**United States**

**Securities and ExchangeCommission**

**Washington, D.C. 20549**

** **

**Form 10-Q**

** **

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

 

**For the****Quarterly Period Ended****September 30, 2005**

** **

**or**

 
| **o** | **Transition Report Under  Section 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.) |
|                                                                 |       |                                 |
| **1000 Main Street, Suite  3300, Houston,**                          |       | **Texas 77002**                      |
| (Address of principal executive offices)                             |       | (Zip code)                           |

** **

**(713) 307-8700**

(Registrant’s telephone number, including area code)

 

**None**

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

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  ý   Yes   o   No

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act).  ý   Yes   o   No

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).  o   Yes   ý   No

 

Asof November 1, 2005, 75,489,052 shares of the registrant’s common stock wereoutstanding.

 

 

----

** **

**Endeavour International Corporation**

** **

**Index**

 
| Part I:                     |                                                                                                |                                                 |
|-----------------------------|-----------------------------------------------------------------------------------------------------|------------------------------------------------------|
|                        | Item  1: Financial Statements                                                                       |                                                 |
|                        |                                                                                                | Condensed Consolidated Balance Sheets                |   |
|                        |                                                                                                | Condensed Consolidated Statements of Operations      |   |
|                        |                                                                                                | Condensed Consolidated Statements of Cash Flows      |   |
|                        |                                                                                                | Notes to Condensed Consolidated Financial Statements |   |
|                        | Item 2: Management’s Discussion and Analysis of Financial Condition  and Results of Operations |                                                 |
|                        | Item 3: Quantitative and Qualitative Disclosures about Market Risk                                  |                                                 |
|                        | Item 4: Controls and Procedures                                                                     |                                                 |
| Part  II. Other Information |                                                                                                |                                                 |
|                        | Item  1: Legal Proceedings                                                                          |                                                 |
|                        | Item 4: Submission of Matters to a Vote of Security Holders                                         |                                                 |
|                        | Item 6:  Exhibits                                                                                   |                                                 |
| Signatures                  |                                                                                                |                                                 |
|                             |                                                                                                     |                                                      |  |  |

 

----

 

**Item1:  Financial Statements**

** **

**Endeavour International Corporation**

**Condensed Consolidated Balance Sheets**

**(Unaudited)**

(Amounts in thousands, except share data)

 
| ** **                                                                                           | ** ** | **September 30, 2005** | ** **  | **December 31, 2004** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| **Assets**                                                                                           |       |                   |        |                  |       |
| Current Assets:                                                                                      |       |                   |        |                  |       |
| Cash and cash equivalents                                                                            | ** ** | **$**                  | **89,121**  | ** **            | $          | 8,975 |   |
| Accounts receivable                                                                                  | ** ** | **5,866**              | ** **  | 4,286                 |       |
| Amount held in escrow                                                                                | ** ** | **10,131**             | ** **  | —                |       |
| Prepaid expenses and other current assets                                                            | ** ** | **3,811**              | ** **  | 3,814                 |       |
| Total Current Assets                                                                                 | ** ** | **108,929**            | ** **  | 17,075                |       |
|                                                                                                 |       |                   | ** **  |                  |       |
| Equity Interests in Entities with Oil and Gas Properties                                             | ** ** | **—**             | ** **  | 3,688                 |       |
| Property and Equipment, Net                                                                          | ** ** | **54,284**             | ** **  | 50,228                |       |
| Goodwill                                                                                             | ** ** | **27,758**             | ** **  | 20,119                |       |
| Restricted Cash                                                                                      | ** ** | **4,366**              | ** **  | 2,507                 |       |
| Other Assets                                                                                         | ** ** | **11,218**             | ** **  | 8,120                 |       |
| Total Assets                                                                                         | ** ** | **$**                  | **206,555** | ** **            | $          | 101,737 |   |
|                                                                                                 |       |                   | ** **  |                  |       |
| **Liabilities and Stockholders’ Equity**                                                        |       |                   | ** **  |                  |       |
| Current Liabilities:                                                                                 |       |                   | ** **  |                  |       |
| Accounts payable                                                                                     | ** ** | **$**                  | **18,698**  | ** **            | $          | 2,909 |   |
| Accrued expenses                                                                                     | ** ** | **7,244**              | ** **  | 7,106                 |       |
| Current portion of long-term debt                                                                    | ** ** | **—**             | ** **  | 2,138                 |       |
| Other                                                                                                | ** ** | **8,414**              | ** **  | 223                   |       |
| Total Current Liabilities                                                                            | ** ** | **34,356**             | ** **  | 12,376                |       |
|                                                                                                 |       |                   | ** **  |                  |       |
| Long-Term Debt                                                                                       | ** ** | **81,250**             | ** **  | 2,150                 |       |
| Deferred Taxes                                                                                       | ** ** | **17,799**             | ** **  | 18,012                |       |
| Other Liabilities                                                                                    | ** ** | **10,256**             | ** **  | 8,979                 |       |
| Total Liabilities                                                                                    | ** ** | **143,661**            | ** **  | 41,517                |       |
|                                                                                                 |       |                   | ** **  |                  |       |
| Minority Interest                                                                                    | ** ** | **—**             | ** **  | 3,248                 |       |
|                                                                                                 |       |                   | ** **  |                  |       |
| Commitments and Contingencies (Note 10)                                                              |       |                   | ** **  |                  |       |
|                                                                                                 |       |                   | ** **  |                  |       |
| Stockholders’ Equity:                                                                           |       |                   | ** **  |                  |       |
| Preferred stock (Liquidation preference:  $2,418)                                                    | ** ** | **—**             | ** **  | —                |       |
| Common stock; shares issued and outstanding  – 75,247,834 at 2005 and 69,995,165 shares at 2004 | ** ** | **75**                 | ** **  | 70                    |       |
| Additional paid-in capital                                                                           | ** ** | **156,101**            | ** **  | 133,919               |       |
| Accumulated other comprehensive loss                                                                 | ** ** | **(6,093**             | **)**       | (528                  | )          |
| Deferred compensation                                                                                | ** ** | **(11,334**            | **)**       | (6,570                | )          |
| Accumulated deficit                                                                                  | ** ** | **(75,855**            | **)**       | (69,919               | )          |
| Total Stockholders’ Equity                                                                      | ** ** | **62,894**             | ** **  | 56,972                |       |
| Total Liabilities and Stockholders’ Equity                                                      | ** ** | **$**                  | **206,555** | ** **            | $          | 101,737 |   |

 

See accompanying notes to consolidated financial statements.

