
| Net G&A expenses                   | ** ** | **$**                                                             | **4,836**  | ** **                                                      | $          | 5,160 | ** ** | **$** | **9,587** | ** ** | $ | 10,527 |   |

 

Interestexpense increased by $0.3 million to $9.2 million for the six months ended June 30,2008 as compared to $8.9 million for the corresponding period in 2007 after considerationof costs related to our early retirement of the Second Lien Term Loan of $4.3million.

 

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**Income Taxes**

 

The following summarizes the components of tax expense (benefit):

 
| **(Amounts in thousands)**                         | ** ** | **UK**      | ** **   | **Norway** | ** ** | **U.S.**   | ** ** | **Other**  | ** ** | **Total**   | ** ** |
|--------------------------------------------------------------|------------|-------------|--------------|------------|------------|------------|------------|------------|------------|-------------|------------|
| Six Months Ended June 30, 2008                          |       |        |         |       |       |       |       |       |       |        |       |
| Net income (loss) before taxes                               | ** ** | **$**       | **(136,434** | **)**      | **$**      | **27,639** | ** ** | **$**      | **(3,140** | **)**       | **$**      | **(11,275** | **)** | **$** | **(123,210** | **)** |
| ** **                                                   | ** ** | ** **  | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **  | ** ** |
| Current tax expense (benefit)                                | ** ** | **1,867**   | ** **   | **14,016** | ** ** | **—** | ** ** | **—** | ** ** | **15,883**  | ** ** |
| Deferred tax expense (benefit)                               | ** ** | **(68,958** | **)**        | **7,959**  | ** ** | **—** | ** ** | ** ** | ** ** | **(60,999** | **)**      |
| Foreign currency (gains) losses on deferred  tax liabilities | ** ** | **161**     | ** **   | **2,561**  | ** ** | **—** | ** ** | **—** | ** ** | **2,722**   | ** ** |
| Total tax expense (benefit)                                  | ** ** | **(66,930** | **)**        | **24,536** | ** ** | **—** | ** ** | ** ** | ** ** | **(42,394** | **)**      |
| ** **                                                   | ** ** | ** **  | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **  | ** ** |
| Net income (loss) after taxes                                | ** ** | **$**       | **(69,504**  | **)**      | **$**      | **3,103**  | ** ** | **$**      | **(3,140** | **)**       | **$**      | **(11,275** | **)** | **$** | **(80,816** | **)** |
|                                                         |       |        |         |       |       |       |       |       |       |        |       |
| Six Months Ended June 30, 2007                          |       |        |         |       |       |       |       |       |       |        |       |
| Net income (loss) before taxes                               |       | $           | (18,083      | )          | $          | 2,612      |       | $          | (4,499     | )           | $          | 6,040 |   | $ | (13,930 | ) |
|                                                         |       |        |         |       |       |       |       |       |       |        |       |
| Current tax expense (benefit)                                |       | 2,046       |         | (1,763     | )          | (3         | )          | 78         |       | 358         |       |
| Deferred tax expense (benefit)                               |       | (9,969      | )            | 3,856      |       | —     |       | 711        |       | (5,402      | )          |
| Foreign currency (gains) losses on deferred  tax liabilities |       | 3,065       |         | 1,397      |       | —     |       | —     |       | 4,462       |       |
| Total tax expense (benefit)                                  |       | (4,858      | )            | 3,490      |       | (3         | )          | 789        |       | (582        | )          |
|                                                         |       |        |         |       |       |       |       |       |       |        |       |
| Net income (loss) after taxes                                |       | $           | (13,225      | )          | $          | (878       | )          | $          | (4,496     | )           | $          | 5,251 |   | $ | (13,348 | ) |

 

The change in income tax benefit from $0.6million to $42.4 million for the first six 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 2008 and 2007, we did not record anyincome tax benefits in the U.S. as there was no assurance that we couldgenerate any U.S. taxable earnings, resulting in a full valuation allowance ofdeferred 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.

