Exhibit 99.3

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Endeavour International Corporation:

We have audited the accompanying consolidated balance sheets of Endeavour International Corporation and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Endeavour International Corporation and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 2 to the consolidated financial statements, effective January 1, 2007, the Company changed its accounting for uncertain tax positions. As also discussed in Note 2 to the consolidated financial statements, effective January 1, 2008, the Company changed its method of accounting and disclosures for fair value measurements and fair value reporting of financial assets and liabilities.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Endeavour International Corporation’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 13, 2009 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP
Houston, Texas
March 13, 2009, except for the effects of discontinued operations, as discussed in Note 23, which is as of January 8, 2010.

Endeavour International Corporation
Consolidated Balance Sheets
(Amounts in thousands)

		December 31,
		2008				2007
Assets
Current Assets:
Cash and cash equivalents		$	31,421			$	13,810
Restricted cash, related to rig commitments			20,739				22,000
Accounts receivable			22,325				26,708
Prepaid expenses and other current assets			42,194				41,874
Current assets of discontinued operations			16,726				13,855
Total Current Assets			133,405				118,247
Property and Equipment, Net			232,346				273,324
Goodwill			213,949				215,330
Other Assets			9,165				11,029
Long Term Assets of Discontinued Operations			148,605				129,693
Total Assets		$	737,470			$	747,623
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable		$	38,630			$	25,484
Current maturities of debt			13,000				—
Accrued expenses and other			36,642				40,843
Current liabilities of Discontinued Operations			22,231				14,722
Total Current Liabilities			110,503				81,049
Long-Term Debt			214,855				266,250
Deferred Taxes			67,299				101,554
Other Liabilities			55,791				61,991
Long-term Liabilities of Discontinued Operations			46,051				41,630
Total Liabilities			494,499				552,474
Commitments and Contingencies
Series C Convertible Preferred Stock (Liquidation preference: $125,000)			125,000				125,000
Stockholders’ Equity:
Series B Preferred stock (Liquidation preference: $2,957)			—				—
Common stock; shares issued and outstanding – 128,572 at 2008 and 127,006 at 2007			129				127
Additional paid-in capital			244,471				241,539
Treasury stock			(450	)			—
Accumulated other comprehensive loss			(1,266	)			(923	)
Accumulated deficit			(124,913	)			(170,594	)
Total Stockholders’ Equity			117,971				70,149
Total Liabilities and Stockholders’ Equity		$	737,470			$	747,623

The accompanying notes are an integral part of these consolidated financial statements.

Endeavour International Corporation
Consolidated Statements of Operations
(Amounts in thousands, except per share data)

		For the Year Ended December 31,
		2008				2007				2006
Revenues		$	170,781			$	135,876			$	24,881
Expenses:
Operating expenses			32,317				27,263				4,477
Depreciation, depletion and amortization			67,326				68,982				13,831
Impairment of oil and gas properties			36,970				—				849
General and administrative			15,932				15,853				17,240
Total expenses			152,545				112,098				36,397
Operating Profit (Loss)			18,236				23,778				(11,516	)
Other Income (Expense):
Derivatives:
Unrealized gain (loss)			76,666				(89,132	)			34,531
Realized gain (loss)			(28,578	)			12,048				—
Interest expense			(22,975	)			(19,282	)			(8,571	)
Unrealized foreign currency exchange gain (loss)			5,569				(139	)			(598	)
Other			1,057				374				(4,021	)
Total Other Income (Expense)			31,739				(96,131	)			21,341
Income (Loss) Before Income Taxes			49,975				(72,353	)			9,825
Income Tax (Benefit) Expense			24,116				(22,208	)			14,870
Income (Loss) from Continuing Operations			25,859				(50,145	)			(5,045	)
Income (loss) from Discontinued Operations, net of tax			30,631				1,068				(1,793	)
Net Income (Loss)			56,490				(49,077	)			(6,838	)
Preferred Stock Dividends			10,809				11,238				1,991
Net Income (Loss) to Common Stockholders		$	45,681			$	(60,315	)		$	(8,829	)
Basic Net Income (Loss) Per Common Share:
Continuing operations		$	0.12			$	(0.50	)		$	(0.08	)
Discontinued operations			0.24				0.01				(0.02	)
Total		$	0.36			$	(0.49	)		$	(0.10	)
Diluted Net Income (Loss) per Common Share:
Continuing operations		$	0.15			$	(0.50	)		$	(0.08	)
Discontinued operations		$	0.17				0.01				(0.02	)
Total		$	0.32			$	(0.49	)		$	(0.10	)
Weighted Average Number of Common Shares Outstanding:
Basic			128,312				123,118				86,636
Diluted			178,312				123,118				86,636

The accompanying notes are an integral part of these consolidated financial statements.

Endeavour International Corporation
Consolidated Statements of Cash Flows
(Amounts in thousands)

		Year Ended December 31,
		2008				2007				2006
Cash Flows from Operating Activities:
Net income (loss)		$	56,490			$	(49,077	)		$	(6,838	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation, depletion and amortization			81,734				76,850				20,164
Impairment of oil and gas properties			36,970				—				849
Deferred tax expense (benefit)			17,682				(12,925	)			13,038
Unrealized (gain) loss on derivative instruments			(76,666	)			89,132				(34,531	)
Amortization of non-cash compensation			3,226				4,968				11,573
Foreign currency exchange (gain) loss on non-operating liabilities			(10,508	)			1,078				1,012
Non-cash interest charges and other			11,879				2,948				5,396
Changes in assets and liabilities:
(Increase) Decrease in receivables			9,795				30,127				(32,165	)
(Increase) Decrease in prepaid expenses and other			(3,745	)			(984	)			(9,749	)
Increase (Decrease) in current liabilities			6,323				(13,611	)			17,151
Net Cash Provided by (Used in) Operating Activities			133,180				128,506				(14,100	)
Cash Flows From Investing Activities:
Capital expenditures			(66,370	)			(88,007	)			(55,496	)
Acquisitions, net of cash acquired			—				—				(376,915	)
(Increase) decrease in restricted cash and other investing activities			1,519				(20,133	)			5,293
Net Cash Used in Investing Activities			(64,851	)			(108,140	)			(427,118	)
Cash Flows From Financing Activities:
Repayment of borrowings			(120,000	)			(47,000	)			—
Proceeds from borrowings			88,000				7,000				225,000
Payment of preferred dividends			(10,625	)			(2,656	)			—
Financing costs paid			(3,538	)			(263	)			(9,565	)
Proceeds from common stock, net of issuance costs			—				—				83,967
Proceeds from preferred stock, net of issuance costs			—				—				100,657
Other financing activities			(450	)			(821	)			3,310
Net Cash Provided by (Used in) Financing Activities			(46,613	)			(43,740	)			403,369
Net Increase (Decrease) in Cash and Cash Equivalents			21,716				(23,374	)			(37,849	)
Effect of Foreign Currency Changes on Cash			—				—				1,536
Cash and Cash Equivalents, Beginning of Period			16,440				39,814				76,127
Cash and Cash Equivalents, End of Period		$	38,156			$	16,440			$	39,814

The accompanying notes are an integral part of these consolidated financial statements.

