UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549





**FORM
      10-K**




x
              ANNUAL
                  REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
                  OF
                  1934





For
      the
      fiscal year ended June 30, 2006


or


o
            TRANSITION
                REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITES EXCHANGE ACT OF
                1934





For
      the
      transition period from ___________ to ____________________





Commission
      File Number 000-25496





**HYPERDYNAMICS
      CORPORATION**


(Exact
      name of registrant as specified in its charter)





**DELAWARE**
            **87-0400335**(State
                or other jurisdiction of incorporation or organization)
            (IRS
                Employer Identification Number)





**One
      Sugar Creek Center Blvd., #125**


**Sugar
      Land, Texas 77478**


(Address
      of principal executive offices, including zip code)





**(713)
      353-9400**


(Issuer's
      telephone number, including area code)





Securities
      registered under Section 12(b) of the Exchange Act:





Title
                of Each Class
            
            Name
                of Each Exchange on Which Registered**Common
                Stock, $0.001 par value**
            
            **American
                Stock Exchange**





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act


oYes
              xNo





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.


oYes
              xNo





Indicate
      by check mark whether
      the registrant (1) has filed all reports required to be filed by Section 13
      or
      15(d) of the Securities Exchange Act during the preceding 12 months (or for
      such
      shorter period that the registrant was required to file such reports), and
      (2)
      has been subject to such filing requirements for the past 90 days.


xYes
              oNo





Indicate
      by check mark if
      disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
      contained in herein, and will not be contained, to the best of the registrant’s
      knowledge , in definitive proxy or information statements incorporated by
      reference in Part III of this Form 10-K or any amendment to this Form 10-K.
      o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer.


Large
                accelerated filero
            
            Accelerated
                filero
            
            Non-accelerated
                filerx








Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12-b-2 of the Exchange Act) oYes
              xNo





As
      of
      December 31, 2005, the aggregate market value of the registrant’s common
      stock held by non-affiliates of the registrant was $63,920,711 based on the
      closing sale price as reported on the American Stock Exchange.  We
      had
      47,123,990 shares of common stock outstanding on October 10, 2006.













**TABLE
      OF CONTENTS**




Page**PART
                  I.**ITEM
                  1.
              
              Description
                  of Business
              
              4ITEM
                  1A.
              
              Risk
                  Factors
              
              18ITEM
                  1B.
              
              Unresolved
                  Staff Comments
              
              27ITEM
                  2.
              
              Properties
              
              27ITEM
                  3.
              
              Legal
                  Proceedings
              
              32ITEM
                  4.
              
              Submission
                  of Matters to a Vote of Security Holders
              
              34**PART
                  II.**ITEM
                  5.
              
              Market
                  for Registrant’s Common Equity, Related Stockholder
                  Matters and Issuer Purchases of Equity Securities
              
              35ITEM
                  6.
              
              Selected
                  Financial Data
              
              36ITEM
                  7.
              
              Management’s
                  Discussion and Analysis of Financial Condition andResults
                  of Operations
              
              36ITEM
                  7A.
              
              Quantitative
                  and Qualitative Disclosures About Market Risk
              
              45ITEM
                  8.
              
              Financial
                  Statements and Supplementary Data
              
              45ITEM
                  9.
              
              Changes
                  In and Disagreements with Accountants on Accounting
                  and Financial Disclosures
              
              46ITEM
                  9A.
              
              Controls
                  and Procedures
              
              46ITEM
                  9B
              
              Other
                  Information
              
              46**PART
                  III.**ITEM
                  10.
              
              Directors
                  and Executive Officers of the
                  Registrant
              
              46ITEM
                  11.
              
              Executive
                  Compensation
              
              49ITEM
                  12.
              
              Security
                  Ownership of Certain Beneficial Owners and Management andRelated
                  Stockholder Matters
              
              53ITEM
                  13.
              
              Certain
                  Relationships and Related Transactions
              
              55ITEM
                  14.
              
              Principal
                  Accounting Fees and Services
              
              56**PART
                  IV.**ITEM
                  15.
              
              Exhibits
                  and Financial Statement Schedules
              
              57





2
 *Table
            of Contents*





**AVAILABLE
      INFORMATION**




We
      are
      currently subject to the reporting requirements of the Securities Exchange
      Act
      of 1934, as amended (the “Exchange Act”). We file periodic reports, proxy
      materials and other information with the Securities and Exchange Commission
      (the
“Commission”). In addition, we will furnish stockholders with annual reports
      containing audited financial statements certified by our independent accountants
      and interim reports containing unaudited financial information as may be
      necessary or desirable. We will provide without charge to each person who
      receives a copy of this report, upon written or oral request, a copy of any
      information that is incorporated by reference (not including exhibits to the
      information that is incorporated by reference unless the exhibits are themselves
      specifically incorporated by reference). Such request should be directed to:
      Kent Watts, Hyperdynamics Corporation, One Sugar Creek Center Blvd., #125,
      Sugar
      Land, Texas 77478, voice: (713) 353-9400, fax: (713) 353-9421. Our Web site
      is
      www.hypd.com.




We
      provide free of charge on our Web site our annual report on Form 10-K, quarterly
      reports on Form 10-Q, current reports on Form 8-K, and amendments to those
      reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
      Act as soon as reasonably practicable.




For
      further information about us, you may inspect our SEC filings without charge
      at
      the public reference room maintained by the Commission at 100 F Street N.E.,
      Washington , D.C. 20549, tel. 1-800-SEC-0330. Copies of such material may also
      be obtained from the Public Reference Section of the Commission at 100 F Street
      N.E., Washington , D.C. 20549.




The
      Web
      site of the Commission is www.sec.gov that contains reports, proxy and
      information statements and other information regarding issuers that file
      electronically with the Commission. Visitors to the Commission's Web site may
      access such information by searching the EDGAR database.








**INFORMATION
      ABOUT**


**FORWARD-LOOKING
      STATEMENTS**




Some
      of
      the statements contained in this prospectus, including, without limitation,
      statements containing the words “believes,” “anticipates,” “expects,” and other
      words of similar import, are “forward-looking statements.” Forward-looking
      statements involve known and unknown risks, uncertainties and other factors
      which may cause our actual results, performance or achievements to be materially
      different from any future results, performance, or achievements expressed or
      implied by forward-looking statements. Given these uncertainties, readers are
      cautioned not to place undue reliance on forward-looking
      statements.


3
 *Table
            of Contents*




**Part
      I**





**Item
      1. Description of Business**





**Descriptors**





HDY
                “Hyperdynamics
                    Corporation”
                    is the company listed on the American Stock
                    Exchange.




HYDR
                “HYD
                    Resources”
                    is the name of a business segment of HDY that is composed of
                    our oil and
                    gas operations in
                    Louisiana.




HYD
            “HYD
                Resources Corporation”
                owns drilling rigs, a workover rig and drilling equipment. HYD is
                in our
                HYDR business segment. We own HYD.




TPC
            “Trendsetter
                Production Company”
                is an authorized oil and gas operator in Louisiana. TPC is in our
                HYDR
                business segment. We own TPC.




SCS
            “SCS
                Corporation”
                is engaged in oil and gas exploration activities located offshore
                Guinea, West Africa. We own SCS. SCS is also the name of a business
                segment of HDY that is composed of our oil and gas exploration activity
                in
                Guinea.




SCSG
            “SCS
                Guinea SARL”
                is a Guinea limited liability Oil and Gas company located in Conakry,
                Guinea. We own 65% of SCSG, which was formed to manage the business
                associated with SCS's farmed out 2002 Oil and Gas Production and
                Sharing
                Contract with the government of the Republic of
                Guinea.





**Introduction**





Hyperdynamics
      Corporation (“Hyperdynamics”) is a Delaware corporation. At inception we were a
      value added reseller of computer hardware and software. Our business plan was
      to
      develop into a complete service provider of integrated information technology
      services. During the fiscal year ended June 30, 2001, we began to offer our
      Integrated Technology Service Provider (ITSP) product, a bundled service
      offering for clients who wished to outsource their information technology
      department in addition to receiving Internet service. We discontinued this
      integrated service beginning in fiscal year 2002, about a year after acquiring
      our subsidiary, SCS Corporation (“SCS”). When we acquired SCS, we decided to
      implement a dramatic change in our business plan. SCS quickly became our only
      operating subsidiary. In the summer of 2001, months after the SCS acquisition,
      we began offering products and services targeted specifically to the oil and
      gas
      industry such as seismic data management services, customized geological
      workstations, and data transcription services. SCS's management had years of
      experience which included both oil and gas exploration and the provision of
      seismic data management services to the oil and gas industry. In 2002, SCS
      got
      the opportunity to become involved in an exploration project offshore of the
      Republic of Guinea, West Africa (“Guinea”). Additionally in 2004, we began
      exploration and production activities in Louisiana, USA through our business
      segment HYD Resources (“HYDR”).





In
      2004,
      we started a new subsidiary, HYD Resources Corporation (“HYD”) which owns
      drilling rigs, a workover rig and drilling equipment. We engage
      in
      crude oil exploration and production within
      the United States. Thus far all of our drilling activity has occurred in
      Louisiana. Our primary goal for HYDR is to cost effectively generate domestic
      production revenues.





In
      2005 a
      misunderstanding arose in connection with our Guinea exploration project. During
      this past fiscal year we have worked to resolve all issues. These efforts
      resulted in a new 2006 Production Sharing Contract (the “2006 PSC”) being signed
      on September 22, 2006. The new agreement gives the company exclusive rights
      to
      approximately 33,000 square miles offshore the Republic of Guinea for
      exploration, development, and production. The company is now updating its entire
      business plan and moving forward with extensive exploration work programs.





We
      continue to use our seismic data management or NuData (sm) services in house.
      In
      fiscal 2005, we copied all the vintage data of the Republic of Guinea from
      nine
      track data tapes to DVD. This software continues to meet our in-house data
      management requirements. Our seismic data management capabilities facilitate
      the
      further analysis and use of the data acquired pursuant to the needs of our
      exploration work programs.


4
 *Table
            of Contents*




Our
      current business focuses are offshore oil and gas exploration and, in the
      future, exploitation in Guinea, and onshore oil production in Louisiana. Thus
      the company’s direction is to emerge as a uniquely targeted oil and gas
      exploration and production company. The company’s corporate mission is:





To
      provide energy for the future by exploring and developing new and re-developing
      residual sources of energy worldwide.




**History
      of The Company’s Concession Offshore The Republic of Guinea, West
      Africa**





In
      early
      2002, SCS management, in association with USOil Corporation of Houston, Texas
      (“USOil”) began to evaluate the viability of USOil's oil and gas concession off
      the coast of The Republic of Guinea, West Africa (“Guinea”). After SCS's review
      of older seismic data collected from that concession, we decided that the
      concession provided a good business opportunity. We negotiated an agreement
      with
      USOil to revitalize the then dormant 1995 Production and Sharing Agreement
      that
      USOil still had in effect with Guinea. We proposed to perform a regional seismic
      data acquisition across the concession using modern digital technology. USOil
      agreed to the proposal and the Government of Guinea was amenable to our proposal
      and issued permits. SCS proceeded in 2002 to acquire one thousand kilometers
      of
      regional two dimensional (“2D”) seismic lines. In December 2002 USOil negotiated
      a new Production and Sharing Agreement (“2002 PSA”) with Guinea. USOil farmed
      out 100% of the rights and obligations of this agreement to SCS. The 2002 PSA
      gave us rights for exploration and production across a concession of
      approximately sixteen million (16,000,000) acres. During fiscal 2004 we
      accomplished critical exploration work: a 4000 kilometer 2D seismic data shoot,
      the processing of the seismic data acquired, and the evaluation of that data
      and
      data that had been acquired in the past.





Until
      SCS
      began the exploration program, the geological information relating to offshore
      Guinea was scant. The first exploration activity in our concession area occurred
      in the 1970s. The technology available for data acquisition and processing
      at
      that time did not reveal geological information with great precision. The area
      was not considered as attractive as other areas which more clearly evidenced
      hydrocarbon systems using contemporaneous technology and which were easier
      to
      explore and develop. Accordingly, very little additional exploration work
      occurred on the concession until we began our work in 2002. The general economic
      environment has changed dramatically since the 1970s. Today, oil is more scarce
      and the price of oil is the highest it has ever been. Exploration and
      development is occurring in certain areas around the world that were previously
      not explored because the cost was perceived to exceed the potential benefits,
      and offshore Guinea had been viewed as an area such as this for many years
      based
      on old geological and geophysical data. We conducted our surveys using modern
      technology which more accurately depicts the geological character of the area.
      The geological work that we and our vendors have performed supports our plan
      to
      begin drilling exploration wells.





The
      regional 2D seismic acquired in 2002 included about 1,000 kilometers of new
      data, which we reevaluated during 2004. We used the information from this
      regional data shoot to design a more detailed 2D coverage of a 4,000 kilometer
      grid and we acquired the additional data. During 2004, we completed the
      processing and interpretation of this additional 4,000 kilometers of seismic
      data. This fulfilled our work obligation under the initial exploration phase
      of
      the 2002 PSA. The interpretation and analysis of this data kept us in full
      compliance with our required work under the 2002 PSA and began our strategy
      to
      exceed minimum requirements in support of our commitment to a hydrocarbon
      discovery. We continued our analyses with new and better methods into 2005.
      This
      work continues to provide us with growing evidence in the form of documented
      direct hydrocarbon indicators.





In
      2004,
      after completion of the initial processing and reprocessing of our newly
      acquired 4,000 kilometers of digital 2D data, we were able to determine, through
      intense detailed analysis and mapping procedures, the existence of direct
      hydrocarbon indicators, including many noted gas seeps sourcing from the ocean
      floor in our coverage area. Based on this and the other geological and
      geophysical analysis, we contracted TDI-Brooks International (“TDI”) to perform
      an extensive geochemical analysis. In 2004 we obtained a permit from the
      government of Guinea and the geochemical work program began offshore Guinea
      in
      2004. A total of 57 core samples were acquired and delivered back to TDI's
      laboratory at College Station, Texas and an analysis was completed in August
      2004. The results of the coring program added additional evidence supporting
      our
      plan to drill our first exploration wells.





In
      addition to the geochemical analysis, we had originally planned to implement
      a
      three dimensional (“3D”) survey in early 2004. We decided to defer the 3D
      survey because we desired to first perform further analysis of our data in
      order to design a more efficient program which would concentrate our efforts
      on
      the most prospective areas in the concession. We contracted with internationally
      known Petroleum Geo-Services (“PGS”) to perform a third party detailed and
      comprehensive analysis and interpretation of all our seismic data which PGS
      began in July 2004, and PGS presented its preliminary report to us in August
      2004 revealing significant corroborating evidence of hydrocarbons, but most
      importantly it clearly expressed agreement with our view that there is a well
      defined working petroleum system across the concession in Guinea. PGS gave
      us
      their completed report in December 2004. This report supported our work, giving
      us additional corroborating evidence to go forward with drilling in Guinea.
      One
      of the main issues with regard to determining the next step was the
      corroborating evidence of the size of the drilling targets. This confirmed
      our
      belief that the next step should be drilling our first exploration wells as
      opposed to spending any more time and money on 3D seismic. Due to the size
      of
      the structures, we determined that we would gain much more by simply spending
      the money to drill. In January 2005, we began looking at ways to put together
      drilling operations. Additionally, we stepped up our communications and
      negotiations with potential oil company working interest partners
      and drilling companies, and we began work to contract drilling platforms to
      use to drill our exploration wells.


5
 *Table
            of Contents*




We
      refined our work during the first half of 2005 and focused on four targets
      in
      shallow to medium depth water. We also developed a multi channel strategy to
      drill wells faster. The first channel is to partner with oil companies on a
      working interest basis. The second is to raise significant private funds and
      to
      contract directly with a drilling company and drilling platform vendors
      ourselves. The third strategy was to contract with turn key offshore drilling
      companies whereby we would direct the drilling operations of the contractor.
      We
      made progress toward this goal and in June 2005, we sent a request for a
      drilling permit to Guinea, through USOil. The request was to obtain a permit
      to
      drill as many as four exploration wells offshore Guinea.




**History
      of Administrative Delays with Guinea Concession Beginning in
      2005**





In
      July
      2005 we received a notice from USOil which alleged that the 2002 PSA had been
      canceled by the government of Guinea. We disagreed totally with that and filed
      suit against USOil on July 29, 2005. We immediately began working diligently
      to
      clear up this misunderstanding with the Government of Guinea.





In
      August
      2005, we hired Mr. Famourou Kourouma as our new Vice President of Guinea
      Affairs. Mr. Kourouma was born and raised in Guinea. He began his work for
      us in
      Guinea in August 2005 with the goal being to get us back into a position to
      begin our Guinea drilling program. Through Mr. Kourouma's many meetings and
      contacts with business and government officials, including two separate meetings
      with the Head of State, support for our issues was sincerely expressed by the
      government. In September 2005, Kent Watts, our president, arrived in Guinea
      to
      meet with government officials who told Kent Watts that the government of Guinea
      had not terminated the PSA. The Minister Secretary General of the private office
      of the president of Guinea, Mr. Fode Bangoura, told us that he was pleased
      to
      discuss our issues and that he was very encouraged and believed that we were
      the
      right company for the work. Mr. Bangoura then said that he will begin by
      reviewing everything in detail and he would discuss the information with the
      ministerial committee and a proposal from the President will be submitted to
      the
      National Assembly for approval.





In
      the
      last few months of 2005 and the first months of 2006, based on months of effort
      by our Chief Executive and our Vice President for Guinea Affairs, including
      trips to Guinea, numerous meetings with government officials, and consistent
      in-country efforts of our new subsidiary, SCS Guinea SARL, the government of
      Guinea began to communicate with us on a very positive basis. The Guinea
      government explained to us that they want to continue working with us and they
      desired to develop an open and transparent business relationship going forward.
      This resulted next in an invitation from the Prime Minister for our Chief
      Executive, Kent Watts to join our VP of Guinea Affairs, Mr. Famourou Kourouma
      and hold a series of meetings held in January 2006. The two executives met
      with
      the Head of State, President Lansana Conté. During our meeting with him, he
      arranged for an immediate meeting with the then Minister of the Mines and of
      the
      Geology, Minister Ahmed Tidiane Souaré . The President further stated that we
      were his guests there in Guinea and he wanted action taken on our case. The
      two
      executives had several meetings with Minister Souaré . We explained that we
      could continue our work under the 2002 Production and Sharing Agreement. It
      was
      suggested by Souaré that a better approach would be to execute a new 2006
      Production Sharing Agreement, so we began working on it while, at the same
      time,
      we maintained the assertion of our rights under the 2002 Agreement. Based on
      the
      Minister's desires to move forward we brought our Executive Vice President,
      Harry Briers and Robert Bearnth, the Vice President and Chief Geologist for
      SCS
      Corporation to Guinea for a technical review. Dr. Bangoura and Mr. Diallo headed
      up the technical team for the government and we had two lengthy meetings with
      them, updating them on our work since we began in 2002. It was discovered that
      Mr. Diallo had been on the platform of the offshore well drilled in 1977. We
      had
      plenty of discussion surrounding our evaluation of the well logs from that
      well
      and explained the significance of it to our work. In short, the technical team
      gave us a very positive review. At that time, we continued to work to finalize
      a
      new agreement.


