Unless the context otherwise requires, references to "Endeavour," "we," "us," "our" and similar terms refer to Endeavour International Corporation and, unless the contest 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 April 2, 2009, we signed a definitive agreement to divest our Norwegian subsidiary, Endeavour Energy Norge AS, to Verbundnetz Gas AG for cash consideration of $150 million (the "Norway Sale"). The transaction is subject to certain government approvals and regulatory compliance processes that are expected to be completed by the end of May 2009. We expect to recognize a gain upon closing the Norway Sale of approximately $47 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 the beginning of 2008 as a result of the global economic decline. Accordingly, revenues have decreased from $45.8 million in the first three months of 2008 to $16.3 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 $23.4 million for the first three months of 2009 as compared to $36.3 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 commodity derivatives, impairment of oil and gas properties, currency impact of long-term liabilities and deferred taxes. Net loss to common shareholders for the first three months of 2009 was $19.5 million, or $0.15 per share. For the first three months of 2008, net loss to common shareholders was $19.5 million, or $0.15 per share. The net loss for 2009 reflects a smaller unrealized loss on the mark-to-market of commodity derivatives and an impairment of oil and gas properties of $29.4 million. Net loss as adjusted for 2009 would have been $2.2 million without the effect of derivative transactions, impairment of oil and gas properties and currency impacts of deferred taxes as compared to net loss as adjusted of $4.7 million in 2008. Adjusted EBITDA decreased to $17.9 million in 2009 from $31.7 million in

2008. 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."

The cash flows provided by operating activities increased to $39.7 million for the three months ended March 31, 2009 as compared to $29.1 million for the three months ended March 31, 2008 primarily due to an increase in cash flows provided by changes in net operating assets and liabilities partially offset by decreases in revenues as a result of lower commodity prices.

Results of Operations

The following table shows our average sales volumes and sales prices for our
continuing operations for the periods presented.



                                                     Three Months Ended March 31,
                                                       2009              2008
 Sales volume (1):
 Oil and condensate sales (Mbbl)                             179                265
 Gas sales (MMcf)                                          1,129              2,035
 Total sales (MBOE)                                          367                604
 BOE per day                                               4,080              6,648

 Physical production volume (BOE per day)                  4,405              7,234


 Realized Prices (2):
 Oil and condensate price ($ per Bbl):
 Before commodity derivatives                      $       38.84    $         86.87
 Effect of commodity derivatives                   $       55.08    $        (23.89 )

 Realized prices including commodity derivatives   $       93.92    $         62.97


 Gas price ($ per Mcf):
 Before commodity derivatives                      $        8.31    $         11.16
 Effect of commodity derivatives                   $        1.84    $          1.57

 Realized prices including commodity derivatives   $       10.15    $         12.74

 Equivalent oil price ($ per BOE):
 Before commodity derivatives                      $       44.49    $         75.72
 Effect of commodity derivatives                   $       32.51    $         (5.21 )

 Realized prices including commodity derivatives   $       77.00    $         70.51

(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 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 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 for oil and natural gas, 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 is still developing a global transportation system, is more subject to local supply and demand conditions. Consequently, price movements for all types and grades of crude oil generally move in the same direction. Natural gas prices in the North Sea have been influenced by fuel prices around the world, including crude oil and coal. These prices are also impacted by European gas supplies, particularly deliveries from Russian gas supplies. In addition, regional supply and demand issues affect gas prices. The majority of our natural gas is sold in the UK market. Market prices for both oil and natural gas were at high levels during 2008. Both crude oil and natural gas prices have declined in 2009 as a result of the global economic decline.

For the first quarter of 2009 and 2008, we had sales volume of 7,600 BOE per day and 8,800 BOE per day, respectively. Our physical daily production was approximately 7,800 BOE and 10,100 BOE for 2009 and 2008, respectively. The decrease in sales volume is primarily attributable to maintenance down time at Goldeneye, the timing of liftings and the suspension of production at IVRRH, Renee and Rubie. The production from IVRRH, Renee and Rubie has been suspended until the development activities at Rochelle are operational which we currently anticipate to be late 2010. After the start of Rochelle production, we expect to re-develop these fields if economically feasible.

