HKN, Inc. (HKN)

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The foreign currency translation adjustment of $497 thousand and the unrealized loss on investment of $8.4 million for these changes in market value between the two periods are recorded to other comprehensive income in stockholders’ equity at June 30, 2007.

In June 2007, Global announced they signed a new contract covering 691,500 acres located offshore for the exploration and exploitation of hydrocarbons in the Garachine area of eastern Panama.  The contract is the first operations contract the government of Panama has signed since 1990.

At March 31, 2007 and December 31, 2006, our investment in Global was equal to the market value of our 11.9 million shares of Global’s common stock as follows:

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The foreign currency translation adjustment of $142 thousand and the unrealized loss on investment of $7.7 million for these changes in market value are recorded to other comprehensive income in stockholders’ equity at March 31, 2007.

In April 2006, Global advised us that Lyford had sold a portion of its equity interest in Global, reducing Lyford ownership to 15.89% of the ordinary shares of Global such that our direct equity interest in Global combined with Lyford’s direct equity interest in Global was reduced to less than 50% of Global’s outstanding voting securities.  Based upon this reduction in ownership and the elimination of shared management and administrative functions between us and Global, we determined that we no longer had the legal power to control the operating policies and procedures of Global and that we were required to deconsolidate Global from our consolidated financial statements beginning effectively during the second quarter of 2006. Under U.S. GAAP, we are required to reflect this deconsolidation prospectively. As a result of this treatment, Global’s operations for the quarter ended March 31, 2006 are still included in our consolidated financial statements at December 31, 2006.

Based upon our ownership percentage at December 31, 2006 of approximately 34% of Global’s outstanding common shares, we would normally treat our ownership of Global as an equity method investment if we had the ability to exercise significant influence over Global. However, there are certain information requirements needed from Global to permit us to comply with the requirements of the equity method.  Global’s common shares are listed on the AIM Market of the London Stock Exchange, and under AIM guidelines, Global publicly reports its financial results on a semi-annual basis (June 30 and December 31) in conformity with accounting principles generally accepted in the United Kingdom (“UK GAAP”). To comply with the requirements of the equity method we require adequate financial information from Global in order to conform Global’s UK GAAP financial statements to accounting principles generally accepted in the United States on a quarterly basis. We made formal written requests to Global to provide us the needed financial information to apply the equity method, but Global refused to provide to us this information, citing foreign securities exchange restrictions against providing more financial information to us than is available to their other shareholders.

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As reflected in Global’s public announcements and filings, Global’s board of directors was expanded to six members.  One of the new directors, a member of the House of Lords of the United Kingdom, heads Global’s audit committee and has taken an active role in the oversight of the committee’s functions and obligations with respect to restrictions imposed on Global regarding the disclosure of nonpublic information.  As a result, and due to Global’s continued refusal to provide the financial information required for us to treat Global as an equity method investment, we concluded that we do not have the ability to exercise significant influence over Global and cannot comply with the requirements of the equity method.  Therefore beginning April 1, 2006, we are accounting for our Global shares as an available-for-sale cost method investment. We recognize only dividend income beginning April 1, 2006, and our investment in Global is adjusted to fair value every quarterly period with an offset to other comprehensive income in stockholders’ equity.

The deconsolidation of Global from our financial statements as of April 1, 2006 resulted in an adjusted carrying value of our investment in Global of $9.8 million which was then adjusted to market value on that same date. At April 1, 2006, our investment in Global of $58.5 million was equal to the market value of our 11.9 million shares of Global’s common stock based on Global’s closing share price of £2.83 (U.K. pounds sterling). The unrealized gain on investment of $48.8 million was recorded to other comprehensive income in stockholders’ equity at April 1, 2006.

At December 31, 2006, our investment in Global of $28.2 million was equal to the market value of our 11.9 million shares of Global’s common stock based on Global’s closing share price of £1.21. The foreign currency exchange rate changed from 1.74 U.S. dollars per U.K. pounds sterling at April 1, 2006 to 1.96 U.S. dollars per U.K. pounds sterling at December 31, 2006. The foreign currency translation adjustment of $5.8 million and the unrealized loss on investment of $36.2 million for these subsequent changes in market value are recorded to other comprehensive income in stockholders’ equity at December 31, 2006. At December 31, 2006, our total unrealized gain on our investment and foreign currency translation in Global shares recorded to other comprehensive income in stockholders equity was $18.4 million.

DECONSOLIDATION OF GLOBAL

At December 31, 2005 and September 30, 2006, we owned approximately 34% of Global’s ordinary shares. During the first quarter of 2006, Lyford Investments Enterprises Ltd. (“Lyford”) owned 17.01% of the ordinary shares of Global and also beneficially owned approximately 30% of the combined voting power of our common stock. Lyford’s representative, Alan Quasha, is the Chairman of our Board of Directors. During the first quarter of 2006, our direct equity interest of 33.67% combined with Lyford’s 17.01% equity interest in Global and the previous sharing of certain management and administrative functions between Global and us, were deemed to provide us with the legal power to control the operating policies and procedures of Global as of March 31, 2006, which required us to consolidate the operations of Global as of such date.

