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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2003

For the transition period from                      to                     

Commission file number 1-10262

HARKEN ENERGY CORPORATION

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code (281) 504-4000

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

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 ¨ No þ

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ¨ No þ.

The aggregate market value of the voting Common Stock, par value $0.01 per share, held by non affiliates of the Registrant as of June 30, 2003 was approximately $50,013,000. For purposes of the determination of the above stated amount only, all directors, executive officers and 5% or more stockholders of the Registrant are presumed to be affiliates.

The number of shares of Common Stock, par value $0.01 per share, outstanding as of March 1, 2004 was 186,450,409.

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Cautionary Statements

Certain information in this Annual Report, including certain information in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7, is “forward-looking information” as defined by the Private Securities Litigation Reform Act of 1995. Examples include discussions as to Harken’s expectations, beliefs, plans, goals, objectives and future financial or other performance or assumptions concerning matters discussed in this Annual Report. This information, by its nature, involves estimates, projections, forecasts and uncertainties that could cause actual results or outcomes to differ substantially from those expressed in the forward-looking statement.

The business of Harken Energy Corporation (together with its wholly-owned or controlled subsidiaries, “Harken”) is influenced by many factors that are difficult to predict, involve uncertainties that may materially affect actual results and are often beyond its ability to control. A number of these factors have been identified herein under “Risk Factors” set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this report, and that are otherwise described from time to time in Harken’s Securities and Exchange Commission (“SEC”) reports filed after this report. The factors include weather conditions; governmental regulations; cost of environmental compliance; inherent risk in the operation of drilling; fluctuations in energy-related commodities prices and the effect these could have on our earnings, liquidity position and the underlying value of our assets; capital market conditions; changes in accounting standards; the risks of operating businesses in regulated industries that are in the process of becoming deregulated or increasingly regulated; and political and economic conditions in Middle America and South America (including inflation rates). Although Harken’s management strives to mitigate market risk through risk management activities, changes in commodity prices can have an adverse impact on earnings and asset values.

Any forward-looking statement speaks only as of the date on which it is made, and Harken undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made.

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PART I

ITEM 1. BUSINESS

Overview

Harken is engaged in oil and gas exploration, development and production operations both domestically and internationally through its various subsidiaries. The majority of Harken’s domestic operations presently include oil and gas exploration, development and production operations in the onshore and offshore Gulf Coast regions of South Texas and Louisiana. Harken’s international operations during the year ended December 31, 2003 included three exclusive Association Contracts with the state-owned oil company in the Republic of Colombia and Technical Evaluation Agreements covering acreage in Peru and Panama.

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 580 WestLake Park Blvd., Suite 650, Houston, Texas 77079, and its telephone number is (281) 504-4000.

Harken divides its operations into two operating segments which are managed and evaluated as separate operations. Harken’s North American operating segment currently consists of Harken’s exploration, development, production and acquisition efforts in the United States. In the first quarter of 2004, Harken established Gulf Energy Management, Company (“GEM”), a wholly-owned subsidiary, to manage its domestic operations held through its other domestic wholly-owned subsidiaries. Harken’s Middle American operating segment currently consists of exploration, development, production and acquisition efforts in Colombia, Peru and Panama as well as potential future operations elsewhere in Central America and South America. All of the Middle American operating revenues during 2003 have been generated from Colombian operations. See “Note 17 – Other Information” in the Notes to Consolidated Financial Statements contained in Part II, Item 8 of this Annual Report on Form 10-K for certain financial information about Harken’s two operating segments and certain financial information about the geographical areas of Harken’s operations.

In March 2002, Global Energy Development, Ltd., a wholly-owned subsidiary of Harken, transferred all of its interests in its international assets, operations, and obligations relating to such assets and such operations were assumed by, a new subsidiary, Global Energy Development PLC (“Global,” a United Kingdom company), in exchange for 92.77% of Global’s common stock. Upon the completion of this exchange transaction, Global then completed the listing of its common stock for trading on the AIM Exchange in London, and sold 7.23% (2,021,902 shares) of such stock in a private placement to investors, of which less than 1% (166,198 shares) of Global was purchased by certain officers, directors and employees of Harken and Global and a family member at the offering price. In December 2002, Harken exchanged 2,000,000 shares of its Global common stock for 1,232,742 redeemable ordinary shares of New Opportunities Investment Trust PLC (“NOIT”), an investment trust organized under the laws of the United Kingdom. This exchange further reduced Harken’s ownership of Global to approximately 85.62%. Global’s executive offices are located at 580 WestLake Park Blvd., Suite 615, Houston, Texas 77079. Global’s business strategy is to develop energy projects internationally and to aggregate assets internationally through strategic acquisitions and alliances.

During 2003, Harken focused on reducing its significant debt obligations consisting primarily of Harken’s 5% Senior Convertible Notes (“5% European Notes”) and Harken’s 5% Convertible Notes (“Benz Convertible Notes”) issued to Benz Energy, Incorporated (“Benz”), which were scheduled to mature in May 2003 and November 2003, respectively. Under its capital restructuring plan, Harken’s management actively

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worked to repurchase, redeem and/or restructure its outstanding debt obligations prior to their maturity date. Also, certain additional convertible debt obligations were either converted into or redeemed with Harken common stock, under the terms of the specific note agreements, either prior to or upon the maturity date in 2003. Since January 1, 2003 and as of March 25, 2004, Harken has reduced its overall outstanding debt principal amounts by 91%, or approximately $52 million, as compared to the outstanding debt principal amounts as of December 31, 2002. For further discussion concerning Harken’s capital restructuring plan and its efforts to reduce its outstanding debt, see “Liquidity and Capital Resources” contained in Part II, Item 7 of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Harken’s capital restructuring plan included a shareholder rights offering effected in 2003. In February 2003, Harken distributed to holders of its common stock, Series G1 preferred stock and Series G2 preferred stock, at no charge, nontransferable subscription rights to purchase shares of its common stock. Harken distributed 32,154,867 subscription rights exercisable for up to 72,885,437 shares of common stock. In connection with the rights offering, subscription rights were properly exercised for 13,169,179 shares of common stock for an aggregate purchase price of $1,807,000. Pursuant to a standby purchase agreement, on March 20, 2003, Lyford Investments Enterprises Ltd. (“Lyford”) purchased the remaining unsubscribed shares of common stock offered in the rights offering at the subscription price.

As a result of the standby commitment, Lyford purchased 59,716,227 shares of common stock from Harken for an aggregate purchase price of approximately $8,193,000. Lyford paid approximately $3,185,000, net of the $5,000,000 outstanding under Harken’s 10% Term Loan Payable to Lyford (“Investor Term Loan”), plus accrued interest, in cash to Harken at the closing of the standby commitment. As a result, no amounts remain outstanding under the Investor Term Loan. Harken used the remaining proceeds of the rights offering and the standby commitment in 2003 to redeem certain amounts of the 5% European Notes.

After giving effect to the consummation of Harken’s rights offering and Lyford’s standby commitment, Lyford became the holder of approximately 62% of Harken’s outstanding common stock. Therefore, these transactions resulted in a change of control of Harken. Lyford’s percentage ownership has been subsequently reduced in the aggregate due to the conversions of the 5% European Notes, Harken’s 7% Senior Convertible Notes due 2006 (“the 7% European Notes due 2006”), Harken’s 7% Senior Convertible Notes due 2007 (“7% European Notes”), and certain Series G1, G2 and G3 preferred shares into shares of Harken common stock. As of March 1, 2004, Lyford beneficially owns approximately 35% of Harken’s outstanding common stock. Therefore, Lyford exercises significant voting control over Harken and is in a position to significantly influence decisions relating to the election of Harken’s board of directors and the approval of other matters presented for consideration by the stockholders, which could include mergers, acquisitions, amendments to Harken’s charter and various corporate governance actions. For further discussion regarding Lyford’s concentration of ownership, see “Risk Factors” set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7.

