Edgar Filing: HARKEN ENERGY CORP

Amendment No.3 to Form 10-K for the Year Ended December 31, 2004

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

(Amendment No. 3)

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-10262

HARKEN ENERGY CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		95-2841597
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

180 State Street, Suite 200 Southlake, Texas		76092
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (817) 424-2424

Securities registered pursuant to Section 12(b) of the Act:


Title of each class:		Name of each exchange on which registered:
Common Stock, Par Value $0.01 Per Share		American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K/A or any amendment to this Form 10-K/A . ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þNo ¨.

The aggregate market value of the voting Common Stock, par value $0.01 per share, held by non affiliates of the Registrant as of June 30, 2004 was approximately $75 million. For purposes of the determination of the above stated amount only, all directors, executive officers and 5% or more stockholders of the Registrant are presumed to be affiliates.

The number of shares of Common Stock, par value $0.01 per share, outstanding as of March 9, 2005 was 221,661,672.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Annual Report on Form 10-K/A incorporates by reference portions of the Registrant’s definitive proxy statement, to be filed with the Securities and Exchange Commission not later than 120 days after the close of its fiscal year.

EXPLANATORY NOTE

This Amendment No. 3 to the Annual Report on Form 10-K/A is being filed for the purpose of amending the following items of the Annual Report:

(i)

Item 8 (Financial Statements and Supplementary Data, Footnote 20 “Oil and Gas Disclosures”)

(ii)

Item 9A (Controls and Procedures); and

(iii)

the principal executive officer and principal financial officer certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and the certifications by the principal executive officer and principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Harken previously filed Amendment No. 1 of Form 10-K/A on April 5, 2005 to include restated consolidated financial statements for the year ended December 31, 2004 and the three months ended September 30, 2004 to correctly account for the July 2004 modification of the employee share option plan of Global Energy Development PLC, Harken’s 85%-owned subsidiary.

Harken filed Amendment No. 2 of Form 10-K/A on April 13, 2005 to include management’s annual report on internal control over financial reporting required by Item 308(a) of Regulation S-K and the related attestation report of Harken’s registered public accounting firm required by Item 308 (b) of Regulation S-K.

In order to preserve the nature and character of the disclosures as of March 16, 2005, except as specifically discussed in this Amendment No. 3 to the Annual Report on Form 10-K/A, no attempt has been made in this amendment to modify or update such disclosures for events which occurred subsequent to the original filing on March 16, 2005. This Amendment No.3 to the Annual Report on Form 10-K/A does not otherwise alter the disclosures set forth in the Amendment No. 1 and Amendment No. 2 of the Annual Report for the year ended December 31, 2004.

TABLE OF CONTENTS


		Page
PART II.

ITEM 8.	Financial Statements and Supplementary Data	4

ITEM 9A.	Controls and Procedures	64

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following financial statements appear on pages 8 through 64 in this Annual Report.


		Page
Reports of Independent Registered Public Accounting Firms		5

Consolidated Balance Sheets — December 31, 2003 and 2004		8

Consolidated Statements of Operations — Years ended December 31, 2002, 2003 and 2004		9

Consolidated Statements of Stockholders’ Equity — Years ended December 31, 2002, 2003 and 2004		10

Consolidated Statements of Cash Flows — Years ended December 31, 2002, 2003 and 2004		11

Notes to Consolidated Financial Statements		12

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIR M

To the Stockholders and Board of Directors of Harken Energy Corporation:

We have audited the accompanying consolidated statements of operations, stockholders’ equity and cash flows of Harken Energy Corporation for year ended December 31, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with 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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of Harken Energy Corporation’s operations and its cash flows for the year ended December 31, 2002 in conformity with U.S. generally accepted accounting principles.

ERNST & YOUNG LLP

Houston, Texas

March 26, 2003

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors of Harken Energy Corporation:

We have audited the accompanying consolidated balance sheet of Harken Energy Corporation as of December 31, 2003, and the related consolidated statements of operations, stockholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Harken Energy Corporation at December 31, 2003, and the consolidated results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 5 to the consolidated financial statements, effective January 1, 2003, Harken Energy Corporation changed its method of accounting for asset retirement obligations.

BDO SEIDMAN, LLP

Houston, Texas

March 25, 2004

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors of Harken Energy Corporation:

We have audited the accompanying consolidated balance sheet of Harken Energy Corporation as of December 31, 2004, and the related consolidated statements of operations, stockholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Harken Energy Corporation at December 31, 2004, and the consolidated results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

As explained in Note 22 to the financial statements, the Company has restated its financial statements to give effect for variable plan accounting for the third quarter 2004 modification of the Global Energy Development PLC share option plan.

HEIN & ASSOCIATES LLP

Dallas, Texas

March 4, 2005

(except with respect to

the matter discussed in

Note 22, as to which

the date is April 1, 2005.)

HARKEN ENERGY CORPORATIO N

CONSOLIDATED BALANCE SHEETS


	December 31,
	2003			2004
				(restated)
ASSETS
Current Assets:
Cash and temporary investments	$	12,173,000		$	28,632,000
Accounts receivable, net of allowance for uncollectible accounts of $229,000 for 2003 and 2004, respectively		2,307,000			6,305,000
Prepaid expenses and other current assets		1,160,000			1,068,000
Investment in securities		1,209,000			—

Total Current Assets		16,849,000			36,005,000
Property and Equipment:
Oil and gas properties, using the full cost method of accounting:
Evaluated		342,082,000			359,703,000
Unevaluated		3,112,000			2,142,000
Facilities and other property		25,913,000			26,620,000
Less accumulated depreciation and amortization		(308,273,000	)		(318,982,000	)

Total Property and Equipment, net		62,834,000			69,483,000
Other Assets, net		1,329,000			1,993,000

	$	81,012,000		$	107,481,000

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Trade payables	$	963,000		$	4,648,000
Accrued liabilities and other		5,166,000			5,798,000
Revenues and royalties payable		1,166,000			2,047,000
Convertible notes payable		1,667,000			1,667,000

Total Current Liabilities		8,962,000			14,160,000
Convertible notes payable		3,673,000			6,911,000
Share based compensation liability		—			6,120,000
Senior secured notes		2,020,000			—
Accrued preferred stock dividends		3,239,000			—
Asset retirement obligation		6,305,000			5,954,000
Other long-term obligations		651,000			14,858,000
Minority interest in consolidated subsidiary		3,401,000			2,896,000

Total Liabilities		28,251,000			50,899,000
Commitments and contingencies (Note 21)
Temporary Equity:
Series J Preferred Stock, $1.00 par value; $0 and $5,000,000 liquidation value, respectively; 65,000 shares authorized; 0 and 50,000 shares outstanding respectively		—			4,675,000
Series L Preferred Stock, $1.00 par value; $0 and $1,000,000 liquidation value, respectively; 65,000 shares authorized; 0 and 10,000 shares outstanding respectively		—			805,000
Stockholders’ Equity:
Series G1 Preferred Stock, $1.00 par value; $32,531,000 and $1,393,000 liquidation value, respectively; 700,000 shares authorized; 325,312 and 13,925 shares outstanding, respectively		325,000			14,000
Series G2 Preferred Stock, $1.00 par value; $6,165,000 and $250,000 liquidation value, respectively; 100,000 shares authorized; 61,650 and 2,500 shares outstanding respectively		62,000			2,000
Series G3 Preferred Stock, $1.00 par value; $7,670,000 and $0 liquidation value, respectively; 150,000 shares authorized; 76,700 and 0 shares outstanding, respectively		77,000			—
Series G4 Preferred Stock, $1.00 par value; $0 and $7,752,000 liquidation value, repectively; 150,000 shares authorized, 0 and 77,517 shares outstanding, respectively		—			78,000
Series M Preferred Stock, $1.00 par value; $0 and $5,000,000 liquidation value, repectively; 50,000 shares authorized; 0 and 50,000 shares outstanding respectively		—			50,000
Common stock, $0.01 par value; 325,000,000 shares authorized; 185,405,471 and 219,615,485 shares issued, respectively		1,854,000			2,196,000
Additional paid-in capital		432,027,000			450,473,000
Accumulated deficit		(380,872,000	)		(399,280,000	)
Accumulated other comprehensive income		740,000			119,000
Treasury stock, at cost 605,700 and 2,605,700 shares held, respectively		(1,452,000	)		(2,550,000	)

Total Stockholders’ Equity		52,761,000			51,102,000

	$	81,012,000		$	107,481,000

The accompanying Notes to Consolidated Financial Statements

are an integral part of these Statements.

HARKEN ENERGY CORPORATIO N

CONSOLIDATED STATEMENTS OF OPERATIONS


	Year Ended December 31,
	2002			2003			2004
							(restated)
Revenues and other:
Oil and gas operations	$	24,989,000		$	27,309,000		$	29,308,000
Interest and other income		366,000			(19,000	)		434,000

		25,355,000			27,290,000			29,742,000

Costs and Expenses:
Oil and gas operating expenses		9,331,000			9,469,000			7,964,000
General and administrative expenses, net		10,298,000			9,210,000			9,222,000
Share-based compensation expense		—			—			5,866,000
Depreciation and amortization		11,510,000			8,941,000			10,713,000
Full cost valuation allowance		521,000			—			—
Provision for asset impairments		400,000			—			—
Increase in Global warrant liability		—			7,000			14,207,000
Litigation and contingent liability settlements, net		1,288,000			1,125,000			—
Accretion expense		335,000			460,000			388,000
Interest expense and other, net		4,533,000			3,394,000			414,000

		38,216,000			32,606,000			48,774,000

Gains from exchanges and extinguishments of debt		3,528,000			5,525,000			155,000
(Loss)/gain on investment		(499,000	)		(488,000	)		990,000

Loss before income taxes	$	(9,832,000	)	$	(279,000	)	$	(17,887,000	)
Income tax (expense)/benefit		(237,000	)		184,000			(579,000	)

Loss before cumulative effect of change in accounting principle and minority interest	$	(10,069,000	)	$	(95,000	)	$	(18,466,000	)
Minority interest of subsidiary		262,000			(89,000	)		572,000

Loss before cumulative effect of change in accounting principle	$	(9,807,000	)	$	(184,000	)	$	(17,894,000	)
Cumulative effect of change in accounting principle		—			(813,000	)		—

Net loss	$	(9,807,000	)	$	(997,000	)	$	(17,894,000	)

Accrual of dividends related to preferred stock		(4,110,000	)		(3,676,000	)		(2,884,000	)
Exchange of preferred stock		—			—			(1,123,000	)
Payment of preferred stock dividends		—			6,805,000			3,492,000

Net income / (loss) attributed to common stock	$	(13,917,000	)	$	2,132,000		$	(18,409,000	)

Basic net income /(loss) per common share:
Income / (loss) per common share before cumulative effect of change in accounting principle	$	(0.64	)	$	0.03		$	(0.09	)
Cumulative effect of change in accounting principle		—			(0.01	)		—

Income / (loss) per common share	$	(0.64	)	$	0.02		$	(0.09	)

Weighted average shares outstanding		21,742,163			112,694,654			201,702,235

Diluted income / (loss) per common share:
Income / (loss) per common share before cumulative effect of change in accounting principle	$	(0.64	)	$	(0.02	)	$	(0.09	)
Cumulative effect of change in accounting principle		—			(0.01	)		—

Loss per common share	$	(0.64	)	$	(0.03	)	$	(0.09	)

Weighted average shares outstanding		21,742,163			112,790,327			201,702,235

The accompanying Notes to Consolidated Financial Statements

are an integral part of these Statements.

HARKEN ENERGY CORPORATIO N

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


	G1 Preferred Stock			G2 Preferred Stock			G3 Preferred Stock			G4 Preferred Stock		M Preferred Stock		Common Stock		Additional Paid-In Capital			Treasury Stock			Accumulated Deficit			Accumulated Other Comprehensive Income			Total
Balance, December 31, 2001	$	446,000		$	95,000		$	—		$	—	$	—	$	187,000	$	385,710,000		$	(1,433,000	)	$	(369,087,000	)	$	296,000		$	16,214,000
Issuance of common stock		—			—			—			—		—		27,000		2,623,000			—			—			—			2,650,000
Redemption of convertible note		—			—			—			—		—		20,000		1,091,000			—			—			—			1,111,000
Repurchase of preferred stock - related party		(6,000	)		—			—			—		—		—		45,000			—			—			—			39,000
Repurchase of preferred stock		(13,000	)		—			—			—		—		—		(53,000	)		—			—			—			(66,000	)
Conversions of preferred stock		(24,000	)		(2,000	)		—			—		—		3,000		463,000			—			—			—			440,000
Repurchase of treasury stock		—			—			—			—		—		—		—			(19,000	)		—			—			(19,000	)
Rights offering costs		—			—			—			—		—		17,000		555,000			—			—			—			572,000
Preferred stock dividends		—			—			—			—		—		—		—			—			(4,110,000	)		—			(4,110,000	)
Issuance of stock of subisidiary		—			—			—			—		—		—		(1,731,000	)		—			—			—			(1,731,000	)
Comprehensive income:
Net change in derivative fair value		—			—			—			—		—		—		—			—			—			(72,000	)
Reclassification of derivative fair value into earnings		—			—			—			—		—		—		—			—			—			(90,000	)
Net loss		—			—			—			—		—		—		—			—			(9,807,000	)		—
Total comprehensive loss																													(9,969,000	)

Balance, December 31, 2002	$	403,000		$	93,000		$	—		$	—	$	—	$	254,000	$	388,703,000		$	(1,452,000	)	$	(383,004,000	)	$	134,000		$	5,131,000
Issuance of common stock, net of offering costs		—			—			—			—		—		729,000		8,226,000			—			—			—			8,955,000
Conversion/redemption of convertible notes		(17,000	)		—			—			—		—		817,000		28,727,000			—			—			—			29,527,000
Issuance of preferred stock		(32,000	)		—			93,000			—		—		—		5,883,000			—			—			—			5,944,000
Repurchase of preferred stock - related party		(5,000	)		—			—			—		—		—		(43,000	)		—			—			—			(48,000	)
Conversions of preferred stock		(24,000	)		(31,000	)		(16,000	)		—		—		45,000		321,000			—			—			—			295,000
Payment of preferred stock dividends		—			—			—			—		—		9,000		210,000			—			6,805,000			—			7,024,000
Accrual of preferred stock dividends		—			—			—			—		—		—		—			—			(3,676,000	)		—			(3,676,000	)
Comprehensive income:
Unrealized holding gain on available for sale investment		—			—			—			—		—		—		—			—			—			606,000
Net loss		—			—			—			—		—		—		—			—			(997,000	)		—
Total comprehensive loss		—			—			—			—		—		—		—			—			—			—			(391,000	)

Balance, December 31, 2003	$	325,000		$	62,000		$	77,000			—		—	$	1,854,000	$	432,027,000		$	(1,452,000	)	$	(380,872,000	)	$	740,000		$	52,761,000
Issuance of common stock, net of offering costs		—			—			—			—		—		36,000		3,189,000			—			—			—			3,225,000
Issuance of common stock to repay debt		—			—			—			—		—		19,000		1,072,000			—			—			—			1,091,000
Conversion/redemption of convertible notes		—			—			—			—		—		7,000		311,000			—			—			—			318,000
Issuance of preferred stock and common stock warrants		—			—			—			—		50,000		—		7,355,000			—			(1,885,000	)		—			5,520,000
Conversions of preferred stock to common stock		(310,000	)		(37,000	)		(77,000	)		—		—		273,000		4,210,000			—			(289,000	)		—			3,770,000
Conversions of preferred stock to preferred stock		(1,000	)		(23,000	)		—			78,000		—		—		1,851,000			—			338,000			—			2,243,000
Payment of preferred stock dividends		—			—			—			—		—		7,000		611,000			—			4,206,000			—			4,824,000
Accrual of preferred stock dividends		—			—			—			—		—		—		—			—			(2,884,000	)		—			(2,884,000	)
Issuance of stock of subisidiary		—			—			—			—		—		—		(153,000	)		—			—			—			(153,000	)
Repurchase of treasury stock		—			—			—			—		—		—		—			(1,098,000	)		—			—			(1,098,000	)
Comprehensive income:
Reclassification of holding gain on available for sale investment into earnings		—			—			—			—		—		—		—			—			—			(606,000	)
Reclassification of derivative fair value into earnings		—			—			—			—		—		—		—			—			—			(15,000	)
Net loss (restated)		—			—			—			—		—		—		—			—			(17,894,000	)		—
Total comprehensive loss (restated)		—			—			—			—		—		—		—			—			—			—			(18,515,000	)

Balance, December 31, 2004 (restated)	$	14,000		$	2,000		$	—		$	78,000	$	50,000	$	2,196,000	$	450,473,000		$	(2,550,000	)	$	(399,280,000	)	$	119,000		$	51,102,000

The accompanying Notes to Consolidated Financial Statements

are an integral part of these Statements.

HARKEN ENERGY CORPORATIO N

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Year Ended December 31,
	2002			2003			2004
							(restated)
Cash flows from operating activities:
Net loss	$	(9,807,000	)	$	(997,000	)	$	(17,894,000	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		11,510,000			8,941,000			10,713,000
Full cost valuation allowance		521,000			—			—
Provision for asset impairments		400,000			—			—
Accretion of asset retirement obligation		—			460,000			388,000
Share-based compensation		—			—			5,866,000
Standby purchase agreement costs		300,000			—			—
(Gain)/loss on investment		499,000			488,000			(990,000	)
Amortization of issuance and finance costs		862,000			1,641,000			162,000
Gains from repurchases/exchanges of Convertible Notes		(3,528,000	)		(5,525,000	)		(155,000	)
Increase in Global warrant liability		—			7,000			14,207,000
Minority interest		(262,000	)		89,000			(572,000	)
Litigation and contingent liability settlements, net		1,288,000			1,125,000			—
Cumulative effect of change in accounting principle		—			813,000			—
Change in assets and liabilities:
(Increase) decrease in accounts receivable		(522,000	)		835,000			(3,998,000	)
Decrease (increase) in trade payables and other		(2,680,000	)		(1,643,000	)		4,651,000

Net cash provided by (used in) operating activities		(1,419,000	)		6,234,000			12,378,000

Cash flows from investing activities:
Proceeds from sales of assets		2,835,000			7,315,000			(23,000	)
Capital expenditures, net		(4,951,000	)		(7,947,000	)		(17,767,000	)
Sale of investment		—			—			1,592,000

Net cash used in investing activities		(2,116,000	)		(632,000	)		(16,198,000	)

Cash flows from financing activities:
Proceeds from issuances of long-term debt, net of issuance costs		4,889,000			4,791,000			4,893,000
Proceeds from issuances of common stock, net of issuance costs		921,000			4,319,000			3,225,000
Repayments of debt, convertible notes and long-term obligations		(6,363,000	)		(17,702,000	)		(2,489,000	)
Proceeds from issuance of preferred stock, net of issuance costs		—			5,847,000			16,144,000
Payments of preferred dividends		—			—			(396,000	)
Proceeds from issuances of European Notes, net of issuance costs		2,327,000			2,997,000			—
Purchase of preferred stock		(366,000	)		(58,000	)		—
Treasury shares purchased		(19,000	)		—			(1,098,000	)

Net cash provided by financing activities		1,389,000			194,000			20,279,000

Net (decrease)/increase in cash and temporary investments		(2,146,000	)		5,796,000			16,459,000
Cash and temporary investments at beginning of year		8,523,000			6,377,000			12,173,000

Cash and temporary investments at end of year	$	6,377,000		$	12,173,000		$	28,632,000

The accompanying Notes to Consolidated Financial Statements

are an integral part of these Statements.

HARKEN ENERGY CORPORATIO N

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Harken is engaged in oil and gas exploration, development and production operations both domestically and internationally through its various subsidiaries. The majority of Harken’s domestic operations presently include oil and gas exploration, development and production operations in the onshore and offshore Gulf Coast regions of South Texas and Louisiana. Harken’s international operations during the year ended December 31, 2004 included three exclusive Colombian Association Contracts with Ecopetrol, two Exploration and Production Contracts with the newly formed National Hydrocarbons Agency of the Republic of Colombia and Technical Evaluation Agreements covering acreage in Peru and Panama. In September 2004, Harken invested in a start-up energy company which was formed to engage in trading gas futures contracts, principally in Hungary as well as in the United States.

Principles of Consolidation and Presentation — The Consolidated Financial Statements include the accounts of Harken Energy Corporation (a Delaware corporation) and all of its wholly-owned and majority-owned subsidiaries and variable interest entity (“Harken”) after elimination of significant intercompany balances and transactions.

The Consolidated Financial Statements as of December 31, 2004 and the year then ended have been restated to give effect for variable plan accounting for the third quarter 2004 modification of the Global Energy Development PLC share option plan. See Note 22 - Restatement of Financial Statements for further discussion.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Certain prior year amounts have been reclassified to conform with the 2004 presentation.

Statement of Cash Flows — For purposes of the Consolidated Statements of Cash Flows, Harken considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Harken paid cash for interest in the amounts of $2,888,000, $1,769,000 and $219,000 during 2002, 2003 and 2004, respectively. All significant non-cash investing and financing activities are discussed in Notes 2, 11 and 13 – Mergers, Acquisitions and Dispositions, Convertible Notes Payable and Stockholders’ Equity.

Concentrations of Credit Risk — Although Harken’s cash and temporary investments, commodity derivative instruments and accounts receivable are exposed to potential credit loss, Harken does not believe such risk to be significant. Cash and temporary investments includes investments in high-grade, short-term securities, placed with highly rated financial institutions. Most of Harken’s accounts receivable are from a broad and diverse group of industry partners, many of which are major oil and gas companies and do not in total represent a significant credit risk.

Allowance for Doubtful Accounts —Accounts receivable are customer obligations due under normal trade terms. Harken sells its oil and gas production to companies involved in the transportation and refining of oil and natural gas. Harken performs continuing credit evaluations of its customers’ financial condition and although Harken generally does not require collateral, letters of credit may be required from its customers in certain circumstances.

Senior management reviews accounts receivable to determine if any receivables will potentially be uncollectible. Harken includes any accounts receivable balances that are determined to be uncollectible, along with a general reserve, in the overall allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Based on the information available, Harken believes the allowance for doubtful accounts as of December 31, 2004 is adequate. However, actual write-offs might exceed the recorded allowance.

Property and Equipment — Harken follows the full cost accounting method to account for the costs incurred in the acquisition, exploration, exploitation, development and production of oil and gas reserves. Other property is depreciated on the straight-line method over their estimated useful lives ranging from four to twenty years. Production facilities are depreciated on a units-of-production method.

In accordance with the full cost accounting method for oil and gas properties, Harken reflected valuation allowances during the year ended December 31, 2002 related to the amount of net capitalized costs of evaluated oil and gas properties in excess of the present value of Harken’s oil and gas reserves. See Note 5 – Oil and Gas Properties for further discussion.

