Summary of ENDEAVOUR INTERNATIONAL CORP

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

Unless the context otherwise requires, references to "Endeavour," "we," "us," "our" and similar terms refer to Endeavour International Corporation and, unless the context indicates otherwise, 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 in the North Sea and United States. To date, we have invested a significant amount of our resources on various development, acquisition and exploration projects. On May 14, 2009, we completed the sale of our Norwegian subsidiary, Endeavour Energy Norge AS, to Verbundnetz Gas AG for cash consideration of $150 million (the "Norway Sale"). We recognized a gain upon closing the Norway Sale of $47.0 million, after the allocation of $68 million of goodwill to the assets sold.
Our revenues and cash flows from operating activities are very sensitive to changes in prices received for our products. Market prices for both oil and natural gas have significantly declined since mid 2008 as a result of the global economic decline. Accordingly, revenues have decreased from $145.3 million in the nine months ended September 30, 2008 to $42.2 million in the same period of 2009. With our various oil and gas derivative instruments, discretionary cash flow did not drop as precipitously as revenue. Discretionary cash flow was $50.0 million for the nine months ended September 30, 2009 as compared to $105.1 million for the same period in 2008.
Our net income can be significantly affected by various non-cash items, such as unrealized gains and losses on our derivatives, impairment of oil and gas properties, currency impact of long-term liabilities and deferred taxes. Net loss to common shareholders for the nine months ended September 30, 2009 was $19.6 million, or ($0.15) per share. For the nine months ended September 30, 2008, net loss to common shareholders was $10.7 million, or ($0.08) per share. The net loss for 2009 reflects a smaller unrealized loss on the mark-to-market of commodity derivatives, an impairment of oil and gas properties of $30.6 million and $47.4 million in gain on sale of our discontinued operations. Net loss as adjusted for the nine months ended September 30, 2009 would have been $27.5 million without the effect of derivative transactions, impairment of oil and gas properties and currency impacts of deferred taxes as compared to net income as adjusted of $6.6 million for the same period in 2008. Adjusted EBITDA decreased to $46.5 million for the nine months ended September 30, 2009 from $142.9 million for the same period in 2008. For definitions of Adjusted EBITDA and Discretionary Cash Flow, and a reconciliation

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Endeavour International Corporation of Adjusted EBITDA to net income as adjusted, please see "Reconciliation of Non-GAAP Accounting Measures."
The cash flows provided by operating activities decreased to $39.7 million for the nine months ended September 30, 2009 as compared to $99.6 million for the same period in 2008 primarily due to significant decreases in revenues as a result of lower commodity prices and lower production volumes discussed below. Results of Operations
The following table shows our average sales volumes and sales prices for our operations for the periods presented.

                                                Three Months Ended         Nine Months Ended
                                                  September 30,              September 30,
                                                2009          2008         2009         2008

 Sales volume (1)
 Oil and condensate sales (Mbbls):
 United Kingdom                                     82          235          494          834
 United States                                       1            -            2            -

 Continuing operations                              83          235          496          834
 Discontinued operations - Norway                    -          204          310          545

 Total                                              83          439          806        1,379


 Gas sales (MMcf):
 United Kingdom                                    629        1,470        2,777        5,149
 United States                                      19            -          130            -

 Continuing operations                             648        1,470        2,907        5,149
 Discontinued operations - Norway                    -          575          686        1,640

 Total                                             648        2,045        3,593        6,789


 Oil equivalent sales (MBOE)
 United Kingdom                                    187          480          957        1,692
 United States                                       4            -           23            -

 Continuing operations                             191          480          980        1,692
 Discontinued operations - Norway                    -          299          425          819

 Total                                             191          779        1,405        2,511


 Total BOE per day                               2,072        8,477        5,147        9,162


 Physical production volume (BOE per day):
 United Kingdom                                  2,777        5,075        3,675        6,064
 United States                                      32            -           54            -

 Continuing operations                           2,809        5,075        3,729        6,064
 Discontinued operations - Norway                    -        2,763        1,545        2,816

 Total                                           2,809        7,838        5,274        8,880


 Realized Prices (2)
 Oil and condensate price ($ per Bbl):
 Before commodity derivatives                 $  61.73     $ 106.22      $ 47.38     $ 101.60

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                      Endeavour International Corporation

                                                     Three Months Ended                  Nine Months Ended
                                                       September 30,                       September 30,
                                                   2009              2008             2009              2008
Effect of commodity derivatives                    46.05            (23.70 )          24.47            (20.78 )

Realized prices including commodity
derivatives                                     $ 107.78          $  82.52          $ 71.85          $  80.82


Gas price ($ per Mcf):
Before commodity derivatives                    $   4.10          $  12.14          $  5.99          $  11.63
Effect of commodity derivatives                     5.75             (1.58 )           2.46             (0.39 )

Realized prices including commodity
derivatives                                     $   9.85          $  10.56          $  8.45          $  11.24


Equivalent oil price ($ per BOE):
Before commodity derivatives                    $  40.70          $  91.65          $ 42.51          $  87.26
Effect of commodity derivatives                    39.50            (17.48 )          20.34            (12.46 )

Realized prices including commodity
derivatives                                     $  80.20          $  74.17          $ 62.85          $  74.80

(1) We record oil revenues using 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 reflect both our continuing and discontinued operations and include gains and losses for derivative contracts we utilize to manage price risk related to our future cash flows.

