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, 2008. 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, 2008 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 business strategy is focused on enhancing value for our stockholders through the development of a well-balanced portfolio of energy-based assets. Currently, the majority of the value of our assets is derived from our ownership of Gulf Coast oil and gas properties. During 2009, commodity pricing for both crude oil and natural gas has averaged well below pricing from the prior year. We continue to believe in the long-term fundamentals of our industry, therefore during periods of low pricing, we have focused on cutting our operational, general and administrative costs in order for our operations to remain cash-flow positive until pricing rebounds.

During the second quarter 2009, we acquired an interest in a private company with a patented emulsion breaking "OHSOL" technology. This environmentally-clean process can be used to purify oilfield emulsions by breaking and separating the emulsions into oil, water and solids. This technology was successfully tested with a mobile OHSOL unit in a demonstration in Prudhoe Bay, Alaska, proving the effectiveness of the OHSOL emulsion breaking technology to recover valuable hydrocarbons and reduce wastes. During the last half of 2009, we will focus on emulsion testing the OHSOL plant currently located in Texas and commercializing the OHSOL technology.

During the remainder of 2009, we are seeking to identify further investment opportunities in undervalued energy-based companies which could provide future value for our shareholders.

Focus on Efficient Operations

Our revenues are primarily derived from sales from our Gulf Coast oil and gas producing properties. During 2009, our oil and gas revenue has been comprised approximately 78% from oil sales and 22% from natural gas sales. During the six months ended June 30, 2009, oil commodity pricing was approximately 57% lower than the prior year period, and natural gas commodity pricing was approximately 63% lower than the prior year period. If oil and gas commodity pricing and economic conditions decline again in the future, our revenue will continue to be adversely affected.

We are in a financially-stable position due to our past strategies. We have no debt outstanding, and we have a cash balance of approximately $12.4 million at June 30, 2009. 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.

Gulf Coast Oil and Gas Properties

During the second quarter 2009, our results of operations reflect decreased oil and natural gas revenues due to the decrease in commodity prices as compared to the prior year period. 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 46% 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. As of June 30, 2009, our net domestic production rate was approximately 706 barrels of oil equivalent ("boe") per day.

The following field data updates the status of our operations through June 30, 2009:

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. 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 2009 averaged approximately 417 boe per day. A comprehensive plan for the field is being evaluated in order to improve field economics. In order to lower our gas lift expense in the field, we are evaluating a possible recompletion project of at least one gas zone in the third quarter 2009. Several of these zones were previously identified in the field study compiled in 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 258 boe per day for the second quarter 2009. Evaluation efforts by the operator 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 57 boe per day for the second quarter 2009. Production decreaased significantly this quarterly period, due to the fact that the SL 14284-1 well ceased production in February. Diagnostic work indicated that the well ceased production due to sand build up in the tubing. Coiled tubing work was carried out, but failed to restore production. We are currently evaluating the economic potential of the Tex 16 zone behind pipe, as well as several other zones in our two other producing wells 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 2009 was approximately 43 boe per day. Production remains steady from this one well field.

Creole Field, Terrebonne Parish - Louisiana

We hold an average 15% non-operated working interest in this offshore field. Gross daily production from the wells (six completions) was approximately 1,115 boe per day during the second quarter 2009. Three completions in two wells drilled in late 2008 were put on production in late March 2009 after significant weather delays.

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 871 boe per day during the second quarter 2009.

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 39 boe per day for the second quarter 2009. 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 by the operator.

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 339 boe per day for the second quarter 2009. Production remains steady from this two well field.

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

We own a 25% non-operated working interest in the Boquillas #1 well. Gross production from this well was approximately 191 boe per day for the second quarter 2009.

NW Speaks Field, Lavaca County - Texas

We own approximately 2% to 10% in various leases in the NW Speaks area. Current gross production for this field averaged approximately 94 boe per day during the second quarter 2009 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 62 boe per day during the second quarter 2009 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, but future development of the field is currently on hold pending higher natural gas pricing.

Raymondville Field, Willacy County - Texas

We own a 27% non-operated working interest in this area. Current gross production for this field averaged approximately 375 boe per day during the second quarter 2009. Field production continues to decline as fewer behind pipe zones remain. Several wells that produced in the first quarter ceased production in the second quarter and have no remaining potential.