 

**Reconciliationof 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 

 

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measures in addition to net income, including non-financial performanceindicators and non-GAAP measures as key metrics to manage our business.  These key metrics demonstrate the company’sability to maintain or grow production levels and reserves, internally fundcapital 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 tofuture delivery periods, analysis of results of operations from one period toanother can be difficult.  We believethat excluding 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:

 

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·      our cash expenditures, or future requirements, for capital expendituresor contractual commitments;

·      changes in, or cash requirements for, our working capital needs;

·      unrealized gains (losses) on derivatives;

·      non-cash foreign currency gains (losses);

·      our interest expense, or the cash requirements necessary to serviceinterest 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 net lossto the following non-GAAP financial measures: net income (loss) as adjusted, Adjusted EBITDA and discretionary cashflow.

 
| ** **                                                                     | ** ** | **For the Three Months  Ended June 30,** |        | **For the Six Months  Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|-------------|-----------------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2008**                                                          | ** **  | **2007**                                                        |       | **2008** | ** ** | **2007** | ** ** |
| Net loss                                                                       | ** ** | **$**                                                             | **(64,024** | **)**                                                           | $          | (10,204 | ) | **$** | **(80,816** | **)** | $ | (13,348 | ) |
|                                                                           |       |                                                              | ** **  |                                                            |       |   | ** ** |   |   |
| Depreciation, depletion and amortization                                       | ** ** | **23,720**                                                        | ** **  | 15,247                                                          |       | **45,123** | ** ** | 34,461 |   |
| Deferred tax benefit                                                           | ** ** | **(55,133**                                                       | **)**       | (1,201                                                          | )          | **(58,277** | **)** | (940 | ) |
| Unrealized loss on derivative instruments                                      | ** ** | **130,686**                                                       | ** **  | 12,612                                                          |       | **160,328** | ** ** | 28,308 |   |
| Amortization of non-cash compensation                                          | ** ** | **652**                                                           | ** **  | 851                                                             |       | **1,196** | ** ** | 2,735 |   |
| Amortization of loan costs and discount                                        | ** ** | **1,423**                                                         | ** **  | 413                                                             |       | **4,579** | ** ** | 840 |   |
| Non-cash interest expense                                                      | ** ** | **1,174**                                                         | ** **  | —                                                          |       | **2,044** | ** ** | — |   |
| Other                                                                          | ** ** | **117**                                                           | ** **  | 79                                                              |       | **750** | ** ** | 93 |   |
| **Discretionary cash flow**(1)                                                 | ** ** | **$**                                                             | **38,615**  | ** **                                                      | $          | 17,797 |   | **$** | **74,927** | ** ** | $ | 52,149 |   |
|                                                                           |       |                                                              | ** **  |                                                            |       |   | ** ** |   |   |
| Net loss to common shareholders, as  reported                                  | ** ** | **$**                                                             | **(66,733** | **)**                                                           | $          | (13,048 | ) | **$** | **(86,221** | **)** | $ | (19,036 | ) |
| Unrealized losses on derivatives (2)                                           | ** ** | **69,626**                                                        | ** **  | 6,306                                                           |       | **84,234** | ** ** | 14,154 |   |
| Currency impact of deferred taxes                                              | ** ** | **81**                                                            | ** **  | 3,225                                                           |       | **2,722** | ** ** | 4,462 |   |
| **Net income (loss), as adjusted**                                             | ** ** | **$**                                                             | **2,974**   | ** **                                                      | $          | (3,517 | ) | **$** | **735** | ** ** | $ | (420 | ) |
|                                                                           |       |                                                              | ** **  |                                                            |       |   | ** ** |   |   |
| Weighted average number of common shares  outstanding – basic and diluted | ** ** | **127,626**                                                       | ** **  | 123,661                                                         |       | **127,581** | ** ** | 121,133 |   |
| **Earnings per share, as adjusted**                                            | ** ** | **$**                                                             | **(0.02**   | **)**                                                           | $          | (0.03 | ) | **$** | **(0.01** | **)** | $ | (0.00 | ) |

 