During the three months ended March 31, 2009, we realized $12 million in gains on the settlement of commodity derivatives, compared to $3 million in losses for the same period in 2008. In the first quarter of 2009, we also recognized $0.4 million in gains on the mark-to-market of our commodity derivatives versus a loss of $30.3 million for the same period in 2008.

The following table shows our average sales volumes and sales prices for both continuing and discontinued operations for the periods presented.

                      Endeavour International Corporation



                                                              Three Months Ended March 31,
                                                                2009              2008
Sales volume (1):
Oil and condensate sales (Mbbl):
United Kingdom                                                        178                265
United States                                                           1                 -

Continuing operations                                                 179                265
Discontinued operations-Norway                                        224                 96

Total                                                                 403                361


Gas sales (MMcf):
United Kingdom                                                      1,078              2,035
United States                                                          51                 -

Continuing operations                                               1,129              2,035
Discontinued operations-Norway                                        533                599

Total                                                               1,662              2,634


Total sales (MBOE):
United Kingdom                                                        358                604
United States                                                           9                 -

Continuing operations                                                 367                604
Discontinued operations-Norway                                        313                196

Total                                                                 680                800


BOE per day                                                         7,551              8,796


Physical production volume:
Total production (BOE per day):
United Kingdom                                                      4,315              7,234
United States                                                          90                 -

Continuing Operations                                               4,405              7,234
Discontinued operations-Norway                                      3,365              2,894

Total                                                               7,770             10,128


Realized Prices (including discontinued operations) (2):
Oil and condensate price ($ per Bbl):
Before commodity derivatives                                $       41.68    $         89.84
Effect of commodity derivatives                             $       24.50    $        (17.57 )

Realized prices including commodity derivatives             $       66.18    $         72.27


Gas price ($ per Mcf):
Before commodity derivatives                                $        7.78    $         10.93
Effect of commodity derivatives                             $        1.25    $          1.22

Realized prices including commodity derivatives             $        9.03    $         12.15


Equivalent oil price ($ per BOE):
Before commodity derivatives                                $       43.71    $         76.53
Effect of commodity derivatives                             $       17.56    $         (3.94 )

Realized prices including commodity derivatives             $       61.27    $         72.59

(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 contracts we utilize to manage price risk related to our future cash flows.

Expenses

Operating expenses decreased to $6.2 million during the first quarter of 2009 as compared to $7.3 million in the first quarter of 2008, primarily as a result of fewer liftings in 2009 due to timing. While operating expenses decreased, the lower volumes due to production declines at Goldeneye and the suspension of production at IVRRH, Renee and Rubie caused operating expenses per BOE to increase from $12.14 per BOE in the first quarter of 2008 to $16.84 per BOE in the first quarter of 2009.

G&A expenses remained relatively flat from $3.8 million during the first quarter of 2009 as compared to $3.7 million for the corresponding period in 2008. The material components of G&A expenses for these periods are as follows:

     (Amounts in thousands)                     Three Months Ended March 31,
                                                  2009                 2008
     Compensation                            $        3,411       $        3,336
     Consulting, legal and accounting fees              901                  919
     Occupancy costs                                    224                  315
     Other expenses                                     441                  950

     Total gross cash G&A expenses                    4,977                5,520

     Non-cash stock-based compensation                  538                  365

     Gross G&A expenses                               5,515                5,885
     Less: capitalized G&A expenses                  (1,680 )             (2,176 )

     Net G&A expenses                        $        3,835       $        3,709

Interest expense decreased to $3.9 million for the three months ended March 31, 2009 as compared to $8.3 million for the corresponding period in 2008 and is primarily associated with financing costs of $4.3 million incurred for our early retirement of the second lien term loan in the first quarter of 2008.

