HARKEN ENERGY CORP, 10-K405/A, 1996-04-23

HARKEN ENERGY CORP
10-K405/A, 1996-04-23
PETROLEUM & PETROLEUM PRODUCTS (NO BULK STATIONS)

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K/A
(Amendment No. 1)

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995

[ ] 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 0-9207

HARKEN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)

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

5605 N. MACARTHUR BLVD., SUITE 400 75038
IRVING, TEXAS (Zip Code)
(Address of principal executive offices)

Registrant's telephone number, including area code (214) 753-6900

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

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Title of each class: Name of each exchange on which registered:
<S> <C>
COMMON STOCK, PAR VALUE $0.01 PER SHARE AMERICAN STOCK EXCHANGE
</TABLE>

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 X 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 INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO
THIS FORM 10-K. [x]

The aggregate market value of the voting Common Stock, par value $0.01 per
share, held by nonaffiliates of the Registrant as of April 22, 1996 was
approximately $135,000,000. For purposes of the determination of the above
stated amount only, all directors, executive officers and 5% or more
shareholders of the Registrant are presumed to be affiliates.

The number of shares of Common Stock, par value $0.01 per share,
outstanding as of April 22, 1996 was 77,988,688.

DOCUMENTS INCORPORATED BY REFERENCE: DEFINITIVE PROXY MATERIALS FOR 1996
ANNUAL MEETING OF STOCKHOLDERS -- PART III, ITEMS 10, 11, 12, AND 13.

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TABLE OF CONTENTS

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PAGE
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PART I.

ITEM 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ITEM 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . 15

PART II.

ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . 16
ITEM 6. Selected Financial Information and Other Data . . . . . . . . . . . . . . . 17
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ITEM 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . 28
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

PART III.

ITEM 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . 58
ITEM 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
ITEM 12. Security Ownership of Certain Beneficial Owners . . . . . . . . . . . . . . 58
ITEM 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . 58

PART IV.

ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . 59
</TABLE>

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PART I

ITEM 1. BUSINESS

OVERVIEW

Harken Energy Corporation (together with its wholly-owned
subsidiaries, "Harken") is engaged in oil and gas exploration, development and
production operations both domestically and internationally through its various
wholly-owned subsidiaries and joint operating agreements. Harken's domestic
operations include oil and gas exploration, development and production
operations in the Aneth Field and Blanding Sub-Basin portions of the Paradox
Basin in Utah, Arizona and New Mexico, in the Western Paradox Basin in Utah and
in the on-shore Gulf Coast of Texas and the Texas Panhandle area. Harken's
international operations include four exclusive Colombian Association Contracts
with the state-owned Colombian oil company.

Harken's strategy is to expand its domestic reserve base through
acquisitions and additional exploration and developmental drilling on its
existing oil and gas properties and to reinvest a substantial portion of the
cash flow generated from its domestic assets, along with funds generated from
traditional and other sources of financing, towards developing its higher
potential, and higher risk, international prospects.

Harken was incorporated in 1973 in the state of California and
reincorporated in 1979 in the state of Delaware. Harken's principal offices
are located at 5605 N. MacArthur Blvd., Suite 400, Irving, Texas 75038 and its
telephone number is (214) 753-6900.

INTERNATIONAL EXPLORATION OPERATIONS

Harken's international operations consist primarily of its exploration
operations in Colombia. Harken, through its wholly-owned subsidiary Harken de
Colombia, Ltd., has entered into four exclusive Association Contracts with
Empresa Colombiana de Petroleos ("Ecopetrol").

Alcaravan Contract -- During the third quarter of 1992, Harken de
Colombia, Ltd., was awarded the exclusive right to explore for, develop and
produce oil and gas throughout approximately 350,000 acres within the Alcaravan
area of Colombia. The Alcaravan area is located in Colombia's Llanos Basin and
is located approximately 140 miles east of Santafe De Bogota. Harken and
Ecopetrol have entered into an Association Contract (the "Alcaravan Contract")
which requires Harken to conduct a seismic and exploratory drilling program in
the Alcaravan area during the initial six (6) years of the Alcaravan Contract.
At the end of each of the first six years of the Alcaravan Contract, Harken has
the option to withdraw from the Alcaravan Contract or to commit to the next
year's work requirements. If during the initial six years of the Alcaravan
Contract, Harken discovers a field capable of producing oil or gas in
quantities that are economically exploitable and Ecopetrol agrees that such
field is economically exploitable (a "commercial discovery"), the term of the
Alcaravan Contract will be extended for a period of 22 years from the date of
such commercial discovery.

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barrels of oil, and thereafter all production will be allocated 70% to
Ecopetrol and 30% to Harken. If more than one field capable of commercial
production is discovered on the Alcaravan acreage, the production sharing
percentages applicable to the field with the greatest cumulation production
will be applied to all fields within the Alcaravan acreage. After declaration
of a commercial discovery, Harken and Ecopetrol will be responsible for all
future operating expenses in direct proportion to their interest in production.

In September 1994, Huffco Group, Inc. ("Huffco") of Houston, Texas
joined Harken in the drilling of its first exploratory well under the Alcaravan
Contract. Under the terms of a joint operating agreement, which was approved
by Ecopetrol, Harken served as operator and retained a 50% interest in the
well. The well, the Alcaravan #1, was spudded in early February 1995 and was
drilled to a depth of 10,550 feet to test for commercial quantities of oil in
the oil prone zones prevalent in the Llanos Basin; the Carbonera, Mirador,
Guadalupe and the basal Cretaceous formations. Harken initially determined in
April 1995 that the Alcaravan #1 well failed to produce commercial quantities
of oil. Harken intends to re-enter the well, preferably with a joint venture
partner, to finalize the evaluation of the Alcaravan #1 well's ability to
produce commercial quantities of oil. In addition, Huffco elected to not
participate in the further exploration and development of the Alcaravan
acreage.

Harken has completed all work requirements for the first and second
year of the Alcaravan Contract, and Harken is currently completing the required
work commitment for the third year of the Alcaravan Contract, the reprocessing
of additional seismic data. Harken is required to complete the reprocessing of
such seismic data by May 13, 1996, and at that time Harken must choose to (i)
commit to drill two additional wells on the Alcaravan acreage, (ii) drill one
well and release a portion of the Alcaravan acreage or (iii) allow the
Alcaravan Contract to terminate by its own terms. Harken intends to attempt to
renegotiate the Alcaravan Contract with Ecopetrol to reduce the future number
of wells required to be drilled and Harken intends to seek a partner to share
in the cost of such drilling. Harken does not currently believe that the loss
of any rights under the Alcaravan Contract would have a material adverse effect
on Harken's business.

Bocachico Contract -- In January 1994, Harken de Colombia, Ltd. signed
its second Association Contract (the "Bocachico Contract") with Ecopetrol,
covering the Bocachico Contract area. Under the Bocachico Contract, Harken has
acquired the exclusive rights to conduct exploration activities and drilling on
this area, which covers approximately 192,000 acres in the Middle Magdalena
Valley of Central Colombia.

During the initial six year term of the Bocachico Contract, if Harken
makes a commercial discovery in the contract area, the contract will be further
extended for a period of 22 years from the date of any commercial discovery of
oil and/or gas. The production sharing arrangements under the Bocachico
Contract are substantially similar to those under the Alcaravan Contract.

During the first year of the Bocachico Contract, Harken conducted
seismic activities on the land covered by this contract including the
reprocessing of approximately 250 kilometers of existing seismic data and the
acquisition of approximately 35 kilometers of new seismic data. During each of
the second through the sixth contract years, Harken may elect to continue the
contract by committing to the drilling of at least one well during each
contract year.

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techniques in this area. On January 19, 1995, after completing the engineering
feasibility study, Harken notified Ecopetrol of Harken's commitment to drill a
well under the Bocachico Contract, and thereby extended the Bocachico Contract
into its second year. Harken has selected its first well site and currently
anticipates beginning site preparation and rig mobilization upon receipt of
final environmental and drilling permits. Under the terms of the Bocachico
Contract, Harken is required to complete the first well on the Bocachico
acreage by June 5, 1996. If Harken were unable to complete the well by such
date and unless an extension was granted, Ecopetrol would have the right to
terminate the Bocachico Contract after an appropriate notice period, which
could have a material adverse effect on Harken's business. In addition, Harken
has committed to drilling a second well thereby extending the Bocachico
Contract into its third year.

In October 1995, Harken entered into a Development Finance Agreement
(the "Development Agreement") with Arbco Associates L.P., Offense Group
Associates L.P., Kayne Anderson Nontraditional Investments L.P. and Opportunity
Associates L.P. (collectively, the "Investors"), pursuant to which the
Investors agreed to provide up to $3,500,000 to Harken to finance the drilling
of two wells on the Rio Negro prospect in the Bocachico Contract area in
exchange for the right to receive future payments from Harken equal to 40% of
the net profits that Harken de Colombia, Ltd. may derive from the sale of oil
and gas produced from the Rio Negro prospect (the "Participation") if the
planned drilling on that prospect is successful. Pursuant to the Development
Agreement, Harken has agreed to drill two wells on the Rio Negro prospect.

Pursuant to the Development Agreement, the Investors have the right at
any time prior to October 12, 1997 (the "Commitment Date"), to convert all or
part of the Participation into shares of Series D Preferred Stock of Harken
(the "Preferred Stock"), and Harken likewise has the right, exercisable at the
Commitment Date, to convert up to 75% of the Participation into shares of
Preferred Stock if the Investors have not previously elected to convert all of
such Participation. If Harken exercises its right to convert the Participation
into Preferred Stock, the Investors at that time can elect to receive cash or
Preferred Stock equal to the amount of the balance of the remaining
Participation plus an additional amount computed at a rate of 25% per annum.
In addition, the Investors may then elect to further convert any remaining
portion of the Participation into additional shares of Preferred Stock. The
shares of Preferred Stock which may be issued pay dividends at an annual rate
of 15% and are redeemable by Harken without premium except for accrued unpaid
dividends at any time after the Commitment Date, and must be redeemed by Harken
no later than October 12, 2000. A failure by Harken to timely pay dividends
due under this Preferred Stock for three quarters or to redeem such Preferred
Stock when due would give rise to a right exercisable on behalf of the
Investors to elect one director to Harken's Board of Directors.

Playero Contract -- In December 1994, Harken de Colombia, Ltd. signed
its third Association Contract (the "Playero Contract") with Ecopetrol,
covering the Playero Contract area. Under the Playero Contract, Harken has
acquired the exclusive rights to conduct exploration activities and drilling on
this area, which covers approximately 10,000 acres in the Llanos Basin of
Colombia, contiguous to Harken's Alcaravan Contract area.

During the first year of the Playero Contract, Harken acquired
approximately 12 kilometers of new seismic data in the Playero Contract area.
Harken is currently completing its evaluation of the new seismic data. During
each of the second through the sixth contract years, Harken may elect to
continue the contract by committing to the drilling of at least one well during
each contract year. Harken must complete the evaluation of the new seismic
data by May 10, 1996, at which time Harken must elect to either commit to
drilling a well on the Playero acreage or allow its rights to the acreage to
expire. Harken does not currently believe that the loss of any of its rights
under the Playero Contract would have a material adverse effect on Harken's
business.

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If during the initial six years of the Playero Contract, Harken
discovers a field capable of commercial production of oil or gas, the term of
the Playero Contract will be extended for a period of 22 years from the date of
such commercial discovery. Upon a commercial discovery, Ecopetrol will
reimburse Harken for 50% of its successful well costs expended up to the point
of declaration of a commercial discovery. Production from a commercial
discovery will be allocated as follows: Ecopetrol, on behalf of the Colombian
government, will receive a 20% royalty interest in all production and all
production (after royalty payments) will be allocated 50% to Ecopetrol and 50%
to Harken until cumulative production from all fields in the Playero acreage
reaches 60 million barrels of oil, after which Ecopetrol's share of production
will increase progressively to 75% and Harken's share will decrease
progressively to 25% determined by a formula based on Harken's recovery of its
total expenditures under the Playero Contract. After a declaration of a
commercial discovery, Harken and Ecopetrol will be responsible for all future
operating expenses in direct proportion to their interest in production.

Cambulos Contract -- In September 1995, Harken de Colombia, Ltd.
signed its fourth Association Contract with Ecopetrol, covering the Cambulos
Contract area. Under the Cambulos Contract, Harken has acquired the exclusive
rights to conduct exploration activities in the Cambulos Contract area, which
covers approximately 300,000 acres in the Middle Magdalena Valley of Central
Colombia.

During the first two years of the Cambulos Contract, Harken will
conduct geologic studies on the lands covered by this contract, including
reprocessing of at least 400 kilometers of existing seismic data and the
acquisition of at least 90 kilometers of new seismic data. During each of the
third through the sixth contract years, Harken may elect to continue the
contract by committing to the drilling of at least one well during each
contract year.

The production sharing arrangements under the Cambulos Contract are
substantially similar to those under the Playero Contract, except that under
the Cambulos Contract, if Harken makes a commercial discovery, Harken will be
reimbursed for 50% of all seismic costs and dry well costs incurred prior to
the point at which a declaration of a commercial discovery is made in addition
to being reimbursed for 50% of its successful well costs.

Bahrain Operations -- In January 1990, Harken, through its
wholly-owned subsidiary, Harken Bahrain Oil Company ("HBOC"), entered into a
production sharing agreement with the Bahrain National Oil Company ("BANOCO")
which gave it the exclusive right to explore for, develop and produce oil and
gas throughout most of Bahrain's Arabian Gulf offshore territories. In 1992
and 1993, HBOC drilled two exploratory wells, neither of which discovered
commercial quantities of oil or gas. In January 1996, the term of the
production sharing agreement expired of its own accord. Harken is currently
negotiating with BANOCO to extend the term of the production sharing agreement
and expand the acreage covered thereby, in order to allow Harken to market the
prospects to interested parties.

DOMESTIC EXPLORATION AND PRODUCTION OPERATIONS

Between 1990 and 1992, Harken's domestic exploration and production
operations were conducted through Harken's interest in Harken Anadarko
Partners, L.P., ("HAP"), a limited partnership managed by a wholly-owned
subsidiary of Harken. As general partner of HAP, Harken's wholly-owned
subsidiary received a monthly management fee from the partnership. In 1992,
Harken sold its interest in HAP to Aeneas Venture Corporation, a significant
stockholder of Harken.

Chuska Resources Corporation --Effective February 15, 1993, Harken
consummated a merger pursuant to which Chuska Resources Corporation ("Chuska")
became a wholly-owned subsidiary of Harken.

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Chuska is engaged, primarily through its subsidiary, Harken Southwest
Corporation ("HSW"), in the business of exploring for and producing oil and gas
in the Aneth Field and Blanding Sub-Basin portions of the Paradox Basin in
Utah, Arizona and New Mexico, and in the Western Paradox Basin in Utah. HSW's
operations in the Paradox Basin are primarily concentrated on the 16 million
acre Navajo Indian Reservation (the "Reservation"), which comprises portions of
Arizona, New Mexico and Utah. In addition to its oil and gas exploration
activities, HSW also has an interest in a gas processing plant near the Paradox
Basin, the Aneth Gas Plant, on the Utah portion of the Reservation.

HSW currently has two operating agreements with the Navajo Tribe of
Indians (the "Navajo Nation") allowing oil and gas exploration and development
on an aggregate of 13,724 acres of Navajo tribal lands on the Reservation (the
"Navajo Nation Lands"). HSW has the right to explore for, produce, and sell
oil, natural gas, and other specified gases until July 20, 2012, under the
Tribal Agreement effective July 20, 1987 (the "1987 Tribal Agreement") and
until August 26, 2003, under the Tribal Agreement effective August 26, 1983
(the "1983 Tribal Agreement").

The Navajo Nation receives 30% of gross revenues from the sale of
production of oil and gas under the 1983 Tribal Agreement and 20% under the
1987 Tribal Agreement (23% with respect to each barrel of oil sold for more
than $22). Under both Tribal Agreements, the Navajo Nation is entitled to
receive 50% of all gross proceeds recovered over $35 per barrel of oil. Under
the 1983 Tribal Agreement, the Navajo Nation receives 50% of all gross proceeds
over $4 per MCF of gas. Under the 1987 Tribal Agreement, the Navajo Nation
receives 40% of all gross proceeds over $8 per MCF of gas.

In addition to the Navajo Nation's share of gross proceeds,
designation consideration and delay rentals, HSW pays severance tax and
possessory interest tax ("PIT") to the Navajo Nation. The severance tax is
payable monthly and is 4% of HSW's gross proceeds from sales of oil and gas,
after deducting the Navajo Nation's share of gross proceeds. The PIT is
assessed once a year and is calculated as a specified percentage of a defined
discounted present value of projected future cash flows (net of the Navajo
Nation's share of gross proceeds) from existing proven reserves as of January 1
of the year for which the PIT is assessed, although the Navajo Nation actually
retains title to those reserves. HSW is also required to pay the Navajo Nation
land damage costs relating to HSW's seismic and drilling activities.

In order to develop the Navajo Nation Lands, HSW transferred an
undivided 50% interest in the gross proceeds receivable by HSW under the 1983
Tribal Agreement and the 1987 Tribal Agreement to a group of investors
consisting of Amadeus Petroleum, Inc., Bligh Petroleum, Inc., Crusader, Inc.,
C.A.B. Resources, Inc. (an affiliate of Crusader, Inc.), Australian
Hydrocarbons, Inc., Jindavik Petroleum, Inc., and Paroo Petroleum (USA), Inc.
effective August 1, 1988. Pursuant to a Joint Operations Agreement, HSW has
been appointed as operator for itself and each of the investors (such
arrangements are hereafter referred to as the "CHAP Venture" or "CHAP").

In October 1994, Harken acquired the interests of Crusader, Inc.,
C.A.B. Resources, Inc. and Australian Hydrocarbons, Inc. in CHAP, raising HSW's
total interest in CHAP to approximately 70%. HSW further increased its
interest in CHAP to approximately 82% in May 1995 by acquiring the interest of
Paroo Petroleum (USA), Inc.

Each CHAP co-venturer pays its respective participating interest share
of costs and expenses and receives its participating interest share of
revenues. As operator, HSW is reimbursed by CHAP for indirect costs incurred
on behalf of CHAP or in the pursuit of CHAP activities.

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Search Exploration, Inc. -- On May 22, 1995, Harken acquired Search
Exploration, Inc., a publicly-held oil and gas exploration and production
company ("Search Exploration"), through a merger between Search Exploration and
Search Acquisition Corp., a wholly-owned subsidiary of Harken ("Search
Acquisition"). At the effective time of the merger, each of the outstanding
shares of common stock, preferred stock and certain outstanding promissory
notes of Search Exploration were converted into approximately 2.2 million
shares of Common Stock. Harken also issued warrants exercisable for 732,771
shares of Common Stock in exchange for certain outstanding warrants of Search
Exploration. In addition, the holders of Search Exploration common stock,
certain notes and overriding royalty interest in certain properties of Search
Exploration received a non-transferable right to receive additional shares in
the future, if any, of Common Stock, or under certain circumstances, cash,
based upon the increase that may subsequently be realized prior to June 30,
1996 in the value of a group of undeveloped leases and properties of Search
Exploration.

Yellowhouse Properties -- In October 1995, a wholly-owned subsidiary
of Harken acquired certain non-operated interests in producing properties
located in the western region of Texas (the "Yellowhouse Properties"). As
consideration for the purchase of these interests, Harken issued three million
shares of Common Stock, one million warrants to purchase additional shares of
Common Stock at $2 per share, and assumed $750,000 of short-term notes payable.
Harken and the seller made payments totaling approximately $417,000 on these
notes payable at closing and the remaining balance is scheduled to be paid in
monthly installments through March 1996. If at the expiration of three years,
or earlier upon certain conditions, the aggregate proceeds received by the
sellers upon the sale of all three million shares of Common Stock issued is
less than $4 million, the sellers have the right to receive from Harken, at
their election, property having a value of, or a promissory note in the
principal amount equal to, the difference between $4 million and the proceeds
received by the sellers upon the sale of the three million shares of Common
Stock.

Panhandle Properties -- On December 21, 1995, pursuant to a Purchase
and Sale Agreement (the "Panhandle Purchase and Sale Agreement"), Harken
Exploration Company, a wholly-owned subsidiary of Harken ("Harken
Exploration"), acquired working interests in certain producing oil and gas
leases located on approximately 6,800 acres in Hutchinson County, Texas, a gas
gathering system located thereon, property and equipment related thereto and
the surface rights to a 161 acre tract of land (the "Panhandle Properties"), in
exchange for 2,500,000 shares of Common Stock of Harken (the "Purchase
Shares"), $2,500,000 in cash and a promissory note of Harken Exploration (the
"Panhandle Note") in the principal amount of $13,000,000. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Notes to Consolidated Financial Statements, Note 6 -- Notes
Payable and Long-Term Obligations" contained in Part II, Item 8 for further
description of the terms of the Panhandle Note.

