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 have engaged 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 have focused 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.

Effect of Recent Hurricanes in the Gulf of Mexico

During the third quarter 2008, both Hurricane Gustav and Hurricane Ike (the "Hurricanes") hit the Gulf Coast of Mexico effectively shutting in most oil & gas production in the Texas and Louisiana coastal area. Production from our operated oil and gas properties (Main Pass 35, Lake Raccourci and Point a la Hache) along with most of our non-operated properties was shut-in during late August and September and certain of our pre-storm production currently remains curtailed. We are continuing to repair damage to our operations that remain shut-in which include Lake Raccourci and our non-operated properties at Branville Bay. Restoration of remaining curtailed production is also dependent on resumption of downstream infrastructure and the availability of service and equipment contractors necessary for over-water transportation and repairs.

Our net loss for the third quarter of 2008 reflects both decreased revenue, due to the interruption of production, and non-capitalizable net repair costs related to the Hurricanes both totaling approximately $3.0 million. Total gross direct damage costs to repair and rebuild the damaged properties are estimated at

approximately $3.0 million ($2.0 million net of partner's share) but could be higher as actual repairs and restoration efforts are completed during the remainder of 2008. In connection with our oil and gas properties, we have property damage insurance, but not business interruption coverage. We expect our fourth quarter 2008 financial results to reflect the subsequent continued decline in oil and gas commodity pricing and the residual effects of curtailed production from certain of our operated and non-operated properties which remain shut-in after the Hurricanes.

Update on Monetization Efforts of Main Pass 35

In 2008 and consistent with our monetization strategy, we retained Lantana Oil & Gas Partners to market our operated working interest in Main Pass Block 35 in Plaquemines Parish, offshore Louisiana. While our working interest in the Main Pass 35 field remains a strong cash-flowing oil asset, we believe this asset represents a disproportionate concentration of value for us. Due to the effects of the Hurricanes in August and early September 2008, the bid process and analysis was significantly affected while production was shut-in and damages were assessed. Subsequently, in October 2008, repairs were completed on Main Pass 35 and pre-Hurricane production and marketing efforts were resumed. However, as a result of volatile stock market conditions, declines in oil and gas commodity pricing and the general deterioration in market factors, a limited number of offers were received all of which failed to meet the bid criteria. While we have continued our discussions with potential purchasers of our Main Pass 35 field, we do not currently anticipate divestiture of this asset prior to year end. If we do not consummate a transaction of the sale of our interests in Main Pass 35 during the remainder of 2008, we will continue to optimize and develop this asset and re-evaluate our monetization efforts at a later time.

Adverse Market Conditions

During September and October 2008, unfavorable changes in economic conditions, including decreased oil and gas commodity pricing and a dramatic decline in the U.S. and international stock markets resulted in an adverse effect on our oil and gas revenue along with our investment activities. If oil and gas commodity pricing and economic conditions continue to decline, our revenue is likely to continue to be adversely affected. Challenging economic conditions also have impaired the ability of our third-party investor in Canergy Management Company and Canergy Growth Fund to continue to maintain their investments in these entities. Subsequently during October 2008, with the dramatic decline in the Canadian stock markets, and in order to avoid future additional significant losses, Canergy Growth Fund divested of all of its common stock holdings in Canadian junior oil and gas companies with the intent to re-enter the market in the near future. In addition, the third-party investor exercised their right to voluntarily withdraw from the Canergy Fund and Canergy Management, and HKN is currently the sole participant in both the Canergy Fund and Canergy Management.

Also in October 2008, due to the dramatic volatility in the U.S. and international stock markets, we closed our entire open derivative trading portfolio resulting in realized losses of over $3.3 million which will be reflected in our fourth quarter 2008 earnings. We had maintained an investment portfolio of various holdings, types, and maturities. These investments were subject to general credit, liquidity, and market risks, which may have continued to be exacerbated by unusual events that are currently affecting domestic and global financial markets.

We continue to believe that adverse market conditions may lead to future opportunities in late 2008 and 2009 to reinvest our cash into undervalued Canadian and U.S. oil and gas companies and investments as opportunities arise.

