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 and in our condensed consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2007. 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.

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. Although oil prices have declined significantly in recent weeks, natural gas prices in the UK and Norway have not experienced similar steep declines. Lower production volumes due to planned maintenance had a larger effect on our revenues for the third quarter than the falling oil prices as much of the decline in prices occurred late in the quarter or after September 30, 2008. While we expect revenues to decline from third quarter 2008 to fourth quarter 2008 as a result of the sharp decline in oil prices, the full impact on our cash flows will be substantially mitigated by our balance of gas to oil production and our commodity derivative positions. As of September 30, 2008, our outstanding commodity derivatives covered approximately 50% of our anticipated production for the remainder of 2008 and a substantial portion of expected 2009 production.

The worldwide credit and capital markets have recently exhibited adverse conditions. Continued volatility in the credit and capital markets may increase costs associated with issuing debt instruments due to, among other things, increased spreads over relevant interest rate benchmarks and affect our ability to access those markets. At this point, we do not believe our liquidity has been materially affected by the recent events in the global financial markets and we do not expect our liquidity to be materially impacted in the near future. We will continue to monitor our capital requirements, the credit and capital markets and circumstances surrounding each of our lenders in our senior bank facility. To date we have experienced no disruptions in our ability to access additional funding through our senior facility. However, we cannot predict with any certainty the impact to us of any further disruptions in the credit environment.

We believe the combination of cash on hand, cash flow from operations and our ability to time capital expenditures allows us to manage volatile markets.

Results of Operations

As oil prices climbed to record levels and gas prices in our markets have recovered from last year, our realized price before derivatives increased 40% from the third quarter of 2007 to the third quarter of 2008. This substantial increase in prices helped revenue grow from $121.6 million in the first nine months of 2007 to $219.1 million in the same period of 2008. With this higher revenue and strong fiscal discipline over expenses, we repaid $32.0 million in debt, spent $46.5 million in capital expenditures during the first nine months of 2008 and increased cash from year end by $9.2 million. At September 30, 2008, we held $25.7 million in cash and another $22.0 million in cash restricted for drilling rig commitments.

Even with the substantial growth in revenues, 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 stockholders for the first nine months of 2008 was $10.7 million, or $0.08 per share, reflecting the significant unrealized loss on the mark-to-market of commodity derivatives. For the first nine months of 2007, net loss to common stockholders was $30.7 million, or $0.25 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 nine months of 2008 would have been $6.6 million, or $0.05 per share without the effect of derivative transactions and currency impacts of deferred taxes as compared to net loss as adjusted of $2.1 million, or $0.02 per share, in 2007. Net income and net income 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 $142.9 million in 2008 from $89.0 million in 2007.

Discretionary cash flow was $105.1 million for the first nine months of 2008 compared to $79.4 million for the same period in 2007, reflecting the increase in revenues over the periods. Cash flows provided by operating activities increased to $99.6 million for the nine months ended September 30, 2008 as compared to $95.2 million for the nine months ended September 30, 2007 primarily due to decreases in net cash provided by changes in operating assets and liabilities partially offset by higher commodity prices.

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.

For definitions of Adjusted EBITDA and Discretionary Cash Flow, and a reconciliation of Adjusted EBITDA to net income as adjusted, please see "Reconciliation of Non-GAAP Accounting Measures."

Revenues

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 likely become more global in nature with a probable convergence of pricing between European and North American markets.

For the third quarter of 2008 and 2007, we had sales volumes of 8,477 BOE per day and 9,713 per day barrels of oil equivalent ("BOE"), respectively. Sales volumes of 8,477 per day BOE reflect scheduled downtime at many of our fields to perform planned maintenance activities during the third quarter 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 nine months ended September 30, 2008 and 2007, we had sales volumes of 9,162 BOE per day and 9,205 BOE per day, respectively. We continue to expect full year 2008 production to range from 8,600 to 9,000 BOE per day.

                      Endeavour International Corporation



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



                                         Three Months Ended      Nine Months Ended
                                           September 30,           September 30,
                                         2008         2007        2008        2007
    Sales Volume: (1)
    Oil and condensate sales (Mbbl):
    United Kingdom                           235          361        834         982
    Norway                                   204          136        545         391

    Total                                    439          497      1,379       1,373


    Gas sales (MMcf):
    United Kingdom                         1,470        2,306      5,149       6,657
    Norway                                   575           72      1,640         181

    Total                                  2,045        2,378      6,789       6,838


    Total sales (MBOE):
    United Kingdom                           480          745      1,692       2,092
    Norway                                   300          148        818         421