North American Exploration and Production Operations

During the three years ended December 31, 2003, Harken has drilled or participated in the drilling of 33 oil and gas wells domestically, completing 24 of the wells drilled. Harken’s domestic drilling activity increased following the August 1999 acquisition of XPLOR Energy, Inc. (“XPLOR,” a wholly-owned subsidiary) and the December 1999 acquisition of prospects from Benz Energy, whereby Harken acquired a variety of domestic prospect acreage within its Texas and Louisiana Gulf Coast area of emphasis. Over the past several years, Harken has capitalized on the higher product prices by selling certain non-strategic producing properties and mineral interests, most of which were outside of Harken’s Gulf Coast operating focus. Such

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producing property and mineral interest sales during the three years ended December 31, 2003, generated cash proceeds of approximately $24 million, which were used in part to support Harken’s exploration and development activities and repay debt obligations.

During 2002, Harken’s domestic operations shifted from primarily an exploration and development focus to an exploitation and acquisition growth strategy, with a reduced emphasis on exploration. This shift allowed Harken to conserve its capital resources to repurchase convertible debt and other debt obligations pursuant to a capital restructuring plan. For further information concerning this capital restructuring plan, see “Liquidity and Capital Resources” contained in Part II, Item 7, Management’s Discussion and Analysis of Financial Conditions and Results of Operations. In April 2002, a wholly-owned subsidiary of Harken acquired certain property interests (the “Republic Properties”) from Republic Resources, Inc., in exchange for 2,645,500 shares of Harken common stock. The Republic Properties consist of interests in 16 oil and gas wells in nine fields and interests in additional prospect acreage located in southern Louisiana and the Texas Gulf Coast region.

During 2003, Harken minimized its drilling activity in order to conserve capital resources to repurchase convertible debt obligations pursuant to the capital restructuring plan. In May 2003, Harken retained Petrie Parkman and Co., Inc. to evaluate its domestic oil and gas assets and to make recommendations to maximize their value. Following the conclusion of Petrie Parkman and Co., Inc’s evaluation and as of December 12, 2003, Harken and certain wholly-owned subsidiaries of Harken sold the majority of its oil and gas properties located in the Panhandle region of Texas for a gross sales price of approximately $7 million, subject to certain adjustments. Harken considered the Panhandle assets as non-core assets since the majority of Harken’s domestic reserves and productions were located along the Gulf Coast regions of Texas and Louisiana. Harken’s Gulf Coast assets are primarily natural gas. In December 2003, Harken used approximately $4 million of the Panhandle asset sales proceeds to repay all outstanding principal and interest under, and terminate Harken’s credit facility with Guaranty Bank FSB.

During 2004, Harken plans to concentrate on the development and growth of North American and Middle American oil and gas assets and energy-based growth opportunities. In the first quarter of 2004, Harken established GEM, a wholly-owned subsidiary, to manage its domestic operations held through its other domestic wholly-owned subsidiaries. In January 2004, Harken’s board of directors approved the 2004 capital expenditure budget of approximately $18 million, a 150% increase in capital expenditures as compared to 2003. Of the 2004 budget, approximately $9 million is allocated to North American capital expenditures. Under Harken’s 2004 capital expenditure budget, Harken’s domestic operating strategy includes efforts to increase its oil and gas reserves in North America through acquisitions, exploitation and development drilling activities. This domestic capital expenditure budget focuses on the onshore and offshore Gulf Coast regions of Texas and Louisiana. Based in part upon the success of its drilling efforts in the fourth quarter of 2003, the majority of this budgeted capital amount will be used to drill five to seven exploitation and development wells in the Lake Raccourci and Lapeyrouse fields in Southern Louisiana. Harken expects to fund these capital expenditures through available cash on hand and through projected cash flow from operations in 2004. Possible weakening commodity prices, a decline in drilling success or substantial delays in bringing on production from wells drilled could cause Harken to reduce its 2004 drilling plans. The majority of Harken’s planned capital expenditures for 2004 are discretionary, and as a result, will be curtailed if sufficient funds are not available.

Harken is continuing to seek joint venture and farmout opportunities to explore and develop its domestic prospect portfolio. Harken is seeking additional acquisition opportunities to expand its domestic operations.

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As of December 31, 2003, Harken operates or owns a non-operating working interest in 34 oil wells and 47 gas wells in the United States. Substantially all of Harken’s North American operations are currently located in the onshore and offshore Gulf Coast regions of South Texas and Louisiana and the Texas Panhandle region. There were no domestic customers during 2001, 2002 or 2003 which individually represented 10% or more of Harken’s consolidated revenues.

Gulf Coast Operations — On August 19, 1999, Harken acquired XPLOR whereby XPLOR became a wholly-owned subsidiary of Harken. At December 31, 2003, through XPLOR and other wholly-owned subsidiaries, Harken owns operating and non-operating working interests in 36 gas wells located in various counties in South Texas, concentrated in the Raymondville area of Willacy County and the Esperanza field in Wharton County. In Louisiana, through XPLOR, Harken owns operated and non-operated interests in 24 oil wells and 11 gas wells concentrated primarily in the Main Pass area offshore Plaquemines Parish and the Lake Raccourci area of LaFourche Parish. In April 2002, Harken acquired the Republic Properties, which consist of 16 oil and gas wells located primarily in Jackson County, Texas, the Bayou Sorrel field located in Iberville and Lafayette Parishes, Louisiana. After the sale of certain of our Panhandle operations during the fourth quarter of 2003, substantially all of Harken’s domestic proved reserves are located in the Gulf Coast region of Louisiana and Texas.

During 2002 and 2003, Harken has drilled or participated in the drilling of several Gulf Coast area exploratory and development wells. During the fourth quarter of 2003, one exploitation well was drilled in the Lapeyrouse field. The AM Dupont #2 was successfully drilled and completed, and is now producing at an initial gross rate of approximately 3,600,000 cubic feet per day with 50 barrels of condensate, no water, and a flowing tubing pressure of approximately 4,100 pounds per square inch (“psi”). Harken holds a working interest of approximately 10% in this well. During 2002 and 2003, Harken drilled 28 wells in the Raymondville area of South Texas, successfully completing 27 of the wells drilled. Harken holds an approximate 27% working interest in the Raymondville area wells.

West Texas Operations — Prior to the sale of the Panhandle properties, Harken operated or owned non-operated interests in 157 oil wells and 40 gas wells in Hutchinson and Gray Counties and 61 oil wells in Hockley County, all located in the Panhandle area of Texas. In December 2003, Harken and certain wholly-owned subsidiaries of Harken sold the majority of its oil and gas properties located in the Panhandle region of Texas for gross cash proceeds of approximately $7 million, subject to certain adjustments. At December 31, 2003, Harken continues to own interests in 10 producing oil wells in the Panhandle area of Texas.

Prospect Acreage — In addition to the producing property interests discussed above, Harken, through certain wholly-owned subsidiaries, owns interests in a variety of domestic prospect acreage. Through XPLOR, Harken owns acreage interests in the Lake Raccourci and Lapeyrouse fields of LaFourche and Terrebonne Parishes, respectively, in Louisiana. As part of the December 1999 prospect purchase from Benz Energy, Inc., Harken Gulf Exploration owns prospect acreage interests in the Old Ocean field in Matagorda and Brazoria Counties of Texas.

Middle American Exploration and Development Operations – Colombia

At December 31, 2003, Global held, through Harken de Colombia, Ltd., a wholly-owned subsidiary of Global, three exclusive Association Contracts with Empresa Colombiana de Petroleos (“Ecopetrol”), the state-owned Colombian oil company. A fourth Association Contract with Ecopetrol covering the Cajaro Contract area was terminated in August 2003. Global has proved reserves attributable to each of its three Association Contracts, the Alcaravan, Bolivar and Bocachico Contracts. In the Alcaravan Contract, Global has proved

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reserves in the Palo Blanco and Anteojos fields. In the Bolivar Contract, Global has proved reserves in the Buturama field. In the Bocachico Contract, Global has proved reserves in the Rio Negro field. Ecopetrol, which purchases the majority of Global’s crude oil production, individually accounted for 29% of Harken’s consolidated revenues in each of 2002 and 2003.

Global has responded to security concerns in Colombia by implementing a number of operating changes including the 2001 decision to replace its field operating employees with outsourced personnel. Global’s operating plans in Colombia are continuing, subject to the ongoing monitoring of security developments. For further discussion of Global’s security concerns in Colombia, see “Risk Factors” set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7.