Capital Deployment Update

During 2008, we have continued our efforts to deploy assets into energy-based opportunities that will build annual measurable value and/or cash flow as follows:

†††††† We deployed capital expenditures of approximately $5 million for oil and gas development drilling including new interests (the RC Roberson #1 and Ruebush #1 wells) in the NW Speaks field in South Texas, two wells and a pipeline in our Creole Field, completion costs on the successful Boquillas #1 well also in South Texas as well as other projects.

†††††† We continued our deployment of capital of approximately $1 million towards the 2ndfive-well pilot project for our coalbed methane Indiana Posey Prospect.

†††††† We have also repurchased approximately 401 thousand of our common shares in the market for total proceeds of approximately $3.8 million.

Gulf Coast Oil and Gas Properties

Our Texas and Louisiana Gulf Coast oil and gas properties were affected by the Hurricanes in the third quarter 2008, which interrupted both production and certain drilling operations. A significant portion of our oil and gas production was shut in during late August and September and certain of our pre-storm production currently remains curtailed. During September 30, 2008, our net domestic production rate averaged approximately 530 barrels of oil equivalent ("boe") per day.

During the third quarter 2008, our results of operations reflect increased oil revenues through the benefit of high oil commodity prices. Our natural gas revenues declined slightly in the third quarter 2008 compared to the prior year period due primarily to normal decline of our gas producing wells along with the effects of shut-in production from the Hurricanes. 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 43% 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 third quarter 2008, our oil and gas revenues were comprised of approximately 69% oil sales and 31% natural gas production.

The following field data updates the status of our operations through September 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. During 2008, a third-party engineering firm 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 third quarter 2008 averaged approximately 327 boe per day. Following the hurricanes, production from Main Pass 35 was restored in late September 2008 as repairs still continue and are expected to be completed early fourth quarter 2008.

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. Gross field production averaged approximately 265 boe per day for the third quarter 2008. A total of 25 field wide producing days were lost due to storm related problems. Currently, only two wells have been restored to production. 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 201 boe per day for the third quarter 2008. Efforts to secure additional compression and to upgrade gas lift equipment to address production decline in the field were put on hold as Hurricane Gustav hit the platform facilities followed immediately by Hurricane Ike. There was considerable damage to the platform facilities which currently remain shut-in under repair through the end of the third quarter 2008. Completion of hurricane repairs and re-start of the field production is anticipated by mid fourth quarter 2008.

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 third quarter 2008 was approximately 34 boe per day, until Hurricane Gustav struck in late August 2008. Production was shut in for the remainder of the third quarter while repairs to the production facility were carried out, but production was restored in early October 2008.

Creole Field, Terrebonne Parish - Louisiana

We hold an average 15% non-operated working interest in this offshore field. 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. Upgrades to surface facilities and flowlines and the drilling of a SWD well were completed in 2008. Gross daily production from the wells (six completions) was approximately 509 boe per day during the third quarter 2008. Two additional wells were spud in the third quarter 2008. Both wells logged multiple stacked pays. Three completions in the two new wells are expected to be put on production in the fourth quarter 2008. Hurricanes Gustav and Ike hampered drilling operations, but the existing wells and facilities sustained only minimal damage. Production was shut in for a total of fifteen days due to the hurricanes.

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. Gross daily production from both wells was approximately 862 boe per day during the third quarter 2008. Hurricane damage was minimal and accounted for only three days of shut-in time.

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 77 boe per day for the third 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.

Branville Bay Field, St. Bernard Parish - Louisiana

We own a 12.5% non-operated working interest in two state leases in the Branville Bay area of Chandeleur Sound Block 71. Gross production for this field was approximately 169 boe per day for the third quarter 2008 prior to Hurricane Gustav. The production barge which was located on another lease held by the operator was blown off its location by three miles during the storm. The operator anticipates that production will be restored in late October or early November.

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 139 boe per day for the third quarter 2008. Higher than expected location and drilling costs coupled with falling commodity prices has caused a proposed project to fall below our economic criteria necessary for drilling. We have elected not to participate in that prospect at this time. A decision will be reached in the fourth quarter 2008 with respect to continued efforts in this project.

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. A third well was spud in late third quarter 2008, and is expected to reach total depth in fourth quarter 2008. At least one other location has been identified which is currently scheduled to spud in early 2009. Current gross production for this field averaged approximately 977 boe per day during the third quarter 2008 from two wells.

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 105 boe per day during the third 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. Another development location has been identified, and a drilling proposal is expected from the operator in early 2009.

Raymondville Field, Willacy County - Texas

We own a 27% non-operated working interest in this area. Current gross production for this field averaged approximately 875 boe per day during the third quarter 2008. Well work during 2008 netted successful recompletions and was followed by three more successful recompletions in the third quarter 2008.

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 66 boe per day during the third 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 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 2008, chemical treatments to enhance well fluid productivity was begun with fracture stimulation under evaluation as desorption pump-down continues. Also in 2008, a fracture stimulation was performed to increase desorption pumpdown rates. Alternative design stimulations are under evaluation as pumpdown continues as the initial fracture treatments are evaluated.

We 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 three quarters of 2008, five pilot producers and the water disposal well were completed with fracture stimulation continuing and expected to be complete early fourth quarter 2008. Upon completion of the fracturing program, pumpdown for desorption of the second Posey pilot will begin. Following an evaluation period of these two pilot areas, 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 was terminated effective July 2008.

With the decline in oil and gas commodity prices, resource plays, such as coalbed methane prospects, can become uneconomical in low price environments. Our discretionary capital expenditures, including costs related to our coalbed methane prospects, may be curtailed at our discretion in the future. Such expenditure curtailments could result in us losing certain prospect acreage or reducing our interest in future development projects.

INVESTMENT ACTIVITIES

During the nine months ended September 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 September 30, 2008, we held approximately $8.3 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 September 30, 2008 were as follows (in thousands):

Written common stock put options    $ 1,517
Written common stock call options         -
Derivative liabilities              $ 1,517

In October 2008, due to the dramatic volatility in the U.S. and international stock markets, we closed our entire open derivative trading portfolio resulting in net realized losses of over $3.3 million to be recognized in our earnings in the fourth quarter 2008.

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.

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.

INVESTMENT IN GLOBAL

At September 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:

                                         September 30,    December 31,
                                             2008             2007

Shares of Global Stock held by HKN           11,893,463      11,893,463
Closing Price of Global Stock           £           .99   £        0.84
Foreign Currency Exchange Rate                   1.7804          1.9843
Market Value of Investments in Global   $    20,963,370   $  19,824,167

The foreign currency translation adjustment of $2.7 million and the unrealized gain on investment of $3.8 million for these changes in market value between the two periods are recorded to other comprehensive income in stockholders' equity at September 30, 2008.

Subsequent Event - In October 2008, with the decline in the U.S. and foreign stock markets, Global's ordinary share price has declined dramatically. At October 31, 2008, the market value of our investment in Global had declined to approximately $12.6 million as follows:

                                        October 31,
                                           2008

Shares of Global Stock held by HKN       11,893,463
Closing Price of Global Stock          £       0.65
Foreign Currency Exchange Rate                1.627
Market Value of Investment in Global   $ 12,577,932

INVESTMENT IN SPITFIRE

At September 30, 2008, we owned 11.1 million common shares of Spitfire and 1.3 million warrants to acquire common shares of Spitfire. Our common share holdings represent approximately 27% of the outstanding Spitfire common shares. As a result of our 27% 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.

During the third quarter 2008 and subsequently in October 2008, Spitfire's common share price declined. As of September 30, 2008, Spitfire's share price had declined to Can $0.35 per share. Based upon the significant deterioration of the U.S. and foreign stock markets, including the Canadian stock market, along with our significant doubt that Spitfire's management will take needed steps to increase the market value of Spitfire in the near future, we believe our investment has experienced an other-than-temporary decline in fair value, requiring an impairment charge of $2.8 million to write down the carrying value of our investment to its market value as of September 30, 2008. Further declines in Spitfire's share price and the Canadian stock markets in the future may require additional impairment of our investment in Spitfire if these declines are deemed to be other-than-temporary.

INVESTMENT IN CANERGY FUND

At September 30, 2008, the Canergy Fund owned investments in the common shares of seven Canadian junior oil and gas companies traded on the Toronto Stock Exchange (TSX). The fair value of these common shares which were recorded as available for sale investments on our consolidated condensed balance sheet at September 30, 2008 was $678 thousand. We owned approximately 83% of the Canergy Fund at September 30, 2008.

Subsequent Event - During October 2008, with the dramatic decline in the U.S. and foreign stock markets, and in order to avoid future additional significant . . .