Endeavour International 10-Q 2008 Q1 Quarterly report

United States

Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the Quarterly Period Ended March 31, 2008

or

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

For the transition period from                    to                   

Commission file number:1-13463

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.)

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

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

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

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

As of May 7, 2008, 127,602,822 shares of the registrant’s common stock were outstanding.

Endeavour International Corporation

Index

Part I: Financial Information
Item 1: Financial Statements
Condensed Consolidated Balance Sheets	1
Condensed Consolidated Statements of Operations	2
Condensed Consolidated Statements of Cash Flows	3
Notes to Condensed Consolidated Financial Statements	4
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3: Quantitative and Qualitative Disclosures About Market Risk	29
Item 4: Controls and Procedures	30
Part II. Other Information
Item 1A: Risk Factors	30
Item 6: Exhibits	30
Signatures	31

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

Part I:  Financial Information

Item 1:  Financial Statements

Endeavour International Corporation

Condensed Consolidated Balance Sheet

(Unaudited)

(Amounts in thousands, except share data)

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

See accompanying notes to condensed consolidated financial statements.

1

Endeavour International Corporation

Condensed Consolidated Statement of Operations

(Unaudited)

(Amounts in thousands, except per share data)

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

See accompanying notes to condensed consolidated financial statements.

2

Endeavour International Corporation

Condensed Consolidated Statement of Cash Flows

(Unaudited)

(Amounts in thousands)

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

See accompanying notes to condensed consolidated financial statements.

3

Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1 – General

Endeavour International Corporation (a Nevada corporation formed in 2000) is an independent oil and gas company engaged in the acquisition, exploration and development of energy reserves.  Our goal is to become a leading upstream company with an exploration focus primarily in the North Sea.  We strive to achieve this position through acquisitions, licensing rounds and exploration drilling.

As used in these Notes to Condensed Consolidated Financial Statements, the terms “Endeavour”, “we”, “us”, “our” and similar terms refer to Endeavour International Corporation and, unless the context indicates otherwise, its consolidated subsidiaries.  The accompanying condensed consolidated financial statements of Endeavour should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10–K for the year ended December 31, 2007.

Basis of Presentation and Use of Estimates

The accompanying unaudited condensed consolidated financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and have been presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.  These accounting principles require management to use estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, and revenues and expenses during the reporting period.  Management reviews its estimates, including those related to the determination of proved reserves, estimates of future dismantlement costs, income taxes and litigation.  Actual results could differ from those estimates.  In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included in these financial statements.  Certain amounts for prior periods have been reclassified to conform to the current presentation.

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

Loss Per Share

Basic loss per common share is computed by dividing net loss to common stockholders by the weighted average number of common shares outstanding for the period.  Diluted loss per share includes the effect of our outstanding stock options, warrants and shares issuable pursuant to

4

Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

convertible debt, convertible preferred stock and certain stock incentive plans under the treasury stock method, if including such instruments is dilutive.

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

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

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

New Accounting Developments

In January 2008 we adopted two new interpretations issued by the Financial Accounting Standards Board.  Both interpretations pertain to fair value measurement in financial reporting.  The first interpretation defines fair value, outlines a structure for measuring fair value and requires expanded financial statement disclosures about fair value measurements.  It is applicable to all financial assets and liabilities that are being measured and reported on a fair value basis.  The second interpretation allows entities the option of fair value measurement for certain eligible financial instruments and other financial assets and liabilities.  The results of our adoption and application of these standards are presented in Note 10.

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

Note 2 – Stock-Based Compensation Arrangements

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

5

Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

have a five-year term.  The vesting of these shares and options is dependent upon the continued service of the grantees with Endeavour.  Upon the occurrence of a change in control, each outstanding share of restricted stock and stock option will immediately vest.  For the first quarter of 2008, we included non-cash stock-based compensation of $0.3 million in both general and administrative (“G&A”) expenses and capitalized G&A expenses.  For the first quarter of 2007, we included non-cash stock-based compensation of $1.4 million and $0.5 million in G&A expenses and capitalized G&A expenses, respectively.  At March 31, 2008, total compensation costs related to awards not yet recognized was approximately $7.4 million and is expected to be recognized over a weighted average period of less than three years.