Other Assets — Harken includes in other assets certain issuance costs associated with its debt instruments, as well as the cost of oilfield material and equipment inventory, and prepaid drilling costs. At December 31, 2003, other assets included deferred issuance costs of $252,000, net of $23,000 of accumulated amortization, $545,000 of oilfield material and equipment inventory and $449,000 of prepaid drilling costs. At December 31, 2004, other assets included debt issuance costs of $398,000, net of $89,000 of accumulated amortization, $473,000 of oilfield material and equipment inventory and $1,010,000 of prepaid drilling costs and other. Debt issuance costs are amortized over the term of the associated debt instrument.

Middle American Operations — Harken’s Middle American operations are all conducted through its ownership in Global Energy Development PLC (“Global”) (a public limited company registered in England and Wales under the Companies Act (1985) of the United Kingdom) and include oil and gas exploration and development efforts in Colombia, Peru and Panama pursuant to certain Association Contracts, Exploration and Production Contracts, and Technical Evaluation Agreements. See further discussion in Note 7 – Middle American Operations. Global accounts for its Middle America activities using the United States dollar as the functional currency as significant exploration expenditures have typically been denominated in U.S. dollars. See further discussion at Notes 5 and 20 — Oil and Gas Properties and Oil and Gas Disclosures.

Capitalization of Interest — Harken capitalizes interest on certain oil and gas exploration and development costs which are classified as unevaluated costs, or which have not yet begun production. During 2002, Harken recorded interest expense of $3,856,000, net of $114,000 of interest which was capitalized to Harken’s oil and gas properties. During 2003, Harken recorded interest expense of $3,312,000, net of $103,000 of interest which was capitalized to Harken’s oil and gas properties. During 2004, Harken recorded interest expense of $402,000, net of $82,000 of interest which was capitalized to Harken’s oil and gas properties.

General and Administrative Expenses — Harken reflects general and administrative expenses net of operator overhead charges and other amounts billed to joint interest owners. General and administrative expenses are net of $238,000, $241,000 and $238,000 for such amounts during 2002, 2003 and 2004, respectively.

Provision for Asset Impairments — Assets that are used in Harken’s operations, and are not held for resale, are carried at cost, less any accumulated depreciation and amortization. Harken reviews its long-lived assets, other than its investment in oil and gas properties, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When evidence indicates that operations will not produce sufficient cash flows to cover the carrying amount of the related asset, and when the carrying amount of the related asset cannot be realized through sale, a permanent impairment is recorded and the asset value is written down to fair value.

During 2002, Global reflected an impairment of $400,000 based on continued declines in the market on certain Colombia oilfield equipment consisting primarily of casing and tubing materials held by Global. Based on the low industry demand for such equipment in light of heightened Colombia security concerns, the carrying value of such inventory was in excess of estimated future cash flows from sale or use of such equipment as estimated using third party quotations.

Revenue Recognition – Harken uses the sales method of accounting for natural gas and crude oil revenues. Under this method, revenues are recognized based on actual volumes of oil and gas sold to purchasers. The volumes sold may differ from the volumes to which Harken is entitled based on its interests in the properties. These differences create imbalances that are recognized as a liability only when the estimated remaining reserves will not be sufficient to enable the underproduced owner to recoup its entitled share through production. There are no significant balancing arrangements or obligations related to Harken’s operations.

Commodity Derivative Financial Instruments — Harken has entered into certain commodity derivative instruments to mitigate commodity price risk associated with a portion of its natural gas and crude oil production and cash flows. Harken accounts for its derivatives in accordance with Statement of Financial Accounting Standard No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (SFAS 133) which requires recognition of all derivatives as assets or liabilities at fair value. For derivatives designated as hedges of forecasted cash flows, Harken records the effective portion of the gain or loss on the derivative as a component of Other Comprehensive Income and reclassifies those amounts to earnings in the period the hedged cash flow affects earnings. Harken records in earnings any gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item. For option derivative contracts, Harken excludes the time value component from the assessment of hedge effectiveness. For derivative instruments not designated as hedging instruments, Harken records the change in fair value of the derivative instrument to earnings in Interest Income in the Consolidated Statement of Operations. For further discussion, see Note 17 – Derivative Instruments.

Stock Options – Harken applies APB Opinion 25, “Accounting for Stock Issued to Employees,” and related interpretations (“APB 25”) in accounting for all stock option plans of Harken and its consolidated subsidiaries. In accordance with APB 25, compensation cost for nonqualifying stock option plans is determined based on the difference between the option exercise price and the stock price of the underlying common stock at the date of grant or the date the number of underlying shares and the strike price is known (the “intrinsic method”). Compensation expense, if any, is recognized in earnings over the vesting period of the option. All

of Harken’s option grants have been for a fixed number of options with the strike price determined on the date of grant. Such plans are generally referred to as fixed plans.

Historically, all of Harken’s stock option plans were fixed plans and no stock-based compensation cost was recognized in the consolidated statements of operations because the option exercise price was equal to or exceeded the market price of the underlying common stock on the date of grant.

In July 2004, the board of directors of Global modified the Global share option plan to allow for the cashless exercise of options granted to employees under the plan. The modification requires variable plan accounting for all option grants under the Global Share option plan from the date of the modification until all options granted under the plan have been exercised, forfeited or expire. Variable plan accounting is applicable to all outstanding options as of the date of the modification and all subsequent option grants under the Global share plan. Under variable plan accounting, compensation costs are determined under the intrinsic method at the date of grant or the date of the modification and recognized in earnings over the vesting period (or remaining vesting period for a modification). Compensation expense for vested options is recognized in earnings immediately as of the date of the modification. Additionally, if the underlying stock price is greater than the option exercise price, variable plan accounting requires compensation expense (or benefit) to be recognized for subsequent changes in the underlying stock price. During 2004, Harken recognized approximately $5.9 million of Share-Based Compensation Expense relating to the variable Global share plan in the consolidated statement of operations.

See Note 14 for further discussion of Harken’s and Global’s stock-based employee compensation.

SFAS No. 123, “Accounting for Stock-Based Compensation,” (SFAS 123) requires Harken to provide pro forma information regarding net income (loss) as if the compensation cost for Harken’s stock option plans had been determined in accordance with the fair value based method prescribed in SFAS 123. To provide the required pro forma information, Harken estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing mode with the following weighted-average assumptions for the year ended December 31, 2004: risk-free interest rate of 3.5%; dividend yield of 0%; volatility factors of the expected market price of Global common stock of 28.93%; and a weighted-average expected life of the options of 10 years. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. All of the pro-forma information for the year ended December 31, 2004 reflects the effects of Global’s employee stock-based compensation plans under the fair value method of SFAS 123.

The following table represents the pro forma effect on net income (loss) and income (loss) per share as if Harken and Global had applied the fair value based method and recognition provisions of SFAS 123 to stock-based employee compensation. For further discussion of Harken’s and Global’s stock options, see Note 14 – Stock Option Plan.


	Year Ended December 31,
	2002			2003			2004
	(in thousands, except for per share data)
Net income / (loss) attributed to common stock, as reported	$	(13,917	)	$	2,132		$	(18,409	)
Add: Total share-based employee compensation recognized under intrinsic value based method for all amounts		—			—			5,866
Less: Related minority interest and foreign currency loss		—			—			(642	)
Deduct: Total stock-based employee compensation determined under fair value based method for all amounts		(1,547	)		(353	)		(369	)

Pro forma net income / (loss) attributed to common stock	$	(15,464	)	$	1,779		$	(13,554	)
Basic net income / (loss) per share, as reported	$	(0.64	)	$	0.02		$	(0.09	)
Pro forma basic income / (loss) per share	$	(0.71	)	$	0.02		$	(0.07	)
Diluted net income / (loss) per share, as reported	$	(0.64	)	$	(0.03	)	$	(0.09	)
Pro forma diluted income / (loss) per share	$	(0.71	)	$	(0.03	)	$	(0.07	)

Sales of Oil and Gas Properties – Harken accounts for sales of oil and gas properties as adjustments of capitalized costs to the full cost pool, with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas attributable to the full cost pool.

Accounting for Payment of Series G1 Preferred, Series G2 Preferred and Series G4 Preferred Stock Dividend Liability in Common Shares – Harken accounts for the payment of the Series G1, Series G2 and Series G4 Preferred stock dividends with shares of Harken common stock as a debt extinguishment in accordance with Accounting Principles Board Opinion No. 26, “Extinguishment of Debt” (APB 26). Accordingly, the difference between the carrying value of the Series G1 and Series G2 preferred stock dividend liability at December 31, 2002, approximately $7.4 million, and the fair market value of the shares of Harken common stock issued by Harken in payment of the liability in January 2003, approximately $227,000, is recognized as a Payment of Preferred Stock Dividends in the Consolidated Statement of Operations for the year ended December 31, 2003 as a $6.8 million increase, net of income taxes paid on behalf of the preferred shareholders, to Net Income Attributed to Common Shareholders. For further discussion of Harken’s accounting treatment for payment of Series G1, G2 and G4 Preferred stock dividends, see Note 13 – Stockholders’ Equity.

In 2004, Harken paid the Series G1, Series G2 and Series G4 preferred stock dividend liabilities accrued at December 31, 2003, June 30, 2004 and December 31, 2004 with a total of approximately 742,000 shares of Harken common stock. Accordingly, the difference between the carrying values of the preferred stock dividend liability at December 31, 2003, June 30, 2004 and December 31, 2004 of approximately $4.9 million,

and the fair market value of the shares of Harken common stock issued by Harken in payment of the liabilities in 2004, approximately $619,000, is recognized as a Payment of Preferred Stock Dividends in the Consolidated Statement of Operations for the year ended December 31, 2004 as a $4.2 million increase, net of income taxes paid on behalf of the preferred shareholders, to Net Income Attributed to Common Shareholders.

Potential Change in Ownership in Global — At December 31, 2004, Harken owned 85.35% of Global’s common stock. As more fully described in Note 8 – Global Warrants and Stock Options, Harken’s ownership in Global may be reduced under certain circumstances. The following Global warrants and options are outstanding:


Warrants to purchase Global shares held by Harken (50 UK pence)	7,000,000	(a)
Warrants to purchase Global shares (Minority-owned) (60 UK pence)	500,061	(a)
Warrants to purchase Global shares (Harken-owned) (60 UK pence)	6,487,481	(b)
Global employee stock options (50 UK pence)	3,243,000
Global employee stock options (151 UK pence)	780,000

(a)

As required under SFAS 133, Harken is required to record the warrants issued to Lyford Investment Enterprises Ltd. (“Lyford”) and the minority shareholders (collectively referred to as “Global Warrants held by Outside Parties”) as a liability at fair value with any changes in fair value reflected in earnings each period. At December 31, 2003 and 2004, these warrants were recorded as a liability of $651,000 and $15 million in the Consolidated Balance Sheets. These warrants will expire in August and October 2005.

(b)

As part of Global’s issuance of warrants to its shareholders in August 2002, Global issued to Harken warrants to purchase 6,487,481 of Global shares at 60 UK pence per share. Since Global is a consolidated subsidiary, the warrant issuance is not reflected in the consolidated financial statements. The estimated fair market value of these warrants at December 31, 2003 and 2004 was approximately $16,000 and $11.8 million, as calculated by a third-party firm. These warrants will expire in August 2005.

If all Global warrants and stock options, as listed above, were exercised, Harken’s ownership in Global’s ordinary common shares could decrease from 85.35% to 59.96%. As mentioned above, Harken has accounted for Global Warrants held by Outside Parties as a derivative in accordance with SFAS 133, and accordingly has reflected the fair value of the warrants as a liability in the Consolidated Balance Sheet at December 31, 2003 and 2004. Such liability is reflected at the fair value of the derivative, based on the underlying market price of Global common stock, and the corresponding gain or loss related to the change in derivative fair value is reflected in earnings. Harken will continue to measure the changes in the fair value of these warrants and record such changes in value through the income statement in the period in which such changes occur.

Consolidation of Variable Interest Entity – In September 2004, Harken invested $12.5 million in a start-up energy company, International Business Associates, Ltd. (“IBA”) which was formed to focus primarily on opportunities created by the recent deregulation of the energy markets in Eastern Europe. IBA will engage in trading gas futures contracts, principally in Hungary as well as in the United States. IBA’s trading operations are expected to increase in early 2005. In exchange for Harken’s $12.5 million cash investment, Harken received 12,500 shares of nonvoting preferred stock along with warrants to purchase 48% of IBA’s common stock for a nominal amount. Harken also holds 3 of 5 seats on IBA’s Board of Directors.

In accordance with Financial Accounting Standards Board Interpretations 46 (Revised December 2003) “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (FIN 46R), Harken’s investment in IBA is a variable interest. FIN 46R requires the consolidation of a variable interest entity, as defined, if a company will absorb a majority of the variable interest entity’s expected losses, receive a majority of the variable interest entity’s expected residual returns, or both. Harken has determined that the investment in IBA meets the requirements of FIN 46R, and Harken is the primary beneficiary, as defined. Therefore, Harken has consolidated the assets, liabilities and results of operations of IBA as of December 31, 2004 and for the period from September 10, the closing date of the transaction, through December 31, 2004.

Recent Accounting Pronouncements—In September 2004, the SEC released Staff Accounting Bulletin No. 106 (SAB 106) which expresses the SEC’s views regarding the application of FASB Statement No. 143, Accounting for Asset Retirement Obligations, (SFAS 143) by oil and gas producing companies following the full cost accounting method. SAB 106 addresses the calculation of ceiling tests for full-cost oil and gas companies, depreciation, depletion and amortization as affected by the adoption of SFAS 143, as well as the required related disclosures. SAB 106 had no impact on Harken’s financial position or results of operations.

On December 16, 2004, the FASB issued Statement 123 (revised 2004), “Share-Based Payment” that will require compensation costs related to share-based payment transactions (e.g., issuance of stock options and restricted stock) to be recognized in the financial statements. With limited exceptions, the amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. In addition, liability awards will be remeasured each reporting period. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. Statement 123(R) replaces SFAS 123, “Accounting for Stock-Based Compensation,” and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” For Harken, SFAS 123 (R) is effective for the first reporting period after June 15, 2005 and is applicable only to new awards or awards that have been modified, repurchased or cancelled after the effective date. Harken is currently evaluating the impact this new standard will have the Company.

On December 16, 2004, the FASB issued Statement 153, “Exchanges of Nonmonetary Assets”, an amendment of APB Opinion No. 29, to clarify the accounting for nonmonetrary exchanges of similar productive assets. SFAS 153 provides a general exception from fair value measurement for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The Statement will be applied prospectively and is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not have any nonmonetary transactions for any period presented that this Statement would apply.

(2) MERGERS, ACQUISITIONS AND DISPOSITIONS

Acquisition of Republic Properties — In January 2002, a wholly-owned subsidiary of Harken signed an agreement to acquire certain property interests (the “Republic Properties”) from Republic Resources, Inc. (“Republic”). This acquisition was closed in April 2002 following approval by Republic stockholders and debenture holders. The Republic Properties consist of interests in oil and gas wells plus interests in additional prospect acreage located in southern Louisiana and the Texas Gulf Coast region. The Republic Properties were acquired by Harken in exchange for 2,645,500 shares of Harken common stock, which was valued at $2,645,500 on the closing date, plus 79,365 shares of Harken common stock issued as a transaction fee in this acquisition. In addition, the Purchase and Sale Agreement provided for contingent additional consideration of cash or additional shares of Harken common stock, or any combination of the two as Harken may decide, to be

paid within 45 days after December 31, 2003, based on a defined calculation to measure the appreciation, if any, of the reserve value of the Republic Properties. No such consideration was required based on the reserve value of certain Republic Properties at December 31, 2003. Since Harken acquired only the oil and gas properties from Republic, the entire purchase price was allocated to the domestic full cost pool.

Sale of Certain Panhandle Oil and Gas Properties – In the fourth quarter of 2003, Harken sold the majority of its oil and gas properties located in the Panhandle region of Texas for a gross sales price of approximately $7.0 million, subject to certain adjustments. Harken considered the Panhandle assets as non-core domestic assets since the majority of Harken’s domestic reserves and productions were located along the Gulf Coast regions of Texas and Louisiana. Harken’s Gulf Coast assets are primarily natural gas. In December 2003, Harken used approximately $4 million of the Panhandle asset sales proceeds to repay all outstanding principal and interest under and terminate Harken’s credit facility with Guaranty Bank FSB.

The sale of the Panhandle oil and gas properties did not significantly alter the relationship between capitalized costs and proved reserves of oil and gas attributable to the full cost pool. No gain or loss was recognized on this transaction as the entire amount of the proceeds (including any subsequent purchase price adjustments), was recorded as a reduction to the domestic full cost pool. During the year ended December 31, 2004, Harken paid approximately $23,000 in net purchase price adjustments related to the sale of these Panhandle oil and gas properties. This amount is reflected as a reduction of proceeds from sales of assets in the Consolidated Statement of Cash Flows for the year ended December 31, 2004.

Pro Forma Information — The following unaudited pro forma combined condensed statement of operations for the year ended December 31, 2002 gives effect to the acquisition of the Republic Properties and the sale of the Panhandle oil and gas properties, as if it had been consummated at January 1, 2002. The following unaudited pro forma combined condensed statement of operations for the year ended December 31, 2003 gives effect to the sale of the Panhandle oil and gas properties as if it had been consummated at January 1, 2003. See information above for a discussion of each transaction. The above transactions were accounted for in the full cost pool, and accordingly, did not generate any gain or loss.

The unaudited pro forma data is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred had the transactions been consummated at the dates indicated, nor are they indicative of future operating results. The unaudited pro forma data does not reflect the effect of the interest income earned from proceeds from asset sales.

Pro Forma Condensed Statement of Operations

For the Year Ended December 31, 2002

(unaudited)

(in thousands, except per share amounts)


	Harken Actual			Pro Forma Adjustments			Pro Forma
Oil and gas revenue	$	24,989		$	308	(1)	$	21,720
					(3,577	)(2)
Other revenues		366			—			366

Total Revenues		25,355			(3,269	)		22,086

Oil and gas operating expenses		9,331			83	(1)		6,920
					(2,494	)(2)
General and administrative expenses, net		10,298			—			10,298
Depreciation and amortization		11,510			169	(1)		12,138
					459	(3)
Litigation and contingent liablility settlements, net		1,288			—			1,288
Full cost valuation allowance		521			—			521
Provision for asset impairments		400			—			400
Accretion expense		335			—			335
Interest expense and other, net		4,533			—			4,533

Total Expenses		38,216			(1,783	)		36,433

Gains from repurchases/exchanges of convertible notes		3,528			—			3,528

(Loss)/gain on investment		(499	)		—			(499	)

Income tax expense		237			—			237

Loss before minority interest		(10,069	)		(1,486	)		(11,555	)
Minority intrest in loss of subsidiary		262			—			262

Net loss	$	(9,807	)	$	(1,486	)	$	(11,293	)
Preferred stock dividends		(4,110	)		—			(4,110	)

Net loss attributed to common stock	$	(13,917	)	$	(1,486	)	$	(15,403	)

Basic and diluted loss per common share	$	(0.64	)					(0.69	)

Weighted average common shares outstanding		21,742,163						22,414,047

Pro Forma Adjustments - Pro Forma Condensed Statement of Operations - Year Ended December 31, 2002

(1)	Pro forma entry to adjust oil and gas revenues, operating expenses and depreciation and amortization to reflect the purchase of the Republic Properties.

(2)	Pro forma entry to adjust oil and gas revenues and operating expenses to reflect the sale of the Panhandle Properties.

(3)	Pro forma entry to reflect the increase in depreciation and amortization rate associated with the sale of the Panhandle Properties and the associated proved reserve volumes.

Pro Forma Condensed Statement of Operations

For the Year Ended December 31, 2003

(unaudited)

(in thousands, except per share amounts)


	Harken Actual			Pro Forma Adjustments			Pro Forma
Oil and gas revenue	$	27,309		$	(4,523	)(1)	$	22,786
Other revenues		(19	)		—			(19	)

Total Revenues		27,290			(4,523	)		22,767

Oil and gas operating expenses		9,469			(2,275	)(1)		7,194
General and administrative expenses, net		9,210			—			9,210
Depreciation and amortization		8,941			1,355	(2)		10,296
Increase in Global warrant liability		7			—			7
Litigation and contingent liablility settlements, net		1,125			—			1,125
Accretion expense		460			—			460
Interest expense and other, net		3,394			—			3,394

Total Expenses		32,606			(920	)		31,686

Gains from repurchases/exchanges of convertible notes		5,525			—			5,525

(Loss)/gain on investment		(488	)		—			(488	)

Income tax benefit		184			—			184

Loss before minority interest		(95	)		(3,603	)		(3,698	)
Minority interest in income of subsidiary		(89	)		—			(89	)
Cumulative effect of change in accounting principle		(813	)		—			(813	)

Net loss	$	(997	)	$	(3,603	)	$	(4,600	)
Preferred stock dividends		(3,676	)		—			(3,676	)
Payment of preferred stock dividend liability in common shares		6,805			—			6,805

Net income / (loss) attributed to common stock	$	2,132		$	(3,603	)	$	(1,471	)

Basic income / (loss) per common share	$	0.02					$	(0.01	)

Weighted average common shares outstanding		112,694,654						112,694,654

Diluted income / (loss) per common share	$	(0.03	)				$	(0.01	)

Weighted average common shares outstanding		112,790,327						112,694,654

Pro Forma Adjustments - Pro Forma Condensed Statement of Operations - Year Ended December 31, 2003

(1)	Pro forma entry to adjust oil and gas revenues and operating expenses to reflect the sale of the Panhandle Properties.

(2)	Pro forma entry to reflect the increase in depreciation and amortization rate associated with the sale of the Panhandle Properties and the associated proved reserve volumes.

(3) INVESTMENTS

Included within cash and temporary investments at December 31, 2003 and 2004 are certain investments in money market accounts. The cost of such investments totaled $11,615,000 and $9,715,000 as of December 31, 2003 and 2004, respectively, with cost equal to fair value.

On December 16, 2002, Harken exchanged 2,000,000 of its shares of common stock of Global for 1,232,742 of the redeemable ordinary common shares of New Opportunities Investment Trust PLC (“NOIT”), an investment trust organized under the laws of the United Kingdom (a public limited company admitted for trading on the Alternative Investment Market of the London Stock Exchange). This transaction reduced Harken’s ownership in Global from 92.77% to 85.62%. Harken accounted for the 1,232,742 ordinary shares of NOIT as an investment in available for sale securities in accordance with Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investment in Debt and Equity Transactions,” and reflected the fair value of the investment as an asset included as Investment in Securities at December 31, 2003. As of December 31, 2002, the fair value of the investment, based on the market price of the NOIT common stock, had declined by $499,000. Due to the fact the NOIT common stock price had declined significantly since the date of exchange and trading volume of the stock was minimal, Harken believed this decline was other than temporary. At December 31, 2002, the fair market value of the investment in NOIT was approximately $1.1 million, and the holding loss of $499,000 was recorded in Loss on Investment in Harken’s Consolidated Statement of Operations for the year ended December 31, 2002.

