The following discussion is intended to assist you in understanding our business and the results of our operations. It should be read in conjunction with the Consolidated Condensed Financial Statements and the related notes that appear elsewhere in this report as well as our Annual Report on Form 10-K for the year ended December 31, 2007. Certain statements made in our discussion may be forward looking. Forward-looking statements involve risks and uncertainties and a number of factors could cause actual results or outcomes to differ materially from our expectations. These risks, uncertainties, and other factors include, among others, the risks described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 filed with the Securities and Exchange Commission, as well as other risks described in this Quarterly Report. Unless the context requires otherwise, when we refer to "we," "us" and "our," we are describing HKN, Inc. and its consolidated subsidiaries on a consolidated basis.

BUSINESS OVERVIEW

Our strategy is to enhance value for our stockholders through the development of a well-balanced portfolio of energy-based assets. Our Gulf Coast oil and gas assets and our coalbed methane prospects provide a large inventory of both high and low-risk projects and high-potential exploration long-term opportunities. We engage in the active management of investments in energy industry securities and futures traded on domestic and international securities exchanges in order to provide us with high-yield returns and additional cash flow. During 2008, we are focusing on:

† Deploying assets into energy-based opportunities that will build annual measurable value and/or cash flow

† Optimizing the value of our assets through collective expectations and objectives, and;

† Monetizing assets that have reached their full potential, that do not have an expectation of near-term value enhancement or that represent a disproportionate concentration of value in one asset.

Consistent with our strategy to deploy assets into energy-based opportunities, we:

† Created the Canergy Growth Fund LLC (Canergy Fund), a U.S. Virgin Islands non-registered investment company, to invest in a potentially undervalued segment of the global energy industry, the Canadian junior oil and gas market. The Canergy Fund is seeking total capital commitments up to $10 million. As of June 30, 2008, total capital contributions into the Canergy Fund were $2.4 million (HKN owning approximately 83% of the Canergy Fund).

† Held approximately $7.7 million outstanding of average notional value in exchange-traded written positions in our energy trading portfolio through our treasury activities.

† Deployed capital expenditures of $1 million for development drilling on new interests (the RC Roberson #1 well) in the NW Speaks field in South Texas, completion costs on the successful Boquillas #1 well also in South Texas as well as other projects.

† Deployed over $1.7 million of prepaid costs towards the 2nd five-well pilot project for our coalbed methane Indiana Posey Prospect as well as for two wells in our Creole Field to be drilled during the third quarter 2008.

† Repurchased approximately 92 thousand of our common shares in the market.

Consistent with our focus to improve our financial condition and optimize the value of our assets through collective expectations and objectives, we:

† Improved our current ratio (defined as current assets divided by current liabilities) to 6.76 to 1.00 at June 30, 2008 up from 5.81 to 1.00 at March 31, 2008 and 5.48 to 1.00 at December 31, 2007.

†          Held no debt outstanding during the six months ended June 30, 2008.



†          Increased our profitable operations resulting in net income of $3.3
million.

† Decreased depreciation, depletion and amortization rates per unit as a result of increased proved reserve volumes.

† Experienced an increase in the fair value of our investment in Global Energy Development plc ("Global") shares to approximately $28.8 million at June 30, 2008 as compared to $19.8 million at December 31, 2007.

† Reaped a 73% increase in our crude oil revenue compared to prior year period due to increased commodity prices and an overall increase in our oil production from our Main Pass 35 and Creole fields.

† Decreased our general and administrative expenses in an increasing-cost environment.

Financial and Operational Disappointments:

† We experienced a $1.2 million realized loss on crude oil futures contracts. At June 30, 2008, we no longer hold any open crude oil futures contracts.

† Our natural gas revenues decreased 10% to approximately $4.1 million. Our natural gas production declined 31% compared to the first six months of 2007 due to lower than anticipated partner generated well workover and drilling activity.