 

1

----

 

**Endeavour International Corporation**

**Condensed Consolidated Statements ofOperations**

**(Unaudited)**

(Amounts in thousands, except per share data)

 
| ** **                                                                     | ** ** | **Three Months  Ended September 30,** | ** **  | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------|-------------|------------------------------------------|------------|
| ** **                                                                     | ** ** | **2005**                              | ** **  | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues                                                                       | ** ** | **$**                                 | **10,852**  | ** **                               | $          | — |   | **$** | **27,645** | ** ** | $ | 8 |   |
|                                                                           |       |                                  | ** **  |                                     |       |   | ** ** |   |   |
| Cost of Operations:                                                            |       |                                  | ** **  |                                     |       |   | ** ** |   |   |
| Operating expenses                                                             | ** ** | **2,569**                             | ** **  | —                                   |       | **7,943** | ** ** | 1 |   |
| Depreciation, depletion and amortization                                       | ** ** | **2,399**                             | ** **  | 382                                      |       | **6,860** | ** ** | 890 |   |
| Impairment of oil and gas properties                                           | ** ** | **9,394**                             | ** **  | —                                   |       | **9,394** | ** ** | — |   |
| Equity loss from entities with oil and gas  properties                         | ** ** | **—**                            | ** **  | 90                                       |       | **79** | ** ** | 224 |   |
| General and administrative                                                     | ** ** | **5,730**                             | ** **  | 3,658                                    |       | **14,255** | ** ** | 9,141 |   |
| Total Expenses                                                                 | ** ** | **20,092**                            | ** **  | 4,130                                    |       | **38,531** | ** ** | 10,256 |   |
|                                                                           |       |                                  | ** **  |                                     |       |   | ** ** |   |   |
| Loss From Operations                                                           | ** ** | **(9,240**                            | **)**       | (4,130                                   | )          | **(10,886** | **)** | (10,248 | ) |
|                                                                           |       |                                  | ** **  |                                     |       |   | ** ** |   |   |
| Other (Income) Expense:                                                        |       |                                  | ** **  |                                     |       |   | ** ** |   |   |
| Consideration given in excess of fair value  of identifiable assets acquired   | ** ** | **—**                            | ** **  | —                                   |       | **—** | ** ** | 10,779 |   |
| Interest income                                                                | ** ** | **(770**                              | **)**       | (155                                     | )          | **(1,714** | **)** | (398 | ) |
| Interest expense                                                               | ** ** | **1,150**                             | ** **  | 8                                        |       | **3,115** | ** ** | 262 |   |
| (Gain) loss on sale of oil and gas  interests                                  | ** ** | **(22**                               | **)**       | —                                   |       | **(14,966** | **)** | (355 | ) |
| Gain on collection of promissory notes                                         | ** ** | **—**                            | ** **  | —                                   |       | **—** | ** ** | (1,848 | ) |
| Other (income) expense                                                         | ** ** | **(26**                               | **)**       | 9                                        |       | **(687** | **)** | 216 |   |
|                                                                           |       |                                  | ** **  |                                     |       |   | ** ** |   |   |
| Total Other (Income) Expense                                                   | ** ** | **332**                               | ** **  | (138                                     | )          | **(14,252** | **)** | 8,656 |   |
|                                                                           |       |                                  | ** **  |                                     |       |   | ** ** |   |   |
| Income (Loss) Before Minority Interest                                         | ** ** | **(9,572**                            | **)**       | (3,992                                   | )          | **3,366** | ** ** | (18,904 | ) |
| Minority Interest                                                              | ** ** | **—**                            | ** **  | (5                                       | )          | **(470** | **)** | 12 |   |
|                                                                           |       |                                  | ** **  |                                     |       |   | ** ** |   |   |
| Income (Loss) Before Income Taxes                                              | ** ** | **(9,572**                            | **)**       | (3,987                                   | )          | **2,896** | ** ** | (18,892 | ) |
| Income Tax Expense                                                             | ** ** | **4,850**                             | ** **  | —                                   |       | **8,714** | ** ** | — |   |
|                                                                           |       |                                  | ** **  |                                     |       |   | ** ** |   |   |
| Net Loss                                                                       | ** ** | **(14,422**                           | **)**       | (3,987                                   | )          | **(5,818** | **)** | (18,892 | ) |
| Preferred Stock Dividends                                                      | ** ** | **39**                                | ** **  | 39                                       |       | **118** | ** ** | 385 |   |
|                                                                           |       |                                  | ** **  |                                     |       |   | ** ** |   |   |
| Net Loss to Common Stockholders                                                | ** ** | **$**                                 | **(14,461** | **)**                                    | $          | (4,026 | ) | **$** | **(5,936** | **)** | $ | (19,277 | ) |
|                                                                           |       |                                  | ** **  |                                     |       |   | ** ** |   |   |
| Net Loss Per Common Share – Basic and Diluted                             | ** ** | **$**                                 | **(0.19**   | **)**                                    | $          | (0.06 | ) | **$** | **(0.08** | **)** | $ | (0.31 | ) |
|                                                                           |       |                                  | ** **  |                                     |       |   | ** ** |   |   |
| Weighted Average Number of Common Shares  Outstanding – Basic and Diluted | ** ** | **74,656**                            | ** **  | 69,366                                   |       | **74,084** | ** ** | 62,596 |   |

 

See accompanying notes to consolidated financial statements.

 

2

----

 

**Endeavour International Corporation**

**Condensed Consolidated Statements of CashFlows**

**(Unaudited)**

(Amounts in thousands)