6
 *Table
            of Contents*




Kent
      Watts returned to Guinea in March 2006 upon a written request of the then
      Minister of the Mines and of the Geology, Minister Ahmed Tidiane Souare to
      finalize negotiations. In previous meetings with him we had resolved all
      technical issues and completed most of the negotiations. We also met again
      with
      the US Ambassador to Guinea, Jackson McDonald and brought him up to date on
      our
      work and meetings with the government. He expressed a strong willingness to
      continue to help us succeed in Guinea. When Mr. Watts left Guinea, he returned
      with a protocol letter agreement to follow through with the execution of the
      newly negotiated 2006 Production Sharing Agreement between the Republic of
      Guinea and SCS Corporation; to receive a decree regarding such new contract
      from
      President Lansana Conté ; and to pass a supporting bill for our contract through
      the National Assembly of Guinea.





Subsequent
      to Mr. Watts return from his March trip, the Guinea government experienced
      a
      major change with the resignation of Prime Minister Diallo. In April Mr. Harry
      Briers, our Executive Vice President and Mr. Michael Watts, Hyperdynamics'
      consultant and brother of Kent Watts, traveled to Guinea to join Mr. Kourouma
      to
      continue the steady focused process of completing a new contract. During their
      visit several meetings were held with the President, ministers, advisors, and
      new government officials including the Director General of the National
      Assembly. Three additional meetings were held with President Conté . One of the
      meetings included President Lansana Conté , a presidential advisor, Madame
      Chantal Colle, U.S. Ambassador Jackson McDonald, and Michael Watts. In this
      meeting the development of U.S. commercial and diplomatic interests in Guinea
      was significantly discussed. The ambassador expressed the United States'
      continued desire to strengthen relations with the Republic of Guinea, including
      through commercial projects such as those advanced by Hyperdynamics. He
      reiterated continued U.S. support for security and stability in Guinea and
      West
      Africa. In that meeting, President Conté again expressed a desire for us to
      continue our work.




After
      Michael Watts and Harry Briers return from their April trip, Mr. Famourou
      Kourouma remained in Guinea, working towards a completely approved and signed
      contract.




By
      May
      2006 our Guinea operations were firmly entrenched with our office and personnel
      in Guinea working in our behalf and our contacts throughout the government
      have
      been fully educated to the fact of our work and that we are the only company
      ready to drill offshore Guinea. Additionally, we consistently kept Ambassador
      McDonald fully informed of each and every development as things materialized
      along the way and we quickly learned to solicit his assistance whenever it
      made
      sense. Through the Ambassador’s guidance, we have used a great deal of diplomacy
      and patience in allowing Guinea to determine exactly what needs to happen on
      their end to complete this task so we can move ahead with our drilling programs.




**New
      Contract Executed and Exploration Work Resumed**




The
      company and the Republic of Guinea signed an oil and gas production sharing
      contract (2006 PSC) on September 22, 2006. The contract was filed as an exhibit
      attached to the company’s 8K, filed on September 28, 2006.





The
      2006
      PSC, signed by two ministers of Guinea with proper authority, is a binding
      agreement and currently gives us the exclusive rights for exploration,
      development, and production of approximately 33,000 square miles offshore the
      Republic of Guinea in West Africa. We have now resumed our exploration work
      based on this newly signed contract.





We
      have exclusive rights that we will continue to maintain in 100 % of the
      original contract area that is approximately 33,000 square miles in size. There
      is no requirement for the company to give up all of its rights to all or any
      portion of the contract area. There is a provision of the 2006 PSC regarding
      conditions that once met by the Guinea government, would require us to surrender
      a portion of our exclusive rights which will convert to priority rights of
      participation that we will then maintain going forward. Regarding this, the
      company anticipates that a bill will be passed by the National Parliament
      (representing the people of Guinea), the Supreme Court will give an affirmation,
      and a Guinea Presidential decree will be issued. Our understanding is that
      this
      process takes the already legally binding contract and registers it as part
      of
      Guinea law.





Should
      the contract be registered as part of Guinea law through these actions
      specified, 64% of the original contract area (approximately 22,000 square miles)
      will become an area that we no longer have exclusive rights to but in which
      we
      will maintain priority participation rights and 36% (approximately 11,000 square
      miles) will remain under exclusive rights as specified by the 2006 PSC.


7
 *Table
            of Contents*




Our
      minimum rights that we will maintain going forward include:





a)
              Exclusive
                  rights for exploration, development, and production for approximately
                  11,000 square miles of our choosing from the total contract area
                  consisting of 33,000 square miles. All benefits and obligations
                  surrounding these minimum exclusive rights are determined by the
                  provisions of the 2006 PSC.




and,





b)
              Non-exclusive
                  right to participate in any other development of the area not chosen
                  by us
                  in (a) above or in the area which exclusive rights are surrendered
                  and
                  which totals approximately 22,000 square miles from the original
                  contract
                  area of 33,000 square miles. The benefits to us regarding these
                  rights
                  could be controlled by several factors. We could negotiate additional
                  contracts on a priority basis or participate with others on an
                  equal
                  basis, both of which could be controlled by new agreements that
                  we
                  negotiate.




Thus,if
                  and when any surrender occurs as explained above, the non-exclusive
                  priority participation rights do not prevent us from acquiring
                  additional
                  exclusive rights in the surrendered area directly from Guinea on
                  a
                  priority basis through additional contracts. Short of entering
                  into any
                  additional exclusive contracts, we will have the priority right
                  to
                  participate on an equal basis with anyone else within the 22,000
                  square
                  mile nonexclusive area.




The
      Exclusive Rights allow us to develop the exclusive contract area at our
      discretion and expense subject to the terms and conditions of the 2006 PSC.
      Some
      of the major terms to the 2006 PSC are that the Royalty to the Government will
      be 10%. The cost recovery percentage available to us will be 75%. The
      exploitation period(s) for each area specified as an exploitation area will
      be
      for 25 years with two ten year automatic extensions available for a total of
      45
      years. Each well in the exploitation area will have its own exploitation
      period.




Management
      is now working on an update of Hyperdynamics entire business plan to incorporate
      the objectives and related strategies required to maximize our return on our
      renewed and most unique oil and gas property offshore West Africa. We believe
      that our ability to generate revenues on an increasing and steady basis has
      been
      greatly enhanced by the accomplishment of entering into the new 2006 PSC with
      the Republic of Guinea. We now are contemplating as part of our business plan
      a
      multi-channel approach to developing our extensive contract area. We are working
      now to attract top drilling subcontractors to help us drill the targets we
      had
      pinpointed in June of 2005. We are also marketing our area to oil companies
      as
      possible partners for joint development and we are talking with the leaders
      of
      the largest industries in Guinea, such as the aluminum industry that have a
      need
      to have access to hydrocarbon based fuels to support their multi-billion dollar
      refining plants that are being built there.




Accordingly,
      we are now doing an assessment of the drilling infrastructure, the support
      services and the offshore operating environment in Guinea.





**Seismic
      Data Management Services.**





In
      August
      2004, we entered into a contract with Texas Geophysical Company (“TGC”) relating
      to its data from Northern Alaska covering an offshore area of the Alaska
      National Wildlife Refuge (“ANWR”). Under this contract, SCS became the sales
      agent and seismic data management provider for TGC's ANWR data. TGC has the
      rights to the only 2D seismic data known to cover this area. Should oil
      companies license this data, SCS will perform the data processing and will
      earn
      associated service revenues and a percentage of the license fees. The contract
      continues to be in force; however, we have had no revenues related to this
      contract as yet because the United States government has not opened the area
      to
      oil exploration.





**Development
      of SCS NuData(TM) Management System.**





In
      September 2002, we acquired the copyrights and all rights to the source code
      of
      the ONYX and ONYXII related conversion and transcription software. The software
      is instrumental in providing the technical capabilities to handle virtually
      any
      type of tape transcription and data conversion service. The ONYX software
      establishes a major competitive advantage for us as a primary component for
      our
      SCS NuData Management System. The ONYX software has been developed over the
      last
      five years and we are in the process of completing the latest version of the
      software to take full advantage of Microsoft's 32 bit Operating Systems such
      as
      Windows XP and future 64 bit operating systems. ONYX facilitates over 120
      different tape formats including such common formats like SEG A, B, C, or D,
      Western Code 4.2 and 1, Geocore 4, and Tempest. These formats are converted
      to
      the more standard SEG-Y format and then consolidated to DVD. Features of the
      NuData Management System in addition to the ONYX based conversion capabilities
      include:





8
 *Table
            of Contents*




-
                A
                    custom and unique tape tracking system tightly monitoring and
                    managing the
                    transcription process and database to organize and keep track
                    of all the
                    data associated with a particular line or area of seismic data.
                    Bundled
                    services to scan well logs, maps and other related information
                    to PDF
                    format and consolidate such related data on the same disk or
                    DVD as the
                    converted seismic data.




-
                Strong
                    quality assurance procedures. Data sets are catalogued in the
                    NuData
                    database and then compared to client's database and reconciled
                    to NuData
                    database.




-
            Once
                consolidated on DVD, there are many different data management and
                backup
                solutions available, for example, online virtual private network
                (VPN)
                access established privately or high speed transmission from Hyperdynamics
                transcription facility to remote sites across high bandwidth capacity
                connection.




-
            While
                we maintain the ability to service third party companies, the primary
                benefit of our NuData capability is to make our exploration activities
                significantly more efficient.





When
      coupled with our extensive industry experience, the NuData Management System
      allows us to consolidate our seismic data in ways that save substantial amounts
      in future data maintenance expenses. We can dramatically enhance our
      accessibility and utility of our seismic data, thereby enhancing our ability
      to
      find new oil and gas reserves faster and at a lower cost. In summary, the NuData
      Management System makes the data we manage more secure, accessible, manageable,
      and portable all while saving us significant time and money.





**HYDR’s
      Domestic Oil Field Service and Production**




In
      April
      2004, we acquired our subsidiary, HYD Resources Corporation. It is our second
      operating subsidiary with corporate offices located at our home office
      in Sugar Land, Texas and one field office located in La Salle Parish
      in Louisiana. At the time of the acquisition, HYD Resources Corporation had
      approximately $375,000 worth of assets, the bulk of which was oil field
      equipment. HYD Resources Corporation also had no prior history of operations.
      HYD Resources Corporation engages in crude oil exploration and production within
      the United States. Thus far, all of our drilling activity is in
      Louisiana.




In
      January 2005, Hyperdynamics acquired an inactive company from the
      former owners of HYD Resources Corporation named Trendsetter Production
      Company (“TPC”). TPC is an authorized operator in the state of Louisiana. This
      immediately made us an oil and gas operator.





We
      evaluate the performance of these two companies (HYD Resources Corporation
      and
      Trendsetter Production Company) as a single business unit through our business
      segment named HYD Resources (“HYDR”).





One
      of
      HYDR's past activities was the acquisition and repair of oil field equipment.
      We
      use this equipment to drill for our own oil and gas production, establish
      production facilities, and maintain our producing wells. Because of our
      capabilities to drill and operate, we acquired the working interest on 518
      acres
      in Louisiana. We intend to continue to acquire oil leases in known producing
      areas and drill these leases to increase our own production revenues. We can
      acquire onshore producing leases with a very low risk and we can enhance the
      production of wells by working over existing wells. We sometimes sell a portion
      of the working interest in our onshore wells.




In
      the
      last fiscal year, we have drilled 2 oil wells and completed some field
      improvements on two leases. In fiscal 2005, while drilling our first lease
      known
      as the J. W. Norris (“Norris”)lease, it was determined that significant amounts
      of high pressure gas existed on the lease. As each well drilled continued to
      hit
      additional gas zones, the first twelve wells were left basically shut-in and
      it
      was determined that we would need to install a gas gathering system, contract
      with a pipeline transmission company and then execute a contract with a company
      to buy our gas. We have not yet sold commercial quantities of gas and we decided
      to abandon the gas gathering system when it became apparent that a sustainable
      flow of production could not be reached. The Norris lease is now being evaluated
      for drilling new well(s) into a zone that we hope to find reasonable production.
      So far our experience with the Norris lease has not produced what we had
      originally expected. Management is trying to decide whether to drill additional
      well(s) on the Norris lease or to focus its efforts back onto the Kelly and
      McGee Smith leases, which have produced on a steady and increasing basis now
      over the last eight months. We could also make the decision to abandon the
      Norris lease and move to develop other leases that we have the right to work
      on.


9
 *Table
            of Contents*




We
      began
      drilling oil wells on the Kelly lease in July 2005. The first well drilled,
      Kelly #1 began initially with flow rates of approximately 30 barrels per day
      in
      July 2005. This increased to approximately 70 barrels per day in early August
      2005 and was expected to level out at around 50 barrels per day. We drilled
      Kelly # 2 last year. It was completed during the quarter ended September 30,
      2005. During the 12 months ended June 30, 2006, we sold approximately 16,000
      barrels of oil, primarily from production from our McGee Smith and Kelly
      leases.





Going
      forward HYDR plans to perform work to improve its production on these leases
      and
      drill additional wells in areas that it has realized the best production from.
      We are also evaluating new opportunities such as acquiring shallow production
      leases in areas that have previously produced oil, drilling new wells and
      re-developing wells that have produced in the past, and reworking the related
      production facilities associated with those wells.





**Employees
      and Independent Contractors**





We
      currently have 22 full time employees and one part time employee of which 13
      people are a part of corporate overhead and three are directly associated with
      SCS and attributable to the exploration and seismic data management effort.
      Seven people are focused on our domestic oil field production of which one
      person is a manager and 6 people are hourly employees working on oil field
      workover, production, and shop work.  Additionally, we use independent
      contractors to minimize fixed overhead. No employees are represented by a union
      and we believe that our labor relations are good.


10
 *Table
            of Contents*




**Alliance
      Partnerships, Key Vendors and Technical Certifications**





Our
      oil
      industry vendors include the following:




Spectrum
      Geophysical Processing Company (“Spectrum”) provides us with professional data
      processing services. Spectrum is a member of a UK registered group of companies
      providing seismic data processing, nonexclusive surveys and electronic data
      management services to a wide range of international clients. Spectrum has
      its
      headquarters in Woking, England, with operational centers in Houston and
      Cairo.





Petroleum
      Geophysical Services (“PGS”) provides us with seismic acquisition and
      independent data interpretation services. PGS provides a broad range of seismic
      and reservoir services, including data acquisition, processing, interpretation,
      and field evaluation. PGS also owns and operates four floating production,
      storage and offloading units (FPSOs). PGS operates on a worldwide basis with
      headquarters in Oslo, Norway.




TDI-Brooks
      International (“TDI”) provides us with geochemical core analysis of our
      concession.  TDI is the recognized leader in offshore surface geochemical
      exploration and heat flow measurement.




GlobalSantaFe
      Corporation is a leading provider of offshore oil and gas drilling and drilling
      management services. The company owns or operates a mobile fleet of marine
      drilling rigs that operates in major drilling regions around the world,
      including premium and heavy-duty, harsh-environment jackups, semisubmersibles,
      and dynamically positioned ultra-deepwater drillships. More information can
      be
      found at www.globalsantafe.com .




**Competition.**





A
      large
      number of companies and individuals engage in drilling for gas and oil, and
      there is competition for the most desirable prospects. We will encounter intense
      competition from other companies and other entities in the sale of our oil
      and
      gas. We could be competing with numerous gas and oil companies which may have
      financial resources significantly greater than ours. The quantities of oil
      and
      gas that we may produce and deliver may be affected by factors beyond our
      control, such as the inability of the wells to deliver at the necessary
      quality and pressure, premature exhaustion of reserves, changes in governmental
      regulations affecting allowable production and priority allocations, and price
      limitations imposed by federal and state regulatory agencies.





**Key
      Customers.**





Oil
      production from our Louisiana properties was  purchased by one customer,
      Plains Marketing LLC,  through September 2006.  Effective
      September 2006, we entered a contract with Shell Trading to be the sole
      purchaser of our oil production in Louisiana.  Louisiana Office of
      Conservation rules prohibit us from maintaining more than one purchaser at
      any
      given time.




**Research
      and Development.**





We
      do not
      expend a material amount on research and development.





**Cost
      of Compliance with Environmental Laws.**





Because
      we are engaged in extracting natural resources, our business is subject to
      various Federal, state and local provisions regarding the environment.
      Compliance with environmental laws may necessitate significant capital
      outlays, affect our earnings potential, and cause material changes in our
      current and proposed business activities. At the present time, however, the
      environmental laws do not materially hinder nor adversely affect our business.
      Capital expenditures relating to environmental control facilities have not
      been
      material to our operations since our inception. In 2005, we did one oil well
      clean up. The cost of the clean up was less than $5,000. We have abided by
      and
      are in compliance with the environmental law. There were no clean ups in
      2006.





11
 *Table
            of Contents*





**Financing
      From Cornell Capital.**





In
      June
      2006, we entered into a financing arrangement with Cornell Capital Partners,
      LP
      whereby we received the gross amount of $6,000,000 (net amount of $5,440,000)
      by
      selling Cornell 3 debentures. We also issued stock options to Cornell in
      connection with this financing, as follows:




(a)  one
      warrant to purchase 955,000 shares of common stock at an exercise price of
      $2.50 per share;




(b)  one
      warrant to purchase 715,000 shares of common stock at an exercise price of
      $3.50 per share; and




(c)  one
      warrant to purchase 430,000 shares of common stock at an exercise price of
      $4.00 per share.




**The
      Agreements with Cornell.**




1.
            **THE
                FIRST CORNELL DEBENTURE**.