Stock Options

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model.  Expected volatility is based on an average of historical volatility of common stock prices of Endeavour and our peer companies where there is a lack of relevant Endeavour volatility information for the length of the expected term.  The expected term is the average of the vesting period and the term of the option.  We use historical data to estimate option exercises and employee terminations within the valuation model. The risk-free rate for the expected term is the yield on the zero-coupon U.S. treasury security with a term comparable to the expected term of the option.  We do not include an estimated dividend yield since we have not paid dividends on our common stock historically.

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

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

6

Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

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

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

Restricted Stock

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

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

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

7

Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 3 – Debt Obligations

Our debt consisted of the following at the indicated dates:

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

Additional information concerning variable interest rates paid

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

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

Convertible Bonds

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

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

· Issuance of $40 million under a private offering of 11.5% guaranteed convertible bonds to a company controlled by the Smedvig Family Office of Norway; and

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

8

Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

Upon the fourth anniversary, the holders have the right to redeem the Bonds if the weighted average closing price of our common stock for 30 days prior to that anniversary 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 market price of our common stock if such price is lower than the conversion price, as adjusted.

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

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

Embedded derivatives

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

Junior Facility

We also borrowed $25 million under a Junior Facility Agreement (the “Junior Facility”), dated January 22, 2008.  Indebtedness under the Junior Facility will bear interest at LIBOR plus 3.5% (LIBOR plus 5.5% after the first year).  Amounts borrowed under the Junior Facility will be repaid in semi-annual payments beginning December 31, 2009 and must be repaid in full in October 2011.

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

The amounts outstanding under the Junior Facility may become immediately due upon the occurrence of a change of control, failure to pay obligations under other financial indebtedness

9

Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

Second Lien Term Loan repayment

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

Note 4 - Property and Equipment

Property and equipment included the following:

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

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

10

Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

approximately $0.3 million and $0.5 million, respectively, of stock-based compensation in capitalized G&A expenses in property and equipment.

Note 5 – Derivative Instruments

Commodity derivatives

From time to time, we may utilize derivative financial instruments with respect to a portion of our oil and gas production or a portion of our variable rate debt to achieve a more predictable cash flow by reducing our exposure to price fluctuations.  These transactions are likely to be swaps, collars or options and to be entered into with major financial institutions or commodities trading institutions.  Derivative financial instruments are intended to:

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

· reduce our exposure to increases in interest rates; and

· manage cash flows in support of our annual capital expenditure budget.

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

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

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

11

Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

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

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

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

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

Interest Rate Swap

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

12

Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 6 – Asset Retirement Obligations

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

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

Note 7 – Supplemental Cash Flow Information

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

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

Note 8 – Comprehensive Loss

Excluding net loss, our source of comprehensive loss is due to the net unrealized loss on derivative instruments and marketable securities, which are classified as available-for-sale.  The following summarizes the components of comprehensive loss:

13

Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

Note 9 – Commitments and Contingencies

Rig Commitments

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

In 2006, we entered into a rig commitment for 220 days over a one-year period beginning in May 2007 for the United Kingdom sector of the North Sea for a heavy-duty harsh environment jack-up.  In January 2007, a $22 million escrow payment was made under the rig commitment.  This escrow payment is included in “Restricted cash” on our Balance Sheet.  The escrow will be released in the final two months of the commitment, which we currently anticipate to be complete by 2009.  We have utilized 73 days of this rig commitment and expect to utilize the remaining 147 days of this commitment beginning in the third quarter of 2008 through 2009 depending on well scheduling.