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| ** **                                    | ** ** | **For the Three Months  Ended June 30,** |        | **For the Six Months  Ended June 30,** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------------------------|-------------|-----------------------------------------------------------------|------------|
| ** **                                    | ** ** | **2008**                                                          | ** **  | **2007**                                                        |       | **2008** | ** ** | **2007** | ** ** |
| Net loss to common shareholders, as  reported | ** ** | **$**                                                             | **(66,733** | **)**                                                           | $          | (13,048 | ) | **$** | **(86,221** | **)** | $ | (19,036 | ) |
|                                          |       |                                                              | ** **  |                                                            |       |   | ** ** |   |   |
| Unrealized losses on derivatives              | ** ** | **130,686**                                                       | ** **  | 12,612                                                          |       | **160,328** | ** ** | 28,308 |   |
| Net interest expense                          | ** ** | **5,004**                                                         | ** **  | 3,574                                                           |       | **12,845** | ** ** | 7,742 |   |
| Depreciation, depletion and amortization      | ** ** | **23,720**                                                        | ** **  | 15,247                                                          |       | **45,123** | ** ** | 34,461 |   |
| Income tax benefit                            | ** ** | **(42,864**                                                       | **)**       | (1,873                                                          | )          | **(42,394** | **)** | (582 | ) |
| Preferred stock dividends                     | ** ** | **2,709**                                                         | ** **  | 2,844                                                           |       | **5,405** | ** ** | 5,688 |   |
|                                          |       |                                                              | ** **  |                                                            |       |   | ** ** |   |   |
| **Adjusted EBITDA**                           | ** ** | **$**                                                             | **52,522**  | ** **                                                      | $          | 19,356 |   | **$** | **95,086** | ** ** | $ | 56,581 |   |

 

----

(1)   Discretionary cash flow is equal to cash flowfrom operating activities before the changes in operating assets andliabilities.

(2)   Net of tax benefits of $61,060, $6,306,$76,094 and $14,154, respectively.

 

### ***Liquidity and 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 Six Months Ended June 30,** | ** **  |
|-------------------------------------------|------------|---------------------------------------------------------------------|-------------|
| **(Amounts in thousands)**      | ** ** | **2008**                                                            | ** **  | **2007** | ** ** |
|                                      |       |                                                                |        |   |   |
| Net cash provided by Operating Activities | ** ** | **$**                                                               | **71,954**  |   | $ | 78,413 |   |
| Net cash used in Investing Activities     | ** ** | **$**                                                               | **(32,168** | **)** | $ | (61,840 | ) |
| Net cash used in Financing Activities     | ** ** | **$**                                                               | **(26,847** | **)** | $ | (33,157 | ) |

 

The net cash flows provided by operating activities are primarilyimpacted by the earnings from our business activities.  The cash flows provided by operatingactivities decreased to $71.9 million for the six months ended June 30,2008 as compared to $78.4 million for the six months ended June 30, 2007primarily due to decreases in cash flows provided 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 used in financing activitiesgenerally consists of borrowings and repayments of debt, proceeds from theissuance of equity securities and payment of financing costs.

 

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

 

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·      Repayment of the outstandingbalance of $75 million under our Second Lien Term Loan, plus accrued interest;

·      Issuance of $40 millionunder a private offering of 11.5% guaranteed convertible bonds to a companycontrolled by the Smedvig Family Office of Norway; and

·      Issuance of $25 millionunder a Junior Facility Agreement (the “Junior 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 eachquarter.  Interest is not payable incash, but is instead 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.  During thesecond quarter of 2008, we repaid $10 million of the outstanding loan.  .  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 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.

 

**DrillingProgram**

 

We anticipate spending approximately $90 million during 2008 to fundoil and gas exploration and development in the North Sea.  The program includes maintenance programs onour existing producing field, exploration prospects and appraisal wells.  The primary activity on exploration prospectsand appraisal wells includes the following:

 

***Norway***

 

·      **Galtvort**(2.5% interest) – In Norway, the Galtvort well began drilling in April 2008and is a near-field prospect operated by StatoilHydro Petroleum AS.  Both the initial well and the sidetrackdiscovered gas. Geologic evaluations of the data are continuing.  As a result 

 

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of a farm-out agreement with a privatecompany, we are carried for all costs associated with the drilling of thesewell bores and the next exploration well at Galtvort that is planned for 2009.

·      **Noatun C** (2.5%interest) – Noatun C is currently drilling a prospect north of the Njord field.

·      **Brage North**(4.4%interest – The well is beginning an exploration target in the Brage field.