We
      sold
      the first convertible debenture to Cornell at the first closing which occurred
      on June 22, 2006. Pursuant to the terms of the first convertible debenture,
      we
      promise to pay to Cornell or its successors and assigns the principal sum of
      $2,000,000 together with accrued but unpaid interest on or before June 19,
      2009
      (the "Maturity Date"). Interest accrues on the outstanding principal balance
      at
      the annual rate of 10%. Interest is calculated on the basis of a 365-day year
      and the actual number of days elapsed. Interest is to be paid to Cornell or
      its
      assignee. We will make monthly scheduled payments ("Scheduled Payments") on
      the
      Debenture and all other debentures issued in connection with the Securities
      Purchase Agreement consisting of a total of $175,000 of principal plus accrued
      and unpaid interest, commencing with the first Scheduled Payment which shall
      be
      due and payable on August 16, 2006 and continuing on the first business day
      of
      each calendar month until paid in full. The Debenture shall become due and
      immediately payable, including all accrued but unpaid interest, upon an Event
      of
      Default. If the Holder converts a portion of the principal amount outstanding
      under this Debenture or any other debenture issued in connection with the
      Securities Purchase Agreement prior to a Scheduled Payment due date, the Obligor
      shall be entitled to an off-set of the amount due pursuant to such Schedule
      Payment equal to the amount converted (the "Off-Set Amount"). In such event
      we
      are still obligated to make a Scheduled Payment reduced by the Off-Set Amount.
      At our option we have the right to redeem a portion or all amounts outstanding
      under this Debenture prior to the Maturity Date, which are not otherwise due
      pursuant to a Scheduled Payment, provided that the Closing Bid Price of the
      our
      Common Stock is less than $2.00 at the time of the Redemption Notice. We will
      pay an amount equal to the principal amount being redeemed plus a redemption
      premium ("Redemption Premium") equal to twenty percent (20%) of the principal
      amount being redeemed, and accrued interest, (collectively referred to as the
      "Redemption Amount"). In order to make a redemption, we must first provide
      written notice to Cornell. After receipt of the Redemption Notice, Cornell
      will
      have three business days to elect to convert all or any portion of this
      Debenture.




The
      Debenture is secured by a Security Agreement dated June 19, 2006 between the
      Holder and Trendsetters Production Company (the "Security Agreement") and a
      Subsidiary Security Agreement dated June 19, 2006.





An
      "Event
      of Default" means any one of the following events:





(i)  Any
      default in the payment of the principal of, interest on or other charges in
      respect of this Debenture, free of any claim of subordination (whether on a
      Scheduled Payment due date, a Conversion Date or the Maturity Date or by
      acceleration or otherwise), which is not cured within three (3) business days
      of
      notice of such breach;





12




(ii) The
      Obligor or any material subsidiary of the Obligor shall commence, or there
      shall
      be commenced against the Obligor or any material subsidiary of the Obligor
      under
      any applicable bankruptcy or insolvency laws as now or later in effect or any
      successor, or the Obligor or any material subsidiary of the Obligor commences
      any other proceeding under any reorganization, arrangement, adjustment of debt,
      relief of debtors, dissolution, insolvency or liquidation or similar law of
      any
      jurisdiction whether now or later in effect relating to the Obligor or any
      material subsidiary of the Obligor or there is commenced against the Obligor
      or
      any material subsidiary of the Obligor any such bankruptcy, insolvency or other
      proceeding which remains undismissed for a period of 61 days; or the Obligor
      or
      any material subsidiary of the Obligor is adjudicated insolvent or bankrupt;
      or
      any order of relief or other order approving any such case or proceeding is
      entered; or the Obligor or any material subsidiary of the Obligor suffers any
      appointment of any custodian, private or court appointed receiver or the like
      for it or any substantial part of its property which continues undischarged
      or
      unstayed for a period of sixty one (61) days; or the Obligor or any material
      subsidiary of the Obligor makes a general assignment for the benefit of
      creditors; or the Obligor or any material subsidiary of the Obligor shall fail
      to pay, or shall state that it is unable to pay, or shall be unable to pay,
      its
      debts generally as they become due; or the Obligor or any material subsidiary
      of
      the Obligor shall call a meeting of its creditors with a view to arranging
      a
      composition, adjustment or restructuring of its debts; or the Obligor or any
      material subsidiary of the Obligor shall by any act or failure to act expressly
      indicate its consent to, approval of or acquiescence in any of the foregoing;
      or
      any corporate or other action is taken by the Obligor or any material subsidiary
      of the Obligor for the purpose of effecting any of the foregoing. The term
      "material subsidiary" shall mean any subsidiary with total assets in excess
      of
      $100,000;





(iii)The
      Obligor shall
      default in any of its obligations under any other debenture or any mortgage,
      credit agreement or other facility, indenture agreement, factoring agreement
      or
      other instrument under which there may be issued, or by which there may be
      secured or evidenced any indebtedness for borrowed money or money due under
      any
      long term leasing or factoring arrangement of the Obligor in an amount exceeding
      $500,000, whether such indebtedness now exists or shall later be created and
      such default shall result in such indebtedness becoming or being declared due
      and payable prior to the date on which it would otherwise become due and
      payable, except those being contested in good faith;




(iv)The
      Common Stock
      shall cease to be quoted for trading or listing for trading on any of (a) the
      American Stock Exchange, (b) New York Stock Exchange, (c) the Nasdaq National
      Market, (d) the Nasdaq Capital Market, or (e) the Nasdaq OTC Bulletin Board
      ("OTC") (each, a "Subsequent Market") and shall not again be quoted or listed
      for trading on any Subsequent Market within five (5) Trading Days of such
      delisting;




(v)            
      If the effectiveness of the Underlying Shares Registration Statement lapses
      for
      any reason or the Holder shall not be permitted to resell the shares of Common
      Stock underlying this Debenture under the Underlying Shares Registration
      Statement, in either case, for more than ten (10) consecutive Trading Days
      or an
      aggregate of thirty (30) Trading Days (which need not be consecutive Trading
      Days);





(vi)The
      Obligor shall
      fail for any reason to deliver Common Stock certificates to a Holder prior
      to
      the fifth (5th) Trading Day after a Conversion Date or the Obligor shall provide
      notice to the Holder, including by way of public announcement, at any time,
      of
      its intention not to comply with requests for conversions of this Debenture
      such
      breach is not cured within three (3) days of notice of such breach;





(vii)          
      The Obligor shall fail for any reason to deliver the payment in cash pursuant
      to
      a Buy-In within five (5) days after notice is claimed delivered;





(viii)      
      The Obligor shall fail to observe or perform in any material respect any other
      covenant, agreement or warranty contained in, or otherwise commit any breach
      or
      default of any provision of this Debenture or any Transaction Document which
      is
      not cured within twenty (20) business days after the Obligor is provided with
      written notice from the Holder.





(b)  
      During the time that any portion of this Debenture is outstanding, if any Event
      of Default has occurred, the full principal amount of this Debenture, together
      with interest and other amounts owing to the date of acceleration shall become
      at the Holder's election, immediately due and payable in cash, provided however,
      the Holder may request (but shall have no obligation to request) payment of
      such
      amounts in Common Stock of the Obligor. In addition to any other remedies,
      the
      Holder shall have the right (but not the obligation) to convert this Debenture
      at any time after (x) an Event of Default or (y) the Maturity Date at the
      Conversion Price then in-effect (including, without limitation, the Default
      Conversion Price).





Conversion
      of Debenture





The
      Debenture shall be convertible into shares of Common Stock at the option of
      the
      Holder, in whole or in part at any time and from time to time, after the
      Original Issue Date. The number of shares of Common Stock issuable upon a
      conversion equals the quotient obtained by dividing (x) the outstanding amount
      of this Debenture to be converted by $2.00. The Obligor shall deliver Common
      Stock certificates to the Holder prior to the Fifth (5th) Trading Day after
      a
      Conversion Date.


13
 *Table
            of Contents*




However,
      if on any Conversion Date (and subject to notice by the Debenture holder to
      us
      and subject to cure by us):





(1)
            The
                number of shares of our Common Stock that are at that time authorized,
                unissued and unreserved for all purposes, or held as treasury stock,
                is
                insufficient to pay principal and interest on the Debenture in shares
                of
                Common Stock; or,




(2)
            Our
                Common Stock is not listed or quoted for trading on our trading market;
                or




(3)
            We
                have failed to timely satisfy conversion of the
                Debentures,





then,
      at
      the option of the Debenture Holder, we shall, in lieu of delivering shares
      of
      Common Stock to the Debenture Holder, deliver to the Debenture Holder, within
      three trading days of each conversion date, an amount in cash equal to the
      product of the outstanding principal amount to be converted plus any interest
      due therein divided by the Conversion Price, and multiplied by the highest
      closing price of the stock from date of the conversion notice till the date
      that
      such cash payment is made.





However,
      if we have not delivered any cash due in respect of conversion of the Debenture
      or as payment of interest by the fifth trading day after the conversion date,
      the Debenture holder may, by notice to us, require us to issue shares of Common
      Stock except that for such purpose the Conversion Price shall be the lesser
      of
      the Conversion Price on the Conversion Date and the Conversion Price on the
      date
      of such Holder demand.”




Conversion
      Restrictions




A
      Holder
      may not convert this Debenture or receive shares of Common Stock as payment
      of
      interest to the extent such conversion or receipt of such interest payment
      would
      result in the Holder, together with any affiliate, beneficially owning in excess
      of 4.99% of the then issued and outstanding shares of Common Stock, including
      shares issuable upon conversion of, and payment of interest on, this Debenture
      held by such Holder.





The
      Total
      Transaction Shares shall not be greater than 9,215,406 shares (which does not
      exceed 19.99% of the 46,308,573 outstanding shares of Common Stock as of the
      date of the Securities Purchase Agreement), until the Obligor's shareholders
      approve (without the vote of any shares acquired in this transaction and related
      transactions) the issuance of the Total Transaction Shares. "Total Transaction
      Shares" shall mean, in the aggregate, any shares of Common Stock issued under
      (a) this Debenture to the Holder, or its affiliates, and transferees, subsequent
      transferees, or any other debenture issued pursuant to the Securities Purchase
      Agreement (b) the Warrant Shares (as defined in the Securities Purchase
      Agreement), and (c) any shares of Common Stock issued as Liquidated
      Damages.





Conversion
      Price and Adjustments to Conversion Price.





The
      conversion price (the "Fixed Conversion Price" or "Conversion Price") in effect
      on any Conversion Date shall be equal to $2.00, subject to anti-dilution
      adjustments.





1A.
            **THE
                SECOND CORNELL DEBENTURE**.




The
      second debenture matures on June 28, 2009 and has the same terms as the first
      debenture.





1B.
            **THE
                THIRD DEBENTURE**.





The
      third
      debenture matures on August 11, 2009 and has the same terms as the first
      debenture.




2.
            **THREE
                CORNELL WARRANTS**.




Pursuant
      to the Securities Purchase Agreement, we issued three warrants to Cornell,
      all
      issued on June 19, 2006, with similar terms except for the exercise price and
      number of underlying shares of common stock. The unique terms of each of the
      three warrants are: (a) one warrant to purchase 955,000 shares of common stock
      at an exercise price of $2.50 per share; (b) one warrant to purchase 715,000
      shares of common stock at an exercise price of $3.50 per share; and (c) one
      warrant to purchase 430,000 shares of common stock at an exercise price of
      $4.00
      per share. The three warrants expire in 2011


14
 *Table
            of Contents*




The
      material terms of each of the Warrants are as follows:




Cornell,
      is entitled to purchase from the Company upon surrender of the Warrants the
      number of shares of common stock at the applicable exercise price or as
      subsequently adjusted. However, in no event shall the holder be entitled to
      exercise this Warrant or be forced to exercise this Warrant for a number of
      Warrant Shares in excess of that number of Warrant Shares which, upon giving
      effect to such exercise, would cause the aggregate number of shares of Common
      Stock beneficially owned by the holder and its affiliates to exceed 4.99% of
      the
      outstanding shares of the Common Stock following such exercise, except within
      60
      days of the Expiration Date (however, such restriction may be waived by Holder
      (but only as to itself and not to any other holder) upon not less than 65 days
      prior notice to the Company).





Exercise
      of Warrant





Each
      Warrant may be exercised by the holder (i) on a cash basis or (ii) if an Event
      of Default has occurred, or if at the time of exercise, one year has elapsed
      from the Issuance Date and the Warrant Shares are not subject to an effective
      registration statement, then on a cashless exercise.




Adjustment
      of Warrant Exercise Price and Number of Shares upon Issuance of Common
      Stock.




If
      and
      whenever on or after the Issuance Date of this Warrant, the Company issues
      or
      sells, or is deemed to have issued or sold, any shares of Common Stock (other
      than (i) Excluded Securities, (ii) shares of Common Stock which are issued
      or
      deemed to have been issued by the Company in connection with an Approved Stock
      Plan, or (iii) the Other Securities) for a consideration per share less than
      a
      price (the "Applicable Price") equal to the Warrant Exercise Price in effect
      immediately prior to such issuance or sale, then immediately after such issue
      or
      sale the Warrant Exercise Price then in effect shall be reduced to an amount
      equal to such consideration per share. Upon each such adjustment of the Warrant
      Exercise Price, the number of Warrant Shares issuable upon exercise of this
      Warrant shall be adjusted to the number of shares determined by multiplying
      the
      Warrant Exercise Price in effect immediately prior to such adjustment by the
      number of Warrant Shares issuable upon exercise of this Warrant immediately
      prior to such adjustment and dividing the product by the Warrant Exercise Price
      resulting from such adjustment.





The
      number of shares of Common Stock issuable upon exercise of this Warrant shall
      in
      no event be increased to an amount such that the Total Transaction Shares shall
      be greater than 9,215,406 shares (which is not more than 19.99% of the
      46,308,573 outstanding shares of Common Stock as of the date of Securities
      Purchase Agreement), until the Company's shareholders approve (without the
      vote
      of any shares acquired in this transaction and related transactions) the
      issuance of the Total Transaction Shares. "Total Transaction Shares" shall
      mean,
      in the aggregate, any shares of Common Stock issued under (a) the Convertible
      Debentures issued in connection with the Securities Purchase Agreement to the
      Holder, or its affiliates, and transferees, subsequent transferees, or any
      other
      debenture issued pursuant to the Securities Purchase Agreement (b) the Warrant
      Shares (as defined in the Securities Purchase Agreement), and (c) any shares
      of
      Common Stock issued as Liquidated Damages.





Purchase
      Rights; Reorganization, Reclassification, Consolidation, Merger or
      Sale.





Adjustment
      of Warrant Exercise Price upon Subdivision or Combination of Common Stock.
      If
      the Company at any time after the date of issuance of this Warrant subdivides
      (by any stock split, stock dividend, recapitalization or otherwise) one or
      more
      classes of its outstanding shares of Common Stock into a greater number of
      shares, any Warrant Exercise Price in effect immediately prior to such
      subdivision will be proportionately reduced and the number of shares of Common
      Stock obtainable upon exercise of this Warrant will be proportionately
      increased. If the Company at any time after the date of issuance of this Warrant
      combines (by combination, reverse stock split or otherwise) one or more classes
      of its outstanding shares of Common Stock into a smaller number of shares,
      any
      Warrant Exercise Price in effect immediately prior to such combination will
      be
      proportionately increased and the number of Warrant Shares issuable upon
      exercise of this Warrant will be proportionately decreased. Any adjustment
      shall
      become effective at the close of business on the date the subdivision or
      combination becomes effective.





Distribution
      of Assets. If the Company shall declare or make any dividend or other
      distribution of its assets (or rights to acquire its assets) to holders of
      Common Stock, by way of return of capital or otherwise (including, without
      limitation, any distribution of cash, stock or other securities, property or
      options by way of a dividend, spin off, reclassification, corporate
      rearrangement or other similar transaction) (a "Distribution"), at any time
      after the issuance of this Warrant, then, in each such case:


15
 *Table
            of Contents*




Limitations.
      Notwithstanding the above warrant provisions, the number of shares of Common
      Stock issuable upon exercise of this Warrant shall in no event be increased
      to
      an amount such that the Total Transaction Shares shall be greater than 9,215,406
      shares (which is not more than 19.99% of the 46,308,573 outstanding shares
      of Common Stock as of the date of Securities Purchase Agreement), until the
      Company's shareholders approve (without the vote of any shares acquired in
      this
      transaction and related transactions) the issuance of the Total Transaction
      Shares. "Total Transaction Shares" shall mean, in the aggregate, any shares
      of
      Common Stock issued under (a) the Convertible Debentures issued in connection
      with the Securities Purchase Agreement to the Holder, or its affiliates, and
      transferees, subsequent transferees, or any other debenture issued pursuant
      to
      the Securities Purchase Agreement (b) the Warrant Shares (as defined in the
      Securities Purchase Agreement), and (c) any shares of Common Stock issued as
      Liquidated Damages.





Purchase
      Rights; Reorganization, Reclassification, Consolidation, Merger or
      Sale.





If
      at any
      time the Company grants, issues or sells any Options, Convertible Securities
      or
      rights to purchase stock, warrants, securities or other property pro rata to
      the
      record holders of any class of Common Stock (the "Purchase Rights"), then the
      holder of this Warrant will be entitled to acquire, upon the terms applicable
      to
      such Purchase Rights, the aggregate Purchase Rights which such holder could
      have
      acquired if such holder had held the number of shares of Common Stock acquirable
      upon complete exercise of this Warrant immediately before the date on which
      a
      record is taken for the grant, issuance or sale of such Purchase Rights, or,
      if
      no such record is taken, the date as of which the record holders of Common
      Stock
      are to be determined for the grant, issue or sale of such Purchase
      Rights.





Any
      recapitalization, reorganization, reclassification, consolidation, merger,
      sale
      of all or substantially all of the Company's assets to another Person or other
      transaction in each case which is effected in such a way that holders of Common
      Stock are entitled to receive (either directly or upon subsequent liquidation)
      stock, securities or assets with respect to or in exchange for Common Stock
      is
      referred to herein as an "Organic Change." Prior to the consummation of any
      (i)
      sale of all or substantially all of the Company's assets to an acquiring Person
      or (ii) other Organic Change following which the Company is not a surviving
      entity, the Company will secure from the Person purchasing such assets or the
      successor resulting from such Organic Change (in each case, the "Acquiring
      Entity") a written agreement (in form and substance satisfactory to the holders
      of Warrants representing at least two-thirds (iii) of the Warrant Shares
      issuable upon exercise of the Warrants then outstanding) to deliver to each
      holder of Warrants in exchange for such Warrants, a security of the Acquiring
      Entity evidenced by a written instrument substantially similar in form and
      substance to this Warrant and satisfactory to the holders of the Warrants
      (including an adjusted warrant exercise price equal to the value for the Common
      Stock reflected by the terms of such consolidation, merger or sale, and
      exercisable for a corresponding number of shares of Common Stock acquirable
      and
      receivable upon exercise of the Warrants without regard to any limitations
      on
      exercise, if the value so reflected is less than any Applicable Warrant Exercise
      Price immediately prior to such consolidation, merger or sale). Prior to the
      consummation of any other Organic Change, the Company shall make appropriate
      provision (in form and substance satisfactory to the holders of Warrants
      representing a majority of the Warrant Shares issuable upon exercise of the
      Warrants then outstanding) to insure that each of the holders of the Warrants
      will thereafter have the right to acquire and receive in lieu of or in addition
      to (as the case may be) the Warrant Shares immediately theretofore issuable
      and
      receivable upon the exercise of such holder's Warrants (without regard to any
      limitations on exercise), such shares of stock, securities or assets that would
      have been issued or payable in such Organic Change with respect to or in
      exchange for the number of Warrant Shares which would have been issuable and
      receivable upon the exercise of such holder's Warrant as of the date of such
      Organic Change (without taking into account any limitations or restrictions
      on
      the Exercisability of this Warrant).