Our revenues and cash flows from operating activities are very sensitive to changes in the prices we receive for the oil and natural gas we produce. Our production is sold at prevailing market prices which may be volatile and subject to numerous factors which are outside of our control. Further, the current tightly balanced supply and demand market allows a small variation in supply or demand to significantly impact the market prices for these commodities. While market prices for both oil and natural gas were at historically high levels in 2007 and early 2008, both oil and natural gas prices have significantly declined as a result of diminished demand and the global economic downturn.
The markets in which we sell our oil and natural gas also materially impact our revenues and cash flows. Oil trades on a worldwide market and consequently, price movements for all types and grades of crude oil generally trend in the same direction and within a relatively narrow price range. However, natural gas prices vary among geographic areas as the prices received are largely impacted by local supply and demand conditions as the global transportation infrastructure for natural gas is still developing. As such, the oil we produce and sell is typically in line with global prices, whereas our natural gas is to a large extent impacted by regional supply and demand issues and to a lesser extent by global fuel prices, including oil and coal. Specifically, we sell a majority of our gas into the UK market, which is very sensitive to and impacted by tighter European gas supplies and gas deliveries from Russia. Therefore, the price for natural gas in the UK market is typically higher than the price for natural gas in other geographic regions and markets, including the U.S. For the third quarter of 2009 and 2008, we had sales volume of 2,072 BOE per day and 5,222 BOE per day, respectively, for our continuing operations. Our physical daily production for our continuing operations was approximately 2,809 BOE and 7,838 BOE for the third quarter of 2009 and 2008, respectively. The decrease in sales volume is primarily attributable to maintenance down time at Alba, Bittern, Enoch and Goldeneye. In addition, the suspension of

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Endeavour International Corporation production at IVRRH, Renee and Rubie reduced sales volumes. With facilities in the UK off line for maintenance during the third quarter, we had less than half the oil liftings in the third quarter of 2009 than we had during the second quarter of 2009 or the third quarter 2008. We also had 50% more downtime at Goldeneye in the third quarter of 2009 than in 2008 as the onshore compressor facility for Goldeneye was undergoing maintenance.
The production from IVRRH, Renee and Rubie has been suspended until the development activities at Rochelle are operational which we currently anticipate to be during the second quarter of 2011. After the start of Rochelle production, we expect to re-develop these fields if commercially advisable and practicable. During the nine months ended September 30, 2009, we realized $28.6 million in gains on the settlement of commodity derivatives, compared to $31.3 million in losses for the same period in 2008. In the third quarter of 2009, we also recognized $7.5 million in gains on the mark-to-market of our commodity derivatives versus a loss of $13.6 million for the same period in 2008. Expenses
Operating expenses decreased to $3.9 million for the third quarter of 2009 as compared to $7.2 million in the third quarter of 2008. For the nine months ended September 30, 2009, operating expenses decreased to $14.5 million as compared to $23.7 million for the same period in 2008. Operating costs per BOE increased from $14.89 per BOE in the third quarter of 2008 to $20.33 per BOE in the third quarter of 2009, and from $14.00 per BOE for the nine months ended September 30, 2008 to $14.75 per BOE for the nine months ended September 30, 2009. The decrease in operating expenses from 2008 to 2009 is primarily due to the suspension of production at the IVRRH and Rubie fields, which were our highest operating cost fields. The operating expense per BOE increased due to the significantly lower volumes sold for both periods, thereby causing the fixed costs to have a greater impact on out total operating expense per BOE. Depreciation, depletions and amortization ("DD&A") expense decreased to $5.6 million from $14.9 million for the third quarter of 2009 and 2008, respectively, reflecting the lower sales volumes and the decrease in our DD&A rate per BOE after the impairments recorded in the fourth quarter 2008 and first quarter 2009. DD&A for the nine months ended September 30, 2009 had similar declines versus the same period in 2008.
General and administrative ("G&A") expenses increased to $12.0 million during the nine months ended of 2009 as compared to $11.6 million for the corresponding period in 2008. This increase primarily resulted from higher compensation expense due to increase in headcount associated with the expanding development projects in the U.K. Components of G&A expenses for these periods are as follows:

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                      Endeavour International Corporation

                                              Three Months Ended         Nine Months Ended
                                                September 30,              September 30,
                                              2009          2008         2009         2008

   Compensation                             $  3,659     $  2,228     $ 10,448     $  8,423
   Consulting, legal and accounting fees       1,537        1,491        3,529        3,358
   Occupancy costs                               221          245          717          866
   Other expenses                                 85        1,027        1,062        3,070

   Total gross cash G&A expenses               5,502        4,991       15,756       15,717

   Non-cash stock-based compensation             567        1,058        1,680        1,907