During the three months ended March 31, 2003, the fair value of the investment had declined an additional $488,000. Based on the continuing steep decline of the market price of the NOIT common stock, and its continued lack of trading activity, Harken believed this decline to be other than temporary, and the associated holding loss of $488,000 was included in Loss on Investment during the related period. During the later half of 2003, the market price of NOIT common stock and its trading activity began to stabilize and improve. At December 31, 2003, the fair market value of the investment in NOIT increased to approximately $1.2 million, based on the underlying market price of NOIT common stock. The unrealized holding gain of $606,000 was included as a separate component of Accumulated Other Comprehensive Income in stockholders equity in Harken’s Consolidated Balance Sheet at December 31, 2003. In February 2004, Harken sold all of its 1,232,742 ordinary shares of NOIT on the Alternative Investment Market of the London Stock Exchange for cash proceeds of approximately $1.6 million recognizing a Gain on Investment of $990,000 in the Consolidated Statement of Operations for the year ended December 31, 2004. Approximately $987,000 of the gain on sale of investment in 2004 was a recovery of Harken’s previously recognized losses in 2002 and 2003.

(4) INVESTMENT IN INTERNATIONAL BUSINESS ASSOCIATES, LTD.

In September 2004, Harken invested $12.5 million in a start-up energy company, IBA, which was formed to focus primarily on opportunities created by the recent deregulation of the energy markets in Eastern Europe. It is anticipated that IBA will engage in trading gas futures contracts, principally in Hungary as well as in the United States. IBA had minimal trading operations in 2004. In exchange for Harken’s $12.5 million cash investment, Harken received 12,500 shares of nonvoting preferred stock along with warrants to purchase 48% of IBA’s common stock for a nominal amount. No dividends will be paid on the preferred shares. Under the terms of the agreements, on or about February 15 of each year, as long as any of the preferred stock remains outstanding and if the annual net income of IBA equals or exceeds $2,000,000, the preferred shares will be redeemed by IBA in cash at the liquidation value at an amount equal to 50% of IBA’s available cash flow in the preceding calendar year. Until the preferred shares are redeemed in full, Harken has the right to nominate

the majority of the Board of Directors of IBA. Harken currently holds three of the five IBA Board of Directors positions. Harken’s preferred stock investment represents almost 100% of IBA’s initial working capital as of December 31, 2004.

In accordance with FIN 46R, Harken’s investment in IBA is a variable interest. FIN 46R requires the consolidation of a variable interest entity, as defined, if a company will absorb a majority of the variable interest entity’s expected losses, receive a majority of the variable interest entity’s expected residual returns, or both. Harken has determined that the investment in IBA meets the requirements of FIN 46R, and Harken is the primary beneficiary, as defined. Therefore, Harken has consolidated the assets, liabilities and results of operations of IBA as of December 31, 2004 and for the period from September 10, the closing date of the transaction, through December 31, 2004. IBA’s net loss included in the Consolidated Results of Operations for the period ended December 31, 2004 was approximately $1 million.

(5) OIL AND GAS PROPERTIES

Harken follows the full cost accounting method to account for the costs incurred in the acquisition, exploration, exploitation, development and production of oil and gas reserves. Under this method, all costs, including internal costs, directly related to acquisition, exploration, exploitation and development activities, are capitalized as oil and gas property costs. Harken capitalized $370,000, $272,000 and $821,000 of internal costs directly related to these activities in 2002, 2003 and 2004, respectively. Such costs include certain office and personnel costs of Harken’s international and domestic exploration field offices and do not include any corporate overhead. Harken also capitalizes costs of dismantlement, restoration and abandonment as required under FASB issued Statement No. 143, “Accounting for Asset Retirement Obligations.” See Note 6 – Asset Retirement Obligation and Note 20—Oil and Gas Disclosures for further discussion.

The capitalized costs of oil and gas properties, excluding unevaluated properties, are amortized on a country-by-country basis using a unit-of-production method (equivalent physical units of six Mcf of gas to each barrel of oil) based on estimated proved recoverable oil and gas reserves. Such amortization of U.S. domestic oil and gas properties was $1.44, $1.47 and $2.35 per equivalent Mcf produced during 2002, 2003 and 2004, respectively. Amortization of certain Colombian oil properties was $8.23, $7.56 and $7.02 per equivalent barrel of oil produced during 2002, 2003 and 2004, respectively. The evaluated costs of oil and gas properties, net of accumulated depreciation and amortization, at December 31, 2003 and 2004 include approximately $12.5 million and $18.5 million, respectively, related to Colombia. See Note 7 – Middle American Operations for a discussion of Colombian operations.

Amortization of unevaluated property costs begins when the properties become proved or their values become impaired. Harken assesses realizability of unevaluated properties on at least an annual basis or when there has been an indication that an impairment in value may have occurred, such as for a relinquishment of Global’s contract acreage. Impairment of unevaluated prospects is assessed based on management’s intention with regard to future exploration and development of individually significant properties and the ability of Harken to obtain funds to finance such exploration and development. Harken anticipates its unevaluated property costs to remain as unevaluated for no longer than three years.

Under full cost accounting rules for each cost center, capitalized costs of evaluated oil and gas properties, including asset retirement costs, less accumulated amortization and related deferred income taxes, may not exceed an amount (the “cost ceiling”) equal to the sum of (a) the present value of future net cash flows from estimated production of proved oil and gas reserves, based on current economic and operating conditions, discounted at 10%, plus (b) the cost of properties not being amortized, plus (c) the lower of cost or estimated

fair value of any unproved properties included in the costs being amortized, less (d) any income tax effects related to differences between the book and tax basis of the properties involved. If capitalized costs exceed this limit, the excess is charged to earnings.

During the fourth quarter of 2002, Harken recorded non-cash full-cost valuation allowances totaling $521,000 related to a portion of Global’s Peru and Panama unevaluated property costs. Global has no proved reserves associated with the Peru or Panama Technical Evaluation Agreements.

Given the volatility of oil and gas prices, it is reasonably possible that the estimate of discounted future net cash flows from proved oil and gas reserves could change in the near term. If oil and gas prices decline in the future, even if only for a short period of time, it is possible that additional impairments of oil and gas properties could occur. In addition, it is reasonably possible that additional impairments could occur if costs are incurred in excess of any increases in the present value of future net cash flows from proved oil and gas reserves, or if properties are sold for proceeds less than the discounted present value of the related proved oil and gas reserves.

(6) ASSET RETIREMENT OBLIGATION

Effective January 1, 2003, Harken changed its method of accounting for asset retirement obligations in accordance with SFAS 143. Prior to the effective date of SFAS 143, Harken reflected asset retirement obligations for acquired assets net of related estimated salvage values to be realized at the time of retirement. Under SFAS 143, Harken recognizes the full amount of asset retirement obligations beginning in the period in which they are incurred if a reasonable estimate of a fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The net of tax cumulative effect of the change in accounting method on prior years resulted in a charge to income of $813,000 ((.01) per share) in the first quarter of 2003.

A summary of Harken’s assets with required asset retirement obligations as of December 31, 2004 is as follows:


Asset Category	Asset Retirement Liability		Estimated Life
North American oil and gas producing properties	$	2,809,000	2-55 years
North American facilities and other property		2,428,000	12-29 years
Colombian oil producing properties		717,000	4-23 years
Colombian facilities and other property		—	—

	$	5,954,000

Harken reflects no asset retirement obligation for Global’s Colombian facilities as upon the expiration of the related Association Contract, the ownership of such facilities reverts to Empresa Colombiana de Petroleos (“Ecopetrol”).

The pro forma effects of the application of SFAS 143, as if the statement had been adopted for all periods presented, is presented below (thousands of dollars except per share information):


	2002			2003			2004
							(restated)
Net income / (loss) applicable to common stockholders	$	(13,917	)	$	2,132		$	(18,409	)
Reversal of accretion expense prior to adoption of SFAS 143		315			—			—
Accretion expense under SFAS 143		(443	)		—			—
Cumulative effect of accounting change		—			813			—

Pro forma net income / (loss)	$	(14,045	)	$	2,945		$	(18,409	)
Pro forma income / (loss) per share:
Basic	$	(0.65	)	$	0.03		$	(0.09	)
Diluted	$	(0.65	)	$	(0.02	)	$	(0.09	)

The following table describes all changes to Harken’s asset retirement obligation liability during the years ended December 31, 2003 and 2004.


	2003			2004
Asset retirement obligation at beginning of year	$	4,664,000		$	6,305,000
Liability recognized upon adoption of SFAS 143		2,138,000			—
Additions during the year		124,000			192,000
Deletions during the year		(1,081,000	)		(507,000	)
Changes in estimates		—			(424,000	)
Accretion expense		460,000			388,000

Asset retirement obligation at end of year	$	6,305,000		$	5,954,000

(7) MIDDLE AMERICAN OPERATIONS

Harken’s Middle American operations are conducted through its ownership in Global. Global’s ordinary shares are listed for trading on the Alternative Investment Market of the London Stock Exchange. At December 31, 2004, Harken owns approximately 85% of Global’s common shares, which may be subject to reduction under certain circumstances, as further described in Note 8 – Global Warrants and Stock Options.

Colombian Operations – Global’s Colombian operations are conducted through Harken de Colombia, Ltd., a wholly-owned subsidiary of Global, which holds three exclusive Colombian Association Contracts with Ecopetrol and two Exploration and Production Contracts with the newly formed National Hydrocarbons Agency of the Republic of Colombia. The Association Contracts include the Alcaravan Contract, awarded in 1992, the Bocachico Contract, awarded in 1994, and the Bolivar Contract, awarded in 1996. As of December 31, 2004, the Alcaravan Contract covers an area of approximately 24,000 acres in the Llanos Basin of Eastern Colombia, the Bocachico Contract covers approximately 54,600 acres in the Middle Magdalena Valley of Central Colombia, and the Bolivar Contract covers an area of approximately 59,000 acres in the Northern Middle Magdalena Valley of Central Colombia. As of December 31, 2004, Global was in compliance with the requirements of each of the Alcaravan, Bocachico and Bolivar Association Contracts.

In September 2004, Global signed an Exploration and Production Contract with the National Hydrocarbons Agency of the Republic of Colombia for the Rio Verde area, located in the central Llanos region. The contract assigns Global exclusive exploration and production rights to 75,000 acres located approximately 40 kilometers north of Global’s Palo Blanco complex.

Global currently owns a 100% working interest in the Rio Verde contract, and production, if any, is subject to an initial 10.5% percent royalty interest. The final size of the royalty is to be determined by future production levels. The contract duration is approximately six years for the exploration phase and 24 years for the following exploitation phase. The time period for Phase 1 of the Rio Verde contract is 20 months. Terms of the contract require Global during Phase 1 to equip for production two existing wells located on the Rio Verde acreage, the Tilodiran #1 and the Macarenas #1. Both of these wells were equipped for production in late 2004 and early 2005. Also during Phase 1 of the contract, Global is required to reprocess 300 kilometers of existing seismic and acquire 50 kilometers of new 2D seismic. The estimated cost to reprocess and acquire the seismic is approximately $600,000.

If Global elects to enter Phase 2 of the Rio Verde contract, Global must drill one exploration well and acquire a further 25 kilometers of 2D seismic. Phases 3, 4 and 5, also optional, require one exploratory well to be drilled per phase. Phases 2, 3, 4 and 5 have a time period of 12 months each.

In November 2004, Global signed a new exploration and production contract with the National Hydrocarbons Agency of the Republic of Colombia for the Los Hatos area, located in the central Llanos region. Global owns 100% of the contract, subject only to an initial 8% royalty payable to the Colombian Ministry of Energy. The final size of the royalty is to be determined by future production levels. The contract duration is approximately 6 years for the exploration phase and 24 years for the exploitation phase.

The Los Hatos contract grants Global exclusive exploration and production rights to 85,000 acres which are adjoined to the established Palo Blanco field. The terms of the Los Hatos contract require Global during phase 1 to drill one exploratory well. The time period for phase 1 is 16 months. If Global elects to enter phase 2 of the contract, Global must drill either one well or acquire 50 kilometers of 2D seismic data. Phases 3, 4 and 5, also optional, require one exploratory well to be drilled per phase. Phases 2,3,4 and 5 have a time period of 12 months each.

As of March 16, 2005, Global was in compliance with the requirements of each of the Rio Verde and Los Hatos Exploration and Production Contracts.

Under the terms of the Alcaravan, Bocachico and Bolivar Association Contracts, if, during the first six years of each contract, Global discovers one or more fields capable of producing oil or gas in quantities that are economically exploitable and Ecopetrol elects to participate in the development of the field, or if Global chooses to proceed with the development on a sole-risk basis, the term of that contract will be extended for a period of 22 years from the date of such election by Ecopetrol, subject to the entire term of the Association Contract being limited to 28 years. Upon an election by Ecopetrol to participate in the development of a field and upon commencement of production from that field, Ecopetrol would begin to reimburse Global for 50% of Global’s successful well costs expended up to the point of Ecopetrol’s participation plus, in the case of the Bolivar Contract, 50% of all seismic and dry well costs incurred prior to the point of Ecopetrol’s participation. Ecopetrol, on behalf of the Colombian government, receives a 20% royalty interest (5% to 25% royalty interest on the Cajaro #1 well, under the Alcaravan Contract, depending on production levels) from all production. For fields in which Ecopetrol participates, all production (after royalty payments) will be allocated 50% to Ecopetrol and 50% to Global until cumulative production from all fields (or the particular productive field under certain of the Association Contracts) in the Association Contract acreage reaches 60 million barrels of oil.

After a declaration of Ecopetrol’s participation, Global and Ecopetrol would be responsible for all future development costs and operating expenses in direct proportion to their interest in production. For any fields in which Ecopetrol declines to participate, Global is entitled to receive Ecopetrol’s 50% share of production, after deduction of Ecopetrol’s royalty interest, until Global has recovered 200% of its costs, after which time Ecopetrol could elect to begin to receive 50% working interest share of production. In 2001 and 2002, Global was notified by Ecopetrol that Global could proceed with the development and production of the Buturama, Palo Blanco and Rio Negro fields on a sole risk basis.

In 2004, Ecopetrol advised Global that it had elected to declare the Cajaro #1 well of the Alcaravan Association Contract comercial. Effective as of October 2004, Ecopetrol began receiving a 50% working interest share of production, after deduction of the Colombian government’s 8% royalty interest on the Cajaro #1 well. As a 50% working interest owner, Ecopetrol will be responsible for 50% of any future development costs and operating expenses associated with the Cajaro #1 commercial field attributable to the Alcaravan Contract Area. As of March 16, 2005, Global and Ecopetrol continue to negotiate the terms of Ecopetrol’s commerciality declaration, including the extent of the commercial area and the potential need for unitization of the Cajaro #1 commercial area and a portion of Global’s recently acquired Los Hatos Concession Contract which abuts the Alcaravan Contract area. As of December 31, 2004, Global has been reimbursed by Ecopetrol out of Ecopetrol’s share of production, net of royalties, for 50% of all seismic costs and direct exploratory well costs (including costs related to dry holes) incurred prior to the point of Ecopetrol’s participation. Based upon the extent of the area declared commercial in relation to the Cajaro #1 well by Ecopetrol, Global has advised Ecopetrol, ANH and the Ministry of Energy that Global’s Los Hatos concession contract area which is adjacent to Global’s Alcaravan contract, is being drained of Mirador formation oil reserves located beneath the Los Hatos contract. Because two contract areas are being drained by one well, it is our opinion that Colombian law requires the division of reserves and revenues be settled through a unitization proceeding. This proceeding will affect the Cajaro #1 net revenues and costs assigned to both Ecopetrol and Global. Although the ultimate results of the unitization proceeding cannot be determined at this time, Global, based on the proposed unitization maps and data presented by Ecopetrol, reflects 50% interest in net production from the Cajaro #1 well associated with the Alcaravan Contract Area in the cash flows in its financial statements and reserve information.

At December 31, 2004, Global has proved reserves attributable to the Alcaravan, Bolivar and Bocachico Association Contracts and the Rio Verde Exploration and Production Contract. In the Alcaravan Contract, Global has proved reserves in the Palo Blanco and Anteojos field, and, in the Bolivar Contract, Global has proved reserves in the Buturama field. In the Bocachico Contract, Global has proved reserves in the Rio Negro field. In the Rio Verde Exploration and Production Contract, Global has proved reserves in the Tilodiran and Macarenas fields.

Peru Operations – In April 2001, Global, through a wholly owned subsidiary, signed a Technical Evaluation Agreement (“Peru TEA”) with Perupetro, the national oil company of Peru. The Peru TEA covered an area of approximately 6.8 million gross acres in northeastern Peru. Under the terms of the Peru TEA, Global had the option to convert the Peru TEA to a seven year exploration contract, with a twenty-two year production period. Terms of the Peru TEA allowed Global to conduct a study of the area that included the reprocessing of seismic data and evaluation of previous well data. In April 2003, Global received an extension from Perupetro of the Peru TEA to July 2003. In June of 2003 Global submitted a final report and completed all obligations required under the TEA. Prior to the expiration of the Peru TEA in July 2003, Global exercised its option under the Peru TEA and entered into negotiations with Perupetro for a License Contract. All work requirements under the Peru TEA were satisfied prior to its expiration. As of December 2004, the negotiations with Perupetro for a License Contract were completed. Global announced on December 2004 that Perupetro, the national oil company of Peru, had approved for signature a new License Contract between Perupetro and

Global for the Exploration and Exploitation of Hydrocarbons in the Block 95 Area located in the Marañon Basin of Northeastern Peru.

Panama Operations – In September 2001, Global, through a wholly owned subsidiary, signed a Technical Evaluation Agreement (“Panama TEA”) with the Ministry of Commerce and Industry for the Republic of Panama. The Panama TEA covered an area approximately 1.4 million gross acres divided into three blocks in and offshore Panama. Under the terms of this Panama TEA, Global performed certain work program procedures and studies and submitted them to the Panamanian government. The Panama TEA provided Global with an option to negotiate and enter into one or more Contracts for the Exploration and Exploitation of Hydrocarbons with the Ministry of Commerce and Industry. Global completed all of its obligations under the Panama TEA and exercised its options to negotiate an Exploration and Exploitation Contract. As of March 16, 2005, the negotiations with the Panamanian government are still in progress.

(8) GLOBAL WARRANTS AND STOCK OPTIONS

Global Warrants held by Lyford - In July and August 2002, Harken issued a 10% Term Loan Payable (the “Investor Term Loan”) in the total principal amount of $5,000,000 to Lyford, in exchange for cash in the principal amount of the Investor Term Loan. The principal of Lyford is Phyllis Quasha, whose son, Alan G. Quasha, became a member of Harken’s board of directors and the Chairman of Harken in March 2003. Harken’s indebtedness to Lyford under the Investor Term Loan was repaid in full in March 2003 pursuant to the terms of, and the completion of, the 2003 rights offering to Harken’s shareholders.

As additional consideration for the Investor Term Loan, as amended, Harken issued to Lyford warrants (the “Lyford Warrants”) to purchase up to 7,000,000 shares held by Harken of Global at a price of 50 UK pence per share. The warrants will expire on October 13, 2005, 90 days after the originally scheduled maturity date of the Investor Term Loan. These warrants constitute approximately 29% of Harken’s holdings of Global shares at December 31, 2004.

Global Warrants held by Global’s Minority Interest Owners – As part of Global’s issuance of warrants to its shareholders in August 2002, Global issued to its minority shareholders warrants to purchase up to 505,407 shares of Global stock at 60 pence per share. During 2004, certain of Global’s minority interest owners exercised their warrants to purchase 5,406 shares of Global stock at 60 UK pence per share. At December 31, 2004, there were 500,061 Global warrants held by Global’s minority interest owners outstanding. The warrants expire in August 2005.

Harken is required to account for the Global Warrants held by Outside Parties as derivatives in accordance with SFAS 133. SFAS 133 requires Harken to record the estimated fair value of the warrants as a liability at issuance and to adjust the liability to estimated fair value each period with any changes in value reflected in earnings.

During 2004, there was a 206% increase in Global’s common share price from approximately 50 UK pence at December 31, 2003 to 153 UK pence at December 31, 2004. As a result of the changes in Global’s common share price, Harken recorded a loss of approximately $14 million for the year ended December 31, 2004 for the change in the fair value of the Global Warrants held by Outside Parties. The fair value of the warrants was calculated by a third party firm based primarily on the underlying market price of the Global common stock.

Global Warrants held by Harken - As part of Global’s issuance of warrants to its shareholders in August 2002, Global issued to Harken warrants to purchase 6,487,481 of Global’s ordinary common shares at 60 UK pence per share. These warrants expire in August 2005. Since Global is a consolidated subsidiary, this warrant issuance is not reflected in the consolidated financial statements. The estimated fair market value of these warrants at December 31, 2004 was approximately $11.8 million, as calculated by a third-party firm.

Global Stock Options - In addition to the warrants described above, certain employees and directors of Global hold options to purchase 3,243,000 of Global’s ordinary common shares at 50 UK pence per share.

In July 2004, Global’s Board of Directors, amended the Global share option plan to allow for the cashless exercise of options granted to employees under the plan. The modification resulted in variable plan accounting for the Global share option plan. See Note 22 – Restatement of Financial Statements for further discussion.

In December 2004, Global issued to certain of its directors, officers and employees options to purchase 780,000 of Global’s ordinary common shares at 151 UK pence per share.

Stock options to purchase 132,000 of Globals’ ordinary common shares at 50 UK pence per share were exercised during 2004. As a result of the Global warrants and stock options exercised during 2004, Harken’s ownership in Global decreased from 85.62% to 85.35% as of December 31, 2004.

If all outstanding Global warrants and stock options were exercised, Harken’s ownership in Global could decrease from 85.35% to 59.96%.

(9) 10% NOTES PAYABLE

In May 2003, Harken issued to certain holders of Harken’s 5% Senior Convertible Notes due 2003 (the “5% European Notes”) certain 10% Notes Payable (“Notes Payable”) in the total principal amount of $1,390,500, along with the payment of approximately $1,080,000 in cash in exchange for $3,090,000 principal amount of the 5% European Notes. The Notes Payable were to mature on April 30, 2004 and were unsecured. Interest incurred on the Notes Payable was payable semi-annually in October 2003 and April 2004. The principal amount of the Notes Payable was payable in two installments. The first installment in the principal amount of $772,500 together with accrued interest was paid in October 2003. A second and final installment of principal in the amount of $618,000 together with accrued interest was payable no later than April 30, 2004. During December 2003, Harken exercised its right, under the terms of the notes, to prepay the remaining outstanding principal and interest of the Notes Payable. Harken’s indebtness under the Notes Payable was repaid in full on December 31, 2003.