In April 2006, Global advised us that Lyford had sold a portion of its equity interest in Global, reducing Lyford ownership to 15.89% of the ordinary shares of Global such that our direct equity interest in Global combined with Lyford’s direct equity interest in Global was reduced to less than 50% of Global’s outstanding voting securities.  Based upon this reduction in ownership and the elimination of shared management and administrative functions between us and Global, we determined that we no longer have the legal power to control the operating policies and procedures of Global and that we were required to deconsolidate Global from our consolidated financial statements during the second quarter of 2006. Under US GAAP, we reflected this deconsolidation prospectively, and, accordingly, we have not restated prior year amounts. As a result of this treatment, Global’s operations for the quarter ended March 31, 2006 are still included in our consolidated condensed financial statements at September 30, 2006.

Based upon our ownership percentage at September 30, 2006 of approximately 34% of Global’s outstanding common shares, we normally would treat our ownership of Global as an equity method investment if we had the ability to exercise significant influence over Global. However, there are certain information requirements needed from Global to permit us to comply with the requirements of the equity method.   Global’s common shares are listed on the AIM Market of the London Stock Exchange, and under AIM guidelines, Global publicly reports its financial results on a semi-annual basis (June 30 and December 31) in conformity with accounting principles generally accepted in the United Kingdom (“UK GAAP”). To comply with the requirements of the equity method, we require adequate financial information from Global in order to conform Global’s UK GAAP financial statements to accounting principles generally accepted in the United States on a quarterly basis. We have made formal written requests to Global to provide us the needed financial information to apply the equity method, but Global has refused to provide to us this information, citing foreign exchange restrictions against providing more financial information than is available to their other shareholders.

As reflected in Global’s public announcements and filings, Global’s board of directors was expanded to six members.  One of the new directors, a member of the House of Lords of the United Kingdom, now heads Global’s audit committee and has taken an active role in the oversight of the committee’s functions and obligations with respect to restrictions imposed on Global regarding the disclosure of nonpublic information.  As a result, and due to Global’s continued refusal to provide the financial information required for us to treat Global as an equity method investment, we concluded that we do not have the ability to exercise significant influence over Global and cannot comply with the requirements of the equity method.  Therefore beginning April 1, 2006, we are accounting for our Global shares as an available-for-sale cost method investment.  We will recognize only dividend income beginning April 1, 2006, and our investment in Global will be adjusted to fair value every quarterly period with an offset to other comprehensive income in stockholders’ equity.

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The deconsolidation of Global from our financial statements as of April 1, 2006 resulted in an adjusted carrying value of our investment in Global of $9.8 million which was then adjusted to market value on that same date. At April 1, 2006, our investment in Global of $58.5 million was equal to the market value of our 11.9 million shares of Global’s common stock based on Global’s closing share price of £2.83 (U.K. pounds sterling). The unrealized gain on investment of $48.8 million was recorded to other comprehensive income in stockholders’ equity at April 1, 2006.

At September 30, 2006, our investment in Global of $30.5 million was equal to the market value of our 11.9 million shares of Global’s common stock based on Global’s closing share price of £1.37. The foreign currency exchange rate changed from 1.74 U.S. dollars per U.K. pounds sterling at April 1, 2006 to 1.87 U.S. dollars per U.K. pounds sterling at September 30, 2006. The foreign currency translation adjustment of $4.2 million and the unrealized loss on investment of $32.3 million for these subsequent changes in market value are recorded to other comprehensive income in stockholders’ equity at September 30, 2006. At September 30, 2006, our total unrealized gain on Global shares recorded to other comprehensive income in stockholders equity was $20.7 million.

Pro Forma Information – The following unaudited pro forma combined condensed balance sheet at December 31, 2005 along with the pro forma combined condensed statement of operations for the three months ended September 30, 2005 and the nine months ended September 30, 2005 and 2006 gives effect to the deconsolidation of Global’s operations as if it had been effective for all periods presented.  The combined condensed balance sheet at September 30, 2006 and the combined condensed statement of operations for the three months ended September 30, 2006 are presented as reported.  The unaudited pro forma data is presented for illustrative purposes only and is not necessarily indicative of future operating results.

To arrive at our pro forma combined condensed balance sheet at December 31, 2005, we removed Global’s historical balance sheet at its previously-reported values and made an adjustment to the Investment in Global and Stockholders’ Equity to reflect our investment in Global at its fair market value based on its December 31, 2005 stock price and the foreign currency conversion factor as of December 31, 2005.

To arrive at our pro forma combined condensed statement of operations for each period presented, we removed Global’s historical results of operations at their previously-reported values and adjusted the Gain on Sale of Global shares and the Gain on Exercise of Global Warrants to the gains which would have been reported if Global was a cost-method investment at the time.