Endeavour International Corporation
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)
(Amounts in thousands)

																		Accumulated
																		Other								Total				Total
		Common				Treasury				Additional				Deferred				Comprehensive				Accumulated				Stockholders’				Comprehensive
		Stock				Stock				Paid-In Capital				Compensation				Loss				Deficit				Equity				Income (Loss)
Balance, December 31, 2005		$	75			$	—			$	155,734			$	(9,437	)		$	(4,578	)		$	(101,450	)		$	40,344
Adoption of stock-based compensation accounting standards							—				(9,110	)			9,437				—				—				327
Issuance of common stock as deferred compensation			2				—				473				—				—				—				475
Exercise of warrants and options			2								3,308				—				—				—				3,310
Other issuances of common stock			40				—				89,353				—				—				—				89,393
Amortization of deferred compensation			—								11,573				—				—				—				11,573
Expenses related to Convertible Preferred Stock offering			—				—				(24,343	)			—				—				—				(24,343	)
Preferred stock dividend			—				—				—				—				—				(1,991	)			(1,991	)
Comprehensive Loss:							—
Net Loss			—				—				—				—				—				(6,838	)			(6,838	)		$	(6,838	)
Other comprehensive income (net of tax):							—
Unrealized loss on derivative instruments, net of tax			—				—				—				—				3,690				—				3,690				3,690
Unrealized gain (loss) on available-for- sale securities			—				—				—				—				888				—				888				888
Balance, December 31, 2006		$	119			$	—			$	226,988			$	—			$	—			$	(110,279	)		$	116,828			$	(2,260	)
Balance, December 31, 2006		$	119			$	—			$	226,988			$	—			$	—			$	(110,279	)		$	116,828
Preferred stock dividend			6				—				10,509				—				—				(11,238	)			(723	)
Amortization of deferred compensation			—				—				4,975				—				—				—				4,975
Other			2				—				(933	)			—				—				—				(931	)
Comprehensive Loss:
Net Loss			—				—				—				—				—				(49,077	)			(49,077	)		$	(49,077	)
Other comprehensive income (net of tax):
Unrealized loss on derivative instruments, net of tax			—				—				—				—				(852	)			—				(852	)			(852	)
Unrealized gain (loss) on available-for- sale securities			—				—				—				—				(71	)			—				(71	)			(71	)
Balance, December 31, 2007		$	127			$	—			$	241,539			$	—			$	(923	)		$	(170,594	)		$	70,149			$	(50,000	)

The accompanying notes are an integral part of these consolidated financial statements.

Endeavour International Corporation
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)
(Amounts in thousands)

																		Accumulated
																		Other								Total				Total
		Common				Treasury				Additional				Deferred				Comprehensive				Accumulated				Stockholders’				Comprehensive
		Stock				Stock				Paid-In Capital				Compensation				Loss				Deficit				Equity				Income (Loss)
Balance, December 31, 2007		$	127			$	—			$	241,539			$	—			$	(923	)		$	(170,594	)		$	70,149
Preferred stock dividend			—				—				—				—				—				(10,809	)			(10,809	)
Amortization of deferred compensation			—				—				3,226				—								—				3,226
Treasury stock repurchase			—				(450	)			—				—				—				—				(450	)
Other			1				—				(294	)			—												(293	)
Comprehensive Loss:
Net Income			—				—				—								—				56,490				56,490			$	56,490
Other comprehensive income (net of tax):
Unrealized loss on derivative instruments, net of tax			—				—				—				—				(342	)			—				(342	)			(342	)
Unrealized gain (loss) on available-for- sale securities			—				—				—				—				(1	)			—				(1	)
Balance, December 31, 2008		$	128			$	(450	)		$	244,471			$	—			$	(1,266	)		$	(124,913	)		$	117,970			$	56,148

The accompanying notes are an integral part of these consolidated financial statements.

Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)

Note 1 – Description of Business

Endeavour International Corporation was incorporated under the laws of the state of Nevada on January 13, 2000. As used in these Notes to Consolidated Financial Statements, the terms “Endeavour”, “we”, “us”, “our” and similar terms refer to Endeavour International Corporation and, unless the context indicates otherwise, its consolidated subsidiaries.

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation and Use of Estimates

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

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

Principles of Consolidation

The accompanying consolidated financial statements include all of the accounts of Endeavour and our consolidated subsidiaries. All significant intercompany accounts and transactions have been eliminated. Investments in entities over which we have significant influence, but not control, are carried at cost adjusted for equity in earnings or (losses) and distributions received.

Cash and Cash Equivalents

We consider all highly liquid instruments with an original maturity of 90 days or less at the time of purchase to be cash equivalents.

Inventories

Materials and supplies and oil inventories are valued at the lower of cost or market value (net realizable value).

Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)

Full Cost Accounting for Oil and Gas Operations

Under the full cost method, all acquisition, exploration and development costs, including certain directly related employee costs and a portion of interest expense, incurred for the purpose of finding oil and gas are capitalized and accumulated in pools on a country-by-country basis. Capitalized costs include the cost of drilling and equipping productive wells, including the estimated costs of dismantling and abandoning these assets, dry hole costs, lease acquisition costs, seismic and other geological and geophysical costs, delay rentals and costs related to such activities. Employee costs associated with production and other operating activities and general corporate activities are expensed in the period incurred.

Capitalized costs are limited on a country-by-country basis (the ceiling test). The ceiling test limitation is calculated as the sum of the present value of future net cash flows related to estimated production of proved reserves, using end-of-the-current-period prices including the effect of derivative instruments that qualify as cash flow hedges, discounted at 10%, plus the lower of cost or estimated fair value of unproved properties, all net of expected income tax effects. Under the ceiling test, if the capitalized cost of the full cost pool, net of deferred taxes, exceeds the ceiling limitation, the excess is charged as an impairment expense.

We utilize a single cost center for each country where we have operations for amortization purposes. Any conveyances of properties are treated as adjustments to the cost of oil and gas properties with no gain or loss recognized unless the operations are suspended in the entire cost center or the conveyance is significant in nature.

Unproved property costs include the costs associated with unevaluated properties and properties under development and are not initially included in the full cost amortization base (where proved reserves exist) until the project is evaluated. These costs include unproved leasehold acreage, seismic data, wells and production facilities in progress and wells pending determination, together with interest costs capitalized for these projects. Seismic data costs are associated with specific unevaluated properties where the seismic data is acquired for the purpose of evaluating acreage or trends covered by a leasehold interest owned by us. Significant unproved properties are assessed periodically for possible impairment or reduction in value. If a reduction in value has occurred, these property costs are considered impaired and are transferred to the related full cost pool. Geological and geophysical costs included in unproved properties are transferred to the full cost amortization base along with the associated leasehold costs on a specific project basis. Costs associated with wells in progress and wells pending determination are transferred to the amortization base once a determination is made whether or not proved reserves can be assigned to the property. Costs of dry holes are transferred to the amortization base immediately upon determination that the well is unsuccessful. Unproved properties whose acquisition costs are not individually significant are aggregated, the portion of such costs estimated to be ultimately nonproductive, based on experience, are amortized to the full cost pool over an average holding period.