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

Contingencies

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

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Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 10 – Fair Value Measurements

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

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

We apply fair value measurements to certain assets and liabilities including commodity and interest rate derivative instruments, marketable securities and embedded derivatives relating to conversion and change in control features in certain of our debt instruments.  We maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

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

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Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

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

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

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

Note 11 – Subsequent Events

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

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

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Endeavour International Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

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Item 2:  Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

Overview

We are an international oil and gas exploration and production company focused on the acquisition, exploration and development of energy reserves.  To date, we have invested a significant amount of our resources on various development, acquisition and exploration projects.

As oil prices continue to climb to record levels and gas prices in our markets have recovered from last year, our realized price before derivatives increased over 60% from the first quarter of 2007 to the first quarter of 2008.  This substantial increase in prices helped revenue grow from $42.8 million in the first three months of 2007 to $61.3 million in the same period of 2008.  By keeping cash expenses reasonably flat from 2007 to 2008, the cash flow from this higher revenue allowed us to pay down an additional $2.0 million in debt while spending $19.6 million in capital expenditures during the first quarter of 2008 and increasing cash from year end by $4.0 million.  At March 31, 2008, we held $20.5 million in cash and another $22.0 million in cash restricted for drilling rig commitments.

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

Discretionary cash flow was $36.3 million for the first three months of 2008 compared to $34.4 million for the same period in 2007, reflecting the increase in revenues over the periods.  Cash flows provided by operating activities decreased to $29.1 million for the three months ended

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March 31, 2008 as compared to $46.3 million for the three months ended March 31, 2007 primarily due to decreases in net cash provided by changes in operating assets and liabilities partially offset by higher commodity prices.

Results of Operations

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

For the first quarter of 2008 and 2007, we had sales volume of 8,800 BOE per day and 10,150 BOE per day, respectively.  Our physical daily production was approximately 10,100 BOE and 9,800 BOE for 2008 and 2007, respectively.  The decrease in sales volume is primarily attributable to timing of tanker liftings partially offset by production from Enoch (which recorded first sales in the third quarter of 2007) and the contribution of the gas from the completion of the gas project at Njord in the fourth quarter of 2007.  Even with the delay in tanker liftings for the first quarter of 2008, we still expect full year 2008 production to range from 8,600 to 9,000 BOE per day.

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

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

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

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

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

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

Expenses

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

G&A expenses decreased to $4.8 million during the first quarter of 2008 as compared to $5.4 million for the corresponding period in 2007.  This decrease resulted from changes in non-cash stock-based compensation as a result of current year forfeitures and lower consulting fees.  The decreases were partially offset by increases resulting from compensation expense, and occupancy costs.  The compensation expense increase reflects salary expense related to increases in staffing and $0.2 million related to retiring employees.  Components of G&A expenses for these periods are as follows:

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

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

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Income Taxes

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

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

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

In the first quarter of 2008 and 2007, we did not record any income tax benefits in the U.S. as there was no assurance that we could generate any U.S. taxable earnings, resulting in a full valuation allowance of deferred tax assets generated.

As our deferred tax liabilities are denominated in their respective currencies, we revalue those deferred tax liabilities to the applicable foreign currency exchange rate at the end of each period.  Those foreign currency gains and losses are included in income tax expense as shown above.

Reconciliation of Non-GAAP Measures

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

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expenditures and service debt as well as provide comparisons to other oil and gas exploration and production companies.  These measures include, among others, debt and 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 net income.