·      **Aegis**(20%interest) – The Aegis exploration well on block 25/10 is expected to begindrilling late in the fourth quarter of 2008.

 

***United Kingdom***

*** ***

·      **Tesla** (25%interest) – The Tesla exploration well on Block 22/24c will test forhydrocarbons in one of our primary areas of focus.

·      **Rochelle** (55.6%interest) – Another appraisal well is planned on the Rochelle discovery inwhich we hold a 55.6% interest.  We willuse our existing rig commitment for a semi-submersible drilling rig in thefourth quarter of 2008 to drill this well.

·      **Jade** (65%interest) – We will operate our first well in Norway with the drilling of theJade prospect.  The area is the site ofthe two Agat natural gas discoveries and the test will set out to identifyadditional reserves in support of commercial development. We will use ourexisting rig commitment for a heavy-duty harsh environment jack-up at the endof 2008 to drill this well.

·      **Cygnus**(12.5% interest) – We also plan to drill a well to further appraise the Cygnusdiscovery.

 

The timing and order of this program will be determined by thecompletion of ongoing technical work, partner approvals and rig scheduling forindividual prospects.  We may increase ordecrease our planned activities for 2008 or high grade our exploratoryprospects, depending upon drilling results, potential acquisition candidates,product prices, the availability of capital resources and other factors affectingthe economic 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 2008, we were awarded interests in two productionlicenses on the Norwegian Continental Shelf, a 25% interest in PL453S and a 20%interest 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 in late 2008 and2009.

 

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 

 

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jack-up.  In January 2007, a$22 million escrow payment was made under the rig commitment.  This escrow payment is included in “Restrictedcash” on our Balance Sheet.  We haveutilized 73 days of this rig commitment and expect to utilize the remaining 147days of this commitment from late 2008 through 2009 depending on wellscheduling.

 

Also in March 2008, we entered into a $51.9 million agreement withApplied Drilling Technology International for a semi-submersible drilling rigin the fourth quarter of 2008 and mid 2009.

 

We expect to apply the $22 million escrow toward the first of twodrilling slots on the semi-submersible rig discussed above.  We expect to utilize that rig during thefourth quarter of 2008.

 

**2008 Outlook**

 

We expect production for 2008 to range from 8,600 to 9,000 BOE per day, with approximately50%– 55% of that production as gas.  For2008, we expect realized prices before derivatives to be $0.30 - $0.40 per Mcfless than the National Balance Point price for gas and $4.00 - $5.00 per Bblless than the Dated Brent price for oil. For the six months ended June 30, 2008, our productionaveraged 9,500 BOE per day.  According to the sales method ofaccounting, oil revenues are recognized when production is sold to a purchaserat a fixed or determinable price, when delivery has occurred and title hastransferred, 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 operatingexpenses.  Significant commodity priceincreases, as experienced in recent years, can lead to an increase in drillingand development activities.  As a result,the demand and cost for people, services, equipment and materials may alsoincrease, causing a negative impact on our cash flow.

 

### ***Disclosures About Contractual Obligations andCommercial Commitments***

### ** **

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

 

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

 

The information contained in this Form 10-Q and in other publicstatements by us and our officers or directors includes or may contain certainforward-looking statements.  The words “may,”“will,” “expect,” “anticipate,” “believe,” “continue,” “estimate,” “project,” “intend,”and similar expressions used in this Form 10-Q are intended to identifyforward-looking statements within the meaning of Section 27A of the U.S.Securities Act of 1933, as amended, and Section 21E of the U.S. SecuritiesExchange Act of 1934, as amended.  Youshould not place undue reliance on these forward-looking statements, whichspeak only as of the date made.  Weundertake no obligation to publicly update these forward-looking statements toreflect events or circumstances after the date they are made or to reflect theoccurrence of unanticipated events.  Youshould also know that such statements are not guarantees of future performanceand are subject to risks, uncertainties and assumptions.  These factors include, but are not limitedto, those risks described in detail in this Form 10-Q and in the ourAnnual Report on Form 10-K for the year ended December 31, 2007 underthe caption “Risk Factors” and other filings with the Securities and ExchangeCommission.  These risk factors include,among others, our ability to replace reserves and sustain production; the levelof our indebtedness; the availability of capital on an economic basis to fundreserve replacement costs; uncertainties in evaluating oil and natural gasreserves of acquired properties and associated potential liabilities;unsuccessful exploration and development drilling; and production interruptionsthat could adversely affect our cash flow. Should any of these risks or uncertainties materialize, or should any ofthese assumptions prove incorrect, actual results may differ materially fromthose included within the forward-looking statements.