(10) SENIOR SECURED NOTES

In May 2003, Harken issued $2,020,000 principal amount of Increasing Rate Senior Secured Notes Due 2008 (“Senior Secured Notes”) in exchange for $2,020,000 principal amount of 5% European Notes. The Senior Secured Notes were to mature on May 26, 2008 and ranked senior to the 7% Senior Convertible Notes due 2007 (the “7% European Notes”). Interest incurred on the Senior Secured Notes was payable quarterly beginning January 2004 until maturity.

The principal balance of the Senior Secured Notes could have been redeemed at Harken’s option for cash equal to the outstanding principal balance. Prior to maturity, the principal balance in its entirety, plus accrued and unpaid interest, of the Senior Secured Notes could have been prepaid, upon not less than 30 days notice to the noteholders, at a discount with a combination of cash and freely tradable shares of Harken common stock, as defined in the Senior Secured Note agreement. In December 2003, Harken exercised its rights, under the terms of the notes, to prepay the principal balance in its entirety, plus accrued and unpaid interest, at the stated discount with cash. Harken provided the required notice to the noteholders in December 2003. Subsequently, in accordance with the terms of the notes, in January 2004, Harken repaid in full, the principal amount of the Senior Secured Notes, at a discount equal to 18%, plus accrued and unpaid interest, with cash. In 2004, Harken recorded a gain on extinguishment of $325,000 in the Consolidated Results of Operations. Harken’s indebtness under the Senior Secured Notes was repaid in full in January 2004.

(11) CONVERTIBLE NOTES PAYABLE

A summary of convertible notes payable is as follows:


	December 31, 2003			December 31, 2004
7% European Notes	$	340,000		$	—
4.25% Convertible Notes		5,000,000			3,333,000
5% Senior Convertible Notes		—			5,245,000

		5,340,000			8,578,000
Less: Current portion		(1,667,000	)		(1,667,000	)

	$	3,673,000		$	6,911,000

As of December 31, 2004, maturities of Harken’s long-term and short-term debt in 2005 through 2009 are $1,666,000, $1,667,000, $0, $0 and $5,245,000, respectively.

7% European Notes — At December 31, 2003, Harken had outstanding a total of approximately $340,000 principal amount of its 7% European Notes, which were to mature on March 31, 2007. In February 2004, in accordance with the terms of the 7% European Notes, Harken converted the remaining outstanding principal amounts of $340,000, plus accrued and unpaid interest of its 7% European Notes into approximately 696,000 shares of Harken common stock. No gain or loss was recorded for the mandatory conversions of the 7% European Notes as this transaction did not qualify as debt extinguishment.

4.25% Convertible Notes — In December 2003, Harken issued to qualified investors a total of $5 million principal amount of its 4.25% Convertible Notes due 2006 (the “4.25% Convertible Notes”), which mature in December 2006, in exchange for $5 million cash. The 4.25% Convertible Notes are unsecured and rank equal to all other present and future unsecured indebtedness of Harken. Both principal and accrued interest on the 4.25% Convertible Notes are payable semi-annually in six equal installments at Harken’s option in cash or with shares of Harken common stock equal to 110% of the principal amount to be redeemed divided by the 30-day average market price of Harken’s common stock immediately prior to the semi-annual redemption date. The first principal installment payment along with accrued interest was paid in cash as of June 30, 2004.

In December 2004, in accordance with the terms of the 4.25% Convertible Notes, Harken paid the second principal installment of the 4.25% Convertible Notes with approximately 1.9 million shares of Harken common stock. The December 2004 principal installment of the 4.25% Convertible Notes was paid in

accordance with the terms of the notes, for a number of shares of common stock equal to 110% of the sum of the outstanding principal amount of the notes to be redeemed plus accrued and unpaid interest thereon to the date of redemption, divided by approximately $0.53 (the average market price of the common stock over the 30 calendar days immediately preceding the date of the notice of the redemption).

On the December 2004 settlement date, Harken recorded a loss on extinguishment of approximately $170,000 for the difference between the carrying value of the December 2004 installment of principal and accrued interest on 4.25% Convertible Notes and the fair market value of the 1.9 million shares of Harken common stock issued on the settlement date.

At December 31, 2003 and 2004, respectively, based on the scheduled principal installments, approximately $1.7 million of the 4.25% Convertible Notes are classified as current debt in the Consolidated Balance Sheet.

Pursuant to the terms of the 4.25% Convertible Notes, Harken is required to maintain unencumbered assets such that the ratio of (a) the fair market value of the unencumbered assets to (b) the outstanding principal amount of the 4.25% Convertible Notes, is equal to or greater than 1.5 to 1.0. At December 31, 2003 and 2004, Harken was in compliance with the asset coverage ratio under the 4.25% Convertible Notes.

5% Senior Convertible Notes — In August 2004, Harken issued to qualified investors $5,245,000 aggregate principal amount of its 5% Senior Convertible Notes due June 30, 2009 (the “5% Notes”) in exchange for $5,245,000 in cash. The 5% Notes are convertible into shares of Harken’s common stock at a conversion price of $0.52 per share, subject to adjustments in certain circumstances. The 5% Notes bear interest at the rate of 5% per annum. Interest is payable semi-annually in arrears on December 31 and June 30, commencing December 31, 2004. Upon registration with the SEC of the shares of Harken’s common stock into which the 5% Notes are convertible, the holders of the 5% notes may exercise their rights to convert the 5% Notes. The Notes may be converted in whole or in part, at Harken’s option, after the effective date of the registration statement, if at any time following such effective date the average market price of Harken’s common stock over any 20 consecutive business day period equals or exceeds 125% of the conversion price ($0.65 per share). The outstanding principal balance of the Notes becomes due and payable in full on June 30, 2009 in cash or, at Harken’s option, in shares of Harken common stock equal to 110% of the principal amount of the 5% Notes divided by the 20-day average market price of Harken’s common shares immediately preceding the date of notice of redemption.

5% European Notes — On May 26, 1998, Harken issued a total of $85 million of its 5% European Notes, which matured on May 26, 2003. Such 5% European Notes were originally convertible into shares of Harken common stock at a conversion price of $65.00 per share, subject to adjustment in certain circumstances. In January 2003, such conversion price was adjusted to $45.22 per share. Since their issuance in 1998 and prior to their maturity in 2003, Harken repurchased or exchanged an aggregate of approximately $77.7 million principal amount of the 5% European Notes. Upon the date of their maturity in May 2003, the outstanding principal balance of the 5% European Notes, prior to their conversion into shares of Harken common stock, was approximately $7.3 million.

In accordance with the terms of the 5% European Notes, upon their maturity, Harken redeemed the remaining principal balance of approximately $7.3 million of the 5% European Notes plus accrued interest by issuing approximately 24.8 million shares of Harken common stock. The number of the redemption shares was equal to 115% of the principal amount of the notes to be redeemed plus accrued and unpaid interest, divided by approximately $0.35 (the average market price of the common stock over the 30 calendar days immediately preceding the date of the notice of the redemption).

During 2003, Harken recognized total gains of approximately $5.3 million from the cash purchases and/or exchanges of other debt securities for the 5% European Notes in the accompanying Consolidated Statement of Operations.

Waverley Note — In March 2003, Harken issued $3,410,000 principal amount of 7% European Notes and the Waverley Note to Waverley in exchange for 17,050 shares of Harken’s Series G-1 Preferred owned by an affiliate of Waverley, and $3,410,000 in cash. In June 2003, Harken redeemed the entire $1,705,000 principal amount of the Waverley Note for cash, the difference between the carrying value of the Waverley Note and the principal amount was fully accreted to Interest Expense in 2003.

Benz Convertible Notes — In December 1999, Harken issued $12 million principal amount of the Benz Convertible Notes in exchange for certain prospects acquired from Benz Energy, Incorporated. The Benz Convertible Notes originally were to mature on May 26, 2003. In March 2000, the maturity date of certain of the Benz Convertible Notes was extended to November 26, 2003. The Benz Convertible Notes were originally convertible into shares of Harken common stock at a conversion price of $65.00 per share, subject to adjustment in certain circumstances. In 2003, the conversion price for the Benz Convertible Notes was adjusted to $29.41 per share, effective January 31, 2003. In July 2002, pursuant to the terms of the Benz Convertible Notes, Harken elected to redeem Benz Convertible Notes with a principal amount of approximately $1.1 million for 2 million shares of Harken common stock. In August 2002, Harken repurchased approximately $4.1 million principal amount of Benz Convertible Notes from a holder for $1.2 million in cash and recognized a gain on extinguishment of approximately $2.8 million on this transaction during 2002. Prior to their maturity date in November 2003, Harken had repurchased or redeemed to date approximately $6.3 million principal amount of the Benz Convertible Notes for cash and/or common stock.

In October 2003, Harken issued a notice of redemption for the Benz Convertible Notes for shares of Harken’s common stock. The date of redemption was November 26, 2003. In accordance with the terms of the Benz Convertible Notes, Harken redeemed each Benz Convertible Note outstanding on November 26, 2003, approximately $5.7 million principal amount of Benz Convertible Notes outstanding, plus accrued and unpaid interest, for approximately 8.6 million shares of Harken common stock. The Benz Convertible Notes were redeemed, in accordance with the terms of the notes, for a number of shares of common stock equal to 115% of the sum of the outstanding principal amount of the notes to be redeemed plus accrued and unpaid interest thereon to the date of redemption, divided by approximately $0.78 (the average market price of the common stock over the 30 calendar days immediately preceding the date of the notice of the redemption).

On the November 2003 settlement date, Harken recorded a gain on extinguishment of approximately $242,000 for the redemption of the outstanding Benz Convertible Notes for the difference between the carrying value of the Benz Convertible Notes and the fair market value of the 8.6 million shares of Harken common stock issued at the settlement date.

At December 31, 2004, the approximate carrying amount and estimated fair value of Harken’s non-traded fixed-rate debt is as follows:


	Carrying Amount		Fair Value
4.25% Convertible Notes	$	3,333,000	$	3,201,000
5% Notes		5,245,000		4,719,000

	$	8,578,000	$	7,920,000

The fair value of Harken’s non-traded fixed-rate debt is based on the discounted cash flows of principal and interest using an estimated available incremental borrowing rate.

(12) REDEEMABLE PREFERRED STOCKS

Issuance of Series J Convertible Preferred Stock and Warrants –

In March 2004, Harken’s Board of Directors approved the authorization and issuance of up to 65,000 shares of a new series of convertible preferred stock, the Series J Preferred. In April 2004, in exchange for $5.0 million in cash, Harken issued

•

50,000 shares of Series J Preferred Stock,

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Warrants to purchase shares of Harken’s common stock; and

•

10,000 unit purchase warrants

The Series J Preferred has a liquidation value of $100 per share, is non-voting and is convertible at the holders’ option into common stock at a conversion price of $0.85 per share, subject to adjustments in certain circumstances. The Series J Preferred is also convertible by Harken, into freely tradable shares of Harken common stock at the conversion price, if for any period of thirty consecutive calendar days the average closing price of Harken common stock has equaled or exceeded 150% of the conversion price ($1.28 per share).

Dividends - The holders of the Series J Preferred are entitled to receive dividends at an annual rate equal to 5% per share. All dividends on the Series J Preferred stock are payable quarterly in arrears, beginning on September 30, 2004 in cash or, at Harken’s option, in shares of Harken common stock. The dividend payments in September and December 2004 were paid in cash. The Series J Preferred dividend and liquidation rights rank junior to all claims of creditors, including holders of outstanding debt securities, but senior to the holders of Harken common stock and pari passu to the holders of any other series of Harken preferred stock, unless otherwise provided.

Warrants – In connection with the Series J Preferred, 2.9 million warrants were issued to purchase shares of Harken’s common stock. These warrants expire in April 2005 and have an exercise price of $0.92. Harken may call the warrants if the closing price of Harken’s common stock over five consecutive days closes at or above 150% of the exercise price ($1.38 per share).

Unit Purchase Warrants – The unit purchase warrants issued in connection with the Series J Preferred have an exercise price of $100 per unit. Each unit consists of one share of Series J Preferred and one warrant to purchase that number of shares of Harken’s common stock that equals 50% of the number of shares of Harken common stock into which one share of the Series J Preferred that is purchased, by exercise of the unit purchase warrant, may be converted. These unit purchase warrants expire in April 2005.

Additional Dividend Feature – If an additional dividend event occurs while the Series J Preferred is outstanding, the holders will have the right to an annual additional dividend calculated at a rate of 6.0% per annum of the issue price of any outstanding Series J Preferred, payable in cash, until such additional dividend event has been remedied. Additional dividend events include the failure of Harken common stock to be listed for trading on any principal market, Harken’s failure to declare or pay in full any dividend payable on the

shares of Series J Preferred on the applicable dividend payment date, as well as other additional dividend events that are defined in the terms of the Series J Preferred.

Optional Redemption Event - If an optional redemption event occurs while the Series J Preferred is outstanding, each holder will have the right to require Harken to repurchase all or any portion of such holder’s Series J Preferred at the greater of (x) 115% of the stated value of the Series J Preferred, or (y) the market value of Harken common stock as if the Series J Preferred were converted at the then prevailing conversion price at the time of redemption. An optional redemption event includes the failure to declare and pay dividends on the Series J Preferred, voluntary liquidation, a fundamental change in the ownership of Harken, failure of Harken to generally pay its debts as they become due, as well as other events defined in the terms of the Series J Preferred.

Accounting for the Series J Preferred Stock and Warrants – In accordance with EITF Topic D-98 “Classification and Measurement of Redeemable Securities” (EITF D-98), the Series J Preferred contains certain provisions whereby redemption is deemed to be out of Harken’s control. Therefore the fair value of the Series J Preferred, of approximately $4.7 million is classified as temporary equity in the Consolidated Balance Sheet at December 31, 2004.

In accordance with EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (EITF 00-19), the common stock warrants were initially measured at fair value of $287,000 by an independent third party and are classified as permanent equity in the Consolidated Balance Sheet at December 31, 2004. The fair value allocated to the unit purchase warrants, approximately $38,000, is also classified as permanent equity in the Consolidated Balance Sheet at December 31, 2004.

After allocating the net proceeds between the Series J Preferred, the common stock warrants and the unit purchase warrants, Harken determined no beneficial conversion feature existed.

Adjustment of Series J Conversion Price and Warrant Exercise Price – In May 2004, as a result of Harken’s issuance of its Series L Convertible Preferred Stock (the “Series L Preferred”), the conversion price of the Series J Preferred was adjusted from $0.87 to $0.85. In accordance with EITF Issue 00-27, Issue 7, the number of the additional shares issuable upon conversion of the Series J Preferred multiplied by Harken’s stock price on the date of the original transaction is recorded as a Payment of Preferred Stock Dividends of approximately $135,000 which is included as a decrease to Net Income Attributed to Common Stock in the Consolidated Statement of Operations for the year ended December 31, 2004. In addition, the original exercise price of the common stock warrants issued with the Series J Preferred was adjusted from $0.98 to $0.95. In August and October 2004, as a result of Harken’s issuance of the 5% Notes and the Series M Convertible Preferred Stock (the “Series M Preferred”), the exercise price of the common stock warrants issued with the Series J Preferred was adjusted from $0.95 to $0.92. In conjunction with SFAS 123 “Accounting for Stock Based Compensation” (SFAS 123), the incremental increase in the fair value of the warrant of approximately $26,000, is recorded as a Payment of Preferred Stock Dividends which is included as a decrease to Net Income Attributed to Common Stock in the Consolidated Statement of Operations for the year ended December 31, 2004. If Harken issues any additional shares of its common stock or any common stock equivalent at a price per share less than the exercise price of the common stock warrants issued with the Series J Preferred, the exercise price of the common stock warrants is subject to additional adjustment.

Issuance of Series L Convertible Preferred Stock and Warrants –

In March 2004, Harken’s Board of Directors approved the authorization and issuance of up to 65,000 shares of convertible preferred stock, the Series L Preferred. In May 2004, Harken issued 50,000 shares of Series L Preferred stock and warrants to purchase shares of Harken common stock in exchange for $5 million in cash. Shares of the Series L Preferred have a liquidation value of $100 per share, are non-voting and were convertible at the holders’ option into Harken common stock at a conversion price of $0.71 per share, subject to adjustments in certain circumstances. See Series L Conversion / Redemption Agreement discussion below.

Dividends - The holders of the Series L Preferred were entitled to receive dividends at an increasing rate starting at 4% per share. All dividends on the Series L Preferred were payable semi-annually on June 30 and December 30. Dividends may be paid in cash or, at Harken’s option, in freely tradable shares of Harken common stock. The June 2004 and December 2004 dividend payments were paid in cash at Harken’s option.

The dividend and liquidation rights of the Series L Preferred shall rank junior to all claims of creditors, including holders of outstanding debt securities, but senior to holders of Harken common stock and pari passu to any other series of Harken preferred stock, unless otherwise provided.

Warrants – In connection with the issuance of the Series L Preferred, 3.7 million warrants to purchase shares of Harken’s common stock were issued. These warrants expire in May 2006 and have an exercise price of $0.67.

Accounting for the Series L Preferred Stock and Warrants – In accordance with EITF D-98, events of default for the Series L Preferred contained certain provisions whereby redemption was deemed to be out of Harken’s control. Therefore at December 31, 2004, the remaining balance of the Series L Preferred of approximately $805,000 is classified as temporary equity in the Consolidated Balance Sheet. In accordance with EITF 00-19, the fair value allocated to the common stock warrants of approximately $976,000 is classified as permanent equity in the Consolidated Balance Sheet at December 31, 2004.

The proceeds allocated to the Series L Preferred represented a discount to the market value of the underlying common stock. The discount of approximately $498,000 was treated as a beneficial conversion feature and was recognized as a Payment of Preferred Stock Dividends and presented as a decrease to Net Income Attributed to Common Stock in the Consolidated Statement of Operations for the year ended December 31, 2004.

Adjustment of Series L Conversion Price and Warrant Exercise Price – In August 2004, as a result of Harken’s issuance of its 5% Notes, the original conversion price of the Series L Preferred was adjusted from $0.72 to $0.71. In accordance with EITF Issue 00-27, Issue 7, approximately $51,000 is recorded as a Payment of Preferred Stock Dividends which is presented as a decrease to Net Income Attributed to Common Stock in the Consolidated Statement of Operations for the year ended December 31, 2004. In addition, the original exercise price of the common stock warrants issued with the Series L Preferred was adjusted from $0.68 to $0.67. The incremental increase in the fair value of the warrant of approximately $9,000 was recorded as a Payment of Preferred Stock Dividends which is presented as a decrease to Net Income Attributed to Common Stock in the Consolidated Statement of Operations for the year ended December 31, 2004.

Series L Conversion / Redemption Agreement and Issuance of Series M Cumulative Convertible Preferred Stock

In October 2004, Harken entered into a Conversion/Redemption Agreement (the “Agreement”) with the holders of the Series L Preferred, pursuant to which Harken modified the conversion terms of the Series L Preferred as a part of the agreement to issue the Series M Cumulative Convertible Preferred Stock, as described below.

Pursuant to the Agreement, each holder of the Series L Preferred agreed to convert at least 20% of its holdings of Series L Preferred on each of October 8, 2004, November 2, 2004, December 1, 2004, December 30, 2004 and February 1, 2005, provided Harken met certain conditions. Harken agreed that the conversion price would be the volume weighted average price of the Harken’s common stock for the twenty consecutive trading days immediately preceding the applicable conversion date. In 2004, a total of $4 million, plus accrued dividends, of the liquidation value of the Series L Preferred was converted into 7.4 million shares of Harken’s common stock. In February 2005, the remaining $1 million, plus accrued dividends, of the liquidation value of the Series L Preferred was converted into 2.1 million shares of Harken common stock. As of March 16, 2005, the Series L Preferred is no longer outstanding.

Concurrent with the Agreement, in October 2004, Harken sold 50,000 shares of its Series M Preferred and issued warrants to purchase up to 4,385,965 shares of Harken’s common stock at an exercise price equal to $0.57 per share. The aggregate purchase price for the Series M Preferred and the related warrants was cash consideration of $5,000,000.

The Series M Preferred has a liquidation value of $100 per share, is non-voting and is convertible at the holders’ option into common stock at a conversion price of $0.60 per share, subject to adjustments in certain circumstances. If for any period of thirty consecutive days the average closing price of Harken common stock during such period trades above $0.75 per share for 30 consecutive days, up to 25,000 shares of the Series M Preferred is convertible by Harken into freely tradable shares of Harken common stock at $0.60 per share. If the average daily volume weighted average price of Harken’s common stock during a period of thirty trading days equals or exceeds $0.90, Harken may convert all the Series M Preferred into freely tradable shares of Harken common stock at $0.60 per share.

Accounting for the Series L Conversion / Redemption and the Issuance of the Series M Preferred – In accordance with EITF Topic D-42, “The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock,” and EITF Topic D-53, “Computation of Earnings per Share for a Period That Includes a Redemption or an Induced Conversion of a Portion of a Class of Preferred Stock”, Harken has reflected the difference between the total of the carrying amount of the Series L Preferred, including accrued dividends, plus the $5 million in cash, less transaction fees, and the total of the fair value of the Series M Preferred, the common stock warrants issued plus the consideration paid to redeem the Series L Preferred as Exchange of Preferred Stock of approximately $1.2 million in the Consolidated Statement of Operations for the year ended December 31, 2004 as a decrease to Net Income Attributed to Common Stock.

Accounting for the Classification of the Series M Preferred Stock and Warrants – In accordance with EITF Topic D-98, the Series M Preferred does not contain provisions whereby redemption is deemed to be out of Harken’s control. Therefore the Series M Preferred is classified as permanent equity in the Consolidated Balance Sheet at December 31, 2004. In accordance with EITF 00-19, the common stock warrants were initially measured at fair value and are classified as permanent equity in the Consolidated Balance Sheet at December 31, 2004.

(13) STOCKHOLDERS’ EQUITY

Common Stock — Harken has authorized 325 million shares of $.01 par common stock. At December 31, 2003 and 2004, Harken had 185,405,471 shares and 219,615,485 shares, respectively issued and outstanding. Dividends may not be paid to holders of Harken’s common stock prior to all dividend obligations related to Harken’s Series G1, Series G2, Series G4, Series J and Series M Preferred stock being satisfied.

Treasury Stock — At December 31, 2003 and 2004, Harken had 605,700 and 2,605,700 shares, respectively, of treasury stock. During 2003, Harken did not purchase any shares of its common stock. During 2004, Harken purchased 2 million shares of its common stock at a cost of approximately $1.1 million.

Series G1 Convertible Preferred Stock - The Series G1 Convertible Preferred Stock (the “Series G1 Preferred”), which was issued in October 2000, has a liquidation value of $100 per share, is non-voting, and is convertible at the holder’s option into Harken common stock at a conversion price of $12.50 per share, subject to adjustment in certain circumstances.