Alcaravan Contract — The Alcaravan Association Contract (the “Alcaravan Contract”) gives Global the exclusive right to explore for, develop and produce oil and gas throughout approximately 24,000 acres in the Alcaravan area of Colombia, which is located in Colombia’s Llanos Basin approximately 140 miles east of Santafe de Bogota. Global has completed the maximum six year seismic and exploratory drilling program of the Alcaravan Contract (the “Exploration Period”).

In October 2001, Global received notification from Ecopetrol that Global could proceed with the sole risk development of the Palo Blanco field of the Alcaravan Association Contract. As such, the term of the Alcaravan Contract related to the productive areas has been extended for a period of 22 years from the date of the October 2001 election by Ecopetrol, subject to the entire term of the Alcaravan Contract being limited to no more than 28 years. Due to Ecopetrol’s election not to participate, Global elected to proceed with the development of the Palo Blanco field on a sole risk basis, whereby Global is entitled to receive Ecopetrol’s 50% share of production after deduction for Ecopetrol’s 20% royalty interest, until Global has recovered 200% of its successful well costs expended, after which time Ecopetrol could elect to begin to receive its 50% working interest share of production. Accordingly, Global reflects its 80% interest in gross production and cash flows in its financial statements and reserve information. Global has retained the acreage covering those structure areas associated with the Palo Blanco and Anteojos discoveries.

Alcaravan Contract Operations – Global has drilled six wells on the Alcaravan acreage, four of which are currently producing. These four producing wells include the Estero #1 and Estero #2 wells, the Canacabare #1 well and the Cajaro #1 well. In February 1997, Global drilled the Estero #1 well and in January 2001, Global drilled the Estero #2 well, both located on the Palo Blanco field. Between January 1, 2004 and March 25, 2004, daily combined production from the Estero #1 and Estero #2 wells from the Palo Blanco field have averaged a total of approximately 540 gross barrels per day. In June 2003, the Cajaro #1 well began production and produced a total of 104,000 gross barrels of oil during the year. At December 31, 2003, Global reflects proved reserves of approximately 1.8 million net barrels related to its interest in the Palo Blanco field. During 2003, Global produced a total of approximately 352,000 gross barrels of oil from its Palo Blanco field, and since inception and through December 31, 2003, Global has produced a cumulative total of approximately 1,866,000 gross barrels of oil from its Palo Blanco field.

At December 31, 2003, Global also reflects proved reserves of approximately 150,000 net barrels related to its interest in the Anteojos prospect within the Alcaravan Contract area, which includes the Canacabare #1 well and the Cajaro #1 well. The Canacabare #1 well, which was drilled during 1998 to a total depth of 8,410 feet, has not produced consistently due to the rainy season and resulting operating conditions in the Llanos Basin area in Colombia. During the last half of 2002, and first quarter of 2003, Global installed a flowline connection, at a cost of approximately $500,000, to Global’s existing Palo Blanco pipeline facility. Daily production from the Canacabare #1 well began in mid- 2003 and produced a total of 38,000 gross barrels of oil during 2003. Global’s net revenue interest in production that may be discovered on the Anteojos

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prospect will depend on whether or not Ecopetrol elects to participate. Upon the election by Ecopetrol to participate in a field and upon commencement of production from the field, Global will begin to be reimbursed by Ecopetrol out of Ecopetrol’s share of production, net of royalties, for 50% of all direct exploratory well costs incurred prior to the point of Ecopetrol’s participation. Production from a field in which Ecopetrol elects to participate will be allocated as follows: Ecopetrol, on behalf of the Colombian government, will receive a royalty interest of 20% of all production, and all production (after royalty payments) will be allocated 50% to Ecopetrol and 50% to Global. Ecopetrol and Global will be responsible for all future development costs and operating expenses in direct proportion to their interest in production. If Ecopetrol does not elect to participate, Global has the choice to proceed with the development of the prospect area on a sole-risk basis. If Global does proceed on a sole-risk basis, it will be entitled to receive Ecopetrol’s 50% share of production after deduction for Ecopetrol’s 20% royalty interest, until Global has recovered 200% of its successful well costs expended, after which time Ecopetrol could elect to receive its 50% working interest share of production.

Global’s net revenue interest in the production from the Mirador discovery on the Cajaro #1 well will depend on whether or not Ecopetrol elects to participate. Upon the election by Ecopetrol to participate in a field, Global will begin to be reimbursed by Ecopetrol out of Ecopetrol’s share of production, net of royalties, for 50% of all seismic costs and direct exploratory well costs (including costs related to dry holes) incurred prior to the point of Ecopetrol’s participation. Production from a field in which Ecopetrol elects to participate will be allocated as follows: Ecopetrol, on behalf of the Colombian government, will receive a royalty interest ranging from 5% to 25% (based on levels of average monthly production) of all production, and all production (after royalty payments) will be allocated 50% to Ecopetrol and 50% to Global. Ecopetrol and Global will be responsible for all future development costs and operating expenses in direct proportion to their interest in production. In 2003, Ecopetrol held an 8% royalty interest in the Cajaro #1 well.

Bocachico Contract — Under the Bocachico Association Contract (the “Bocachico Contract”), Global acquired the exclusive rights to conduct exploration and production activities and drilling on this area, which covers approximately 54,700 acres in the Middle Magdalena Valley of Central Colombia. Global has fulfilled all of the work requirements for the Bocachico Contract. Global has completed the Exploration Period related to the Bocachico Contract. The production sharing and term arrangements under the Bocachico Contract are substantially similar to those under the Alcaravan Contract. The Bocachico Contract provides that two years following the end of the Exploration Period, the Bocachico Contract area will be further reduced to 25% of the original area.

Bocachico Contract Operations – From 1996 to 1998, Global drilled and completed three wells on the Bocachico Contract area, all in the Rio Negro prospect. Global initiated sales of production from both the Torcaz #2 and Torcaz #3 wells to a local purchaser at the wellsites, and for most of 1998 these wells produced in excess of 100 gross barrels of oil per day. From 1999 and until the last six months of 2002, Global could not sustain production consistently from the Torcaz wells. However, during the last six months of 2002, Global performed workover procedures on the Torcaz #3 well. During 2003, the Torcaz wells averaged approximately 80 gross barrels of production per day from the Torcaz field. At December 31, 2003, Global reflected proved reserves of approximately 180,000 net barrels related to its interest in the Rio Negro field. There are no significant capital expenditures presently scheduled for the Rio Negro field in 2004.

In December 1999, Global submitted an application to Ecopetrol for their participation in the Rio Negro field. Global submitted an updated application to Ecopetrol in October 2002 and received sole risk approval in June 2003. Accordingly, Global reflects its 80% interest in gross production and cash flows in its financial statements and reserve information.

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Bolivar Contract — Under the Bolivar Association Contract (the “Bolivar Contract”), Global acquired the exclusive rights to conduct exploration and production activities in the Bolivar Contract area, which covers approximately 59,000 acres in the Northern Middle Magdalena Valley of Central Colombia.

In February 2001, Global received notification from Ecopetrol that it had elected not to participate in the development of the Buturama field of the Bolivar Association Contract. Due to Ecopetrol’s election not to participate, Global has elected to proceed with the development of the field on a sole risk basis, whereby Global is entitled to receive Ecopetrol’s 50% share of production, after deduction of Ecopetrol’s 20% royalty interest, until Global has recovered 200% of its successful well costs expended, after which time Ecopetrol could elect to begin to receive its 50% working interest share of production. Accordingly, Global reflects its 80% interest in gross production and cash flows in its financial statements and reserve information. In addition, the term of the Bolivar Contract related to the productive areas has been extended for a period of 22 years from the date of such election by Ecopetrol, subject to the entire term of the Bolivar Contract being limited to no more than 28 years.

Global has completed all of the work obligations of the Bolivar Contract. Global and Ecopetrol entered into an agreement in June 2002 whereby Global relinquished all but approximately 59,000 of the Bolivar Contract area acreage in exchange for the release from the sixth year Bolivar Contract work obligations. The release of such acreage did not affect Global’s proved reserves on the Bolivar Contract area. With the execution of this amendment, Global has completed the Exploration Period related to the Bolivar Contract. The production sharing and term arrangements under the Bolivar Contract are substantially similar to the Alcaravan and Bocachico Contracts.