 
| ** **                                                                       | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                       | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Cash Flows from Operating Activities:                                            |       |                                 | ** ** |   |   |
| Net loss                                                                         | ** ** | **$**                                | **(5,818** | **)** | $ | (18,892 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |       |                                 | ** ** |   |   |
| Depreciation, depletion and amortization                                         | ** ** | **6,860**                            | ** ** | 890 |   |
| Impairment of oil and gas properties                                             | ** ** | **9,394**                            | ** ** | — |   |
| Consideration given in excess of fair value  of identifiable assets acquired     | ** ** | **—**                           | ** ** | 10,779 |   |
| Deferred tax expense                                                             | ** ** | **3,275**                            | ** ** | — |   |
| Gain on collection of promissory notes                                           | ** ** | **—**                           | ** ** | (1,848 | ) |
| Amortization of non-cash compensation                                            | ** ** | **5,131**                            | ** ** | 4,733 |   |
| Fair market value adjustment of stock  options                                   | ** ** | **287**                              | ** ** | 574 |   |
| Gain on sale of oil and gas interests                                            | ** ** | **(14,966**                          | **)**      | (355 | ) |
| Other                                                                            | ** ** | **1,011**                            | ** ** | 745 |   |
| Changes in assets and liabilities:                                               |       |                                 | ** ** |   |   |
| (Increase) Decrease in receivables                                               | ** ** | **(1,678**                           | **)**      | 4,121 |   |
| Increase in other current assets                                                 | ** ** | **(9,549**                           | **)**      | (450 | ) |
| Increase in accounts payable and accrued  expenses                               | ** ** | **20,031**                           | ** ** | 1,480 |   |
| Net Cash Provided by Operating Activities                                        | ** ** | **13,978**                           | ** ** | 1,777 |   |
|                                                                             |       |                                 | ** ** |   |   |
| Cash Flows From Investing Activities:                                            |       |                                 | ** ** |   |   |
| Capital expenditures                                                             | ** ** | **(22,648**                          | **)**      | (4,278 | ) |
| Acquisitions, net of cash acquired                                               | ** ** | **(1,437**                           | **)**      | (66 | ) |
| Investment in Limited Partnership                                                | ** ** | **(156**                             | **)**      | (1,590 | ) |
| Proceeds from sale of assets                                                     | ** ** | **19,465**                           | ** ** | 741 |   |
| Increase in restricted cash                                                      | ** ** | **(2,298**                           | **)**      | — |   |
| Net Cash Used in Investing Activities                                            | ** ** | **(7,074**                           | **)**      | (5,193 | ) |
|                                                                             |       |                                 | ** ** |   |   |
| Cash Flows From Financing Activities:                                            |       |                                 | ** ** |   |   |
| Proceeds from borrowings                                                         | ** ** | **81,250**                           | ** ** | — |   |
| Repayment of borrowings                                                          | ** ** | **(4,006**                           | **)**      | (1,751 | ) |
| Purchase and retirement of common and  preferred stock                           | ** ** | **—**                           | ** ** | (5,031 | ) |
| Proceeds from warrant and stock option  exercises                                | ** ** | **1,518**                            | ** ** | — |   |
| Financing costs paid                                                             | ** ** | **(3,648**                           | **)**      | — |   |
| Proceeds from common and preferred stock  issued and issuable                    | ** ** | **—**                           | ** ** | 46,399 |   |
| Other financing                                                                  | ** ** | **(95**                              | **)**      | — |   |
| Net Cash Provided by Financing Activities                                        | ** ** | **75,019**                           | ** ** | 39,617 |   |
|                                                                             |       |                                 | ** ** |   |   |
| Net Increase in Cash and Cash Equivalents                                        | ** ** | **81,923**                           | ** ** | 36,201 |   |
| Effect of Foreign Currency Changes on Cash                                       | ** ** | **(1,777**                           | **)**      | — |   |
| Cash and Cash Equivalents, Beginning of Period                                   | ** ** | **8,975**                            | ** ** | 57 |   |
|                                                                             |       |                                 | ** ** |   |   |
| Cash and Cash Equivalents, End of Period                                         | ** ** | **$**                                | **89,121** | ** ** | $ | 36,258 |   |
|                                                                                  |            |                                      |            |  |  |  |  |  |

 

See accompanying notes to consolidated financial statements.

 

3

----

 

**Endeavour International Corporation**

**Notes to Condensed Consolidated Financial Statements**

**(Unaudited)**

 

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

## *** ***

### ***General***

### ** **

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

 

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

### ** **

The accompanying financial statements have been prepared, withoutaudit, pursuant to the rules and regulations of the Securities and ExchangeCommission (“SEC”), and, accordingly, certain information normally included infinancial statements prepared in accordance with accounting principles generallyaccepted in the United States has been condensed or omitted.

 

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

 

### ***Intangible Assets***

### ** **

During the third quarter, we determined that the intangible assetrepresenting the purchase price allocation to the assembled workforce as aresult of the NSNV Acquisition (see Note 3) no longer had a useful life thatwas indeterminate.  As a result, we areamortizing the carrying amount of the intangible asset over its estimated lifeof six years using the straight-line method.

 

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

### ** **

Basic loss per common share is computed by dividing net lossattributable to common stockholders by the weighted average number of commonshares outstanding for the period. Diluted loss per share includes the effect of our outstanding stockoptions, warrants and shares issuable pursuant to convertible debt and certain stockincentive plans under the treasury stock method, if including such instrumentsis dilutive.

 

4

----

 

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

 
| ** **                            | ** ** | **September 30,** | ** ** |
|---------------------------------------|------------|-------------------|------------|
| **(Amounts in thousands)**            | ** ** | **2005**          | ** ** | **2004** | ** ** |
|                                  |       |              |       |   |   |
| Options and  stock based compensation | ** ** | **1,729**         |       | 1,047 |   |
| Warrants                              | ** ** | **1,314**         |       | 1,365 |   |
| Convertible  Debt                     | ** ** | **14,579**        |       | — |   |
|                                  |       |              |       |   |   |
| Common  shares potentially issuable   | ** ** | **17,622**        |       | 2,412 |   |

 

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

### ** **

In December 2004, the Financial Accounting Standards Board issued arevised Statement of Financial Accounting Standard No. 123 (revised 2004), *Share-Based Payment* (“SFAS 123R”), which replaces SFAS 123and supersedes APB Opinion No. 25.  SFAS123R requires all share-based payments to employees, including grants ofemployee stock options, to be recognized in the financial statements based ontheir fair values.  The pro formadisclosures previously permitted under SFAS 123 will no longer be analternative to financial statement recognition. In April 2005, the SEC delayed the effective date of SFAS 123R to fiscalyears beginning after June 15, 2005.  Asa result SFAS 123R will be effective for the Company beginning in the firstquarter of 2006.  The guidance alsoprovides for classifying awards as either liabilities or equity, which impactswhen and if the awards must be remeasured to fair value subsequent to the grantdate.  We plan to adopt SFAS 123R on January1, 2006.

 

At the time of adoption, companies can select from various transitionmethods, two of which would allow for restatement of certain priorperiods.  Management anticipatesselecting the transition method in which prior period financial statementswould not be restated. The adoption of SFAS No. 123R is not expected to have asignificant effect on our financial condition and will not affect ourconsolidated cash flows.  The futureimpact on our consolidated results of operations of the adoption of SFAS 123R cannotbe predicted as certain of our deferred compensation plans are treated asliabilities and are currently accounted for using the variable method ofaccounting. However, had we adopted SFAS 123R in prior periods, the impact ofthat standard would have approximated the impact of SFAS 123 as described inthe disclosure of pro forma net loss and loss per share below.

 

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

## *** ***

We account for stock–based compensation plans for employees, includingdirectors, using the intrinsic value method. Under this method, we record no compensation expense for stock

 

5

----

 

 

options granted when the exercise price of options granted is equal toor greater than the fair market value of our common stock on the date of grant.

 

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

 

During 2003 and before the NSNV Acquisition (see Note 3), 700,000options were granted to then-current directors. While all the options granted had an exercise price higher than themarket value of the stock on the date of grant, a subsequent modification ofthese options by the predecessor board of directors has triggered variableaccounting.  We are required to recordcompensation expense if the modified option price is lower than the marketprice of the stock at the end of a reporting period until the options expire orare exercised.  For the three monthsended September 30, 2005 and 2004, we recorded non-cash general andadministrative expenses of $0.7 million and $(0.1) million, respectively,related to these options.  For the ninemonths ended September 30, 2005 and 2004, we recorded non-cash general andadministrative expenses of $0.3 million and $0.6 million, respectively, relatedto these options. During the third quarter of 2005, 200,000 of these optionswere utilized in a cashless exercise resulting in a net issuance of 80,478shares.