Current production from the Panhandle Properties is approximately 80%
natural gas and 20% oil. In addition to existing production, the Panhandle
Properties include substantial proved undeveloped reserves which Harken plans
to systematically develop over the next two to four years. The properties
purchased include an area pipeline and gathering system that has capacity and
expansion capability to accommodate the planned development of the properties.
Harken believes that the gas produced from the Panhandle Properties, with its
associated products, can be sold at approximately a 60% premium to posted gas
prices in the region as a result of the high BTU content of such gas. The
average price per mcf of gas produced from the Panhandle Properties in early
1996 was up to $3.60 per mcf compared to posted prices of approximately $2.25
per mcf. The premium associated with the gas produced from the Panhandle
Properties did not have a material effect on Harken's revenues during 1995 as
the acquisition of the Panhandle Properties was not consummated until December
21, 1995.

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EXECUTIVE OFFICERS OF HARKEN

The officers of Harken are elected annually by the Board of Directors
at the first meeting of the Board of Directors held following each Annual
Meeting of Stockholders, or as soon thereafter as necessary and convenient, in
order to fill vacancies or newly-created offices. Each officer holds office
until the earlier of such time as his or her successor is duly elected and
qualified, his or her death or he or she resigns or is removed from office.
Any officer or agent elected or appointed by the Board of Directors, may be
removed by the Board of Directors whenever, in its judgement, the best
interests of Harken will be served thereby, but such removal will be without
prejudice to the contract rights, if any, of the person so removed.

The executive officers of Harken as of December 31, 1995, their ages
and positions held with Harken and their business experience for the past five
years are listed below.

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Name Age Position Held with Harken
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<S> <C> <C>
Mikel D. Faulkner 46 Chairman of the Board of Directors and
Chief Executive Officer
Richard H. Schroeder 51 President, Chief Operating Officer and Director
Bruce N. Huff 45 Senior Vice President and Chief Financial Officer
Stephen C. Voss 45 Senior Vice President
Larry E. Cummings 43 Vice President, Secretary and General Counsel
</TABLE>

Mikel D. Faulkner has served as Chairman of the Board of Harken since
February 1991 and Chief Executive Officer of Harken since 1982. Mr. Faulkner
previously served as President of Harken between 1982 and 1993.

Richard H. Schroeder has served as President, Chief Operating Officer
and Director of Harken since March 1994. From November 1990 to March 1994, Mr.
Schroeder was President and owner of RHS Management, a management consulting
firm, and from January 1983 to November 1990, Mr. Schroeder was President of
Rosewood Resources, Inc., a privately owned oil and gas exploration and
production company.

Bruce N. Huff has served as Senior Vice President and Chief Financial
Officer since 1990.

Stephen C. Voss has served as Senior Vice President of Harken since
1990. Mr. Voss has also served since 1990 as President of Harken
International, Ltd., Burns Drilling Company and Supreme Well Service Company,
each of which are wholly-owned subsidiaries of Harken.

Larry E. Cummings has served as Vice President, Secretary and General
Counsel of Harken since 1983. Mr. Cummings previously served as Senior Legal
Counsel to Harken from 1978 to 1983.

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DISCONTINUED OPERATIONS

During the 1980's, Harken grew rapidly, becoming a fully diversified
energy company engaged, in addition to its traditional business of oil and gas
exploration, in retail and wholesale marketing of refined petroleum products
through its subsidiary E-Z Serve Corporation ("E-Z Serve"), natural gas
marketing, gathering and transmission and storage operations through its
subsidiary Tejas Power Corporation ("Tejas") and contract drilling and well
servicing operations. In 1990, Harken made the decision to separate the
ownership, operations and management of E-Z Serve and Tejas from Harken
primarily in order to allow each company to concentrate on its core business.
Pursuant to a rights offering to holders of Common Stock, Preferred Stock and
warrants completed in April 1991, E-Z Serve and Tejas became separate
publicly-held companies.

In April 1991, Harken made the decision to suspend domestic contract
drilling operations due to decreased demand and increased competition,
particularly in the Austin Chalk trend in South Texas. In January 1994, Harken
made the decision to liquidate its remaining drilling rigs and related assets.
As a result of this decision, Harken recognized an additional non-cash charge
of approximately $3.1 million during the fourth quarter of 1993.

In May 1994, Harken decided to discontinue the operations of its
wholly-owned subsidiary Supreme Well Service Company ("Supreme"), which had
previously provided services to oil and gas exploration and production
companies for the maintenance and workover of existing oil and gas wells and
the completion of newly drilled wells. The assets of Supreme were subsequently
sold.

The decisions described above have allowed Harken to concentrate on
its historic business of oil and gas exploration and production, and have
allowed Harken to redirect funds provided from the sale of these assets toward
developing Harken's exploration and production operations both domestically and
internationally.

INDUSTRY RISKS

Price Volatility. The revenues generated by Harken are highly
dependent upon the prices of crude oil and natural gas. Fluctuations in the
energy market make it difficult to estimate future prices of crude oil and
natural gas. Fluctuations in energy prices are caused by a number of factors,
including regional, domestic and international demand, energy legislation,
federal or state taxes (if any) on sales of crude oil and natural gas,
production guidelines established by the Organization of Petroleum Exporting
Countries ("OPEC"), and the relative abundance of supplies of alternative fuel
such as coal. Additionally, changing international economic and political
conditions may have a substantial impact upon crude oil and natural gas prices.
Many of these factors are beyond the control of Harken.

Business Risks. Harken must continually acquire or explore for and
develop new oil and gas reserves to replace those being depleted by production.
Without successful drilling or acquisition ventures, Harken's oil and gas
assets, properties and the revenues derived therefrom will decline over time.
To the extent Harken engages in drilling activities, such activities carry the
risk that no commercially viable oil or gas production will be obtained. The
cost of drilling, completing and operating wells is often uncertain. Moreover,
drilling may be curtailed, delayed or canceled as a result of many factors,
including shortage of available working capital, title problems, weather
conditions, environmental concerns, shortages of or delays in delivery of
equipment, as well as the financial instability of well operators, major
working interest owners and drilling and well servicing companies. The
availability of a ready market for Harken's oil and gas depends on numerous
factors beyond its control, including the demand for and supply of oil and gas,
the proximity of Harken's natural

10
<PAGE> 11
gas reserves to pipelines, the capacity of such pipelines, fluctuations in
seasonal demand, the effects of inclement weather, and government regulation.
New gas wells may be shut-in for lack of a market until a gas pipeline or
gathering system with available capacity is extended into the area.

Operating Hazards and Uninsured Risks. The operations of Harken are
subject to the inherent risks normally associated with exploration for and
production of oil and gas, including blowouts, cratering, pollution,
environmental liabilities and fires, each of which could result in damage to or
destruction of oil and gas wells or production facilities or damage to persons
and property. As is common in the oil and gas industry, Harken is not fully
insured against all of these risks, either because insurance is not available
or because Harken has elected to self-insure due to high premium costs. The
occurrence of a significant event that is not fully insured against could have
a material adverse effect on Harken's financial condition.

International Operations. Harken conducts international operations
presently and anticipates that it will conduct significant international
operations in the future. Foreign properties, operations or investments may be
adversely affected by local political and economic developments, exchange
controls, currency fluctuations, royalty and tax increases, retroactive tax
claims, renegotiation of contracts with governmental entities, expropriation,
import and export regulations and other foreign laws or policies governing
operations of foreign-based companies, as well as by laws and policies of the
United States affecting foreign trade, taxation and investment. In addition,
as certain of Harken's operations are governed by foreign laws, in the event of
a dispute, Harken may be subject to the exclusive jurisdiction of foreign
courts or may not be successful in subjecting foreign persons to the
jurisdiction of courts in the United States. Harken may also be hindered or
prevented from enforcing its rights with respect to a governmental
instrumentality because of the doctrine of sovereign immunity. Exploration
and production activities in areas outside the United States are also subject
to the risks inherent in foreign operations, including loss of revenue,
property and equipment as a result of hazards such as expropriation,
nationalization, war, insurrection and other political risks.

Environmental Regulation. The activities of Harken are subject to
various foreign governments, Navajo, federal, state, and local laws and
regulations covering the discharge of material into the environment or
otherwise relating to protection of the environment. In particular, Harken's
oil and gas exploration, development, production; its activities in connection
with storage and transportation of liquid hydrocarbons; and its use of
facilities for treating, processing, recovering, or otherwise handling
hydrocarbons and wastes therefrom are subject to stringent environmental
regulation by governmental authorities in the United States and in foreign
jurisdictions. Such regulations have increased the costs of planning,
designing, drilling, installing, operating and abandoning Harken's oil and gas
wells and other facilities.

The Aneth Gas Plant facility, of which HSW is a co-owner, was in
operation for many years prior to HSW's becoming an owner. The operations at
the Aneth Gas Plant previously used open, unlined drip pits for storage of
various waste products. The plant owners have replaced all of the open ground
pits currently being used with steel tanks. The plant owners are currently in
the process of closing the open ground pits.

Texaco, the plant's operator, received a letter from the EPA dated
July 21, 1991 and a subsequent letter dated June 8, 1992, in which the EPA
requested certain information in order to determine if there had been at the
Aneth Gas Plant the release of hazardous substances to the environment. Texaco
has advised HSW that certain information was supplied to the EPA pursuant to
this request. Subsequently, core samples in and around certain pit areas were
taken by the EPA and Texaco jointly and a Phase II environmental investigation
was undertaken. A closure plan is currently being negotiated with the EPA.

11
<PAGE> 12
The prior owner of the Aneth Gas Plant facility has agreed to accept
financial responsibility for a portion of the remediation work. Texaco and the
other current plant owners, including HSW, are presently negotiating a formal
agreement with the prior owner to allocate the costs of the remediation work.
At this time, however, it is impossible for HSW to accurately estimate the
costs of the cleanup at the Aneth Gas Plant facility or the amount of
indemnification the prior owner will provide to the present owners, including
HSW, for the costs of the remediation work. However, as the cost of certain
remediation procedures will be incurred, Harken has accrued a contingency
reserve of $177,000 for management's best estimate of its share of remediation
expenditures.

Harken has expended significant resources, both financial and
managerial, to comply with environmental regulations and permitting
requirements and anticipates that it will continue to do so in the future.
Although Harken believes that its respective operations and facilities are in
general compliance with applicable environmental laws and regulations, risks of
substantial costs and liabilities are inherent in oil and gas operations, and
there can be no assurance that significant costs and liabilities will not be
incurred in the future. Moreover, it is possible that other developments, such
as increasingly strict environmental laws, regulations and enforcement policies
thereunder, and claims for damages to property, employees, other persons and
the environment resulting from Harken's operations, could result in substantial
costs and liabilities in the future.

Imprecise Nature of Reserve Estimates. Reserve estimates are
imprecise and may be expected to change as additional information becomes
available. Furthermore, estimates of crude oil and natural gas reserves, of
necessity, are projections based on engineering data, and there are
uncertainties inherent in the interpretation of such data as well as the
projection of future rates of production and the timing of development
expenditures. Reserve engineering is a subjective process of estimating
underground accumulations of oil and gas that cannot be measured in an exact
way, and the accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Accordingly, there can be no assurance that the information regarding reserves
set forth herein will ultimately be produced.

Competitive Factors in Oil and Gas Industry. The oil and gas industry
is highly competitive in all its phases. Competition is particularly intense
with respect to the acquisition of desirable producing properties and the sale
of crude oil and natural gas production. Harken's competitors in oil and gas
exploration, development and production include major oil companies and
numerous independent oil and gas companies, and individual producers and
operators. Many of Harken's competitors possess and employ financial and
personnel resources substantially greater than those which are available to
Harken and may, therefore, be able to pay greater amounts for desirable leases
and to define, evaluate, bid for and purchase a greater number of producing
prospects than the financial or personnel resources of Harken will permit.

Extensive Regulation. The production of oil and gas is subject to
extensive Navajo, federal and state laws, rules, orders and regulations
governing a wide variety of matters, including the drilling and spacing of
wells, allowable rates of production, prevention of waste and pollution and
protection of the environment. In addition to the direct costs borne in
complying with such regulations, operations and revenues may be impacted to the
extent that certain regulations limit oil and gas production to below economic
levels. Although the particular regulations applicable in each state in which
operations are conducted vary, such regulations are generally designed to
ensure that oil and gas operations are carried out in a safe and efficient
manner and to ensure that similarly-situated operators are provided with
reasonable opportunities to produce their respective fair shares of available
crude oil and natural gas reserves. However, since these regulations generally
apply to all oil and gas producers, management of Harken believes that these
regulations should not put Harken at a material disadvantage to other oil and
gas producers.

12
<PAGE> 13
Certain sales, transportation, and resales of natural gas by Harken
are subject to Navajo, federal and state laws and regulations, including, but
not limited to, the Natural Gas Act (the "NGA"), the Natural Gas Policy Act
(the "NGPA") and regulations promulgated by the Federal Energy Regulatory
Commission under the NGA, the NGPA and other statutes. The provisions of the
NGA and NGPA, as well as the regulations thereunder, are complex, and can
affect all who produce, resell, transport, purchase or consume natural gas.

Although recent FERC transportation regulations do not directly apply
to Harken because they are not engaged in rendering jurisdictional
transportation services, these regulations do affect the operations of Harken
by virtue of the need to deliver its gas production to markets served by
interstate or intrastate pipelines. In most instances, interstate pipelines
represent the only available method of accomplishing such transportation.

PROPERTIES AND LOCATIONS

Production and Revenues. The following table shows for the periods
indicated operating information attributable to Harken's oil and gas interests.
The 1993 information reflects the February 15, 1993 merger with Chuska. The
1995 information reflects the May 22, 1995 acquisition of Search Exploration,
Inc., the October 5, 1995 acquisition of the Yellowhouse Properties and the
December 21, 1995 acquisition of the Panhandle Properties.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1991 1992 1993 1994 1995
------------- ----------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Production:
Oil (Bbls). . . . . . . . . . -- -- 185,000 158,000 217,000
Natural Gas (Mcf) . . . . . . -- -- 429,000 426,000 810,000
Revenues:
Oil . . . . . . . . . . . . . $ -- $ -- $ 2,989,000 $ 2,552,000 $ 3,985,000
Natural Gas . . . . . . . . . $ -- $ -- $ 792,000 $ 806,000 $ 1,188,000
------------- ----------- ------------- ------------- --------------
Total. . . . . . . . . . . . $ -- $ -- $ 3,781,000 $ 3,358,000 $ 5,173,000
============= =========== ============= ============= ==============
Unit Prices:
Oil (per Bbl). . . . . . . . $ -- $ -- $ 16.16 $ 16.15 $ 18.36
Natural Gas (per Mcf) . . . $ -- $ -- $ 1.85 $ 1.89 $ 1.47
Production costs per
equivalent barrel. . . . . $ -- $ -- $ 7.12 $ 6.70 $ 6.06
Amortization per equivalent
barrel. . . . . . . . . . . $ -- $ -- $ 5.58 $ 6.31 $ 5.68
</TABLE>

13
<PAGE> 14
Acreage and Wells. At December 31, 1995, Harken owned interests in the
following oil and gas wells and acreage, primarily through its subsidiaries,
Harken Southwest Corporation, Search Acquisition Corp., Harken Energy West
Texas, Inc. and Harken Exploration Company:

Domestic
<TABLE>
<CAPTION>
GROSS WELLS NET WELLS DEVELOPED ACREAGE UNDEVELOPED ACREAGE
------------- ---------------- ----------------- -------------------
STATE OIL GAS OIL GAS GROSS NET GROSS NET
----- ---- --- ------- ------ ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona . . . . . . . 1 5 0.82 4.10 4,690 3,845 -- --
New Mexico . . . . . 7 0 5.74 0.00 670 549 -- --
Texas . . . . . . . . 73 32 69.70 13.50 12,764 7,739 8,340 1,760
Utah . . . . . . . . 32 1 26.24 0.82 12,149 9,794 45,433 45,433
---- --- ------- ------ ------ ------- ------- -------
Total . . . . . . 113 38 102.50 18.42 30,273 21,927 53,773 47,193
==== === ======= ====== ====== ======= ======= =======
</TABLE>

International - Colombia

<TABLE>
<CAPTION>
CONTRACT AREA GROSS UNDEVELOPED ACREAGE
- ------------- -------------------------
<S> <C>
Alcaravan . . . . . . . . . . . . . . . . . . . . . . . . . 350,000
Bocachico . . . . . . . . . . . . . . . . . . . . . . . . . 192,000
Playero . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Cambulos . . . . . . . . . . . . . . . . . . . . . . . . . 300,000
-------
Total . . . . . . . . . . . . . . . . . . . . . . . . . 852,000
========
</TABLE>

Drilling Activity. The following table summarizes certain information
concerning Harken's domestic drilling activity:

<TABLE>
<CAPTION>
NUMBER OF GROSS WELLS DRILLED
----------------------------------------------------------------------------
EXPLORATORY DEVELOPMENTAL TOTAL
---------------------- ------------------------ ----------------------
PRODUCTIVE DRILLED PRODUCTIVE DRILLED PRODUCTIVE DRILLED
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
1993 . . . . . . . . . . . . . 1 3 1 1 2 4
1994 . . . . . . . . . . . . . 0 0 0 1 0 1
1995 . . . . . . . . . . . . . 1 2 2 2 3 4
-- -- -- -- -- --
Total . . . . . . . . . . . 2 5 3 4 5 9
== == == == == ==
</TABLE>

<TABLE>
<CAPTION>
NUMBER OF NET WELLS DRILLED
----------------------------------------------------------------------------
EXPLORATORY DEVELOPMENTAL TOTAL
---------------------- ------------------------ ----------------------
PRODUCTIVE DRILLED PRODUCTIVE DRILLED PRODUCTIVE DRILLED
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
1993 . . . . . . . . . . . . . 0.50 2.18 0.67 0.67 1.17 2.85
1994 . . . . . . . . . . . . . 0.00 0.00 0.00 0.70 0.00 0.70
1995 . . . . . . . . . . . . . 0.59 1.59 1.59 1.59 2.18 3.18
----- ----- ----- ----- ----- -----
Total . . . . . . . . . . . 1.09 3.77 2.26 2.96 3.35 6.73
===== ===== ===== ===== ===== =====
</TABLE>

In addition to Harken's domestic drilling, Harken drilled one well in
Colombia in 1995 which was initially determined not to be productive. Harken
intends to re-enter the well to finalize the evaluation of such well. A well
is considered "drilled" when it is completed. A productive well is completed
when permanent

14
<PAGE> 15
equipment is installed for the production of oil or gas. A dry hole is
completed when it has been plugged as required and its abandonment is reported
to the appropriate government agency.

EMPLOYEES

As of December 31, 1995, Harken had 51 employees. Harken has
experienced no work stoppages or strikes as a result of labor disputes and
considers relations with its employees to be satisfactory. Harken maintains
group life, medical, dental, surgical and hospital insurance plans for its
employees.

ITEM 2. PROPERTIES

See "Item 1. Business" for discussion of oil and gas properties and
locations.

ITEM 3. LEGAL PROCEEDINGS

Search Acquisition Corp. ("Search Acquisition"), a wholly-owned
subsidiary of Harken, has been named as a defendant in a lawsuit by
Petrochemical Corporation of America and Lorken Investments Corporation
(together, "Petrochemical"). This lawsuit arises out of an attempt by
Petrochemical to enforce a judgement entered in 1993 against, among other
parties, a group of twenty limited partnerships known as the "Odyssey limited
partnerships." In 1989, Search Exploration acquired all of the assets of eight
of the twenty Odyssey limited partnerships. Petrochemical claims that Search
Exploration is liable for payment of the judgement as the successor-in-interest
to the eight Odyssey limited partnerships. Search Acquisition was the
surviving corporation in the merger with Search.

On February 28, 1996, the court granted Search Acquisition's motion
for summary judgement. Petrochemical has the right to appeal the decision of
the trial court. Although the ultimate outcome of this litigation is
uncertain, Harken believes that any liability to Harken as a result of this
litigation will not have a material adverse effect on Harken's financial
condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

15
<PAGE> 16
PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

PRICE RANGE OF COMMON STOCK

Since March 18, 1991, the Common Stock has been listed on the American
Stock Exchange and traded under the symbol HEC. On February 18, 1991, the
stockholders of Harken approved an amendment to Harken's Certificate of
Incorporation to reduce the par value of the Common Stock from $1.00 to $0.01
per share. At December 31, 1995, there were 3,702 holders of record of Common
Stock.