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DECONSOLIDATION OF GLOBAL

At December 31, 2005 and June 30, 2006, we owned approximately 34% of Global’s ordinary shares. During the first quarter of 2006, Lyford Investments Enterprises Ltd. (“Lyford”) owned 17.01% of the ordinary shares of Global and also beneficially owned approximately 30% of the combined voting power of our common stock. Lyford’s representative, Alan Quasha, is the Chairman of our Board of Directors. During the first quarter of 2006, our direct equity interest of 33.67% combined with Lyford’s 17.01% equity interest in Global and the previous sharing of certain management and administrative functions between Global and us,

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were deemed to provide us with the legal power to control the operating policies and procedures of Global as of March 31, 2006, which required us to consolidate the operations of Global as of such date.

In April 2006, Global advised us that Lyford had sold a portion of its equity interest in Global, reducing Lyford ownership to 15.89% of the ordinary shares of Global such that our direct equity interest in Global combined with Lyford’s direct equity interest in Global was reduced to less than 50% of Global’s outstanding voting securities.  Based upon this reduction in ownership and the elimination of shared management and administrative functions between us and Global, we have determined that we no longer have the legal power to control the operating policies and procedures of Global and that we are required to deconsolidate Global from our consolidated financial statements during the fiscal quarter ending June 30, 2006. Under US GAAP, we are required to reflect this deconsolidation prospectively, and, accordingly, we have not restated prior year amounts. As a result of this treatment, Global’s operations for the quarter ended March 31, 2006 are still included in our consolidated condensed financial statements at June 30, 2006.

Based upon our ownership percentage at June 30, 2006 of approximately 34% of Global’s outstanding common shares, we normally would treat our ownership of Global as an equity method investment if we had the ability to exercise significant influence over Global. However, there are certain information requirements needed from Global to permit us to comply with the requirements of the equity method.  Global’s common shares are listed on the AIM Market of the London Stock Exchange, and under AIM guidelines, Global publicly reports its financial results on a semi-annual basis (June 30 and December 31) in conformity with accounting principles generally accepted in the United Kingdom (“UK GAAP”). To comply with the requirements of the equity method, we require adequate financial information from Global in order to conform Global’s UK GAAP financial statements to accounting principles generally accepted in the United States on a quarterly basis. We have made formal written requests to Global to provide us the needed financial information to apply the equity method, but Global has refused to provide to us this information, citing foreign exchange restrictions against providing more financial information than is available to their other shareholders.

As reflected in Global’s public announcements and filings, Global’s board of directors was recently expanded to six members.  One of the new directors, a member of the House of Lords of the United Kingdom, now heads Global’s audit committee and has taken an active role in the oversight of the committee’s functions and obligations with respect to restrictions imposed on Global regarding the disclosure of nonpublic information.  As a result, and due to Global’s continued refusal to provide the financial information required for us to treat Global as an equity method investment, we have concluded that we do not have the ability to exercise significant influence over Global and cannot comply with the requirements of the equity method.  Therefore beginning April 1, 2006, we are accounting for our Global shares as an available-for-sale cost method investment.  We will recognize only dividend income beginning April 1, 2006, and our investment in Global will be adjusted to fair value every quarterly period with an offset to other comprehensive income in stockholders’ equity.

The deconsolidation of Global from our financial statements as of April 1, 2006 resulted in an adjusted carrying value of our investment in Global of $9.8 million which was then adjusted to market value on that same date. At April 1, 2006, our investment in Global of $58.5 million was equal to the market value of our 11.9 million shares of Global’s common stock based on Global’s closing share price of £2.83 (U.K. pounds sterling). The unrealized gain on investment of $48.8 million was recorded to other comprehensive income in stockholders’ equity at April 1, 2006.

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At June 30, 2006, our investment in Global of $42 million was equal to the market value of our 11.9 million shares of Global’s common stock based on Global’s closing share price of £1.91. The foreign currency exchange rate changed from 1.74 U.S. dollars per U.K. pounds sterling at April 1, 2006 to 1.85 U.S. dollars per U.K. pounds sterling at June 30, 2006. The foreign currency translation adjustment of $3.8 million and the unrealized loss on investment of $20.3 million for these subsequent changes in market value  are recorded to other comprehensive income in stockholders’ equity at June 30, 2006. At June 30, 2006, our total unrealized gain on Global shares recorded to other comprehensive income in stockholders equity was $28.4 million.

Pro Forma Information — The following unaudited pro forma combined condensed balance sheet at December 31, 2005 along with the pro forma combined condensed statement of operations for the three months ended June 30, 2005 and the six months ended June 30, 2005 and 2006 gives effect to the deconsolidation of Global’s operations as if it had been effective for all periods presented.  The combined condensed balance sheet at June 30, 2006 and the combined condensed statement of operations for the three months ended June 30, 2006 are presented as reported.  The unaudited pro forma data is presented for illustrative purposes only and is not necessarily indicative of future operating results.

To arrive at our pro forma combined condensed balance sheet at December 31, 2005, we removed Global’s historical balance sheet at its previously-reported values and made an adjustment to the Investment in Global and Stockholders’ Equity to reflect our investment in Global at its fair market value based on its December 31, 2005 stock price and the foreign currency conversion factor as of December 31, 2005.

To arrive at our pro forma combined condensed statement of operations for each period presented, we removed Global’s historical results of operations at their previously-reported values and adjusted the Gain on Sale of Global shares to the gain which would have been reported if Global was a cost-method investment at the time.

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