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 52 boe per day during the second quarter 2009.

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, 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 are currently in the second pilot well phase of Phase II (Exploratory Phase) of the project. The extent of water influx from the first pilot wells is under evaluation to enhance desorption efforts. Alternative design stimulations are also under evaluation as pumpdown continues while the initial fracture treatments are evaluated.

As part of the second pilot well phase, we drilled five pilot producers and completed a water disposal well with specialized fracture stimulation. 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, the 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.

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 IN GLOBAL

At June 30, 2009 and December 31, 2008, 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 (in thousands, except
for share amounts):

                                                 June 30,       December 31,
                                                   2009             2008
        Shares of Global Stock held by HKN       11,893,463        11,893,463

        Closing price of Global Stock          £       0.62     £        0.68

        Foreign Currency Exchange Rate               1.6587            1.4619

        Market Value of Investment in Global   $     12,231     $      11,824

The foreign currency translation adjustment of approximately $1.1 million and the unrealized loss on investment of $664 thousand for these changes in market value between the two periods were recorded to other comprehensive income in stockholders' equity during the six months ended June 30, 2009.

INVESTMENT IN SPITFIRE

At June 30, 2009, we owned 10.1 million common shares of Spitfire and 1.3 million warrants to acquire common shares of Spitfire. Our common share holdings represent approximately 25% of the outstanding Spitfire common shares. In 2009, we have sold approximately 1 million of our Spitfire shares in the market for cash proceeds of $177 thousand.

INVESTMENT IN OHSOL

Under UniPure's Operating Agreement, effective June 30, 2009, we are the Managing Member of UniPure and, as such, possess the legal power to direct the operating policies and procedures of UniPure. Therefore, we have determined that our OHSOL investment meets the requirements of FIN 46R, and we are the primary beneficiary, as defined. Therefore, we have consolidated the assets and liabilities of UniPure as of June 30, 2009, the acquisition date. We did not consolidate the results of operations for the one day ended June 30, 2009, as it was determined to be immaterial.

INVESTMENT IN CANERGY FUND

HKN is currently the sole participant in both the Canergy Fund and Canergy Management. For the three and six months ended June 30, 2009, there was no trading activity related to the Canergy Growth Fund recorded on our consolidated condensed statement of operations, but we intend to monitor the market and reinvest cash as conditions improve and opportunities arise.

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 Ceiling Test - At the end of each quarter, the unamortized cost of oil and natural gas properties, after deducting the asset retirement obligation, net of related deferred income taxes, is limited to the sum of the estimated future net revenues from proved properties using period-end prices, discounted at 10%, and the lower of cost or fair value of unproved properties adjusted for related income tax effects.

The calculation of the ceiling test and the provision for depletion are based on estimates of proved reserves. There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting the future rates of production, timing, and plan of development. The accuracy of any reserves estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of drilling, testing, and production subsequent to the date of the estimate may justify a revision of such estimate. Accordingly, reserve estimates are often different from the quantities of oil and natural gas that are ultimately recovered.

Based on June 30, 2009 pricing of $3.83 per Mmbtu of natural gas and $69.89 per barrel of oil, we did not have an impairment of our oil and natural gas properties under the full cost method of accounting.

Due to the imprecision in estimating oil and natural gas revenues as well as the potential volatility in oil and natural gas prices and their effect on the carrying value of our proved oil and natural gas reserves, there can be no assurance that write-downs in the future will not be required as a result of factors that may negatively affect the present value of proved oil and natural gas reserves and the carrying value of oil and natural gas properties, including volatile oil and natural gas prices, downward revisions in estimated proved oil and natural gas reserve quantities and unsuccessful drilling activities.

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 investment in ordinary shares of Global at their estimated fair values. The fair values of our securities are based on prices quoted in the active market. The fair value of our warrants on common stock of Spitfire is estimated using the Black Scholes model. Our investment in Global is classified as an available-for-sale non-current asset in our accompanying balance sheets. The associated unrealized gains and losses on our available-for-sale investments (non-trading) 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 is 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.