The following table sets forth, for the periods indicated, the
reported high and low sales prices of the Common Stock on the American Stock
Exchange Composite Tape.
<TABLE>
<CAPTION>
PRICES
-----------------------
HIGH LOW
---- -----
<S> <C> <C>
1994 -- First Quarter . . . . . . . . . . . . . . . . . . . . $1.50 $1.06
Second Quarter . . . . . . . . . . . . . . . . . . . 1.44 0.94
Third Quarter . . . . . . . . . . . . . . . . . . . . 2.75 1.00
Fourth Quarter . . . . . . . . . . . . . . . . . . . 2.25 1.63

1995 -- First Quarter . . . . . . . . . . . . . . . . . . . . 2.25 1.50
Second Quarter. . . . . . . . . . . . . . . . . . . . 2.50 1.38
Third Quarter . . . . . . . . . . . . . . . . . . . . 2.00 1.50
Fourth Quarter . . . . . . . . . . . . . . . . . . . 2.00 1.50
</TABLE>

DIVIDENDS

Harken has not paid any cash dividends on the Common Stock since its
organization and it is not contemplated that any cash dividends will be paid on
shares of Common Stock in the foreseeable future.

16
<PAGE> 17
ITEM 6. SELECTED FINANCIAL INFORMATION AND OTHER DATA

<TABLE>
<CAPTION>
1991(1)(2) 1992(1) 1993(1) 1994 1995
------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 3,191,000 $ 4,382,000 $ 6,601,000 $ 4,895,000 $ 7,471,000
Income (loss) from continuing operations . . . . . $ (4,413,000) $ 661,000 $ (1,797,000) $ (8,211,000) $ (1,625,000)
Income (loss) from discontinued operations (1)(2) . $(11,190,000) $ (328,000) $ (3,697,000) $ (223,000) $ --
Extraordinary item . . . . . . . . . . . . . . . . $ -- $ 172,000 $ -- $ -- $ --
Net income (loss) . . . . . . . . . . . . . . . . . $(15,603,000) $ 505,000 $ (5,494,000) $ (8,434,000) $ (1,625,000)
Net income (loss) per common share:
Income (loss) from continuing operations . . . . $ (0.12) $ 0.01 $ (0.03) $ (0.14) $ (0.02)
Discontinued operations (1) (2) . . . . . . . . . (0.26) (0.01) (0.06) (0.00) --
Extraordinary item . . . . . . . . . . . . . . . -- 0.00 -- -- --
------------ ------------- ------------ ------------ ------------
Net income (loss) . . . . . . . . . . . . . . . . $ (0.38) $ 0.00 $ (0.09) $ (0.14) $ (0.02)
============ ============= ============ ============ ============
Current assets . . . . . . . . . . . . . . . . . . $ 15,560,000 $ 13,911,000 $ 7,677,000 $ 6,840,000 $ 10,531,000
Current liabilities . . . . . . . . . . . . . . . $ 15,122,000 $ 10,201,000 $ 6,533,000 $ 5,133,000 $ 4,918,000
------------ ------------- ------------ ------------ ------------
Working capital . . . . . . . . . . . . . . . . . . $ 438,000 $ 3,710,000 $ 1,144,000 $ 1,707,000 $ 5,613,000
============ ============= ============ ============ ============
Total assets . . . . . . . . . . . . . . . . . . . $ 37,664,000 $ 34,872,000 $ 37,731,000 $ 28,960,000 $ 70,794,000
Long-term obligations:
Long-term obligations and other liabilities . . . $ 1,276,000 $ -- $ -- $ -- $ 25,726,000
Notes payable to related parties . . . . . . . . $ 253,000 $ -- $ -- $ -- $ --
Redeemable preferred stock (3) . . . . . . . . . $ 9,000,000 $ 1,868,000 $ 1,868,000 $ 1,868,000 $ --
------------ ------------- ------------ ------------ ------------
Total . . . . . . . . . . . . . . . . . . . . . $ 10,529,000 $ 1,868,000 $ 1,868,000 $ 1,868,000 $ 25,726,000
============ ============= ============ ============ ============
Stockholder's equity . . . . . . . . . . . . . . . $ 11,499,000 $ 20,316,000 $ 28,963,000 $ 21,959,000 $ 40,150,000
Redeemable preferred stock outstanding . . . . . . 900,000 186,760 186,760 186,760 --
Weighted average common stock outstanding . . . . . 42,519,373 45,752,936 58,392,901 59,722,853 65,041,063
Proved reserves at end of year (4):
Bbls of oil . . . . . . . . . . . . . . . . . . . -- -- 1,035,000 1,521,000 3,523,000
Mcf of gas . . . . . . . . . . . . . . . . . . . -- -- 4,970,000 7,148,000 29,203,000
Future net revenues . . . . . . . . . . . . . . . $ -- $ -- $ 13,707,000 $ 20,178,000 $ 99,193,000
Present value (discounted at 10% per year) . . . $ -- $ -- $ 8,230,000 $ 11,712,000 $ 58,776,000
</TABLE>

______________________________

(1) Financial information for these periods has been restated to present
the operations of Harken's well servicing and contract drilling
operations as discontinued operations. See "Notes to Consolidated
Financial Statements, Note 10--Discontinued Operations" contained in
Part II, Item 8, for a discussion of its discontinued contract
drilling and well service segment.

(2) Pursuant to a plan of reorganization, Harken completed a rights
offering and related exchange transactions on April 30, 1991. These
transactions resulted in a discontinuance of Harken's refined products
marketing and natural gas gathering and marketing operations.
Discontinued operations for 1991 includes a loss of $2,997,000 from
Harken's discontinued refined products marketing and natural gas
gathering and marketing operations.

17
<PAGE> 18
(3) See "Notes to Consolidated Financial Statements, Note 8 -- Redeemable
Preferred Stock" contained in Part II, Item 8, for a discussion of
Harken Series C Preferred Stock.

(4) These estimated reserve quantities, future net revenues and present
value figures are related solely to proved reserves. No consideration
has been given to probable or possible reserves. Oil and gas prices
were held constant except where future price increases were fixed and
determinable under existing contracts and government regulations.
Operating costs were held constant. Harken's share of an equity method
investee's proved oil and gas reserves at December 31, 1991 are not
reflected in these amounts.

Effective February 15, 1993, Harken consummated a merger whereby
Chuska became a wholly-owned subsidiary of Harken. The 1993 and 1994
amounts reflect primarily the proved reserve quantities and future net
revenues of Chuska. On December 21, 1995, Harken acquired certain
producing oil and gas properties located in the Texas panhandle. In
addition to existing production, the properties have substantial
proved undeveloped reserves which Harken plans to systematically
develop over the next two to four years. (See "Notes to Consolidated
Financial Statements, Notes 2 and 14 -- Acquisitions and Oil and Gas
Disclosures" contained in Part II, Item 8.)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

RESULTS OF OPERATIONS

The following table presents certain data for Harken's continuing
operations for the years ended December 31, 1993, 1994 and 1995. A discussion
follows of certain significant factors which have affected Harken's operating
results during such periods. This discussion should be read in conjunction with
Harken's Consolidated Financial Statements and related footnotes contained in
Part II, Item 8.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
EXPLORATION AND PRODUCTION OPERATIONS
- -------------------------------------

Revenues
Oil sales revenues . . . . . . . . . . . . . . . . . $ 2,989,000 $ 2,552,000 $ 3,985,000
Oil volumes in barrels . . . . . . . . . . . . . 185,000 158,000 217,000
Oil price per barrel . . . . . . . . . . . . . . $ 16.16 $ 16.15 $ 18.36
Gas sales revenues . . . . . . . . . . . . . . . . . $ 792,000 $ 806,000 $ 1,188,000
Gas volumes in mcf . . . . . . . . . . . . . . . 429,000 426,000 810,000
Gas price per mcf . . . . . . . . . . . . . . . $ 1.85 $ 1.89 $ 1.47
Gas plant revenues . . . . . . . . . . . . . . . . . $ 1,189,000 $ 798,000 $ 787,000
Management fee income . . . . . . . . . . . . . . . . $ 300,000 $ -- $ --

OTHER REVENUES
- --------------

Interest income . . . . . . . . . . . . . . . . . . . $ 225,000 $ 147,000 $ 667,000
Other income . . . . . . . . . . . . . . . . . . . . $ 1,106,000 $ 592,000 $ 844,000
</TABLE>

18
<PAGE> 19
OVERVIEW

Harken reported a net loss from continuing operations for the year
ended December 31, 1995 of $1,625,000. Total revenues increased from
approximately $4.9 million in 1994 to $7.5 million in 1995 and gross profit
before depreciation and amortization, general and administrative expenses and
provision for asset impairments increased to approximately $3.8 million in 1995
compared to $2.6 million during the prior year. During the year, Harken
consummated four acquisitions which increased domestic oil and gas reserves and
monthly cash flow from operations. In addition, as a result of these
acquisitions, Harken has diversified its domestic oil and gas operations to
include onshore areas of South Texas as well as the Panhandle and Western
regions of Texas. Two of these acquisitions occurred during the fourth quarter
of 1995, resulting in only a minimal impact on Harken's revenues and gross
profit for the year. Based upon the historical operating results and oil and
gas reserve quantities associated with these 1995 acquisitions, Harken expects
that such acquired interests will contribute materially to Harken's domestic
oil and gas revenues and cash flows in the future. In addition, Harken intends
to seek to increase its domestic reserve base through acquisitions as well as
additional drilling activities. Harken does not currently have any agreements
or understandings regarding any additional significant acquisitions, and there
can be no assurance that Harken will be able to complete any additional
acquisitions, nor can Harken quantify the effects of any such acquisitions on
Harken's operations.

Internationally, Harken drilled its first well in Colombia, the
Alcaravan #1, during the first quarter of 1995. In September 1995, Harken
announced the signing of its fourth Association Contract with Ecopetrol, the
Cambulos Contract, and is currently waiting on the approval and issuance of
environmental permits in Colombia prior to initiating construction of the
drillsite for Harken's second well in Colombia, the Torcaz #2, to be drilled on
the Bocachico Contract area in the Middle Magdalena Basin of Colombia.

Harken reported a net loss from continuing operations for the year
ended December 31, 1994, of $8,211,000 primarily due to a reduction in Harken's
carrying value in its investment in E-Z Serve Series C Preferred Stock and
related accrued dividends by approximately $5.8 million due to a permanent
decline in value as indicated by efforts of Harken management to sell the
investment in early 1995. Despite production declines on existing wells and
the lack of new production from drilling activities, Harken did bolster its oil
and gas reserve and revenue base through the additional acquisition of
approximately 20% of the CHAP Venture during the last half of 1994. Total
gross revenues from oil and gas operations totaled approximately $4.2 million
with a gross profit before depreciation and amortization, general and
administrative expenses and provision for asset impairments of approximately
$2.6 million.

Harken reported a net loss from continuing operations for the year
ended December 31, 1993, of $1,797,000. Effective February 15, 1993, Harken
consummated a merger pursuant to which Chuska became a wholly-owned subsidiary
of Harken. As a result of the merger with Chuska, Harken began reflecting oil
and gas sales revenues and related operating expenses and depreciation and
amortization in 1993. Harken's exploration and production operations generated
gross revenues of approximately $5.5 million and gross profit before
depreciation and amortization, general and administrative expenses and
provision for asset impairments totaled approximately $3.7 million during 1993,
primarily generated from the Chuska acquisition.

DOMESTIC OPERATIONS

Gross oil and gas revenues during 1993, 1994 and 1995 were generated
by Harken's domestic exploration and production operations, consisting
primarily of the operations of Harken Southwest Corporation ("HSW"), which
includes the production of oil and gas reserves in the Aneth Field and Blanding
Sub-Basin portions of the Paradox Basin in the Four Corners area of Utah,
Arizona and New Mexico, primarily on the

19
<PAGE> 20
Navajo Indian Reservation. Such operations are conducted through HSW's
interests in CHAP, the Greater Blanding venture and the Central Blanding
venture. Harken also includes in oil and gas revenues certain gas plant
revenues, primarily from CHAP's plant owner interest in the Aneth Gas Plant
which serves many of the Utah properties.

In October 1994, Harken acquired additional interests in CHAP which
resulted in Harken increasing its ownership in the Reservation reserves,
exploration acreage, development drilling locations and the Aneth Gas Plant.
The acquisition of the sellers' interest raised Harken's total interest in CHAP
from 50% to approximately 70% and increased Harken's share of daily production
by approximately 40% over its previous interest. In May 1995, Harken again
acquired an additional interest in CHAP, raising Harken's total interest in
CHAP from approximately 70% to approximately 82%.

In May 1995, Harken acquired Search Exploration pursuant to an Amended
and Restated Agreement and Plan of Reorganization (the "Search Agreement").
Search is primarily engaged in the domestic exploration for, and development
and production of oil and gas in Texas. Pursuant to the Search Agreement,
Search Exploration merged with and into Search Acquisition (the "Search
Merger"). Upon the consummation of the Search Merger, all outstanding shares
of common stock, preferred stock and certain promissory notes of Search were
converted into approximately 2.2 million shares of Common Stock. In addition,
the holders of Search common stock, certain notes and overriding royalty
interests in certain properties of Search received a non-transferable right to
receive additional shares in the future, if any, of Common Stock or, under
certain circumstances, cash, based upon the increase that may subsequently be
realized in the value of a group of undeveloped leases and properties of
Search.

In October 1995, a wholly-owned subsidiary of Harken acquired certain
non-operated interests in the Yellowhouse Properties. As consideration for the
purchase of these interests, Harken issued three million shares of Common
Stock, one million warrants to purchase additional shares of Common Stock at $2
per share, and assumed $750,000 of short-term notes payable.

On December 21, 1995, pursuant to the terms of the Panhandle Purchase
and Sale Agreement, Harken Exploration acquired certain interests in the
Panhandle Properties, in exchange for, along with other consideration, 2.5
million shares of Common Stock, $2.5 million in cash and the Panhandle Note in
the principal amount of $13 million. Harken has the option over the next two
years to convert all or part of the Panhandle Note into Common Stock at
conversion rates tied to future trading prices of shares of Common Stock. The
Panhandle Note matures and becomes payable in two stages, with each maturity
amount subject to certain adjustments.

Gross oil revenues during 1995 increased compared to 1994 primarily
due to the increased production from the above mentioned acquisitions of
additional interests in CHAP and the fourth quarter 1995 acquisition of the
Yellowhouse Properties. The October 1994 acquisition of an approximately 20%
additional interest in CHAP resulted in increased oil revenues of approximately
$842,000 for 1995. Harken drilled four wells during the first half of 1995 on
acreage it holds in the Paradox Basin area, in an effort to offset the
production declines typically experienced in the region. In addition, oil
prices improved from the prior years due to increased overall demand,
particularly in the Paradox Basin. Prior to 1995, gross oil revenues reflect
the overall weak demand experienced by the industry, resulting in low oil
pricing, particularly during the fourth quarter of 1993 and early 1994. Oil
revenues decreased during 1994 as compared to 1993 due to the normal production
decline of existing wells and the lack of new production due to delays in plans
for additional drilling during 1994.

20
<PAGE> 21
Gross gas revenues during 1995 also increased compared to 1994, in
spite of the sharp decrease in gas prices experienced throughout 1995 due to
the October 1994 acquisition of additional interest in CHAP which contributed
gas revenues of approximately $177,000, and due to the recognition of $275,000
of gas revenues in connection with the write-off of certain liabilities
related to suspended gas revenues associated with property interests operated
in prior years. The December 1995 acquisition of the Panhandle Properties had
only a minimal impact on 1995 gas production and revenues, although the
acquired interests should contribute significantly to future Harken gas
production volumes. Revenues from gas sales totaled $806,000 during 1994
compared to $792,000 during 1993 and were enhanced by production from a new
successful gas well drilled in mid-1993 in the Black Rock Field in Arizona.
Harken drilled four wells during 1993 and is largely dependent on future
drilling success to offset the production declines typically experienced in the
Paradox Basin region.

Gas plant revenues decreased from $1,189,000 in 1993 to $798,000 in
1994 and again to $787,000 in 1995 due to an annual redetermination whereby
HSW's interest in the Aneth Gas Plant was reduced based on each owner's
throughput volume. Gas plant revenues decreased in 1995 despite an increase of
approximately $143,000 resulting from the October 1994 acquisition of
additional interest in CHAP. Harken expects future decreases in HSW's
interest in the Aneth Gas Plant due to the annual redetermination and future
expected production declines of CHAP.

Oil and gas operating expenses consist of lease operating expenses and
gas plant expenses, along with a number of production and reserve-based taxes,
including Utah severance, conservation, and property taxes and Navajo severance
and possessory interest taxes. The increase in oil and gas operating expenses
during 1995 compared to 1994 reflects the above acquisitions of oil and gas
properties, particularly the interest in CHAP, which increased oil and gas
operating expenses by approximately $400,000.

INTEREST AND OTHER INCOME

Interest and other income increased during 1995 compared to 1994 due
to the interest earned by Harken on proceeds received from the May 1995
issuance of $15 million of European 8% Senior Convertible Notes Payable (the
"European Notes"). Such proceeds, net of issuance costs on the European Notes,
are maintained and invested in a separate interest bearing bank account (the
"Segregated Account") and earned approximately $475,000 during 1995. Interest
and other income decreased in 1994 from 1993, primarily due to the release of
the E-Z Serve 12% subordinated debenture in April 1993 as part of a
restructuring of E-Z Serve and due to lower investment and cash balances, and
generally lower investment yields available during the year.

OTHER COSTS AND EXPENSES

General and administrative expenses have remained fairly level during
the past three years, as Harken has minimized increasing administrative staff
and office costs despite its growth in domestic oil and gas operations. In
addition, the loss of Harken's operator overhead fees and other operator cost
reimbursements related to properties owned by a managed limited partnership
were offset by the effect of general and administrative cost reductions during
1993 and 1994. General and administrative expenses for 1993 include costs
related to certain offices of HSW that have since been closed in an effort to
reduce costs and improve efficiency. Harken also took efforts throughout 1993
to reduce total personnel with the objective of eliminating duplicative
administrative and operational functions. General and administrative expenses
during 1993 were net of approximately $1,666,000 of such operator overhead fees
and other operator cost reimbursements, compared to only $198,000 of such
reimbursements during 1994, and $94,000 during 1995, with the decrease caused
by the above mentioned 1993 sale by the managed limited partnership of all
remaining oil and gas

21
<PAGE> 22
properties operated by Harken. Harken accounts for operator fees and
reimbursements as a reduction to general and administrative expenses in its
statements of operations.

Depreciation and amortization expense increased during 1995 compared
to 1994 consistent with the increased production levels from the acquired oil
and gas property interests during 1994 and 1995. Depreciation and amortization
on oil and gas properties is calculated on a unit of production basis in
accordance with the full cost method of accounting for oil and gas properties.
Depreciation and amortization decreased during 1994 as compared to 1993 due to
the sale or full depreciation of certain non-oil and gas property assets.

Interest expense and other increased significantly during 1995
compared to 1994 due to the May 1995 issuance of the European Notes, which
generated interest expense of approximately $446,000, net of amounts of
interest capitalized, and approximately $337,000 of amortization of issuance
costs associated with the European Notes. In December 1995, Harken issued the
Panhandle Note for an initial face amount of $13 million in connection with the
acquisition of the Panhandle Properties, but such note payable had only a
minimal impact on interest expense during 1995.

Provision for asset impairments during 1995 consisted of $457,000
primarily related to Harken's decision to record a valuation adjustment for the
full Bahrain investment amount, as a result of the January 1996 expiration of
the term of the production sharing agreement with BANOCO. Such adjustment does
not affect Harken's other international operations. Provision for asset
impairments during 1994 totaled $6,361,000 due primarily to the decision to
reduce Harken's investment in E-Z Serve Series C Preferred Stock and related
accrued dividends by $5,831,000 to realizable value, in light of efforts by
Harken management to sell that investment in early 1995. Provision for asset
impairments during 1993 includes a total of $551,000 of accrued interest which
was expensed related to certain non-recourse notes receivable from certain
current and former employees, officers and directors.

DISCONTINUED WELL SERVICING AND CONTRACT DRILLING OPERATIONS

Harken's well servicing revenues totaled $1,053,000 in 1994 compared
to $2,074,000 in 1993. Harken generated its well servicing revenue from the
operations by Supreme Well Service Company of up to 10 well service rigs and 2
swab rigs. Well servicing operating expenses, which consist principally of
contract labor and supplies, totaled $770,000 in 1994 and $936,000 in 1993. In
May 1994, Harken announced that it discontinued its well servicing operations,
and has reflected the activities of its well servicing and contract drilling
segment as discontinued operations in the accompanying financial statements.

In January 1994, Harken made the decision to liquidate its remaining
drilling rigs and related assets and apply the proceeds primarily to its
international exploration efforts, specifically in Colombia and Bahrain. As a
result of this decision, Harken recognized a non-cash charge of $3.1 million
during the fourth quarter of 1993.