3.
            **REGISTRATION
                OF CORNELL SHARES**.





We
      registered the shares underlying the Cornell debentures and the warrants, and
      we
      are required to keep the registration statement effective as long as the
      debentures and warrants are outstanding.




4.
            **CORNELL
                SECURITIES PURCHASE AGREEMENT**.




We
      have
      agreed to take all steps necessary in our control to maintain the effectiveness
      and availability of an equity credit line that we already have from Dutchess
      Capital. We are limited in the number and value of puts we may make against
      the
      Dutchess equity credit line to aggregate gross proceeds of up to $500,000 per
      sixty (60) day period. However, if (a) the Registration Statement is effective,
      (b) no Event of Default has occurred, (c) the Closing Bid Price of our Common
      Stock is above $5 for five consecutive Trading Days, (d) the Closing Bid Price
      remains above $5.00 on the day a put is made, then we may exceed the limitation
      $500,000 and instead make up to two puts against the Dutchess equity line of
      credit per 30 day period using a volume matrix price formula contained in the
      Dutchess equity line of credit, the result of which is based on future stock
      volume and stock prices and it not determinable at this time.








16
 *Table
            of Contents*





We
      have
      reserved for issuance to Cornell 6,000,000 shares for issuance upon conversions
      of the Convertible Debentures and 2,100,000 shares for issuance upon exercise
      of
      the Warrants




5.
            **THE
                AMENDMENT TO THE CORNELL SECURITIES PURCHASE
                AGREEMENT**.





At
      the
      request of the American Stock Exchange we added explicit language to the
      Securities Purchase Agreement to set forth that the aggregate number of shares
      that could be issued in the transaction with Cornell shall not be greater than
      9,215,406 shares (which does not exceed 19.99% of the 46,308,573 outstanding
      shares of Common Stock as of the date of the Securities Purchase Agreement),
      until the Obligor's shareholders approve (without the vote of any shares
      acquired in this transaction and related transactions) the issuance of the
      Total
      Transaction Shares.




6.
            **TWO
                SECURITY AGREEMENTS**.





We
      and
      two of our subsidiaries gave Cornell a security interest in some assets as
      long
      as the debentures are outstanding..





Parent
      Security Agreement.




In
      consideration of the debentures and warrant transactions, we granted to Cornell
      a security interest in:





(a)    All
      goods including, without limitation, machinery, equipment, furniture,
      furnishings, fixtures, signs, lights, tools, parts, supplies and motor vehicles
      of every kind and description owned by the Company or in which the Company
      may
      have.





(b)    All
      inventory including, but not limited to, all goods, wares, merchandise, parts,
      supplies, finished products, other tangible personal property, including such
      inventory as is temporarily out of Company's custody or possession and including
      any returns upon any accounts or other proceeds, including insurance proceeds,
      resulting from the sale or disposition of any of the foregoing;





(c)    All
      contract rights and general intangibles, including, without limitation,
      goodwill, trademarks, trade styles, trade names, leasehold interests,
      partnership or joint venture interests, patents and patent applications,
      copyrights, deposit accounts;





(d)    All
      documents, warehouse receipts, instruments and chattel paper of the
      Company;





(e)    All
      accounts and other receivables, instruments or other forms of obligations and
      rights to payment.





(f)    to
      the extent assignable, all rights under all present and future authorizations,
      permits, licenses and franchises issued or granted in connection with the
      operations of any of its facilities





(g)   except
      with respect to SCS Corporation and SCS Guinea SARL or any other interest,
      direct or indirect, that the subsidiaries may have or acquire in connection
      with
      Guinea, all equity interests, securities or other instruments in other
      companies, including, without limitation, any subsidiaries, investments or
      other
      entities (whether or not controlled); and;





(h)    all
      products and proceeds (including, without limitation, insurance proceeds) from
      the above-described Pledged Property.





(i)    The
      Pledged Property shall specifically exclude any and all interests in SCS
      Corporation and SCS Guinea SARL and any other interest, direct or indirect,
      now
      or in the future in connection with Guinea, and nothing herein shall be deemed
      to encumber any assets of either SCS Corporation or SCS Guinea SARL or any
      other
      interest, direct or indirect, that the subsidiaries may have or acquire in
      connection with Guinea.


17
 *Table
            of Contents*




Subsidiary
      Security Agreement.





In
      consideration of the debenture and warrant transactions, two of our
      subsidiaries, Trendsetter Production Company and HYD Resources Corporation,
      granted to Cornell a security interest in effectively all of their
      assets.








**OIL
      AND GAS RESERVE DATA**





Disclosure
      of our proven petroleum reserves are included in this Form 10-K in reliance
      on
      the report of Michael F. Stell, PE, SVP, Ryder Scott Company of Houston, Texas,
      given on the authority of that firm as petroleum consultant
      experts.





Our
      estimates of proved reserves are based on quantities of oil and gas reserves
      which current engineering data indicates are recoverable from known reservoirs
      under existing economic and operation conditions. Estimates of proved reserves
      are key elements in determining our depreciation, depletion and amortization
      expense and our full-cost ceiling limitation. Estimates of proved reserves
      are
      inherently imprecise because of uncertainties in projecting rates of production
      and timing of developmental expenditures, interpretations of geological,
      geophysical, engineering and production data and the quality and quantity of
      available data. Changing economic conditions also may affect our estimates
      of
      proved reserves due to changes in developmental costs and changes in commodity
      prices that may impact reservoir economics. We utilize independent reserve
      engineers to estimate our proved reserves. See Note 20 - “Oil and Gas
      Disclosures” in the Notes to the Consolidated Financial Statements.








**Item
      1A. Risk Factors.**




You
      should carefully consider the following risk factors before purchasing our
      common stock. The risks and uncertainties described below are not the only
      ones
      we face. There may be additional risks and uncertainties that are not known
      to
      us or that we do not consider to be material at this time. If the events
      described in these risks occur, our business, financial condition and results
      of
      operations would likely suffer. This prospectus contains forward-looking
      statements that involve risks and uncertainties. Our actual results may differ
      significantly from the results discussed in the forward-looking statements.
      This
      section discusses the risk factors that might cause those
      differences.




**Risks
      about the Oil and Gas Industry**




**OIL
      AND GAS PRICES ARE VOLATILE.**





Our
      revenues, cash flow, operating results, financial condition and ability to
      borrow funds or obtain additional capital depend substantially on the prices
      that we receive for oil and gas production. Declines in oil and gas prices
      may
      adversely affect our financial condition, liquidity, ability to obtain financing
      and operating results. Lower oil and gas prices also may reduce the amount
      of
      oil and gas that we can produce economically. High oil and gas prices could
      preclude acceptance of our business model. Depressed prices in the future could
      have a negative effect on our future financial results. Historically, oil and
      gas prices and markets have been volatile, with prices fluctuating widely,
      and
      they are likely to continue to be volatile. Prices for oil and gas are subject
      to wide fluctuations in response to relatively minor changes in supply and
      demand, market uncertainty and a variety of additional factors that are beyond
      our control. These factors include:




-
              the
                  domestic and foreign supplies of
                  oil;
  -
              the
                  level of consumer product demand;
  -
              weather
                  conditions;
  -
              political
                  conditions in oil producing regions, including the Middle
                  East;
  18
 *Table
            of Contens*
 
 -
              the
                  ability of the members of the Organization of Petroleum Exporting
                  Countries to agree to and maintain oil price and production
                  controls;





-
            the
                price of foreign imports;




-
            actions
                of governmental authorities;




-
            domestic
                and foreign governmental
                regulations;




-
            the
                price, availability and acceptance of alternative
                fuels;




-
            overall
                economic conditions.




These
      factors and the volatile nature of the energy markets make it
      impossible to predict with any certainty future oil and gas prices. Our
      inability to respond appropriately to changes in these factors could negatively
      affect our profitability.




**INVESTMENT
      IN THE OIL AND GAS BUSINESS IS RISKY.**





Oil
      and
      gas exploration and development are inherently speculative activities. There
      is
      no certain method to determine whether or not a given lease will produce oil
      or
      gas or yield oil or gas in sufficient quantities and quality to result in
      commercial production. There is always the risk that development of a lease
      may
      result in dry holes or in the discovery of oil or gas that is not commercially
      feasible to produce. There is no guarantee that a producing asset will continue
      to produce. Because of the high degree of risk involved, there can be no
      assurance that we will recover any portion of our investment or that our
      investment in leases will be profitable.





**THERE
      ARE DRILLING AND OPERATIONAL HAZARDS.**




The
      oil
      and gas business involves a variety of operating risks, including:





-
            blowouts,
                cratering and explosions;





-
            mechanical
                and equipment problems;





-
            uncontrolled
                flows of oil and gas or well
                fluids;





-
            fires;





-
            marine
                hazards with respect to offshore
                operations;





-
            formations
                with abnormal pressures;





-
            pollution
                and other environmental risks;





-
            natural
                disasters.




Any
      of
      these events could result in loss of human life, significant damage to property,
      environmental pollution, impairment of our operations and substantial losses.
      Locating pipelines near populated areas, including residential areas, commercial
      business centers and industrial sites, could increase these risks. In accordance
      with customary industry practice, we will maintain insurance against some,
      but
      not all, of these risks and losses. The occurrence of any of these events not
      fully covered by insurance could have an adverse effect on our financial
      position and results of operations.





19
 *Table
            of Contents*





**WE
      ARE SUBJECT TO GOVERNMENTAL REGULATIONS.**





Oil
      and
      gas operations in the United States are subject to extensive government
      regulation and to interruption or termination by governmental authorities on
      account of ecological and other considerations. The Environmental Protection
      Agency of the United States and the various state departments of environmental
      affairs closely regulate gas and oil production effects on air, water and
      surface resources. Furthermore, proposals concerning regulation and taxation
      of
      the gas and oil industry are constantly before Congress. It is impossible to
      predict future proposals that might be enacted into law and the effect they
      might have on us. Thus, restrictions on gas and oil activities, such as
      production restrictions, price controls, tax increases and pollution and
      environmental controls may have an adverse effect on us.


20
 *Table
            of Contents*




**THE
      OIL AND GAS INDUSTRY IS SUBJECT TO HAZARDS RELATED TO POLLUTION AND
      ENVIRONMENTAL ISSUES.**





Hazards
      in the drilling and/or the operation of gas and oil properties, such as
      accidental leakage or spillage, are sometimes encountered. Such hazards may
      cause substantial liabilities to third parties or governmental entities, the
      payment of which could reduce distributions or result in the loss of our leases.
      Although it is anticipated that insurance will be obtained by third party
      operators for our benefit, we may be subject to liability for pollution and
      other damages due to environmental events which cannot be insured against due
      to
      prohibitive premium costs, or for other reasons. Environmental regulatory
      matters also could increase substantially the cost of doing business, may cause
      delays in producing oil and gas or require the modification of operations in
      certain areas.





Our
      operations are subject to numerous stringent and complex laws and regulations
      at
      the Federal, state and local levels governing the discharge of materials into
      the environment or otherwise relating to environmental protection. Failure
      to
      comply with these laws and regulations may result in the assessment of
      administrative, civil and criminal penalties, the imposition of remedial
      requirements, and the imposition of injunctions to force future
      compliance.





The
      Oil
      Pollution Act of 1990 and its implementing regulations impose a variety of
      requirements related to the prevention of oil spills, and liability for damages
      resulting from such spills in United States waters. OPA 90 imposes strict joint
      and several liability on responsible parties for oil removal costs and a variety
      of public and private damages, including natural resource damages. While
      liability limits apply in some circumstances, a party cannot take advantage
      of
      liability limits if the spill was caused by gross negligence or willful
      misconduct or resulted from violation of a Federal safety, construction or
      operation regulation. If a party fails to report a spill or to cooperate fully
      in a cleanup, liability limits likewise do not apply. Even if applicable, the
      liability limits for offshore facilities require the responsible party to pay
      all removal costs, plus up to $75 million in other damages. For onshore
      facilities, the total liability limit is $350 million. OPA 90 also requires
      a
      responsible party at an offshore facility to submit proof of its financial
      ability to cover environmental cleanup and restoration costs that could be
      incurred in connection with an oil spill.




The
      Comprehensive Environmental Response, Compensation, and Liability Act, also
      known as the “Superfund” law, and analogous state laws impose joint and several
      liability on certain classes of persons that are considered to have contributed
      to the release of a “hazardous substance” into the environment. These parties
      include the owner or operator of the site where the release occurred, and those
      that disposed or arranged for the disposal of hazardous substances found at
      the
      site. Responsible parties under CERCLA may be subject to joint and several
      liability for remediation costs at the site, and may also be liable for natural
      resource damages. Additionally, it is not uncommon for neighboring landowners
      and other third parties to file tort claims for personal injury and property
      damage allegedly caused by hazardous substances released into the
      environment.





State
      and
      local statutes and regulations require permits for drilling operations, drilling
      bonds and reports concerning operations. In addition, there are state statutes,
      rules and regulations governing conservation matters, including the unitization
      or pooling of oil and gas properties, establishment of maximum rates of
      production from oil and gas wells and the spacing, plugging and abandonment
      of
      such wells. Such statutes and regulations may limit the rate at which oil and
      gas could otherwise be produced from our properties and may restrict the number
      of wells that may be drilled on a particular lease or in a particular
      field.





**Risks
      About Our Business**





**GEOPOLITICAL
      INSTABILITY.**





We
      conduct business in Guinea, which is in a region of the world where there have
      been recent civil wars, revolutionary wars, and internecine conflicts. Although
      Guinea is a peaceful nation, external or internal political forces could
      potentially create a political or military climate that might cause a change
      in
      political leadership or the outbreak of hostilities. Such a change could result
      in our having to cease our Guinea operations and result in the loss or delay
      of
      our rights under the PSA.


21
 *Table
            of Contents*




**GEOPOLITICAL
      POLITICS.**





We
      recently entered into a 2006 Production Sharing Contract with the Republic
      of
      Guinea. The government of the Republic of Guinea could unlawfully terminate
      this
      new contract.





**WE
      MAY HAVE WRITE DOWNS OF OUR ASSETS DUE TO PRICE
      VOLATILITY.**





SEC
      accounting rules require us to review the carrying value of our oil and gas
      properties on a quarterly basis for possible write down or impairment. Under
      these rules, capitalized costs of proved reserves may not exceed a ceiling
      calculated at the present value of estimated future net revenues from those
      proved reserves. Capital costs in excess of the ceiling must be permanently
      written down. A decline in oil and natural gas prices could cause a write down
      which would negatively affect our net income.





**ESTIMATES
      OF OIL AND GAS RESERVES ARE UNCERTAIN AND MAY VARY SUBSTANTIALLY FROM ACTUAL
      PRODUCTION.**





We
      do not
      have any reserve reports or geology or petroleum engineering reports related
      to
      our foreign property. We do have a third-party reserve report for our Louisiana
      properties. There are numerous uncertainties inherent in estimating quantities
      of proved reserves and in projecting future rates of production and timing
      of
      expenditures, including many factors beyond our control. A reserve report is
      the
      estimated quantities of oil and gas based on reports prepared by third party
      reserve engineers. Reserve reporting is a subjective process of estimating
      underground accumulations of oil and natural gas that cannot be measured in
      an
      exact manner. The accuracy of any reserve estimate is a function of the quality
      of available geological, geophysical, engineering and economic data and the
      precision of engineering and judgment. As a result, estimates of different
      engineers often vary. The estimates of reserves, future cash flows and present
      value are based on various assumptions, including those prescribed by the SEC
      relating to oil and natural gas prices, drilling and operating expenses, capital
      expenditures, taxes and availability of funds, and are inherently
      imprecise.





**THE
      UNAVAILABILITY OR HIGH COST OF DRILLING RIGS, EQUIPMENT, SUPPLIES, PERSONNEL
      AND
      OILFIELD SERVICES COULD ADVERSELY IMPACT US.**





Drilling
      activity offshore Guinea will require that we have access to an offshore
      drilling rig. Either unavailability, shortages or increases in the cost of
      drilling rigs, equipment, supplies or personnel could delay or adversely affect
      our Guinea operations. There can be no assurance that we will be able to obtain
      the necessary equipment or that services will be available at economical
      prices.





**FAILURE
      TO FIND OIL AND GAS.**





We
      may
      not be able to find oil and gas in commercial quantities, and if not, our future
      revenue potential would be substantially reduced.





**WE
      MAY BE UNABLE TO ACQUIRE OIL AND GAS LEASES.**





To
      engage
      in oil and gas exploration, we must first acquire rights to conduct exploration
      and recovery activities on identified prospects. We may not be successful in
      acquiring farmouts, permits, lease options, leases or other rights to explore
      for or recover oil and gas. Other major and independent oil and gas companies
      with financial resources significantly greater than ours may bid against us
      for
      the purchase of oil and gas leases. If we or our subsidiaries are unsuccessful
      in acquiring these leases, permits, options and other interests, our prospect
      inventory for exploration and drilling could be significantly reduced, and
      our
      business, results of operations and financial condition could be substantially
      harmed.




**EXPANSION
      OF OUR EXPLORATION PROGRAM WILL REQUIRE CAPITAL FROM OUTSIDE
      SOURCES.**





We
      do not
      currently have the financial resources to explore and drill all of our currently
      identified prospects. Absent raising additional capital or entering into joint
      venture agreements, we will not be able to increase our exploration and drilling
      operations at the projected rate. This could limit the size of our business.
      There is no assurance that capital will be available in the future to us or
      that
      capital will be available under terms acceptable to us. We will need to raise
      additional money, either through the sale of equity securities (which could
      dilute the existing stockholders' interest), through the entering of joint
      venture agreements (which, while limiting our risk, could reduce our ownership
      interest in particular assets), or from borrowings from third parties (which
      could result in additional assets being pledged as collateral and which would
      increase our debt service requirements).





22
 *Table
            of Contents*




Additional
      capital could be obtained from a combination of funding sources, many of which
      could have an adverse effect on our business, results of operations and
      financial condition. These potential funding sources, and the potential adverse
      effects attributable thereto, include:




-
              cash
                  flow from operating activities, which is sensitive to prices we
                  receive
                  for oil and natural gas and the success of current and future
                  operations;
  -
              borrowings
                  from financial institutions, which may subject us to certain restrictive
                  covenants, including covenants restricting our ability to raise
                  additional
                  capital or pay dividends;
  -
              debt
                  offerings, which would increase our leverage and add to our need
                  for cash
                  to service such debt (which could result in additional assets being
                  pledged as collateral and which could increase our debt service
                  requirements);
  -
              additional
                  offerings of equity securities, which would cause dilution of our
                  common
                  stock;
  -
              sales
                  of prospects generated by the exploration program, which would
                  reduce
                  future revenues from that program;
  -
              additional
                  sales of interests in our projects, which could reduce future
                  revenues.