Bolivar Contract Operations – Global has drilled four wells on the Bolivar Contract area. In November 1997, Global spudded its first well on the Bolivar Contract acreage, the Catalina #1, which was found to be productive, but is no longer producing. In March 1998, Global spudded the Olivo #1, which was drilled from the same surface location as the Catalina #1, and was also found to be productive. Two additional wells, the Laurel #1, drilled in 1999, and the Olivo #2, drilled in early 2001, were unproductive.

At December 31, 2003, Global reflects proved reserves (primarily proved undeveloped) of approximately 2.3 million net barrels related to its interest in the Buturama field. Global plans to install a gas injection system to increase reservoir pressure in the Rosa Blanca formation in the Buturama field, scheduled for 2004, for a total cost of completion of approximately $1.7 million. Such costs are expected to be funded out of cash on hand and cash from operations. If sufficient funds are not available, Global intends to seek additional financing, however, there can be no assurance that Global will be able to obtain financing on acceptable terms. During 2003, the Olivo #1 produced a total of 51,000 gross barrels of oil and, since inception, Global has produced cumulative production of approximately 539,000 gross barrels of oil from this well. During 2002, the Catalina #1 and Olivo #1 wells experienced mechanical problems, with workovers and recompletions completed in 2002 at a total approximate cost of $800,000, which was funded out of a combination of cash on hand and cash from operations. During the fourth quarter of 2002, Global modified the lift systems on both the Catalina #1 and Olivo #1 wells at a combined cost of $447,000. Production volumes for the Bolivar Contract area are currently derived from the Olivo #1 well, since the Catalina #1 well is shut-in. Global expects to continue to transport 100% of current and projected Bolivar area production through its current trucking operations. For further discussion of Global’s security concerns in Colombia, see “Risk Factors” set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7.

Cajaro Contract — In December 2001, Global signed an Association Contract with Ecopetrol, covering the Cajaro Contract area. Under the Cajaro Contract, which became effective in February 2002,

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Global acquired the exclusive rights to conduct exploration and production activities in the Cajaro Contract area. In February 2003, Global commenced drilling operations on the initial well required to be drilled in Cajaro Association Contract, the Cajaro #1 well. In April 2003, Global announced that it had perforated and tested the Upper Mirador zone from 8,263 to 8,267 feet in its Cajaro #1 well. Global placed the Cajaro #1 well on production effective in June 2003. The production from the Cajaro #1 well relates to the Mirador formation located within and attributable to Global’s existing Alcaravan Contract as previously described. In August 2003, Global elected not to proceed with the second year of the Cajaro Association Contract and thereby elected to terminate that agreement without further obligation.

Middle American Operations - Peru

In April 2001, Global, through a wholly owned subsidiary, signed a Technical Evaluation Agreement (“Peru TEA”) with Perupetro, the national oil company of Peru. The Peru TEA covered an area of approximately 6.8 million gross acres in northeastern Peru. Under the terms of the Peru TEA, Global has the option to convert the Peru TEA to a seven year exploration contract, with a twenty-two year production period. Terms of the Peru TEA allowed Global to conduct a study of the area that included the reprocessing of seismic data and evaluation of previous well data. In April 2003, Global received an extension from Perupetro of the Peru TEA to July 2003. In June of 2003 Global submitted a final report and completed all obligations required under the TEA. Prior to the expiration of the Peru TEA in July 2003, Global exercised its option under the Peru TEA and entered into negotiations with Perupetro for a Production Sharing Contract. All work requirements under the Peru TEA were satisfied prior to its expiration. As of March 25, 2004, the negotiations with Perupetro for a Production Sharing Contract are still in progress.

Middle American Operations – Panama

In September 2001, Global, through a wholly owned subsidiary, signed a Technical Evaluation Agreement (“Panama TEA”) with the Ministry of Commerce and Industry for the Republic of Panama. The Panama TEA covered an area approximately 1.4 million gross acres divided into three blocks in and offshore Panama. Under the terms of this Panama TEA, Global performed certain work program procedures and studies and submitted them to the Panamanian government. The Panama TEA provided Global with an option to negotiate and enter into one or more Contracts for the Exploration and Exploitation of Hydrocarbons with the Ministry of Commerce and Industry. Global completed all of its obligations under the Panama TEA and exercised its options to negotiate an Exploration and Exploitation Contract. As of March 25, 2004, the negotiations with the Panamanian government are still in progress.

Middle American Exploration and Development Operations - Costa Rica

Under the terms of an Exploration and Production Concession contract with the Republic of Costa Rica (the “Costa Rica Contract”), Global, through an investment in Harken Costa Rica Holdings (“HCRH,” a Nevada limited liability company), owns an interest in approximately 1.4 million acres in the North and South Limon Back Arc Basin onshore and offshore Costa Rica. Global’s participation in Costa Rica is structured whereby a wholly-owned subsidiary owns a 40% share of the stock of HCRH, with an affiliate of MKJ Xploration, Inc. (“MKJ”) owning the remaining stock of HCRH. MKJ is the operator of HCRH and the Costa Rica Contract.

Costa Rica Operations — In November 1999, HCRH commenced its offshore seismic acquisition program in Costa Rica to collect approximately 100 square kilometers of 3-D seismic information. The seismic data confirmed the viability of the Moin prospect in both the Tertiary and Cretaceous target horizons. In July 2000, HCRH filed its environmental impact study requesting an environmental permit related to the planned

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drilling operation with the Costa Rican environmental agency SETENA. In March 2002, SETENA denied its approval of the requested environmental permit. HCRH filed an appeal related to this ruling by SETENA, which was denied, in April 2002, without, in Global’s opinion, a valid basis. Since that time, Global has attempted to resolve the Costa Rica government’s infringement on HCRH’s Concession Contract rights. As of March 2004, Global continues to be involved in discussion with the Costa Rica government to reach a resolution of this matter.

In January 2002, the Costa Rica Constitutional Court rendered a published opinion in a suit that had been filed against another oil and gas operator and the Costa Rican ministry of Environment and Energy (“MINAE”) by certain environmental groups. In its opinion, in this case, the Constitutional Court of Costa Rica found, among other issues, that SETENA did not have the current authority to grant environmental permits. The Costa Rica Constitutional Court decision discussed above, and recent political developments in Costa Rica, in the opinion of Harken and Global, severely limit the opportunity for future oil and gas exploration in Costa Rica. Harken fully impaired its investment in Costa Rica operations in 2001. See “Risk Factors” set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7.

Other Middle American Operations

Global is committed to broadening its exploration efforts internationally, in addition to its existing operations in Colombia, Peru and Panama. Global’s operational experience in those areas may enable Global to expand its exploration efforts in Latin America or elsewhere. Global’s business strategy is to focus on improvement of its cash flow by increasing its daily production volumes, as well as to develop energy projects and to aggregate international assets through strategic acquisitions and alliances.

Properties and Locations

Production and Revenues – See also “Note 19 – Oil and Gas Disclosures” in the Notes to Consolidated Financial Statements contained in Part II, Item 8 of this Annual Report on Form 10-K for certain information about Harken’s proved oil and gas reserves. A summary of Harken’s and Global’s ownership in its most significant producing properties is as follows:

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The following table shows, for the periods indicated, operating information attributable to Harken’s oil and gas interests:

North American

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Acreage and Wells — At December 31, 2003, Harken and Global owned interests in the following oil and gas wells and acreage.

North American

Colombia

Costa Rica

Drilling Activity — A well is considered “drilled” when it is completed. A productive well is completed when permanent 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. International activity relates to Global’s Colombian operations. Colombian net wells drilled information does not consider any potential future participation by Ecopetrol. The following tables summarize certain information concerning Harken’s and Global’s drilling activity:

North American

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Colombia

Employees

As of December 31, 2003, Harken had 26 employees, including 9 employees of Global and its subsidiaries. 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.

Where You Can Find More Information About Harken Energy Corporation

Harken makes available free of charge through its website at www.harkenenergy.com its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q. Current Reports on Form 8-K and amendments to

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those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after it electronically files such material with, or furnishes it to the SEC.