The Series G1 Preferred holders shall be entitled to receive dividends at an annual rate equal to $8 per share when, as and if declared by Harken’s Board of Directors. All dividends on the Series G1 Preferred are cumulative and payable semi-annually in arrears, payable on June 30 and December 30. At Harken’s option, dividends may also be payable in Harken common stock valued at $12.50 per share. The Series G1 Preferred dividend and liquidation rights shall rank junior to all claims of creditors, including holders of outstanding debt securities, but senior to Harken common stockholders and to any subsequent series of Harken preferred stock, unless otherwise provided, except for the Series G2, Series G3, Series G4, Series J and Series M Preferred, which shall rank equal to the Series G1 Preferred. As of December 31, 2002, Harken had accrued approximately $6.3 million of dividends in arrears related to the Series G1 Preferred stock, approximately $15.62 per share of such preferred stock outstanding. During 2002, Harken’s Board of Directors declared that a dividend be paid on all accrued and unpaid dividends as of December 31, 2002 payable to holders of Harken Series G1 Preferred and Series G2 Preferred, such dividend was paid with shares of Harken common stock. As of the record date for such dividends, December 26, 2002, there were 402,688 shares of Series G1 Preferred outstanding. In January 2003, a total of approximately 587,000 shares of Harken common stock were paid to holders of Series G1 Preferred.

As of December 31, 2003, Harken had accrued approximately $2.6 million of dividends in arrears related to the Series G1 Preferred stock, approximately $8.00 per share of such preferred stock outstanding. During 2003, Harken’s Board of Directors declared that a dividend be paid on all accrued and unpaid dividends as of December 31, 2003 payable to holders of Harken Series G1 Preferred and Series G2 Preferred, such dividend to be paid with shares of Harken common stock. As of the record date for such dividends, December 30, 2003, there were 325,312 shares of Series G1 Preferred outstanding. During January and February 2004, a total of approximately 208,000 shares of Harken common stock were paid to holders of Series G1 Preferred.

During 2004, Harken’s Board of Directors declared that a dividend be paid on all accrued and unpaid dividends as of June 30, 2004 and December 31, 2004 payable to holders of Harken’s Series G1, Series G2 and Series G4 Preferred. The dividends were paid with shares of Harken common stock. As of the record date for such dividends, in May and November 2004, there were 295,372 and 13,925, shares respectively, of the Series G1 Preferred outstanding. In June and December 2004, Harken had accrued a total of approximately $1.2 million of dividends in arrears related to the Series G1 Preferred, or approximately $8.00 per share of

such preferred stock outstanding. In June and December 2004, a total of approximately 99,000 shares of Harken common stock were paid to holders of the Series G1 Preferred.

During the year ended December 31, 2004, holders of 28,940 shares of the Series G1 Preferred voluntarily elected to exercise their conversion option, and such holders were issued 231,651 shares of Harken common stock. Inducement to Voluntarily Convert Series G1 and Series G2 Preferred to Shares of Harken Common Stock

Inducement to Voluntarily Convert Series G1 and Series G2 Preferred to Shares of Harken Common Stock — In October 2004, Harken offered all Series G1 and G2 Preferred holders an inducement to convert their Series G1 and G2 Preferred shares into shares of Harken common stock. For a limited time, holders of Series G1 and G2 Preferred were able to convert their preferred shares into shares of Harken’s common stock at a 20% premium to the original conversion terms of the Series G1 and G2 Preferred. Under the original conversion terms, the Series G1 Preferred are convertible into shares of Harken common stock at a conversion rate of $12.50 per share, and the Series G2 Preferred are convertible into shares of Harken’s common stock at a conversion rate of $3.00 per share.

The inducement offer adjusted the conversion terms to 120% of the number of common shares the holders of Series G1 and G2 Preferred would have received under the original conversion terms. In November 2004, holders of 281,447 shares of Series G1 Preferred tendered out of the total 295,372 Series G1 Preferred outstanding, and holders of 21,650 shares of Series G2 Preferred of the total 24,150 Series G2 Preferred outstanding tendered under the inducement offer. In November 2004, Harken agreed to issue 3.6 million common shares in exchange for the tendered Series G1 and G2 Preferred. At December 31, 2004, there were 13,925 shares of Series G1 Preferred outstanding.

Accounting for Inducement to Voluntarily Convert Series G1 and Series G2 Preferred to Shares of Harken Common Stock – In accordance with EITF D-98, Harken recognized the difference between the fair value of the common stock transferred to the holders of the Series G1 and G2 Preferred under the induced conversion terms and the fair value of the common stock issuable under the original conversion terms as Exchange of Preferred Stock in the Consolidated Statement of Operations for the year ended December 31, 2004 as a $287,490 decrease to Net Income Attributed to Common Stock.

Series G2 Convertible Preferred Stock - In July 2001, Harken’s Board of Directors approved the issuance of shares of the Series G2 Preferred, which has a liquidation value of $100 per share, is non-voting, and is convertible at the holder’s option into Harken common stock at a conversion price of $3.00 per share, subject to adjustment in certain circumstances. The Series G2 Preferred is also convertible by Harken into shares of Harken common stock if for any period of twenty consecutive calendar days, the average of the closing prices of Harken common stock during such period shall have equaled or exceeded $3.75 per share.

The Series G2 Preferred holders shall be entitled to receive dividends at an annual rate equal to $8 per share when, as and if declared by the Harken Board of Directors. All dividends on the Series G2 Preferred are cumulative and payable semi-annually in arrears, payable on June 30 and December 30. At Harken’s option, dividends may also be payable in Harken common stock at $3.00 per share of Harken common stock. The Series G2 Preferred dividend and liquidation rights shall rank junior to all claims of creditors, including holders of outstanding debt securities, but senior to Harken common stockholders and to any subsequent series of Harken preferred stock, unless otherwise provided. The Series G2 Preferred shall rank equal to the Series G1, the Series G3, the Series G4, the Series J, and the Series M Preferred. At December 31, 2002, Harken had accrued approximately $1,080,000 of dividends in arrears related to the Series G2 Preferred stock, approximately $11.59 per share of such preferred stock outstanding. During 2002, Harken’s Board of Directors declared that a dividend be paid for all accrued and unpaid dividends payable as of December 31, 2002 to

holders of Harken Series G1 Preferred and Series G2 Preferred, such dividend was paid with shares of Harken common stock. As of the record date for such dividends, December 26, 2002, there were 93,150 shares of Series G2 Preferred outstanding. In January 2003, a total of 360,010 shares of Harken common stock were paid to holders of Series G2 Preferred.

At December 31, 2003, Harken had accrued approximately $493,000 of dividends in arrears related to the Series G2 Preferred stock, approximately $8.00 per share of such preferred stock outstanding. During 2003, Harken’s Board of Directors declared that a dividend be paid for all accrued and unpaid dividends payable as of December 31, 2003 to holders of Harken Series G1 Preferred and Series G2 Preferred, such dividend to be paid with shares of Harken common stock. As of the record date for such dividends, December 30, 2003, there were 61,650 shares of Series G2 Preferred outstanding. During January and February 2004, a total of approximately 164,000 shares of Harken common stock were issued to holders of Series G2 Preferred.

During 2004, Harken’s Board of Directors declared that a dividend be paid as of June 30, 2004 and December 31, 2004 to holders of the Series G1 Preferred, Series G2 Preferred and Series G4 Preferred, such dividend to be paid with shares of common stock. As of the record date for such dividends, in May and November 2004, there were 27,150 and 2,500 shares, respectively, of the Series G2 Preferred outstanding. In June and December 2004, Harken had accrued a total of approximately $119,000 of dividends in arrears related to the Series G2 Preferred or approximately $8.00 per share of such preferred stock outstanding. In June and December 2004, a total of approximately 40,000 shares of Harken common stock were paid to holders of the Series G2 Preferred.

During 2004, holders of 14,500 shares of the Series G2 Preferred voluntarily elected to exercise their conversion option, and such holders were issued 487,697 shares of Harken common stock.

See prior discussion of the October 2004 inducement to convert Series G1 and Series G2 Preferred into shares of Harken common stock. At December 31, 2004, there were 2,500 shares of Series G2 Preferred outstanding.

Series G3 Convertible Preferred Stock — In May 2003, Harken’s Board of Directors approved the authorization and issuance of up to 150,000 shares of a series of convertible preferred stock. The Series G3 Convertible Preferred Stock (the “Series G3 Preferred”), which had a liquidation value of $100 per share, was non-voting and was convertible at the holders’ option into Harken common stock at a conversion price of $0.50 per share, subject to adjustments in certain circumstances. The Series G3 Preferred was also convertible by Harken into freely tradable shares of Harken common stock if for any period of twenty consecutive calendar days, the average of the closing prices of Harken common stock during such period shall have equaled or exceeded $0.625 per share. In May 2003, Harken issued 92,700 shares of the Series G3 Preferred in exchange for approximately 31,350 shares of Harken’s outstanding Series G1 Preferred, including commissions, with a liquidation value of $100 per share, and $6 million in cash.

During 2003, holders of 16,000 shares of Harken’s Series G3 Preferred stock elected to exercise their conversion option, and such holders were issued a total of approximately 3.2 million shares of Harken common stock. Also in 2003, Harken exchanged 2,700 shares of Series G3 Preferred stock in receipt of 1,350 shares of Series G1 Preferred stock in payment of financial transaction services to a non-related party for the placement of the Series G3 Preferred series.

During 2004, holders of the remaining 76,700 shares of Harken’s Series G3 Preferred stock elected to exercise their conversion option, and these remaining holders were issued a total of approximately 15.5 million shares of Harken common stock. At December 31, 2004, the Series G3 Preferred is no longer outstanding.

Issuance of Series G4 Convertible Preferred Stock — In March 2004, Harken’s Board of Directors approved the authorization and issuance of up to 150,000 shares of a series of convertible preferred stock, the Series G4 Preferred. In April 2004, Harken issued 77,517 shares of the Series G4 Preferred in exchange for approximately 1,000 shares of the Series G1 Preferred and 23,000 shares of the Series G2 Preferred and $2.4 million in cash. The Series G4 Preferred has a liquidation value of $100 per share, is non-voting and is convertible at the holders’ option into Harken common stock at a conversion price of $2.00 per share, subject to adjustments in certain circumstances. The Series G4 Preferred is also convertible by Harken into freely tradable shares of Harken common stock if for any period of twenty consecutive calendar days the average of the closing prices of Harken common stock has equaled or exceeded $2.20 per share, initially. This target price will be reduced by 10 percent of the immediately preceding target price in December of each year, commencing December 31, 2004.

The holders of the Series G4 Preferred are entitled to receive dividends, when as and if declared by the Board of Directors, at an annual rate equal to $8.00 per share. All dividends on the Series G4 Preferred are payable semi-annually in arrears in cash or, at Harken’s option, in shares of Harken’s common stock, payable on June 30 and December 31, commencing December 31, 2004. At Harken’s option, the dividends can be paid in shares of Harken’s common stock valued at $2.00 per share. The Series G4 Preferred dividend and liquidation rights rank junior to all claims of creditors, including holders of outstanding debt securities, but senior to Harken common stockholders and pari passu to any other series of Harken preferred stock, unless otherwise provided.

Harken may also redeem the Series G4 Preferred in whole or in part for cash at any time at $100 per share plus any accrued and unpaid dividends. In addition, on or after January 1, 2006, Harken may further elect, in any six month period, to redeem up to 50% of the outstanding Series G4 Preferred with shares of Harken common stock valued at an average market price, and using a redemption value of the Series G4 Preferred that includes a 5% premium based on Harken’s market capitalization at the time of redemption.

During 2004, Harken’s Board of Directors declared that a dividend be paid as of June 30, 2004 and December 31, 2004 to holders of the Series G1, Series G2 and Series G4 Preferred, such dividend to be paid with shares of common stock. As of the record date for such dividends, in May 2004, there were 295,372 and 27,150 shares of Series G1 and Series G2, respectively and in November 2004 there were 13,925, 2,500 and 77,517 shares of Series G1, Series G2 and Series G4, respectively, outstanding. As of December 2004, Harken had accrued a total of approximately $462,000 of dividends in arrears related to the Series G4 Preferred or approximately $8.00 per share of such preferred stock outstanding. In December 2004, a total of approximately 231,000 shares of Harken common stock were paid to holders of the Series G4 Preferred.

Accounting for the Series G4 Preferred Stock Issuance — In April 2004 upon the issuance of the Series G4 Preferred, Harken reflected the difference between the face amount of the Series G1 Preferred and the Series G2 Preferred, plus the $2.4 million in cash, less transaction fees, and the fair value of the Series G4 Preferred shares issued as Exchange of Preferred Stock of approximately $337,000 in the Consolidated Condensed Statement of Operations for the year ended December 31, 2004, as an increase to Net Income Attributed to Common Stock. The valuation of the Series G4 Preferred stock is supported by an appraisal, performed by RP&C International Inc. (“RP&C”), and is based on the market value of the underlying conversion shares of Harken common stock as of the date of the exchange along with a discounted value associated with an assumed dividend yield.

Accounting for Payment of Series G1, Series G2 and Series G4 Preferred Stock Dividends — Harken accounts for the payment of the Series G1 Preferred, the Series G2 Preferred and the Series G4 Preferred stock

dividends with shares of Harken common stock as a liability extinguishment in accordance with APB 26. Accordingly, the difference between the carrying value of the preferred stock dividend liability at December 31, 2002, approximately $7.4 million, and the fair market value of the shares of Harken common stock issued by Harken in payment of the liability in January 2003, approximately $227,000, is recognized as a Payment of Preferred Stock Dividends in the Consolidated Statement of Operations for the year ended December 31, 2003 as a $6.8 million increase, net of withholding taxes paid on behalf of the preferred shareholders, to Net Income Attributed to Common Shareholders.

In January and February 2004, Harken paid the Series G1 and Series G2 Preferred stock dividend liability accrued at December 31, 2003 with 373,000 shares of Harken common stock. Accordingly, the difference between the carrying value of the preferred stock dividend liability at December 31, 2003, approximately $3.1 million, and the fair market value of the shares of Harken common stock issued by Harken in payment of the liability in January and February 2004, approximately $425,000, was recognized as a Payment of Preferred Stock Dividends in the Consolidated Statement of Operations in 2004 as a $2.6 million increase to Net Income Attributed to Common Shareholders.

Also in 2004, Harken paid the dividends on the Series G1 Preferred, Series G2 Preferred and Series G4 Preferred accrued at June 30, 2004 and December 31, 2004 with approximately 369,000 shares of Harken common stock. The difference between the carrying value of the preferred stock dividend liability at June 30, 2004 and December 31, 2004, approximately $1.8 million, and the fair market value of the shares of Harken common stock issued by Harken in payment of the liability in June and December 2004, approximately $193,000, is recognized as a Payment of Preferred Stock Dividends in the Consolidated Statement of Operations as of December 31, 2004 as a $1.6 million increase to Net Income Attributed to Common Stock.

The number of common and preferred shares outstanding and shares held in treasury during 2003 and 2004 are as follows:


	Number of Shares
Description	Preferred G1		Preferred G2		Preferred G3		Series G4	Series J	Series L		Series M	Common	Treasury
Balance as of December 31, 2002	403,000		93,000		—		—	—	—		—	25,448,000	(606,000	)
Issuances of common stock	—		—		—		—	—	—		—	72,886,000	—
Issuance of preferred stock	(32,000	)	—		93,000		—	—	—		—	—	—
Repurchases of preferred stock	(5,000	)	—		—		—	—	—		—	—	—
Issuance of preferred dividends	—		—		—		—	—	—		—	947,000	—
Conversion/Redemption of Convertible Notes	(17,000	)	—		—		—	—	—		—	81,577,000	—
Conversions of G1 Preferred	(24,000	)	—		—		—	—	—		—	198,000	—
Conversions of G2 Preferred	—		(31,000	)	—		—	—	—		—	1,102,000	—
Conversions of G3 Preferred	—		—		(16,000	)	—	—	—		—	3,247,000	—

Balance as of December 31, 2003	325,000		62,000		77,000		—	—	—		—	185,405,000	(606,000	)
Issuances of common stock	—		—		—		—	—	—		—	3,646,000	—
Issuances of preferred stock	—		—		—		—	50,000	50,000		50,000	—	—
Issuances of preferred dividends	—		—		—		—	—	—		—	742,000	—
Conversion/Redemption of Convertible Notes	—		—		—		—	—	—		—	2,611,000	—
Conversions of G1 Preferred	(310,000	)	—		—		—	—	—		—	2,979,000	—
Conversions of G2 Preferred	—		(37,000	)	—		—	—	—		—	1,349,000	—
Conversions of G3 Preferred	—		—		(77,000	)	—	—	—		—	15,502,000	—
Redemptions of L Preferred	—		—		—		—	—	(40,000	)	—	7,381,000	—
Conversions of G1 to G4 Preferred	(1,000	)	—		—		76,000	—	—		—	—	—
Conversions of G2 to G4 Preferred	—		(23,000	)	—		2,000	—	—		—	—	—
Treasury shares purchased	—		—		—		—	—	—		—	—	(2,000,000	)

Balance as of December 31, 2004	14,000		2,000		—		78,000	50,000	10,000		50,000	219,615,000	(2,606,000	)

Accumulated Other Comprehensive Income — At January 1, 2003, the balance in Other Comprehensive Income was the accumulated foreign currency translation adjustment relating to prior periods. Since 1998, Harken has accounted for its international operations using the U.S. dollar as the functional currency, and as such, foreign currency gains and losses are reflected in the Statement of Operations. During 2003, Harken recorded unrealized holding gains of $606,000 on its available for sale investment in NOIT in Other Comprehensive Income in stockholders’ equity in Harken’s Consolidated Balance Sheet at December 31, 2003. In February 2004, upon the sale of Harken’s investment in NOIT, the accumulated holding gain of $606,000 in Other Comprehensive Income was realized into earnings.

Rights Offering — In February 2003, Harken distributed to holders of its common stock, Series G1 preferred, and Series G2 preferred, at no charge, nontransferable subscription rights to purchase shares of its common stock. These shares of common stock included preferred stock purchase rights attached to such common stock under the Stockholder Rights Plan (see further discussion below). Such holders received one subscription right for each share of common stock they owned (or in the case of the Series G1 preferred and Series G2 preferred, one subscription right for each share of common stock issuable upon conversion) at the close of business on January 30, 2003. Harken distributed 32,154,867 subscription rights exercisable for up to 72,885,437 shares of common stock.

Each subscription right entitled the holders to purchase 2.2667 shares of common stock at a subscription price of $0.311 per right (or $0.1372 per share). The subscription rights expired on March 13, 2003. In connection with the rights offering, subscription rights were properly exercised for 13,169,779 shares of common stock for an aggregate purchase price of approximately $1,807,000 during 2003.

Standby Purchase Agreement — On September 6, 2002, Harken entered into a standby purchase agreement with Lyford that defined Harken’s rights and obligations, and the rights and obligations of Lyford, (the “Standby Commitment”). This agreement was amended on November 22, 2002. The standby purchase agreement obligated Harken to sell, and required Lyford to subscribe for and purchase from Harken, a number of shares of common stock equal to the Shortfall divided by the subscription price per share. The “Shortfall” was the amount by which $10,000,000 offering amount exceeded the aggregate subscription price paid by the stockholders who subscribed for and purchased shares in the offering.

During 2002, as compensation to Lyford for its Standby Commitment, Harken paid Lyford a Standby Commitment Fee of $600,000 by issuing 1,714,286 shares of common stock to Lyford (the “Standby Commitment Fee Shares”), with each such share being attributed a value of $0.35. Harken also paid Lyford $50,000, in cash, in 2002 for its legal fees in connection with the rights offering.

Pursuant to the standby purchase agreement, on March 20, 2003, Lyford purchased 59,716,227 shares of common stock from Harken for an aggregate purchase price of approximately $8,193,000. Lyford paid approximately $3,185,000 in cash to Harken. After giving effect to the consummation of Harken’s rights offering and the standby purchase agreement, Lyford became the holder of approximately 62% of Harken’s outstanding common stock, which resulted in a change of control of Harken. As of December 31, 2004, Lyford’s ownership has been subsequently reduced to approximately 30% in the aggregate due to the conversions of certain convertible notes payable and certain preferred shares into shares of Harken common stock.

Private Placement of Common Stock - In March 2004, Harken issued 3.6 million shares of Harken common stock in a private placement offering to two institutional investors for a total of $3.2 million in cash, less transaction costs. In connection with this private placement common stock offering, in March 2004, Harken issued to those investors, warrants to purchase 1.75 million shares of Harken’s common stock. These warrants expired in March 2005.

Issuance of Convertible Notes - In December 2003, Harken issued to qualified purchasers a total of $5 million of 4.25% Convertible Notes. At December 31, 2004, approximately $3.3 million of the 4.25% Convertible Notes remain outstanding. During 2004, Harken extinguished certain amounts of the 4.25% Convertible Notes by issuing shares of Harken common stock based on the conversion price in accordance with the original terms of the note agreements. See Note 11 - Convertible Notes Payable for further discussion. Such 4.25% Convertible Notes are convertible into shares of Harken common stock at a conversion price of $1.25 per share, subject to adjustment in certain circumstances.

In August 2004, Harken issued to qualified purchasers a total of $5.245 million aggregate principal amount of its 5% Convertible Notes which are convertible into shares of Harken common stock at a conversion price of $0.52, subject to adjustments in certain circumstances. See Note 11 - Convertible Notes Payable for further discussion.

Stockholder Rights Plan — In April 1998, Harken adopted a rights agreement (the “Rights Agreement”) whereby a dividend of one preferred share purchase right (a “Right”) was paid for each outstanding share of Harken common stock. The Rights will be exercisable only if a person acquires beneficial ownership of 15% or more of Harken common stock (an “Acquiring Person”), or commences a tender offer which would result in beneficial ownership of 15% or more of such stock. When they become exercisable, each Right entitles the registered holder to purchase from Harken one one-thousandth of one share of Series E Junior Participating Preferred Stock (“Series E Preferred Stock”), at a price of $35.00 per one one-thousandth of a share of Series E Preferred Stock, subject to adjustment under certain circumstances. During 2002, Harken’s Board of Directors amended the Rights Agreement to exclude from the definition of an Acquiring Person certain parties who have received or would receive beneficial ownership pursuant to certain transactions, including the rights offering and the redemption of Harken’s 5% European Notes.

Upon the occurrence of certain events specified in the Rights Agreement, each holder of a Right (other than an Acquiring Person) will have the right to purchase, at the Right’s then current exercise price, shares of Harken common stock having a value of twice the Right’s exercise price. In addition, if, after a person becomes an Acquiring Person, Harken is involved in a merger or other business combination transaction with another person in which Harken is not the surviving corporation, or under certain other circumstances, each Right will entitle its holder to purchase, at the Right’s then current exercise price, shares of common stock of the other person having a value of twice the Right’s exercise price.

Unless redeemed by Harken earlier, the Rights will expire on April 6, 2008. Harken will generally be entitled to redeem the Rights in whole, but not in part, at $.01 per Right, subject to adjustment. No Rights were exercisable under the Rights Agreement at December 31, 2004. The terms of the Rights generally may be amended by Harken without the approval of the holders of the Rights prior to the public announcement by Harken or an Acquiring Person that a person has become an Acquiring Person.