 

Had compensation expense been determined under fair value provisions,our net loss and net loss per share would have been the following:

 
| ** **                                                                                                  | ** ** | **Three Months Ended  September 30,** |        | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|-------------|--------------------------------------|------------|
| **(Amounts in thousands, except  per share data)**                                                          | ** ** | **2005**                              | ** **  | **2004**                             |       | **2005** | ** ** | **2004** | ** ** |
|                                                                                                        |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| Net loss to  common stockholders, as reported                                                               | ** ** | **$**                                 | **(14,461** | **)**                                | $          | (4,026 | ) | **$** | **(5,936** | **)** | $ | (19,277 | ) |
| Add:                                                                                                        |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| Stock-based compensation expense as  reported                                                               | ** ** | **1,810**                             | ** **  | 1,325                                |       | **3,565** | ** ** | 4,154 |   |
| Less:                                                                                                       |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| Total stock-based compensation expense  determined under fair-value-based method for all awards, net of tax | ** ** | **(1,382**                            | **)**       | (2,652                               | )          | **(4,062** | **)** | (4,881 | ) |
|                                                                                                        |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| Pro forma  net loss                                                                                         | ** ** | **$**                                 | **(14,033** | **)**                                | $          | (5,353 | ) | **$** | **(6,433** | **)** | $ | (20,004 | ) |
|                                                                                                        |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| Loss per  share – Basic and Diluted:                                                                   |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| As Reported                                                                                                 | ** ** | **$**                                 | **(0.19**   | **)**                                | $          | (0.06 | ) | **$** | **(0.08** | **)** | $ | (0.31 | ) |
| Pro Forma                                                                                                   | ** ** | **$**                                 | **(0.19**   | **)**                                | $          | (0.08 | ) | **$** | **(0.09** | **)** | $ | (0.32 | ) |

 

These pro forma amounts may not be representative of future amounts sincethe estimated fair value of stock options is amortized to expense over thevesting period and additional options may be issued in future years.  The estimated fair value of each optiongranted was calculated

 

6

----

 

using the Black-Scholes Method. The following summarizes the weighted average of the assumptions used inthe method.

 
| ** **                     | ** ** | **2005**   | ** ** | **2004** | ** ** |
|--------------------------------|------------|------------|------------|----------|------------|
|                           |       |       | ** ** |     |       |
| Risk free  rate                | ** ** | **3.9**    | **%**      | 4.0      | %          |
| Expected  years until exercise | ** ** | **5.0**    | ** ** | 7.0      |       |
| Expected  stock volatility     | ** ** | **52**     | **%**      | 31       | %          |
| Dividend  yield                | ** ** | **—** | ** ** | —   |       |

 

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

## *** ***

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

### ** **

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

 

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

### ** **

In January 2005, we purchased the remaining 23.34% minority interest, representing1,299,772 shares, in OER for consideration of NOK 6.98 per share and 1.68shares of our common stock per share of OER. The aggregate consideration paid of $10.7 million was approximately $1.4million in cash and 2,183,617 shares of our common stock.  As a result of this purchase, goodwillincreased by $7.7 million.

 

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

### ** **

On February 26, 2004, we acquired NSNV, Inc. (“NSNV”), through a mergerwith a newly created subsidiary of the Company, resulting in NSNV becoming awholly-owned subsidiary of the Company (the “NSNV Acquisition”).  NSNV was a private company owned by WilliamL. Transier, John N. Seitz and PGS Exploration (UK) Limited (“PGS”), a UnitedKingdom corporation that is a provider of geophysical services.  The former shareholders of NSNV received anaggregate of 12.5 million of our common shares in the merger, representingapproximately 18.9% of our outstanding common stock immediately after theclosing of the NSNV Acquisition.

 

The NSNV Acquisition was accounted for as a purchase of assets and nota business combination.  Therefore, theconsideration given was allocated to the fair value of the

 

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identifiable assets and liabilities acquired with the excess,approximately $10.8 million, expensed.

 

### ***The Restructuring***

### ** **

Simultaneous with the consummation of the NSNV Acquisition and aprivate placement of our common stock for aggregate gross proceeds of $50million, we restructured various financial and stockholder related items (the “Restructuring”).  With the Restructuring we sold substantially allof our United States oil and gas assets, eliminated outstanding convertiblenotes and eliminated all of the Series A and C preferred stock as well asnearly all of the Series B Preferred Stock.

 

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

### ** **

During the first quarter of 2004, we sold all of our limitedpartnership units in Knox Miss. Partners, L.P (“Knox Miss”) for $5.0 millionand received $500,000 in cash and a $4.5 million short-term note that wassecured by a pledge of the limited partnership interest.  The short-term note was paid in full during2004.  We recorded a gain on the sale ofKnox Miss of $1.2 million during the first quarter of 2004.

 

### ***Sale of Louisiana Shelf Partners, L.P.***

### ** **

During the second quarter of 2004, we sold all of our equity interest inLouisiana Shelf Partners, L.P. for $250,000 in cash and a $2 million contingentdeferred payment that is payable from proceeds from production of drillingactivities on the oil and gas leases held by Louisiana Shelf Partners, L.P.  With the uncertainty of collection of thecontingent deferred payment, no receivable was recorded at the time of thesale.  In connection with the sale, werecorded a loss of $895,000 during the second quarter of 2004.

 

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

### ** **

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

 

## ***Note 4 – Amount Held in Escrow***

## *** ***

During the third quarter of 2005, we deposited $10.1 million in anescrow account as required by a drilling contract.  The drilling contract requires an escrowaccount during the early stages of drilling as collateral for payment under thecontract.  We expect to pay all amountsunder the drilling contract by the end of 2005, thereby relieving the escrowaccount.

 

8

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## ***Note 5 – Convertible Senior Notes***

## *** ***

During the first quarter of 2005, we issued $81.25 million aggregateprincipal amount of convertible senior notes due 2012.  The notes bear interest at a rate of 6.00%per annum, payable in January and July.  Thenotes are convertible into shares of our common stock at an initial conversionrate of 199.2032 shares of common stock per $1,000 principal amount of notes,subject to adjustment, which represents an initial conversion price ofapproximately $5.02 per share.  Inconnection with the issuance of these notes, we paid $3.6 million in financingand other costs.