LIQUIDITY AND CAPITAL RESOURCES

During the year ended December 31, 1995, Harken took significant steps
to strengthen its operating cash flow and available capital resources in order
to implement its overall operating strategy. Such efforts included the issuance
of $15 million of European Notes, the generation of approximately $4.4 million
from private placements of Common Stock, four separate acquisitions of domestic
oil and gas reserves and the signing of a Development Finance Agreement with
certain investors to provide up to $3.5 million for

22
<PAGE> 23
Colombian exploration efforts. During 1995, Harken's working capital increased
approximately $3.9 million, primarily due to the availability of a portion of
the cash proceeds from the issuance of the European Notes as discussed below.

In May 1995, Harken generated net proceeds totaling approximately
$13,250,000 from the sale of a total of $15 million in principal amount of
European Notes, which mature in May 1998. Such European Notes are convertible
at any time by the holders into shares of Common Stock at a conversion price of
$1.50 per share, and convertible by Harken into shares of Common Stock after
one year following issuance, if for any period of thirty consecutive days the
closing price of Common Stock for each day during such period shall have
equaled or exceeded 140% of the conversion price (or $2.10 per share of Common
Stock). The European Notes are collateralized by a negative pledge from Harken
of certain defined categories of assets. Upon closing, all proceeds from the
sale of the European Notes were paid to a paying and conversion agent and are
held in the Segregated Account to be maintained in Harken's name.

Upon a conversion, any proceeds attributable to the European Notes
converted which remain in the Segregated Account will be available to be
released and paid to Harken without regard to the Asset Value Coverage Ratio
test (as defined below). As of December 31, 1995, holders of European Notes
totaling $2,450,000 exercised their conversion option and had been issued
1,633,327 shares of Common Stock. Subsequent to December 31, 1995 and as of
February 28, 1996, additional notifications of exercise of conversion options
have been received from holders of European Notes totaling $950,000, which has
resulted in the additional issuance of 633,332 shares of Common Stock.

Harken must maintain an Asset Value Coverage Ratio equal to or greater
than 1:1. As of December 31, 1995, the Company was in compliance with the
Asset Value Coverage Ratio test. The Asset Value Coverage Ratio is calculated
as a ratio of the sum of 100% of the aggregate amount of Harken's cash on
deposit in the Segregated Account plus 60% of the aggregate amount of Harken's
marketable securities plus 40% of the present value of Harken's unencumbered
proved developed producing reserves located in the U.S. to the aggregate
outstanding principal amount of the Notes.

In order for a specific amount of proceeds to be released from the
Segregated Account, Harken must demonstrate that the Asset Value Coverage Ratio
test would continue to be met after such release of funds and that no Event of
Default with respect to any of the Notes has occurred and is continuing at the
date of such release. Such request must be accompanied by an independent
reserve engineering report or other independent third party valuation of
Harken's unencumbered proved developed producing assets.

The anticipated timing at which funds will be released from the
Segregated Account is dependent upon the timing and magnitude of conversions
into Common Stock by the individual noteholders, the market price of the Common
Stock, the amount of Harken's assets which qualify for inclusion in the Asset
Value Coverage Ratio test, and the decision and ability by Harken to convert
the Notes into Common Stock. Once an amount of proceeds are available to be
released from the Segregated Account, Harken may submit its request for the
transfer of such proceeds at its discretion and according to its capital
resource requirements. Upon maturity date of the Notes, the Segregated Account
cash proceeds then remaining could be used to retire any remaining unconverted
Notes.

To the extent that proceeds invested in the Segregated Account at the
balance sheet date are available under the above collateral-based limitations,
such cash is included as a current asset as it is available to Harken to fund
international and domestic activities including acquisitions, drilling costs
and other capital expenditures

23
<PAGE> 24
or other working capital needs. Interest incurred on the European Notes is
payable semi-annually in May and November of each year to maturity or until the
European Notes are converted. Interest payments will be funded from cash flow
from operations, existing cash balances or from available proceeds.

As mentioned above, Harken consummated four transactions during 1995
to increase domestic proved oil and gas reserves and monthly cash flow from
domestic operations. Such acquisitions, along with 1995 exploration activity,
increased Harken's total present value of future net revenues from oil and gas
reserves from approximately $11.7 million at December 31, 1994 to approximately
$58.8 million at December 31, 1995, excluding Harken's share of CHAP's interest
in the future cash flows from the Aneth Gas Plant. In the acquisitions of the
additional interest in CHAP and the Yellowhouse Properties as well as the
merger with Search, Harken issued shares of Common Stock as primary
consideration for each transaction, expending only minimal amounts of working
capital cash and absorbing minor amounts of debt. In the acquisition of the
Panhandle Properties, Harken issued, among other consideration, 2.5 million
shares of Common Stock, $2.5 million in cash (which was satisfied using
European Note proceeds advances from Harken's Segregated Account) and the
Panhandle Note in the principal amount of $13 million.

The Panhandle Note bears interest at 5% per annum as to $8,000,000 in
principal amount only, is secured by Harken Exploration's interest in the
Panhandle Properties (but is otherwise a non-recourse note) and has not been
guaranteed by Harken. The Panhandle Note matures and becomes payable in two
stages. On November 7, 1996, $8,000,000 in principal amount of the Panhandle
Note, subject to adjustment, will mature, and become payable ("Maturity I").
The remaining $5,000,000 in principal amount of the Panhandle Note, subject to
adjustment, will mature and become payable ("Maturity II") on July 15, 1997;
provided, however, that if the amount due at Maturity I is paid in shares of
Common Stock as described below, such principal amount will mature and become
payable on the earlier of (i) the expiration of 270 days following the date
upon which the Securities and Exchange Commission declares effective a
registration statement covering the resale of the shares issued at Maturity I
or (ii) November 15, 1997. The amounts payable at Maturity I and Maturity II
are subject to adjustment as described in "Notes to Consolidated Financial
Statements, Note 6 -- Notes Payable and Long-Term Obligations" contained in
Part II, Item 8.

Pursuant to the Panhandle Purchase and Sale Agreement, Harken
Exploration may elect to pay the amounts due at either or both of Maturity I
and Maturity II in shares of Common Stock, with the number of shares to be
issued at Maturity I to be determined by dividing the amount due at Maturity I
by the average of the closing prices of the Common Stock on the American Stock
Exchange during the period beginning on January 22, 1996 and ending ten (10)
trading days prior to Maturity I (the "Maturity I Average Trading Price") and
the number of shares to be issued at Maturity II to be determined by dividing
the amount due at Maturity II by the average of the closing prices of the
Common Stock on the American Stock Exchange during the period beginning upon
the date which a registration statement covering the resale of the shares
issued at Maturity I is declared effective by the Securities and Exchange
Commission and ending ten (10) trading days prior to Maturity II.

Harken does not currently have sufficient cash reserves to repay the
$13 million Panhandle Note payable with cash, and Harken does not anticipate
that its cash flow from operations will be sufficient to repay the Panhandle
Note. If Harken does not elect to convert the amounts due under the Panhandle
Note into shares of Common Stock, Harken anticipates that it will be required
to seek additional sources of financing in order to repay the Panhandle Note.
There can be no assurance that such financing will be available to Harken. In
addition, Harken does not currently have a sufficient number of unissued shares
of Common Stock which have not previously been reserved for other purposes
available to allow Harken to convert the amount due at Maturity I into shares
of Common Stock. An amendment to Harken's Certificate of Incorporation may be

24
<PAGE> 25
required to increase the number of authorized shares of Common Stock, which
would require approval of Harken's stockholders.

As Harken's intention is to pay the Panhandle Note with shares of
Common Stock, the entire Panhandle Note balance has been classified as
long-term obligations on Harken's Consolidated Balance Sheet. The recorded
amount of the Panhandle Note on Harken's Consolidated Balance Sheet is equal to
the discounted fair value of the payments to be made at each maturity date,
using a market rate of interest.

In addition to Harken's efforts to acquire domestic oil and gas
reserves, Harken continues to be very active in exploration efforts
internationally, particularly in Colombia. As of December 31, 1995, Harken's
investment in its Colombian operations has totaled approximately $4.9 million,
the realizability of which is dependent upon the success of Harken's
exploration efforts. In addition, terms of each of the Association Contracts
entered into between Harken de Colombia, Ltd. and Ecopetrol commit Harken to
perform certain activities in accordance with a prescribed timetable. Failure
by Harken to perform these activities as required could result in Harken losing
its rights under the particular Association Contract, which could potentially
result in a material adverse effect to Harken's business. For a detailed
discussion of each of the Association Contracts entered into between Harken de
Colombia, Ltd. and Ecopetrol, see Item 1. Business, "International Exploration
Operations."

Harken anticipates that full development of Colombian reserves in the
Alcaravan and Playero contract areas of the Llanos Basin and the Bocachico and
Cambulos contract areas of the Middle Magdalena Basin may take several years
and may require extensive production facilities which could require significant
additional capital expenditures. The ultimate amount of such expenditures
cannot be presently predicted. Harken anticipates that amounts required to
fund international activities, including those in Colombia, will be funded from
existing cash balances, asset sales, stock issuances, production payments,
operating cash flows and potentially from industry partners; however, there can
be no assurances that Harken will have adequate funds available to it to fund
its international activities without participation from industry partners or
that industry partners can be obtained to fund such international activities.

In October 1995, Harken entered into a Development Finance Agreement
(the "Development Agreement") with Arbco Associates L.P., Offense Group
Associates L.P., Kayne Anderson Nontraditional Investments L.P. and Opportunity
Associates L.P. (collectively, the "Investors"), pursuant to which the
Investors agreed to provide up to $3.5 million to Harken to finance the
drilling of two wells on the Rio Negro prospect in the Bocachico Contract area
in exchange for the right to receive future payments from Harken equal to 40%
of the net profits that Harken, through its wholly-owned subsidiary Harken de
Colombia, Ltd., may derive from the sale of oil and gas produced from the Rio
Negro prospect (the "Participation") if the planned drilling on that prospect
is successful. Pursuant to the Development Agreement, Harken has agreed to
drill two wells on the Rio Negro prospect. As of December 31, 1995, Harken has
requested no funds under the Development Agreement.

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<PAGE> 26
Participation into additional shares of Preferred Stock. The shares of
Preferred Stock which may be issued would be constituted as the Series D
Preferred and would pay dividends at an annual rate of 15% and are redeemable
by Harken without premium except for accrued unpaid dividends at any time after
the Commitment Date, and must be redeemed by Harken no later than October 12,
2000. A failure by Harken to timely pay dividends due under this preferred
stock for three quarters or to redeem such preferred stock when due would give
rise to a right exercisable on behalf of the Investors to elect one director to
Harken's Board of Directors.

All of the steps taken by Harken during 1995, including the above
mentioned Development Agreement, provide Harken with additional capital
resources, both internally and externally, to be used toward accomplishing
Harken's exploration and development objectives during 1996. Such capital
expenditures will be incurred only to the extent that cash flows from
operations or additional capital resources are available. Capital expenditures
related to Harken's Colombian operations are expected to total a minimum of
$3.2 million during 1996, with a majority of such costs related to the Rio
Negro prospect on the Bocachico Contract area. In addition, Harken plans to
expend at least $1 million in 1996 on domestic drilling activities, primarily
related to the development of its Panhandle Properties. Harken anticipates
that such amounts will be funded from existing cash balances (including
available European Segregated Account cash), operating cash flows and the
Development Agreement.

During the year ended December 31, 1995, Harken's cash and temporary
investments, excluding its initial proceeds from the European Notes, increased
approximately $1.6 million, consisting primarily of Common Stock private
placement offering proceeds of approximately $4.4 million, transfer from the
European Segregated Account of $2.5 million and proceeds from the sale of
assets totaling approximately $3.4 million. Such activity was sufficient to
fund capital expenditures of approximately $7.9 million and repayments of notes
payable and long-term obligations of approximately $1.0 million. Cash flow
provided by operations during 1995 totaled $371,000.

During the year ended December 31, 1994, Harken's working capital
increased approximately $563,000, primarily due to the decision by management
to market its E-Z Serve Series C Preferred Stock in 1995. Cash and temporary
investments decreased approximately $471,000 although cash of approximately $2
million was obtained from the sale of certain non-strategic assets. This
reduction was caused by cash used for operating activities of $510,000 and net
capital expenditures of approximately $2 million. The improvement in cash
provided from operations was due to reductions of personnel and offices during
1994 further centralizing the Chuska operations into Harken.

During the year ended December 31, 1993, Harken's working capital
decreased approximately $2.6 million, primarily due to the accrual of certain
liabilities totaling approximately $2.9 million associated with Chuska's
operations and due to capital expenditures during 1993. Cash and temporary
investments decreased by $7.0 million despite the $2.6 million of cash balances
that were acquired from the merger with Chuska. Such cash usage was caused by
cash used by operating activities of $3.9 million, $4.1 million of net capital
expenditures and $1.6 million of repayments of debt. The cash used by operating
activities was primarily caused by the payment of approximately $2.1 million of
operator suspended revenues primarily related to amounts which were
appropriately released upon the sale of operated properties by Harken's managed
limited partnership.

Harken believes that cash flow from operations will be sufficient to
meet its operating cash requirements in 1996. Harken includes in cash and
temporary investments certain balances which are restricted to use for specific
project expenditures, collateral or for distribution to outside interest owners
and are not

26
<PAGE> 27
available for general working capital purposes. Such restricted cash amounts
totaled approximately $1,063,000 and $1,435,000 at December 31, 1994 and 1995,
respectively.

The exploration, development and production of oil and gas are subject
to various Navajo, 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
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.

Harken has accrued approximately $1,345,000 at December 31, 1995
relating to operational or regulatory contingent liabilities related to
Harken's domestic operations. Harken and its subsidiaries currently are
involved in various lawsuits and other contingencies, including the guarantee
of certain lease obligations, which in management's opinion, will not result in
significant loss exposure to Harken.

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<PAGE> 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following financial statements appear on pages 29 through 57 in this
report.

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Consolidated Balance Sheets -- December 31, 1994 and 1995 . . . . . . . . . . . . . . . . . . . . 30

Consolidated Statements of Operations --
Years ended December 31, 1993, 1994 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Consolidated Statements of Stockholders' Equity --
Years ended December 31, 1993, 1994 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Consolidated Statements of Cash Flows --
Years ended December 31, 1993, 1994 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
</TABLE>

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<PAGE> 29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

We have audited the accompanying consolidated balance sheets of Harken
Energy Corporation (a Delaware corporation) and subsidiaries as of December 31,
1994 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. 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 audits.

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

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Harken Energy
Corporation and subsidiaries as of December 31, 1994 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.

/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP

Dallas, Texas,
February 28, 1996
(except with regard to Note 15 as to
which the date is April 18, 1996)

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<PAGE> 30
HARKEN ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1994 1995
-------------- -------------
<S> <C> <C>
Current Assets:
Cash and temporary investments . . . . . . . . . . . . . . . . . . . . $ 2,828,000 $ 4,456,000
Cash available in European segregated account . . . . . . . . . . . . -- 4,705,000
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . 543,000 1,061,000
Investment in former subsidiary held for resale . . . . . . . . . . . 2,898,000 --
Prepaid expenses and other current assets . . . . . . . . . . . . . . 571,000 309,000
-------------- -------------
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . 6,840,000 10,531,000

Property and Equipment:
Oil and gas properties, using the full cost method of accounting-
Evaluated . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,944,000 39,526,000
Unevaluated . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,446,000 15,983,000
Gas plants and other property . . . . . . . . . . . . . . . . . . . . 6,646,000 6,746,000
Less accumulated depreciation and amortization . . . . . . . . . . . . (7,859,000) (10,113,000)
-------------- -------------
Total Property and Equipment, net . . . . . . . . . . . . . . . . 20,177,000 52,142,000

Restricted Cash in European Segregated Account . . . . . . . . . . . . -- 6,173,000
Investments in Former Subsidiaries . . . . . . . . . . . . . . . . . . 1,219,000 --
Notes Receivable from Related Parties, including interest . . . . . . . 474,000 232,000
Other Assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 250,000 1,716,000
-------------- -------------
$ 28,960,000 $ 70,794,000
============== =============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Trade payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 492,000 $ 356,000
Accrued liabilities and other . . . . . . . . . . . . . . . . . . . . 2,464,000 2,722,000
Revenues and royalties payable . . . . . . . . . . . . . . . . . . . . 1,277,000 972,000
Notes payable and current portion of long-term obligations . . . . . . 900,000 868,000
-------------- -------------
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . 5,133,000 4,918,000

Long-Term Obligations . . . . . . . . . . . . . . . . . . . . . . . . . -- 13,176,000
European Convertible Notes Payable . . . . . . . . . . . . . . . . . . -- 12,550,000
Commitments and Contingencies (Note 15)
Redeemable Preferred Stock . . . . . . . . . . . . . . . . . . . . . . 1,868,000 --

Stockholders' Equity:
Common stock, $0.01 par value; authorized 100,000,000 shares;
issued 66,426,508 and 75,913,832 shares, respectively . . . . . . . 664,000 759,000
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 132,572,000 136,435,000
Retained deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . (90,520,000) (92,047,000)
Treasury stock, 5,983,655 and 1,440,896 shares held, respectively . . (20,757,000) (4,997,000)
-------------- -------------
Total Stockholders' Equity . . . . . . . . . . . . . . . . . . . . 21,959,000 40,150,000
-------------- -------------
$ 28,960,000 $ 70,794,000
============== =============
</TABLE>

The accompanying Notes to Consolidated Financial Statements are
an integral part of these Statements.

30
<PAGE> 31

HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1993 1994 1995
------------- ------------- ------------
<S> <C> <C> <C>
Revenues:
Oil and gas operations . . . . . . . . . . . . . . . . . . $ 4,970,000 $ 4,156,000 $ 5,960,000
Interest and other income . . . . . . . . . . . . . . . . 1,631,000 739,000 1,511,000
------------- ------------- ------------
6,601,000 4,895,000 7,471,000
------------- ------------- ------------
Costs and Expenses:
Oil and gas operating expenses . . . . . . . . . . . . . 1,825,000 1,535,000 2,135,000
General and administrative expenses, net . . . . . . . . 3,179,000 3,132,000 3,376,000
Depreciation and amortization . . . . . . . . . . . . . . 2,571,000 1,993,000 2,251,000
Provision for asset impairments . . . . . . . . . . . . . 726,000 6,361,000 457,000
Interest expense and other, net . . . . . . . . . . . . . 97,000 85,000 877,000
------------- ------------- ------------
8,398,000 13,106,000 9,096,000
------------- ------------- ------------

Loss from continuing operations before income taxes . . (1,797,000) (8,211,000) (1,625,000)

Income tax expense . . . . . . . . . . . . . . . . . . . . -- -- --
------------- ------------- ------------

Loss from continuing operations . . . . . . . . . . . . (1,797,000) (8,211,000) (1,625,000)

Discontinued Operations (Note 10):
Loss from operations of discontinued well servicing
and contract drilling segment . . . . . . . . . . . . . . (3,697,000) (223,000) --
-------------- -------------- ------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . $ (5,494,000) $(8,434,000) $ (1,625,000)
============= =========== ============

Loss per common share:
Continuing operations . . . . . . . . . . . . . . . . . . $ (0.03) $ (0.14) $ (0.02)
Discontinued operations . . . . . . . . . . . . . . . . . (0.06) (0.00) --
------------- ------------- ------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.09) $ (0.14) $ (0.02)
============= ============= ============
Weighted average shares outstanding . . . . . . . . . . . . 58,392,901 59,722,853 65,041,063
============= ============= ============
</TABLE>

The accompanying Notes to Consolidated Financial Statements are
an integral part of these Statements.

31
<PAGE> 32
HARKEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON ADDITIONAL RETAINED TREASURY
STOCK PAID-IN CAPITAL DEFICIT STOCK
------------ --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Balance, December 31, 1992 . . . . . . . $ 512,000 $ 114,207,000(A) $ (76,492,000) $ (17,911,000)
Issuance of common stock, net . . . . 142,000 12,663,000 -- --
Payment of notes receivable, net of
retirements . . . . . . . . . . . . -- 2,846,000 -- (2,846,000)
Exchange of subordinated debenture . . -- 1,336,000 -- --
Net loss . . . . . . . . . . . . . . . -- -- (5,494,000) --
------------ --------------- -------------- ---------------
Balance, December 31, 1993 . . . . . . . 654,000 131,052,000 (81,986,000) (20,757,000)
Issuance of common stock, net . . . . 10,000 1,520,000 -- --
Adjustment for unrealized losses
on available-for-sale securities . . -- -- (100,000) --
Net loss . . . . . . . . . . . . . . . -- -- (8,434,000) --
------------ --------------- ---------------- ---------------
Balance, December 31, 1994 . . . . . . . 664,000 132,572,000 (90,520,000)(B) (20,757,000)
Issuance of common stock, net . . . . 79,000 1,740,000 -- 15,760,000
Conversions of European notes payable 16,000 2,123,000 -- --
Adjustment for unrealized losses
on available-for-sale securities . . -- -- 100,000 --
Equity adjustment from foreign
currency translation . . . . . . . . -- -- (2,000) --
Net loss . . . . . . . . . . . . . . . -- -- (1,625,000) --
------------ --------------- ---------------- ---------------
Balance, December 31, 1995 . . . . . . . $ 759,000 $ 136,435,000 $ (92,047,000) $ (4,997,000)
============ =============== =============== ===============
</TABLE>

_____________________

(A) Includes, as an offset to Additional Paid-In Capital, notes receivable
of $4,182,000 as of December 31,1992 from certain officers, directors
and affiliates for stock purchases. See Note 12 -- Related Party
Transactions "Other Transactions" for discussion.