(14) STOCK OPTION PLAN

Harken has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS 123 requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of Harken’s employee stock options equals or exceeds the market price of the underlying

stock on the date of grant, generally, no compensation expense is recognized. However, the July 2004 modification of the Global Share plan changed the plan from a fixed plan to a variable plan. Accordingly in 2004, Global recorded share-based compensation expense of $2.9 million attributable to the vested options as of the date of the modification. The compensation expense was equal to the difference between the exercise price of the options and Global’s stock price on the date of modification. Compensation costs relating to the unvested options is recorded over the remaining vesting period. Additionally, since the Global share price was greater than the option exercise price, variable plan accounting requires compensation expense (or benefit) to be recognized for subsequent changes in Global’s share price for all options outstanding under the plan. During 2004, Harken recognized additional compensation expense of $3 million attributable to the remaining options which vested during the period following the modification and to the increase in the Global share price from the date of the modification or option grant to December 31, 2004.

Harken’s 1993 Stock Option and Restricted Plan authorized the grant of options to Harken employees and directors for up to 400,000 shares of Harken common stock. Harken’s 1996 Stock Option and Restricted Stock Plan authorized the grant of 1,852,500 shares of Harken common stock. All options granted under these plans had 10-year terms, vested and became fully exercisable at the end of 4 years of continued employment. At December 31, 2004, all of Harken’s previously issued and/or outstanding employee stock options had expired or were previously voluntarily surrendered. In 2004 and after duly authorized action by Harken’s Board of Directors, Harken’s stock option plans have been terminated. See Note 8 – Global Warrants and Stock Options for discussion on Global stock options. Global’s 2002 Stock Option Plan authorized the grant of options to Global employees and directors for up to 4,155,000 shares of Global common stock. All options granted have 10-year terms, vest and become fully exercisable at the end of 3 years of continued employment.

The weighted average fair value of Harken’s options issued in 2002 and 2003 was $0.43 and $0.19 per share, respectively. The weighted average fair value of Global’s options issued in 2002 and 2004 was $0.34 and $0.55 share, respectively.

A summary of Harken’s and Global’s stock option activity, and related information for the years ended December 31, 2002, 2003 and 2004 follows (not in thousands):


	Year Ended December 31,
	2002				2003				2004
	Options		Weighted- Average Exercise Price		Options		Weighted- Average Exercise Price		Options		Weighted- Average Exercise Price
Outstanding-beginning of year	1,553,252		$	20.81	4,819,485		$	6.63	3,381,000		$	0.77
Granted	3,380,000		$	0.70	50,000		$	0.23	780,000		$	2.91
Exercised	—		$	—	—		$	—	(132,000	)	$	0.71
Forfeited	(113,767	)	$	24.50	(1,488,485	)	$	19.78	(6,000	)	$	38.65

Outstanding-end of year	4,819,485		$	6.63	3,381,000		$	0.77	4,023,000		$	1.13
Exercisable-end of year	1,121,098		$	24.83	1,131,000		$	0.82	2,118,000		$	0.71

Exercise prices for Harken’s options outstanding as of December 31, 2002 ranged from $0.51 to $63.75. Exercise prices for Harken’s options outstanding as of December 31, 2003 ranged from $8.125 to $63.75. The exercise price for Global’s options outstanding as of December 31, 2002 and 2003 was 50 UK pence. Exercise

prices for Global’s options outstanding as of December 31, 2004 ranged from 50 UK pence ($0.71) to 151 UK pence ($2.91). All stock options granted, exercised and outstanding as of the year ended December 31, 2004 are related to Global.

(15) INCOME TAXES

The total provision for income taxes/(benefit) consists of the following:


	Year Ended December 31,
	2002			2003			2004
	(in thousands)
Current Taxes:
Federal - AMT	$	(63	)	$	53		$	18
State		—			—			—
Foreign - Colombia		300			(237	)		561
Deferred		—			—			—

Total	$	237		$	(184	)	$	579

The following is a reconciliation of the reported amount of income tax expense (benefit) for the years ended December 31, 2002, 2003, 2004 to the amount of income tax expense (benefit) that would result from applying domestic federal statutory tax rates to pretax income:


	Year Ended December 31,
	2002			2003			2004
	(in thousands)
Statutory Tax (Benefit)	$	(4,261	)	$	(421	)	$	(5,887	)
Increase/(Decrease) in Valuation Allowance		3,272			56			2,109
Effect of Foreign Operations		300			(237	)		(400	)
Interest Expense Disallowed for Tax		921			383			99
Global Warrant Losses not deducted for tax		—			—			4,830
Minority Interest and Other		5			35			(172	)

Total Tax Expense/(Benefit)	$	237		$	(184	)	$	579

At December 31, 2004, Harken had available for U.S. federal income tax reporting purposes, a net operating loss (NOL) carryforward for regular tax purposes of approximately $109,000,000 which expires in varying amounts during the tax years 2005 through 2023, an alternative minimum tax NOL carryforward of approximately $92,000,000 which expires in varying amounts during the tax years 2005 through 2023, and a statutory depletion carryforward of approximately $3,647,000 which can be carried forward indefinitely to offset future taxable income of Harken subject to certain limitations imposed by the Internal Revenue Code. In March 2003, Harken underwent a change in ownership, within the meaning of Internal Revenue Code Section

382 that will significantly restrict Harken’s ability to utilize its NOLs. At December 31, 2004, Harken had available for Colombian income tax reporting purposes a NOL carryforward of approximately $130,000,000 (US Dollars) that expires in varying amounts during the Colombian tax years 2005 through 2008.

Total deferred tax liabilities, relating primarily to U.S. oil and gas properties as of December 31, 2004, were approximately $800,000. Total deferred tax assets, primarily related to the NOLs and Colombian oil properties, were approximately $85.6 million at December 31, 2004. The total net deferred tax asset is offset by a valuation allowance of approximately $84.8 million at December 31, 2004, resulting in no impact to results of operations.

Total deferred tax liabilities, relating primarily to U.S. oil and gas properties as of December 31, 2003, were approximately $2.1 million. At December 31, 2003, total deferred tax assets, primarily related to the NOLs and Colombian oil and gas properties, were approximately $76 million. The total net deferred tax asset was offset by a valuation allowance of approximately $74 million at December 31, 2003, resulting in no impact to results of operations.

(16) RELATED PARTY TRANSACTIONS

In May 2002, Harken entered into a severance agreement and agreed to forgive the repayment of a short-term loan in the principal amount of $64,000 to a member of management related to his resignation as an officer of Harken due to health reasons. Harken reflected the forgiveness as a charge to earnings during 2002.

In January 2004, pursuant to agreements executed in December 2003, Harken forgave the repayment of the remaining outstanding short-term loans in the principal amounts of $80,000 and $25,000 respectively, to a member of management and to a former member of management related to the surrender of their Harken stock options and reflected the forgiveness as a charge to earnings in 2003. Such loans were recourse loans secured by their options.

In 2001, Global elected to its Board of Directors a director who is also a director of RP&C International Inc. (“RP&C”). RP&C has historically provided financial and transaction consulting services to Harken. In addition, RP&C has served as a financial advisor in connection with Harken’s restructuring of its international assets, obligations and operations through its Global subsidiary. Also, RP&C currently serves as Global’s nominated advisor for the AIM Exchange in London. In connection with these services provided, RP&C has earned consulting and transaction fees and may continue to earn such fees in the future. During 2003, Harken repurchased 5,395 shares of Series G1 Preferred stock held by RP&C in consideration for certain financial and transaction consulting services. During 2003, RP&C, as holders of 13,720 shares of Harken’s Series G1 Preferred Stock and 9,000 shares of Harken’s Series G2 Preferred Stock, elected to exercise their conversion option, and such holders were issued 426,424, shares of Harken common stock. During 2003 and 2004, Harken paid to RP&C approximately $1,028,000 and $927,000, respectively, for transaction costs associated with transaction consulting services. In connection with these services provided, RP&C may continue to earn such fees in the future.

(17) DERIVATIVE INSTRUMENTS

Harken holds certain commodity derivative instruments which are effective in mitigating commodity price risk associated with a portion of its future monthly natural gas and crude oil production and related cash flows. Harken’s oil and gas operating revenues and cash flows are impacted by changes in commodity product

prices, which are volatile and cannot be accurately predicted. Harken’s objective for holding these commodity derivatives is to protect the operating revenues and cash flows related to a portion of its future natural gas sales and crude oil from the risk of significant declines in commodity prices.

In 2003, Harken purchased a crude oil floor contract with a strike price of $23.00 per barrel for a notional amount of 6,500 barrels per month over a period of the contract through December 31, 2003. Harken did not designate the above derivative as a cash flow hedge under SFAS 133, therefore the derivative cost of approximately $34,000 was recognized as a decrease to Other Income in the Consolidated Statement of Operations for the year ended December 31, 2003.

During 2003 and 2004, Harken held a natural gas collar contract consisting of a fixed price floor option of $3.00 per MMBTU and a fixed price cap option of $4.95 per MMBTU covering a notional amount of 70,000 MMBTUs per month. Harken had not designated the above derivative as a hedge under SFAS 133, therefore the derivative was marked to market each period. The change in the fair value of the derivative of approximately $129,000 and $303,000 in 2003 and 2004, respectively, is reflected as a decrease and an increase, respectively, to Other Income in the Consolidated Statement of Operations. Such natural gas collar contract was settled at fair value in June 2004.

In December 2003, Harken purchased a crude oil floor contract with a strike price of $27.00 per barrel for a notional amount of 6,000 barrels per month over a period of the contract from January 1, 2004 through December 31, 2004. In March 2004, Harken terminated this crude oil floor contract and replaced it with a crude oil floor contract with a strike price of $28.00 per barrel for a notional amount of 6,000 barrels per month over a period of the contract from April 1, 2004 through December 31, 2004. In June 2004, Harken terminated this crude oil floor contract and replaced it with a crude oil floor contract with a strike price of $30.00 per barrel for a notional amount of 6,000 barrels per month over a contract period from July through December 2004. Harken designated this derivative as a hedge under SFAS 133. During the year ended December 31, 2004, approximately $105,000 is included as a decrease to Other Income in the Consolidated Statement of Operations to reflect the decrease in value of this crude oil floor contract associated with time value. Such crude oil floor contract was settled at fair value in December 2004.

In January 2004, Harken purchased a natural gas floor contract with a strike price of $4.00 per MMBTU for a notional amount of 90,000 MMBTUs per month over the period of the contract from July 1, 2004 through December 31, 2004. Harken designated this derivative as a hedge under SFAS 133. During the year ended December 31, 2004, approximately $54,000 is included as a decrease to Other Income in the Consolidated Statement of Operations to reflect the decrease in value of this natural gas floor contract associated with time value. Such natural gas floor contract was settled at fair value in December 2004.

In September 2004, Harken purchased a crude oil floor contract with a strike price of $30.00 per barrel for a notional amount of 6,000 barrels per month over a period of the contract from January 1, 2005 through December 31, 2005. Harken designated this derivative as a hedge under SFAS 133. This crude oil floor contract is reflected in Prepaid Expenses and Other Assets in the Consolidated Balance Sheet at December 31, 2004 with a market value of approximately $40,000. During the year ended December 31, 2004, approximately $12,000 is included as a decrease to Other Income in the Consolidated Statement of Operations to reflect the decrease in value of this crude oil floor contract associated with time value.

In October 2004, Harken purchased a natural gas floor contract with a strike price of $5.00 per MMBTU for a notional amount of 70,000 MMBTUs per month over the period of the contract from January 1, 2005 to December 31, 2005. Harken designated this derivative as a hedge under SFAS 133. At December 31, 2004, this hedge no longer qualified for hedge accounting treatment under SFAS 133.This natural gas floor

contract is reflected in Prepaid Expenses and Other Assets in the Consolidated Balance Sheet at December 31, 2004 with a market value of approximately $63,000. During the year ended December 31, 2004, approximately $15,000 is included as a decrease to Other Income in the Consolidated Statement of Operations to reflect the change in fair value of this natural gas floor contract.

Each of the above option floor contracts were originally designated as cash flow hedges of the exposure from the variability of cash flows from future specified production from certain of Harken’s domestic property operations. Gains and losses from commodity derivative instruments are reclassified into earnings when the associated hedged production occurs. Harken holds no derivative instruments which are designated as either fair value hedges or foreign currency hedges. Settlements of oil and gas commodity derivatives are based on the difference between fixed option prices and the New York Mercantile Exchange closing prices for each month during the life of the contracts. Harken monitors its crude oil and natural gas production prices compared to New York Mercantile Exchange prices to assure its commodity derivatives are effective hedges in mitigating its commodity price risk.

(18) OTHER INFORMATION

Quarterly Data — (Unaudited) — The following tables summarize selected quarterly financial data for 2003 and 2004 expressed in thousands, except per share amounts:


	Quarter Ended												Total Year
	March 31			June 30			September 30			December 31			Total Year
2003
Revenues and other	$	7,061		$	6,593		$	7,399		$	6,237		$	27,290
Gross profit		5,351			4,130			4,209			4,150			17,840
Litigation and contingent liability settlements, net		—			—			—			(1,125	)		(1,125	)
Net income / (loss) before cumulative effect of change in accounting principle		2,661			(400	)		16			(2,461	)		(184	)
Net income / (loss)		1,848			(400	)		16			(2,461	)		(997	)
Net income / (loss) attributed to common stock		7,906	(A)		(1,410	)		(806	)		(3,558	)		2,132
Basic income / (loss) per common share	$	0.22	(A)	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	0.02
Diluted income / (loss) per common share	$	0.05	(A)	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	(0.03	)

2004 (restated) (B)
Revenues and other	$	6,677		$	8,158		$	8,308		$	6,599		$	29,742
Gross profit		4,566			5,817			6,305			4,656			21,344
Increase/(decrease) in fair value of Global warrant liability		—			12,481			(1,120	)		2,846			14,207
Share-based compensation expense		—			—			4,167			1,699			5,866
Net income / (loss)		1,511			(12,025	)		(1,274	)		(6,106	)		(17,894	)
Net income / (loss) attributed to common stock		3,409			(11,491	)		(2,750	)		(7,577	)		(18,409	)
Basic income / (loss) per common share	$	0.02		$	(0.06	)	$	(0.01	)	$	(0.04	)	$	(0.09	)
Diluted income / (loss) per common share	$	0.02		$	(0.06	)	$	(0.01	)	$	(0.04	)	$	(0.09	)

^(A)

As reported in Harken’s Form 10-K for the year ended December 31, 2003, Net Income / (Loss) Attributable to Common Stock previously reported was changed since Harken determined it is necessary to account for the January 2003 payment of Harken’s Series G1 and Series G2 Preferred stock dividends with shares of Harken common stock to reflect, in accordance with APB 26, the difference between the carrying value of the preferred stock dividend liability of approximately $7.4 million and the fair market value of the shares of Harken common stock of approximately $227,000 issued by Harken in payment of the liability. The difference was recognized as a Payment of Preferred Stock Dividend Liability in Common Shares of approximately $6.8 million in the Consolidated Statement of Operations for the period ended March 31, 2003 as an increase, net of income taxes paid on behalf of the preferred shareholders, to Net Income Attributed to Common Stock. Harken had previously accounted for the payment of the Series G1 and G2 Preferred stock dividend liability with shares of Harken common stock as a conversion transaction, pursuant to the terms of the respective preferred stock agreement, with the difference between the carrying amount of the preferred stock dividend liability and the par value of the common stock issued recorded to Additional Paid-in Capital. This accounting treatment had no effect on Harken’s revenues, net income, net working capital, or cash flow for the period in question. Basic earnings (loss) per share increased from $0.02 to $0.22, and diluted earnings (loss) per share increased from $0.01 to $0.05 for the quarter ended March 31, 2003 as a result of the increase to Income Attributable to Common Share. Additionally, none of Harken’s debt compliance covenants were affected by this accounting treatment.

^(B)

On March 16, 2005, immediately after completion of the audit and filing of our Annual Report on Form 10-K, we were advised by our independent registered public accounting firm of the discovery of an error in our 2004 financial statements. During the third quarter of 2004, the board of directors of Global amended the Global share option plan to allow for the cashless exercise of options granted to employees under the plan. In accordance with Accounting Principles Board Opinion No 25 , Accounting for Stock Issued to Employees, as interpreted by Financial Accounting Standards Board Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, the modification resulted in variable plan accounting for the Global share option plan. Accordingly, Global is required to record compensation expense attributable to the vested options as of the date of the modification in an amount equal to the difference between the exercise price of the options and Global’s stock price on the date of modification. Unrecognized compensation cost relating to the unvested options, if any, is recorded over the remaining vesting period. Additionally, if the Global share price is greater than the option exercise price, variable plan accounting requires compensation expense (or benefit) to be recognized for subsequent changes in Global’s share price. The financial statements, as previously filed, treated the Global share option plan as a fixed plan and did not include accounting recognition for the modification.

Restatement for the Quarter ended September 31, 2004

As a result of the restatement, for the three months ended September 30, 2004, we recorded share-based compensation expense of $4.2 million, a foreign currency gain of approximately $20,000, and a reduction in minority interest of approximately $600,000 in our Consolidated Statement of Operations and a share-based compensation liability of $4.2 million in our Consolidated Balance Sheet as of September 30, 2004. For the three-month period ended September 30, 2004, net income/(loss) attributable to common shareholders decreased from a net income of $795,000 to a net loss of $2.8 million (decreasing from $0.00 per fully diluted share to ($0.01) per fully diluted share).

Restatement for the Quarter Ended December 31, 2004

As a result of the restatement, for the three months ended December 31, 2004, we recorded share-based compensation expense of $1.7 million, a foreign currency loss of approximately $270,000, and a reduction in minority interest of approximately $293,000 in our Consolidated Statement of Operations and an increase of $1.7 million in the share-based compensation liability in our Consolidated Balance Sheet as of December 31, 2004. Our net loss attributable to common shareholders for the three-month period ended December 31, 2004 increased from $5.9 million to $7.6 million (increasing from ($0.03) per fully diluted share to ($0.04) per fully diluted share)

See Note 22 – Restatement of Financial Statements for further discussion of Harken’s restatement of its 2004 financial statements.

Significant Customers — In 2002, 2003 and 2004, Ecopetrol, which purchases the majority of Global’s Colombia oil production, represented, 30%, 29% and 30%, respectively, of Harken’s consolidated revenues. In addition, management does not feel that the loss of a significant domestic purchaser would significantly impact the operations of Harken due to the availability of other potential purchasers for its oil and gas production.

Operating Segment Information — Harken divides its operations into three operating segments which are managed and evaluated as separate operations. Gulf Energy Management, Inc. (“GEM”), a wholly-owned subsidiary of Harken, manages its domestic operations held through its other domestic wholly-owned subsidiaries. GEM’s operating segment currently relates to exploration, development, production and acquisition efforts in the United States whereby production cash flows are discovered or acquired, and operates primarily through traditional ownership of mineral interests in the various states in which it operates. GEM production is sold to established purchasers and generally transported through existing and well-developed pipeline infrastructure. Global’s operating segment currently relates to exploration, development, production and acquisition efforts in Colombia, Peru and Panama. Global segment production cash flows have been discovered through extensive drilling operations conducted under Association and Exploration and Production Contracts with the state-owned oil and gas companies/ministries in the respective countries. Global’s production is primarily sold to Ecopetrol. During the three-year period ended December 31, 2004, none of Global’s segment revenues related to Peru or Panama. Harken’s investment in IBA represents its third operating segment. IBA engages in trading gas futures contracts, principally in Hungary as well as in the United States. IBA’s operations began in the late fourth quarter of 2004 and was comprised principally of start-up costs.

Harken’s accounting policies for each of its operating segments are the same as those described in Note 1 – Summary of Significant Accounting Policies. There are no intersegment sales or transfers. Revenues and expenses not directly identifiable with any segment, such as certain general and administrative expenses, are allocated by Harken based on various internal and external criteria including an assessment of the relative benefit to each segment.

See Note 20 – Oil and Gas Disclosures for geographic information regarding Harken’s long-lived assets. Harken’s financial information, expressed in thousands, for each of its operating segments is as follows for each of the three years in the period ended December 31, 2004:


	GEM			GLOBAL			IBA			Total
For the year ended December 31, 2002:
Operating revenues	$	17,370		$	7,619			—		$	24,989
Oil and gas operating expenses		7,292			2,039			—			9,331
Interest and other income		(44	)		410			—			366
Depreciation and amortization		7,498			4,012			—			11,510
Full cost valuation allowance		—			521			—			521
Provision for asset impairments		—			400			—			400
Litigation and contingent liability settlements, net		1,288			—			—			1,288
Interest expense and other, net		4,238			295			—			4,533
Income tax (benefit) expense		(63	)		300			—			237
Segment loss		(6,298	)		(3,509	)		—			(9,807	)
Capital expenditures		3,688			2,324			—			6,012
Total assets at end of year		59,783			25,797			—			85,580

For the year ended December 31, 2003:
Operating revenues	$	18,753		$	8,556			—		$	27,309
Oil and gas operating expenses		7,071			2,398			—			9,469
Interest and other income		(122	)		103			—			(19	)
Depreciation and amortization		5,804			3,137			—			8,941
Litigation and contingent liability settlements, net		1,125			—			—			1,125
Interest expense and other, net		3,312			82			—			3,394
Income tax (benefit) expense		53			(237	)		—			(184	)
Segment income (loss)		(1,616	)		619			—			(997	)
Capital expenditures		4,427			4,149			—			8,576
Total assets at end of year		54,616			26,396			—			81,012

For the year ended December 31, 2004:
Operating revenues	$	18,334		$	10,974		$	—		$	29,308
Oil and gas operating expenses		5,428			2,536			—			7,964
Interest and other income (restated)		825			(185	)		(206	)		434
Depreciation and amortization		7,304			3,400			9			10,713
Increase in fair value of Global warrant liability		14,207			—			—			14,207
Interest expense and other, net		412			2			—			414
Income tax (benefit) expense		(8	)		561			26			579
Segment income (loss) (restated)		(11,277	)		(5,720	)		(897	)		(17,894	)
Capital expenditures		8,770			8,891			106			17,767
Total assets at end of year		62,670			33,108			11,703			107,481

(19) EARNINGS (LOSS) PER SHARE

Basic earnings per share includes no dilution and is computed by dividing income or loss attributed to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if security interests were exercised or converted into common stock.

The following table sets forth the computation of basic and diluted earnings / (loss) per share for the years ended December 31, 2002, 2003 and 2004.