ITEM 2. PROPERTIES

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

Harken and Global have offices in Houston and Southlake, Texas and Bogotá, Colombia. Harken leases approximately 26,800 square feet of office space in Houston, Texas, which lease runs through October 2006, approximately 2,200 square feet in Southlake, Texas, which runs through May 2004, and approximately 658 square feet of office space in Bogotá, Colombia, which lease runs through November 2004. The average annual cost of Harken’s Houston leases are approximately $638,000. See “Liquidity and Capital Resources – Capital Commitments – Consolidated Contractual Obligations” contained in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

ITEM 3. LEGAL PROCEEDINGS

As previously reported in Harken’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002, D.E. Rice and Karen Rice, as Trustees for the Rice Family Living Trust, filed a lawsuit in state court in August 2002 alleging damages from alleged spills by the Company on the Rice’s property. In December 2003, the parties agreed to formal mediation of this matter which took place in January 2004. Following mediation, the parties reached a settlement agreement, whereby Harken and Harken’s insurers agreed to pay to Rice the total sum of $1.9 million in return for a full and final release for all disputes and claims alleged by Rice against Harken. The insurer agreed to contribute $775,000 of this settlement amount. Based on the settlement agreement and the contribution from the insurers, Harken has accrued and expensed $1.125 million in December 2003. Harken’s insurers, pursuant to a separate Fifth Circuit Court of Appeals order, have covered Harken’s legal costs of defense in the litigation.

As previously reported in Harken’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002, 420 Energy Investment, Inc. and ERI Investments, Inc. filed a lawsuit against XPLOR Energy, Inc., a wholly-owned subsidiary of Harken (“XPLOR”). Although the outcome of this litigation is uncertain, Harken continues to believe that any liability to Harken as a result of this litigation will not have a material adverse effect on Harken’s financial condition.

As previously reported in Harken’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002, New West Resources, Inc. (“New West”), a former XPLOR stockholder, filed a lawsuit against XPLOR, Harken and other defendants. In December 2003, New West voluntarily dismissed XPLOR and Harken and as a result had no material adverse effect on Harken’s financial condition.

As previously reported in Harken’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002, Black Point Limited (“Black Point”) filed a lawsuit alleging that Global Ltd., aided and abetted by officers of Harken, fraudulently induced Black Point to spend time and money locating prospective business partners for Global Ltd. in the People’s Republic of China. Pursuant to an agreement between the parties, a joint motion to dismiss was filed with the court, and the court dismissed the lawsuit in its entirety in May 2003.

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

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to a disputed interpretation of the assignment clause but reserved for trial XPLOR’s reformation claim. Trial of this issue is not anticipated until the fourth quarter of 2004. XPLOR will continue to vigorously dispute these claims and retains the right to appeal the summary judgment granted by the court. While the results of the trial and any appeals related to the trial or summary judgment remain uncertain, Harken believes the ultimate outcome will not have a material adverse effect on Harken’s financial conditions and results of operations.

On October 31, 2003, Xplor was served with a complaint filed by Apache Corporation in the Harris County District Court. As alleged in its complaint, Apache sought payment of $219,000 plus interest and attorneys’ fees. Apache alleged that the amount demanded was due pursuant to the terms of a 1998 purchase and sale agreement between Apache and Xplor. Xplor refuted Apache’s allegations and intends to seek dismissal of the complaint. In March 2004, Apache and XPLOR executed a letter agreement agreeing to resolve all controversies between the parties and to the dismissal of this case.

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

Harken and its subsidiaries currently are involved in various other lawsuits and other contingencies, which in management’s opinion, will not result in a material adverse effect upon Harken’s financial condition or operations taken as a whole.

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

Harken held its 2002 annual meeting of stockholders on February 17, 2004. At the meeting, Harken’s stockholders voted on the following five proposals and cast their votes as follows:

Proposal 1: To approve an amendment to Harken’s Certificate of Incorporation to eliminate the classification of directors;

Proposal 2: To approve an amendment to Harken’s Certificate of Incorporation to eliminate the requirement that the holders of two-thirds of the outstanding shares vote for the removal of any or all directors;

Proposal 3: To approve an amendment to Harken’s Certificate of Incorporation to eliminate cumulative voting;

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Proposal 4: To elect five directors to serve until the next annual meeting of stockholders, or until their successors are duly elected and qualified;

Proposal 5: Solely in the event that the stockholders did not approve the amendment of Harken’s Certificate of Incorporation. To eliminate the classification of directors under proposal 1, to elect two Class A directors to hold office until 2006 Annual Meeting of Stockholders and until their respective successors are duly elected and qualified. Since Proposal 1 was approved, stockholder voting on Proposal 5 was not required.

Proposal 6: To approve an amendment to Harken’s Certificate of Incorporation to increase the number of shares of Harken’s common stock, par value $0.01, authorized for issuance.

Information Concerning the 2003 Annual Meeting of Stockholders

Harken expects to hold its 2003 Annual Meeting of Stockholders during the second quarter of fiscal year 2004. Stockholders that desire to have a proposal included in Harken’s proxy materials for the 2003 Annual Meeting should provide written notice to Harken of the intention to submit a proposal no later than April 7, 2004. The written notice should be submitted to the Secretary of Harken at 580 WestLake Park Boulevard, Suite 650, Houston, Texas 77079 and must include the following:

In addition, the stockholder must comply with the SEC’s rules and regulations governing stockholder proposals.

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PART II

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

Price Range of Common Stock

Since March 18, 1991, Harken common stock has been listed on the American Stock Exchange and traded under the symbol HEC. At December 31, 2003, there were approximately 1,625 holders of record of Harken common stock. See “Risk Factors” set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 – If Harken does not continue to meet the listing requirements of the American Stock Exchange, its common stock could be delisted, for further discussion.

The following table sets forth, for the periods indicated, the reported high and low closing sales prices of Harken common stock on the American Stock Exchange Composite Tape.

Dividends

Harken has not paid any cash dividends on common stock since its organization and does not contemplate that any cash dividends will be paid on shares of common stock in the foreseeable future. Dividends may not be paid to holders of common stock prior to all dividend obligations related to Harken Series G1 Preferred Stock, Series G2 Preferred Stock and Series G3 Preferred Stock being satisfied.

During 2002, Harken’s Board of Directors declared that a dividend of all accrued and unpaid dividends as of December 31, 2002 be payable to holders of Harken Series G1 Preferred Stock and Series G2 Preferred Stock, such dividend to be paid with shares of Harken common stock. As of the record date for the dividends, December 26, 2002, there were 402,688 shares of Series G1 Preferred outstanding and 93,150 shares of Series G2 Preferred Stock outstanding. In January 2003, a total of 586,755 shares of Harken common stock were paid to holders of Series G1 Preferred Stock and a total of 360,010 shares of Harken common stock were paid to holders of Series G2 Preferred Stock.

During 2003, Harken’s Board of Directors declared that a dividend be paid on all accrued and unpaid dividends as of December 31, 2003 payable to holders of Harken Series G1 Preferred and Series G2 Preferred, such dividend to be paid with shares of Harken common stock. As of the record date for such dividends, December 30, 2003, there were 325,312 shares of Series G1 Preferred outstanding and 61,650 shares of Series G2 Preferred outstanding. During January and February 2004, a total of approximately 208,000 shares of

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Harken common stock were paid to holders of Series G1 Preferred stock and a total of approximately 164,000 shares of Harken common stock were paid to holders of Series G2 Preferred.

On December 31, 2003, Harken paid approximately $144,000 of accrued dividends in cash to holders of Harken Series G3 Preferred Stock.

For further discussion of the terms of the Harken Series G1 Preferred Stock, Series G2 Preferred Stock and Series G3 Preferred Stock outstanding, see Part II, Item 8, “Notes to Consolidated Financial Statements, Note 12 – Stockholders’ Equity.”

For information concerning Harken’s equity compensation plans, including both stockholder approved plans non-stockholder approved plans, see “Security Ownership of Certain Beneficial Owners and Management” in Part III, Item 12.

Recent Sales of Unregistered Securities

The following is a description of the unregistered securities Harken has issued during the period covered by this Annual Report and during the subsequent period through the date of this Annual Report:

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ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth historical financial data derived from Harken’s audited Consolidated Financial Statements and should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and our Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements.