Our
      ability to raise additional capital will depend on the results of operations
      and
      the status of various capital and industry markets at the time such additional
      capital is sought. Capital may not become available to us from any particular
      source or at all. Even if additional capital becomes available, it may not
      be on
      terms acceptable to us. Failure to obtain additional financing on acceptable
      terms may have an adverse effect on our business, results of operations and
      financial condition.




**WE
      HAVE COMPETITION FROM OTHER COMPANIES.**





A
      large
      number of companies and individuals engage in drilling for gas and oil, and
      there is competition for the most desirable prospects. We will encounter intense
      competition from other companies and other entities in the sale of our gas
      and
      oil production. We could be competing with numerous gas and oil companies which
      may have financial resources significantly greater than ours. Further, the
      quantities of gas and oil to be delivered by us may be affected by factors
      beyond our control, such as the inability of the wells to deliver at the
      necessary quality and pressure, premature exhaustion of reserves, changes in
      governmental regulations affecting allowable production and priority
      allocations, and price limitations imposed by Federal and state regulatory
      agencies.





**WE
      DEPEND ON INDUSTRY VENDORS AND MAY NOT BE ABLE TO OBTAIN ADEQUATE
      SERVICES.**





We
      are
      and will continue to be dependent on industry vendors for the success of our
      oil
      and gas exploration projects. These contracted services include, but are not
      limited to, accounting, drilling, completion, workovers (remedial down hole
      work
      on a well) and reentries (entering an existing well and changing the direction
      and/or depth of a well), geological evaluations, engineering, leasehold
      acquisition (landmen), operations, legal, investor relations/public relations,
      and prospect generation. We could be harmed if we fail to attract quality
      industry vendors to participate in the drilling of prospects which we identify
      or if our industry vendors do not perform satisfactorily. We often have, and
      will continue to have, little control over factors that would influence the
      performance of our vendors.





**WE
      RELY ON THIRD PARTIES FOR PRODUCTION SERVICES AND PROCESSING
      FACILITIES.**





The
      marketability of our production depends upon the proximity of our reserves
      to,
      and the capacity of, facilities and third party services, including oil and
      natural gas gathering systems, pipelines, trucking or terminal facilities,
      and
      processing facilities. The unavailability or lack of capacity of such services
      and facilities could result in the shut-in of producing wells or the delay
      or
      discontinuance of development plans for properties. A shut-in or delay or
      discontinuance could adversely affect our financial condition. In addition,
      Federal and state regulation of oil and natural gas production and
      transportation affect our ability to produce and market oil and natural gas
      on a
      profitable basis.


23
 *Table
            of Contents*




**OUR
      APPROACH TO TITLE ASSURANCE COULD ADVERSELY AFFECT OUR BUSINESS AND
      OPERATIONS.**





We
      intend
      to purchase oil and gas interests and leases from third parties or directly
      from
      the mineral fee owners as the inventory upon which we will perform our
      exploration activities. The existence of a title deficiency can render a lease
      worthless and can result in a large expense to us. Title insurance covering
      the
      mineral leaseholds is not generally available and in all instances, we forego
      the expense of retaining lawyers to examine the title to the mineral interest
      to
      be placed under lease or already placed under lease until the drilling block
      is
      assembled and ready to be drilled. We rely upon the judgment of oil and gas
      lease brokers or experienced landmen who perform the field work in examining
      records in the appropriate governmental office before attempting to acquire
      or
      place under lease a specific mineral interest. This is customary practice in
      the
      oil and gas industry. However, if there is a defect in title, the amount that
      we
      paid for such oil and gas leases or interests is generally lost. If the
      defective lease covers acreage which is critical to the success of a particular
      project, the loss could have an adverse effect by making the target area
      potentially not drillable.





**RISKS
      RELATED TO OUR FINANCIAL OPERATIONS**





**WE
      HAVE A HISTORY OF LOSSES.**





We
      have
      experienced substantial operating losses. We expect to incur significant
      operating losses until sales increase. We will also need to raise sufficient
      funds to finance our activities. We may be unable to achieve or sustain
      profitability.





**WE
      HAVE AN ACCUMULATED DEFICIT AND MAY INCUR ADDITIONAL
      LOSSES.**





We
      have a
      substantial accumulated deficit. We may not be able to meet our debts as they
      become due. If we are unable to generate sufficient cash flow or obtain funds
      to
      pay debt, we will be in default.





**WE
      MAY EXPERIENCE POTENTIAL FLUCTUATIONS IN RESULTS OF
      OPERATIONS.**





Our
      future revenues may be affected by a variety of factors, many of which are
      outside our control, including (a) the success of project results; (b) swings
      in
      availability of drilling services needed to implement projects and the pricing
      of such services; (c) a volatile oil and gas pricing market which may make
      certain projects that we undertake uneconomic; (d) the ability to attract new
      independent professionals with prospects in a timely and effective manner;
      and
      (e) the amount and timing of operating costs and capital expenditures relating
      to conducting our business operations and infrastructure. As a result of our
      limited operating history and the emerging nature of our business plan, it
      is
      difficult to forecast revenues or earnings accurately, which may fluctuate
      significantly from quarter to quarter.








24
 *Table
            of Contents*





**IF
      WE CANNOT OBTAIN ADDITIONAL FINANCING, WE MAY HAVE TO CURTAIL OPERATIONS AND
      MAY
      ULTIMATELY CEASE TO EXIST.**





Our
      financial statements reflect recurring, ongoing and substantial yearly net
      losses, and negative cash flows from operations. These conditions require
      sufficient additional funding or alternative sources of capital to meet our
      working capital needs. We have raised capital by selling common stock, issuing
      convertible debentures and our equity line of credit which will also requires
      us
      to issue common stock. However, future financing may not be available in amounts
      or on terms acceptable to us, if at all. If we cannot raise funds on acceptable
      terms, or achieve positive cash flow, we may be forced to curtail operations
      or
      may ultimately cease to exist.




**WE
      MAY NOT BE ABLE TO RAISE THE REQUIRED CAPITAL TO CONDUCT OUR OPERATIONS; EQUITY
      LINE OF CREDIT.**





We
      may
      require additional capital resources in order to conduct our operations. If
      we
      cannot obtain additional funding, we may make reductions in the scope and size
      of our operations. In order to grow and expand our business, and to introduce
      our services to the marketplace, we will need to raise additional funds. We
      have
      an equity line of credit. We have made 5 puts on the equity line of credit
      since
      February 2006 in the aggregate amount of $967,000. At October 10, 2006, the
      remaining amount available for us to draw down on the equity line of credit
      is
      $19,032,900. The equity line of credit expires in February 2009, after which
      we
      will not be able to draw down on the equity line of credit even if has not
      been
      fully utilized by us. The Cornell agreements limit our use of the equity line
      of
      credit. Whether as a result of the Cornell Agreements or as a result of our
      discretion, between now and February 2009, we may not have drawn down the full
      $19,032,900 currently available in the equity line of credit.








**RISKS
      ABOUT OUR SECURITIES**





**WE
      MAY ISSUE ADDITIONAL SHARES OF COMMON STOCK IN THE FUTURE, WHICH COULD CAUSE
      DILUTION TO ALL SHAREHOLDERS.**





We
      may
      seek to raise additional equity capital in the future. Any issuance of
      additional shares of our common stock will dilute the percentage ownership
      interest of all shareholders and may dilute the book value per share of our
      common stock.





**SHAREHOLDERS
      COULD INCUR NEGATIVE IMPACT DUE TO THE REMOVAL OF THE LEGEND ON A SIGNIFICANT
      PERCENTAGE OF OUR OUTSTANDING SHARES OF COMMON STOCK, OR THE EXERCISE OF OPTIONS
      AND WARRANTS.**





As
      of June 30, 2006, approximately 9,225,938 shares of our common stock was
      restricted stock, some of which was eligible to be sold immediately pursuant
      Rule 144 of the Securities Act of 1933, as amended. We have outstanding warrants
      and options to purchase 8,421,902 shares of our common stock. If these options
      and warrants are exercised, the underlying shares will ultimately become subject
      to resale pursuant to Rule 144. We do not know when or if these options will
      be
      exercised. In the event that a substantial number of these shares are offered
      for sale in the market by several holders, the market price of our common stock
      could be adversely affected.




**OUR
      MANAGEMENT CONTROLS A SIGNIFICANT PERCENTAGE OF OUR CURRENT OUTSTANDING COMMON
      STOCK; THEIR INTERESTS MAY CONFLICT WITH THOSE OF OUR
      SHAREHOLDERS.**





Our
      Directors and Executive Officers and their affiliates collectively and
      beneficially owned approximately 35 % of our outstanding common stock voting
      control (including voting Series B Preferred Stock. This concentration of voting
      control gives our Directors and Executive Officers and their respective
      affiliates substantial influence over any matters which require a shareholder
      vote, including, without limitation, the election of Directors, even if their
      interests may conflict with those of other shareholders. It could also have
      the
      effect of delaying or preventing a change in control of or otherwise
      discouraging a potential acquirer from attempting to obtain control of us.
      This
      could have an adverse effect on the market price of our common stock or prevent
      our shareholders from realizing a premium over the then prevailing market prices
      for their shares of common stock.


25
 *Table
            of Contents*




**IF
      WE ISSUE COMMON STOCK PURSUANT TO THE EQUITY LINE OF CREDIT, THEN EXISTING
      STOCKHOLDERS MAY EXPERIENCE SIGNIFICANT DILUTION.**





We
      utilize an equity line of credit. The sale of shares pursuant to equity line
      of
      credit will have a dilutive impact on our stockholders. As a result, our net
      income per share could decrease in future periods, and the market price of
      our
      common stock could decline. In addition, the lower our stock price at the time
      we exercise draw down on the equity line of credit, the more shares we will
      have
      to issue. If our stock price decreases, then our existing stockholders would
      experience greater dilution.





**IMPACT
      OF THE EQUITY LINE OF CREDIT**





As
      we
      draw down on the equity line of credit, our common stock will be purchased
      at or
      less than the then market price. Sales of such common stock could cause the
      market price of our common stock to decline.





**IF
      WE ISSUE COMMON STOCK PURSUANT TO CORNELL'S CONVERSION OF DEBENTURES OR EXERCISE
      OF WARRANT, THEN EXISTING STOCKHOLDERS MAY EXPERIENCE SIGNIFICANT
      DILUTION.**





The
      conversion into shares pursuant to Cornell debentures and warrants will have
      a
      dilutive impact on our stockholders. As a result, our net income per share
      could
      decrease in future periods, and the market price of our common stock could
      decline. In addition, the lower our stock price at the time we exercise draw
      down on the equity line of credit, the more shares we will have to issue. If
      our
      stock price decreases, then our existing stockholders would experience greater
      dilution.





**OUR
      STOCK PRICE IS HIGHLY VOLATILE AND YOU MAY LOSE SOME OR ALL OF YOUR
      INVESTMENT.**


Trading
        prices of our common stock may fluctuate in response to a number of events
        and
        factors, such as:
 
 -
              general
                  economic conditions changes in interest
                  rates;
  -
              conditions
                  or trends in the oil and gas
                  business;
  -
              fluctuations
                  in the stock market in general and market prices for oil and gas
                  companies
                  in particular;
  -
              quarterly
                  variations in our operating
                  results;
  -
              new
                  products, services, innovations, and strategic developments by
                  our
                  competitors or us, or business combinations and investments by
                  our
                  competitors or us;
  -
              changes
                  in environmental regulation;
  -
              changes
                  in our capital structure, including issuance of additional debt
                  or equity
                  to the public;
  -
              additions
                  or departures of our key personnel;
  -
              corporate
                  restructurings, including layoffs or closures of
                  facilities;
  -
              certain
                  analyst reports, news and
                  speculation.




26
 *Table
            of Contents*





**WE
      DO NOT INTEND TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE; THEREFORE, YOU MAY
      NEVER SEE A RETURN ON YOUR INVESTMENT.**





We
      do not
      anticipate the payment of cash dividends on our common stock in the foreseeable
      future. We anticipate that any profits from our operations will be devoted
      to
      our future operations. Any decision to pay dividends will depend upon our
      profitability at the time, cash available and other factors.




**SINCE
      WE HAVE NOT PAID ANY DIVIDENDS ON OUR COMMON STOCK AND DO NOT INTEND TO DO
      SO IN
      THE FUTURE, A PURCHASER OF OUR COMMON STOCK WILL ONLY REALIZE A GAIN ON THEIR
      INVESTMENT IF THE MARKET PRICE OF OUR COMMON STOCK
      INCREASES.**





We
      have
      never paid, and do not intend to pay, any cash dividends on our common Stock
      for
      the foreseeable future. An investor in this offering, in all likelihood, will
      only realize a profit on their investment if the market price of our common
      stock increases in value.





**MATERIAL
      RISKS RELATED TO OUR CORPORATE GOVERNANCE**





**OUR
      DIRECTORS AND OFFICERS HAVE RIGHTS TO INDEMNIFICATION.**





The
      Delaware General Corporation Law provides that we will indemnify our directors
      and officers if they are a party to any civil or criminal action. This may
      discourage claimants from making claims against the directors and officers
      even if the claims have merit. The cost of indemnification could be
      high.





Insofar
      as indemnification for liabilities arising under the Securities Act may be
      permitted to our directors, officers and controlling persons pursuant to the
      foregoing provisions, we have been advised that in the opinion of the Securities
      and Exchange Commission, such indemnification is against public policy as
      expressed in the Securities Act and is therefore unenforceable.








**Item
      1B. Unresolved Staff Comments.**





None.






**Item2. 
Properties.**





**Description
      of Oil and Gas Properties--Foreign.**





We
      are
      engaged in oil and gas operations. In West Africa, offshore Guinea, we
      are engaged in oil and gas geophysical exploration. We have not yet done any
      drilling off the coast of Guinea.





In
      2002
      USOil negotiated a Production and Sharing Agreement (“2002 PSA”) with the
      Republic of Guinea which USOil farmed out 100% of the rights and obligations
      of
      to SCS on December 10, 2002. This 2002 PSA gave exclusive rights for exploration
      and production across the concession of 16 million acres. All of our work from
      2002 until June 27, 2005 led up to our request for a drilling. A permit was
      not
      immediately issued as expected in July of 2005 as claims were made by USOil
      stating the 2002 PSA was terminated. This resulted in us filing a lawsuit
      against USOil (See the Legal Disclosure for USOil Corporation). At the request
      of the Government of Guinea, we negotiated a production sharing contract
      directly between SCS Corporation and the Republic of Guinea. After over 14
      months of work directly with the Government of Guinea, we and Guinea entered
      into a new 2006 Production Sharing Contract (2006 PSC) directly with Guinea.
      As
      of the filing of this 10K, we have exclusive rights to explore, develop, and
      produce approximately 33,000 square miles of Guinea’s offshore territory. 
All time frames to achieve our exploration work according to the 2006 PSC begin
      with the effective date of September 22, 2006.





The
      minimum remaining term of our new 2006 PSC with Guinea is described as
      follows: The first exploration period is for two years with two one year
      extensions available for a total of 4 years for the first exploration
      period.  In the first exploration period we are required to acquire,
      evaluate, and analyze 2D or 3D seismic with an estimated minimum expenditure
      of
      $10MM.  The second exploration period starts after the end of the first and
      is for 4 years with and extension of 4 years for a total of 8 years. In the
      second exploration period we are required to acquire additional 2D or 3D
      seismic, evaluate it and analyze it with an estimated minimum cost of $6MM,
      and
      drill 2 exploration wells for an estimate minimum cost of $15MM to $20MM
      each.  Fulfilling the work obligation in all cases exempts us from
      fulfilling any minimum expenditure obligation. We have the right to perform
      2 nd exploration period work such as drilling in the first exploration period and
      such work will accrue to the requirements in the second exploration
      period.  Once we determine an area to be capable of commercial production,
      SCS can secure as many “Exploitation Areas” it can find in a shape defined by
      us.  Each “Exploitation Area defined  as a contiguous block
      surrounding a discovery shall be 500 square kilometers in size. Each
      Exploitation Area is held for 25 years but if we show the area can still produce
      we will get two additional extensions for 10 years each so the total
      exploitation period becomes effectively 45 years.  Each well has its own
      exploitation period that starts when it begins producing.





27
 *Table
            of Contents*





Upon
      the
      government entering our new contract into government law, as described under
      article 5.1 and 5.2 of the new 2006 PSC, we will surrender our exclusive rights
      under this contract area to approximately 22,000 square miles of the 33,000
      square miles and then our contract area with respect to this new contract will
      govern an area of our choosing from the 33,000 square miles totaling
      approximately 11,000 square miles.  At that time, should this occur we will
      have another category of asset whereby we retain priority rights of
      participation to this 22,000 square mile area and all the work requirements
      above will pertain specifically to the exclusive rights area we choose of
      approximately 11,000 square miles.





**Contract
      Area**





The
      Contract Area represented on the attached map consists of an area deemed equal
      to approximately 80,000 sq. km.





The
      points indicated on this map are defined hereinafter with WGS 84 (World Geodetic
      System 1984) datum.





Point
            Latitude
                LongitudeA
            10:49:55:N
            15:10:33:WB
            10:39:49:N
            15:20:32:WC
            10.39:49:N
            15.34:16:WD
            09.23:27:N
            17:35:00:WE
            08.30:00:N
            17.30:00:WF
            08.10:00:N
            16:30:00:WG
            08.35:00:N
            15:30:00:WH
            08.10:30:N
            14:21:12:WI
            09:00:50:N
            13:23:54:W





The
      coastal boundary is the line between Point A and Point I wherever the water
      depth is greater than 25 meters.







28
 *Table
            of Contents*


**Description
      of Oil and Gas Properties--Domestic.**





Beginning
      in 2004, in Louisiana (onshore), we started drilling for and produced oil.
      During that time we also started drilling for gas, sometimes in the same
      borehole as was drilled for oil. As of June 30, 2006, we drilled in Louisiana
      an
      aggregate of 8 wells, and reworked 8 shut in wells that predate our acquisition
      of the leases. We financed our Louisiana drilling and production operations
      from
      internal resources and by selling some of the working interest in oil and gas
      leases to investors, while retaining a portion of the working interest for
      ourselves.