 

## ***Note 6 - Property and Equipment***

## *** ***

Property and equipment included the following:

 
| **(Amounts in thousands)**                            | ** ** | **September  30, 2005** | ** ** | **December  31, 2004** | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| Oil and gas  properties under the full cost method:   |       |                    | ** ** |                   |       |
| Subject to amortization                               | ** ** | **$**                   | **22,042** | ** **             | $          | 20,081 |   |
| Not subject to amortization:                          |       |                    | ** ** |                   |       |
| Acquired in 2005                                      | ** ** | **19,153**              | ** ** | —                 |       |
| Acquired in 2004                                      | ** ** | **25,005**              | ** ** | 26,749                 |       |
| ** **                                            |       | **66,200**              | ** ** | 46,830                 |       |
|                                                  |       |                    | ** ** |                   |       |
| Other oil  and gas assets                             | ** ** | **4,875**               | ** ** | 4,875                  |       |
|                                                  |       |                    | ** ** |                   |       |
| Computers,  furniture and fixtures                    | ** ** | **1,035**               | ** ** | 635                    |       |
| Total property and equipment                          | ** ** | **72,110**              | ** ** | 52,340                 |       |
|                                                  |       |                    | ** ** |                   |       |
| Accumulated  depreciation, depletion and amortization | ** ** | **(17,826**             | **)**      | (2,112                 | )          |
|                                                  |       |                    | ** ** |                   |       |
| Net property  and equipment                           | ** ** | **$**                   | **54,284** | ** **             | $          | 50,228 |   |

 

The costs not subject to amortization relate to unproved propertieswhich are excluded from amortized capital costs until it is determined whetheror not proved reserves can be assigned to such properties.  We capitalized $2.0 million and $1.3 millionin certain employee costs directly related to exploration activities for thequarter ended September 30, 2005 and 2004, respectively.  We capitalized $5.4 million and $3.1 millionin certain employee costs directly related to exploration activities for the ninemonths ended September 30, 2005 and 2004, respectively.

 

During the third quarter of 2005, we recorded $9.4 million inimpairment of oil and gas properties related to three wells, Fiacre, Prometheusand Turnberry, that were drilling during the

 

9

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third quarter of 2005.  Fiacrewas determined to be a dry hole in September 2005 while Prometheus andTurnberry were determined to be dry holes in October 2005.  The impairment includes dry hole costsincurred at September 30, 2005 and certain other costs previously capitalizedrelated to these prospects.  See Note 11.

 

## ***Note 7 – Derivative Instruments***

## *** ***

In January 2005, we entered into an oil commodity swap where we paymarket IPE Brent and receive a fixed price that ranges from $46.20 per barrelin the initial month to $40.00 per barrel at the end of the contract.  The contract covers 600 barrels per day fromFebruary 2005 through December 2006.  Thecontract requires us to provide certain collateral.  For the three and nine months ended September30, 2005, we realized $1.0 million and $1.5 million, respectively, as areduction to revenue related to settlements for this contract.  We did not exclude any component of thehedging instrument’s gain or loss when assessing effectiveness.

 

At September 30, 2005, the net deferred loss recognized in accumulatedother comprehensive income was $5.4 million, net of tax.  Based on current prices, we anticipate a lossof $4.3 million, net of tax, will be transferred out of accumulated othercomprehensive income and recognized within earnings over the next 12 months.

 

We discontinue hedge accounting prospectively when (1) we determinethat the derivative is no longer effective in offsetting changes in the fairvalue or cash flows of a hedged item (including hedged items such as firmcommitments or forecasted transactions); (2) the derivative expires; (3) it isno longer probable that the forecasted transaction will occur; (4) a hedgedfirm commitment no longer meets the definition of a firm commitment; or (5)management determines that designating the derivative as a hedging instrumentis no longer appropriate.

 

## ***Note 8 – Supplemental Cash Flow Information***

## *** ***

As described above, in the first quarter of 2005, we purchased theminority interest in OER for a combination of cash and common stock.  During the third quarter of 2005, a formerdirector executed a cashless exercise of 200,000 options to purchase commonstock at an exercise price of $3.00 per share. As a result of this net exercise, we issued 80,478 shares of commonstock with a value of $0.4 million in settlement of all 200,000 outstandingoptions.

 

During the first quarter of 2004, we had noncash investing activitieswith the NSNV Acquisition for 12.5 million shares of our common stock with atotal purchase price of approximately $25 million.  Therefore, the NSNV Acquisition increasedcurrent assets by $1 million, oil and gas property by $11.4 million, otherassets by $8.3 million, current liabilities by $2.5 million other liabilitiesby $3.5 million and equity by $25 million through a noncash transaction thatwas not reflected in the statement of cash flows.  Noncash investing activities and financingactivities

 

10

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were also incurred with the transactions involved in the Restructuring. In the first quarter of 2004, weexercised a call option and issued 835,000 shares of our common stock to RAMTrading Ltd. in full payment of the option.

 

## ***Note 9 – Comprehensive Loss***

## *** ***

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

 
| ** **                                                       | ** ** | **Three Months Ended  September 30,** |        | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------|-------------|--------------------------------------|------------|
| **(Amounts in thousands)**                                       | ** ** | **2005**                              | ** **  | **2004**                             |       | **2005** | ** ** | **2004** | ** ** |
|                                                             |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| Net loss                                                         | ** ** | **$**                                 | **(14,422** | **)**                                | $          | (3,987 | ) | **$** | **(5,818** | **)** | $ | (18,892 | ) |
|                                                             |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| Unrealized loss on commodity derivative  instruments, net of tax | ** ** | **(2,718**                            | **)**       | —                               |       | **(6,698** | **)** | — |   |
| Unrealized  loss on marketable securities                        | ** ** | **108**                               | ** **  | (504                                 | )          | **(168** | **)** | (330 | ) |
| Reclassification adjustment for loss  realized in net loss above | ** ** | **830**                               | ** **  | —                               |       | **1,301** | ** ** | 207 |   |
|                                                             |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| Net impact  on comprehensive loss                                | ** ** | **(1,780**                            | **)**       | (504                                 | )          | **(5,565** | **)** | 123 |   |
|                                                             |       |                                  | ** **  |                                 |       |   | ** ** |   |   |
| Comprehensive  loss                                              | ** ** | **$**                                 | **(16,202** | **)**                                | $          | (4,491 | ) | **$** | **(11,383** | **)** | $ | (19,015 | ) |
|                                                                  |            |                                       |             |                                      |            |  |  |  |  |  |  |  |  |  |

 

## ***Note 10 – Commitments and Contingencies***

## *** ***

### ***General***

### ** **

The oil and gas industry is subject to regulation by federal, state andlocal authorities.  In particular, gasand oil production operations and economics are affected by environmental protectionstatutes, tax statutes and other laws and regulations relating to the petroleumindustry.  We believe we are incompliance with all federal, state and local laws and regulations applicable tothe Company and its properties and operations, the violation of which wouldhave a material adverse effect on us or our financial condition.