(B) Includes, as a component of Retained Deficit, net unrealized losses on
available-for-sale securities of $100,000 as of December 31, 1994.
See Note 3 -- Marketable Equity Securities for further discussion.

The accompanying Notes to Consolidated Financial Statements are
an integral part of these Statements.

32
<PAGE> 33
HARKEN ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1993 1994 1995
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Loss from continuing operations . . . . . . . . . . . . . . . $ (1,797,000) $ (8,211,000) $ (1,625,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 2,571,000 1,993,000 2,251,000
Interest expense (income) on notes payable to/receivable
from related parties . . . . . . . . . . . . . . . . . . . (466,000) (423,000) --
Forgiveness of related party note receivable . . . . . . . . -- 232,000 232,000
Provision for asset impairments . . . . . . . . . . . . . . 726,000 6,361,000 457,000
Provision for doubtful accounts . . . . . . . . . . . . . . -- 24,000 (180,000)
Accretion of note payable . . . . . . . . . . . . . . . . . -- -- 27,000
(Gain) loss on sales of assets and other . . . . . . . . . . (201,000) (176,000) (832,000)
Amortization of European note issuance costs . . . . . . . . -- -- 337,000

Loss from discontinued operations . . . . . . . . . . . . . . . (3,697,000) (223,000) --
Adjustments to reconcile loss to net cash provided by
(used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 683,000 77,000 --
Provision for asset impairments . . . . . . . . . . . . . . 3,112,000 -- --
(Gain)loss on sales of assets and other . . . . . . . . . . -- (286,000) --

Change in assets and liabilities, net of effect of
companies acquired:
(Increase) decrease in accounts receivable . . . . . . . . . 2,282,000 577,000 43,000
(Increase) decrease in accounts receivable from former
subsidiaries . . . . . . . . . . . . . . . . . . . . . . . (338,000) 100,000 --
Increase (decrease) in trade payables and other . . . . . . (6,761,000) (555,000) (339,000)
------------- ------------- ------------
Net cash provided by (used in) operating activities . . . . (3,886,000) (510,000) 371,000
------------- ------------- ------------

Cash flows from investing activities:
Proceeds from sales of assets . . . . . . . . . . . . . . . . 350,000 338,000 3,423,000
Cash from acquired subsidiary . . . . . . . . . . . . . . . . 2,616,000 -- 190,000
Capital expenditures, net . . . . . . . . . . . . . . . . . . (4,499,000) (2,344,000) (7,908,000)
Proceeds from sale of assets of discontinued operations . . . -- 2,045,000 --
------------- ------------- ------------
Net cash provided by (used in) investing activities . . . . (1,533,000) 39,000 (4,295,000)
------------- ------------- ------------

Cash flows from financing activities:
Transfer from segregated account cash . . . . . . . . . . . . -- -- 2,500,000
Issuance of common stock, net of issuance costs . . . . . . . -- -- 4,409,000
Repayments of notes payable and long-term obligations . . . . (1,630,000) -- (1,025,000)
Investment in segregated account cash, net . . . . . . . . . . -- -- (332,000)
------------- ------------- ------------
Net cash provided by (used in) financing activities . . . . (1,630,000) -- 5,552,000
------------- ------------- ------------

Net increase (decrease) in cash and temporary investments . . . (7,049,000) (471,000) 1,628,000

Cash and temporary investments at beginning of year . . . . . . 10,348,000 3,299,000 2,828,000
------------- ------------- ------------
Cash and temporary investments at end of year . . . . . . . . . $ 3,299,000 $ 2,828,000 $ 4,456,000
============= ============= ============
</TABLE>

The accompanying Notes to Consolidated Financial Statements are
an integral part of these Statements.

33
<PAGE> 34
HARKEN ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 subsidiaries ("Harken") after
elimination of significant intercompany balances and transactions. Interests in
oil and gas properties jointly owned and operated pursuant to a Joint
Operations Agreement are proportionately consolidated. Data is as of December
31 of each year or for the year then ended and dollar amounts in tables are in
thousands unless otherwise indicated. The preparation of financial statements
in conformity with generally accepted accounting principles 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 1995
presentation.

Harken's consolidated balance sheet as of December 31, 1995 includes
certain assets of a wholly-owned subsidiary that are restricted pursuant to
certain provisions related to a promissory note payable. See Note 6 -- Notes
Payable and Long-Term Obligations for further discussions.

Cash and Temporary Investments -- For purposes of the Consolidated
Statements of Cash Flows, Harken considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents.
Harken paid cash for interest in the amounts of $97,000, $85,000 and $246,000
during 1993, 1994 and 1995, respectively. All significant noncash investing and
financing activities are discussed in Notes 2, 6, 7, 8 and 9 -- Acquisitions,
Notes Payable and Long-Term Obligations, European Convertible Notes Payable,
Redeemable Preferred Stock and Stockholders' Equity.

Harken includes in cash and temporary investments certain balances
which are restricted to use for specific project expenditures, collateral or
for distribution to outside interest owners and are not available for general
working capital purposes. Such restricted cash amounts totaled approximately
$1,063,000 and $1,435,000 at December 31, 1994 and 1995, respectively. In
addition, Harken excludes from cash and temporary investments certain proceeds
received from the issuance of European Convertible Notes Payable that remain in
the European segregated account. See Note 7 -- European Convertible Notes
Payable for further discussion.

Accounts Receivable -- Harken maintains a reserve for potential losses
in collection of its accounts receivable. The allowance for doubtful accounts
was $1,162,000 and $375,000 as of December 31, 1994 and 1995, respectively.

Assets Held for Resale -- Harken reflects assets that it intends to
sell during the next twelve months as a current asset in the accompanying
consolidated balance sheets at the lower of cost or net realizable value. At
December 31, 1994, Harken has reflected its investment in E-Z Serve Series C
Preferred and related accrued dividends as Investment in Former Subsidiary Held
for Resale. This investment was sold during 1995. See Note 4 -- Investments
in Former Subsidiaries for further discussion.

Other Assets -- Harken includes in other assets certain deferred
commissions and issuance costs associated with the May 1995 issuance of 8%
Senior European Convertible Notes Payable. See Note 7 --

34
<PAGE> 35
European Convertible Notes Payable for further discussion. At December 31,
1995, such deferred costs totaled $1,228,000 net of $337,000 of accumulated
amortization.

Accrued Liabilities and Other -- Accrued liabilities and other at
December 31, 1994, includes an amount of $1,260,000 related to certain
operational or regulatory contingent liabilities related to Harken's domestic
operations and other accrued expense liabilities of $1,204,000. The December
31, 1995 balance includes an amount of $1,345,000 related to certain
operational or regulatory contingent liabilities related to Harken's domestic
operations and other accrued expense liabilities of $1,377,000.

Colombian Operations -- Harken's operations include oil and gas
exploration efforts in Colombia pursuant to certain Colombian Association
Contracts. See further discussion at Note 15 -- Commitments and Contingencies.
Harken accounts for its activities in Colombia using the Colombian peso as the
functional currency. Any foreign currency translation adjustment relating to
the translation to U.S. dollars of the financial statements of Harken's
investment in Colombian operations is accounted for as an equity adjustment
from foreign currency translation and is included as a component of
stockholders' equity in the accompanying consolidated financial statements. At
December 31, 1994 and 1995, Harken reflects its exploration activities in
Colombia primarily as a capitalized cost of oil and gas properties. See
further discussion at Notes 5 and 14 -- Property and Equipment and Oil and Gas
Disclosures.

Management Fee Income -- During 1993, Harken received management fees
of approximately $300,000 related to monthly fees earned as manager of a
partnership. Such management fees are included in interest and other income in
the accompanying consolidated financial statements.

Capitalization of Interest -- During 1995, Harken recorded interest
expense of $540,000, net of $204,000 of interest which was capitalized to
Harken's unevaluated oil and gas properties. No interest was capitalized
during 1994 or 1993.

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
$1,666,000, $198,000 and $94,000 for such amounts during 1993, 1994 and 1995,
respectively.

Provision for Asset Impairments -- Assets which are used in Harken's
operations, or are not held for resale, are carried at cost, less any
accumulated depreciation. Harken reviews its long-lived assets 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
recoverable fair value. Harken reflected a provision for asset impairments
from continuing operations in the amounts of $726,000, $6,361,000 and $457,000
during 1993, 1994, and 1995, respectively. See Notes 4 and 12 -- Investments
in Former Subsidiaries and Related Party Transactions for further discussion.

(2) ACQUISITIONS

Merger with Chuska Resources Corporation - Effective February 15,
1993, Harken consummated a merger pursuant to which Chuska Resources
Corporation ("Chuska") became a wholly-owned subsidiary of Harken. Harken
acquired all of the 11,055,918 shares of Chuska common stock outstanding in
exchange for 14,210,357 shares of newly-issued Harken common stock. Chuska is
engaged, primarily through its subsidiary, Harken Southwest Corporation
("HSW"), in the business of exploring for and producing oil and gas in the
Aneth

35
<PAGE> 36
Field and Blanding Sub-Basin portions of the Paradox Basin in Utah, Arizona and
New Mexico, and in the Western Paradox Basin in Utah. HSW's operations in the
Paradox Basin area are primarily concentrated on the 16 million acre Navajo
Indian Reservation ("the Reservation"), which comprises portions of Arizona,
New Mexico and Utah. HSW conducts activities on the Reservation as a
contractually appointed operator and agent of the Navajo Nation pursuant to two
Federally approved operating agreements. In addition to its oil and gas
exploration activities, HSW also has an interest in a gas processing plant near
the Paradox Basin, the Aneth Gas Plant, on the Utah portion of the Reservation.
The acquisition of Chuska has been accounted for under the purchase method of
accounting.

HSW is the general partner and operator of four limited partnerships
and is the operator of the CHAP Venture ("CHAP") pursuant to a Joint Operations
Agreement, all of which were formed for the exploration and production of oil
and gas. Chuska or its wholly-owned subsidiaries are venturers in three
additional projects for the exploration and production of oil and gas. Harken
accounts for its investments in the partnerships and CHAP using the
proportionate consolidation method.

Acquisition of CHAP Venture Interests -- In October 1994, Harken
acquired additional interests in CHAP which resulted in Harken increasing its
ownership in the Reservation reserves, exploration acreage, development
drilling locations and the Aneth Gas Plant. The acquisition of the sellers'
interest raised Harken's total interest in CHAP from 50% to approximately 70%
and increased Harken's share of daily production by approximately 40% over its
previous interest. As consideration for this acquisition, Harken issued a
total of 960,000 shares of restricted Harken common stock to the sellers,
assumed certain liabilities of the sellers relating to the properties, and the
sellers in turn retained responsibility for certain contingent operational and
environmental liabilities related to the interests as well as retaining certain
distributions made by CHAP prior to the actual date of closing.

In May 1995, Harken again acquired an additional interest in CHAP,
raising Harken's total interest in CHAP from approximately 70% to approximately
82%. The purchase consideration paid by Harken to the seller consisted of
$300,000 cash plus the issuance of 534,000 shares of restricted Harken common
stock. Harken also assumed certain liabilities of the seller relating to the
properties, and the seller in turn retained responsibility for certain
contingent operational and environmental liabilities related to the interests
purchased. The above acquisitions of the additional interests in CHAP have
been accounted for under the purchase method of accounting.

Merger with Search Exploration, Inc. -- In November 1994, Harken
entered into an Agreement and Plan of Merger (the "Merger Agreement") with
Search Exploration, Inc. ("Search"). Search is primarily engaged in the
domestic exploration for, and development and production of Texas oil and gas.
Pursuant to the Merger Agreement, Search merged with and into Search
Acquisition Corp., a wholly-owned subsidiary of Harken ("the Merger"). Upon
the consummation of the Merger, (a) each outstanding share of Search common
stock was converted into the right to receive that number of shares of Harken
common stock determined by dividing $0.8099 by the average of the closing sales
price of a share of Harken common stock on the American Stock Exchange over the
30 days immediately preceding the date that is five trading days prior to the
consummation of the Merger, subject to certain restrictions ("the Average
Trading Price"); (b) each outstanding share of Search Series 1993 Redeemable
Preferred Stock was converted into the right to receive that number of shares
of Harken common stock determined by dividing $1.00 by the Average Trading
Price and (c) certain promissory notes to be issued by Search were, by their
terms, converted into the right to receive that number of shares of Harken
common stock determined by dividing the principal amount of each note by the
Average Trading Price. In addition, the holders of Search common stock,
certain notes and overriding royalty interests in certain properties of Search
received a non-transferable right to receive additional shares in the future,
if any, of Harken common

36
<PAGE> 37
stock or, under certain circumstances, cash, based upon the increase that may
subsequently be realized in the value of a group of undeveloped leases and
properties of Search. The Merger was consummated following a vote held at a
Search stockholders' meeting on May 22, 1995 and has been accounted for under
the purchase method of accounting due to the above mentioned contingently
issuable shares of Harken common stock.

Acquisition of Texas Properties -- In October 1995, a wholly-owned
subsidiary of Harken acquired certain non-operated interests in producing
properties located in the western region of Texas ("Yellowhouse Properties").
As consideration for the purchase of these interests, Harken issued three
million shares of restricted Harken common stock, one million warrants to
purchase additional shares of restricted Harken common stock at $2 per share,
and assumed $750,000 of short-term notes payable. Harken and the seller made
payments totaling approximately $417,000 on these notes payable at closing and
the remaining balance is scheduled to be paid in monthly installments through
March 1996. Also, Harken issued an additional 82,759 shares of restricted
Harken common stock to a financial advisor as a fee in connection with the
acquisition. Pursuant to the acquisition, if at the expiration of three years,
or earlier upon certain conditions, the aggregate proceeds received by the
sellers upon the sale of all three million shares of Harken common stock issued
is less than $4 million, the sellers have the right to receive from Harken, at
their election, property having a value of, or a promissory note in the
principal amount equal to, the difference between $4 million and the proceeds
received by the sellers upon the sale of the three million shares of Harken
common stock.

Harken estimates that as of June 30, 1995, the acquired interests in
the Yellowhouse Properties represented approximately 1.3 million barrels of oil
and 534,000 mcf of gas. The purchase price of this acquisition was allocated
entirely to the producing properties.

On December 21, 1995, pursuant to the terms of a Purchase and Sale
Agreement (the "Panhandle Purchase and Sale Agreement"), Harken Exploration
Company ("Harken Exploration"), a wholly-owned subsidiary of Harken, acquired
certain interests in producing properties located in the panhandle region of
Texas ("Panhandle Properties"). As consideration for the purchase of these
interests, Harken issued, along with other consideration, 2.5 million shares of
restricted Harken common stock (the "Purchase Shares"), $2.5 million in cash
and a non-recourse note payable by Harken Exploration to the seller for an
initial face amount of $13 million. Harken has the option over the next two
years to repay all or part of this $13 million note with restricted common
stock at conversion rates tied to future trading prices of Harken common stock.
The $13 million note matures and becomes payable in two stages, with each
maturity amount subject to certain adjustments. See Note 6 -- Notes Payable
and Long-Term Obligations for further discussion of the $13 million note
payable. The acquisition of the Panhandle Properties has been accounted for
under the purchase method of accounting. Due to the note payable adjustments
to be calculated, some of which are based on the future trading prices of
Harken common stock, the allocation of the purchase price to the assets and
liabilities related to the acquisition of the Panhandle Properties is
preliminary, with further adjustments anticipated upon the maturity dates of
the $13 million note payable.

37
<PAGE> 38
Harken estimates that as of December 31, 1995, the acquired interests
in the Panhandle Properties represent approximately 24,116,000 mcf of gas and
853,000 barrels of oil, with a total present value of approximately
$42,728,000.

Pro Forma Information -- The following unaudited pro forma combined
condensed statements of operations for the years ended December 31, 1994 and
1995, give effect to the Search merger, the acquisition of an additional
interest in CHAP, the two acquisitions of Texas properties and the issuance of
the European 8% Senior Convertible Notes Payable (See Note 7 -- European
Convertible Notes Payable for further discussion) as if each had been
consummated at the beginning of each period.

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.

PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)

<TABLE>
<CAPTION>
Acquired Yellowhouse Panhandle
Harken Interest in Search Properties Properties Pro Forma
Actual CHAP-Actual Actual Actual Actual Adjustments Pro Forma
-------- ----------- ------- ----------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Oil and gas revenue $ 4,156 $1,035 $ 495 $ 2,065 $ 1,252 $ 89 (5) $ 9,092
Other revenues 739 39 221 -- -- (120)(2) 879
-------- ------ ------- ------- ------- ------- ---------
Total Revenues 4,895 1,074 716 2,065 1,252 (31) 9,971
-------- ------ ------- ------- ------- ------- ---------

Oil and gas operating expenses 1,535 337 274 903 287 37 (5) 3,421
48 (8)
General and administrative 3,132 96 698 166 -- 108 (8) 4,200
Depreciation and amortization 1,993 416 499 -- -- 573 (3) 3,481
Provision for asset 6,361 -- 2,667 -- -- (2,667)(4) 6,361
Interest expense and other, 85 -- 5 -- -- 1,752 (1) 2,715
27 (5)
846 (7)
-------- ------ ------- ------- ------- ------- ---------
Total Expenses 13,106 849 4,143 1,069 287 724 20,178
-------- ------ ------- ------- ------- ------- ---------
Income tax expense (benefit) -- -- (227) -- -- 227 (6) --
-------- ------ ------- ------- ------- ------- ---------
Income (loss) from continuing $ (8,211) $ 225 $(3,200) $ 996 $ 965 $ (982) $ (10,207)
======== ====== ======= ======= ======= ======= =========
Net loss per share from
continuing operations
attributable to common stock $ (0.14) $ (0.15)
======== =========
Weighted Average Shares
Outstanding 59,722,853 68,345,609
========== ==========
</TABLE>

38
<PAGE> 39
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)

<TABLE>
<CAPTION>
Period from January 1, 1995 to
Closing Date of Acquisition
--------------------------------------
Yellowhouse Panhandle
Harken Search Properties Properties Pro Forma
Actual Actual Actual Actual Adjustments Pro Forma
---------- ------ ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Oil and gas revenue $ 5,960 $ 188 $ 1,510 $1,251 $ 8,909
Other revenues 1,511 -- -- -- (117)(2) 1,394
---------- ----- ------- ------ -------- ----------
Total Revenues 7,471 188 1,510 1,251 (117) 10,303
---------- ----- ------- ------ -------- ----------
Oil and gas operating expenses 2,135 79 665 242 48 (8) 3,169
General and administrative 3,376 236 123 -- 108 (8) 3,843
Depreciation and amortization 2,251 18 -- -- 897 (3) 3,166
Provision for asset impairments 457 -- -- -- 457
Interest expense and other, net 877 19 -- -- 616 (1) 2,352
840 (7)
---------- ----- ------- ------ -------- ----------
Total Expenses 9,096 352 788 242 2,509 12,987
---------- ----- ------- ------ -------- ----------
Income tax expense (benefit) -- -- -- -- -- --
---------- ----- ------- ------ -------- ----------
Income (loss) from continuing $ (1,625) $(164) $ 722 $1,009 $ (2,626) $ (2,684)
========== ===== ======= ====== ======== ==========
Net loss per share from continuing
operations attributable to
common stock $ (0.02) $ (0.04)
========== ==========
Weighted Average Shares 65,041,063 70,747,413
========== ==========
</TABLE>

PRO FORMA ADJUSTMENTS-PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS-

(1) Pro forma entry to reflect interest and amortization expense incurred
on the European 8% Senior Convertible Notes Payable.
(2) Pro forma entry to reflect the reduction in interest income earned due
to the $2,500,000 cash consideration paid in connection with the
acquisition of the Panhandle Properties.
(3) Pro forma entry to adjust actual depreciation and depletion expense on
oil and gas properties for the acquired interests to the depreciation
and depletion expense calculated on a consolidated basis.
(4) Pro forma entry to eliminate the valuation provision on oil and gas
properties for Search in 1994.
(5) Pro forma entry to reflect the additional revenues and expenses of
Search's required roll-up of its managed limited partnerships, along
with related interest expense on the notes payable issued.
(6) Pro forma entry to eliminate income tax benefit of Search in 1994.
(7) Pro forma entry to record the accretion of interest expense related to
the discounted fair value of the note payable issued by Harken as part
of the acquisition of the Panhandle Properties.
(8) Pro forma entry to record additional operating and general and
administrative expenses expected to be incurred by Harken related to
the Panhandle Properties. The additional oil and gas operating
expenses consist of $4,000 per month in pumper and related expenses
that have been incurred in connection with operating the Panhandle
Properties. The additional general and administrative expenses
consist of $24,000 for the annual cost of a new field office in the
panhandle region and $84,000 related to newly hired operating and
administrative employees to serve the Panhandle Properties.

