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 more than doubled from the second quarter of 2007 to the second quarter of 2008. This substantial increase in prices helped revenue grow from $74.4 million in the first six months of 2007 to $147.6 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 $15.0 million in debt while spending $32.1 million in capital expenditures during the first six months of 2008 and increasing cash from year end by $12.9 million. At June 30, 2008, we held $29.4 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 six months of 2008 was $86.2 million, or $0.68 per share, reflecting the significant unrealized loss on the mark-to-market of commodity derivatives. For the first six months of 2007, net loss to common shareholders was $19.0 million, or $0.16 per share. The net loss for 2007 reflects a smaller unrealized loss on the mark-to-market of commodity derivatives. Net income as adjusted for the six months of 2008 would have been $0.7 million, or $0.01 per share without the effect of derivative transactions and currency impacts of deferred taxes as compared to net loss as adjusted of $0.4 million, or $0 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 $95.1 million in 2008 from $56.6 million in 2007.

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

30, 2008 as compared to $78.4 million for the six months ended June 30, 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 which 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 second quarter of 2008 and 2007, we had sales volume of 10,222 BOE per day and 7,758 per day BOE, respectively. Sales volumes of 10,222 per day BOE reflect a significant contribution from sales at our IVRRH field that covered physical production for the first six months of 2008. We record oil revenues on the sales method, i.e. when delivery has occurred. Physical production may differ based on the timing of tanker liftings. We use the entitlements method to account for sales of gas production. During the six months ending June 30, 2008 and 2007, we had sales volumes of 9,509 BOE per day and 8,946 BOE per day, respectively. We continue to expect full year 2008 production to range from 8,600 to 9,000 BOE per day. During the third quarter of 2008, many of our fields have scheduled downtime to perform planned maintenance activities, which will result in both lower physical production and sales volumes.

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

                                    For the Three Months       For the Six Months
                                       Ended June 30,            Ended June 30,
                                      2008         2007        2008         2007

Sales volume:
Oil and condensate sales (Mbbl):
United Kingdom                            332          224         598          621
Norway                                    246          124         342          255
Total                                     578          348         940          876

Gas sales (MMcf):
United Kingdom                          1,644        2,091       3,679        4,351
Norway                                    467           55       1,065          109
Total                                   2,111        2,146       4,744        4,460

Total sales (MBOE):
United Kingdom                            606          573       1,211        1,346
Norway                                    324          133         520          273
Total                                     930          706       1,731        1,619
BOE per day                            10,222        7,758       9,509        8,946

Physical production volume:
Total production (MBOE):
United Kingdom                          6,123        7,478       6,678        7,840
Norway                                  2,791        1,569       2,843        1,515
Total                                   8,914        9,047       9,521        9,355

                                              For the Three Months          For the Six Months
                                                 Ended June 30,               Ended June 30,
                                               2008           2007          2008          2007

Realized Sales Prices:
Oil and condensate price ($ per Bbl):
Before commodity derivatives               $     105.45    $    65.34    $     99.44    $   58.23
Effect of commodity derivatives            $     (20.57 )  $     0.25    $    (19.42 )  $    3.69
Realized prices including commodity
derivatives                                $      84.88    $    65.59    $     80.02    $   61.92

Gas price ($per Mcf):
Before commodity derivatives               $      12.01    $     4.13    $     11.41    $    5.25
Effect of commodity derivatives            $      (1.23 )  $     1.80    $      0.13    $    2.64
Realized prices including commodity
derivatives                                $      10.78    $     5.93    $     11.54    $    7.89

Equivalent oil price ($per BOE):
Before commodity derivatives               $      92.82    $    44.79    $     85.29    $   45.95
Effect of commodity derivatives            $     (15.58 )  $     5.59    $    (10.20 )  $    9.27
Realized prices including commodity
derivatives                                $      77.24    $    50.38    $     75.09    $   55.22

(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 six months ending June 30, 2008, we realized $17.6 million in losses on the settlement of commodity derivatives, compared to $15.0 million in gains for the same six month period in 2007. For the six months ending June 30, 2008, we also recognized $160.3 million in losses on the mark-to-market of our commodity derivatives that were not accounted for as hedges with $28.3 million in losses for the same period in 2007. In the second quarter of 2008, we realized $14.5 million in losses on the settlement of commodity derivatives, compared to $3.9 million in gains for the same period in 2007. In the second quarter of 2008, we also recognized $130.7 million in losses on the mark-to-market of our commodity derivatives with $12.6 million in losses for the same period in 2007.