In regards to our monetization strategy, in July 2008, we retained Lantana Oil & Gas Partners to market our operated working interest in Main Pass Block 35 in Plaquemines Parish, Louisiana. While our working interest in the Main Pass 35 field remains a strong oil asset, we believe this asset represents a disproportionate concentration of value for us and has reached the potential of its near-term value. Based on Lantana's current marketing timetable, bids from qualified and interested potential purchasers will be due August 19, 2008.

Gulf Coast Oil and Gas Properties

During the second quarter 2008, our results of operations reflect increased oil revenues through the benefit of strong oil commodity prices. Our natural gas revenues declined in the second quarter 2008 compared to the prior year period due to the decline of our gas producing wells. Substantially all of our production is concentrated in twelve oil and gas fields along the onshore and offshore Texas and Louisiana Gulf Coast.

Our revenues are primarily derived from sales from our oil and gas properties. Approximately 60% of our production comes from our operated properties all located in the United States. These revenues are a function of the oil and gas volumes produced and the prevailing commodity price at the time of production, and certain quality and transportation discounts. The commodity prices for crude oil and natural gas as well as the timing of production volumes have a significant impact on our operating income. During the second quarter 2008, our oil and gas revenues were comprised of approximately 68% oil sales and 32% natural gas production. As of June 30, 2008, our net domestic production rate was averaging approximately 800 barrels of oil equivalent ("boe") per day.

The following field data updates the status of our operations through June 30, 2008:

Main Pass, Plaquemines Parish - Louisiana

We have a 90% interest in Main Pass and are the field operator. This field contains a seven-platform facility complex including separation, injection, compression, processing and transportation terminals for oil, water and gas. The field also contains 67 wellbores (60 oil and 7 injection wells), of which 33 are active, and an eight mile oil transport line with pump/metering facilities. Our Main Pass 35 facility is located approximately six miles offshore in state waters off the Gulf Coast of Louisiana. In late 2007, third party compression was upgraded and additional third party production was brought to the Main Pass 35 facility. In the six months of 2008, additional third party operators have inquired about bringing their production and products to the Main Pass facility in future periods. A third-party engineering firm has completed evaluation and documentation of additional recompletion targets, a geological and geophysical study and wellbore utilization plan. We currently have license to 21 square miles of 3D seismic data covering the area held by productive leases. Gross production during the second quarter 2008 was approximately 439 boe per day. Additional compression upgrades for gas lift are planned in 2008 to better serve Main Pass 35 wells as well as the production from four other producing areas and anticipated additional areas.

Lapeyrouse Field, Terrebonne Parish - Louisiana

We hold an average non-operated working interest of approximately 18% in the production from nine wells in this field. Current gross field production is averaging approximately 881 boe per day for the second quarter 2008. Evaluation efforts are still ongoing with additional diagnostic work planned by the operator to address the field pressure decline and to utilize all available wellbores.

Lake Raccourci Field, Lafourche Parish - Louisiana

We hold an average 40% operated working interest in each of our Lake Raccourci wells. Gross production for this field averaged 337 boe per day for the second quarter 2008. Efforts are underway to secure additional compression and to upgrade gas lift equipment to address production decline in the field.

Point-a-la-Hache Field, Plaquemines Parish - Louisiana

We maintain a 25% operated working interest in one producing well in this field. Average gross production for the second quarter 2008 was approximately 57 boe per day. Injection upgrades to the SWD well were completed in the second quarter.

Creole Field, Terrebonne Parish - Louisiana

We hold an average 15% non-operated working interest in this offshore field. Both wells that were drilled in 2007 were tied in and began producing in late 2007. Multiple stacked pays in these wells indicate favorable future recompletion potential. In January 2008, we acquired interest in adjoining acreage and facilities which will ensure the availability of gas lift gas and improved salt water disposal. Gross daily production from the wells (six completions) was approximately 586 boe per day during the second quarter 2008. Upgrades to surface facilities and flowlines and the drilling of an SWD well were completed in the second quarter. Two additional drill wells are planned to spud in the third quarter 2008. These wells have multiple stacked pays targeted.