Due to reduced oil and gas prices as of December 31, 2001, Harken recorded a consolidated non-cash valuation allowance of approximately $18.7 million during the year ended December 31, 2001.

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

The following discussion should be read in conjunction with the Consolidated Financial Statements and the related notes that appear elsewhere in this report.

Overview

Harken is engaged in oil and gas exploration, exploitation, development and production operations both domestically and internationally through its various subsidiaries. Harken divides its operations into two operating segments, which are managed and evaluated as separate operations. Harken’s North American operating segment presently consists of Harken’s exploration, exploitation, development, production and acquisition efforts in the United States. Substantially all of Harken’s North American operations currently include those activities in the onshore and offshore Gulf Coast regions of South Texas and Louisiana. Harken also has oil and gas properties located in the Western and Panhandle regions of Texas. Harken’s Middle American operations currently include Global’s activities in Colombia, Panama and Peru. Although Global owns an interest in approximately 1.4 million acres in Costa Rica, Harken believes that political and judicial developments has severely limited the opportunity for future oil and gas development in that country. All of the Middle American operating revenues during 2003 have been generated from Colombian operations.

During 2003, Harken focused on reducing its significant debt obligations, consisting primarily of the 5% European Notes and the Benz Convertible Notes which were scheduled to mature in May 2003 and November 2003, respectively. Under its capital restructuring plan, as described below under “Liquidity and Capital Resources”, Harken’s management effected the repurchase, redemption and/or restructuring of certain of its outstanding debt obligations prior to their maturity date. Also, certain convertible debt obligations were either converted into or redeemed with Harken common stock, under the terms of the specific note agreements, either prior to or upon the maturity date. Since January 1, 2003 and as of March 25, 2004, Harken has reduced its overall outstanding debt principal amounts by 91%, or approximately $52 million, as compared to the outstanding debt principal amounts as of December 31, 2002.

In the first quarter of 2004, Harken established Gulf Energy Management, Inc. (“GEM”), a wholly-owned subsidiary, to manage its domestic operations held through its other domestic wholly-owned subsidiaries. Harken’s North American operating segment has experienced successful drilling activity over the past three fiscal years, with an average success completion rate of approximately 73% and an average historical finding cost of approximately $0.93 per million cubic foot equivalent. However, during 2003, Harken minimized its drilling activity in order to conserve capital resources to reduce convertible debt obligations pursuant to the capital restructuring plan. In May 2003, Harken retained Petrie Parkman and Co., Inc. to evaluate its domestic oil and gas assets and to make recommendations to maximize their value. Following the conclusion of Petrie Parkman and Co., Inc’s evaluation and in December 2003, Harken sold the majority of its oil and gas properties located in the Panhandle region of Texas for a gross sales price of approximately $7 million, subject to certain adjustments. Harken considered the Panhandle assets to be non-core assets since the majority of Harken’s domestic reserves and productions were located along the Gulf Coast regions of Texas and Louisiana. Harken’s Gulf Coast assets are primarily natural gas. In December 2003, Harken used approximately $4 million of the Panhandle asset sales proceeds to repay all outstanding principal and interest under, and terminate, Harken’s credit facility with Guaranty Bank FSB.

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Harken’s Middle American operations are conducted through its ownership in Global, a public limited company registered in England and Wales under the Companies Act (1985) of the United Kingdom with its ordinary shares admitted for trading on the AIM Exchange in London. In 2002, Harken’s ownership in Global decreased from 100% to 85.62%. See Note 6 – Middle American Operations in the Notes to Consolidated Financial Statements contained in Part II, Item 8 for further discussion. All of the Middle American operating revenues during 2003 have been generated from Global’s Colombian operations. These revenues have increased from the comparable period last year due to higher commodity prices, which were partially offset by lower production volumes.

During 2004, Harken is concentrating on the development and growth of North American and Middle American oil and gas assets and energy-based growth opportunities. In January 2004, Harken’s board of directors approved the 2004 capital expenditure budget of approximately $18 million, a 150% increase in capital expenditures as compared to 2003. Of the 2004 budget, approximately $9 million is allocated to North American capital expenditures and approximately $9 million is allocated to Middle American capital expenditures. Harken expects to fund these capital expenditures through available cash on hand and through projected cash flow from operations in 2004. Possible weakening commodity prices, a decline in drilling success or substantial delays in bringing on production from wells drilled could cause Harken to reduce its 2004 drilling plans. The majority of Harken’s planned capital expenditures for 2004 are discretionary, and as a result, will be curtailed if sufficient funds are not available.

The volatility of crude oil and natural gas prices has a significant impact on the profitability of Harken’s oil and gas operations. Overall, the oil and gas industry benefited from increased oil and gas commodity prices in 2003 helping to generate improved industry cash flows from operations. Worldwide crude oil inventories during 2003 were low compared to average inventories over the last ten years. These lower worldwide crude oil inventories helped contribute to higher crude oil prices as compared to average crude oil prices over the past several years. OPEC restrained marginal international oil supplies in 2003 thereby preventing the growth in oil inventories. Geopolitical disruptions to the international supply of oil occurred in Nigeria, Venezuela and Iraq. Both Venezuela and Iraq had not returned to their average 2002 production levels by the end of 2003. Worldwide demand for oil and gas increased in 2003 in response to improving worldwide economic conditions. Worldwide natural gas inventories in 2003 were slightly above the five year average, but improved demand for natural gas helped contribute to higher natural gas prices in 2003 as compared to average natural gas prices over the past several years. Industry-wide oil and gas drilling activity increased domestically and abroad in 2003 in response to improved industry cash flows from operations.

Critical Accounting Policies

Full cost accounting method — Harken accounts for the costs incurred in the acquisition, exploration, exploitation, development and production of oil and gas reserves using the full cost accounting method. Under full cost accounting rules, the net capitalized costs of evaluated oil and gas properties shall not exceed an amount (the “cost ceiling”) equal to the present value of future net cash flows from estimated production of proved oil and gas reserves, based on current economic and operating conditions, including the use of oil and gas prices as of the end of each quarter, after giving effect to cash flow hedge positions and the asset retirement obligation. Harken reflected a full cost valuation allowance totaling $18.7 million as of December 31, 2001, based on NYMEX prices of $19.84/barrel and $2.57/mmbtu. As of December 31, 2002, Global reflected a non-cash full-cost valuation allowance totaling approximately $521,000 for unevaluated costs incurred for specific areas which Global no longer intended to pursue under its Technical Evaluation Agreements in Peru

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and Panama. Global has no proved reserves in Peru and Panama. For a complete discussion of Harken’s proved oil and gas reserves, see Note 19 – Oil and Gas Disclosures in the Notes to Consolidated Financial Statements contained in Part II, Item 8.

As of December 31, 2003, based on NYMEX posted prices of $32.52 per barrel and $6.19 per mmbtu, Harken and Global’s estimates of discounted future net cash flows from proved oil and gas reserves exceeded their adjusted carrying values. Given the volatility of oil and gas prices, it is reasonably possible that the estimate of discounted future net cash flows from proved oil and gas reserves could change in the near term. If oil and gas prices decline in the future, even if only for a short period of time, it is possible that impairments of oil and gas properties could occur. In addition, it is reasonably possible that additional impairments could occur if costs are incurred in excess of any increases in the cost ceiling, revisions to proved oil and gas reserves occur or if properties are sold for proceeds less than the discounted present value of the related proved oil and gas reserves.

A reporting issue has arisen regarding the application of certain provisions of SFAS No. 142 to companies in the extractive industries, including oil and gas companies. The issue is whether SFAS No. 142 requires registrants to classify the costs of mineral rights held under lease or other contractual arrangement associated with extracting oil and gas as intangible assets in the balance sheet, apart from other capitalized oil and gas property costs, and provide specific footnote disclosures. Historically, Harken has included the costs of such mineral rights associated with extracting oil and gas as a component of oil and gas properties. If it is ultimately determined that SFAS No. 142 requires oil and gas companies to classify costs of mineral rights held under lease or other contractual arrangement associated with extracting oil and gas as a separate intangible assets line item on the balance sheet, Harken believes amounts required to be reclassified out of oil and gas properties, net of accumulated depreciation and amortization and into a separate intangible assets line item would not be material. Harken’s cash flows and results of operations would not be affected since such intangible assets would continue to be depleted and assessed for impairment in accordance with full cost accounting rules.