 

11

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### ***PGS Commitment***

### ** **

We have a three-year product and service commitment to PGS in returnfor the right to use 79,200 square kilometers of 3-D seismic and related datain the North Sea region, including the 3D Mega Merge and North Sea DigitalAtlas databases.  Under the agreement, weare required to purchase products and services from PGS, or affiliates, thathave an aggregate invoice value of at least $4.5 million over a period of threeyears ending on December 15, 2006. Our commitment remaining at September 30,2005 is as follows:

 
| **(amounts in thousands)**              | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|------------|------------|
| Through  December 15, 2005              |       | $          | 1,215      |   |
| December 16,  2005 to December 15, 2006 |       | 2,000      |       |
|                                    |       |       |       |
| Total PGS  commitment                   |       | $          | 3,215      |   |

 

### ***Legal Proceeding***

### ** **

In March 2004, the GHK Company, LLC, GHK/Potato Hills LimitedPartnership, and Brian F. Egolf (collectively “Plaintiffs”) commenced an actionagainst Endeavour International Corporation (“Endeavour”), f/k/a ContinentalSouthern Resources, Inc. (“CSOR”), as well as BWP Gas, L.L.C. (“BWP”) and HBAGas, Inc. (“HBA”) in state court in Oklahoma City, Oklahoma.  In the petition, Plaintiffs allege that in2003, at a time when CSOR intended to acquire a majority of the membershipinterests in BWP, that BWP entered into an agreement to assign to Plaintiffs2.5 million common shares of Endeavour stock upon compliance by Plaintiffs withcertain contractual obligations including but not limited to completion andinitial commercial production of the Mary #2-34 well, along with thepresentation of a development plan and the commencement of the next explorationor development well in the Potato Hills Deep Prospect.  Plaintiffs allege in their petition that BWP,HBA and Endeavour are alter egos of each other and jointly and severally liableto Plaintiffs for failing to deliver to Plaintiffs the Endeavour commonstock.  Plaintiffs seek delivery of thestock as well as a temporary restraining order and a primary and permanentinjunction (i) enjoining all dilutions of Plaintiffs’ rights pertaining toEndeavour stock; (ii) enjoining Endeavour from all future stock issuances andtransfers of assets not in the ordinary course of business; and (iii) prohibitingthe alienation or encumbrance of the Endeavour stock that is allegedly in HBA’spossession.  In April 2004, thedefendants removed the action from the state court to the United StatesDistrict Court for the Western District of Oklahoma.  In October 2004, the United States DistrictCourt granted a motion to remand to state court filed by the Plaintiffs andremanded the matter to the District Court of Oklahoma County, Oklahoma.  In June 2005, BWP and HBA filed voluntarypetitions for relief under Chapter 11 of the United States Bankruptcy Code inthe United States Bankruptcy Court for the Eastern District ofPennsylvania.  In July 2005, Endeavourfiled a Notice of Removal to the federal courts based among other things on thefact that the case of the Plaintiffs relates to the pending bankruptcyproceedings of BWP and HBA.  ThePlaintiffs have contested this removal.  Whilethe outcome cannot be predicted at this time, management believes it has goodand valid defenses in this litigation and intends to litigate vigorously.

 

12

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## ***Note 11 – Subsequent Events***

## *** ***

On October 17, 2005, we announced that drilling operations were complete onthe Prometheus prospect (where we held a 22.5 percent working interest) in theSouthern Gas Basin of the North Sea.  Noncommercial shows of hydrocarbons were encountered in the well which has beenplugged and abandoned.  On October 26, 2005,we announced that drilling operations were completed on the Turnberry prospectin the Central North Sea, where we were operator with a 40 percent workinginterest.  Commercial hydrocarbons werenot present in the objective and the well will be plugged and abandoned.  The total costs of the Fiacre prospect andthese two wells are anticipated to be approximately $16 million, $9.4 millionof which had been incurred at September 30, 2005.

 

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

 

The information contained in this Quarterly Report on Form 10-Q and inother public statements by the Company and Company officers or directorsincludes or may contain certain forward-looking statements. The words “may,” “will,”“expect,” “anticipate,” “believe,” “continue,” “estimate,” “project,” “intend,”and similar expressions used in this Report are intended to identify forward-lookingstatements within the meaning of Section 27A of the U.S. Securities Act of 1933and Section 21E of the U.S. Securities Exchange Act of 1934. You should notplace undue reliance on these forward-looking statements, which speak only asof the date made. We undertake no obligation to publicly release the result ofany revision of these forward-looking statements to reflect events orcircumstances after the date they are made or to reflect the occurrence ofunanticipated events. You should also know that such statements are notguarantees of future performance and are subject to risks, uncertainties andassumptions. These factors include, but are not limited to, those risksdescribed in detail in the Company’s Annual Report on Form 10-K under thecaption “Risk Factors” and other filings with the Securities and ExchangeCommission. Should any of these risks or uncertainties materialize, or shouldany of these assumptions prove incorrect, actual results may differ materiallyfrom those included within the forward-looking statements.

 

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

 

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

 

## ***General***

 

During the first quarter of 2004, we completed a series of mutuallyinterdependent transactions that significantly expanded our scope and provideda new focus with new management, primarily on international oil and gasexploration.  As a result of the 2004transactions, all of our producing operations were sold as well as ourexploration activities in Mississippi. We retained our equity interests relating to Thailand and Louisianathrough the end of the first quarter of 2004; however our equity interests inLouisiana were sold in May 2004 and our partnership interests in Thailand weresold in April 2005.

 

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

 

14

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## ***Results of Operations***

 

We had revenues of $10.9 million and $27.6 million for the three and ninemonths ended September 30, 2005, respectively, with sales volumes of 2,159barrels of oil equivalent per day for the third quarter of 2005 and 2,019barrels of oil equivalent per day for the nine months ended September 30, 2005.  Our Norwegian operations are also responsiblefor nearly all of the increases in operating expenses; depreciation, depletionand amortization (“DD&A”) expense; and income taxes.

 

The increases in general and administrative (“G&A”) expenses weredriven primarily by the significant increase in operations through theacquisition of NSNV at the end of February 2004, our Norway operations at theend of November 2004, and the fair market value adjustment of stock options undervariable plan accounting.  Components ofG&A expenses for these periods are as follows:

 
| ** **                                     | ** ** | **Three Months Ended  September 30,** |       | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **(Amounts in thousands)**                     | ** ** | **2005**                              | ** ** | **2004**                             |       | **2005** | ** ** | **2004** | ** ** |
|                                           |       |                                  | ** ** |                                 |       |   | ** ** |   |   |
| Compensation                                   | ** ** | **$**                                 | **2,869**  | ** **                           | $          | 1,348 |   | **$** | **7,840** | ** ** | $ | 2,850 |   |
| Consulting, legal and accounting fees          | ** ** | **1,257**                             | ** ** | 878                                  |       | **3,170** | ** ** | 1,909 |   |
| Occupancy costs                                | ** ** | **157**                               | ** ** | 119                                  |       | **861** | ** ** | 271 |   |
| Other  expenses                                | ** ** | **462**                               | ** ** | 552                                  |       | **1,390** | ** ** | 1,321 |   |
| Total gross cash G&A expenses              | ** ** | **4,745**                             | ** ** | 2,897                                |       | **13,261** | ** ** | 6,351 |   |
| Non-cash  stock-based compensation             | ** ** | **2,285**                             | ** ** | 2,125                                |       | **6,144** | ** ** | 5,274 |   |
| Fair market value adjustment of stock  options | ** ** | **678**                               | ** ** | (84                                  | )          | **287** | ** ** | 574 |   |
| Total gross non-cash G&A expenses          | ** ** | **2,963**                             | ** ** | 2,041                                |       | **6,431** | ** ** | 5,848 |   |
| Gross  G&A expenses                        | ** ** | **7,708**                             | ** ** | 4,938                                |       | **19,692** | ** ** | 12,199 |   |
| Less:  capitalized G&A expenses            | ** ** | **(1,978**                            | **)**      | (1,280                               | )          | **(5,437** | **)** | (3,058 | ) |
| Net G&A  expenses                          | ** ** | **$**                                 | **5,730**  | ** **                           | $          | 3,658 |   | **$** | **14,255** | ** ** | $ | 9,141 |   |

 

Interest expense increased to $3.1 million for the nine months ended September30, 2005 as compared to $0.3 million for the corresponding period in 2004primarily due to the issuance of our convertible senior notes during the firstquarter of 2005.