Net Income (Loss) as Adjusted, Adjusted EBITDA and Discretionary Cash Flow are internal, supplemental measures of our performance that are not required by, or presented in accordance with, generally accepted accounting principles (GAAP).  We use these non-GAAP measures as internal measures of performance and to aid in our budgeting and forecasting processes.  We view these non-GAAP measures, and we believe that others in the oil and gas industry view these, or similar, non-GAAP measures, as commonly used analytic indicators to compare performance among companies.  We further believe that these non-GAAP measures are frequently used by securities analysts, 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 provide useful information to both management and investors to gain an overall understanding of our current financial performance and provide investors with financial measures that most closely align to our internal measurement processes.  Since the application of mark-to-market accounting has the effect of pulling forward into current periods non-cash gains and losses related to commodity derivatives relating to future delivery periods, analysis of results of operations from one period to another can be difficult.  We believe that excluding these unrealized non-cash gains and losses related to commodity derivatives and currency exchange changes provides a more meaningful representation of our economic performance in the reporting period and is therefore useful to us, investors, analysts and others in facilitating the analysis of our results of operations from one period to another.  These measures should not be considered as measures of financial performance under GAAP, and the items excluded from these measures are significant components in understanding and assessing financial performance.

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

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

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

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

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· unrealized gains (losses) on derivatives;

· non-cash foreign currency gains (losses);

· our interest expense, or the cash requirements necessary to service interest and principal payments on our debts;

· our preferred stock dividend requirements; and

· depreciation, depletion and amortization.

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

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

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

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

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 the components of our primary cash flow amounts, see the Condensed Consolidated Statements of Cash Flows under Item 1 of this report.

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

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

The cash used in investing activities represents expenditures for capital projects and asset purchases, as discussed in “Drilling Program” below, and increases to restricted cash under escrow for our rig commitments for 2007.  The cash provided by (used in) financing activities generally consists of borrowings and repayments of debt, proceeds from the issuance of equity securities and payment of financing costs.

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

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

· Issuance of $40 million under a private offering of 11.5% guaranteed convertible bonds to a company controlled by the Smedvig Family Office of Norway; and

25

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

The $40 million Convertible Bonds due 2014 bear interest at a rate of 11.5% per annum, compounded quarterly, and are unconditionally guaranteed by us on a senior unsecured basis.  Interest is compounded quarterly and added to the outstanding principal balance each quarter.  Interest is not payable in cash, 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 bears interest at LIBOR plus 3.5% (plus 5.5% after the first year).  Amounts borrowed under the Junior Facility will be repaid in semi-annual payments beginning December 31, 2009 and must be repaid in full in October 2011.

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

The amounts outstanding under the Junior Facility may become immediately due upon the occurrence of a change of control, failure to pay obligations under other financial indebtedness when due, certain events of default, breach of financial covenants and other events as defined in the agreement.

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

Drilling Program

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

In Norway, the Galtvort well began drilling in April 2008 and is a near-field prospect operated by StatoilHydro Petroleum AS in which we have a 7.5 percent interest in the well.  We will also participate in the drilling of three other exploration wells on the Norwegian Continental Shelf as part of our 2008 drilling campaign.  We will operate our first well in Norway with the drilling of the Jade well, in which Endeavour holds a 65 percent interest.  The area is the site of the two Agat natural gas discoveries and the test will set out to identify additional reserves in support of commercial development.  The other two wells include the Noatun C, a prospect in north of the

26

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

We plan to drill three exploration and appraisal wells and one development well in the United Kingdom sector of the North Sea during the second half of this year.  The Tesla exploration well on Block 22/24c will test for hydrocarbons in one of our primary areas of focus.  We hold a 25 percent interest in the license.  We also plan to drill a well to further appraise the Cygnus discovery, in which we hold a 12.5 percent interest.  Another appraisal well is planned on the Rochelle discovery in which we hold a 55.6% interest.  We are scheduled to drill and operate a development well on one of the two R blocks, Renee and Rubie, later this year.

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

In March, we were awarded interests in two production licenses on the Norwegian Continental Shelf, a 25 percent interest in PL453S and a 20 percent interest in PL457.  Total acreage for the two awards approximates 538,000 acres, which brings our total acreage to 1,423,000 acres.  We also entered into an agreement to farm down our interest in the Galtvort and Gygrid prospects.