Colombia operations — During the year ended December 31, 2003, approximately 29% of Harken’s consolidated revenues were generated from Global’s sales to Ecopetrol, the state-owned Colombian oil company. The country of Colombia is currently experiencing heightened security issues which could affect Global’s Colombian operations as well as the strength and operations of Ecopetrol. If Ecopetrol experiences significant adverse conditions in its operations, it may not be able to meet its ongoing financial obligations to Global for delivered production or be able to purchase future production under the terms of existing contract provisions. Global’s Colombian operations could also be directly affected by guerilla activity or other instances or threats of violence, preventing or interrupting Global from producing, transporting or delivering future production volumes. Any such adverse developments in Global’s Colombian operations could result in, among other things, additional full cost valuation allowances and impairments related to Global’s assets.

Asset Retirement Obligations—Harken has significant obligations for the dismantlement and removal of its oil and gas production and related facilities. Estimating future asset removal costs is difficult and requires management to make estimate and judgments since most the removal activities will occur several years in the future. In addition, asset removal technologies and costs are constantly changing, as are political, environmental, safety considerations that may ultimately impact the amount of the obligation. Effective January 1, 2003, Harken changed its method of accounting for asset retirement obligations in accordance with FASB Statement No. 143, “Accounting for Asset Retirement Obligations” (SFAS 143). SFAS 143 requires

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asset retirement costs to be capitalized as part of the cost of the related tangible long-lived assets and subsequently allocated to expense using a systematic and rational method over the useful life of the asset. See Note 5—Asset Retirement Obligation Disclosures in the Notes to Consolidated Financial Statements contained in Part II, Item 8 for discussion of implementation and impact of SFAS 143.

Derivative Instruments—Harken is exposed to risk from fluctuations in crude oil and natural gas prices. To reduce the impact of this risk in earnings and to increase the predictability of its cash flow, from time to time Harken enters into certain derivative contracts, primarily collars and floors for a portion of its North American oil and gas operations. At December 31, 2003, Harken holds a natural gas collar contract that was not designated as a hedge under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133). Harken also holds an oil floor contract, at December 31, 2003, that was designated as a hedge under SFAS 133. These commodity derivative instruments are measured at fair value and recorded as assets or liabilities in the accompanying Consolidated Balance Sheet. When available, quoted market prices are used in determining fair value. The counterparties to these contractual arrangements are limited to creditworthy major institutions.

Accounting for Payment of Series G1 and Series G2 Preferred Stock Dividend Liability in Common Shares – Harken accounts for the payment of the Series G1 and Series G2 Preferred stock dividends with shares of Harken common stock as a debt extinguishment in accordance with Accounting Principles Board Opinion No. 26, “Extinguishment of Debt” (“APB 26”). Accordingly, the difference between the carrying value of the preferred stock dividend liability at December 31, 2002, approximately $7.4 million, and the fair market value of the shares of Harken common stock issued by Harken in payment of the liability in January 2003, approximately $227,000, is recognized as a Payment of Preferred Stock Dividend Liability in Common Shares in the Consolidated Statement of Operations for the year ended December 31, 2003 as a $6.8 million increase, net of income taxes paid on behalf of the preferred shareholders, to Net Income Attributed to Common Shareholders. For further discussion of Harken’s accounting treatment for payment of Series G1 and G2 Preferred stock dividends, see Note 17 – Other Information in the Notes to Consolidated Financial Statements contained in Part II, Item 8.

In January and February 2004, Harken paid the Series G1 and Series G2 Preferred stock dividend liability accrued at December 31, 2003 with 372,000 shares of Harken common stock. Accordingly, the difference between the carrying value of the preferred stock dividend liability at December 31, 2003, approximately $3.1 million, and the fair market value of the shares of Harken common stock issued by Harken in payment of the liability in January and February 2004, approximately $425,000, will be recognized as a Payment of Preferred Stock Dividend Liability in Common Shares in the Consolidated Statement of Operations for the quarter ended March 31, 2004 as a $2.7 million increase to Net Income Attributed to Common Shareholders.

RECENT ACCOUNTING PRONOUNCEMENTS

During December 2003, the FASB issued Interpretation No. 46R, “Consolidation of Variable Interest Entities” (“FIN 46”), which requires the consolidation of certain entities that are determined to be variable interest entities (“VIE’s”). An entity is considered to be a VIE when either (i) the entity lacks sufficient equity to carry on its principal operations, (ii) the equity owners of the entity cannot make decisions about the entity’s activities or (iii) the entity’s equity neither absorbs losses or benefits from gains. Harken owns no interests in variable interest entities, and therefore this new interpretation has not affected Harken’s consolidated financial statements.

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In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. “SFAS No. 150 establishes standards for how an issuer measures certain financial instruments with characteristics of both liabilities and equity and requires than an issuer classify a financial instrument within its scope as a liability (or asset in some circumstances). SFAS No. 150 was effective for financial instruments entered into or modified after May 31, 2003 and otherwise was effective and adopted by Harken on July 1, 2003. As Harken’s Series G1, Series G2 and Series G3 Preferred stock do not qualify as liabilities under SFAS No. 150, the adoption of this statement did not have an impact on Harken’s financial condition or results of operations.

A reporting issue has arisen regarding the application of certain provisions of SFAS No. 142 “Goodwill and Other Intangible Assets” to companies in the extractive industries, including oil and gas companies. The issue is whether SFAS No. 142 requires registrants to classify the costs of mineral rights held under lease or other contractual arrangement associated with extracting oil and gas as intangible assets in the balance sheet, apart from other capitalized oil and gas property costs, and provide specific footnote disclosures. Historically, Harken has included the costs of such mineral rights associated with extracting oil and gas as a component of oil and gas properties. If it is ultimately determined that SFAS No. 142 requires oil and gas companies to classify costs of mineral rights held under lease or other contractual arrangement associated with extracting oil and gas as a separate intangible assets line item on the balance sheet, Harken believes amounts required to be reclassified out of oil and gas properties, net of accumulated DD&A and into a separate intangible assets line item would not be material. Harken’s cash flows and results of operations would not be affected since such intangible assets would continue to be depleted and assessed for impairment in accordance with full cost accounting rules.

In April 2002, the FASB issued Statement No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections.” The rescission of Statement No. 4 requires that gains and losses on extinguishments of debt no longer be presented as extraordinary items in the Consolidated Statement of Operations, commencing in 2003. Thus, prior periods have been restated in 2003 to reflect this change in presentation.

RESULTS OF OPERATIONS

The historical results section in “Statement of Operations Comparisons” below present a discussion of Harken’s consolidated operating results prepared in accordance with accounting principles generally accepted in the United States for the years ended December 31, 2001, 2002 and 2003. The discussion of results of operations at the consolidated level is followed by a more detailed discussion of North and Middle American oil and gas revenues and operating expenses in “Segment Information” below. The discussion of our segment operating results is presented on an historical basis for the years ended December 31, 2001, 2002 and 2003:

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Statement of Operations Comparisons

Net loss and per-share amounts for each of the years in the three year period ended December 31, 2003, were as follows:

The primary components in Harken’s (1) net loss for the year ended December 31, 2003 to the net loss for the year ended December 31, 2002 and (2) net loss for the year ended December 31, 2002 to the net loss for the year ended December 31, 2001, are outlined in the table below:

General and Administrative Expenses

General and administrative expenses decreased 11% to $9.2 million during 2003 as compared to the prior year due primarily due to employee reductions during 2003 offset by related severance costs. Harken reduced its employee count by 38%, from 42 employees at December 31, 2002 to 26 employees at December 31, 2003. The decrease in general and administrative expenses over prior year period was partially mitigated by increased legal and professional costs in 2003 associated with Harken’s capital restructuring plan. General and

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administrative expenses decreased 5% during 2002 compared to 2001, due primarily to the personnel and salary reductions in 2002. Harken reduced the number of its employees by 35% in 2002. The decrease in general and administrative expenses was partially mitigated by increased legal and professional costs in 2002 associated with Harken’s capital restructuring plan, as well as the reimbursement in 2001 of approximately $740,000 of litigation expenses pursuant to Harken’s insurance coverage related to such litigation.