In countries where the existence of proved reserves has not yet been determined, unevaluated property costs remain capitalized in unproved property cost centers until proved reserves have been established, exploration activities cease or impairment and reduction in value occurs. If exploration activities result in the establishment of a proved reserve base, amounts in the unproved property cost center are reclassified as proved properties and become subject to amortization and the application of the ceiling test. When it is determined that the value of unproved property costs have been permanently diminished (in part or in

Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)

whole) based on the impairment evaluation and future exploration plans, the unproved property cost centers related to the area of interest are impaired, and accumulated costs charged against earnings.

Other Property and Equipment

Other oil and gas assets, computer equipment and furniture and fixtures are recorded at cost, less accumulated depreciation. The assets are depreciated using the straight-line method over their estimated useful lives of two to five years.

Capitalized Interest

We capitalize interest on expenditures for significant exploration and development projects while activities are in progress to bring the assets to their intended use. Capitalized interest is calculated by multiplying our weighted-average interest rate on debt by the amount of qualifying costs and is limited to gross interest expense. As costs are transferred to the full cost pool, the associated capitalized interest is also transferred to the full cost pool.

Marketable Securities

The marketable securities reflected in these financial statements are deemed by management to be “available-for-sale” and, accordingly, are reported at fair value, with unrealized gains and losses reported in other comprehensive income and reflected as a separate component within the Statement of Stockholders’ Equity unless we determine that an other-than-temporary impairment has occurred. Realized gains and losses on securities available-for-sale are included in other income/expense and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income. Gains and losses on the sale of available-for-sale securities are determined using the specific-identification method.

At December 31, 2006, we determined that our investment in equity securities were subject to an other-than-temporary impairment. Therefore, we recorded an impairment of $1.8 million for 2006 as we impaired the value of the equity securities to the fair market value of the securities, based on the quoted market price of the securities at December 31, 2006.

Goodwill and Intangible Assets

Goodwill represents the excess of the purchase price over the estimated fair value of the assets acquired and liabilities assumed in an acquisition. Intangible assets represent the purchase price allocation to the assembled workforce as a result of the acquisition in 2004. We assess the carrying amount of goodwill and other indefinite-lived intangible assets by testing the asset for impairment annually at year-end, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test requires allocating goodwill and all other assets and liabilities to reporting units. The fair value of each reporting unit is determined and compared to the book value of the reporting unit. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.

Dismantlement, Restoration and Environmental Costs

We recognize liabilities for asset retirement obligations associated with tangible long-lived assets, such as producing well sites, offshore production platforms, and natural gas processing plants, with a

Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)

corresponding increase in the related long-lived asset. The asset retirement cost is depreciated along with the property and equipment in the full cost pool. The asset retirement obligation is recorded at fair value and accretion expense, recognized over the life of the property, increases the liability to its expected settlement value. If the fair value of the estimated asset retirement obligation changes, an adjustment is recorded for both the asset retirement obligation and the asset retirement cost.

Revenue Recognition

We use the entitlements method to account for sales of gas production. We may receive more or less than our entitled share of production. Under the entitlements method, if we receive more than our entitled share of production, the imbalance is treated as a liability at the market price at the time the imbalance occurred. If we receive less than our entitled share, the imbalance is recorded as an asset at the lower of the current market price or the market price at the time the imbalance occurred. Oil revenues are recognized when production is sold to a purchaser at a fixed or determinable price, when delivery has occurred, title has transferred and collectibility of the revenue is probable.

Significant Customers

Our oil sales are to a limited number of customers, each of which accounts for more than 10% of revenue: Chevron North Sea Ltd; Shell U.K. Limited, and Esso Exploration and Production. Our gas and natural gas liquids sales are to StatoilHydro, Shell UK Limited and Esso Exploration and Production UK Limited.

Derivative Instruments and Hedging Activities

From time to time, we may utilize derivative financial instruments to hedge cash flows from operations or to hedge the fair value of financial instruments. We may use derivative financial instruments with respect to a portion of our oil and gas production or a portion of our variable rate debt to achieve a more predictable cash flow by reducing our exposure to price fluctuations. These transactions are likely to be swaps, collars or options and to be entered into with major financial institutions or commodities trading institutions. Derivative financial instruments are intended to reduce our exposure to declines in the market prices of crude oil and natural gas that we produce and sell, to increases in interest rates and to manage cash flows in support of our annual capital expenditure budget. We also have two embedded derivatives related to our debt instruments.

We record all derivatives at fair market value in our Consolidated Balance Sheets at the end of each period. The accounting for the fair market value, and the changes from period to period, depends on the intended use of the derivative and the resulting designation. This evaluation is determined at each derivative’s inception and begins with the decision to account for the derivative as a hedge, if applicable. The accounting for changes in the fair value of a derivative instrument that is not accounted for as a hedge is included in other (income) expense as an unrealized gain or loss. Where we intend to account for a derivative as a hedge, we document, at its inception, the hedging relationship, the risk management objective and the strategy for undertaking the hedge. The documentation includes the identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged, and the method that will be used to assess effectiveness of derivative instruments that receive hedge accounting treatment.

Changes in fair value to hedge instruments, to the extent the hedge is effective, are recognized in other comprehensive income until the forecasted transaction occurs. Hedge effectiveness is assessed at least

Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)

quarterly based on total changes in the derivative’s fair value. Any ineffective portion of the derivative instrument’s change in fair value is recognized immediately in other (income) expense.

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

Concentrations of Credit and Market Risk

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash deposits at financial institutions. At various times during the year, we may exceed the federally insured limits. To mitigate this risk, we place our cash deposits only with high credit quality institutions. Management believes the risk of loss is minimal.

Derivative financial instruments that hedge the price of oil and gas, interest rates or currency exposure will be generally executed with major financial or commodities trading institutions which expose us to market and credit risks, and may at times be concentrated with certain counterparties or groups of counterparties. Although notional amounts are used to express the volume of these contracts, the amounts potentially subject to credit risk, in the event of non-performance by the counterparties, are substantially smaller. We review the credit ratings of our counterparties to derivative contracts (who are all lenders under our senior bank facility) on a regular basis and to date we have not experienced any non-performance by any of our counterparties, currently BNP Paribas S.A. and J. Aron & Company, a subsidiary of Goldman Sachs International. At December 31, 2008, our derivative instruments do not require either side to maintain collateral or margin accounts.

As an independent oil and gas producer, our revenue, profitability and future rate of growth are substantially dependent upon prevailing prices for oil and gas, which are dependent upon numerous factors beyond our control, such as economic, political and regulatory developments and competition from other sources of energy. The energy markets have historically been very volatile, and there can be no assurance that oil and gas prices will not be subject to wide fluctuations in the future. A substantial or extended decline in oil and gas prices could have a material adverse effect on our financial position, results of operations, cash flows and our access to capital and on the quantities of oil and gas reserves that may be economically produced.

Foreign Currency Translation

The U.S. dollar is the functional currency for all of our existing operations, as a majority of all revenue and financing transactions in these operations are denominated in U.S. dollars. For foreign operations with the U.S. dollar as the functional currency, monetary assets and liabilities are remeasured into U.S. dollars at the exchange rate on the balance sheet date. Nonmonetary assets and liabilities are translated into U.S. dollars at historical exchange rates. Income and expense items are translated at exchange rates prevailing during each period. Adjustments are recognized currently as a component of foreign currency gain or loss and deferred income taxes. To the extent that business transactions are not denominated in U.S. dollars, we are exposed to foreign currency exchange rate risk.

Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)

Income Taxes

We use the liability method of accounting for income taxes under which deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as part of the provision for income taxes in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of, or all of, the deferred tax assets will not be realized.

Share-Based Payments

We recognize all share-based payments to employees, including grants of employee stock options, based on their fair values. The share-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as general and administrative expense over the employee’s requisite service period (generally the vesting period of the equity award). We apply the fair value method in accounting for stock option grants using the Black-Scholes Method.

It is our policy to use authorized but unissued shares of stock when stock options are exercised. At December 31, 2008, we had approximately 7.7 million additional shares available for issuance pursuant to our existing stock incentive plan.

Adoption of Accounting for Uncertainty in Income Taxes

In July 2006, the Financial Accounting Standards Board issued a new interpretation that seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. This new interpretation also provides guidance on classification, derecognition, interest, penalties and accounting in interim periods and also requires expanded disclosure with respect to the uncertainty in income taxes. The interpretation was effective for us as of January 1, 2007. Our adoption of this standard on January 1, 2007 did not have a material effect on our financial statements. We recognize interest and/or penalties related to income tax matters in income tax expense.

Adoption of Fair Value Standards

On January 1, 2008, we applied the new standard that permits entities to choose to measure many financial instruments and certain other items at fair value. This standard expanded the use of fair value measurement and applied to entities that elect the fair value option. The adoption of this pronouncement did not have a material impact on our financial position or results of operations.

On January 1, 2008, we applied the new standards which defined fair value, established a framework for measuring fair value in generally accepted accounting principles and expanded disclosures about fair value measurements. The new standards does not require new fair value measurements, rather, its provisions apply when fair value measurements are performed under other accounting pronouncements.

In February 2008, the standard was deferred for one year as it applies to nonfinancial assets and liabilities that are recognized or disclosed at fair value on a nonrecurring basis (e.g. those measured at fair value in a

Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)

business combination and goodwill impairment). We are reviewing the potential impact, if any, of this new guidance.

Recent Accounting Pronouncements

In December 2007, the FASB issued enhanced guidance related to the measurement of identifiable assets acquired, liabilities assumed and disclosure of information related to business combinations and their effect. The standard applies prospectively to business combinations in 2009 and is not subject to early adoption. We are currently evaluating the potential impact of this new guidance on business combinations and related valuations.

In December 2007, the FASB issued a new standard for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as a component of consolidated equity. This is a change from the current practice to present noncontrolling interests in liabilities or between liabilities and stockholders’ equity. Similarly, the new standard requires consolidated net income and comprehensive income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interests. The standard is effective prospectively with respect to transactions involving noncontrolling financial interests that occur on or after January 1, 2009. We are currently evaluating the potential impact, if any, of this new guidance.

In March 2008, the FASB issued a new standard that requires entities to present expanded and detailed financial statement disclosures for their derivatives and hedged financial instruments. This standard applies to all derivatives and non-derivative instruments designated and qualifying as hedges, including bifurcated derivative instruments and related hedged items. The new standard is effective for interim periods and fiscal years beginning after November 15, 2008. We do not expect the adoption of this pronouncement to have a material impact on our financial position or results of operations.

In May 2008, the FASB posted a new staff position that applies to convertible debt that may be settled in part or in whole in cash upon conversion. The new staff position requires required issuers of this form of debt to account for its debt and equity components separately. The new position also expands the definition of convertible preferred shares of an entity’s stock that are mandatorily redeemable financial instruments classified as liabilities. The new FASB staff position is effective for financial statements issued for fiscal years after December 15, 2008 and interim period within those fiscal years. It must be applied retroactively to all presented periods. We are currently evaluating the potential impact, if any, of this new guidance.

In June 2008, the FASB issued a new staff position that addresses whether instruments that are granted in share-based payment transactions are participating securities prior to vesting; and therefore are required to be included in the earnings allocation in the calculation of earnings per share (EPS) under the two-class method as described in a prior FASB standard. The new staff position requires entities to treat unvested share-based payment awards with non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating EPS. The new staff position is effective for fiscal years beginning after December 15, 2008. We are currently evaluating the potential impact, if any, of this new guidance.

Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)

Note 3 – Earnings per Share

Basic loss per common share is computed by dividing net loss to common stockholders by the weighted average number of common shares outstanding for the period. Diluted loss per share includes the effect of our outstanding stock options, warrants and shares issuable pursuant to convertible debt, convertible preferred stock and certain stock incentive plans under the treasury stock method, if including such instruments is dilutive.

		December 31,
		2008				2007				2006
Net income (loss) to common stockholders
Basic		$	45,681			$	(60,315	)		$	(8,829	)
Add Effect of:
Preferred dividends			10,625				—				—
Diluted		$	56,306			$	(60,315	)		$	(8,829	)
Weighted Average Number of Common Shares Outstanding:
Basic			128,312				123,118				86,636
Add Effect of:
							—				—
Preferred stock			50,000				—				—
Diluted			178,312				123,118				86,636

For each of the periods presented, shares associated with stock options, warrants, convertible debt, convertible preferred stock and certain stock incentive plans are not included because their inclusion would be antidilutive (i.e., reduce the net loss per share). The common shares potentially issuable arising from these instruments, which were outstanding during the periods presented in the financial statements, consisted of:

		December 31,
		2008				2007				2006
Options and stock-based compensation			2				—				626
Warrants			—				—				219
Convertible debt			32,725				16,185				16,185
Convertible preferred stock			—				50,000				8,356
Common shares potentially issuable			32,727				66,185				25,386

Note 4 – Acquisitions and Dispositions

Acquisition of Talisman Expro Limited

On November 1, 2006, we completed the acquisition of all of the outstanding shares of Talisman Expro Limited for US $366 million, after purchase price adjustments and expenses (the “Talisman

Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)

Acquisition”). As a result of the Talisman Acquisition, we acquired interests in eight fields in the United Kingdom sector of the North Sea.

The following is an allocation of the purchase price of the Talisman Acquisition:

Purchase price		$	359,594
Legal, accounting and other direct expenses			6,051
Total purchase price		$	365,645
Allocation of purchase price:
Current assets		$	30,373
Property and equipment			209,534
Goodwill			254,147
Current liabilities			(14,345	)
Deferred tax liability			(89,175	)
Other long-term liabilities			(24,889	)
		$	365,645

The purchase price allocation is based on an assessment of the fair value of the assets acquired and liabilities assumed in the Talisman Acquisition. The assessment of the fair values of oil and gas properties acquired was based on projections of expected future net cash flows, discounted to present value. Other assets and liabilities were recorded at their historical book values which we believe represent the best current estimate of fair value.

The following is a reconciliation of the changes in goodwill for the year ended December 31, 2008 and 2007:

		December 31,
		2008				2007
Balance at beginning of year		$	283,324			$	291,752
Acquisition			1,225				(8,428	)
Balance at end of year		$	284,549			$	283,324

$68.0 million in goodwill has been allocated to our discontinued operations. See Footnote 23.