 

## ***Income Taxes***

## *** ***

Our tax expense, relating solely to our Norwegian operations, of $4.9million and $8.7 million for the three and nine months ended September 30,2005, respectively, includes $0.1 million and $1.2 million, respectively offoreign currency gains attributable to tax liability balances.  For the three and nine months ended September30, 2005, our Norwegian operations had income before taxes of $5.4 million and$12.7 million, respectively, as compared to income (loss) before taxes of $(9.6)million and $2.9 million, respectively, for the total company.  During each of the periods presented for 2005and 2004, we did not record any income tax benefits on our non-Norwegianoperations as there was no assurance that we could generate any taxableearnings,

 

15

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and therefore recorded valuation allowances on the full amount ofdeferred tax assets generated.  The gainfrom the sale of our Thailand partnership interests is not taxable in Thailandand is offset by other current year tax losses in the U.S.

 

## ***Drilling Program***

 

During the third quarter of 2005, we began drilling our ten-well 2005-2006exploration program in the UK sector of the North Sea.  The first well, Fiacre in the Central Grabenregion, in which we held a 20 percent non-operating working interest, wasdetermined to be a dry hole.  During thethird quarter, we recorded an impairment of $5.4 million related to this well.

 

At September 30, 2005, we were drilling two other wells – thePrometheus prospect in the Southern Gas Basin (where we held a 22.5 percentworking interest) and the Turnberry prospect in the Central Graben region.  On October 17, 2005, we announced thatdrilling operations had been completed on the Prometheus prospect.  Non commercial shows of hydrocarbons were encounteredin the objective and the well has been plugged and abandoned.  On October 26, 2005, we announced thatdrilling operations were completed on the Turnberry prospect, where we wereoperator with a 40 percent working interest. Commercial hydrocarbons were not present in the objective and the wellwill be plugged and abandoned.  The totalcosts of the Fiacre prospect and these two wells are anticipated to beapproximately $16 million, $9.4 million of which had been incurred at September30, 2005.

 

Drilling operations are set to begin in early November on the finalwell to be drilled in 2005 – the Turiff and Tulliallen prospects on Block31/26b in the Central Graben.  Endeavourholds a 60 percent working interest in the well and serves as operator.

 

In September 2005, we were awarded 11 production licenses covering 17blocks in the 23rd United Kingdom Seaward Licensing Round.  Endeavour was awarded interests in sixproduction licenses covering six blocks in the Central North Sea and will serveas operator on three of the blocks.  Theblocks are as follows:

 

•                  Blocks31/21b, 31/27b  (operator with 40 percentinterest)

•                  Block15/12a (operator with 100 percent interest)

•                  Blocks22/20b, 30/1g  (25 percent interest)

•                  Block23/16f (50 percent interest)

 

In addition, Endeavour was awarded two licenses comprised of six blocksin the Inner Moray Firth. Endeavour will serve as operator with 33.3 percentinterest in the following blocks:

 

•                  Blocks12/26b (Split), 12/27, 17/5, 18/1, 18/2

•                  Block12/23 (Split)

 

The remaining three licenses comprised of five blocks are located inthe Southern Gas Basin with Endeavour serving as operator of two blocks.  The blocks are as follows:

 

•                  Block43/23b  (operator with 50 percentinterest)

 

16

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•                  Block48/8 (Split)  (operator with 100 percentinterest)

•                  Blocks48/5 (Split), 49/1b (Split), 43/30b (33 percent interest)

 

Of the production licenses, eight licenses covering 14 blocks weregranted under traditional terms that require the Company to fulfill a workprogram within four years from the date of award. The remaining three licensescovering three blocks are under “promote” terms that require the Company to payreduced license fees for a two-year period as exploratory evaluations areconducted.

 

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

 

We anticipate exploration and development expenditures in 2005 to be$49 million.  These expenditures areanticipated to include $27 million in the United Kingdom, $10 million inNorway, $1 million in the Netherlands, $2 million on other explorationexpenditures, $1 million in corporate expenditures and $8 million incapitalized employee costs and interest. Cash flows from our Norwegian assets are expected to continue to exceedworldwide cash general administrative expenses. With our planned capital expenditures for the fourth quarter and Norwegiancash flows, we expect to have sufficient cash to complete the remainder of ourten well drilling program.

 

We may increase or decrease our planned activities, depending upondrilling results, potential acquisition candidates, product prices, theavailability of capital resources, and other factors affecting the economicviability of such activities.

 

In the first quarter of 2005, we issued $81.25 million in convertiblesenior notes due 2012.  Interest on thesenior notes is expected to be approximately $4.9 million annually and weanticipate being able to fund interest payments from cash flows from operatingactivities.

 

In addition, we sold our partnership interests in Thailand in April2005 for net proceeds of approximately $19 million.  Proceeds from the sale and capitalexpenditures originally targeted for Thailand will be used for North Seadrilling activity in 2005.

 

## ***Disclosures About Contractual Obligations and Commercial Commitments***

 

As discussed above, we issued $81.25 million in convertible seniornotes due 2012 in the first quarter of 2005. As of September 30, 2005, there have been no other material changes inour contractual obligations.

 

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

 

#### **Foreign Currency Exchange Risk**

#### ** **

The international scope of our business operations exposes us to therisk of fluctuations in foreign currency markets.  As a result, we are subject to foreigncurrency exchange rate risk due to effects that foreign exchange rate movementshave on our costs and on the cash flows that we receive from foreignoperations.  We operate a centralizedcurrency management operation to

 

17

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take advantage of potential opportunities to naturally offset exposuresagainst each other.  To date, we haveaddressed our foreign currency exchange rate risks principally by maintainingour liquid assets in interest-bearing accounts in U.S. dollars, until paymentsin foreign currency are required, but we have not reduced this risk by hedgingto date.

 

#### **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 spot market prices applicablewhich have been volatile and unpredictable for several years.  As a result, our financial results can besignificantly impacted as these commodity prices fluctuate widely in responseto changing market forces.  At September30, 2005, we had an oil commodity swap where we pay market IPE Brent andreceive a fixed price that ranges from $43.76 per barrel in the initial monthto $40.00 per barrel at the end of the contract covering 600 barrels per daythrough December 2006.  At September 30,2005, a $1.00 change in the Brent oil price would result in a $0.3 millionchange in revenues through 2005 and 2006.