Expenses

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

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

General and administrative (G&A) expenses decreased to $4.8 million during the second quarter of 2008 as compared to $5.2 million for the corresponding period in 2007. G&A expenses decreased to $9.6 million during the six months ended June 30, 2008 as compared to $10.5 million for the corresponding period in 2007. This decrease resulted from changes 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 $0.3 million for retiring employees. Components of G&A expenses for these periods are as follows:

                                              For the Three Months         For the Six Months
                                                 Ended June 30,              Ended June 30,
(Amounts in thousands)                        2008           2007           2008         2007

Compensation                               $     4,175    $     3,751    $    9,112    $   7,939
Consulting, legal and accounting fees            1,258          1,730         2,369        3,130
Occupancy costs                                    578            445           989          725
Other expenses                                     281            378            69          247
Total gross cash G&A expenses                    6,292          6,304        12,539       12,041

Non-cash stock-based compensation                  652            851         1,196        2,728
Gross G&A expenses                               6,944          7,155        13,735       14,769
Less: capitalized G&A expenses                  (2,108 )       (1,995 )      (4,148 )     (4,242 )
Net G&A expenses                           $     4,836    $     5,160    $    9,587    $  10,527

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

Income Taxes



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



(Amounts in thousands)               UK         Norway        U.S.         Other        Total
Six Months Ended June 30,
2008
Net income (loss) before
taxes                            $ (136,434 )  $  27,639    $  (3,140 )  $ (11,275 )  $ (123,210 )

Current tax expense (benefit)         1,867       14,016            -            -        15,883
Deferred tax expense
(benefit)                           (68,958 )      7,959            -                    (60,999 )
Foreign currency (gains)
losses on deferred tax
liabilities                             161        2,561            -            -         2,722
Total tax expense (benefit)         (66,930 )     24,536            -                    (42,394 )

Net income (loss) after taxes    $  (69,504 )  $   3,103    $  (3,140 )  $ (11,275 )  $  (80,816 )

Six Months Ended June 30,
2007
Net income (loss) before
taxes                            $  (18,083 )  $   2,612    $  (4,499 )  $   6,040    $  (13,930 )

Current tax expense (benefit)         2,046       (1,763 )         (3 )         78           358
Deferred tax expense
(benefit)                            (9,969 )      3,856            -          711        (5,402 )
Foreign currency (gains)
losses on deferred tax
liabilities                           3,065        1,397            -            -         4,462
Total tax expense (benefit)          (4,858 )      3,490           (3 )        789          (582 )

Net income (loss) after taxes    $  (13,225 )  $    (878 )  $  (4,496 )  $   5,251    $  (13,348 )

The change in income tax benefit from $0.6 million to $42.4 million for the first six 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 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 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;

† 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 loss to the following non-GAAP financial measures: net income (loss) as adjusted, Adjusted EBITDA and discretionary cash flow.

                                             For the Three Months         For the Six Months
                                                Ended June 30,              Ended June 30,
                                               2008          2007          2008         2007
Net loss                                   $    (64,024 )  $ (10,204 )  $  (80,816 )  $ (13,348 )

Depreciation, depletion and
amortization                                     23,720       15,247        45,123       34,461
Deferred tax benefit                            (55,133 )     (1,201 )     (58,277 )       (940 )
Unrealized loss on derivative
instruments                                     130,686       12,612       160,328       28,308
Amortization of non-cash compensation               652          851         1,196        2,735
Amortization of loan costs and discount           1,423          413         4,579          840
Non-cash interest expense                         1,174            -         2,044            -
Other                                               117           79           750           93
Discretionary cash flow (1)                $     38,615    $  17,797    $   74,927    $  52,149

Net loss to common shareholders, as
reported                                   $    (66,733 )  $ (13,048 )  $  (86,221 )  $ (19,036 )
Unrealized losses on derivatives (2)             69,626        6,306        84,234       14,154
Currency impact of deferred taxes                    81        3,225         2,722        4,462
Net income (loss), as adjusted             $      2,974    $  (3,517 )  $      735    $    (420 )

Weighted average number of common
shares outstanding - basic and diluted          127,626      123,661       127,581      121,133
Earnings per share, as adjusted            $      (0.02 )  $   (0.03 )  $    (0.01 )  $   (0.00 )

                                                  For the Three Months         For the Six Months
                                                     Ended June 30,              Ended June 30,
                                                    2008          2007          2008         2007
Net loss to common shareholders, as reported    $    (66,733 )  $ (13,048 )  $  (86,221 )  $ (19,036 )

Unrealized losses on derivatives                     130,686       12,612       160,328       28,308
Net interest expense                                   5,004        3,574        12,845        7,742
Depreciation, depletion and amortization              23,720       15,247        45,123       34,461
Income tax benefit                                   (42,864 )     (1,873 )     (42,394 )       (582 )
Preferred stock dividends                              2,709        2,844         5,405        5,688

Adjusted EBITDA                                 $     52,522    $  19,356    $   95,086    $  56,581

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

Liquidity and Capital Resources

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

                                              For the Six Months Ended June 30,
(Amounts in thousands)                            2008                 2007

Net cash provided by Operating Activities   $          71,954    $          78,413
Net cash used in Investing Activities       $         (32,168 )  $         (61,840 )
Net cash used in Financing Activities       $         (26,847 )  $         (33,157 )

The net cash flows provided by operating activities are primarily impacted by the earnings from our business activities. The cash flows provided by operating activities decreased to $71.9 million for the six months ended June 30, 2008 as compared to $78.4 million for the six months ended June 30, 2007 primarily due to decreases in cash flows provided 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 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

† Issuance of $25 million under a Junior Facility Agreement (the "Junior 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 . . .