Purchase of Interest in Enoch Field

During the second quarter of 2006, we invested $12 million for the purchase of an eight percent interest in the Enoch Field located in Block 16/13a in the North Sea.

Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)

Note 5 – Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following:

		December 31,
		2008				2007
Current deferred tax asset		$	—			$	30,167
Fair market value of commodity derivatives – current			31,649				4,018
Prepaid insurance			1,322				1,255
Inventory			5,109				1,426
Current tax receivable			—				4,083
Other			4,114				925
		$	42,194			$	41,874

Note 6 – Property and Equipment

Property and equipment included the following:

		December 31,
		2008				2007
Oil and gas properties under the full cost method:
Subject to amortization		$	239,024			$	244,906
Not subject to amortization:
Acquired in 2008			37,288				—
Acquired in 2007			14,746				23,366
Acquired in 2006			70,368				90,177
Acquired prior to 2006			12,154				16,013
			373,580				374,462
Other oil and gas activities			4,875				4,875
Computers, furniture and fixtures			3,236				2,027
Total property and equipment			381,691				381,364
Accumulated depreciation, depletion and amortization			(149,345	)			(108,040	)
Net property and equipment		$	232,346			$	273,324

The majority of costs not subject to amortization relate to values assigned to unproved reserves acquired. The remainder of costs not subject to amortization relate to exploration costs such as drilling costs for projects awaiting approved development plan or the determination of whether or not proved reserves can be assigned and other seismic and geological and geophysical costs. These costs are transferred to the amortization base when it is determined whether or not proved reserves can be assigned to such properties. This analysis is dependent upon well performance, results of infield drilling, approval of development plans, drilling results and development of identified projects and periodic assessment of reserves. We expect acquisition costs excluded from amortization to be transferred to the amortization base over the next five years due to a combination of well performance and results of infield drilling

Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)

relating to currently producing assets and the drilling and development of identified projects acquired, such as the Rochelle field. We expect exploration costs not subject to amortization to be transferred to the amortization base over the next three years as development plans are completed and production commences on existing discoveries such as the Columbus, Cygnus and Rochelle projects.

The following is a summary of our oil and gas properties not subject to amortization as of December 31, 2008:

		Costs Incurred in the Year Ended December 31,
		2008				2007				2006				Prior to 2006				Total
Acquisition costs		$	803			$	—			$	48,816			$	—			$	49,619
Exploration costs			32,645				11,319				21,552				12,152				77,668
Capitalized interest			3,840				3,427				—				—				7,267
Total oil and gas properties not subject to amortization		$	37,288			$	14,746			$	70,368			$	12,152			$	134,554

During 2008, 2007 and 2006, we capitalized $8.0 million, $7.2 million and $9.3 million, respectively, in certain directly related employee costs. During 2008, 2007 and 2006, we capitalized $4.0 million, $6.4 million and $0.5 million, respectively, in interest.

Note 7 – Other Assets

Other long-term assets consisted of the following at December 31:

		2008				2007
Intangible assets – workforce in place:
Gross		$	4,800			$	4,800
Accumulated amortization			(3,363	)			(2,806	)
			1,437				1,994
Debt issuance costs			5,714				6,857
Fair market value of long-term portion of commodity derivatives			1,702				1,957
Other			312				221
		$	9,165			$	11,029

Intangible assets represent the purchase price allocated to the assembled workforce as a result an acquisition. During 2006, one of our co-chief executive officers became chairman of the board, president and chief executive officer. Concurrently, our other co-chief executive officer became vice chairman of the board and ceased being our employee although he continued in a consultancy role during 2007. As a result, we assessed the carrying amount of the intangible asset related to our workforce-in-place and determined an impairment of $1.2 million, included in DD&A expense, was necessary. The remaining value of the intangible asset is being amortized over its estimated life of six years using the straight-line method. Estimated amortization expense is $0.6 million for each year through December 31, 2010.

Debt issuance costs are amortized over the life of the related debt obligation.

Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)

Note 8 – Accrued Expenses

We had the following accrued expenses outstanding:

		December 31,
		2008				2007
Derivative liability		$	1,193			$	22,495
Foreign taxes payable			6,655				5,249
Deferred foreign taxes payable			15,825				—
Accrued interest			30				4,751
Preferred dividends			1,011				828
Accrued compensation			2,135				754
Crude oil imbalance			8,954				—
Other			839				6,766
		$	36,642			$	40,843

Note 9 – Debt and Notes Payable

Our debt and notes payable consisted of the following:

		December 31,
		2008				2007
Senior notes, 6% fixed rate, due 2012		$	81,250			$	81,250
Senior bank facility, variable rate, due 2011			113,000				110,000
Convertible bonds, due 2014			44,496				—
Second lien term loan, variable rate, due 2011			—				75,000
			238,746				266,250
Less: debt discount			(10,891	)			—
Less: current maturities			(13,000	)			—
Long-term debt		$	214,855			$	266,250

Principal maturities of debt at December 31, 2008 are as follows:

2009		$	13,000
2010			—
2011			100,000
2012			125,746
2013			—
Thereafter			—

6% Senior notes, due 2012

During 2005, we issued in a private offering $81.25 million aggregate principal amount of convertible senior notes due 2012. The notes bear interest at a rate of 6.00% per annum, payable in January and July. The notes are convertible into shares of our common stock at an initial conversion rate of 199.2032 shares

Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)

of common stock per $1,000 principal amount of notes, subject to adjustment, which represents an initial conversion price of approximately $5.02 per share. In connection with the issuance of these notes, we paid $3.6 million in financing and other costs. Upon specified change of control events, each holder of those notes may require us to purchase all or a portion of the holder’s notes at a price equal to 100% of the principal amount, plus accrued and unpaid interest, if any, up to but excluding the date of purchase.

Senior bank facility

As part of the financing for the Talisman Acquisition during the fourth quarter of 2006, we entered into a $225 million senior bank facility, subject to a borrowing base limitation. The borrowing base is subject to redetermination every six months with an independent reserve report required every 12 months. At December 31, 2008, the borrowing base capacity was $126 million, of which $113 million was outstanding. The senior bank facility also provides for issuances of letters of credit of up to an aggregate $60 million. While all letters of credit issued under the senior bank facility will reduce the total amount available for drawing under the senior bank facility, letters of credit issued to secure abandonment liabilities in respect of borrowing base assets will not reduce the amount available under the borrowing base. As of December 31, 2008, we have $30.1 million of outstanding letters of credit related to abandonment liabilities on certain of our oil and gas properties.

Indebtedness under the facility will be secured by cross guarantees from all of our subsidiaries, share pledges from all of our subsidiaries, floating charges over the operating assets held in the United Kingdom and a receivables pledge in Norway. Our borrowings under the senior bank facility will bear interest at LIBOR plus 1.3% for the first $112 million of availability, and LIBOR plus 1.7% for up to an additional $14 million of availability.