    Total                                    780          893      2,510       2,513


    BOE per day                            8,477        9,713      9,162       9,205


    Physical production volume:
    Total production (BOE per day):
    United Kingdom                         5,075        7,986      6,064       7,860
    Norway                                 2,763        1,668      2,816       1,561

    Total                                  7,838        9,654      8,880       9,421

                      Endeavour International Corporation



                                                       Three Months Ended          Nine Months Ended
                                                          September 30,              September 30,
                                                        2008          2007          2008         2007
Realized Prices: (2)
Oil and condensate price ($ per Bbl):
Before commodity derivatives                         $    106.22     $ 70.17     $   101.60     $ 62.55
Effect of commodity derivatives                      $    (23.70 )   $ (3.24 )   $   (20.78 )   $  1.18

Realized prices including commodity derivatives      $     82.52     $ 66.93     $    80.82     $ 63.73


Gas price ($ per Mcf):
Before commodity derivatives                         $     12.14     $  5.16     $    11.63     $  5.22
Effect of commodity derivatives                      $     (1.58 )   $  0.82     $    (0.39 )   $  2.01

Realized prices including commodity derivatives      $     10.56     $  5.98     $    11.24     $  7.23


Equivalent oil price ($ per BOE):
Before commodity derivatives                         $     91.65     $ 52.79     $    87.26     $ 48.38
Effect of commodity derivatives                      $    (17.48 )   $  0.38     $   (12.46 )   $  6.11

Realized prices including commodity derivatives      $     74.17     $ 53.17     $    74.80     $ 54.49

(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 method to account for sales of gas production.

(2) The average sales prices include gains and losses for derivative instruments we utilize to manage price risk related to our future cash flows.

During the nine months ended September 30, 2008, we realized $31.3 million in losses on the settlement of our commodity derivatives, compared to $15.4 million in gains for the same nine month period in 2007. For the nine months ended September 30, 2008, we also recognized $41.2 million in losses on the mark-to-market of our commodity derivatives that were not accounted for as hedges with $41.3 million in losses for the same period in 2007. In the third quarter of 2008, we realized $13.6 million in losses on the settlement of our commodity derivatives, compared to $0.3 million in gains for the same period in 2007. In the third quarter of 2008, we also recognized $119.1 million in gains on the mark-to-market of our commodity derivatives with $13.0 million in losses for the same period in 2007.

Expenses

Operating expenses increased to $10.9 million for the third quarter of 2008 as compared to $9.5 million in the third quarter of 2007. For the nine months ended September 30, 2008, operating expenses increased to $34.9 million as compared to $30.0 million for the same period in 2007.

Operating costs per BOE increased from $10.68 per BOE in the third quarter of 2007 to $13.98 per BOE in the third quarter of 2008, and from $11.93 per BOE for the nine months ended September 30, 2007 to $13.90 per BOE for the nine months ended September 30, 2008. These increases were primarily due to higher operating costs at some of our non-operated fields.

General and administrative ("G&A") expenses increased to $5.0 million during the third quarter of 2008 as compared to $4.1 million for the corresponding period in 2007 but remained flat for the corresponding nine month periods. These decreases resulted from changes in non-cash stock-based compensation as a result of the final vesting of inducement grants given in 2004 upon the formation of Endeavour and current year forfeitures. The decreases were partially offset by increases resulting from compensation expense, legal and tax consulting fees and occupancy costs. The compensation expense increase reflects additional payroll taxes and salary expense related to increases in staffing. Occupancy costs increased due to additional rental space related to the staffing increase, while property acquisitions furthered the increase in legal and tax consulting fees. Components of G&A expenses for these periods are as follows:

                                            Three Months Ended          Nine Months Ended
                                               September 30,              September 30,
  (Amounts in thousands)                     2008          2007         2008          2007
  Compensation                            $    3,628     $  3,333     $  12,740     $ 11,272
  Consulting, legal and accounting fees        1,960        1,305         4,329        4,435
  Occupancy costs                                416          280         1,404        1,005
  Other expenses                                 785          179           855          426

  Total gross cash G&A expenses                6,789        5,097        19,328       17,138

  Non-cash stock-based compensation            1,182        1,245         2,378        3,973

  Gross G&A expenses                           7,971        6,342        21,706       21,111
  Less: capitalized G&A expenses              (3,005 )     (2,246 )      (7,153 )     (6,488 )

  Net G&A expenses                        $    4,966     $  4,096     $  14,553     $ 14,623

Interest expense remained at $13.8 million for the for both the nine months ended September 30, 2008 and 2007 after consideration of costs related to our early retirement of the Second Lien Term Loan of $4.3 million in 2008.