	2002							2003							2004
(in thousands, except per share data)	Net (loss) Attributed to Common Stock			Weighted- Average Shares	Per-Share (Loss)			Net earnings (loss) Attributed to Common Stock			Weighted- Average Shares	Per-Share earnings (Loss)			Net earnings (loss) Attributed to Common Stock (restated)		Weighted- Average Shares	Per-Share earnings (Loss) (restated)
Basic earnings per share	$	(13,917	)	21,742	$	(0.64	)	$	2,132		112,695	$	0.02		(18,409	)	201,702	(0.09	)
Effect of dilutive securities:
5% European Notes (A)		—		—		—			(5,254	)	95		—		—		—	—

Diluted earnings per share	$	(13,917	)	21,742	$	(0.64	)	$	(3,122	)	112,790	$	(0.03	)	(18,409	)	201,702	(0.09	)

(A)	Represents 5% European Notes extinguished in March and May 2003. Gains on these transactions have been treated as a reduction to income attributed to common stock as such gains would not have occurred had these securities been converted by the holder.

Not included in the calculation for diluted earnings per share were 1,444,485 and 6,000 employee stock options outstanding during the years ended December 31, 2002 and 2003, respectively. Harken’s 4.25% Convertible Notes, 5% Convertible Notes, 7% European Notes, Benz Convertible Notes and Series G-1, G-2, G-3, G-4, J, L and M Preferred Stock were also excluded from the calculation of diluted earnings per share as their effect would have been antidilutive. The inclusion of these options would have been antidilutive since they were not “in the money” at the end of the respective years. Since Harken incurred net losses attributed to common stock for 2002 and 2004, no dilution of the net losses per share would have resulted from the assumed conversions of the convertible notes and convertible preferred stock, discussed above.

(20) OIL AND GAS DISCLOSURES

Costs incurred in property acquisition, exploration and development activities, expressed in thousands:


	Year Ended December 31,
	2002		2003		2004
GEM costs incurred:
Acquisition of properties
Evaluated	$	2,646	$	—	$	—
Exploration		566		337		366
Development		476		2,764		7,595
Cumulative effect of asset retirement costs		—		1,326		—

Total domestic costs incurred	$	3,688	$	4,427	$	7,961

GLOBAL costs incurred:
Exploration	$	622	$	323	$	40
Development		1,702		3,470		8,365
Cumulative effect of asset retirement costs		—		356		—

Total Middle American costs incurred	$	2,324	$	4,149	$	8,405

Global costs during 2002 include $353,000 and $233,000 of costs related to Peru and Panama, respectively. Global costs during 2003 include $139,000 and $184,000 of costs related to Peru and Panama, respectively. Global costs during 2004 include $35,000 and $5,000 of costs related to Peru and Panama respectively.

Capitalized Costs Relating to Oil and Gas Producing Activities, expressed in thousands:


	As of December 31,
	2002			2003			2004
Capitalized costs:
Unevaluated Peru properties	$	562		$	701		$	736
Unevaluated Panama properties		304			488			493
Unevaluated GEM properties		2,617			1,923			914
Evaluated Colombia properties		184,491			188,219			196,649
Evaluated domestic properties		156,072			153,863			163,055
Colombian production facilities		15,409			15,931			16,210
GEM production facilities		508			508			508

Total capitalized costs		359,963			361,633			378,565
Less accumulated depreciation and amortization		(291,159	)		(299,791	)		(309,833	)

Net capitalized costs	$	68,804		$	61,842		$	68,732

Results of Operations from Oil and Natural Gas Producing Activities

(thousands of dollars)


	Year Ended December 31,
	2002		2003			2004
Oil and natural gas revenues	$	24,989	$	27,309		$	29,308
Less:
Oil and natural gas operating costs		9,331		9,469			7,964
Depreciation and amortization		11,510		8,941			10,713
Provision for asset impairments		400		—			—
Full cost valuation allowance		521		—			—
Accretion expense		335		460			388
Income tax expense /(benefit)		237		(184	)		579

		22,334		18,686			19,644

Results of operations from oil and natural gas producing activities	$	2,655	$	8,623		$	9,664

Oil and Gas Reserve Data — (Unaudited) — The following information is presented with regard to Harken’s proved oil and gas reserves. The reserve values and cash flow amounts reflected in the following reserve disclosures are based on prices as of year end. Global reflected proved reserves in Colombia related to its Alcaravan, Bolivar, Bocachico Association Contracts and the Rio Verde Exploration and Production Concession Contract. Global has reflected no proved reserves related to its Peru or Panama operations.

In February and October 2001, Global was notified by Ecopetrol that Global could proceed with the development and production of the Buturama and Palo Blanco fields, respectively, on a sole-risk basis. As such, Global is entitled to receive Ecopetrol’s share of production after royalty, until Global has recovered 200% of its costs, after which time Ecopetrol could elect to begin to receive its 50% working interest share of production. In light of Ecopetrol’s election not to participate in these fields, Global has reflected its 80% share of future net cash flows from the Buturama field in its proved reserves as of December 31, 2004.

settled through a unitization proceeding. This proceeding will affect the Cajaro #1 net revenues and costs assigned to both Ecopetrol and Global. Although the ultimate results of the unitization proceeding cannot be determined at this time, in October 2004, Global, based on the proposed unitization maps and data presented by Ecopetrol, began reflecting a 50% interest in net production from the Cajaro #1 well from the Association Contract area in the cash flows in its financial statements and reserve information as of December 31, 2004.

All Colombian proved reserves are net of Ecopetrol’s royalty pursuant to each related Association and Concession Contract. Global’s Colombian reserves in the Bolivar, Alcaravan and Bocachico and Rio Verde Contract Blocks have been prepared by Ryder Scott Company. For further discussion of Global’s Colombian operations, see Note 7 – Middle American Operations.

GEM’s reserves reflect reductions for certain producing properties which were sold for cash during 2002 and 2003. GEM”s reserves at December 31, 2004 have been prepared by Netherland, Sewell & Associates, Inc.

Proved oil and gas reserves are defined as the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Reservoirs are considered proved if economic productibility is supported by either actual production or conclusive formation tests. The area of a reservoir considered proved includes that portion delineated by drilling and defined by gas-oil and/or oil-water contacts, if any, and the immediately adjoining portions not yet drilled, but which can be reasonably judged as economically productive on the basis of available geological and engineering data. Reserves which can be produced economically through application of improved recovery techniques are included in the “proved” classification when successful testing by a pilot project, or the operation of an installed program in the reservoir, provides support for the engineering analysis on which the project or program was based.

The reliability of reserve information is considerably affected by several factors. Reserve information is imprecise due to the inherent uncertainties in, and the limited nature of, the data base upon which the estimating of reserve information is predicated. Moreover, the methods and data used in estimating reserve information are often necessarily indirect or analogical in character rather than direct or deductive. Furthermore, estimating reserve information, by applying generally accepted petroleum engineering and evaluation principles, involves numerous judgments based upon the engineer’s educational background, professional training and professional experience. The extent and significance of the judgments to be made are, in themselves, sufficient to render reserve information inherently imprecise.

“Standardized measure” relates to the estimated discounted future net cash flows, as adjusted for Harken’s asset retirement obligations, and major components of that calculation relating to proved reserves at the end of the year in the aggregate and by geographic area, based on year end prices, costs, and statutory tax rates and using a 10% annual discount rate. Prices at December 31, 2004 were based on NYMEX prices of $40.25/barrel and $6.18/mmbtu, as adjusted for quality differentials.


	(Unaudited)
	United States				Colombia			Total Worldwide
	Oil (Barrels)		Gas (Mcf)		Oil (Barrels)		Gas (Mcf)	Oil (Barrels)		Gas (Mcf)
	(in thousands)
Proved reserves:
As of December 31, 2001	2,614		39,393		5,012		—	7,626		39,393
Purchases of reserves in place	125		902		—		—	125		902
Extensions and discoveries	2		551		—		—	2		551
Revisions	837		(173	)	946		—	1,783		(173	)
Production	(267	)	(3,225	)	(465	)	—	(732	)	(3,225	)
Sales of reserves in place	(25	)	(2,940	)	—		—	(25	)	(2,940	)

As of December 31, 2002	3,286		34,508		5,493	⁽¹⁾	—	8,779	⁽¹⁾	34,508
Extensions and discoveries	—		706		—		—	—		706
Revisions	(131	)	(3,404	)	(722	)	—	(853	)	(3,404	)
Production	(238	)	(2,133	)	(394	)	—	(632	)	(2,133	)
Sales of reserves in place	(1,569	)	(15,463	)	—		—	(1,569	)	(15,463	)

As of December 31, 2003	1,348		14,214		4,377	⁽¹⁾	—	5,725	⁽¹⁾	14,214
Extensions and discoveries	310		1,760		490		—	800		1,760
Revisions	(70	)	(859	)	(175	)	—	(245	)	(859	)
Production	(182	)	(1,788	)	(366	)	—	(548	)	(1,788	)
Sales of reserves in place	—		—		(126	)	—	(126	)	—

As of December 31, 2004	1,406		13,327		4,200	⁽¹⁾	—	5,606		13,327

Proved developed reserves at:
December 31, 2002	1,945		18,630		1,091	⁽²⁾	—	3,036	⁽²⁾	18,630
December 31, 2003	768		9,488		1,178	⁽³⁾	—	1,946	⁽³⁾	9,488
December 31, 2004	553		2,391		1,282	⁽⁴⁾	—	1,835	⁽⁴⁾	2,391

(1)	Includes approximately 790,000, 629,000 and 615,000 barrels of total proved reserves attributable to a 14.38%, 14.38% and 14.65% minority interest of a consolidated subsidiary at December 31, 2002, 2003 and 2004, respectively.

(2)	Includes approximately 157,000 barrels of total proved developed reserves attributable to a 14.38% minority interest of a consolidated subsidiary.

(3)	Includes approximately 169,000 barrels of total proved developed reserves attributable to a 14.38% minority interest of a consolidated subsidiary.

(4)	Includes approximately 188,000 barrels of total proved developed reserves attributable to a 14.65% minority interest of a consolidated subsidiary.

Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves:


	(Unaudited)
	United States			Colombia			Total Worldwide
	(in thousands)
December 31, 2003:
Future cash inflows	$	135,410		$	110,575		$	245,985
Production costs		(41,241	)		(19,695	)		(60,936	)
Development costs		(19,338	)		(17,148	)		(36,486	)
Future income taxes		(8,768	)		(3,583	)		(12,351	)

Future net cash flows		66,063			70,149			136,212
10% discount factor		(11,822	)		(17,314	)		(29,136	)

Standardized measure of discounted future net cash flows (3)	$	54,241		$	52,835	⁽¹⁾	$	107,076	⁽¹⁾

December 31, 2004:
Future cash inflows	$	150,816		$	152,183		$	302,999
Production costs		(43,489	)		(37,891	)		(81,380	)
Development costs		(23,046	)		(15,216	)		(38,262	)

Future income taxes		(936	)		(4,254	)		(5,190	)

Future net cash flows		83,345			94,822			178,167
10% discount factor		(24,835	)		(28,682	)		(53,517	)

Standardized measure of discounted future net cash flows (3)	$	58,510		$	66,140	⁽²⁾	$	124,650	⁽²⁾

(1)	Includes approximately $7,598,000 of discounted future net cash flows attributable to a 14.38% minority interest of a consolidated subsidiary.

(2)	Includes approximately $9,690,000 of discounted future net cash flows attributable to a 14.65% minority interest of a consolidated subsidiary.

(3)	Cash flows associated with asset retirement obligations are included in the Standardized Measure of Discounted Future Net Cash Flows.


	(Unaudited)
	2002			2003			2004
	(in thousands)
Worldwide
Standardized measure — beginning of year	$	63,297		$	160,237	⁽¹⁾	$	107,076	⁽²⁾
Increase (decrease)
Sales, net of production costs		(15,786	)		(17,840	)		(21,344	)
Net change in prices, net of production costs		92,247			34,007			43,922
Development costs incurred		636			6,111			16,192
Change in future development costs		1,121			2,856			(13,478	)
Change in future income taxes		473			205			3,355
Revisions of quantity estimates		22,247			(22,513	)		(8,161	)
Accretion of discount		6,328			16,024			10,707
Changes in production rates, timing and other		(11,490	)		(39,517	)		(27,718	)
Extensions and discoveries, net of future costs		1,340			1,776			14,099
Sales of reserves-in-place		(4,400	)		(34,270	)		—
Purchases of reserves-in-place		4,224			—			—

Standardized measure — end of year	$	160,237	⁽¹⁾	$	107,076	⁽²⁾	$	124,650	⁽³⁾

(1)	Includes approximately $8,349,000 of discounted future net cash flows attributable to a 14.38% minority interest of a consolidated subsidiary.

(2)	Includes approximately $7,598,000 of discounted future net cash flows attributable to a 14.38% minority interest of a consolidated subsidiary.

(3)	Includes approximately $9,690,000 of discounted future net cash flows attributable to a 14.65% minority interest of a consolidated subsidiary.

(21) COMMITMENTS AND CONTINGENCIES

Operating Leases — Harken leases its corporate and certain other office space and certain field operating offices. Total office lease payments during 2002, 2003 and 2004 were $736,000, $698,000 and $465,000, respectively, net of applicable sublease arrangements. Future minimum rental payments required under all leases that have initial or remaining noncancellable lease terms in excess of one year as of December 31, 2004, net of sublease reimbursements of $234,000, $214,000 and $0 in 2005, 2006 and 2007, respectively, are as follows:


Year	Amount
2005	$	590,000
2006		543,000
2007		111,000
Thereafter		37,000

Total minimum payments required	$	1,281,000

In 2004, Global was advised of Ecopetrol’s intent to declare the Cajaro #1 well commercial pursuant to the Alcaravan Contract terms. As of March 16, 2005, Global and Ecopetrol continue to negotiate the terms of Ecopetrol’s commerciality declaration, including the extent of the commercial area and the potential need for unitization of the Cajaro #1 commercial area and a portion of Global’s recently acquired Los Hatos Concession Contract which is adjacent to the Alcaravan Contract area. As a result, Global’s net revenue interest in the production from the Mirador discovery on the Cajaro #1 well, has been affected by Ecopetrol’s declaration of commerciality. As of December 31, 2004, Global has been reimbursed by Ecopetrol out of Ecopetrol’s share of production, net of royalties, for 50% of all seismic costs and direct exploratory well costs (including costs related to dry holes) incurred prior to the point of Ecopetrol’s participation. Production from Cajaro associated with the Alcaravan Contract area will be allocated as follows: Ecopetrol, on behalf of the Colombian government, will receive a royalty interest of 8% of all production, and all production (after royalty payments) attributable to the Alcaravan Contract area will be allocated 50% to Ecopetrol and 50% to Global. Ecopetrol and Global will be responsible for all future development costs and operating expenses in direct proportion to their interest in production. Based upon the extent of the area declared commercial in relation to the Cajaro #1 well by Ecopetrol, Global has advised Ecopetrol, ANH and the Ministry of Energy that Global’s Los Hatos concession contract area which is adjacent to Global’s Alcaravan contract, is being drained of Mirador formation oil reserves located beneath the Los Hatos contract. Because two contract areas are being drained by one well, it is our opinion that Colombian law requires the division of reserves and revenues be settled through a unitization proceeding. This proceeding will affect the Cajaro #1 net revenues and costs assigned to both Ecopetrol and Global. Although the ultimate results of the unitization proceeding cannot be determined at this time, Global, based on the proposed unitization maps and data presented by Ecopetrol, began in October 2004 reflecting a 50% interest in net production from the Cajaro #1 well associated with the Alcaravan Contract area in the cash flows in its financial statements and reserve information as of December 31, 2004. Until the unitization of the affected areas within the Alcaravan and the Los Hatos Contract areas is resolved, the ultimate impact on the distribution of production from the Cajaro #1 well cannot be definitively ascertained. Harken believes that the ultimate outcome of the unitization process will not have a material adverse effect on our financial conditions or operations. Harken has provided a net reserve of approximately $90,000 in accrued liabilities owed to Ecopetrol as of December 31, 2004 based on Harken’s estimate as to the reasonable and probable outcome of the unitization on the Cajaro #1 well. As noted above, the ultimate impact on the unitization of the affected areas within the Alcaravan and the Los Hatos Contract is uncertain and, therefore, additional losses may be incurred in the future. However, the amount of additional losses cannot be reasonably estimated at this time.

Operational Contingencies — The exploration, development and production of oil and gas are subject to various, federal and state laws and regulations designed to protect the environment. Compliance with these regulations is part of Harken’s day-to-day operating procedures. Infrequently, accidental discharge of such materials as oil, natural gas or drilling fluids can occur and such accidents can require material expenditures to correct. Harken maintains levels of insurance it believes to be customary in the industry to limit its financial exposure. Management is unaware of any material capital expenditures required for environmental control during the next fiscal year.

In September 1997, Harken Exploration Company, a wholly-owned subsidiary of Harken, was served with a lawsuit filed in U.S. District Court for the Northern District of Texas, Amarillo Division, styled D. E. Rice and Karen Rice, as Trustees for the Rice Family Living Trust (“Rice”) vs. Harken Exploration Company. In the lawsuit, Rice alleged damages resulting from Harken Exploration Company’s alleged spills on Rice’s property and claimed that the Oil Pollution Act (“OPA”) should have applied in this circumstance. Rice alleged that remediation of all of the alleged pollution on its land would cost approximately $40,000,000. In October 1999, the trial court granted Harken’s Motion for Summary Judgment that the OPA did not apply and dismissed the Rice claim under it. Rice appealed the trial court’s summary judgment to the U.S. Fifth Circuit Court of Appeals. In April 2001, the Fifth Circuit Court of Appeals issued its opinion affirming the trial court’s summary judgment in Harken’s favor. Rice did not appeal the Fifth Circuit Court of Appeals decision. On August 15, 2002, Harken was served with a new suit filed by Rice in state court in Hutchinson County, Texas. In this new state case, Rice sought approximately $40,000,000 in remediation costs and damages. Formal mediation of this matter took place in January 2004. Following mediation, the parties reached a settlement agreement, whereby Harken and Harken’s insurers agreed to pay to Rice the total sum of $1.9 million in return for a full and final release for all disputes and claims alleged by Rice against Harken. The insurer agreed to contribute $775,000 of this settlement amount. Based on the settlement agreement and the contribution from the insurers, Harken has accrued and expensed $1.125 million in December 2003. Harken’s insurers, pursuant to a separate Fifth Circuit Court of Appeals order, have covered Harken’s legal costs of defense in the litigation. In April 2004 the trial court, upon joint motion of the parties, dismissed the Rice lawsuit in its entirety.

420 Energy Investment, Inc. and ERI Investments, Inc. (collectively “420 Energy”) filed a lawsuit against XPLOR Energy, Inc., a wholly-owned subsidiary of Harken (“XPLOR”), on December 21, 1999 in the New Castle County Court of Chancery of the State of Delaware. In their complaint, 420 Energy alleged that they were entitled to appraisal and payment of the fair value of their common stock in XPLOR as of the date XPLOR merged with Harken. Harken has relied on an indemnity provision in the XPLOR merger agreement to tender the costs of defense in this matter to former stockholders of XPLOR. In April 2004, 420 dismissed this lawsuit in its entirety.

In May 2002, Henry C. Magee III (“Magee”) filed a complaint against XPLOR Energy SPV-I, Inc. and XPLOR Energy Operating Company, as the successor in Interest to Araxas SPV-I, Inc. and Araxas Exploration, Inc. in the United States District Court for the Eastern District of Louisiana. In his complaint, Magee alleges that XPLOR breached a contractual obligation relating to a royalty interest assignment from XPLOR’s predecessor in interest, Araxas Exploration, Inc. The court granted Magee’s motion for summary judgment as to a disputed interpretation of the assignment clause but reserved for trial XPLOR’s reformation claim. Subsequent to the summary judgment, Magee asserted additional claims relating to his purported royalty interest assignment.

On September 10, 2004, all parties to the Magee litigation agreed to settle all matters in dispute and related to the disputes at issue in that litigation. The settlement resulted in Harken contributing approximately $157,000 in cash for settlement and compromise of the Magee claims. On December 9, 2004 the parties filed a Joint Motion to dismiss the Magee lawsuit. On December 10, 2004, the court signed and entered its order and judgment dismissing with prejudice the Magee lawsuit.

In October 2003, Xplor was served with a complaint filed by Apache Corporation in the Harris County District Court. Apache sought payment of $219,000 plus interest and attorneys’ fees. Apache alleged that the amount demanded was due pursuant to the terms of a 1998 purchase and sale agreement between Apache and Xplor. In March 2004, Apache and Xplor entered into a compromise and settlement agreement resolving all disputes between the parties and resulting in the dismissal with prejudice to refiling of this case.

In September 2003, Harken de Colombia Ltd., a Harken subsidiary, obtained a copy of a demand submitted on behalf of several former employees of Geophysical Acquistion & Processing Services Ltd. (“GAPS”), a subcontractor to Harken de Colombia Ltd. In their demand, the former GAPS employees request that the Colombian labor courts in Bogotá, Colombia, declare Harken de Colombia jointly liable with GAPS for past wages allegedly due to the former GAPS employees. Harken disputes the allegations submitted by the former GAPS employees and will vigorously defend against those allegations. A similar claim brought by another group of former GAPS employees in La Dorada, Colombia, was successfully rejected by Harken and dismissed by the labor court in that city. In 2003, the court dismissed the claims of the GAPS employees.

In late 2004, Harken de Colombia, Ltd, (“HDC”) determined that a property owner had instituted an action in Colombia against Grant Geophysical, Inc. a subcontractor to HDC, alleging that his property had been damaged by an amount of approximately $1.9 million as a result of certain seismic activities conducted by Grant Geophysical, Inc. on the claimants property. As of March 16, 2005, HDC has not been joined in the litigation, served or officially notified of any claims against it. As a result, Harken considers the claim to be unasserted. HDC’s subcontract with Grant Geophysical contains an indemnity provision requiring Grant Geophysical, Inc. to indemnify HDC for any losses. While HDC will continue to monitor this matter, Harken believes that the ultimate outcome of this matter will not have a material adverse effect on Harken’s financial conditions and results of operations.

In 2004, the Colombian federal taxing authority (“DIAN”) issued a Special Request suggesting that Harken de Colombia, Ltd. (“HDC”) modify its tax return for the year 2001 to reflect additional tax liabilities of approximately $975,000 pursuant to the Colombian presumptive income tax regulations (“PIT”). The Colombian PIT is calculated with reference to the taxpayer’s asset base. In this case, DIAN’s Special Request relates to DIAN’s opinion that HDC understated its asset base for tax purposes in its 2001 return. The basis for DIAN’s position is that HDC had “productive” assets in 2001, namely the Alcaravan and Bolivar Association Contracts that should have been included in HDC’s asset base calculation. HDC has responded to DIAN’s request by pointing out the following: (1) that Colombian statutes require that the asset base for PIT be calculated as of the end of the year preceding the tax year in question; and (2) that for an asset to be considered “productive” Colombian regulations require that Ecopetrol declare sole risk or commerciality as to the asset in question. In our case, those declarations did not occur until 2001. As a result, the Alcaravan and Bolivar contracts were not “productive” assets as of December 31, 2000. HDC faced a similar request for its year ended December 31, 2000 tax return. HDC successfully refuted DIAN’s claim based on the same arguments presented above. Therefore, Harken believes that any liability to Harken or its subsidiaries as a result of this Special Request will not have a material adverse effect on Harken’s financial condition. Harken has not provided a reserve because it cannot reasonably determine the probability of a loss.