   Gross G&A expenses                          6,069        6,049       17,436       17,624
   Less: capitalized G & A expenses           (1,978 )     (1,985 )     (5,395 )     (6,007 )

   Net G&A expenses                         $  4,091     $  4,064     $ 12,041     $ 11,617

Interest expense decreased by $(6.4) million to $12.1 million for the nine months ended September 30, 2009 as compared to $18.5 million for the corresponding period in 2008 due to the repayment of debt following the Norway Sale and costs related to our early retirement of the Second Lien Term Loan in 2008 of $4.3 million.
Income Taxes
The following summarizes the components of tax expense (benefit):

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                      Endeavour International Corporation

                                                    UK                U.S.              Other              Total

Nine Months Ended September 30, 2009
Net loss before taxes from continuing
operations                                      $ (44,641 )        $ (7,914 )        $ (16,095 )        $ (68,650 )

Current tax expense (benefit)                      (1,176 )               -                  -             (1,176 )
Deferred tax expense (benefit)                    (16,203 )               -                  -            (16,203 )
Foreign currency losses on deferred tax
liabilities                                         6,902                 -                  -              6,902

Income tax expense (benefit)                      (10,477 )               -                  -            (10,477 )


Net loss from continuing operations             $ (34,164 )        $ (7,914 )        $ (16,095 )        $ (58,173 )


Nine Months Ended September 30, 2008
Net loss before taxes from continuing
operations                                      $ (17,582 )        $ (5,656 )        $  (8,165 )        $ (31,403 )

Current tax expense (benefit)                       6,043                 -                  -              6,043
Deferred tax expense (benefit)                    (15,256 )               -                  -            (15,256 )
Foreign currency losses on deferred tax
liabilities                                            18                 -                  -                 18

Income tax expense (benefit)                       (9,195 )               -                  -             (9,195 )


Net loss from continuing operations             $  (8,387 )        $ (5,656 )        $  (8,165 )        $ (22,208 )

The change in income tax benefit from $(9.2) million to $(10.5) million for the nine months ended September 30, 2008 and 2009, respectively, is primarily the result of lower current taxes on decreased income resulting from lower commodity prices and sales volumes offset by the effect of foreign currency changes on the deferred tax liabilities as a result of the strengthening of the British pound versus the U.S. dollar.
In 2009 and 2008, 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 our 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,

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Endeavour International Corporation taxes, depreciation, depletion and amortization ("Adjusted EBITDA") and Net Income as Adjusted.
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. 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.

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Endeavour International Corporation 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. 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,
                                                   2009               2008               2009               2008

Net income (loss)                               $ (4,483 )        $   78,196          $ (11,527 )        $  (2,620 )

Depreciation, depletion and amortization           5,646              18,949             29,509             64,073
Impairment of oil and gas properties                   -                   -             30,645                  -
Deferred tax expense (benefit)                       327              52,709             (3,269 )           (5,568 )
Gain on asset sales                                 (277 )                 -            (47,420 )                -
Unrealized (gain) loss on derivatives              4,360            (119,089 )           38,455             41,239
Other                                              2,042                (621 )           13,577              7,946


Discretionary Cash Flow (1)                     $  7,615          $   30,144          $  49,970          $ 105,070


Net income (loss) to common shareholders        $ (7,179 )        $   75,487          $ (19,588 )        $ (10,733 )

Impairment of oil and gas properties (net
of tax) (2)                                            -                   -             15,322                  -
Unrealized (gain) loss on derivatives
(net of tax) (3)                                   2,885             (62,684 )           23,632             21,549
Currency impact on deferred taxes                 (2,106 )            (6,926 )            8,143             (4,203 )


Net Income (Loss) as Adjusted                   $ (6,400 )        $    5,877          $  27,509          $   6,613


Net income (loss) to common shareholders        $ (7,179 )        $   75,487          $ (19,588 )        $ (10,733 )

Unrealized (gain) loss on derivatives              4,360            (119,089 )           38,455             41,239
Net interest expense                               3,877               4,338             11,860             17,182
Depreciation, depletion and amortization           5,646              18,949             29,509             64,073
Impairment of oil and gas properties                   -                   -             30,645                  -
Income tax expense (benefit)                        (441 )            65,395             (5,047 )           23,001
Gain on asset sales                                 (277 )                 -            (47,420 )                -
Preferred stock dividends                          2,696               2,709              8,061              8,113


Adjusted EBITDA                                 $  8,682          $   47,789          $  46,475          $ 142,875

(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 $ (15,323) for the nine months ended September 30, 2009.

(3) Net of tax expense (benefit) of $ (1,475), $ 56,404, $ (14,823) and $ (19,689), respectively.

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Endeavour International Corporation 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.
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 $39.7 million for the third quarter September 30, 2009 as compared to $99.6 million for the third quarter September 30, 2008 primarily due to decreased revenues as a result of lower commodity prices. The cash provided by or used in investing activities represents the proceeds from the Norway Sale, expenditures for capital projects, as discussed in "Drilling Program" below, and decreases to restricted cash under escrow for our . . .