The senior bank facility contains customary covenants, which limit our ability to incur indebtedness, pledge our assets, dispose of our assets and make exploration and appraisal expenditures. In addition, the senior bank facility contains various financial and technical covenants, including:

•

a maximum consolidated debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratio of 3.0:1;

•

a minimum current assets to current liabilities ratio of 1.1:1;

•

a minimum debt coverage ratio of 1.2:1 for the initial tranche and 1.15:1 for the second tranche;

•

a minimum field life net present value (“NPV”) to loans outstanding coverage ratio of 1.4:1 for the period through March 31, 2009 and 1.5:1 thereafter for the initial tranche, and 1.25:1 for the period through March 31, 2009 and 1.3:1 thereafter for the second tranche; and

•

a minimum loan life NPV to loans outstanding coverage ratio of 1.2:1 for the period through March 31, 2009 and 1.3:1 thereafter for the initial tranche, and 1.15:1 for the period through March 31, 2009 and 1.2:1 thereafter for the second tranche.

The final maturity is the earlier of five years or the reserve tail date, being the date when the remaining borrowing base reserves are projected to be 20% or less of the initially approved borrowing base reserves. The senior bank facility is subject to mandatory prepayment in the event of a change of control of any obligor under the senior bank facility agreement. It is prepayable at our option at any time without penalty.

At December 31, 2008, we had $113 million outstanding under our senior bank facility. The senior bank facility has a current borrowing base capacity of $126 million, which is secured by our oil and gas assets. The borrowing base is subject to redetermination every six months (on April 1 and October 1), and we are

Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)

required to provide our lenders with an independent reserve report every 12 months. Based on our reserve report at December 31 and June 30 each year, commodity prices set by our lenders and terms set forth in the credit agreement, the maximum capacity of our borrowing base is set, and any amounts outstanding over the redetermined borrowing base must be repaid within 45 days of the redetermination date. The senior bank facility is also subject to maximum commitment levels by the participating lenders that change over time.

We have reflected $13 million in current maturities of long-term debt at December 31, 2008 due to the borrowing base capacity and maximum commitment levels. The next scheduled redetermination of our borrowing base will occur on April 1, 2009. We are currently undergoing the redetermination process based on our reserve report as of December 31, 2008. We cannot estimate the level of the borrowing base capacity that will be in effect as of April 1, 2009 although we do expect the borrowing base capacity to decrease given the decline in commodity prices during 2008.

Second lien term loan

As part of the financing for the Talisman Acquisition during the fourth quarter of 2006, we entered into a $75 million second lien term loan. In January 2008, we terminated our obligations under this loan and repaid all of our outstanding indebtedness, including accrued interest and related fees.

Convertible Bonds

In January 2008, we issued 11.5% Convertible Bonds due 2014 (the “Convertible Bonds”) for gross proceeds of $40 million pursuant to a private offering to a sophisticated investor in Norway. The net proceeds from the issuance of the Convertible Bonds was used to repay a portion of our outstanding indebtedness. The $40 million Convertible Bonds bear interest at a rate of 11.5% per annum, compounded quarterly, and are unconditionally guaranteed by us on a senior unsecured basis. Interest is compounded quarterly and added to the outstanding principal balance each quarter. Interest is not payable in cash, but is instead payable in kind upon maturity of the bonds. The bonds are convertible into shares of our common stock at an initial conversion price of $2.36 per $1,000 of principal. The conversion price will be adjusted in accordance with the terms of the bonds upon occurrence of certain events, including payment of common stock dividends, common stock splits or issuance of common stock at a price below the then current market price.

Upon the fourth anniversary, the holders have the right to redeem the Convertible Bonds if the weighted average closing price of our common stock for the preceding 30 days is less than the conversion price, as adjusted. If the holders do not exercise this right, the right will lapse and the conversion price will be reset to the then current market price of our common stock if such price is lower than the conversion price, as adjusted.

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

Two derivatives are associated with the conversion and change in control features of the Convertible Bonds. At December 31, 2008, the combined fair market value of these derivatives is $14.6 million, reflecting a $0.7 million decrease during 2008 that was recorded in unrealized gains (losses) on derivatives.

Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)

Note 10 – Income Taxes

The loss before income taxes and the components of the income tax expense recognized on the Consolidated Statement of Income are as follows:

														Total				Discontinued
														Continuing				Operations -
		UK				U.S.				Other				Operations				Norway				Total
Year Ended December 31, 2008
Net income (loss) before taxes		$	66,129			$	(11,969	)		$	(4,185	)		$	49,975			$	63,244			$	113,219
Current tax expense			11,158				—				10				11,168				27,879				39,047
Deferred tax expense			22,673				—				303				22,976				15,415				38,391
Foreign currency gains on deferred tax liabilities			(10,028	)			—								(10,028	)			(10,681	)			(20,709	)
Total tax expense			23,803				—				313				24,116				32,613				56,729
Net income (loss) after taxes		$	42,326			$	(11,969	)		$	(4,498	)		$	25,859			$	30,631			$	56,490
Year Ended December 31, 2007
Net income (loss) before taxes		$	(68,704	)		$	(10,233	)		$	6,584			$	(72,353	)		$	14,095			$	(58,258	)
Current tax (benefit) expense			2,898				(3	)			289				3,184				562				3,746
Deferred tax (benefit) expense			(27,430	)			—				711				(26,719	)			8,951				(17,768	)
Foreign currency losses on deferred tax liabilities			1,327				—				—				1,327				3,514				4,841
Total tax (benefit) expense			(23,205	)			(3	)			1,000				(22,208	)			13,027				(9,181	)
Net income (loss) after taxes		$	(45,499	)		$	(10,230	)		$	5,584			$	(50,145	)		$	1,068			$	(49,077	)

Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)

														Total				Discontinued
														Continuing				Operations -
		UK				U.S.				Other				Operations				Norway				Total
Year Ended December 31, 2006
Net income (loss) before taxes		$	33,275			$	(23,463	)		$	13			$	9,825			$	7,250			$	17,075
Current tax (benefit) expense			1,837				(45	)			69				1,861				9,014				10,875
Deferred tax (benefit) expense			10,105				—				—				10,105				(1,840	)			8,265
Foreign currency losses on deferred tax liabilities			2,904				—				—				2,904				1,869				4,773
Total tax (benefit) expense			14,846				(45	)			69				14,870				9,043				23,913
Net income (loss) after taxes		$	18,429			$	(23,418	)		$	(56	)		$	(5,045	)		$	(1,793	)		$	(6,838	)

The following table presents the principal reasons for the difference between our effective tax rates and the United States federal statutory income tax rate of 35%.

		Year Ended December 31,
		2008				2007				2006
Federal income tax expense (benefit) at statutory rate		$	17,491			$	(25,323	)		$	3,439
Taxation of foreign operations			12,464				(1,790	)			6,292
Change in valuation allowance – US			4,150				3,515				8,286
Change in valuation allowance – UK			—				—				(6,013	)
Foreign currency (gain)/loss on deferred taxes			(10,028	)			1,328				2,904
Other			39				62				(38	)
Income Tax Expense, continuing operations		$	24,116			$	(22,208	)		$	14,870
Discontinued operations - Norway			32,613				13,027				9,043
Total Income Tax Expense			56,729				(9,181	)			23,913
Effective Income Tax Rate			45	%			(32	)%			117	%

During 2008, 2007 and 2006, we incurred taxes in all of the jurisdictions that we do business in except for the U.S. In 2008, 2007 and 2006, we had a loss before taxes of $8.3 million, $6.9 million and $20.6 million, respectively, in the U.S. and we did not record any income tax benefits as there was no assurance that we could generate any U.S. taxable earnings, and therefore recorded a valuation allowance of the full amount of deferred tax asset generated.