39
<PAGE> 40
(3) MARKETABLE EQUITY SECURITIES

At December 31, 1994 and during the first six months of 1995, Harken
carried an investment in the common stock of E-Z Serve Corporation, a former
subsidiary ("E-Z Serve"), including shares of E-Z Serve common stock resulting
from the conversion of certain shares of E-Z Serve Series C Preferred in June
1994 and January 1995. Harken's investment in E-Z Serve Series C Preferred was
not accounted for pursuant to Statement of Financial Accounting Standards No.
115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"), as it was not a readily marketable security. See Note 4 -- Investments
in Former Subsidiaries for further discussion of E-Z Serve Series C Preferred.
Beginning in 1994 pursuant to SFAS 115, Harken classified its investment in E-Z
Serve common stock as available-for-sale. The following is a summary of
Harken's marketable equity securities, which are included in Prepaid Expenses
and Other Current Assets in the accompanying consolidated balance sheet.
Harken sold its investment in the common stock of E-Z Serve during the third
quarter of 1995.

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
AVAILABLE-FOR-SALE 1994 1995
------------------ ------- -------
<S> <C> <C>
Cost $ 210 $ --
Gross Unrealized Gains -- --
Gross Unrealized Losses 100 --
Estimated Fair Value 110 --
</TABLE>

<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE 1993 1994 1995
------------------ --------- ------- ------
<S> <C> <C> <C>
Gross realized gains $ 164 $ 88 $ 309
Gross realized losses -- 59 --
</TABLE>

An unrealized holding loss on available-for-sale securities of
$100,000 was recognized at December 31, 1994, and included as a component of
stockholders' equity.

(4) INVESTMENTS IN FORMER SUBSIDIARIES

E-Z Serve Preferred Stock -- At December 31, 1994, Harken held 74,754
shares of E-Z Serve $6.00 Convertible Preferred Stock, Series C ("E-Z Serve
Series C Preferred"), which it acquired at a cost of $100 per share. The E-Z
Serve Series C Preferred was to pay a cumulative dividend of $6.00 per share
per annum, payable semi-annually as declared by the E-Z Serve Board of
Directors, and payable in legally available cash or in additional shares of E-Z
Serve Series C Preferred. Each share of E-Z Serve Series C Preferred was
convertible at the option of either E-Z Serve or Harken into 52.63 common
shares of E-Z Serve, such rate to be adjusted under certain conditions. Harken
recorded dividend income of $466,000 and $423,000 during 1993 and 1994,
respectively, related to the E-Z Serve Series C Preferred and has included such
dividends in Interest and Other Income in the accompanying consolidated
financial statements.

During 1994, Harken converted a portion of its shares of E-Z Serve
Series C Preferred into E-Z Serve common stock and has sold certain of its E-Z
Serve common stock. See Note 3 -- Marketable Equity Securities for further
discussion. During the fourth quarter of 1994, Harken also began reviewing the
potential for a sale to other parties of some or all of its remaining
investment in E-Z Serve Series C Preferred and related accrued

40
<PAGE> 41
dividends. Based on the terms and consideration of these potential
transactions, the market price of E-Z Serve common shares, the conversion terms
and limited marketability of the E-Z Serve Series C Preferred and the overall
capital structure of E-Z Serve, Harken deemed that a decline in value that was
other than temporary had occurred with respect to its investment in E-Z Serve
Series C Preferred. Accordingly, Harken reclassified its investment in E-Z
Serve Series C Preferred and its related accrued dividends receivable from E-Z
Serve to current assets at December 31, 1994, at a total estimated realizable
value of $2,898,000. Such amount is reflected as Investment in Former
Subsidiary Held for Resale in the accompanying consolidated balance sheet. In
connection with this determination, Harken recorded a decline in value of
$5,831,000 in Provision for Asset Impairments during the fourth quarter of 1994
in the accompanying consolidated financial statements. In March 1995, Harken
sold its investment in E-Z Serve Series C Preferred and its related accrued
dividends receivable from E-Z Serve and received cash proceeds of approximately
$2,779,000, an amount approximately equal to Harken's recorded value.

Tejas Preferred Stock -- At December 31, 1994, Harken held 1,000
shares of Tejas Power Corporation ("Tejas") Series B Preferred Stock, $.01 par
value per share ("Tejas Preferred Stock"), which it acquired at a purchase
price of $1,200,000. Harken accepted these shares of Tejas Preferred Stock as
full and complete payment for certain expenses owed by Tejas to Harken. In
addition, Tejas agreed to waive certain of the provisions under the terms of
the Harken Series C Preferred and pledged all 186,760 shares of the Harken
Series C Preferred to Harken.

In December 1995, Harken entered into a purchase, sale and exchange
agreement related to its shares of Tejas Preferred Stock, along with a note
payable for approximately $394,000 to Tejas in exchange for the 186,760 shares
of Harken Series C Preferred held by Tejas. See Note 8--Redeemable Preferred
Stock for further discussion.

(5) PROPERTY AND EQUIPMENT

Property and equipment are carried at cost. Gas plants and other
property are depreciated on the straight-line method over their estimated
useful lives ranging from three to fifteen years. Harken follows the full cost
accounting method to account for the costs incurred in the acquisition,
exploration, development and production of oil and gas reserves. Under this
method, all costs, including internal costs, directly related to acquisition,
exploration and development activities are capitalizable as oil and gas
property costs. Harken capitalized $1,840,000, $1,066,000 and $1,182,000 of
internal costs, net of reimbursements from joint interest owners, directly
related to these activities in 1993, 1994 and 1995, respectively. Such costs
include office and personnel costs of Harken's international and domestic
exploration field offices and does not include any corporate overhead. Harken
also accrues costs of dismantlement, restoration and abandonment to the extent
that such costs, in the aggregate, are anticipated to exceed the aggregate
salvage value of equipment and facilities removed from producing wells and
other facilities. See Note 14 -- 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 6 mcf of gas to each barrel of
oil) based on estimated proved recoverable oil and gas reserves. Such
amortization was $5.58, $6.31 and $5.68 per equivalent barrel of oil produced
during 1993, 1994 and 1995, respectively.

The unevaluated property costs at December 31, 1994 and 1995 includes
$1,512,000 and $4,866,000, respectively, related to Colombia (see Note 15 --
Commitments and Contingencies for a discussion of Colombian operations) and
$5,820,000 and $11,117,000, respectively, related to domestic prospects.
Amortization of unevaluated property costs will begin when the properties
become proved or their values become impaired.

41
<PAGE> 42
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. Fair value of unevaluated prospects is determined 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. Under full cost accounting rules,
for each cost center, capitalized costs, less accumulated amortization and
related deferred income taxes, shall not exceed an amount ("the cost ceiling")
equal to the sum of (a) the present value of future net revenues from estimated
production of proved oil and gas reserves 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.

(6) NOTES PAYABLE AND LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1995
---------- ----------
<S> <C> <C>
Note payable to seller of producing properties (A) $ -- $ 12,786

Notes payable to investors (B) -- 132

Note payable to Tejas Power Corporation (C) -- 394

Notes payable to former stockholder of subsidiary (D) 900 400

Notes payable to former investors in Search managed
limited partnerships (E) -- 332
-------- ---------
Total 900 14,044
Less amount classified as current liability (900) (868)
-------- ---------
Total long-term obligations $ -- $ 13,176
======== =========
</TABLE>

(A) As discussed in Note 2 -- Acquisitions, in December 1995 Harken
Exploration issued to the sellers of the Panhandle Properties a note payable in
the initial face amount of $13 million (the "Panhandle Note"). The Panhandle
Note bears interest at 5% per annum as to $8,000,000 in principal amount only,
is secured by Harken Exploration's interest in the acquired properties (but is
otherwise a non-recourse note) and has not been guaranteed by Harken. The
Panhandle Note matures and becomes payable in two stages. On November 7, 1996,
$8,000,000 in principal amount of the Panhandle Note, subject to adjustment as
described below, will mature, and become payable ("Maturity I"). The remaining
$5,000,000 in principal amount of the Panhandle Note is non-interest bearing
and, subject to adjustment as described below, will mature and become payable
("Maturity II") on July 15, 1997; provided, however, that if the amount due at
Maturity I is paid in shares of Harken common stock ("Maturity I Shares") as
described below, such principal amount will mature and become payable on the
earlier of (i) the expiration of 270 days following the date upon which the
Securities and Exchange Commission declares effective a registration statement
covering the resale of shares issued at Maturity I or (ii) November 15, 1997.
The recorded amount of the Panhandle Note is equal to the discounted fair value
of the payments to be made at each maturity date, using a market rate of
interest of 6.66%. As Harken's intention is to pay the Panhandle Note with
shares of Harken common stock, the entire Panhandle Note balance has been
included in long-term obligations.

Pursuant to the Panhandle Purchase and Sale Agreement, Harken
Exploration may elect to pay the amounts due at either or both of Maturity I
and Maturity II in shares of Harken common stock, with the number

42
<PAGE> 43
of shares to be issued at Maturity I to be determined by dividing the amount
due at Maturity I by the average of the closing prices of Harken common stock
on the American Stock Exchange during the period beginning on January 22, 1996
and ending ten (10) trading days prior to Maturity I (the "Maturity I Average
Trading Price") and the number of shares to be issued at Maturity II to be
determined by dividing the amount due at Maturity II by the average of the
closing prices of Harken common stock on the American Stock Exchange during the
period beginning upon the date which the above mentioned registration statement
is declared effective and ending ten (10) trading days prior to Maturity II
(the "Maturity II Average Trading Price").

The principal amount due at Maturity I is subject to adjustment as
follows: (i) the principal amount due will be reduced by an amount equal to (x)
the value of any title, mechanical or environmental defects with respect to the
Panhandle Properties discovered by Harken Exploration after closing and (y) the
amount of costs, expenses, or losses suffered by Harken Exploration as a result
of a breach of the seller's representations and warranties contained in the
Panhandle Purchase and Sale Agreement, up to a maximum of $800,000; (ii) the
principal amount will be adjusted in an amount equal to the difference between
$500,000 and the net revenue received by the seller with respect to the
Panhandle Properties between July 1, 1995 and December 21, 1995, (iii) the
principal amount will be adjusted in an amount equal to the difference between
(x) the greater of the amount realized by the seller upon the sale of the
Purchase Shares or the amount which could have been realized by the seller if
the Purchase Shares were sold at the Maturity I Average Trading Price and (y)
$2.00 per share multiplied by the number of shares of Harken common stock sold
by the seller between December 21, 1995 and Maturity I; (iv) the principal
amount will be increased by a factor equal to 10% per annum of the weighted
average of the daily differences between $5,000,000 and the aggregate proceeds
received by the seller upon the sale of the 2.5 million Purchase Shares; and
(v) the principal amount will be increased by $200,000.

The principal amount due at Maturity II is subject to adjustment as
follows: (i) the principal amount will be adjusted by an amount equal to the
difference between (x) the greater of the amount realized by the seller upon
the sale of the shares of Harken common stock issued to the seller at Maturity
I or the amount which could have been realized by the seller if such shares
were sold at the Maturity I Average Trading Price and (y) the Maturity I
Average Trading Price multiplied by the number of shares of Harken common stock
sold by the seller between Maturity I and Maturity II; and (ii) the principal
amount will be increased by a factor equal to 10% per annum of the weighted
average of the daily differences between $8,000,000 and the aggregate proceeds
received by the seller upon the sale of the shares of Harken common stock
issued to the seller at Maturity I.

In connection with the security agreement covering Harken
Exploration's interests in the acquired properties, without the consent of the
seller, Harken Exploration is restricted from the sale or transfer of the
acquired properties for cash to be used for the benefit of Harken Exploration
or Harken. The carrying value of such restricted assets totaled $20,396,000 at
December 31, 1995 and is included in Oil and Gas Properties in the accompanying
consolidated balance sheet.

(B) As discussed in Note 2 -- Acquisitions, a wholly-owned subsidiary
of Harken assumed $750,000 of short-term notes payable in connection with the
acquisition of the Yellowhouse Properties in October 1995. Harken and the
seller made payments totaling approximately $417,000 on these notes payable at
closing and the remaining balance is scheduled to be paid in monthly
installments through March 1996. Such notes bear interest at the rate of 7%
per annum.

(C) As part of Harken's exchange of its shares of Tejas Preferred
Stock for the shares of Harken Series C Preferred stock held by Tejas, Harken
issued a note payable for $394,000 which is payable in quarterly installments
through September 30, 1997. The note bears interest at a rate of 10% per
annum. See Note 8 -- Redeemable Preferred Stock for further discussion.

43
<PAGE> 44
(D) In March 1994, a lawsuit was settled whereby a Harken subsidiary
executed a non-interest bearing note payable in the principal amount of
$500,000 which was paid to the subsidiary's former stockholder on January 5,
1995. This obligation is included in Notes Payable in the accompanying
December 31, 1994 consolidated balance sheet.

Further, under the terms of this March 1994 agreement, the subsidiary
purchased from its former stockholder its 3% working interest in the wells
drilled by HSW as well as all rights held by the former stockholder to
participate in future wells drilled by HSW on the Navajo Reservation, effective
January 1, 1994. As consideration for such purchase, HSW issued a 10% note
payable in the amount of $400,000 which was paid to the subsidiary's former
stockholder on January 3, 1996.

(E) As part of the Merger Agreement with Search in May 1995, Harken,
through Search, assumed approximately $442,000 of notes payable to former
partners in certain limited partnerships managed by a subsidiary of Search.
Such notes bear interest at 10% per annum and are payable in semiannual
installments beginning June 30, 1995 through June 30, 1998. See further
discussion of the Search Merger at Note 2 - Acquisitions.

Future Maturities of Notes Payable and Long-Term Obligations --
Maturities of notes payable and long-term obligations including the unconverted
European Convertible Notes Payable, during the five years following December
31, 1995 are approximately $9,096,000, $4,837,000, $12,661,000, $0 and $0.

(7) EUROPEAN CONVERTIBLE NOTES PAYABLE

During the second quarter of 1995, Harken issued to qualified
purchasers a total of $15 million in 8% Senior Convertible Notes (the "European
Notes") which mature in May 1998. Interest on these notes is payable
semi-annually in May and November of each year to maturity or until the
European Notes are converted. Such European Notes are convertible at any time
by the holders into shares of Harken common stock at an exercise price of $1.50
per share ("the Conversion Price"). Such European Notes are also convertible
by Harken into shares of Harken common stock after one year following issuance,
if for any period of thirty consecutive days the closing price for each day
during such period shall have equaled or exceeded 140% of the Conversion Price
(or $2.10 per share of Harken common stock). The Conversion Price of the
European Notes was established as the average of the daily low and closing
market prices of Harken common stock for the three trading days prior to April
27, 1995, which was the date of the final offering memorandum for the European
Notes, and is subject to adjustment upon the occurrence of certain events.

The European Notes are collateralized by a negative pledge from Harken
of certain defined categories of assets. Upon closing, all proceeds from the
sale of the European Notes were paid to a paying and conversion agent and are
held in a separate interest bearing bank account (the "Segregated Account") to
be maintained in Harken's name, until the paying and conversion agent is
presented with evidence of sufficient collateral, as defined, held by Harken to
permit an advance of a portion of the proceeds.

Upon a conversion, any proceeds attributable to the European Notes
converted which remain in the Segregated Account will be released and paid to
Harken without regard to the value of any collateral then existing. As of
December 31, 1995, Harken had received notification that holders of European
Notes totaling $2,450,000 had exercised their conversion option and had been
issued 1,633,327 shares of Harken common stock. Subsequent to December 31,
1995 and as of February 28, 1996, additional notifications of exercise of
conversion options have been received from holders of European Notes totaling
$950,000, which has resulted in the additional issuance of 633,332 shares of
Harken common stock.

44
<PAGE> 45
The European Notes were sold strictly to non-U.S. purchasers and are
convertible in $50,000 increments. The European Notes and the Harken common
stock issuable upon conversion of the European Notes have been or will be
issued without registration under the United States Securities Act of 1933 (the
"Securities Act") pursuant to an exemption contained in Regulation S
promulgated under the Securities Act.

In connection with the sale and issuance of the European Notes, Harken
paid approximately $1,750,000 from the European Note proceeds for commissions
and issuance costs. Such costs have been deferred and are included in Other
Assets in the accompanying consolidated balance sheet and are being amortized
to interest expense over the period until conversion or maturity of the
European Notes. As European Notes are converted to Harken common stock, a
pro-rata portion of these deferred costs are charged to additional paid-in
capital. In addition, at closing of the European Notes, Harken issued to the
placement agents certain non-transferable stock purchase warrants to purchase
one million shares of Harken common stock which are exercisable by the holders
thereof at any time following six months after closing at an exercise price
equal to the Conversion Price described above, and expiring in May 1999. Also,
Harken paid a fee in the form of 92,308 shares of Harken common stock to
another financial advisor in connection with the European Notes.

To the extent that proceeds invested in the Segregated Account at the
balance sheet date are available under the above discussed collateral-based
limitations, such cash is included as a current asset in Cash Available in
European Segregated Account in the accompanying consolidated balance sheet.
Segregated Account cash that is not available as of the balance sheet date, due
to the collateral based limitations, is reflected as Restricted Cash in
European Segregated Account in the accompanying consolidated balance sheet, and
is a non-current asset. The initial cash proceeds from the issuance of the
European Notes are not included in the Statement of Cash Flows because the
proceeds are not considered to be cash equivalents. Transfers of proceeds from
the Segregated Account are included in cash flows from financing activities in
the Statement of Cash Flows.

(8) REDEEMABLE PREFERRED STOCK

During 1988, Harken completed the private placement of 3,000,000
shares of newly-issued Series C 12% $1 par value cumulative convertible
redeemable preferred stock ("Series C Preferred") for $30,000,000. Each share
of preferred stock was convertible into 1.667 shares of common stock at the
option of the holder and was mandatorily redeemable at $10 per share over a
five year period beginning in 1993.

At December 31, 1994, 186,760 shares of Series C Preferred outstanding
were held by Tejas and represented the only remaining Series C Preferred shares
outstanding. In connection with the issuance of 1,000 shares of Tejas
Preferred Stock to Harken, Tejas agreed to waive certain of the provisions
under the terms of the Harken Series C Preferred, including the payment of the
12% annual dividend. In December 1995, Harken entered into a purchase, sale
and exchange agreement in which it exchanged the 1,000 shares of Tejas
Preferred Stock it held along with a note payable for $394,000 to Tejas for the
186,760 shares of Series C Preferred. At December 31, 1995 there are no
remaining outstanding shares of Series C Preferred.

(9) STOCKHOLDERS' EQUITY

Common Stock -- Harken currently has authorized 100,000,000 shares of
$.01 par common stock. At December 31, 1994 and 1995, Harken had issued
66,426,508 shares and 75,913,832 shares, respectively. Harken held 5,983,655
and 1,440,896 shares as treasury stock at a cost of $20,757,000 and $4,997,000
at December 31, 1994 and 1995, respectively.

45
<PAGE> 46
Acquisition of Chuska Resources Corporation -- Effective February 15,
1993, Harken consummated a merger pursuant to which Chuska Resources
Corporation ("Chuska") became a wholly-owned subsidiary of Harken. In exchange
for all of the outstanding common stock of Chuska, Harken issued 14,210,357
shares of Harken common stock. In connection with the merger, Harken filed a
registration statement, which became effective January 15, 1993, with the
Securities and Exchange Commission for the shares of Harken common stock
issued. See further discussion of the merger at Note 2 -- Acquisitions.

Acquisition of CHAP Interests -- In October 1994, Harken acquired an
additional interest of approximately 20% in CHAP in exchange for, among other
consideration, 960,000 restricted shares of Harken common stock. In May 1995,
Harken acquired an additional interest of approximately 12% in CHAP primarily
in exchange for, among other consideration, 534,000 restricted shares of Harken
common stock. See Note 2 -- Acquisitions for further discussion.