Our
      domestic energy operations are conducted by our business segment HYD Resources
      (“HYDR”). HYDR provides drilling, work over and construction services internally
      and to third parties. It also operates oil properties. HYDR has approximately
      518 acres of land under lease for oil and gas development. Of this total, leases
      held by production total approximately 234 acres . The leases held by production
      include the Kelly lease in La Salle Parish, in which we own 70% working
      interest, and two Magee Smith leases in Concordia Parish, in which we own 100%
      working interest.





**Reserves
      Reported To Other Agencies.**





We
      did
      not report any estimates of total, proved net oil or gas reserves to any other
      federal authority or agency.





**Production.**





The
      average sales price (including transfers) per unit of oil produced in fiscal
      2006 was $62.59 per barrel.





**Lifting
      Costs.**





The
      average production cost (lifting cost) per barrel of oil produced in fiscal
      2006
      was $30.19 per barrel. We expect this cost to decrease as additional production
      is brought online.




**Productive
      Crude Oil Wells and Natural Gas Wells.**





The
      number of productive crude oil and natural gas wells in which we held an
      interest as of June 30, 2006 was as follows:




**June
                30, 2006**
            
            **(1)
                Gross**
            
            **(2)
                Net**Crude
                Oil Wells:United
                StatesOnshore
            
            3
            
            2.7International:GuineaOffshore
            
            0
            
            0Total
            
            3
            
            2.7




(1) 
      Productive wells are producing wells and wells capable of production. A
      gross well is a well in which a working interest is owned. The number of
      gross wells is the total number of wells in which a working interest is
      owned.


(2) 
      A net well is deemed to exist when the sum of fractional ownership
      working interests in gross wells equals one. The number of net wells is the
      sum of the fractional working interests owned in gross wells expressed as
      whole numbers and fractions thereof. One or more completions in the same
      borehole are counted as one well in this table.





29
 *Table
            of Contents*




**Acreage.**





The
      developed and undeveloped acreage (including both leases and concessions) that
      we held as of June 30, 2006 are as follows:




**Developed
                Acreage (1) (2)**
            
            **Undeveloped
                Acreage (2) (3)****Location**
            
            **Gross
                Acres**
            
            **Net
                Acres**
            
            **Gross
                Acres**
            
            **Net
                Acres**United
                StatesOnshoreLouisiana
            
            
            234
            
            
            229
            
            
            284
            
            
            272ForeignOffshoreGuinea
            
            
            0
            
            
            0
            
            
            16,000,000
            
            
            13,120,000Total
            
            
            234
            
            
            229
            
            
            16,000,284
            
            
            13,120,272


30
 *Table
            of Contents*




(1)
       Developed acreage is acreage spaced or assignable to productive
      wells.


(2) A
      gross acre is an acre in which a working interest is owned. A net acre
      is deemed to exist when the sum of fractional ownership working interests
      in gross acres equals one. The number of net acres is the sum of the fractional
      working interests owned in gross acres expressed as whole numbers and fractions
      thereof. Undeveloped acreage is considered to be those leased acres on which
      wells have not been drilled or completed to a point that would permit the
      production of commercial quantities of crude oil and natural gas regardless
      of
      whether or not such acreage contains proved reserves.


(3) Included
      within undeveloped acreage are those leased acres (held by production under
      the terms of a lease) that are not within the spacing unit containing, or
      acreage assigned to, the productive well so holding such lease.





**Net
      Exploratory and Development Wells.**





The
      following table sets forth, as of June 30, 2006, the number of net exploratory
      and development wells we drilled in the fiscal year ended June 30, 2006. An
      exploratory well is a well drilled to find and produce crude oil or natural
      gas
      in an unproved area, to find a new reservoir in a field previously found to
      be
      productive of crude oil or natural gas in another reservoir, or to extend a
      known reservoir. A development well, for purposes of the following table is
      a
      well drilled within the proved area of a crude oil or natural gas reservoir
      to
      the depth of a stratigraphic horizon known to be productive. The number of
      wells
      drilled refers to the number of wells completed at any time during fiscal 2006,
      regardless of when drilling was initiated. Completion refers to the installation
      of permanent equipment for the production of crude oil or natural gas, or in
      the
      case of a dry hole, to the reporting of abandonment to the appropriate
      agency.




**Net
                Exploratory Wells**
            
            **Net
                Development Wells****Productive
                (1)**
            
            **Dry
                (2)**
            
            **Productive
                (1)**
            
            **Dry
                (2)****Year
                Ended June 30, 2006**
            
            **US**
            
            **Int'l**
            
            **US**
            
            **Int'l**
            
            **US**
            
            **Int'l**
            
            **US**
            
            **Int'l**0
            
            1
            
            0
            
            1
            
            0
            
            0
            
            0


____________________________


(1)
            A
                productive well is an exploratory or development well that is not
                a dry
                hole.





(2)
            A
                dry hole is an exploratory or development well determined to be incapable
                of producing either crude oil or natural gas in sufficient quantities
                to
                justify completion as an oil or gas
                well.





**Drilling
      In Progress**





At
      June
      30, 2006, there was no drilling in progress.





**Delivery
      Commitments--Offshore Guinea.**





When,
      if
      and as there is production in Guinea that falls under the terms of the 2006
      PSC,
      a 10% royalty will be paid to the Republic of Guinea.  Of the remaining 90%
      of the first production, 75% comes to us for cost recovery and 25% goes to
      Guinea, then up to the first 100,000 barrel per day of production we get 60%
      and
      Guinea gets 40%. Over 100,000 barrels per day of production, Guinea gets 60%
      and
      we get 40%.





**Delivery
      Commitments--Onshore Louisiana.**





We
      have
      no domestic delivery commitments.





**Description
      of Physical Facilities--Description of Operations Center in
      Louisiana.**





We
      own
      7/10 acre of highway frontage land containing a metal building of approximately
      7,000 square feet that we use for our oil and gas operations in Jena, Louisiana.
      In December 2005, we paid $50,000 for this property. The property is well
      located and well suited to facilitate the organization and mobilization of
      our
      oil and gas drilling and production in Louisiana.


31
 *Table
            of Contents*




**Description
      of Physical Facilities--Description of Administrative Office
      Property.**





Our
      executive and administrative offices are located at One Sugar Creek
      Center Blvd., Suite 125, Sugar Land, Texas 77478 where we lease 6,752
      square feet of space. The lease term was amended to 87 months commencing on
      August 1, 2006. We will get 3 months of free rent.  We have prepaid 3
      months of rent and given the landlord a $75,000 letter of credit for 24 months
      to secure the cost of the build-out. The letter of credit will be released
      after
      24 months. The monthly rent is $11,816 per month. As of June 30, 2006, the
      buildout has not been completed. The buildout was completed in August
      2006.






**Item
      3. Legal Proceedings.**




**Dixon
      Financial Services.**





In
      2001,
      we were named as a defendant in a lawsuit styled Dixon Financial Services,
      Ltd.
      v. Fidelity Transfer Company, Erin Oil Exploration, Inc., Bill Knollenberg,
      Ron
      Bearden, R.F. Bearden Associates, Inc., James Chang, Nick H. Johnson, Riley
      L.
      Burnett, Jr., Johnson, Burnett & Chang, L.L.P., Greenberg, Peden, Siegmyer
& Oshman, P.C., George Siegmyer and Hyperdynamics Corporation; Cause No.
      2001-06263; In the 215th Judicial District Court of Harris County,
      Texas.




This
      suit
      alleged breach of contract for failure to deliver share certificates in the
      name
      of Dixon Financial Services for 574,500 shares of our stock which were held
      in a
      nominee name. In 2000, The Erin Oil Exploration parties, including their
      attorneys, brought suit against us, wrongfully claiming that the shares were
      subject to their claims against other persons and obtained a temporary
      restraining order preventing the transfer of the shares. Fidelity Transfer,
      as
      our transfer agent, refused to transfer the shares to Dixon because of the
      restraining order. We set aside the temporary restraining order as to the shares
      and the shares were not subject to a later temporary injunction. However, legal
      counsel for the Erin Oil parties wrongfully asserted to Fidelity Transfer that
      the shares were subject to the injunction and Fidelity Transfer refused to
      transfer the shares to Dixon Financial for a period of at least three months
      during which the share price dropped from more than $6.00 a share to slightly
      more than $1.00 per share. We and Dixon Financial brought claims against the
      Erin Oil parties and their legal counsel for their wrongful conduct. The Erin
      Oil legal counsel asserted a litigation privilege under Texas law. The Erin
      Oil parties and their legal counsel filed motions for summary judgment asserting
      the litigation privilege as a bar to liability. The trial court granted all
      such
      motions for summary judgment.




Fidelity
      Transfer asserted that it was not subject to jurisdiction in Texas and we
      determined that Fidelity Transfer was not currently solvent for purposes of
      any
      judgment against it in this matter. Fidelity Transfer is no longer a party
      to
      this lawsuit at this time, but we have a formal agreement allowing us to pursue
      recovery against Fidelity Transfer at a later time.




At
      the
      end of April 2005, we and Dixon Financial entered into an agreement to settle
      and resolve this litigation. The agreement provides, among other things, that
      since the claims of both Dixon Financial and us against the Erin Oil parties
      and
      their legal counsel are similar, that we will bear the cost of appealing the
      summary judgments granted to the Erin Oil parties on the litigation privilege
      defense to liability. The agreement further provides that we agree to a judgment
      in the amount of $2,015,264 for the failure to deliver the shares into the
      name
      of Dixon Financial. However, Dixon Financial has agreed that it will not
      abstract or otherwise seek to enforce the agreed judgment, except in the event
      that the appeal is unsuccessful or the Erin Oil parties are determined not
      to be
      liable for any other reason. If the appeal is unsuccessful, we and Dixon
      Financial have agreed that we will pay the sum of $240,000 payable in the amount
      of $10,000 per month for a period of 24 months. This agreement is subject to
      court approval. We reasonably believe that our liability, if any, will not
      arise
      prior to September 2007. In the event that the appeal is successful, we will
      not
      be obligated to pay any amount of money other than legal fees and expenses.
      If
      the appeal is successful, we will seek to recover our damages and costs from
      the
      Erin Oil parties and their legal counsel. The Erin Oil parties' legal counsel
      has insurance which has been providing a defense and which may pay for any
      liability awarded against the Erin Oil parties' counsel.





The
      proposed agreed judgment described above was submitted to the court in May
      2005.
 As of September 25, 2006, the Court entered an order in June 2006 severing
      some of the Erin Oil parties from the main case so that the summary judgments
      entered in favor of those parties could be appealed. That appeal is proceeding.
      The remainder of the case is set for trial on the issue of damages in December
      2006. Once judgment is entered in the main case, we will seek to combine the
      appeals in the same court of appeals for resolution. An opinion from the court
      of appeals on the appealed issues is not anticipated prior to September 2007.


32
 *Table
            of Contents*




**Wellington,
      LLC.**





On
      April
      9, 2001, we were named as a defendant in a lawsuit styled Wellington, LLC vs.
      Hyperdynamics Corporation et al. Civil Action# 18811-NC, The Court of Chancery
      of Delaware.




The
      Plaintiff claims that we did not carry out conversion of Series A preferred
      stock to common stock. On August 9, 2002 Plaintiff, Defendant, and their
      respective counsels executed an “Agreement for Transfer of Claims in Delaware
      Action to Georgia. Subsequently, the lawsuit was moved in its entirety to
      Atlanta, Georgia to be litigated under the lawsuit discussed below. Under the
      agreement, the Plaintiff in the Delaware action, Wellington, LLC. would become
      the Defendant in Atlanta. During the fiscal year ended June 30, 2004, the Court
      of Chancery of Delaware dismissed the Delaware case.




On
      November 5, 2001, we filed a lawsuit styled Hyperdynamics Corporation,
      Plaintiff, v. J.P. Carey Securities, Inc., J.P. Carey Asset Management LLC,
      Joseph C. Canouse, John C. Canouse, James P. Canouse, Jeffrey Canouse,
      Southridge Capital Management LLC, Stephen Hicks a/k/a Steve Hicks, Thomson
      Kernaghan & Co., Limited, Mark Valentine, Talya Davies, Cache Capital (USA),
      L.P., Carpe Diem, Carpe Diem LTD., Wellington, LLC, Minglewood Capital, LLC,
      Falcon Securities, LTD, Navigator Management LTD., David Sims, and Citco
      Trustees (Cayman) Limited, Defendants; and Wellington LLC,
      Counterclaim/Third-Party Plaintiff, v. Hyperdynamics Corporation, a Delaware
      corporation, Kent Watts, Michael Watts, Robert Hill, Harry J. Briers, DJX,
      Ltd.,
      a Belize corporation, and Does 1-10, Counterclaim/Third-Party Defendants, Civil
      Action File No. 2001CV44988, In The Superior Court of Fulton County, State
      of
      Georgia.




We
      filed
      our First Amended Complaint against Defendants on September 12, 2002 in which
      we
      presented thirteen counts for Causes of Action against defendants including
      “Violations of Georgia Racketeer Influenced and Corrupt Organizations” (RICO)
      Act (O.C.G.A. SS 16-14-1, ET SEO).




We
      believe that more than one of the Defendants worked together to create the
      appearance of providing initial long term financing ($3,000,000) and additional
      financing commitments (up to additional $5,000,000), all from reputable sources,
      while the Defendants' real plan was to manipulate our stock through
      contractually prohibited short selling and multiple breaches of the
      contractually agreed to selling covenants.





We
      are
      subject to counterclaims in this Georgia litigation. The counterclaimants allege
      that Hyperdynamics and its Officers and Directors breached their fiduciary
      duties to shareholders and committed other tortuous acts. We intend to continue
      to vigorously pursue damages and defend all counterclaims. Discovery is being
      primarily focused on jurisdictional issues at this time. During the litigation
      we have made numerous claims of discovery abuse resulting in certain defendants
      and defense attorney's involved being sanctioned by the court. They have filed
      for sanctions against us as well. The court dismissed all non-Georgia
      defendants. We have filed a notice of appeal of that ruling. **** As
      of
      September 30, 2006, no ruling has occurred.




**USOil
      Corporation.**




On
      July
      29, 2005, our wholly owned subsidiary filed a lawsuit styled SCS Corporation,
      Plaintiff v. USOil Corporation, Defendant; Cause No. 2005-49205; in the 333rd
      Judicial District Court of Harris County, Texas. With regard to our contract
      with USOil for a 100% farmout of the December 2002 Production Sharing Agreement
      between USOil and the Republic of Guinea, we allege breach of contract, fraud,
      negligent misrepresentation, and we seek a declaratory judgment and damages
      of
      over $12,000,000 and lost profits which we believe can easily exceed hundreds
      of
      millions of dollars. Early responses from the defendant indicated a general
      denial, that the 2002 PSA had been terminated by the government of Guinea,
      and a
      claim that we owe them $1,600,000. We have added two defendants, Dinesh Shukla
      and Joseph R. Delawa. The suit
      remains in discovery at the date of filing this 10K.




**Trendsetter
      Investors, LLC**





On
      March
      8, 2006, a lawsuit was filed against us styled Trendsetter Investors, LLC,
      Plaintiff vs. Hyperdynamics Corporation, Trendsetter Production Co., Kent Watts,
      Michael Watts, Christopher Watts and Harry Briers, Defendants; Civil Action
      No.
      H 06-0746; in the United States District Court for the Southern District of
      Texas, Houston Division.





The
      Plaintiff alleges Fraud or Deceit in the Sale of Securities, Common Law Fraud,
      Fraud by Omission and Control Person Liability. Plaintiff seeks unspecified
      monetary damages. We deny all their allegations and are vigorously defending
      ourselves. We have filed a motion to dismiss on behalf of all defendants. The
      case is currently stayed by the Court pending a ruling on these motions to
      dismiss. We believe this plaintiff's shareholders are one and the same as the
      members of a control group (the "Manning Group") led by Mr. Jack Manning.
      Manning is a Houston based attorney and has been a supporter of Hyperdynamics
      Corporation in the past. In private equity deals since April of 2003, he and
      his
      group have purchased common stock in the price range of $.15 to $.80 per share.
      We believe that the Manning Group through the circumstances surrounding the
      Trendsetter LLC working interest investment, has an agenda to unjustly enrich
      themselves through our securities. We are considering counter claims against
      Trendsetter LLC and each member of the Manning Group. We have significant
      concerns that they collectively have or have had over 10% of our common stock
      and they have been acting in concert, making them an undisclosed affiliate
      group. As
      of
      September 30,2006, the suit is in discovery.


33
 *Table
            of Contents*




**Manning,
      Moore, Long**





On
      May 5,
      2006 a lawsuit was served styled Jack Manning, Sue Manning, Stephen Moore and
      Geoffrey Long, Plaintiffs versus Hyperdynamics Corporation and Kent Watts,
      defendants. The suit was filed in the 189th District Court of Harris County,
      Texas with cause no. 2006-22135. The Plaintiff alleges they had the pre-emptive
      right to invest in Hyperdynamics Corporation's common stock. We deny all their
      allegations and will vigorously defend ourselves and are evaluating all possible
      counter claim actions. We believe this lawsuit is tied to the Trendsetter LLC
      litigation discussed above, and is a part of their groups' concerted attack
      on
      the company as a strategy to receive undue enrichment in the form of our common
      stock. We have exchanged the first round of written discovery and intend to
      conduct additional discovery, including depositions.





Of
      far
      more importance to us is that this group may have been or is now acting together
      in concert since as far back as April 2003 when they funded a bridge loan and
      collectively invested and purchased 2,878,969 shares of common stock. At that
      time there were approximately 27,000,000 shares of common stock outstanding.
      This would have given them greater than 10% of the outstanding common stock
      of
      the company. In review of our records, during the period of time between October
      of 2003 through approximately the end of March of 2004, this group dramatically
      increased their holdings of Hyperdynamics Corporation's common stock. Based
      on
      concerted actions since then, we are seriously evaluating all corroborating
      information concerning the possibility that their group is an undisclosed
      affiliate of Hyperdynamics Corporation. As
      of
      September 30,2006, the suit is in discovery.







**Item
      4. Submissionof Matters to a Vote of Security
      Holders.**





None.





34
 *Table
            of Contents*





**PART
      II**








**Item
      5.Market for Registrant’s Common Equity, Related
      Stockholder Matters and Issuer Purchases of Equity
      Securities.**





**Price
      Range of Common Stock.**





Our
      common stock is traded on the American Stock Exchange under the trading symbol
      ““HDY”. The following table sets forth the quarterly high and low bid prices per
      share for the common stock, as reported by the OTCBB (our previous trading
      market) or the AMEX as the case may be. The bid prices reflect inter-dealer
      quotations, do not include retail markup, markdown, or commission and do not
      necessarily reflect actual transactions.