Deferred income taxes result from the net tax effects of temporary timing differences between the carrying amounts of assets and liabilities reflected on the financial statements and the amounts recognized for income tax purposes. The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities are as follows at December 31:

Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)

		2008				2007
Deferred tax asset:
Deferred compensation		$	5,771			$	6,834
Unrealized loss on derivative instruments			4,506				27,292
Asset retirement obligation			5,244				13,808
Net operating loss and capital loss carryforward			21,633				37,820
Other			621				1,767
Total deferred tax assets			37,775				87,521
Less valuation allowance			(23,701	)			(19,697	)
Total deferred tax assets after valuation allowance			14,074				67,824
Deferred tax liability:
Property, plant and equipment			(67,810	)			(133,367	)
Unrealized gain on derivative instruments			(23,628	)			—
Petroleum revenue tax, net of tax benefit			(1,642	)			(5,133	)
Debt discount			(3,267	)			—
Other			(850	)			(711	)
Total deferred tax liabilities			(97,197	)			(139,211	)
Net deferred tax liability		$	(83,123	)		$	(71,387	)

During 2006, we recognized a deferred tax liability of approximately $98 million due to the excess of book over tax basis of the assets acquired in the Enoch and Talisman acquisitions.

At December 31, 2008, we had the following carryforwards available to reduce future income taxes:

		Years of				Carryforward
Types of Carryforward		Expiration				Amounts
Continuing Operations - U.S. – Net operating loss			2022 - 2028			$	61,613
Discontinued Operations - Norway – Uplift		Indefinite				$	2,700

With the exception of $61.6 million of net operating loss carryforward attributable to our U.S. operations for which a valuation allowance has been established, the remaining carryforward amounts shown above have been recognized for financial statement reporting purposes to reduce deferred tax liability.

For U.S. federal income tax purposes, certain limitations are imposed on an entity’s ability to utilize its NOLs in future periods if a change of control, as defined for federal income tax purposes, has taken place. In general terms, the limitation on utilization of NOLs and other tax attributes during any one year is determined by the value of an acquired entity at the date of the change of control multiplied by the then-existing long-term, tax-exempt interest rate. The manner of determining an acquired entity’s value has not yet been addressed by the Internal Revenue Service. We have determined that, for federal income tax purposes, a change of control occurred during 2004. However, we do not believe such limitations will significantly impact our ability to utilize the NOL; rather our ability to generate future taxable income will have such an impact.

Recognition of the benefits of the deferred tax assets will require that we generate future taxable income. There can be no assurance that we will generate any earnings or any specific level of earnings in future years. Therefore, we have established a valuation allowance for deferred tax assets of approximately $23.7 million, $19.7 million and $17.3 million of December 31, 2008, 2007 and 2006, respectively.

Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)

During 2008, the valuation allowance in the U.S. increased $2.9 million due to net operating losses and increased $1.1 million for net operating losses in other jurisdictions. During 2007, the valuation allowance in the U.S. increased $2.4 million due to net operating losses and adjustments. During 2006, the valuation allowance decreased $6.0 million when our UK operations commenced and decreased an additional $11.1 million as a result of the deferred tax liabilities established in the purchase of Enoch and Talisman. The valuation allowance also increased $7.3 due to net operating losses in the U.S.

Effective January 1, 2007, we adopted the new guidance on uncertainty in income taxes. We determined there was no cumulative effect on our financial statements relating to this adoption.

At December 2007, we provided for a liability of $1.7 million for unrecognized tax benefits relating to various U.K. matters. The statute of limitations for assessing tax for these benefits expired during 2008, thus allowing the full recognition of these benefits. The benefit was recorded as a reduction to goodwill.

The following represents a reconciliation of the changes in our unrecognized tax benefits, included in “Accrued Expenses and Other” on the balance sheet, for the year ended December 31, 2008:

Balance at January 1, 2008		$	1,727
Increase (Decrease) in unrecognized tax benefits from current period tax positions			(1,727	)
Balance at December 31, 2008		$	—

As of December 31, 2008, we believe that no current tax positions that have resulted in unrecognized tax benefits will significantly increase or decrease within the next year.

Note 11 – Other Liabilities

Other liabilities included the following:

		December 31,
		2008				2007
Asset retirement obligations		$	38,776			$	30,790
Long-term derivative liabilities			17,015				31,201
		$	55,791			$	61,991

Our asset retirement obligations relate to obligation of the plugging and abandonment of oil and gas properties. The asset retirement obligation is recorded at fair value and accretion expense, recognized over the life of the property, increases the liability to its expected settlement value. If the fair value of the estimated asset retirement obligation changes, an adjustment is recorded for both the asset retirement obligation and the asset retirement cost. The following table provides a rollforward of the asset retirement obligations for the year ended December 31, 2008 and 2007:

Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)

		December 31,
		2008				2007
Carrying amount of asset retirement obligations as of beginning of year		$	30,790			$	26,284
Increase (decrease) due to revised estimates of asset retirement obligations			13,840				1,621
Accretion expense			2,795				2,764
Impact of foreign currency exchange rate changes			(8,649	)			121
Carrying amount of asset retirement obligations as of end of year		$	38,776			$	30,790

Note 12 – Equity

The activity in shares of our common and preferred stock during 2008, 2007 and 2006 included the following:

		Year Ended December 31,
		2008				2007				2006
Common Stock:
Outstanding at the beginning of the year			127,006				118,577				75,489
Issuance of common stock in the offering			—				—				39,257
Issuance of common stock to pay preferred dividends			—				6,403				—
Exercise of warrants and stock options			—				—				1,655
Other issuances			1,566				2,026				2,176
Outstanding at the end of the year			128,572				127,006				118,577
Series B Preferred Stock:
Outstanding at the end of the year			20				20				20
Convertible Preferred Stock:
Outstanding at the beginning of the year			125				125				—
Issuances of preferred stock			—				—				125
Outstanding at the end of the year			125				125				125
Treasury Stock:
Outstanding at the beginning of the year			—				—				—
Purchase of Treasury shares for stock vesting			(327	)			—				—
Outstanding at the end of the year			(327	)			—				—

Common Stock

The Common Stock is $0.001 par value common stock, 300,000,000 shares authorized.

In 2008, we issued inducement grants of 300,000 shares of Endeavour restricted common stock, and options to purchase 250,000 shares of our common stock at an exercise price of $0.75 per share upon commencement of employment of one executive officer. In 2007, we issued inducement grants of 800,000 shares of Endeavour restricted common stock, options to purchase 400,000 shares of our common stock at an exercise price of $2.00 per share and options to purchase 200,000 shares of our

Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)

common stock at an exercise price of $1.14 per share upon commencement of employment of two executive officers.

As part of the financing for the Talisman Acquisition during the fourth quarter of 2006, we issued 37.8 million shares of common stock at $2.35 per share. After expenses, proceeds from the offering were $84 million.