Consolidation of variable interest entities - Our OHSOL investment is considered to be a variable interest, as defined in Financial Accounting Standards Board Interpretation ("FIN") No. 46 (Revised December 2003) "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46R"). FIN 46R requires the primary beneficiary of a variable interest entity's ("VIE") activities to consolidate the VIE. FIN 46R defines a VIE as an entity in which the equity investors do not have substantive voting rights and there is not sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. We have determined that our OHSOL investment meets the requirements of FIN 46R, and we are the primary beneficiary, as defined. Therefore, we have consolidated the assets and liabilities of UniPure as of June 30, 2009, the acquisition date. We did not consolidate the results of operations for the one day ended June 30, 2009, as it was determined to be immaterial.

As of June 30, 2009, we owned less than a majority of the common shares of Global and did not possess the legal power to direct the operating policies and procedures of Global through our direct ownership, combined with the ownership by Lyford in Global shares. In addition, we have concluded that Global was not a VIE at June 30, 2009 as contemplated by FIN 46(R).

Income Taxes - We account for income taxes under the liability method. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. We measure and record income tax contingency accruals in accordance with Financial Accounting Standards Board Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48").

We recognize liabilities for uncertain income tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we must determine the probability of various possible outcomes. We reevaluate these uncertain tax positions on a quarterly basis or when new information becomes available to management. These reevaluations are based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, successfully settled issues under audit, expirations due to statutes, and new audit activity. Such a change in recognition or measurement could result in the recognition of a tax benefit or an increase to the tax accrual.

We classify interest related to income tax liabilities as income tax expense, and if applicable, penalties are recognized as a component of income tax expense. The income tax liabilities and accrued interest and penalties that are anticipated to be due within one year of the balance sheet date are presented as current liabilities in our condensed consolidated balance sheets.

In December 2007, FASB issued SFAS No. 141(R), "Business Combinations" ("SFAS 141R"), and SFAS No. 160, "Accounting and Reporting of Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51" ("SFAS 160"). SFAS 141R and SFAS 160 significantly change the accounting for and reporting of business combination transactions and noncontrolling (minority) interests in consolidated financial statements. SFAS 141R retains the fundamental requirements in Statement 141 "Business Combinations" while providing additional definitions, such as the definition of the acquirer in a purchase and improvements in the application of how the acquisition method is applied. SFAS 160 changes the accounting and reporting for minority interests, which is recharacterized as noncontrolling interests, and classified as a component of equity. These Statements became simultaneously effective January 1, 2009. We applied this guidance to our OHSOL investment in June 2009. Please see Note 2 - OHSOL Investment for additional information.

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). This statement requires companies to provide enhanced disclosures about (a) how and why they use derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect a company's financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Our adoption of SFAS 161 on January 1, 2009 did not have a material impact on our consolidated condensed financial statements. See Note 7 - Derivative Instruments for additional information.

In June 2008, the FASB issued EITF 07-5. "Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock" ("EITF 07-5"). The Issue requires entities to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock in order to determine if the instrument should be accounted for as a derivative under the scope of SFAS 133. EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. We adopted EITF 07-5 beginning January 1, 2009. We applied this guidance to the conversion feature in our Series M Convertible Preferred Stock ("Series M Preferred"). See Note 7 - Derivative Instruments for additional information.

In November 2008, the FASB issued EITF 08-6 "Equity Method Investment Accounting Considerations" ("EITF 08-6"). This Issue states that an equity method investor shall account for a share issuance by an investee as if the investor had sold a proportionate share of its investment. Any gain or loss to the investor resulting from an investee's share issuance should be recognized in earnings. Previous to this Issue, changes in equity for both issuances and repurchases were recognized in equity. EITF 08-6 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. We adopted EITF 08-6 beginning January 1, 2009. We applied this guidance to our equity investment in Spitfire Energy. See Note 5 - Equity Investment in Spitfire Energy for additional information.

In December 2008, the Securities and Exchange Commission published a Final Rule, "Modernization of Oil and Gas Reporting". The new rule permits the use of new technologies to determine proved reserves if those technologies have been demonstrated to lead to reliable conclusions about reserves volumes. The new requirements also will allow companies to disclose their probable and possible reserves to investors. In addition, the new disclosure requirements require companies to: (a) report the independence and qualifications of its reserves preparer or auditor; (b) file reports when a third party is relied upon to prepare reserves estimates or conducts a reserves audit; and (c) report oil and gas reserves using an average price based upon the prior 12-month period rather than year-end prices. The use of average prices will affect future impairment and depletion calculations. The new disclosure requirements are effective for . . .