Harken provides for reserves related to contingencies when a loss is probable and the amount is reasonably estimable. Harken and its subsidiaries currently are involved in various other lawsuits and other contingencies, which in management’s opinion, will not result in a material adverse effect upon Harken’s financial condition or operations taken as a whole.

(22) RESTATEMENT OF FINANCIAL STATEMENTS

On March 16, 2005, immediately after completion of the audit and filing of the Annual Report on Form 10-K, Harken was advised by its independent registered public accounting firm of the discovery of an error in the 2004 financial statements. During the third quarter of 2004, the board of directors of Harken’s

85% owned subsidiary, Global, amended the Global share option plan to allow for the cashless exercise of options granted to employees under the plan. In accordance with Accounting Principles Board Opinion No 25, Accounting for stock issued to employees, as interpreted by Financial Accounting Standards Board Interpretation No. 44, Accounting for certain transactions involving stock compensation, the modification resulted in variable plan accounting for the Global share option plan. Accordingly, Global is required to record compensation expense attributable to the vested options as of the date of the modification in an amount equal to the difference between the exercise price of the options and Global’s stock price on the date of modification. Unrecognized compensation costs relating to the unvested options are recorded over the remaining vesting period. Additionally, if the Global share price is greater than the option exercise price, variable plan accounting requires compensation expense (or benefit) to be recognized for subsequent changes in Global’s share price. The 2004 financial statements, as previously filed, treated the Global share option plan as a fixed plan and did not include accounting recognition for the modification.

The following table summarizes the impact of the restatement on Harken’s Consolidated Balance Sheet as of September 30, 2004 and as of December 31, 2004 and the impact on the Consolidated Statement of Operations and Statement of Stockholders’ Equity for each of the quarters ended September 30, 2004 and December 31, 2004 and for the year ended December 31, 2004. See Note 18 – Other Information for a discussion of the impact of the restatement on the 2004 interim financial data. This restatement of the accounting for the modification of the Global stock option plan had no effect on Harken’s oil and gas revenues, net working capital, cash flows from operations, investing or financing activities. Harken had no debt compliance covenants that were affected by the restatement. No other years or periods were affected by the restatement. The following amounts are expressed in thousands.


	2004
	Quarter Ended September 30,						Quarter Ended December 31,						Year Ended December 31,
	Previously Reported			Restated			Previously Reported			Restated			Previously Reported			Restated
Revenues:
Oil and gas operations	$	8,206		$	8,206		$	6,664		$	6,664		$	29,308		$	29,308
Interest and other income		82			102			208			(65	)		687			434

		8,288			8,308			6,872			6,599			29,995			29,742
Costs and Expenses:
Oil and gas operating		1,901			1,901			2,008			2,008			7,964			7,964
General and administrative, net		1,853			1,853			3,722			3,722			9,222			9,222
Share-based compensation		—			4,167			—			1,699			—			5,866
Depreciation and amortization		2,804			2,804			2,326			2,326			10,713			10,713
Increase/ (decrease) in Global warrant liability		(1,120	)		(1,120	)		2,846			2,846			14,207			14,207
Accretion expense		97			97			84			84			388			388
Interest and other, net		104			104			167			167			414			414

		5,639			9,806			11,153			12,852			42,908			48,774
Gains/(losses) from changes and extinguishments of debt		—			—			(170	)		(170	)		155			155
Gain on investment		—			—			—			—			990			990
Income / (loss) before income taxes	$	2,649		$	(1,498	)	$	(4,451	)	$	(6,423	)	$	(11,768	)	$	(17,887	)
Income Tax		(171	)		(171	)		(85	)		(85	)		(579	)		(579	)
Minority Interest		(207	)		395			109			402			(323	)		572

Net income / (loss)	$	2,271		$	(1,274	)	$	(4,427	)	$	(6,106	)	$	(12,670	)	$	(17,894	)
Net income / (loss) attributable to common stock	$	795		$	(2,750	)	$	(5,898	)	$	(7,577	)	$	(13,185	)	$	(18,409	)
Basic and diluted net income (loss) per common share		0.00			(0.01	)		(0.03	)		(0.04	)		(0.07	)		(0.09	)
Balance Sheet and Stockholders’ Equity Data
Total liabilities		39,014			42,559			45,675			50,899			45,675			50,899
Stockholders’ equity		52,140			48,595			56,326			51,102			56,326			51,102

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its filings with the Securities and Exchange Commission (SEC) are recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including its chief executive and chief financial officers, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” as defined in in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In designing and evaluating the disclosure controls and procedures, management has recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply judgment in evaluating its controls and procedures.

Restatement of Previously Issued Financial Statements:

On March 16, 2005, immediately after completion of the audit and filing of the Annual Report on Form 10-K, the Company was advised by its independent registered public accounting firm, Hein & Associates LLP (“Hein”), of the discovery of an error in the 2004 financial statements relating to the July 2004 modification of the share option plan by the board of directors of the Company’s 85% owned subsidiary, Global Energy Development PLC (“Global”). Harken, after consultation with the audit committee of the board of directors, determined that the error was material and required restatement of the previously issued Annual Report on Form 10-K for the year ended December 31, 2004 and selected quarterly financial information for the quarter ended September 30, 2004. See Note 22 to the Consolidated Financial Statements of this Annual Report on Form 10-K/A for a summary of the effects of the restatement of the Company’s consolidated financial statements.

In conjunction with the Company’s decision to restate its financial statements and the identification of a material weakness in its internal control over financial reporting, the Company has reevaluated its disclosure controls and procedures, and the Company’s Chief Executive Officer and Chief Financial Officer have concluded that these controls were not effective as of December 31, 2004.

Management’s Report on Internal Control Over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed, under the supervision of the Company’s chief executive and chief financial officers, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (GAAP). The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

The Company conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2004. This evaluation was based on the framework in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The Company excluded International Business Associates, Ltd. (IBA) from its assessment of internal control over financial reporting because the Company’s investment in IBA was completed in 2004. In accordance with FIN 46R, the Company’s investment in IBA is a variable interest, and is required to be consolidated. IBA represents approximately 11% of consolidated total assets and approximately 1% of consolidated revenue and other as of and for the year ended December 31, 2004.

Based on the Public Company’s Accounting Oversight Board’s Auditing Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction With an Audit Of Financial Statements, restatement of previously issued financial statements to reflect the correction of a misstatement should be regarded as at least a significant deficiency and as a strong indicator that a material weakness in internal control over financial reporting exists. Based on its evaluation as of December 31, 2004, management concluded that, because its consolidated financial statements required restatement as a result of the discovery of an error in the 2004 financial statements relating to the July 2004 modification of the share option plan by the board of directors of the Company’s 85% owned subsidiary, Global, as described below, a material weakness existed in the Company’s internal control over financial reporting as of December 31, 2004.

Also based on the Company’s assessment, the Company identified significant deficiencies in the Company’s internal control over financial reporting that could have resulted in errors in the accounting and/or the disclosures associated with:

1.	Accounting for the Company’s initial investment in IBA and a subsequent derivative contract of IBA, and

2.	Income tax disclosures

The Company concluded that, in the aggregate, these significant deficiencies, along with the previous restatement associated with Global’s July 2004 modification of its share option plan as described above, constitute a material weakness in internal control over financial reporting as of December 31, 2004 which is associated with the Company’s level of complex transactions and the lack of adequate accounting personnel to ensure ongoing compliance with relevant accounting and financial reporting requirements. A material weakness is a significant deficiency, as defined in Public Company Accounting Oversight Board Audit Standard No.2 or a combination of significant deficiencies, that results in more than a remote likelihood that material misstatements of the Company’s annual or interim financial statements would not be prevented or detected by company personnel in the normal course of performing their assigned functions.

Based on the material weakness described above, the Company has concluded it did not maintain effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control– Integrated Framework issued by the COSO.

The Company’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004 has been audited by Hein, an independent registered public accounting firm, as stated in their report which appears elsewhere in this report.

Changes in Internal Control over Financial Reporting

Other than as described herein, there have been no changes in the Company’s internal control over financial reporting during the fiscal year ended December 31, 2004 that materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting. To remediate deficiencies related to the material weakness in the Company’s internal control over financial reporting, subsequent to year end, the Company has hired additional experienced accounting personnel, specifically a Controller for Global and a Vice President – Finance and Chief Financial Officer for Harken’s domestic subsidiary, Gulf Energy Management Company (GEM). The Company will continue to evaluate its need for additional experienced accounting personnel in 2005 to ensure that it has appropriate staffing in its financial reporting function with qualifications for evaluating ongoing compliance with relevant accounting and financial reporting requirements.

Report of Independent Registered Public Accounting Firm

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Controls over Financial Reporting, that Harken Energy Corporation (“the Company”) did not maintain effective internal control over financial reporting as of December 31, 2004, due to a lack of adequate accounting personnel to ensure ongoing compliance with relevant accounting and financial reporting requirements, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been identified and included in management’s assessment:

Based on the level of complex transactions which the Company has and the lack of adequate accounting personnel to ensure ongoing compliance with relevant accounting and financial reporting requirements, a material weakness existed in the Company’s internal control over financial reporting as of December 31, 2004.

The Company’s consolidated financial statements required restatement as a result of the discovery of an error in the 2004 financial statements relating to the July 2004 modification of the share option plan by the board of directors of the Company’s 85% owned subsidiary, Global Energy Development PLC.

1.	the Company’s accounting for its original investment in IBA and a subsequent derivative contract of IBA, and

2.	the Company’s income tax disclosures.

The Company concluded that, in the aggregate, these significant deficiencies along with the restatement associated with Global’s July 2004 modification of its share option plan as described above constitute a material weakness in internal control over financial reporting as of December 31, 2004.

This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2004 financial statements, and this report does not affect our report on these financial statements. That report is dated March 4, 2005, except with respect to the matter discussed in Note 22 as to which the date is April 1, 2005.

In our opinion, management’s assessment that the Company did not maintain effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company at December 31, 2004 and for the year then ended and in our report, which is dated March 14, 2005, except with respect to the matter discussed in Note 22 as to which the date is April 1, 2005, we expressed an unqualified opinion thereon.

HEIN & ASSOCIATES LLP

Dallas, Texas

April 8, 2005

PART IV

ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as a part of this Annual Report:

(1) Financial Statements included in Part II of this Annual Report:


		Page
Harken Energy Corporation and Subsidiaries
— Reports of Independent Registered Public Accounting Firms		5
— Consolidated Balance Sheets — December 31, 2003 and 2004		8
— Consolidated Statements of Operations for the three years ended December 31, 2004		9
— Consolidated Statements of Stockholders’ Equity for the three years ended December 31, 2004		10
— Consolidated Statements of Cash Flows for the three years ended December 31, 2004		11
— Notes to Consolidated Financial Statements		12

(2)

The information required by Schedule I is either provided in the related financial statements or in a note thereto, or is not applicable to Harken. The information required by all other Schedules is not applicable to Harken.

(3) Exhibits


3.1		Certificate of Incorporation of Harken Energy Corporation (filed as Exhibit 3.1 to Harken’s Current Report on Form 8-K dated February 13, 2003, File No. 1-10262, and incorporated by reference herein).

3.2		Certificate of Amendment to Certificate of Incorporation of Harken Energy Corporation (filed as Exhibit 3.2 to Harken’s Current Report on Form 8-K dated February 13, 2003, File No. 1-10262, and incorporated by reference herein).

3.3		Certificate of Amendment to Certificate of Incorporation of Harken Energy Corporation (filed as Exhibit 3.3 to Harken’s Current Report on Form 8-K dated February 13, 2003, File No. 1-10262, and incorporated by reference herein).

3.4		Certificate of Amendment to Certificate of Incorporation of Harken Energy Corporation (filed as Exhibit 3.4 to Harken’s Current Report on Form 8-K dated February 13, 2003, File No. 1-10262, and incorporated by reference herein).

3.5		Certificate of Amendment to Certificate of Incorporation of Harken Energy Corporation (filed as Exhibit 3.5 to Harken’s Current Report on Form 8-K dated February 13, 2003, File No. 1-10262, and incorporated by reference herein).

3.6		Certificate of Amendment to Certificate of Incorporation of Harken Energy Corporation (filed as Exhibit 3.6 to Harken’s Current Report on Form 8-K dated February 13, 2003, File No. 1-10262, and incorporated by reference herein).


*3.7		Certificate of Amendment to Certificate of Incorporation of Harken Energy Corporation dated August 4, 2004.

*3.8		Certificate of Amendment to Certificate of Incorporation of Harken Energy Corporation dated February 22, 2005.

3.9		Amended and Restated Bylaws of Harken Energy Corporation (filed as Exhibit 3.7 to Harken’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002, File No. 1-10262, and incorporated by reference herein).

4.1		Form of certificate representing shares of Harken common stock, par value $.01 per share (filed as Exhibit 1 to Harken’s Registration Statement on Form 8-A, File No. 1-10262, filed with the SEC on June 1, 1989 and incorporated by reference herein).

4.2		Rights Agreement, dated as of April 6, 1998, by and between Harken Energy Corporation and ChaseMellon Shareholder Services L.L.C., as Rights Agent (filed as Exhibit 4 to Harken’s Current Report on Form 8-K dated April 7, 1998, file No. 1-10262, and incorporated by reference herein).

4.3		Amendment to Rights Agreement by and between Harken Energy Corporation and American Stock Transfer and Trust Company (successor to Mellon Investor Services LLC, (formerly known as ChaseMellon Shareholder Services L.L.C.), as Rights Agent, dated June 18, 2002 (filed as Exhibit 4.11 to Harken’s Quarterly Report on Form 10-Q for the period ended September 30, 2002, File No. 1-10262, and incorporated by reference herein).

4.4		Amendment to Rights Agreement by and between Harken Energy Corporation and American Stock Transfer and Trust Company (successor to Mellon Investor Services LLC, (formerly known as ChaseMellon Shareholder Services L.L.C.), as Rights Agent, dated August 27, 2002 (filed as Exhibit 4.12 to Harken’s Quarterly Report on Form 10-Q for the period ended September 30, 2002, File No. 1-10262, and incorporated by reference herein).

4.5		Certificate of Designations of Series E Junior Participating Preferred Stock (filed as Exhibit A to Exhibit 4 to Harken’s Current Report on Form 8-K dated April 7, 1998, file No. 1-10262, and incorporated by reference herein).

4.6		Certificate of Increase of Series E Junior Participating Preferred Stock of Harken Energy Corporation (filed as Exhibit 4.6 to Harken’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002, File No. 1-10262, and incorporated by reference herein).

4.7		Certificate of Designations of Series G1 Convertible Preferred Stock (filed as Exhibit 3.7 to Harken’s Current Report on Form 8-K dated February 13, 2003, File No. 1-10262, and incorporated by reference herein).

4.8		Certificate of Increase of Series G1 Convertible Preferred Stock of Harken Energy Corporation (filed as Exhibit 3.8 to Harken’s Current Report on Form 8-K dated February 13, 2003, File No. 1-10262, and incorporated by reference herein).


4.9		Certificate of Designations of Series G2 Convertible Preferred Stock (filed as Exhibit 4.10 to Harken’s Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2001, File No. 1-10262, and incorporated by reference herein).

4.10		Certificate of Designations of Series G3 Convertible Preferred Stock (filed as Exhibit 10.52 to Harken’s Quarterly Report on Form 10-Q for the period ended June 30, 2003, File 1-10262, and incorporated by reference herein).

4.11		Subscription Agreement for Series J Convertible Preferred Stock dated as of April 27, 2004 by and between Harken Energy Corporation and Alexandra Global Master Fund LTD., with annexures thereto (filed as Exhibit 99.1 to Harken’s Current Report on Form 8-K dated April 29, 2004, File No. 1-10262, and incorporated by reference herein).

4.12		Certificate of Designations of Series G-4 Convertible Preferred Stock (filed as Exhibit 4.15 to Harken From S-3 on May 3, 2004, File No. 333 - 115107, and incorporated by reference herein).

4.13		Certificate of Designations of Series L Cumulative Convertible Preferred Stock (filed as Exhibit to Harken’s Current Report on Form 8-K dated June 4, 2004, File No. 1-10262, and incorporated by reference herein).

4.14		5% Senior Convertible Note Due 2009 by Harken Energy Corporation payable to the Bank of New York Depository dated August 19, 2004 (filed as Exhibit 4.21 to Harken’s Current Report on Form 8-K dated August 20, 2004, File No. 1-10262, and incorporated by reference herein).

4.15		Certificate of Designations of Series M Cumulative Convertible Preferred Stock (filed as Exhibit 4.1 to Harken’s Current Report on Form 8-K dated October 8, 2004, File No. 1-10262, and incorporated by reference herein).

4.16		Conversion/Redemption Agreement, dated October 7, 2004 by and between Harken Energy Corporation and the holders of Harken’s Series L Cumulative Convertible Preferred Stock (filed as Exhibit 10.3 to Harken’s Current Report dated October 8, 2004, File No. 1-10262, and incorporated by reference herein).

4.17		4.25% Senior Convertible Notes due 2006 in the principal amount of $1,000,000 and $4,000,000 (filed as Exhibit 10.55 to Harken’s Form S-1 Registration Statement filed with the SEC on February 3, 2004, File No. 333-112451, and incorporated herein by reference).

10.1		Association Contract (Bolivar) by and between Harken de Colombia, Ltd. and Empresa Colombia de Petroleos (filed as Exhibit 10.4 to Harken’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996, and incorporated herein by reference).

10.2		Association Contract (Alcaravan) dated as of December 13, 1992, but effective as of February 13, 1993, by and between Empresa Colombiana de Petroleos (filed as Exhibit 10.1 to Harken’s Annual Report on Form 10-K for the fiscal year ended December 31, 1992, File No. 1-10262, and incorporated herein by reference).


10.3		Association Contract (Bocachico) dated as of January 1994, but effective as of April 1994, by and between Harken de Colombia, Ltd. and Empresa Colombiana de Petroleos (filed as Exhibit 10.1 to Harken’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1994, File No. 1-10262, and incorporated herein by reference).

10.4		Purchase and Sale Agreement dated January 31, 2002 between Republic Resources, Inc. and Harken Energy Corporation (filed as Exhibit 10.15 to Harken’s Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2001, File No. 1-10262, and incorporated by reference herein).

10.5		Standby Purchase Agreement between Harken Energy Corporation and Lyford Investments Enterprises Ltd. dated September 6, 2002 (filed as Exhibit 99.9 to Harken’s Registration Statement on Form S-3, filed with SEC on September 13, 2002, File No. 333-99579, and incorporated by reference herein).

10.6		Amendment No. 1 to Standby Purchase Agreement of September 6, 2002 between Harken Energy Corporation and Lyford Investments Enterprises Ltd., dated November 22, 2002 (filed as Exhibit 99.10 to Harken’s Amendment No. 1 to Registration Statement on Form S-3, filed with the SEC on December 24, 2002, File No. 333-99579, and incorporated by reference herein).

10.7		Loan Agreement dated July 15, 2002 between Harken Energy Corporation and Lyford Investments Enterprises Ltd. (filed as Exhibit 10.18 to Harken’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, File No. 1-10262, and incorporated by reference herein).

10.8		First Amendment to Loan Agreement between Harken Energy Corporation and Lyford Investments Enterprises Ltd., dated August 29, 2002 (filed as Exhibit 10.2 to Harken’s Quarterly Report on Form 10-Q for the period ended September 30, 2002, File No. 1-10262, and incorporated by reference herein).

10.9		International Business Associates, Ltd. Ordinary Share Purchase Warrant (filed as Exhibit 10.2 to Harken’s Current Report Form 8-K dated September 14, 2004, File No. 1-10262, and incorporated by reference herein).

10.10		Stockholders’ Agreement by and between Harken Energy Corporation’s wholly-owned subsidiary, International Business Associates Holding Co., Ltd. and International Business Associates, Ltd., John Kean, Jr. and Stanley Brownell (filed as Exhibit 10.3 to Harken’s Current Report Form 8-K dated September 14, 2004, File No. 1-10262, and incorporated by reference herein).

10.11		Series A Redeemable Preferred Stock Subscription Agreement by and between a wholly owned subsidiary of Harken Energy Corporation, International Business Associates Holding Co., Ltd. and International Business Associates, Ltd. with annexes thereto (filed as Exhibit 10.1 to Harken’s Current Report Form 8-K dated September 14, 2004, File No. 1-10262, and incorporated by reference herein).

10.12		Rio Verde Exploration and Production Contract (English Translation) (filed as Exhibit 10.1 to Harken’s Current Report on Form 8-K dated September 16, 2004, File No. 1-10262, and incorporated by reference herein).


10.13		Los Hatos Exploration and Production Contract (English Translation) (filed as Exhibit 10.1 to Harken’s Quarterly Report on 10-Q for the fiscal quarter ended September 30, 2001, File No. 1-10262, and incorporated by reference herein).

16.1		Letter from Ernst & Young LLP pursuant to Item 304(a)(3) of Regulation S-K (filed as Exhibit 16.1 in Harken’s current report on Form 8-K, filed on June 25, 2003, File No. 1-10262, and incorporated by reference herein).

*21		Subsidiaries of Harken

**23.1		Consent of Independent Registered Public Accounting Firm - Ernst & Young LLP

**23.2		Consent of Independent Registered Public Accounting Firm - BDO Seidman, LLP

*23.3		Consent of Netherland, Sewell & Associates, Inc. (Independent Reserve Engineers)

*23.4		Consent of Ryder Scott Company (Independent Reserve Engineers)

*24		Power of Attorney

**31.1		Certification by Chief Executive Officer of Harken Energy Corporation.

**31.2		Certification by Chief Financial Officer of Harken Energy Corporation.

**32.1		Certificate of the Chief Executive Officer of Harken Energy Corporation.

**32.2		Certificate of the Chief Financial Officer of Harken Energy Corporation.

*	Previously filed as exhibits in Harken’s annual report on Form 10-K, filed on March 16, 2005, File No. 1-10262 and incorporated herein by reference.

**	Filed herewith

^	Indicates a management contract or compensatory plan or arrangement.

SIGNATURES

Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on June 23, 2005.

HARKEN ENERGY CORPORATION

/s/ Anna M. Williams

By: Anna M. Williams, Vice President – Finance and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities on June 23, 2005.


Signature		Title

/s/ Anna M. Williams Anna M. Williams		Vice President – Finance and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

/s/ Mikel D. Faulkner Mikel D. Faulkner		Director, Chief Executive Officer and President (Principal Executive Officer)

/s/ Michael M. Ameen * Michael M. Ameen		Director

/s/ J. William Petty * J. William Petty		Director

/s/ Alan G. Quasha * Alan G. Quasha		Director

/s/ H.A. Smith * H. A. Smith		Director

/s/ Anna M. Williams

* By: Anna M. Williams, Attorney in-fact