Convertible Preferred Stock

As part of the financing for the Talisman Acquisition during the fourth quarter of 2006, we issued $125 million of Series A Convertible Preferred Stock to a group of private institutional investors. In December 2006, our stockholders approved the conversion of the Series A Convertible Preferred Stock into the Series C Convertible Preferred Stock (the “Convertible Preferred Stock”). The Series A Convertible Preferred Stock and the Series C Convertible Preferred Stock are substantially similar in terms, except that the Series C Convertible Preferred Stock includes a “full-ratchet” antidilution protection provision, which would result in a favorable adjustment (in the number of shares of common stock issuable on conversion and the conversion price) for the holders of Convertible Preferred Stock in the event we were to issue shares of common stock at a price below the conversion price. The Convertible Preferred Stock ranks senior to any of our other existing or future shares of capital stock.

The Convertible Preferred Stock is fully convertible into common stock at any time at the option of the preferred stock investors, at (i) a conversion price of $2.50 (the “Conversion Price”) and (ii) in an amount of common stock equal to the quotient of the liquidation preference of $1,000 per share plus accrued but unpaid dividends (the “Liquidation Preference”) divided by the Conversion Price.

Dividends are payable in cash, or common stock if we are unable to pay such dividends in cash, and any dividends will be paid to the preferred stock investors prior to payment of any other dividend on any other shares of our capital stock. We will pay a cumulative dividend on the Convertible Preferred Stock equal to 8.5% per annum of the original issue price (compounded quarterly) if paid in cash and 8.92% per annum of the original issue price (compounded quarterly) if paid in stock (the “Original Dividend Rate”). The Convertible Preferred Stock also participates on an as-converted basis with respect to any dividends paid on the common stock.

Issuance of dividends in the form of common stock are subject to the following equity conditions (the “Equity Conditions”), which are waivable by two-thirds of the holders of the Convertible Preferred Stock: (i) such common stock is listed on the NYSE Alternext US LLC, the New York Stock Exchange or the Nasdaq Stock Market, and not subject to any trading suspension; (ii) we are not then subject to any bankruptcy event; and (iii) such common stock will be immediately re-saleable by the preferred stock investors pursuant to an effective registration statement and otherwise in compliance with all applicable laws. If we have not maintained the effectiveness of the registration statement pursuant to the Registration rights section below, then the dividend rate on the Convertible Preferred Stock will be increased by the product of 2.5% (if the dividend is paid in cash) or 2.63% (if the dividend is paid in stock) times the number of quarters (or portions thereof) in which the failure occurs or we fail to cure such failure.

After the fourth anniversary of the initial issuance of the Convertible Preferred Stock, we may redeem all of the Convertible Preferred Stock in exchange for a cash payment to the preferred stock investors of an amount equal to 102% of the sum of the Liquidation Preference. If we call the Convertible Preferred Stock for redemption, the holders thereof will have the right to convert their shares into a newly issued

Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)

preferred stock identical in all respects to the Convertible Preferred Stock except that such newly issued preferred stock will not bear a dividend (the “Alternate Preferred Stock”). We may not redeem the Convertible Preferred Stock if the Equity Conditions are not then satisfied with respect to the common stock into which the Alternate Preferred Stock is convertible.

Upon the tenth anniversary of the initial issuance of the Convertible Preferred Stock, we must redeem all of the Convertible Preferred Stock for an amount equal to the Liquidation Preference plus accrued and unpaid dividends payable by us in cash or common stock at our election. Issuance by us of common stock for such redemption is subject to the Equity Conditions and to the market value of the outstanding shares of common stock immediately prior to such redemption equaling at least $500 million.

In the event of a change of control of Endeavour, we will be required to offer to redeem all of the Convertible Preferred Stock for the greater of: (i) the amount equal to which such holder would be entitled to receive had the holder converted such Convertible Preferred Stock into common stock; (ii) 115% of the sum of the Liquidation Preference plus accrued and unpaid dividends; and (iii) the amount resulting in an internal rate of return to such holder of 15% from the date of issuance of such Convertible Preferred Stock through the date that Endeavour pays the redemption price for such shares.

Series B Preferred Stock

In September 2002, we authorized and designated 500,000 shares of Preferred Stock, as Series B Preferred Stock par value $.001 per share.

The Series B Preferred Stock is to pay dividends of 8% of the original issuing price per share per annum, which are cumulative prior to any dividends on the common stock and on parity with the payment of any dividend or other distribution on any other series of preferred stock that has similar characteristics. The holders of each share of Series B Preferred Stock are entitled to be paid out of available funds prior to any distributions to holders of common stock in the amount of $100.00 per outstanding share plus all accrued dividends. We may, upon approval of our Board, redeem all or a portion of the outstanding shares of Series B preferred stock at a cost of the liquidation preference and all accrued and unpaid dividends.

      

Note 13 – Stock-Based Compensation Arrangements

We grant restricted stock and stock options, including notional restricted stock and options, to employees and directors as incentive compensation. The notional restricted stock and options may be settled in cash or stock upon vesting, at our option, however it has been our practice to settle in stock. The restricted stock and options generally vest over three years and the options have a five to ten year expiration. The vesting of these shares and options is dependent upon the continued service of the grantees to Endeavour. Upon the occurrence of a change in control, each share of restricted stock and stock option outstanding on the date on which the change in control occurs will immediately become vested.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. For the years 2007 and 2006, expected volatility is based on an average of our peer companies where there is a lack of relevant Endeavour volatility information for the length of the expected term and the expected term is the average of the vesting date and the expiration of the option. For 2008, expected volatility is based on historical Endeavour volatility for the length of the expected term, which was determined by historical data. We use historical data to estimate option exercises and employee terminations within the valuation model. The risk-free rate for periods within the contractual

Endeavour International Corporation
Notes to Consolidated Financial Statements
(Amounts in thousands, except per unit data)

life of the option is based on the U.S. treasury yield curve in effect at the time of grant. We do not include an estimated dividend yield since we have not paid dividends on our common stock historically.

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

		2008				2007				2006
Risk free rate			3.1	%			4.4	%			4.4	%
Expected years until exercise			4				4				4
Expected stock volatility			46	%			45	%			38	%
Dividend yield			—				—				—

At December 31, 2008, total compensation cost related to nonvested awards not yet recognized was approximately $4.1 million and is expected to be recognized over a weighted average period of less than two years. For the year ended December 31, 2008, we included approximately $0.8 million of stock-based compensation in capitalized G&A in property and equipment.

Stock Options

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

						Weighted				Weighted
						Average				Average
						Exercise				Contractual				Aggregate
		Number of				Price per				Life in				Intrinsic
		Shares				Share				Years				Value
Balance outstanding – December 31, 2007			5,367			$	2.92
Granted			1,455				1.21
Exercised			—				—
Forfeited			406				3.07
Expired			1,610				3.04
Balance outstanding – December 31, 2008			4,807				2.35				3.47			$	10
Currently exercisable – December 31, 2008			2,454				2.92				0.97			$	—

The weighted average grant-date fair value of options granted during 2008, 2007 and 2006 was $0.50, $0.40 and $1.20, respectively.

Of options granted during 2008, 2007 and 2006, 1.2 million, 0.1 million and 1.0 million options, respectively, were granted pursuant to incentive plans which have been approved by our stockholders. All other stock options have been granted pursuant to stock option plans that were not subject to stockholder approval.