Depreciation and Amortization Expense

Depreciation and amortization expense decreased 22% during 2003 compared to the prior year primarily due to decreased production volumes during the period as a result of production decline on both North and Middle American producing properties. Depreciation and amortization expense decreased 25% during 2002 compared to the 2001 primarily due to decreased production volumes during the year as a result of Harken’s sales of certain domestic producing properties. 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.

Full-Cost Valuation Allowances

During the fourth quarter of 2002, Harken recorded non-cash full-cost valuation allowances totaling $521,000 related to Global’s Peru and Panama unevaluated property costs incurred for specific areas which Global no longer intended to pursue under its Technical Evaluation Agreements in Peru and Panama. Global has no proved reserves associated with the Peru or Panama Technical Evaluation Agreements. Harken did not record any full-cost valuation allowances in 2003.

During the fourth quarter of 2001, due to reduced oil and gas prices at December 31, 2001, Harken recorded non-cash valuation allowances of approximately $14.4 million related to its domestic oil and gas properties and $4.3 million related to its Colombian oil properties. The valuation was based on the present value, discounted at ten percent, of Harken proved oil and gas reserves based on year end prices.

Given the volatility of oil and gas prices, it is reasonably possible that the estimate of discounted future net cash flows from proved oil and gas reserves could change in the near term. If oil and gas prices decline in the future, even if only for a short period of time, it is possible that additional impairments of oil and gas properties could occur. In addition, it is reasonably possible that additional impairments could occur if costs are incurred in excess of any increases in the present value of future net cash flows from proved oil and gas reserves, or if properties are sold for proceeds less than the discounted present value of the related proved oil and gas reserves. For further discussion, see “Note 4 – Oil and Gas Properties” in the Notes to the Consolidated Financial Statements contained in Part II, Item 8.

Provision for Asset Impairments

During the fourth quarter of 2002, Global reflected an impairment of approximately $400,000 on certain Colombia oilfield equipment consisting of casing and tubing inventory. Based on the low industry demand for such equipment in light of heightened Colombia security concerns, the carrying value of such inventory was in excess of estimated future cash flows from the sale or use of such equipment.

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In 2001, Harken reflected asset impairments totaling $14.1 million. Included in asset impairments during 2001 were impairments of approximately $8.8 million related to Global’s investment in the Costa Rica project. Also included in 2001 asset impairments was approximately $3.2 million related to certain transportation facility costs related to Global’s Bolivar Contract area in Colombia, as the carrying value of such facilities was in excess of estimates of future cash flows. Global also reflected an impairment of approximately $1.6 million related to certain deferred transaction costs incurred, primarily for certain merger transaction efforts which were a part of the restructuring of Global’s international assets. In addition, Global reflected an impairment of $620,000 on certain Colombia oilfield equipment because the carrying value of such inventory was in excess of estimated future cash flows from sale or use of such equipment.

Litigation and Contingent Liability Settlements

During the fourth quarter of 2003, Harken accrued and charged to expense $1.1 million associated with ongoing settlement discussions related to the Rice lawsuit. For further discussion of this lawsuit see “Note 20 – Commitments and Contingencies” in the Notes to the Consolidated Financial Statements contained in Part II, Item 8.

Harken also recorded a $1.2 million expense during the second quarter of 2002 relating to the settlement of certain liabilities and contingencies resolved during the second quarter of 2002. As discussed further in “Note 20 — Commitments and Contingencies” in the Notes to the Consolidated Financial Statements contained in Part II, Item 8, Harken accrued and charged to expense approximately $2.2 million related to its mediation agreement signed on August 1, 2002 to resolve the Petrochemical litigation. Such amount was partially offset by approximately $1.0 million related to other accrued liabilities that were settled during the second quarter of 2002 for amounts less than the amounts previously accrued.

Interest Expense and Other

Interest expense and other includes the following for each of the years in the three-year period ended December 31, 2003:

Interest expense and other decreased 21% during 2003 compared to 2002, primarily due to the overall reduction in Harken’s current and long-term debt associated with the capital restructuring plan. The decrease in

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interest expense and other was mitigated by Harken’s expensing of the remaining unamortized debt issuance costs of approximately $740,000 related to the issuance of warrants to purchase Global ordinary shares owned by Harken, which were issued to Lyford in consideration for the Investor Term Loan which was paid in full in March 2003. In addition, Harken expensed the $281,000 of debt issuance costs of a promissory note in the principal amount of $1,705,000 (the “Waverley Note”) issued to Waverley Investments Limited (“Waverley”), which was redeemed with cash in full in June 2003. In March 2003, Harken expensed an unrealized holding loss of $488,000 on its investment in shares of New Opportunities Investment Trust PLC, as Harken believed the decline in market value of those shares was other than temporary.

Interest and other expense increased 23% during 2002 compared to 2001. The increase was partially due to the expensing of approximately $382,000 related to the non-refundable portion of the September 2002 standby commitment fee shares issued to Lyford in connection with the rights offering. The increase was also attributed, in part, to a charge of $295,000 related to Colombian war taxes recorded during the third quarter of 2002 by Global. Finally, interest and other expense increased compared to 2001 because during the fourth quarter of 2002, Harken expensed an unrealized holding loss of $499,000 on its investment in shares of NOIT since Harken believed the decline in market value of those shares was other than temporary. See “Note 3 – Investments” in the Notes to Consolidated Financial Statements, contained in Part II, Item 8, for a discussion of this investment.

Gains from Repurchases/Exchanges of Convertible Notes

During 2003 and 2002, Harken repurchased or exchanged certain of its 5% European Notes for cash and/or other debt securities of Harken. During 2003, Harken reflected a gain of approximately $5.5 million from cash purchases, exchanges and/or payment of outstanding 5% European Notes and Benz Convertible Notes in the accompanying Consolidated Statements of Operations. During 2002, Harken recorded a gain of $890,000 relating to the acquisition or exchange of $7,880,000 principal amount of 5% European Notes. Also, in August 2002, Harken repurchased $4,071,000 principal amount of Benz Convertible Notes for $1,231,000 in cash and recorded a gain of approximately $2.8 million related to that transaction. A gain of $2,975,000 was recorded for 2001 related to Harken’s acquisitions of $18,830,000 principal amount of 5% European Notes.

Income Tax Expense/Benefit

Income tax benefit for 2003 was $184,000 as compared to income tax expense of $237,000 for 2002 due primarily to a refund, received in 2003, for the amended 2001 Colombian income tax declaration for Global’s wholly-owned subsidiary, Harken de Colombia, Ltd.

Payment of Preferred Stock Dividend Liability in Common Shares

Harken accounts for the payment of the Series G1 and Series G2 Preferred stock dividends with shares of Harken common stock as a debt extinguishment in accordance with APB 26. Accordingly, the difference between the carrying value of the preferred stock dividend liability at December 31, 2002, approximately $7.4 million, and the fair market value of the shares of Harken common stock issued by Harken in payment of the liability in January 2003, approximately $227,000, is recognized as a Payment of Preferred Stock Dividend Liability in Common Shares in the Consolidated Statement of Operations for the year ended December 31, 2003 as a $6.8 million increase, net of income taxes paid on behalf of the preferred shareholders, to Net Income Attributed to Common Shareholders. For further discussion of

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Harken’s accounting treatment for payment of Series G1 and G2 Preferred stock dividends, see Note 17 – Other Information in the Notes to Consolidated Financial Statements contained in Part II, Item 8.

In January and February 2004, Harken paid the Series G1 and Series G2 Preferred stock dividend liability accrued at December 31, 2003 with 372,000 shares of Harken common stock. Accordingly, the difference between the carrying value of the preferred stock dividend liability at December 31, 2003, approximately $3.1 million, and the fair market value of the shares of Harken common stock issued by Harken in payment of the liability in January and February 2004, approximately $425,000, will be recognized as a $2.7 million gain on Payment of Preferred Stock Dividend Liability in Common Shares in the Consolidated Statement of Operations for the quarter ended March 31, 2004 as an adjustment to Net Income Attributed to Common Shareholders.

SEGMENT ANALYSIS

North American Operations:

The following table sets forth Harken’s North American operating results for each of the years in the three-year period ended December 31, 2003: