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 Financial Statements and the related notes that appear elsewhere in this report. 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. See "Cautionary Statements" at the beginning of this report on Form 10-K for additional discussion of some of these risks and uncertainties. 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 focused on enhancing 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 an inventory of both high and low-risk projects and 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 for the potential for high-yield returns and additional cash flow. During 2008, we targeted:

· Deploying assets into energy-based opportunities to build annual measurable value and/or cash flow,

· Optimizing the value of our existing assets, 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.

During the year, several adverse events, all primarily out of our control, affected our profitability, cash flow and the carrying value of our assets. During late 2008, we suffered property damage and loss of production from both Hurricane Gustav and Hurricane Ike (the "Hurricanes") which hit the Gulf Coast of Mexico and our operated properties. Also, 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.

2008 Recap and 2009 Outlook

Oil and natural gas prices reached historically high levels in recent years and during the first half of 2008. These high prices have been a key factor in the oil and gas industry experiencing cost increases that have exceeded general inflation trends. We are no different from others in the industry in that we have been impacted by these cost increases. However, we have continued to remain disciplined with regards to our operating costs and capital expenditures. We have utilized our cash flows generated by high commodity prices to maintain a strong cash and marketable securities balance and to have no outstanding debt. During this period, we also repurchased $4.4 million of our common shares.

As we exited 2008, oil and natural gas prices had declined sharply from their recent record levels. In addition, recent problems in the credit markets, steep stock market declines, financial institution failures and government bail-outs provide evidence of a weakening United States and global economy. As a result of the market turmoil and price decreases, oil and gas companies with high debt levels and lack of liquidity have been and will continue to be negatively impacted.

We, however, do not expect our liquidity levels to be significantly impacted by these recent events. We are in a financially-strong position due to our past strategies. We continue to have access to capital, and we have a cash and marketable securities balance of approximately $15 million at December 31, 2008. We also anticipate our operating cash flow and other capital resources, if needed, will adequately fund our planned capital expenditures and other capital uses over the near-term. Based on industry outlook for 2009, prices for oil and natural gas are expected to remain reduced as compared to the prior year with the perception of future worldwide demand being altered by turmoil in the financial markets and diminished economic outlook. However, due to cost-cutting measures, we have budgeted our 2009 operations to remain cash-flow positive, even at current market pricing.

Full-Cost Impairment

During 2008, based on NYMEX pricing, the price for a barrel (bbl) of oil ranged from a high of $145.29 to a low of $39.91 and the price for a Mmbtu of gas ranged from a high of $13.58 to a low of $5.29. In late 2008, the market price of oil and natural gas declined dramatically. During the fourth quarter of 2008, due to reduced oil and gas prices at December 31, 2008, we recorded a non-cash impairment charge of approximately $19.9 million related to the carrying value of our oil and gas properties. 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 on the last day of the calendar year, after giving effect to the asset retirement obligation. This non-cash charge during the year contributed to our consolidated net loss of approximately $27.1 million during 2008.

Effect of Recent Hurricanes in the Gulf of Mexico

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 due to the Hurricanes. A significant percentage of our production remained shut-in or curtailed during the fourth quarter 2008 while damages were repaired. As of December 31, 2008, all fields have resumed partial production and repairs have been substantially completed. The estimated effect of the loss of net oil and gas revenue from the Hurricanes was approximately $3.1million.

Our net loss for 2008 includes approximately $1.1 million of hurricane damage repairs related to our insurance deductible and repair costs in excess of insured values. Due to extensive damage through the Gulf Coast area from the Hurricanes and the limited resources available for repairs, significant costs were experienced by the industry. In connection with our oil and gas properties, we have limited property damage insurance, but not business interruption coverage.

Effect of Adverse Market Conditions on our Investment Trading Strategy

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 annual losses of approximately $5.1 million. 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. Based on the 2008 trading losses and the continued volatility in the markets, we have temporarily suspended our trading activities as part of our treasury management.

Effect of Adverse Market Conditions on Canergy Growth Fund

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. 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 future. In addition, the third-party investor exercised their right to voluntarily withdraw from the Canergy Growth Fund and Canergy Management, and we are currently the sole participant in both the Canergy Growth Fund and Canergy Management. Based on the current volatility in the Canadian markets, we have temporarily suspended our trading activities in the Canergy Growth Fund. We continue to believe that these adverse market conditions may lead to future opportunities in 2009 to reinvest our cash into undervalued Canadian oil and gas companies, as opportunities arise.

Capital Deployment Update

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

† We deployed capital expenditures of approximately $5.9 million for oil and gas exploratory and 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 2nd five-well pilot project for our coalbed methane Indiana Posey Prospect.

† We have also repurchased approximately 507 thousand of our common shares in the market for total proceeds of approximately $4.4 million.

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 asset, we believe this asset represents a disproportionate concentration of value for us. Due to the effects of the Hurricanes in 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 continue our discussions with potential purchasers of our Main Pass 35 field, we seek to optimize and develop the value of this asset by focusing on cutting operational costs in 2009.

Gulf Coast Oil and Gas Properties

During 2008, our results of operations reflect increased oil revenues through the benefit of high oil commodity prices. Our natural gas revenues declined slightly in 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. As of December 31, 2008, our net domestic production rate was averaging approximately 1,021 barrels of oil equivalent ("boe") per day.

Our revenues are primarily derived from sales from our oil and gas properties. Approximately 49% 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 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 December 31, 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 2008 averaged approximately 387 boe per day. Following the Hurricanes, production from Main Pass 35 was restored in late September 2008. All hurricane repairs were completed in the fourth quarter 2008. The identified recompletion well work is on hold pending more favorable oil prices.