Acquisition of Search Exploration, Inc. -- In May 1995, Harken
consummated the Merger with Search. See Note 2 -- Acquisitions for further
discussion. Pursuant to the terms of the Merger Agreement, a total of
approximately 2.2 million shares of Harken common stock were issued to the
common stockholders of Search, preferred stockholders of Search and certain
note holders of Search. Up to approximately 8.8 million additional shares of
Harken common stock may be issued in connection with the Merger, including (i)
up to 732,771 shares of Harken common stock upon the exercise of certain
warrants issued by Harken, and (ii) up to 8.1 million shares of Harken common
stock ("Contingent Shares"), if any, that may be issued on or about September
30, 1996 to the holders of record at the effective time of the Merger of
certain Search securities issued by Search and overriding royalty interests in
certain properties held by Search, based in part upon the increase that may
subsequently be realized in the value of a group of undeveloped leases and
properties of Search. As of the most recent valuation date required under the
terms of the Merger Agreement, no Contingent Shares would be issuable based
upon the value of this group of undeveloped leases and properties of Search.

Issuance of European Convertible Notes Payable -- In connection with
the issuance of $15 million in European 8% Senior Convertible Notes in May
1995, Harken issued to the placement agents for the European Notes certain
non-registered non-transferrable stock purchase warrants to purchase one
million shares of Harken common stock which are exercisable by the holders
thereof at any time following six months after closing at an exercise price of
$1.50 per share, and expiring in May 1999. In addition, the European Notes are
convertible under certain terms into a maximum of approximately 10,000,000
shares of Harken common stock. As of December 31, 1995, Harken had received
notification that holders of European Notes totaling $2,450,000 had exercised
their conversion option and had been issued 1,633,327 shares of Harken common
stock. See Note 7 - European Convertible Notes Payable for further discussion.
Subsequent to December 31, 1995 and as of February 28, 1996, additional
notifications of exercise of conversion options have been received from holders
of European Notes totaling $950,000, which has resulted in the additional
issuance of 633,332 shares of Harken common stock. Had all of such European
Note conversions occurred at the time of issuance of the European Notes in May
1995, Harken's loss per share for the year ended December 31, 1995 would have
been $.02 per share. Also, Harken paid a fee of 92,308 shares of Harken common
stock to a financial advisor in connection with the European Notes and the
market value of such shares as of the date issued is included as deferred
issuance costs in Other Assets in the accompanying consolidated balance sheet.

Private Placements of Common Stock -- On March 1, 1995, Harken sold
600,000 shares of newly issued Harken common stock to an institutional
purchaser in exchange for net proceeds of $657,000. Harken subsequently
entered into an agreement on April 7, 1995 to sell to this same institutional
purchaser an additional 600,000 newly-issued shares of Harken common stock in
exchange for net proceeds of $747,000.

46
<PAGE> 47
In July and August of 1995, Harken received additional net proceeds of
$654,000 and $757,000, respectively, related to the sale of a combined total of
1,300,000 newly-issued shares of Harken common stock to certain institutional
and/or accredited purchasers. In November 1995, Harken received an additional
$1,633,000 related to the sale of 1,460,000 shares of Harken common stock
previously held as treasury stock to a certain institutional and/or accredited
purchaser. In connection with certain of these placements, Harken issued to
certain financial advisors an aggregate total of 206,000 warrants to purchase
shares of Harken common stock at an average exercise price of $1.67 per share.

Acquisition of Texas Properties -- In October 1995, a wholly-owned
subsidiary of Harken paid as consideration three million shares of restricted
Harken common stock previously held as treasury stock in exchange for certain
non-operated interests in producing properties located in the western region of
Texas ("Yellowhouse Properties"). As part of the purchase of these interests,
Harken also issued one million warrants to purchase additional shares of
restricted Harken common stock at $2 per share, and also issued 82,759 shares
of restricted Harken common stock previously held as treasury stock to a
financial advisor as a fee in connection with the acquisition.

In December 1995, another wholly-owned subsidiary of Harken acquired
certain interests in producing properties located in the panhandle region of
Texas ("Panhandle Properties") in exchange for, among other consideration, 2.5
million shares of Harken common stock and a $13 million note payable which is
payable, at Harken's option, in shares of Harken common stock. See Notes 2 and
6 -- Acquisitions and Notes Payable and Long-Term Obligations for further
discussion.

Per Share Data -- Per share data has been computed based on the
weighted average number of common shares outstanding during each period.
Common stock equivalents, contingently issuable shares and other potentially
dilutive securities are not included in the computation of earnings per share
if the effect of inclusion would be antidilutive. For purposes of calculating
earnings per share, the unconverted European Convertible Notes discussed above
are considered not to be common stock equivalents.

Stock Options -- Harken accounts for the issuance of employee stock
options and stock-based awards using the intrinsic value method, whereby
compensation expense, if any, is determined on the measurement date, that is,
the first date on which both the number of shares the employee is entitled to
receive, and the exercise price, if any, are known. Compensation expense, if
any, is measured based on the award's intrinsic value which is calculated as
the excess of the market price of the stock over the exercise price on the
measurement date. In conjunction with various stock option plans and grants,
Harken has the following options outstanding at December 31, 1995 (not in
thousands):

<TABLE>
<CAPTION>
YEAR OF NUMBER OF EXPIRATION
GRANT SHARES EXERCISABLE OPTION PRICE DATE
--------- -------------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
1984 . . . . . . . . 29,556 29,556 $1.000 1996-2001
1985 . . . . . . . . 287,219 287,219 $1.000 2000-2001
1986 . . . . . . . . 10,000 10,000 $1.4688 1996
1988 . . . . . . . . 63,250 63,250 $4.1875 to $5.625 1996-1998
1990 . . . . . . . . 92,340 92,340 $4.00 to $5.000 2000
1991 . . . . . . . . 10,000 10,000 $6.500 1996
1993 . . . . . . . . 329,483 301,983 $1.1875 to $1.625 2003
1994 . . . . . . . . 1,485,000 371,250 $1.375 to $1.875 2004
1995 . . . . . . . . 1,320,000 -0- $1.563 to $2.000 2005
</TABLE>

47
<PAGE> 48
At December 31, 1995, Harken had remaining options authorized and
available to be granted of 170,000. In addition, at December 31, 1995, Harken
has the following outstanding warrants available to be exercised (not in
thousands):

<TABLE>
<CAPTION>
YEAR OF NUMBER OF EXPIRATION
ISSUANCE SHARES EXERCISABLE PRICE DATE
- -------- -------------- ----------- --------------------- --------------
<S> <C> <C> <C> <C>
1995 . . . . . . . . . . 3,083,771 3,083,771 $1.500 to $2.00 1996-1999
</TABLE>

(10) DISCONTINUED OPERATIONS

In May 1994, Harken discontinued its well servicing operations which
it had conducted through Supreme Well Service Company ("Supreme"), a
wholly-owned subsidiary. Harken has sold the equipment assets of Supreme and
has utilized the proceeds toward developing Harken's exploration and production
operations, both domestically and internationally. As a result of this
decision, Harken has reflected the revenues and expenses of Harken's well
servicing and contract drilling segment as discontinued operations in the
accompanying financial statements. Such discontinued operations include
revenues of $2,074,000 and $1,053,000 for the years ended December 31, 1993 and
1994, respectively. The December 31, 1994 revenue amount includes $272,000 of
gain on the sale of Harken's contract drilling assets which occurred during the
first quarter of 1994.

(11) INCOME TAXES

At December 31, 1995, Harken had available for federal income tax
reporting purposes, net operating loss (NOL) carryforward for regular tax
purposes of approximately $65,000,000 which expires in 1997 through 2010,
alternative minimum tax NOL carryforward of approximately $57,000,000 which
expires in 1997 through 2010, investment tax credit carryforward of
approximately $860,000 which expires in 1996 through 2002, statutory depletion
carryforward of approximately $1,200,000 which does not have an expiration
date, and a net capital loss carryforward of approximately $6,100,000 which
expires in 2007 through 2008. Approximately $16,000,000 of the net operating
loss carryforward has been acquired with the purchase of subsidiaries and must
be used to offset future income from profitable operations within those
subsidiaries.

Upon adoption of Statement of Financial Accounting Standard No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"), on January 1, 1993, Harken
calculated total deferred tax liabilities of approximately $2,020,000 resulting
from financial statement basis for property and equipment in excess of related
tax basis. In addition, Harken calculated total deferred tax assets of
approximately $18,989,000 consisting of approximately $18,142,000 related to
Harken's net operating loss carryforward and approximately $847,000 primarily
related to tax basis for investments in former subsidiaries in excess of
related financial statement basis. Harken established a valuation allowance for
the entire net deferred tax asset of $16,969,000. As a result, the adoption of
SFAS No. 109 by Harken on January 1, 1993 had no effect on Harken's results
from operations or earnings (loss) per common share for the year ended December
31, 1993.

At December 31, 1993, total deferred tax liabilities totaled
approximately $4,065,000. In addition, total deferred tax assets increased to
approximately $22,872,000, primarily from an increase in the NOL carryforward
during the year. The resulting increase in net deferred tax assets was offset
by a corresponding increase in the valuation allowance, resulting in no impact
to Harken's results of operations.

At December 31, 1994, total deferred tax liabilities increased to
approximately $5,100,000 while total deferred tax assets decreased to
approximately $20,640,000. The resulting decrease in net deferred tax assets
was

48
<PAGE> 49
offset by a corresponding decrease in the valuation allowance to approximately
$15,540,000 at December 31, 1994, resulting in no impact to Harken's results of
operations.

At December 31, 1995, total deferred tax liabilities, relating
primarily to property and equipment, increased to approximately $7,528,000
while total deferred tax assets, primarily related to the net operating loss
carryforward, increased to approximately $22,364,000. The resulting decrease
in net deferred tax assets was offset by a corresponding decrease in the
valuation allowance to approximately $14,836,000 at December 31, 1995,
resulting in no impact to Harken's results of operations.

The Tax Reform Act of 1986 made substantial changes with regard to NOL
carryforwards. After an "ownership change," the taxable income of a loss
corporation is limited annually to a prescribed rate times the value of the
loss corporation's stock immediately before the ownership change. In general,
an ownership change occurs if ownership of more than 50% in value of the stock
of the loss corporation changes during the three-year period preceding the test
date.

(12) RELATED PARTY TRANSACTIONS

The Board of Directors approved the granting of loans from Harken to
certain employees and directors under the Non-Qualified Plan and the Directors
Option Agreement for the purpose of allowing such individuals to exercise their
stock options immediately. The Board of Directors determined in making such
grants that as a result of the restricted nature of the stock and the lack of
any rights on the part of the optionee to cause such shares to be registered,
an option price per share equal to 60% of the closing market price on the date
of grant was the reasonable price for such shares of common stock which were
immediately purchased. Each loan was evidenced by a promissory note which was
due eight years from making and bore interest at 5% per annum. The shares of
stock purchased pursuant to such notes were held by Harken as collateral until
the respective notes were fully paid. During 1988, 1989, 1990 and 1991, certain
officers and directors elected to purchase common stock under these terms.
Harken had notes receivable of $2,846,000 as of December 31, 1992, which were
included in Stockholders' Equity.

During the first and second quarter of 1993, Harken foreclosed on
certain of these non-recourse notes receivable from certain former employees,
officers and directors resulting in the addition of 381,925 shares of treasury
stock, which had served as the sole collateral for these notes. In addition,
during the third quarter of 1993, certain employees, officers and directors
surrendered to Harken a total of 704,000 shares of common stock for the
cancellation of certain of these non-recourse promissory notes given by such
parties to Harken upon the purchase of such shares. In connection with such
surrender, Harken issued new stock options to such parties which options had
been determined to be equal in value to the shares surrendered. This resulted
in the addition of 704,000 shares of treasury stock which had served as
collateral for these notes. As a result of the above transactions, during the
year ended December 31, 1993, Harken expensed a total of $551,000 of accrued
interest related to these non-recourse notes receivable, and such expense has
been included in Provision for Asset Impairments in the accompanying
consolidated financial statements.

In September 1989, Harken's Board of Directors approved a loan to an
officer in the amount of $520,000. The note bears interest at the Broker Loan
Rate plus 1/2% and is due October 2, 1999. The note is secured by vested
options to purchase 266,790 shares of Harken's common stock at $1.00 per share.
During 1994, an agreement was reached with the officer whereby the note,
together with accrued interest, is scheduled to be forgiven equally over three
installments dated April 1994, July 1995 and December 1996 with each
installment of such forgiveness contingent upon the officer's continued
employment through the date of each such installment. Harken has included the
first installment of this forgiveness totaling $232,000 in general and

49
<PAGE> 50
administrative expense during 1994 and has included the second installment of
this forgiveness totaling $232,000 in general and administrative expense during
1995. The remaining balance of the note is included in Notes Receivable from
Related Parties in the accompanying consolidated balance sheets.

See Notes 4, 6, 8 and 9 -- Investments in Former Subsidiaries, Notes
Payable and Long-Term Obligations, Redeemable Preferred Stock and Stockholders'
Equity for other related party transactions.

(13) OTHER INFORMATION

Quarterly Data -- (Unaudited) -- The following tables summarize
selected quarterly financial data for 1994 and 1995 expressed in thousands,
except per share amounts. Such financial information has been restated to
present the operations of Harken's well servicing and contract drilling
operations as discontinued operations. See Note 10 -- Discontinued Operations
for further discussion.
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------- Total
March 31 June 30 September 30 December 31 Year
-------- ------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
1994
Revenues . . . . . . . . . . . . . . . . . . $ 1,163 $ 1,147 $ 1,136 $ 1,449 $ 4,895
Gross profit . . . . . . . . . . . . . . . . 648 587 591 795 2,621
Loss from continuing operations . . . . . . . (430) (395) (604) (6,782) (8,211)
Net loss . . . . . . . . . . . . . . . . . . (296) (637) (717) (6,784) (8,434)
Per common share
Loss from continuing operations . . . . . $ (0.01) $ (0.01) $ (0.01) $ (0.11) $ (0.14)
Net loss . . . . . . . . . . . . . . . . . (0.01) (0.01) (0.01) (0.11) (0.14)

1995
Revenues . . . . . . . . . . . . . . . . . . $ 1,599 $ 1,782 $ 1,800 $ 2,290 $ 7,471
Gross profit . . . . . . . . . . . . . . . . 751 1,082 1,013 979 3,825
Loss from continuing operations . . . . . . . (139) (158) (282) (1,046) (1,625)
Net loss . . . . . . . . . . . . . . . . . . (139) (158) (282) (1,046) (1,625)
Per common share
Loss from continuing operations . . . . . $ (0.00) $ (0.00) $ (0.01) $ (0.01) $ (0.02)
Net loss . . . . . . . . . . . . . . . . . (0.00) (0.00) (0.01) (0.01) (0.02)
</TABLE>

Significant Customers -- There were two oil purchasers which
represented 18% and 28% of consolidated revenues from continuing operations in
1993. These same two oil purchasers represented 38% and 16% of consolidated
revenues from continuing operations in 1994. In 1995, a single oil purchaser
represented 47% of consolidated revenues from continuing operations. Harken
has secured and maintains letters of credit with these significant purchasers.
In addition, management does not feel that the loss of a significant purchaser
would significantly impact the operations of Harken due to the availability of
other potential purchasers for its oil production.

50
<PAGE> 51
14) OIL AND GAS DISCLOSURES

Costs Incurred in Property Acquisition, Exploration and Development
Activities:

<TABLE>
<CAPTION>
1993 1994 1995
---------- --------- ---------
<S> <C> <C> <C>
Domestic costs incurred --
Acquisition of properties
Evaluated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,293 $ 1,464 $ 22,054
Unevaluated . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,029 -- 6,313
Exploration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 -- 696
Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 519 1,428 1,816
---------- --------- ---------
Total domestic costs incurred . . . . . . . . . . . . . . . . . . $ 15,974 $ 2,892 $ 30,879
========== ========= =========

International costs incurred --
Acquisition of properties
Evaluated . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ -- $ --
Unevaluated . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- --
Exploration . . . . . . . . . . . . . . . . . . . . . . . . . . . . 596 830 3,657
Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- --
---------- --------- ---------
Total international costs incurred . . . . . . . . . . . . . . . $ 596 $ 830 $ 3,657
========== ========= =========
</TABLE>

International costs incurred includes approximately $596,000,
$716,000 and $3,354,000 during 1993, 1994 and 1995, respectively, related to
Harken's Colombian operations, and approximately $114,000 and $303,000 during
1994 and 1995, respectively, related to Harken's Bahrain operations.

Capitalized Costs Relating to Oil and Gas Producing Activities:

<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ---------
<S> <C> <C> <C>
Capitalized costs --
Unevaluated international properties not being amortized . . . . . . $ 796 $ 1,626 $ 4,866
Unevaluated domestic properties not being amortized . . . . . . . . 7,208 5,820 11,117
Evaluated domestic properties being amortized . . . . . . . . . . . 9,664 13,944 39,526
---------- ---------- ---------
Total capitalized costs . . . . . . . . . . . . . . . . . . . . . . 17,668 21,390 55,509
Less accumulated depreciation and amortization . . . . . . . . . . (1,433) (2,877) (4,691)
---------- ---------- ---------
Net capitalized costs . . . . . . . . . . . . . . . . . . . . . . . $ 16,235 $ 18,513 $ 50,818
========== ========== =========
</TABLE>

Oil and Gas Reserve Data -- (Unaudited) -- The following information
is presented with regard to Harken's proved oil and gas reserves. Such reserve
information excludes HSW's share of CHAP's interest in the future cash flows
from the Aneth Gas Plant. All of Harken's proved oil and gas reserves, as well
as its consolidated revenues, relate to its domestic operations. The reserve
values reflected in the following reserve disclosures are based on prices
received as of year end. Effective February 15, 1993, Harken consummated a
merger whereby Chuska became a wholly-owned subsidiary of Harken. During 1995,
Harken consummated several transactions resulting in significant additions to
its proved oil and gas reserves. (See Note 2 -- Acquisitions for further
discussion).

51
<PAGE> 52
<TABLE>
<CAPTION>
(UNAUDITED)
--------------------------------
1993 1994 1995
-------- ------- --------
Crude Oil and Condensate (Barrels): (IN THOUSANDS)
<S> <C> <C> <C>
Proved reserves -- beginning of year . . . . . . . . . . . . . . . . 0 1,035 1,521
Extensions and discoveries . . . . . . . . . . . . . . . . . . . . . 1 -- 70
Revisions of previous estimates . . . . . . . . . . . . . . . . . . -- 186 (43)
Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (185) (158) (217)
Purchases of reserves-in-place . . . . . . . . . . . . . . . . . . . 1,219 458 2,192
-------- ------- --------
Proved reserves -- end of year . . . . . . . . . . . . . . . . . . . 1,035 1,521 3,523
======== ======= ========

Proved developed reserves --
Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . 0 624 915
======== ======= --------
End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . 624 915 2,147
======== ======= ========
</TABLE>

<TABLE>
<CAPTION>
(UNAUDITED)
---------------------------------
1993 1994 1995
-------- ------- ---------
Natural Gas (Mcf): (IN THOUSANDS)
<S> <C> <C> <C>
Proved reserves -- beginning of year . . . . . . . . . . . . . . . . 0 4,970 7,148
Extensions and discoveries . . . . . . . . . . . . . . . . . . . . . 683 -- 20
Revisions of previous estimates . . . . . . . . . . . . . . . . . . -- 476 (3,241)
Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (429) (426) (615)
Purchases of reserves-in-place . . . . . . . . . . . . . . . . . . . 4,716 2,128 25,891
-------- ------- ---------
Proved reserves -- end of year . . . . . . . . . . . . . . . . . . . 4,970 7,148 29,203
======== ======= =========

Proved developed reserves --
Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . 0 1,624 2,207
======== ======= =========
End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,624 2,207 8,466
======== ======= =========
</TABLE>

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

<TABLE>
<CAPTION>
(UNAUDITED)
-----------------------
1994 1995
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Future cash inflows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 37,612 $ 154,717
Production costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,045) (44,804)
Development costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,389) (10,720)
--------- -----------
Future net inflows before income tax . . . . . . . . . . . . . . . . . . . . . 20,178 99,193
Future income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
--------- -----------
Future net cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,178 99,193
10% discount factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,466) (40,417)
--------- -----------
Standardized measure of discounted future net cash flows . . . . . . . . . . . $ 11,712 $ 58,776
========= ===========
</TABLE>

52
<PAGE> 53
Changes In Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves:

<TABLE>
<CAPTION>
(UNAUDITED)
---------------------------------
1993 1994 1995
-------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Standardized measure -- beginning of year . . . . . . . . . . . . . $ 0 $ 8,230 $ 11,712
Increase (decrease)
Sales, net of production costs . . . . . . . . . . . . . . . . . (2,726) (2,398) (3,224)
Net change in prices, net of production costs . . . . . . . . . . -- 364 1,045
Development costs incurred . . . . . . . . . . . . . . . . . . . -- -- 391
Change in future development costs . . . . . . . . . . . . . . . -- (208) 1,858
Revisions of quantity estimates . . . . . . . . . . . . . . . . . -- 1,450 (3,420)
Accretion of discount . . . . . . . . . . . . . . . . . . . . . . -- 823 1,171
Changes in production rates, timing and other . . . . . . . . . . -- (150) (1,361)
Extensions and discoveries, net of future costs . . . . . . . . . 875 -- 792
Purchases of reserves-in-place . . . . . . . . . . . . . . . . . 10,081 3,601 49,812
-------- --------- ---------
Standardized measure -- end of year . . . . . . . . . . . . . . . . $ 8,230 $ 11,712 $ 58,776
======== ========= =========
</TABLE>

(15) COMMITMENTS AND CONTINGENCIES

Colombian Operations-Alcaravan Contract -- During the third quarter
of 1992, Harken de Colombia, Ltd., a wholly-owned subsidiary of Harken, was
awarded the exclusive right to explore for, develop and produce oil and gas
throughout approximately 350,000 acres within the Alcaravan area of Colombia.
The Alcaravan area is located in Colombia's Llanos Basin and is located
approximately 140 miles east of Santafe De Bogota. Harken and Empresa
Colombiana de Petroleos ("Ecopetrol") have entered into an Association
Contract (the "Alcaravan Contract") which requires Harken to conduct a seismic
and exploratory drilling program in the Alcaravan area during the initial six
(6) years of the Alcaravan Contract. At the end of each of the first six years
of the Alcaravan Contract, Harken has the option to withdraw from the Alcaravan
Contract or to commit to the next year's work requirements. If during the
initial six years of the Alcaravan Contract, Harken discovers a field capable
of producing oil or gas in quantities that are economically exploitable and
Ecopetrol agrees that such field is economically exploitable (a "commercial
discovery"), the term of the Alcaravan Contract will be extended for a period
of 22 years from the date of such commercial discovery.