East Lake Verret, Assumption Parish - Louisiana

We have an average 5% non-operated working interest in this field. Two development wells on this project were successfully completed and placed into production in 2007. Due to stacked pays, favorable recompletion potential is expected in the future productive life of these wells. The operator proposed the drilling of a third well in late 2007, but we declined participation after deeming the prospect did not meet our risk/reward criteria. Gross daily production from both wells was approximately 910 boe per day during the second quarter 2008.

Point-au-Fer Field, Terrebonne Parish - Louisiana

We own a 12.5% non-operated working interest in this approximate 56 square mile area. Gross production for this field was approximately 102 boe per day for the second quarter 2008. Several prospects have been identified in the area, and we expect to have additional drilling and workover activity in the last part of 2008.

BP 2D Texas Gulf Coast Project, Various Counties - Texas

The first shallow Yegua well in the project, the Boquillas # 1, was spud in late 2007 and put on gas production during the first quarter 2008. Well performance of the Boquillas #1 has been very encouraging. Gross production from this well was approximately 118 boe per day for the second quarter 2008. A number of other locations have been identified and a drilling program is being determined. One prospect has been scheduled for the third quarter 2008.

An 85 square mile 3D seismic survey in the northeastern portion of the project area was proposed, but we declined participation after deeming the 3D portion of the project did not meet our risk/reward criteria.

NW Speaks Field, Lavaca County - Texas

We own approximately 2% to 10% in various leases in the NW Speaks area. This year we have participated in two successful Lower Wilcox wells. At least two additional locations have been identified with

one expected to spud in late third quarter 2008. Current gross production for this field averaged approximately 268 boe per day during the second quarter 2008.

Allen Ranch Field, Colorado County - Texas

We own an 11.25% non-operated working interest in this area. Gross production for this field was approximately 134 boe per day during the second quarter of 2008 primarily from the initial well, the Hancock Gas Unit # 1 which is the only well currently producing from the field. After demonstrating significant commercial production in several horizons, the Hancock Gas Unit #2, was damaged in the course of a remedial workover. The operator has temporarily abandoned operations on this well, and may recommend plugging operations at a future date.

Raymondville Field, Willacy County - Texas

We own a 27% non-operated working interest in this area. Current gross production for this field averaged approximately 566 boe per day during the second quarter 2008. Well work during the first half of 2008 netted successful recompletions and were followed by two more successful recompletions in the second quarter.

Lucky Field, Matagorda County - Texas

We own a 7.5% non-operated working interest in this area. The Dawdy Luck #1 well was completed and started producing during 2007. Current gross production for this field averaged approximately 67 BOE per day during the second quarter of 2008.

Coalbed Methane Prospects - Indiana and Ohio

We hold three significant exploration and development agreements in Indiana and Ohio, of which two prospects provide for an area of mutual interest of approximately 400,000 acres, and one provides for approximately 20,000 acres. The agreements provide for a phased delineation, pilot and development program, with corresponding staged expenditures. Contracted third parties with a long track record in successful Coalbed Methane development provide expert advice for these projects.

On the Indiana Posey Prospect, we have completed Phase I - Core Samples work on the Indiana Prospect which consisted of obtaining and analyzing coal samples. Based on the positive outcome of the coring analysis, we elected into Phase II which consists of exploratory work. During 2007, all five pilot producing wells were drilled, completed and put on pump-down production for gas desorption via newly installed pumps, lines and facilities. In addition, a produced water disposal well was drilled and completed to service the pilot wells. Some gas production has begun and is being used throughout the field for fuel gas needs. The extent of water influx is under evaluation to enhance desorption efforts. In early 2008, chemical treatments to enhance well fluid productivity was begun with fracture stimulation under evaluation as desorption pump-down continues. In the second quarter 2008, a fracture stimulation was performed to increase desorption pumpdown rates. More stimulations are under evaluation as pumpdown continues.

We have elected to proceed with a second pilot well project. A monitor well was drilled, completed and tested for permeability determination in late 2007. During the first half of 2008, plans to begin drilling the five pilot producers and the water disposal well were completed and the wells await installation of surface facilities so that well completions can begin. Following an evaluation period of these pilot wells, we will

evaluate a Phase III - Development election and funding of a development well program as contemplated by the agreements.

On the Ohio Cumberland Prospect, we have completed Phase I - Core Samples work on the Ohio Prospect which consisted of obtaining and analyzing coal samples. With regard to Phase II, we made an additional $500 thousand prospect acquisition payment and intend to fund a $1.28 million project in late 2008 or early 2009 for the first of two pilot well projects on the Cumberland Prospect.

On the Triangle Prospect Area in Ohio, the Phase I - Core work was successfully completed during 2007 with core samples being desorbed, and analyzed in late 2007. In addition, one of the core holes was permeability tested, and based upon the permeability and saturation trends, in July 2008, we elected not to proceed with Phase II development. As a result of our election and the term of the applicable agreement, our participation in this project has been terminated effective July 2008.

INVESTMENT ACTIVITIES

During the six months ended June 30, 2008, through our treasury activities, we engaged in the active management of investments in energy industry and foreign currency securities traded on domestic securities exchanges. During this period, we held a daily weighted average of approximately $7.7 million outstanding of notional value in a combination of exchange-traded common stock options, commodity futures contracts and foreign currency contracts. At June 30, 2008, we held approximately $8.6 million outstanding of notional value in exchange-traded positions. The fair value of our open derivative positions which are recorded as derivative liabilities on our consolidated condensed balance sheet at June 30, 2008 are as follows (in thousands):

Written common stock put options    $ 418
Written common stock call options     229
Foreign currency put option           (20 )
Foreign currency call option          199
Derivative liabilities              $ 826

As the writer of an option on a securities and/or futures contract, however, we may be subject to initial margin requirements in connection with the option and are exposed to potential losses equal to the difference between the premium paid or received for the writing of the option plus or minus the option strike price and the current price of the underlying security or futures contract. Options on securities and futures contracts are traded on the same exchanges as the underlying security and futures contracts, and may only be entered into through brokers that are members of the relevant exchanges. Positions in options on securities and futures contracts are cleared through the relevant exchange clearinghouse, in the same manner.

Monitoring the Portfolio

We monitor our portfolio on a daily basis to verify that there is no market or liquidity exposure level we consider not acceptable. We recalculate our estimates of gross aggregate cash exposure on a daily basis so that total notional value outstanding and cash on hand does not exceed $20 million. At any time though, we may reduce our portfolio exposure by selling or terminating our positions.

INVESTMENT IN GLOBAL



At June 30, 2008 and December 31, 2007, respectively, we owned approximately 34%
of Global's ordinary shares. Our investment in Global was equal to the market
value of our 11.9 million shares of Global's common stock as follows:



                                          June 30,     December 31,
                                            2008           2007

Shares of Global Stock held by HKN        11,893,463      11,893,463
Closing Price of Global Stock           £       1.22   £        0.84
Foreign Currency Exchange Rate                1.9906          1.9843
Market Value of Investments in Global   $ 28,883,655   $  19,824,167

The foreign currency translation adjustment of $78 thousand and the unrealized gain on investment of $9.0 million for these changes in market value between the two periods are recorded to other comprehensive income in stockholders' equity at June 30, 2008.

INVESTMENT IN SPITFIRE

At June 30, 2008, we owned 10.9 million common shares of Spitfire and 1.3 million warrants to acquire common shares of Spitfire. Our common share holdings represent approximately 26% of the outstanding Spitfire common shares. As a result of our 26% ownership of Spitfire's outstanding common shares, we are deemed to have the ability to exert significant influence over Spitfire's operating and financial policies. Accordingly, we reflect our investment in Spitfire as an equity method investment.

INVESTMENT IN CANERGY FUND

At June 30, 2008, the Canergy Fund owned investments in the common shares of nine Canadian junior oil and gas companies traded on the Toronto Stock Exchange (TSX). The fair value of these common shares which are recorded as available for sale investments on our consolidated condensed balance sheet at June 30, 2008 is $1.6 million. We own approximately 83% of the Canergy Fund at June 30, 2008.

CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS

Our consolidated condensed financial statements have been prepared in accordance with U.S. GAAP which requires us to use estimates and make assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Our estimates and assumptions are based on historical experience, industry conditions and various other factors which we believe are appropriate. Actual results could vary significantly from our estimates and assumptions as additional information becomes known. The more significant critical accounting estimates and assumptions are described below.

Full Cost Accounting Method - We account for the costs incurred in the acquisition, exploration and development 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 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 the asset retirement obligation.

Fair Value of Financial Instruments - Financial instruments are stated at fair value as determined in good faith by management. Factors considered in valuing individual investments include, without limitation, available market prices, reported net asset values, type of security, purchase price, purchases of the same or similar securities by other investors, marketability, restrictions on disposition, current financial position and operating results, and other pertinent information.

We carry our financial instruments including cash, derivatives and our investments in common stock at their estimated fair values. The fair values of our securities and exchange-traded derivatives are based on prices quoted in the active market, and the fair values of our foreign currency derivatives and commodity derivatives are based on pricing provided by our counter parties. The fair value of our warrants on common stock of Spitfire is estimated using the Black Scholes model.

With the exception of our investment in common shares of Spitfire, all of our investments in equity securities have been designated as available for sale. Our investment in Global is classified as a non-current asset in our accompanying balance sheets. The associated unrealized gains and losses on our available for sale investments are recorded to other comprehensive income until realized and are reclassified into earnings using specific identification.

Equity Method Investments - For investments in which we have the ability to exercise significant influence but do not control, we follow the equity method of accounting. Initial investments are recorded at cost and adjusted by the proportionate share of the investee's earnings and capital transactions. Our share of investee earnings are recorded to our income statement and our share of their capital transactions are recorded in our shareholders' equity. We evaluate these investments for other-than-temporary declines in value each quarter; any impairment found would be recognized through earnings.

Translation of Non-U.S. Currency Amounts - Assets and liabilities of non-U.S. investees whose functional currency is not the U.S. dollar are translated into U.S. dollars at exchange rates in effect at each balance sheet date. Revenue and expense items are translated at average exchange rates prevailing during the periods. Translation adjustments are included in other comprehensive income until the investment is sold.

Fair Value of Derivatives - Fair values of our exchange-traded derivatives are generally determined from quoted market prices. We currently do not hold any over the counter derivatives that would be valued using valuation models. The end of day price quotations obtained from the third-party broker / dealer portfolio appraisal statement are used as the primary evidence for the fair value of these financial instruments. Our Spitfire warrants are not exchange-traded derivatives. Management estimates the fair value of the Spitfire warrants using the Black Scholes Valuation model. The estimated fair value of the Spitfire warrants was $66 thousand at June 30, 2008 and was recorded in other assets on our consolidated condensed balance sheet. The Spitfire warrants are the only fair-value instruments classified as Level 3 under Statement of Financial Accounting No. 157, "Fair Value Measurements" ("SFAS 157"). We do not consider the fair value of these Spitfire warrants to be material to our financial statements as of June 30, 2008. Also, we do not consider the unrealized loss of $45 thousand associated with the change in the value of these Spitfire warrants during six months ended June 30, 2008 to be material to our financial statements.

We have not designated any of our derivative instruments as hedges under Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." All gains and losses related to these positions are recognized in earnings. At the end of each quarterly period, we evaluate for reasonableness the end of day price quotations in the broker's portfolio appraisal statement by considering the following factors:

† The end of day quoted settlement price set by an exchange on which the financial instrument are principally traded.

† The mean between the last bid and the ask prices from the exchange on which the financial instrument is principally traded.

Subsequent to the above review, if we determine the broker / dealer appraisal prices to be unreliable, we may substitute a good-faith estimate of fair value.

Consolidation of variable interest entities - In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. ("FIN") 46, . . .