**High
                Bid**
            
            **Low
                Bid****Fiscal
                2004**First
                Quarter
            
            $
            2.1400
            
            $
            0.7300Second
                Quarter
            
            
            2.2500
            
            
            1.4100Third
                Quarter
            
            
            3.7200
            
            
            1.5100Fourth
                Quarter
            
            
            3.0200
            
            
            2.2700**Fiscal
                2005**First
                Quarter
            
            $
            2.7200
            
            $
            1.7600Second
                Quarter
            
            
            3.5000
            
            
            2.1700Third
                Quarter
            
            
            3.4000
            
            
            1.7500Fourth
                Quarter
            
            
            3.2000
            
            
            1.9900**Fiscal
                2006**First
                Quarter
            
            $
            2.5700
            
            $
            0.8700Second
                Quarter
            
            
            2.3700
            
            
            1.09000Third
                Quarter
            
            
            3.4200
            
            
            1.6800Fourth
                Quarter
            
            
            3.4200
            
            
            2.0500






On October
      10, 2006, the last price for our common stock as reported by the AMEX was $2.96
      per share. On October 10, 2006, there were approximately 205 stockholders
      of record of the common stock.





We
      have
      not paid, and we do not currently intend to pay in the foreseeable future,
      cash
      dividends on our common stock. The current policy of our Board of Directors
      is
      to retain all earnings, if any, to provide funds for operation and expansion
      of
      our business. The declaration of dividends, if any, will be subject to the
      discretion of the Board of Directors, which may consider such factors as our
      results of operations, financial condition, capital needs and acquisition
      strategy, among others.





35
 *Table
            of Contents*





**Recent
      Sales of Unregistered Securities**





During
      the last quarter of 2006, we issued unregistered securities in transactions
      summarized below.





In
      April
      2006, Hyperdynamics issued 125,000 shares of restricted common stock for the
      exercise of warrants from two individuals and received proceeds of $72,000.
      This
      was a private placement made in reliance of Section 4(2) of the
      Act.





In
      April
      2006, Hyperdynamics issued 15,000 shares of restricted common stock to a
      consultant for services rendered. The services were valued at $48,000. This
      was
      a private placement made in reliance of Section 4(2) of the Act.








**Item
      6.Selected Financial Data.**





The
      selected historical consolidated financial data set forth below for each of
      the
      years in the five-year period ended June 30, 2006 has been derived from our
      audited consolidated financial statements. This information should be read
      in
      conjunction with "Management's Discussion and Analysis of Financial Condition
      and Results of Operations" and the consolidated financial statements and notes
      thereto included elsewhere in this Annual Report on Form 10-K.








**Years
                Ended June 30,****2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****(in
                thousands, except per share amounts)**Consolidated
                Statement of Operations Data:Sales
            
            $
            656
            
            $
            173
            
            $
            38
            
            $
            468
            
            $
            356Loss
                before interest and income taxes
            
            
            (5,041
            )
            
            (4,900
            )
            
            (3,117
            )
            
            (2,415
            )
            
            (3,013
            )Net
                loss chargeable to common shareholders
            
            
            (7,253
            )
            
            (5,344
            )
            
            (3,678
            )
            
            (2,645
            )
            
            (3,181
            )Basic
                and diluted loss per common share
            
            $
            (0.17
            )
            $
            (0.13
            )
            $
            (0.12
            )
            $
            (0.12
            )
            $
            (0.18
            )Weighted
                average shares outstanding
            
            
            43,318,773
            
            
            41,646,844
            
            
            31,938,926
            
            
            22,580,526
            
            
            17,426,561Working
                capital (deficit)
            
            
            142
            
            $
            (1,413
            )
            $
            1,625
            
            $
            (1,267
            )
            $
            (724
            )Capital
                expenditure (deficit)
            
            
            3,176
            
            
            (2,890
            )
            
            2,973
            
            
            147
            
            
            (5,250
            )Long-term
                liabilities
            
            
            67
            
            
            135
            
            
            726
            
            
            256
            
            
            183Stockholders’
                equity
            
            
            4,608
            
            
            3,146
            
            
            4,660
            
            
            (317
            )
            
            367Total
                Assets
            
            
            8,679
            
            
            5,209
            
            
            7,283
            
            
            1,480
            
            
            1,425





**Item
      7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
      CONDITION AND RESULTS OF OPERATION.**





**CAUTIONARY
      STATEMENT ON FORWARD-LOOKING INFORMATION**




We
      are
      including the following cautionary statement to make applicable and take
      advantage of the safe harbor provision of the Private Securities Litigation
      Reform Act of 1995 for any forward-looking statements made by us, or on our
      behalf. This prospectus contains forward-looking statements. Forward-looking
      statements include statements concerning plans, objectives, goals, strategies,
      expectations, future events or performance and underlying assumptions and other
      statements, which are other than statements of historical facts. Certain
      statements contained herein are forward-looking statements and, accordingly,
      involve risks and uncertainties, which could cause actual results or outcomes
      to
      differ materially from those expressed in the forward-looking statements. Our
      expectations, beliefs and projections are expressed in good faith and we believe
      them to have a reasonable basis, including without limitations, our examination
      of historical operating trends, data contained in our records and other data
      available from third parties, but there can be no assurance that our
      expectations, beliefs or projections will result or be achieved or accomplished.
      In addition to other factors and matters discussed elsewhere herein, the
      following are important factors that, in our view, could cause actual results
      to
      differ materially from those discussed in the forward-looking statements: our
      ability to respond to changes in the information system environment,
      competition, the availability of financing, if available, on terms and
      conditions acceptable to us, and the availability of personnel in the future.
      We
      have no obligations to update or revise these forward-looking statements to
      reflect future events.


36
 *Table
            of Contents*




Our
      fiscal year end is June 30.





**Results
      of Operations --- Reportable segments.**




Hyperdynamics
      has two reportable segments: Our operations in Guinea (“SCS”) and our
      domestic Louisiana operations (“HYDR”). SCS is engaged in oil and gas
      exploration activities pertaining to offshore Guinea, West Africa. Additionally,
      it provides seismic data transcription and management services to support its
      activities and to external customers. The seismic data work is performed in
      the
      USA. HYDR is engaged in oil and gas exploration and production activities in
      Louisiana, USA. HYDR also provides some oilfield services to external customers.
      Hyperdynamics evaluates performance based on profit or loss from operations.
      The
      reportable segments are managed by separate management teams who are evaluated
      based on their segment's performance








**Year
                ended June 30,****2004**
            
            **2003**
            
            **%****(in
                Thousands)**
            
            **Change****Revenues**SCS
            
            $
            18
            
            $
            451
            
            
            (96
            %)HYDR
            
            
            10
            
            
            -
            
            
            **(1
            )Corporate
            
            
            10
            
            
            17
            
            
            (42
            %)**Total
                Revenues**
            
            **$**
            **38**
            
            **$**
            **468**
            
            
            **(92**
            **%)**








**Year
                ended June 30,****2005**
            
            **2004**
            
            **%****(in
                Thousands)**
            
            **Change****Revenues**SCS
            
            $
            3
            
            $
            18
            
            
            (83
            %)HYDR
                **(2)
            
            
            170
            
            
            10
            
            
            N/A
                **(2
            )Corporate
            
            
            -
            
            
            10
            
            
            (100
            %)**Total
                Revenues**
            
            **$**
            **173**
            
            **$**
            **38**
            
            
            **352**
            **%**




**Year
                ended June 30,****2006**
            
            **2005**
            
            **%****(in
                Thousands)**
            
            **Change****Revenues**SCS
            
            $
            -
            
            $
            3
            
            
            (100
            %)HYDR
            
            
            656
            
            
            170
            
            
            288
            %Corporate
            
            
            -
            
            
            -
            
            
            -**Total
                Revenues**
            
            **$**
            **656**
            
            **$**
            **173**
            
            
            **281**
            **%**








**Note:**


**  (1)
      There were no results in 2003 for HYDR, as its inception date was in April
      2004.


**
      (2)
      Data only reflects two months of operation in 2004 and is not
      comparable.


**Results
      of Operations --- Louisiana Operations (“HYDR”)**





**Comparison
      for Fiscal Year 2004 and 2003**




Revenues .
       Our revenues in 2004 were $10,000 and there are no 2003 results for HYDR
      to compare.




Selling,
      General and Administrative Expenses. There
      are no 2003 results for HYDR to compare for this segment.


37
 *Table
            of Contents*





Loss
      from Operations. There
      are no 2003 results for HYDR to compare for this segment.





**Comparison
      for Fiscal Year 2005 and 2004**




Revenues .
       Our prior year revenue reflects only two months of operations.
      Accordingly, we are not able to compare the results for this segment. Our
      revenues in 2004 were $10,000 compared to $170,000 in 2005, which includes
      $52,000 from oil production and $118,000 from oilfield service work for 2005.
      The oilfield service work was performed during the six months ended December
      31,
      2004. Since that time, our workover crew has been devoted to improving our
      oil
      and gas properties, and we expect them to continue to provide internal services.
      We expect to derive our future revenues primarily from oil production and not
      from the provision of oilfield services.




In
      2005,
      our cost of revenue comprised of approximately $80,000 of costs associated
      with
      oilfield service work, $271,000 associated with oil production revenues, and
      $860,000 of general field expenses. The breakdown for this expense is
      derived from the costs associated with startup costs, repairs and maintenance,
      tools and yard cost, equipment and service contracts of approximately $603,000
      and $257,000 in operational salaries and contract labor.





Additionally,
      we incurred selling, general and administrative expenses of approximately
      $373,000 and $133,000 attributable to administrative payroll costs. Our
      other significant expenditures were professional fees, such as consulting,
      legal
      and accounting of $62,000, workman's compensation and insurance expenses of
      $77,000, bad debt expense of $34,000, office and administrative expenses of
      $66,000 and depreciation and amortization of $77,000. Our loss from operations
      for the year ended June 30, 2005 from this segment was ($1,508,000) and
      ($92,000) in 2004 which only reflects two months of operation for this
      segment.




**Comparison
      for Fiscal Year 2006 and 2005**




Revenues .
 
      Our revenue for the year ended June 30, 2006 was $656,000 compared to $170,000
      in 2005, respectively. This represents an increase of 286% or $486,000. The
      revenues for 2006 are all derived from oil and gas production. The revenues
      in
      2005 include $52,000 from oil & gas revenues and $118,000 from oilfield
      service work. We expect to derive our future revenues primarily from oil
      production and not from the provision of oilfield services.




Our
      cost
      of revenues for the year ended June 30, 2006 consist of approximately $294,000
      of oil production cost and $1,392,000 of general field expenses. The breakdown
      for general field expenses is derived from the cost associated with repairs
      & maintenance, tools & yard costs, equipment operating costs, working
      interest and royalty expenses for a combined total of $1,014,000 and $378,000
      in
      operational salaries, payroll taxes and contract labor.





Additionally,
      our selling, general and administrative expenses increased 64%, or $236,000,
      from $373,000 to $609,000 for the years ended June 30, 2005 and June 30, 2006
      respectively. The breakdown for these expenses in 2006 includes $4,000 in
      selling expenses $60,000 of administrative payroll costs, an establishment
      of a
      reserve for bad debt on uncollectible working interest billing of $233,000,
      professional fees of $172,000 due to legal expenses stemming from various
      lawsuits filed by our working interest partner, insurance expenses of $43,000,
      and office and administrative expenses of $97,000. In comparison, the 2005
      breakdown includes $133,000 of payroll costs, professional fees of $62,000,
      insurance costs of $77,000, bad debt expense of $34,000, and office and
      administrative expense of $67,000. Thus, the main factors contributing to the
      $236,000 change are: a $73,000 decrease in payroll costs, a $199,000 increase
      in
      bad debt expense, an $110,000 increase in professional fees. We also experienced
      a gain of $34,000 from the settlement of our lease agreement for our previous
      office space.





Our
      depreciation and amortization expense was $116,000 and $77,000 for the years
      ended, June 30, 2006 and 2005, respectively. This represents an increase of
      51%
      or $39,000.. Our loss from operations from this segment was ($1,754,000) and
      ($1,508,000) for the years ended June 30 2006 and 2005, respectively.




**Results
      of Operations --- Guinea And Seismic Data Management (“SCS”)**





**Comparison
      for Fiscal Year 2004 and 2003**




Revenues. Our
      revenues in 2004 and 2003, were $18,000 and $451,000, respectively. The change
      is primarily due to a decrease in internal seismic data processing work. During
      this period, we focused on the acquisition of seismic data for our Guinea
      concession. Our cost of revenues decreased 636% from $372,000 in June 2003
      to
      $58,000 in June 2004. The decrease is primarily due to decline in high
      contribution margin transcription work and the necessity to maintain our level
      of operational personnel.




38
 *Table
            of Contents*





Selling,
      General and Administrative Expenses. We had
      an increase of $21,000 in 2004, from $323,000 in 2003. The change is primarily
      due to the increase in travel expenses associated with our Guinea
      concession.





We
      experienced impairment losses of $350,000 on goodwill during 2003 and no
      impairment in 2004. Our depreciation and amortization increased 61% from $15,000
      in 2003 to $24,000 in 2004 due to the increased cost basis on our
      asset.




Interest
      Expense. Our
      interest expense increased $232,000 in 2004 from $0 in 2003, due to accretion
      of
      interest on our mandatorily redeemable preferred stock.




Loss
      from Operations .
      Based
      on the factors discussed above, our loss from operations from this segment
      in
      2004 and 2003 is ($408,000) and ($610,000) respectively. This represents a
      decrease of $202,000.





**Comparison
      for Fiscal Year 2005 and 2004**




Revenues. We
      had revenues of $3,000 from this segment in 2005 and $18,000 in 2004,
      respectively. The lack of revenues is attributable to the decrease of internal
      seismic data processing work since we have focused on the acquisition of seismic
      data for our concession in Guinea. Cost of revenues increased 19% from $58,000
      in 2004 to $69,000 in 2005.




We
      have
      processed a portion of some data that we have the right to market in order
      to
      provide samples of the data to our prospects. When we sell the right to use
      this
      data, we will receive a fee and we will also be compensated for processing
      the
      data that we sell.




Selling,
      General and Administrative Expenses. We
      had an increase of 23%, from $343,000 in 2004 to $424,000 for 2005 for selling,
      general and administrative expenses. The selling expenses increased 100% from
      $19,000 in 2004 to $38,000 in 2005 due to an addition of staff and 6801%
      increase in general and administrative expenses relating to the purchase of
      additional health insurance coverage for new employees from $0 in 2004 to
      $24,000 in 2005. An increase of 175% on other taxes, particularly the franchise
      tax , which was $5,000 higher than 2004. Utilities expense also rose 31%, or
      $9,000, from $36,000 in 2004 to $47,000 in 2005 due to higher electric
      consumption. Office expenses increased 41%, or $7,000, from $17,000 in 2004
      to
      $24,000 in 2005 due to more conference participation by personnel. Our travel
      expenses increased 42% from $48,000 in 2004 to $68,000 in 2005 due to multiple
      trips to London and Africa in connection with the Guinea
      concession.




Our
      other
      significant expenditures include professional fees which reflect an increase
      of
      305% due to accounting costs related to the fairness opinion for a preferred
      stock paydown matter. Our depreciation and amortization increased 17% from
      $24,000 in 2004 to $28,000 for year ended 2005.




Loss
      from Operations .
      Based
      on the factors discussed above, our loss from operations from this segment
      increased 30% from ($408,000) in 2004 to ($529,000) in 2005.




**Comparison
      for Fiscal Year 2006 and 2005**




Revenues. Our
      revenues for the years ended June 30, 2006 and 2005 were $0 and $3,000,
      respectively. The lack of revenues is attributable to the decrease of internal
      seismic data processing work since we have focused on the acquisition of seismic
      data for our concession in Guinea. Cost of revenues was $62,000 and $69,000
      for
      the years ended June 30, 2006 and 2005, respectively.




We
      have
      processed a portion of some data that we have the right to market in order
      to
      provide samples of the data to our prospects. When we sell the right to use
      this
      data, we will receive a fee and we will also be compensated for processing
      the
      data that we sell.




Selling,
      General and Administrative Expenses. Our selling, general and administrative expenses were $732,000 and $424,000
      for
      the years ended June 30, 2006 and 2005, respectively. This represents an
      increase of 73% or $308,000, of which our selling expenses were $0 and $38,000
      for the years ended June 30, 2006 and 2005, respectively. This represents a
      100%
      decrease. The increase in other general and administrative expenses is
      attributable to various significant expenditures including: an increase in
      salary expenses of 113% or $71,000 from $63,000 to $133,000 for the year ended
      June 30, 2005 and 2006, respectively, due to the hiring of our new SCS Vice
      President of Guinea Affairs and increased allocation of salaries from corporate
      office in connection with work on the Guinea concession; significant increase
      of
      70% or $48,000 on travel expenses to Africa in connection with the Guinea
      concession from $68,000 to $116,000 for the year ended June 30, 2005 and 2006,
      respectively; professional and consulting expenses increase of 2600% or $260,000
      attributable to legal and consultation expenses relating to the Guinea
      concession.





39
 *Table
            of Contents*




Although
      there was a significant increase in expenses, we also experienced
      a decrease of $14,000 on rent and utilities expenses from $179,000 to
      $165,000 for the years ended June 30, 2005 and 2006, respectively. This decrease
      is attributable to the settlement of our lease from our old office. Our new
      office lease agreement decreased our monthly rent payments and usage on
      electricity. Insurance expenses decreased $11,000 from $24,000 to $13,000 for
      the year ended June 30, 2005 and 2006 respectively, due to reduction of staff.
      Office supplies and expenses decreased $11,000 from $20,000 to $9,000 for the
      year ended June 30, 2005 and 2006, respectively, due to decrease in repairs
      and
      maintenance on our office equipments and reduction of purchases on supplies.
      We
      also experienced a gain of $67,000 from the settlement of our lease agreement
      for our previous office space.




Our
      depreciation and amortization increased 10% or $3,000, from $28,000 to $31,000
      for year ended June 30, 2005 and 2006, respectively, due to additional assets
      in
      place at our new office in Guinea, West Africa.




Our
      interest expense decreased 100% due to no retirement on preferred stock or
      no
      redemption of option by investor and no loss occurred on debt retirement for
      the
      year ended June 30, 2006. Our





Loss
      from Operations .
      Based
      on the factors discussed above, our loss from operations from this segment
      increased by 56%, or ($296,000), for the year ended June 30, 2006 to ($825,000)
      from ($529,000) for the year ended June 30, 2005.





**Results
      of Operations --- Corporate Overhead**





**Comparison
      for Fiscal Year 2004 and 2003**




Revenue. The
      revenue for 2004 and 2003 was $10,000 and $17,000, respectively. Our cost of
      revenues decreased by $16,000, from $97,000 in 2003 to $81,000 in
      2004.