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 566 boe per day for 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 315 boe per day for 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. Repairs were completed and field production was restarted by late 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 2008 was approximately 51 boe per day. Production was shut in from the Hurricanes 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 580 boe per day during 2008. Two additional wells were spud in late 2008. Both wells logged multiple stacked pays. Three completions in the two new wells were performed in the fourth quarter 2008 and are expected to be put on production in early 2009. Hurricanes Gustav and Ike hampered drilling operations, but the existing wells and facilities sustained only minimal damage, however the Hurricanes did delay the laying of the flowlines and the setting of the platform for the new wells.

East Lake Verret, Assumption Parish - Louisiana

We have an average 5% non-operated working interest in this field. Gross daily production from the two development wells on this project was approximately 838 boe per day during 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 90 boe per day for 2008. Several prospects have been identified in the area, but due to the low oil and gas pricing, we expect additional drilling and workover activity will be delayed.

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 142 boe per day for 2008. The production barge which was located on another lease held by the operator was blown off its location by three miles during the Hurricanes. Barge repairs have been completed, and the barge is being reset with production restoration expected during first quarter 2009.

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

The Yegua well in the project, the Boquillas # 1, was spud in late 2007 and put on gas production during early 2008. Well performance of the Boquillas #1 has been encouraging. Gross production from this well was approximately 116 boe per day for 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.

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. 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 487 boe per day during 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 118 boe per day during 2008 primarily from the initial well, the Hancock Gas Unit # 1 which is the only well currently producing from the field. 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 684 boe per day during 2008. Well work during 2008 netted successful recompletions and was followed by one more successful recompletion in late 2008, which is currently awaiting facility upgrades to be completed in 2009.

Lucky Field, Matagorda County - Texas

We own a 7.5% non-operated working interest in this area. Current gross production for this field averaged approximately 73 boe per day during 2008.

Coalbed Methane Prospects - Indiana and Ohio

We hold two exploration and development agreements in Indiana and Ohio which provide for an area of mutual interest of approximately 400,000 acres each respectively. 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 2008, five pilot producers and the water disposal well were completed with specialized fracture stimulation completed in late fourth quarter 2008. The proprietary fracture stimulation is currently being evaluated for continued application. 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 for the first of two pilot well projects on the Cumberland Prospect. This Phase II project has been temporarily suspended until such time as oil and gas commodity pricing increases. We are focusing our efforts in 2009 on the Indiana Posey Contract.

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 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 $7.0 million outstanding of notional value in a combination of exchange-traded common stock options, commodity futures contracts and foreign currency contracts. At December 31, 2008, we had closed out of all open exchange-traded options and we had no notional value outstanding at year-end. Based on the 2008 trading losses and the continued volatility in the markets, we have temporarily suspended our trading activities as part of our treasury management.

Common Stock and Futures Options

During 2008, we wrote exchange-traded options on securities and futures contracts associated with either the common stock of energy-related companies or price protection for company related oil and gas production. The options provided our counterparty with the right, but not the obligation, to enter into a "long" position in the underlying security or futures contract, (in the case of a "call" option), or a "short" position in the underlying security or futures contract, (in the case of a "put" option), at a fixed price up to a stated expiration date. During this period, we recognized net realized losses of approximately $4.1 million for the writing of options and trading of common stocks.

Also during the year, we entered into certain commodity derivative instruments which are effective in mitigating commodity price risk associated with a portion of our future monthly natural gas and crude oil production and related cash flows. Our oil and gas operating revenues and cash flows are impacted by changes in commodity product prices, which are volatile and cannot be accurately predicted. Our objective for holding these commodity derivatives was to protect the operating revenues and cash flows related to a portion of our future natural gas sales and crude oil from the risk of significant declines in commodity prices. We did not designate any of our commodity derivatives as hedges under Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities."

During June 2008, we closed all of our open crude oil futures contracts resulting in realized losses of $1.2 million. These amounts are included in trading revenues in our consolidated statement of operations. We do not hold any commodity futures contracts as of December 31, 2008

Monitoring the Portfolio

We monitored our portfolio on a daily basis to verify that there was no market or liquidity exposure level we consider not acceptable. We recalculated our estimates of gross aggregate cash exposure on a daily basis so that total notional value outstanding and cash and marketable securities on hand did not exceed $20 million.

INVESTMENT IN GLOBAL

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

                                               December 31,      December 31,
                                                   2008              2007

       Shares of Global Stock held by HKN         11,893,463        11,893,463
       Closing Price of Global Stock           £        0.68     £        0.84
       Foreign Currency Exchange Rate                 1.4619            1.9843
       Market Value of Investments in Global   $      11,824     $      19,824

The foreign currency translation adjustment of $5.8 million and the unrealized loss on investment of $2.1 million for these changes in market value between the two periods are recorded to other comprehensive income in stockholders' equity at December 31, 2008.

For information on Global's operations and financial statements, visit their website at www.globalenergyplc.com.

INVESTMENT IN SPITFIRE

At December 31, 2008 and 2007, we held an investment in Spitfire through the ownership of approximately 27% and 25%, respectively, of Spitfire's currently outstanding common shares. Spitfire is an independent public company (TSX-V; SEL) actively engaged in the exploration, development and production of crude oil, natural gas and natural gas liquids in Western Canada.

At December 31, 2008, we owned 11.1 million common shares of Spitfire and 1.3 million warrants to acquire common shares of Spitfire. As a result of our 27% . . .