Upon a discovery of a field capable of commercial production,
Ecopetrol will reimburse Harken for 50% of its successful well costs expended
up to the point of declaration of a commercial discovery. Production from a
field following a commercial discovery will be allocated as follows: Ecopetrol,
on behalf of the Colombian government, will receive a 20% royalty interest in
all production and all production (after royalty payments) will be allocated
50% to Ecopetrol and 50% to Harken until cumulative production in such field
reaches 60 million barrels of oil, after which Ecopetrol's share of production
will progressively increase and Harken's share will progressively decrease
until cumulative production from the field reaches 150 million barrels of oil,
and thereafter all production will be allocated 70% to Ecopetrol and 30% to
Harken. If more than one field capable of commercial production is discovered
on the Alcaravan acreage, the production sharing percentages applicable to the
field with the greatest cumulative production will be applied to all fields
within the Alcaravan acreage. After declaration of a commercial discovery,
Harken and Ecopetrol will be responsible for all future operating expenses in
direct proportion to their interest in production.

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<PAGE> 54
In September 1994, Huffco Group, Inc. ("Huffco") of Houston, Texas
joined Harken in the drilling of its first exploratory well under the Alcaravan
Contract. Under the terms of a joint operating agreement, which was approved
by Ecopetrol, Harken served as operator and retained a 50% interest in the
well. The well, the Alcaravan #1, was spudded in early February 1995 and was
drilled to a depth of 10,550 feet to test for commercial quantities of oil in
the oil prone zones prevalent in the Llanos Basin; the Carbonera, Mirador,
Guadalupe and the basal Cretaceous formations. Harken initially determined in
April 1995 that the Alcaravan #1 well failed to produce commercial quantities
of oil. Harken intends to re-enter the well, preferably with a joint venture
partner, to finalize the evaluation of the Alcaravan #1 well's ability to
produce commercial quantities of oil. As a result, the costs incurred on the
Alcaravan #1 well continue to be capitalized at December 31, 1995, as
unevaluated oil and gas properties, pending final determination of the results
of the well. In addition, Huffco elected to not participate in the further
exploration and development of the Alcaravan acreage.

Harken has also conducted engineering studies to evaluate the
potential for recovering existing oil reserves in the Rio Negro area, which is
located in the northern portion of the Bocachico Contract area. Three wells
were drilled over 30 years ago in this area by another contractor who produced
and subsequently abandoned the wells. Well information and data, including
production rates, well logs and pressure tests, has been utilized by Harken in
its studies to evaluate the feasibility of applying modern production and
recovery techniques in this area. On January 19, 1995, after completing the
engineering feasibility study, Harken notified Ecopetrol of Harken's commitment
to drill a well under the Bocachico Contract, and thereby extended the
Bocachico Contract into its second year. Harken has selected its first well
site and currently anticipates beginning site preparation and rig mobilization
upon receipt of final environmental and drilling permits. Under the terms of
the Bocachico Contract, Harken is required to complete the first well on the
Bocachico acreage by June 5, 1996. If Harken were

54
<PAGE> 55
unable to complete the well by such date and unless an extension was granted,
Ecopetrol would have the right to terminate the Bocachico Contract after an
appropriate notice period, which could have a material adverse effect on
Harken's financial position and results of operation. In addition, Harken has
committed to drilling a second well thereby extending the Bocachico Contract
into its third year.

During the first year of the Playero Contract, Harken acquired
approximately 12 kilometers of new seismic data in the Playero Contract area.
Harken is currently completing its evaluation of the new seismic data. During
each of the second through the sixth contract years, Harken may elect to
continue the contract by committing to the drilling of at least one well during
each contract year. Harken must complete the evaluation of the new seismic
data by May 10, 1996, at which time Harken must elect to either commit to
drilling a well or to allow its rights to the Playero acreage to expire.
Harken does not currently believe that the loss of any of its rights under the
Playero Contract would have a material adverse effect on Harken's financial
position or results of operation.

If during the initial six years of the Playero Contract, Harken
discovers a field capable of commercial production of oil or gas, the term of
the Playero Contract will be extended for a period of 22 years from the date of
such commercial discovery. Upon a commercial discovery, Ecopetrol will
reimburse Harken for 50% of its successful well costs expended up to the point
of declaration of a commercial discovery. Production from a

55
<PAGE> 56
commercial discovery will be allocated as follows: Ecopetrol, on behalf of the
Colombian government, will receive a 20% royalty interest in all production
and all production (after royalty payments) will be allocated 50% to Ecopetrol
and 50% to Harken until cumulative production from all fields in the Playero
acreage reaches 60 million barrels of oil, after which Ecopetrol's share of
production will increase progressively to 75% and Harken's share will decrease
progressively to 25% determined by a formula based on Harken's recovery of its
total expenditures under the Playero Contract. After a declaration of a
commercial discovery, Harken and Ecopetrol will be responsible for all future
operating expenses in direct proportion to their interest in production.

Other -- Harken leases its corporate and certain other office space
and certain field operating offices. Total office and operating lease expense
during 1993, 1994 and 1995 was $707,000, $510,000 and $442,000, respectively.
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,
1995, net of sublease arrangements, are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------------
<S> <C>
1996 . . . . . . . . . . . . . . . . . . . . . . . $ 359
1997 . . . . . . . . . . . . . . . . . . . . . . . 301
1998 . . . . . . . . . . . . . . . . . . . . . . . 271
1999 . . . . . . . . . . . . . . . . . . . . . . . 271
2000 . . . . . . . . . . . . . . . . . . . . . . . 4
Thereafter . . . . . . . . . . . . . . . . . . . . --
------------
Total minimum payments required . . . . . . . . $ 1,206
============
</TABLE>

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<PAGE> 57
The exploration, development and production of oil and gas are subject
to various Navajo, 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 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.

The prior owner of the Aneth Gas Plant facility has agreed to accept
financial responsibility for a portion of the remediation work. Texaco and the
other current plant owners, including HSW, are presently negotiating a formal
agreement with the prior owner to allocate the costs of the remediation work.
At this time, however, it is impossible for HSW to accurately estimate the
costs of the cleanup at the Aneth Gas Plant facility or the amount of
indemnification the prior owner will provide to the present owners, including
HSW, for the costs of the remediation work. However, as the cost of certain
remediation procedures will be incurred, Harken has accrued a contingency
reserve of $177,000 for management's best estimate of its share of remediation
expenditures.

Harken has accrued approximately $1,168,000 at December 31, 1995
relating to other operational or regulatory contingent liabilities related to
Harken's domestic operations. Harken and its subsidiaries currently are
involved in various lawsuits and other contingencies, including the guarantee
of certain lease obligations, which in management's opinion, will not result in
significant loss exposure to Harken.

Search Acquisition Corp., a wholly-owned subsidiary of Harken, has
been named as a defendant in a lawsuit by certain parties. On February 28,
1996, the court granted Search Acquisition's motion for summary judgement.
Petrochemical has the right to appeal the decision of the trial court.
Although the ultimate outcome of this litigation is uncertain, Harken believes
that any liability to Harken as a result of this litigation will not have a
material adverse effect on Harken's financial condition.

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<PAGE> 58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

See "Item 1. Business" above for a discussion of the Executive
Officers of Harken. Reference is made to the material under the caption
"Election of Directors" in the Registrant's definitive Proxy Statement to be
filed on or before April 29, 1996 pursuant to Regulation 14A in connection with
its Annual Meeting of Stockholders to be held in June 1996, which is
incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Reference is made to the material under the caption "Compensation of
Executive Officers" in the Registrant's definitive Proxy Statement to be filed
on or before April 29, 1996 pursuant to Regulation 14A in connection with its
Annual Meeting of Stockholders to be held in June 1996, which is incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

Reference is made to the material under the caption "Ownership of
Common Stock" in the Registrant's definitive Proxy Statement to be filed on or
before April 29, 1996 pursuant to Regulation 14A in connection with its Annual
Meeting of Stockholders to be held in June 1996, which is incorporated herein
by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Reference is made to the material under the caption "Certain
Transactions" in the Registrant's definitive Proxy Statement to be filed on or
before April 29, 1996 pursuant to Regulation 14A in connection with its Annual
Meeting of Stockholders to be held in June 1996, which is incorporated herein
by reference.

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<PAGE> 59
PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

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

(1) Financial Statements included in PART II of this report:

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Harken Energy Corporation and Subsidiaries
-- Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . 29
-- Selected Financial Information and Other Data for the five years ended
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
-- Consolidated Balance Sheets -- December 31, 1994 and 1995 . . . . . . . . . . . . 30
-- Consolidated Statements of Operations for the three years ended
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
-- Consolidated Statements of Stockholders' Equity for the three years ended
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
-- Consolidated Statements of Cash Flows for the three years ended
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
-- Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . 34
</TABLE>

(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 the Company. The information required by all other
Schedules is not applicable to the Company.

(3) Exhibits

3.1 Certificate of Incorporation of Harken Energy Corporation as
amended (filed as Exhibit 3.1 to Harken's Annual Report on Form
10-K for fiscal year ended December 31, 1989, File No. 0-9207, and
incorporated by reference herein).

3.2 Amendment to Certificate of Incorporation of Harken Energy
Corporation (filed as Exhibit 28.8 to the Registration Statement
on Form S-1 of Tejas Power Corporation, file No. 33-37141, and
incorporated by reference herein).

3.3 Amendment to the Certificate of Incorporation of Harken Energy
Corporation (filed as Exhibit 3 to Harken's Quarterly Report on
Form 10-Q for fiscal quarter ended March 31, 1991, File No.
0-9207, and incorporated by reference herein).

3.4 Amendments to the Certificate of Incorporation of Harken Energy
Corporation (filed as Exhibit 3 to Harken's Quarterly Report on
Form 10-Q for fiscal quarter ended June 30, 1991, File No. 0-9207,
and incorporated by reference herein).

3.5 Bylaws of Harken Energy Corporation, as amended (filed as Exhibit
3.2 to Harken's Annual Report on Form 10-K for fiscal year ended
December 31, 1989, File No. 0-9207, and incorporated by reference
herein).

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<PAGE> 60
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. 0-9207, and
incorporated by reference herein).

4.2 Certificate of Designations, Powers, Preferences and Rights of
Series A Cumulative Convertible Preferred Stock, $1.00 par value,
of Harken Energy Corporation (filed as Exhibit 4.1 to Harken's
Annual Report on Form 10-K for the fiscal year ended December 31,
1989, File No. 0-9207, and incorporated herein by reference).

4.3 Certificate of Designations, Powers, Preferences and Rights of
Series B Cumulative Convertible Preferred Stock, $1.00 par value,
of Harken Energy Corporation (filed as Exhibit 4.2 to Harken's
Annual Report on Form 10-K for the fiscal year ended December 31,
1989, File No. 0-9207, and incorporated herein by reference).

4.4 Certificate of the Designations, Powers, Preferences and Rights of
Series C Cumulative Convertible Preferred Stock, $1.00 par value
of Harken Energy Corporation (filed as Exhibit 4.3 to Harken's
Annual Report on Form 10-K for fiscal year ended December 31,
1989, File No. 0-9207, and incorporated by reference herein).

4.5 Certificate of the Designations of Series D Preferred Stock, $1.00
par value of Harken Energy Corporation (filed as Exhibit 4.3 to
Harken's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1995, File No. 0-9207, and incorporated by
reference herein).

10.1 Seventh Amendment and Restatement of Harken's Amended Stock Option
Plan (filed as Exhibit 10.1 to Harken's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991, File No. 0-9207, and
incorporated by reference herein).

10.2 Amended and Restated Non-Qualified Incentive Stock Option Plan of
Harken adopted by Harken's stockholders on February 18, 1991
(filed as Exhibit 10.2 to Harken's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991, File No. 0-9207, and
incorporated by reference herein).

10.3 Harken Energy Corporation 401(k) Savings Plan (filed as Exhibit
10.1 to Harken's Registration Statement (Registration No.
33-52874), and incorporated by reference herein).

10.4 Tax Sharing Agreement among Harken and certain subsidiaries of
Harken (filed as Exhibit 10.53 to the Registration Statement on
Form S-1, of E-Z Serve and Tejas (Registration No. 33-37141), and
incorporated by reference herein).

10.5 Master Intercompany Agreement among Harken, Harken Marketing
Company, and E-Z Serve (filed as Exhibit 10.54 to the Registration
Statement on Form S-1, of E-Z Serve and Tejas (Registration No.
33-37141), and incorporated by reference herein).

10.6 Master Intercompany Agreement between Harken and Tejas (filed as
Exhibit 10.55 to the Registration Statement on Form S-1, of E-Z
Serve and Tejas (Registration No. 33-37141), and incorporated by
reference herein).

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<PAGE> 61
10.7 Litigation, Indemnification and Contribution Agreement among
Harken, E-Z Serve, and Harken Marketing Company (filed as Exhibit
10.56 to the Registration Statement on Form S-1, of E-Z Serve and
Tejas (Registration No. 33- 37141), and incorporated by reference
herein).

10.8 Litigation, Indemnification and Contribution Agreement between
Harken and Tejas (filed as Exhibit 10.57 to the Registration
Statement on Form S-1, of E-Z Serve and Tejas (Registration No.
33-37141), and incorporated by reference herein).

10.9 Form of Advancement Agreement dated September 13, 1990, between
Harken and each director of Harken (filed as Exhibit 10.38 to
Harken's Annual Report on Form 10-K for the fiscal year ended
December 31, 1989, File No. 0- 9207, and incorporated by reference
herein).

10.10 Operating Agreement between Chuska Energy Corporation and the
Navajo Tribe of Indians dated February 18, 1987, and effective
July 20, 1987 (filed as Exhibit 10(b) to Chuska Energy
Corporation's Form 10 - General Form for Registration of
Securities (the "Chuska Form 10"), and incorporated by reference
herein).

10.11 Operating Agreement between Chuska Energy Corporation and the
Navajo Tribe of Indians dated July 28, 1983, and effective August
26, 1983 and First Addendum thereto (filed as Exhibit 10(a) to
Chuska's Form 10, and incorporated by reference herein).

10.12 Joint Operations Agreement (CHAP) dated August 1, 1988 (filed as
Exhibit 10(e) to the Chuska Form 10, and incorporated by
reference herein).

10.13 Agreement dated and effective October 22, 1992, among Donald W.
Raymond, Harvey V. Risien, Jr., Chuska Energy Company and Western
Gas Resources, Inc. (filed as Exhibit 10.41 to Harken's
Registration Statement on Form S-4 (Registration No. 33-56964),
and incorporated by reference herein).

10.14 Gas processing Agreement between Western Processing, Ltd. and
Chuska Energy Company dated June 29, 1989 (filed as Exhibit 10.44
to Harken's Registration Statement of Form S-4 (Registration No.
33-56964), and incorporated by reference herein).

10.15 Association Contract (Cambulos), dated September 17, 1995, and
effective as of November 17, 1995, 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 September 30, 1995, File No. 0-9207, and
incorporated by reference herein).

10.16 Development Finance Agreement, dated October 12, 1995, by and
among Harken Energy Corporation, Arbco Associates L.P., Offense
Group Associates L.P., Kayne Anderson Nontraditional Investments
L.P. and Opportunity Associates L.P. (filed as Exhibit 10.2 to
Harken's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1995, File No. 0-9207, and incorporated by
reference herein).

10.17 Harken Energy Corporation's 1993 Stock Option and Restricted Stock
Plan (filed as Exhibit 4.3 to Harken's Registration Statement on
Form S-8, and incorporated by reference herein).

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<PAGE> 62
10.18 Harken Energy Corporation's Directors Stock Option Plan (filed as
Exhibit 4.3 to Harken's Registration Statement on Form S-8, and
incorporated herein by reference).

10.19 Note Purchase Agreement among Harken Energy Corporation and
certain Purchasers relating to Harken's 8% Senior Convertible
Notes due 1998 (filed as Exhibit 99.2 to Harken's Registration
Statement on Form S-3 (Registration No. 33-61673), and
incorporated herein by reference).

10.20 Amended and Restated Agreement and Plan of Merger among Harken
Energy Corporation, Search Acquisition and Search Exploration,
Inc., dated as of March 27, 1995 (filed as Exhibit 2.1 to Harken's
Registration Statement on Form S-4 (Registration No. 33-58265),
and incorporated herein by reference).

10.21 Purchase and Sale Agreement among Harken Energy Corporation,
Harken Exploration Company and Momentum Operating Co., Inc. (filed
as Exhibit 2.1 to Harken's Current Report on Form 8-K dated
December 21, 1995, File No. 0- 9207, and incorporated herein by
reference).

10.22 Promissory Note of Harken Exploration Company dated December 21,
1995 (filed as Exhibit 99.1 to Harken's Current Report on Form 8-K
dated December 21, 1995, File No. 0-9207, and incorporated herein
by reference).

* 22 Subsidiaries of Harken.

* 24 Power of Attorney.

* 27 Financial Data Schedule.

(b) Reports on Form 8-K

(1) The registrant filed a Current Report on Form 8-K dated October 5,
1995 (Item 2) to report the acquisition of the Yellowhouse
Properties.

(2) The registrant filed a Current Report on Form 8-K dated October
12, 1995 (Item 5) to report the execution of a financing
agreement.

(3) The registrant filed a Current Report on Form 8-K dated December
15, 1995 (Item 5) to report the execution of the Panhandle
Purchase and Sale Agreement.

(4) The registrant filed a Current Report on Form 8-K dated December
21, 1995 (Item 2) to report the acquisition of the Panhandle
Properties.

____________________
* previously filed

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<PAGE> 63
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, in the City of
Irving, State of Texas, on April 22, 1996.

HARKEN ENERGY CORPORATION

*
--------------------------------------
Mikel D. Faulkner, Chairman of the
Board and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature Title Date
------------------------------- --------------------------------------- --------------
<S> <C> <C>
* Chairman of the Board and Chief April 22, 1996
------------------------------- Executive Officer (Principal
Mikel D. Faulkner Executive Officer)

* President and Chief Operating April 22, 1996
------------------------------- Officer and Director
Richard H. Schroeder

/s/ Bruce N. Huff Senior Vice President and Chief April 22, 1996
------------------------------- Financial Officer (Principal
Bruce N. Huff Accounting Officer and Principal
Financial Officer)

* Director April 22, 1996
-------------------------------
Michael M. Ameen, Jr.
</TABLE>

63
<PAGE> 64

<TABLE>
<S> <C> <C>
* Director April 22, 1996
-------------------------------
Michael R. Eisenson

* Director April 22, 1996
-------------------------------
Edwin C. Kettenbrink, Jr.

* Director April 22, 1996
-------------------------------
Talat M. Othman

* Director April 22, 1996
-------------------------------
Donald W. Raymond

* Director April 22, 1996
-------------------------------
Gary B. Wood
</TABLE>

*Bruce N. Huff, by signing his name hereto, does hereby sign this Amendment No.
1 to Annual Report on Form 10-K/A for the year ended December 31, 1995 on
behalf of Harken Energy Corporation and each of the above-named officers and
directors of such Company pursuant to powers of attorney, executed on behalf of
the Company and each officer and director.

/s/ Bruce N. Huff
- ------------------------
Bruce N. Huff,
Attorney-in-Fact