                      Endeavour International Corporation



Income Taxes

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



(Amounts in thousands)                          UK          Norway        U.S.        Other         Total
Nine Months Ended September 30, 2008
Net income (loss) before taxes               $ (17,581 )   $ 48,905     $ (5,656 )   $ (5,287 )   $  20,381

Current tax expense                              5,721       22,526           -           322        28,569
Deferred tax expense (benefit)                 (15,546 )     13,890           -           291        (1,365 )
Foreign currency (gains) losses on
deferred tax liabilities                            17       (4,220 )         -            -         (4,203 )

Total tax expense (benefit)                     (9,808 )     32,196                       613        23,001


Net income (loss) after taxes                $  (7,773 )   $ 16,709     $ (5,656 )   $ (5,900 )   $  (2,620 )


Nine Months Ended September 30, 2007
Net income (loss) before taxes               $ (27,482 )   $  5,714     $ (5,058 )   $  6,450     $ (20,376 )

Current tax expense (benefit)                    2,856          (34 )         (3 )        407         3,226
Deferred tax expense (benefit)                 (15,062 )      5,082           -           646        (9,334 )
Foreign currency losses on deferred tax
liabilities                                      3,871        4,049           -            -          7,920

Total tax expense (benefit)                     (8,335 )      9,097           (3 )      1,053         1,812


Net income (loss) after taxes                $ (19,147 )   $ (3,383 )   $ (5,055 )   $  5,397     $ (22,188 )

The increase in income tax expense from $1.8 million to $23.0 million for the first nine months of 2007 and 2008, respectively, is primarily the result of increased revenues resulting from higher commodity prices and partially offset by the effect of foreign currency changes on our deferred tax liabilities.

In 2008 and 2007, we did not record any income tax benefits in the U.S. and certain other jurisdictions as there was no assurance that we could generate any 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 (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 analytical tools, 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.

                                                     Three Months Ended           Nine Months Ended
                                                       September 30,                September 30,
(Amounts in thousands, except per share)             2008          2007          2008          2007
Net (loss)                                        $   78,196     $  (8,841 )   $  (2,620 )   $ (22,188 )

Depreciation, depletion and amortization              18,949        21,728        64,073        56,189
Deferred tax expense (benefit)                        52,709          (474 )      (5,568 )      (1,414 )
Unrealized (gains) losses on derivative
instruments                                         (119,089 )      13,032        41,239        41,340
Amortization of non-cash compensation                  1,182         1,238         2,378         3,973
Amortization of loan costs and discount                1,556           435         6,135         1,275
Non-cash interest expense                              1,209            -          3,252            -
Other                                                 (4,568 )          94        (3,819 )         187

Discretionary cash flow (1)                       $   30,144     $  27,212     $ 105,070     $  79,362


Net income (loss) to common shareholders, as
reported                                              75,487       (11,681 )     (10,733 )     (30,717 )
Unrealized (gains) losses on commodity
derivatives (2)                                      (56,404 )       6,516        19,689        20,670
Unrealized (gain) losses on embedded
derivatives                                           (6,280 )          -          1,860            -
Currency impact of deferred taxes                     (6,926 )       3,457        (4,203 )       7,920

Net income (loss), as adjusted                    $    5,877     $  (1,708 )   $   6,613     $  (2,127 )


Weighted average number of common shares
outstanding - diluted                                211,811       123,649       127,658       121,981
Earnings per diluted share, as adjusted           $     0.03     $   (0.01 )   $    0.05     $   (0.02 )


Net income (loss) to common shareholders, as
reported                                          $   75,487     $ (11,681 )   $ (10,733 )   $ (30,717 )

Unrealized (gains) losses on derivatives            (119,089 )      13,032        41,239        41,340
Net interest expense                                   4,338         4,124        17,182        11,867
Depreciation, depletion and amortization              18,949        21,728        64,073        56,189
Income tax expense                                    65,395         2,395        23,001         1,812
Preferred stock dividends                              2,709         2,840         8,113         8,529


Adjusted EBITDA                                   $   47,789     $  32,438     $ 142,875     $  89,020

(1) Discretionary cash flow is equal to cash flow from operating activities before the changes in operating assets and liabilities.

(2) Net of tax benefits of $56,404, $(6,516), $(19,690) and $(20,670), respectively.

Liquidity and Capital Resources

Our main sources of liquidity and capital resources are internally generated cash flow from operations, a senior bank facility with both uncommitted and committed availability and access to both the debt and equity capital markets. We believe that these sources of liquidity will be sufficient to meet our . . .