 

#### **Interest Rate Risk**

#### ** **

Our convertible senior notes bear interest at a fixed rate of 6%.  We do not currently use interest ratederivative financial instruments to manage exposure to interest rate changes,but may do so in the future.

 

Since the filing of our 2004 Annual Report on Form 10-K, there havebeen no material changes, other than those discussed above, in reported marketrisk as it relates to foreign currencies, interest rates and commodity prices.

 

# **Item 4:  Controlsand Procedures**

 

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

 

As of the end of the period covered by this report,our management carried out an evaluation, with the participation of our co-chiefexecutive officers (the “CEOs”), chief financial officer (“CFO”) and our chiefaccounting officer (the “CAO”), of the effectiveness of our disclosure controlsand procedures required by Rule 13a-15 of the Securities Exchange Act of 1934.  Based on that evaluation, the CEOs, CFO andCAO believe:

 

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

 

(ii)           thatour disclosure controls and procedures are effective.

 

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## ***Changes in Internal Controls over Financial Reporting***

 

There has been no significant change in our internalcontrols over financial reporting during the period covered by this report thathas materially affected, or is reasonably likely to materially affect, ourinternal controls over financial reporting. In reaching this conclusion, management, with the participation of the CEOs,CFO and CAO, included in its assessment of internal controls over financialreporting all consolidated entities except those falling under OER oil AS.  Endeavour International Corporation acquiredOER oil AS on November 23, 2004.  OER oilAS’s internal control over financial reporting related to total assets of $63.3million and total revenues of $3.7 million as of and for the year endedDecember 31, 2004.  As permitted by theSEC’s published guidance, we excluded these entities from our assessment asthey were acquired late in the year, and it was not possible to conduct ourassessment between the date of acquisition and the end of the quarter.

 

# **Part II. Other Information**

# **Item 1:  Legal Proceedings**

 

In March 2004, the GHK Company, LLC, GHK/Potato Hills LimitedPartnership, and Brian F. Egolf (collectively “Plaintiffs”) commenced an actionagainst Endeavour International Corporation (“Endeavour”), f/k/a ContinentalSouthern Resources, Inc. (“CSOR”), as well as BWP Gas, L.L.C. (“BWP”) and HBAGas, Inc. (“HBA”) in state court in Oklahoma City, Oklahoma.  In the petition, Plaintiffs allege that in2003, at a time when CSOR intended to acquire a majority of the membershipinterests in BWP, that BWP entered into an agreement to assign to Plaintiffs2.5 million common shares of Endeavour stock upon compliance by Plaintiffs withcertain contractual obligations including but not limited to completion andinitial commercial production of the Mary #2-34 well, along with thepresentation of a development plan and the commencement of the next explorationor development well in the Potato Hills Deep Prospect.  Plaintiffs allege in their petition that BWP,HBA and Endeavour are alter egos of each other and jointly and severally liableto Plaintiffs for failing to deliver to Plaintiffs the Endeavour common stock.  Plaintiffs seek delivery of the stock as wellas a temporary restraining order and a primary and permanent injunction (i)enjoining all dilutions of Plaintiffs’ rights pertaining to Endeavour stock;(ii) enjoining Endeavour from all future stock issuances and transfers ofassets not in the ordinary course of business; and (iii) prohibiting thealienation or encumbrance of the Endeavour stock that is allegedly in HBA’spossession.  In April 2004, thedefendants removed the action from the state court to the United StatesDistrict Court for the Western District of Oklahoma.  In October 2004, the United States DistrictCourt granted a motion to remand to state court filed by the Plaintiffs andremanded the matter to the District Court of Oklahoma County, Oklahoma.  In June 2005, BWP and HBA filed voluntarypetitions for relief under Chapter 11 of the United States Bankruptcy Code inthe United States Bankruptcy Court for the Eastern District ofPennsylvania.  In July 2005, Endeavourfiled a Notice of Removal to the federal courts based among other things on thefact that the case of the Plaintiffs relates to the pending bankruptcyproceedings of BWP and HBA.  ThePlaintiffs have contested this removal. While the outcome can not be predicted at this time, management believesit has good and valid defenses in this litigation and intends to litigatevigorously.

 

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

# ** **

At the Annual Meeting of Stockholders of the Company held on August 25,2005, the stockholders elected two Class I directors to serve three-year terms,and approved an amendment to the 2004 Incentive Plan primarily to increase thenumber of shares of common stock available for awards under the plan by6,000,000.

 

Votes cast were as follows:

 
| ** **                                           | ** ** | **For**    | ** ** | **Against** | ** ** | **Abstained** | ** ** | **Broker  Non-Votes** | ** ** |
|------------------------------------------------------|------------|------------|------------|-------------|------------|---------------|------------|-----------------------|------------|
| Election as  a Director of the Company of:           |       |       |       |        |       |          |       |                  |       |
| John B. Connally III                                 |       | 53,100,588 |       | —      |       | 5,978,847     |       | —                |       |
| William L. Transier                                  |       | 55,920,458 |       | —      |       | 3,158,977     |       | —                |       |
|                                                 |       |       |       |        |       |          |       |                  |       |
| Approval of an amendment to the 2004  Incentive Plan |       | 41,837,535 |       | 9,606,286   |       | 39,000        |       | 7,596,614             |       |

 

# **Item 6:  Exhibits**

 

The following exhibits are included herein:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                             |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1 *          |       | Certification of William L. Transier, Co-Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.                  |
| 31.2 *          |       | Certification of John N. Seitz, Co-Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.                        |
| 31.3 *          |       | Certification of Lance Gilliland, Chief Accounting Officer, pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.                        |
| 31.4 *          |       | Certification of Robert L. Thompson, Chief Accounting Officer, pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.                     |
| 32.1 *          |       | Certification of William L. Transier, Co-Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2 *          |       | Certification of John N. Seitz, Co-Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.       |
| 32.3 *          |       | Certification of Lance Gilliland, Chief Accounting Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.       |

 

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| 32.4 * |   | Certification of Robert L. Thompson, Chief Accounting Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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| * |   | Filed herewith. |
|---|--------|-----------------|

 

# **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: November 3, 2005 | /s/ William L. Transier       |                           | /s/ John N. Seitz      |   |
|------------------------|-------------------------------|--------------------------------|------------------------|--------|
|                   | William L. Transier           | John N. Seitz                  |
|                   | Co-Chief Executive Officer    | Co-Chief Executive Officer     |
|                   |                          |                           |
|                   | /s/ Lance Gilliland           |                           | /s/ Robert L. Thompson |   |
|                   | Lance Gilliland               | Robert L. Thompson             |
|                   | Executive Vice President and  | Vice President and Chief       |
|                   | Chief Financial Officer       | Accounting Officer             |
|                   | (Principal Financial Officer) | (Principal Accounting Officer) |
|                        |                               |                                |                        |        |  |

 

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