Rig Commitments

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

In 2006, we entered into a rig commitment for 220 days over a one-year period beginning in May 2007 for the United Kingdom sector of the North Sea for a heavy-duty harsh environment jack-up.  In January 2007, a $22 million escrow payment was made under the rig commitment.  This escrow payment is included in “Restricted cash” on our Balance Sheet.  The escrow will be released in the final two months of the commitment, which we currently anticipate to be complete by 2009.  We have utilized 73 days of this rig commitment and expect to utilize the remaining 147 days of this commitment beginning in the third quarter of 2008 through 2009 depending on well scheduling.

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

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2008 Outlook

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

Oil prices continue to be impacted by supply and demand on a worldwide basis, while natural gas prices are more impacted by regional economic and weather patterns.  While oil prices continue to remain strong, natural gas prices in the UK have begun to recover from the levels seen year to date.  Warmer weather conditions and increases in the supply of natural gas available from Norway had impacted the nine month gas prices.  We have commodity derivative instruments to secure our realized prices for a portion of our oil and gas production through 2011.  See Note 5 to the Condensed Consolidated Financial Statements in this report for more discussion of our commodity derivative instruments.

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

Disclosures About Contractual Obligations and Commercial Commitments

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

Cautionary Statement for Forward-Looking Statements

The information contained in this Quarterly Report on Form 10-Q and in other public statements by Endeavour and our officers or directors includes 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-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. Securities Exchange Act of 1934, as amended.  You should not place undue reliance on these forward-looking statements, which speak only as of the date made.  We undertake no obligation to publicly update these forward-looking statements to reflect events or circumstances after the date they are made or to reflect the occurrence of unanticipated events.  You should also know that such statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions.  These factors include, but are not limited to, those risks described in detail below and in the our Annual Report on Form 10-K

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for the year ended December 31, 2007 under the caption “Risk Factors” and other filings with the Securities and Exchange Commission.  These risk factors include, among others, our ability to replace reserves and sustain production; the level of our indebtedness; the availability of capital on an economic basis to fund reserve replacement costs; uncertainties in evaluating oil and natural gas reserves of acquired properties and associated potential liabilities; unsuccessful exploration and development drilling; and production interruptions that could adversely affect our cash flow.  Should any of these risks or uncertainties materialize, or should any of these assumptions prove incorrect, actual results may differ materially from those included within the forward-looking statements.

Item 3:  Quantitative and Qualitative Disclosures about Market Risk

Foreign Exchange Risk

The international scope of our business operations exposes us to the risk of fluctuations in foreign currency markets.  As a result, we are subject to foreign currency exchange rate risk due to effects that foreign exchange rate movements have on our costs and on the cash flows that we receive from foreign operations.  We operate a centralized currency management operation to take advantage of potential opportunities to naturally offset exposures against each other.  To date, we have addressed our foreign currency exchange rate risks principally by maintaining our liquid assets in interest-bearing accounts, until payments in foreign currency are required, but we have not reduced this risk by hedging to date.

Commodity Price Risk

We produce and sell crude oil and natural gas.  Realized pricing is primarily driven by the prevailing worldwide price for crude oil and regional gas spot market prices that have been volatile and unpredictable for several years.  As a result, our financial results can be significantly impacted as these commodity prices fluctuate widely in response to changing market forces.  We may engage in oil and gas hedging activities to realize commodity prices that we consider favorable.  For additional information regarding our derivative instruments, see Note 5 to the Condensed Consolidated Financial Statements.

Interest Rate Risk

We are exposed to changes in interest rates.  Changes in interest rates affect the interest earned on cash and cash equivalents and the interest rate paid on borrowings under debt.

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

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Item 4:  Controls and Procedures

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 chief executive officer (the “CEO”) and chief financial officer (the “CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(b) or 15d-15(b) of the Securities Exchange Act of 1934, as amended).  Based on that evaluation, the CEO and CFO concluded:

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

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

Changes in Internal Control over Financial Reporting

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

Part II. Other Information

Item 1A:  Risk Factors

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

Item 6:  Exhibits

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

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

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

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

Signatures

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

Endeavour International Corporation

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

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