 

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

 

#### **Commodity Price Risk**

 

We produce and sell crude oil and natural gas.  Realized pricing is primarily driven by theprevailing worldwide price for crude oil and regional gas spot market priceswhich 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 which we considerfavorable.  For additional informationregarding our derivative instruments, see Note 5 to the Condensed ConsolidatedFinancial Statements.

 

# **Item 4: Controls and Procedures**

 

### ***Evaluation of Disclosure Controls and Procedures***

 

As of the end of the period covered by this Report, our managementcarried out an evaluation, under the supervision and with the participation ofour chief executive officer (the “CEO”) and 

 

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chief financial officer (the “CFO”), of the effectiveness of the designand operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and15d-15(c) of the Securities Exchange Act of 1934, as amended).  Based on that evaluation, the CEO and CFOconcluded:

 

(i)            that ourdisclosure controls and procedures are designed to ensure that information weare required to disclose in our reports filed or submitted under the SecuritiesExchange Act of 1934, as amended, is (a) recorded, processed, summarizedand 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)           that ourdisclosure controls and procedures were effective as of June 30, 2008.

 

### ***Changes in Internal Control over FinancialReporting***

 

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:  RiskFactors**

 

In addition to the other information set forth in this Form 10-Q,you should carefully consider the factors discussed in Item 1A “*Risk Factors*,” in our Annual Report on Form 10-Kfor the year ended December 31, 2007, which could materially affect ourbusiness, financial condition or future results.  The risks described in this Form 10-Qand in our Annual Report on Form 10-K are not the only risks facing ourcompany.  Additional risks anduncertainties not currently known to us or that we currently deem to beimmaterial also may materially adversely affect our business, financialconditions or future results.

 

# **Item 4: Submission of Matters to a Vote of Security Holders**

 

At the May 29, 2008 Annual Meeting of Stockholders, ourstockholders voted on two matters; the election of three Class I directorsto each serve three-year terms; and the appointment of an independentregistered public accounting firm for the year ending December 31, 2008.

 

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Votes were cast as follows:

 

(1)    Election of three Directors*:

 
| ** **                                | ** ** | **For**     | ** ** | **Withheld** | ** ** | **Broker  Non-  Votes** | ** ** |
|-------------------------------------------|------------|-------------|------------|--------------|------------|-------------------------|------------|
| Election as a Director of the Company of: |       |        |       |         |       |                    |       |
| John B. Connally III                      |       | 145,076,156 |       | 774,367      |       | —                  |       |
| William L. Transier                       |       | 142,868,670 |       | 2,981,853    |       | —                  |       |
| Charles J. Hue Williams                   |       | 126,910,087 |       | 18,940,436   |       | —                  |       |

 

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*     Thosedirectors whose term of office continued were as follows:  Nancy K. Quinn, John N. Seitz, Barry J. Galt,and Thomas D. Clark, Jr.

 

(2)    Ratification of theappointment of KPMG LLP as the independent registered public accounting firmfor 2008:

 
| **For**     | ** ** | **Against** | ** ** | **Abstained** | ** ** |
|-------------|------------|-------------|------------|---------------|------------|
| 145,690,511 |       | 122,050     |       | 37,961        |       |

 

# **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 contractsand 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.)                                                                            |
|-------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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.)                                                                                                             |
| 10.1 † |   | Amended and Restated Employment Agreement dated June 2, 2008, by  and between Endeavour International Corporation and William L. Transier  (incorporated by reference to exhibit 10.1 to our Current Report on  Form 8-K (Commission File No. 001-32212) filed on June 2,  2002). |
| 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.                                                                                                                                                                        |

 

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

 

**Endeavour International Corporation**

 
| Date: August 8, 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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