                      Endeavour International Corporation



Income Taxes

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



(Amounts in thousands)                                   UK           U.S.        Other         Total
Three Months Ended March 31, 2009
Net loss before taxes                                 $ (22,610 )   $   (831 )   $ (4,653 )   $ (28,094 )

Current tax expense                                         594           -            -            594
Deferred tax benefit                                     (9,600 )         -            -         (9,600 )
Foreign currency losses on deferred tax liabilities      (1,946 )         -            -         (1,946 )

Total tax benefit                                       (10,952 )         -            -        (10,952 )


Net loss from continuing operations after taxes       $ (11,658 )   $   (831 )   $ (4,653 )   $ (17,142 )


Three Months Ended March 31, 2008
Net loss before taxes                                 $ (19,565 )   $ (3,216 )   $ (2,371 )   $ (25,152 )

Current tax expense                                       1,470           -            -          1,470
Deferred tax expense (benefit)                          (10,231 )         -           122       (10,109 )
Foreign currency losses on deferred tax liabilities          12           -            -             12

Total tax expense (benefit)                              (8,749 )         -           122        (8,627 )


Net loss from continuing operations after taxes       $ (10,816 )   $ (3,216 )   $ (2,493 )   $ (16,525 )

The change in income tax benefit from $8.6 million to $11.0 million for the first three months of 2008 and 2009, respectively, is primarily due to the effect of lower commodity prices on decreased income, the impairment of oil and gas properties and the effect of foreign currency changes on the deferred tax liabilities as a result of the weakening of the British pound versus the U.S. dollar.

In the first quarter of 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 the respective currencies of the countries in which we have operations, 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, 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 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.

Below are reconciliations of net income (loss) to the following non-GAAP financial measures: Net Income (Loss) as Adjusted, Adjusted EBITDA and Discretionary Cash Flow.

(Amounts in thousands)                                         Three Months Ended March 31,
                                                                 2009                 2008
Net loss                                                    $      (16,863 )     $      (16,792 )

Depreciation, depletion and amortization                            16,059               21,403
Impairment of oil and gas properties                                29,402                   -
Deferred tax benefit                                                (8,423 )             (3,144 )
Unrealized loss on derivative instruments                            1,373               29,642
Amortization of non-cash compensation                                  657                  544
Amortization of loan costs and discount                              1,201                3,156
Non-cash interest expense                                            1,279                  869
Other                                                               (1,293 )                632


Discretionary cash flow                                     $       23,392       $       36,310


Net loss to common shareholders, as reported                $      (19,532 )     $      (19,487 )
Impairment of oil and gas properties (net of 50% tax)               14,701                   -
Unrealized (gains) losses on derivatives (net of 50% tax)              687               14,821
Currency impact of deferred taxes                                    1,946                   12


Net loss, as adjusted                                       $       (2,198 )     $       (4,654 )


Net loss to common shareholders, as reported                $      (19,532 )     $      (19,487 )

Unrealized losses on derivatives                                     1,373               29,642
Interest expense                                                     3,911                8,316
Depreciation, depletion and amortization                            11,324               18,888
Impairment of oil and gas properties                                29,402                   -
Income tax benefit                                                 (10,952 )             (8,627 )
(Income) loss from discontinued operations                            (279 )                267
Preferred stock dividends                                            2,669                2,695


Adjusted EBITDA                                             $       17,916       $       31,694

                      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.



 (Amounts in thousands)                          For the Quarter Ended March 30,
                                                   2009                   2008
 Net cash provided by Operating Activities   $         39,739       $         29,140

 Net cash used in Investing Activities       $        (42,398 )     $        (19,581 )

 Net cash used in Financing Activities       $        (13,384 )     $         (5,540 )

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 increased to $39.7 million for the three months ended March 31, 2009 as compared to $29.1 million for the three months ended March 31, 2008 primarily due to an increase in cash flows provided by changes in net operating assets and liabilities partially offset by decreased revenues as a result of lower 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.

The cash used in financing activities consists of borrowings and repayments of debt, payments of preferred dividends and payment of financing costs.

Drilling Program

We currently anticipate spending approximately $50-$60 million during 2009 to fund oil and gas exploration, production and development activities in our core areas of operation in the North Sea and the US, reflecting a reduction in anticipated expenditures due to the Norway sale. Through March 31, 2009, we have spent $30.6 million in capital, primarily on drilling activities at Rochelle, Cygnus and $7.0 million incurred by our discontinued operations.

Subsequent to March 31, 2009, we announced the successful results of the drilling at Cygnus. In the second quarter of 2009, we have also begun drilling an exploratory well in the UK called Tesla and one in the U.S. called Dalwhinnie. Testing is still in progress at our Alligator Bayou well in the US.

. . .