Selling,
      General and Administrative Expenses. Selling,
      general and administrative expenses increased by $1,262,000, from $1,533,000
      in
      2003 to $2,795,000 in 2004. This represents an increase of 82%. This occurred
      because effective October 1, 2003, Hyperdynamics adopted the fair value
      recognition provisions of FASB Statement 123, Accounting for Stock-Based
      Compensation. We adopted FASB Statement 123 using the retroactive restatement
      method as described in SFAS 148, Accounting for Stock-Based Compensation -
      Transition and Disclosure. In accordance with that statement, we have
      retroactively restated all periods presented so that stock option expense is
      reflected in accordance with SFAS 123. Consequently, amounts previously marked
      to market of $2,147,000 during the year ended June 2003, in accordance with
      APB
      25 and related interpretations, have been restated and these financial
      statements reflect instead the fair value of the employee options earned in
      that
      year of$415,000.




The
      major
      factor involved in the change in Selling, General and Administrative Expenses
      was approximately $1,500,000 of consulting cost incurred in 2004 when warrants
      to purchase 800,000 shares of our common stock were issued to consultants for
      Investor Relations/Public Relations services. The cost of warrants issued to
      consultants in 2003 was $85,000. Our other expense associated with warrants
      issued to our Officers decreased $147,000 or 36% from $413,000 in 2003 to
      $266,000 in 2004. This occurred because warrants were forfeited when one of
      our
      Officers resigned during fiscal 2003. A one-time debt renegotiation cost of
      $100,000 is included in 2003 results and a gain on a settlement with a vendor
      of
      $92,000 is included in 2004 results. Our other consulting, legal and
      professional costs decreased $190,000 or 53%, from $357,000 in 2003 to $167,000
      in 2004.




In
      addition to increased selling, general and administrative expenses, we
      experienced impairment losses of $704,000 on leasehold improvements during
      2003.
      There was no impairment in 2004. The cost basis of our assets decreased as
      of
      July 1, 2004 due to that impairment and our depreciation expense decreased
      significantly from $162,000 in 2003 to $18,000 in 2004.




**Other
      Items.**




Interest
      Expense. Interest
      expense increased 762% from $55,000 in 2003 to $474,000 in 2004. The increase
      was primarily due to Notes Payable due December 31, 2007, which were converted
      during the year ended June 30, 2004.




Net
      Loss. Based
      on the factors discussed for each segment, our net loss chargeable to common
      shareholders was ($3,678,000), or ($0.12) per share in 2004 and compared to
      ($2,645,000), or ($0.12) per share in 2003.


40
 *Table
            of Contents*




**Comparison
      for Fiscal Year 2005 and 2004**




Revenues. We
      continued to receive occasional revenues from our prior value added reselling
      and computer consulting business. When this occurred, we classified the revenue
      to corporate overhead. This revenue was $0 for the year ended June 30, 2005
      and
      $10,000 for the year ended June 2004, thus a 97% decline in revenues for 2005.
      We do not actively pursue revenues of this nature and they occur very
      irregularly.




Our
      cost
      of revenues decreased from $81,000 in 2004 to $68,000 in 2005. We classify
      certain computer expenditures and our system engineer's payroll costs as cost
      of
      revenues attributable to corporate overhead. The 15% difference in cost of
      revenues is attributable to the cost of computer equipment purchased and resold
      in June 2005.




Selling,
      General and Administrative Expenses. Selling,
      general and administrative expenses increased by $393,000, from $2,410,000
      in
      2004 to $2,803,000 in 2005. This represents an increase of 16% and is due to
      equity-based compensation costs.  Equity-based compensation costs were
      approximately $300,000 higher in the year ended June 30, 2005 than in the
      comparable period of 2004. This year's expense related to equity-based
      compensation to four consultants of $1,833,000 derives from the vesting of
      warrants to purchase 800,000 shares of common stock at an exercise price of
      $0.50 per share. During the year ended June 30, 2004, warrants to purchase
      2,000,000 shares of common stock were granted to four consultants and warrants
      vested during that year. Additionally, warrants to purchase 800,000 shares
      of
      common stock vested during fiscal 2005. Warrants to purchase 200,000 shares
      of
      common stock are scheduled to vest during fiscal 2006. We record the expense
      associated with these warrants using the fair value of the warrants as of the
      date they vest as estimated by the Black-Scholes option pricing model. Thus,
      provided that the agreements are not terminated (which would result in the
      forfeiture of the unvested warrants), we will incur expense related to these
      warrants each quarter for the next three quarters and the expense will vary
      based upon the market price of our common stock in each quarter. Equity-based
      compensation does not impact our liquidity or net worth because the consulting
      expense is offset by an increase to additional paid-in capital.




Additional
      factors affecting the increase of selling, general and administrative expenses
      is attributable to the purchase of added coverage for Directors and Officers
      indemnity insurance, an increase of $100,000 from $15,000 in 2004. The insurance
      policy has been in force since April 2004. Our general office expenses increased
      from $49,000 in 2004 to $158,000 in 2005 due to American Stock Exchange listing
      fees of $65,000 and higher expenses for the annual shareholder meeting. Based
      on
      the factors discussed above, the loss from operations attributable to
      corporate overhead increased from ($2,617,000) in 2004 to
      ($2,863,000) in 2005.




**Other
      Items**




Interest
      Expense. Interest
      expense decreased from $474,000 in the year ended June 30, 2004 to $316,000
      in
      the year ended June 30, 2005. The interest expense during fiscal 2004 consisted
      of approximately $250,000 attributable to the Notes Payable, due December 31,
      2007 and $230,000 of accretion on mandatorily redeemable preferred stock. These
      notes payable were converted during the year ended June 30, 2004. The interest
      expense during 2005 consisted of accretion of interest on mandatorily redeemable
      preferred stock and a loss on the retirement of the preferred
      stock.





Net
      Loss. Based
      on the factors discussed for each segment, the Net Loss chargeable to common
      shareholders increased $1,667,000, or 45% from ($3,678,000), or( $.12) per
      share
      in 2004 to ($5,344,000), or ($.13) per share in 2005. The net loss chargeable
      to
      common shareholders includes a provision for preferred stock dividends of
      $187,000 in 2004 and $128,000 in 2005. The negative results are due to the
      factors discussed above.




**Comparison
      for Fiscal Year 2006 and 2005**




Revenues. Our
      revenues for the years ended June 30, 2005 and 2006 were $0. We continue to
      receive occasional revenues from our prior value added reselling and computer
      consulting business. When this occurs, we classify the revenue to corporate
      overhead such as the revenue for 2005. We do not actively pursue revenues of
      this nature and they occur very irregularly.




Our
      cost
      of revenues for the years ended June 30, 2006 and 2005 was $0 and $68,000,
      respectively, a decrease of $68,000 or 100%, attributable to our system
      engineer's payroll costs for work not attributable to generating revenues but
      instead, for administrative tasks.


41
 *Table
            of Contents*





Selling,
      General and Administrative Expenses. Selling,
      general and administrative expenses were $2,443,000 and $2,803,000 for the
      years
      ended June 30, 2006 and 2005, respectively. A decrease of 13% or $360,000,
      was
      attributable to a significant reduction of combined expenses totaling $1,480,000
      based on the following factors: 1) rent and utilities expense decreased $82,000
      due to the termination of our old office lease agreement, a reduction in rent
      on
      our new office lease agreement and decrease in consumption of utilities on
      reduced office space; 2) consultant expenses decreased by $1,352,000 due to
      decrease in consultation services and quarterly expenses associated with prior
      year warrants issued and vested in the last two quarters of fiscal year 2006,
      using the fair value of the warrants as of the date they vest as estimated
      by
      the Black-Scholes option pricing model and based upon the market price of our
      common stock in each quarter. The warrants vesting date ended the second quarter
      of fiscal year 2006; 3) and an offset in payroll tax expenses due to a $46,000
      refund from the IRS.





During
      the year ended June 30, 2006, our compensatory equity based options and warrants
      were valued at $855,000, of which $381,000 are options issued to employees,
      directors and officers; and $473,000 were warrants granted to four consultants
      in 2004, and the remaining part of their warrants vested during the first and
      second quarter of fiscal year 2006. We record the expense associated with these
      warrants using the fair value of the warrants as of the date they vest as
      estimated by the Black-Scholes option pricing model. Equity-based compensation
      does not impact our liquidity or net worth because the consulting expense is
      offset by an increase to additional paid-in capital.




Other
      factors affecting the general and administrative expenses is attributable to
      increase in salaries by 61% or $141,000, from $231,000 in 2005 to $372,000
      in
      2006, due to the hiring of additional employees; Insurance expenses increased
      by
      19% or $28,000 from $145,000 to $173,000 attributable to Directors and Officers
      insurance, liability, auto and health insurance; Travel expense increased by
      3162% or $119,000, from $4,000 in 2005 to $123,000 in 2006 due to various
      committee meetings, annual shareholder meeting, and strategic planning meeting
      with officers and directors; Professional fees increased by 213% or $282,000,
      from $132,000 in 2005 to $414,000 in 2006 due to various legal expenses related
      to lawsuits, review of financing agreements, registration statement filing
      and
      other SEC mandatory filings, as well as quarterly and annual audit fees. Our
      general office expenses increased by 47% or $75,000, from $158,000 in 2005
      to
      $233,000 in 2006, attributable to increase in public relations expenses,
      American Stock Exchange listing fees, increase in annual shareholder meeting
      expenses, transfer agent and reporting fees, as well office supplies and
      expenses.





Depreciation
      and amortization is comparable at $20,000 for the years ended June 30, 2005
      and
      2006, respectively.




We
      also experienced a gain of $34,000 from the
      settlement of our lease agreement for our previous office space.





**Other
      Items.**





Interest
      expense was $316,000 and $1,960,895 for the year ended June 30, 2005 and 2006,
      respectively. The increase is attributable to payments made on our private
      financing related to a convertible note payable and debenture.





Net
      Loss. Based
      on the factors discussed for each segment, the Net Loss attributable to common
      shareholders increased ($1,908,000), or 35% from, ($5,344,000), or ($.13) per
      share in 2005 to ($7,253,000), or ($0.17) per share in 2006. The net loss
      chargeable to common shareholders includes a provision for preferred stock
      dividends of $128,000 in 2005 and $109,000 in 2006. The negative results are
      due
      to the factors discussed above.








**CRITICAL
      ACCOUNTING POLICIES**





**Property
      and Equipment and Unproved Oil and Gas Properties:**




We
      have
      capitalized $4,437,000 in oil and gas properties as of June 30, 2006, which
      is
      subject to impairment review as of June 30, 2006. The oil and gas properties
      were determined to be unimpaired based on our corporate impairment analysis
      performed by our 3 rd party
      Economist and also additional support for no impairment requirements was added
      with the subsequent event of execution of the new 2006 Production Sharing
      Contract between SCS Corporation and the Republic of Guinea, signed on September
      22, 2006. Thus, our asset is unimpaired and we are continuing to perform our
      exploration work with no further delays in accordance with this new agreement.
      Furthermore, based on our financing structures in place, we expect to raise
      significant funds, as discussed in the liquidity and capital resources section,
      easily sufficient to satisfy all our obligations in a timely manner, with regard
      to our concession offshore Guinea.


42
 *Table
            of Contents*




**Proved
      reserves**





Our
      estimates of proved reserves are based on quantities of oil and gas reserves
      which current engineering data indicates are recoverable from known reservoirs
      under existing economic and operation conditions. Estimates of proved reserves
      are key elements in determining our depreciation, depletion and amortization
      expense and our full-cost ceiling limitation. Estimates of proved reserves
      are
      inherently imprecise because of uncertainties in projecting rates of production
      and timing of developmental expenditures, interpretations of geological,
      geophysical, engineering and production data and the quality and quantity of
      available data. Changing economic conditions also may affect our estimates
      of
      proved reserves due to changes in developmental costs and changes in commodity
      prices that may impact reservoir economics. We utilize independent reserve
      engineers to estimate our proved reserves. See Note 18 - “Oil and Gas
      Disclosures” in the Notes to the Consolidated Financial Statements.





**Assets
      Retirement Obligations**





Our
      assets retirement obligation represent our best estimate of the fair value
      of
      our future abandonment costs associated with our oil and gas properties,
      including the costs of removal and disposition of tangible equipment, site
      and
      environmental restoration. We estimate the fair value of our retirement costs
      in
      the period in which the liability is incurred, if a reasonable estimate can
      be
      made. The determination of the fair value of an asset retirement obligation
      generally involves estimating the fair value of the obligation at the end of
      the
      property’s useful life and then discounting it to present value using our credit
      adjusted, risk free rate of return. Estimating future asset removal costs is
      difficult and requires management to make estimates and judgments regarding
      the
      expected removal and site restoration costs, timing and present value discount
      rates. Changes in the estimated useful life and the fair value of the asset
      retirement obligation are imprecise since the removal activities will generally
      occur several years in the future and asset removal technologies and costs
      are
      constantly changing, as are political, environmental and safety considerations
      that may ultimately impact the amount of the obligations.





**Fair
      Value of our debt and equity transactions**





Many
      of
      our various debt and equity transactions require us to determine the fair value
      of a debt or equity instrument in order to properly record the transaction
      in
      our financial statements. Fair value is generally determined by applying widely
      acceptable valuation models, (e.g., the Black Scholes valuation model) using
      the
      trading price of the underlying instrument or by comparison to instruments
      with
      comparable maturities and terms.





**Off-Balance
      Sheet Arrangements.**





We
      also
      have a contingent $350,000 note payable that is only payable with 25% of the
      profits of SCS Corporation. We have the right to pay this note off using common
      stock. This contingent payable will, if paid, increase the cost of the Unproved
      Oil and Gas properties at the time of payment. As such, it will increase the
      cost of sales over the oil and gas production period as part of the periodic
      amortization of the proved properties, or, if the development of the properties
      does not culminate in oil and gas production, the cost will be charged to
      expense as an impairment.





In
      conjunction with our purchase of HYD Resources Corporation, we entered into
      three notes payable to two individuals totaling $856,000. The notes are to
      be
      paid quarterly over the five years ended June 30, 2009. Payments will be due
      only if HYD has net income. Payment amount will be 25% of the net income for
      the
      period, unless there was a net loss in previous period(s). If there is a net
      loss, subsequent net income must completely offset the losses before any amounts
      are due. After the loss is offset, payment of 25% of the remaining net income
      will be due. In conjunction with our settlement agreement with one of the
      noteholders, $350,000 of this contingent amount was foregone. Thus, as of June
      30, 2006, we have two outstanding contingent notes payable to one individual
      totaling $506,000.





43
 *Table
            of Contents*




**Disclosure
      of Contractual Obligations as of June 30, 2006**




**Payments
                due by period ($)****Contractual**
              **Obligations**
            
            **Total**
            
            **Less
                than 1 year**
            
            **1-3
                years**
            
            **3-5
                years**
            
            **More
                than 5 years**Long-Term
                Debt Obligations
            
            
            -
            
            
            -Capital
                Lease Obligations
            
            
            -
            
            
            -
            
            
            
            
            
            -
            
            
            -Operating
                Lease Obligations
            
            $
            1,003,000
            
            
            -
            
            $
            447,000
            
            
            284,000
            
            $
            272,000Purchase
                Obligations
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Other
                Long-Term Liabilities
            
            
            4,000,000
            
            
            2,100,000
            
            
            1,900,000
            
            
            -
            
            
            -Total
            
            $
            5,003,000
            
            
            2,100,000
            
            $
            2,347,000
            
            
            284,000
            
            $
            272,000






**Liquidity
      and Capital Resources**





Our
      ratio
      of current assets to current liabilities (current ratio) was 1.04 to one and
      0.27 to one at June 30, 2006 and 2005, respectively. A deeper analysis of the
      current ratio reveals several current obligations that reduce the current ratio
      but for which there is no requirement to use cash to satisfy them or for which
      the payment is deferred until we receive cash inflows sufficient to pay the
      obligation. These items include Deferred gain, Accounts payable Seismic Data,
      Dividends payable, and Dividends payable to related party. While the company
      continues to work toward generating positive cash flow from domestic operations
      altogether, including corporate overhead, it is expecting to report positive
      cash flow from its HYDR operations very soon.





We
      believe that we are now prepared financially to begin an exploration well
      offshore Guinea. As discussed hereunder we expect our liquidity ratios to
      improve directly from our equity financing and with the success of putting
      our
      drilling operations back online in Guinea, we expect to have plenty of financial
      partnering opportunities that will allow us to far exceed minimum exploration
      and drilling requirements. This will allow us to drill more wells faster in
      quality locations. The more we drill in quality locations, the more chances
      we
      have to realize a viable commercial discovery for Guinea and for us. Now that
      the 2006 PSC has been executed, we will be able to implement our additional
      strategy to bring on working interest partners to share in the risk on some
      of
      our more expensive wells to be drilled in the next nine to twelve
      months.




Currently,
      in anticipation of receiving our permits to drill in Guinea, we are prepared
      and
      our financing is in place to drill at least one well offshore Guinea using
      funds
      from an equity line of credit and the recent Cornell financing. Partners that
      have contacted us with verbal indications of interest could provide the ability
      for us to drill many more wells and at a very fast pace.





With
      our
      financing in place, we are highly confident in our ability to proceed and
      perform under the 2006 PSC.




We
      are
      considering all of our options or any combination of these options to: a)
      increase revenues from operations; b) raise additional capital to support at
      least the minimum required drilling program; c) negotiate one or more
      transactions with oil company partners who share in the required work and
      financing risk; and d) negotiate work program related deals with oil industry
      vendors such as seismic acquisition companies. We believe that our ability
      to
      manage and affect one or more of these options will determine our significant
      current ratio and financial position in the future.





Our
      cash
      from operations was a deficit in 2006. We have taken steps to reduce overhead
      and reduce non-operational costs. We continue to spend most of the capital
      we
      raise on enhancing the value of our offshore oil and gas concession. These
      expenditures, however, do not improve cash flow from operations. In order to
      improve our operating cash flow situation for future periods, we have started
      to
      build up our production revenues for HYDR in Louisiana.





On
      June
      23, 2006, we closed a private financing transaction with Cornell Capital
      Partners, LP. The financing included a subscription for 3 convertible debentures
      in the gross amount of $6,000,000 (net amount of $5,440,000)





We
      also
      have an equity line of credit with Dutchess Capital. We have made 5 puts on
      the
      equity line of credit since February 2006 in the aggregate amount of $967,100.
      As of October 10, 2006, the remaining amount available for us to draw down
      on
      the equity line of credit is $19,032,900. The equity line of credit expires
      in
      February 2009, after which we may no longer utilize the equity line of
      credit.


44
 *Table
            of Contents*




Although
      we plan to continue to improve on our current ratio, we have a contractual
      requirement during the second exploration period in the Guinea under our 2006
      PSC to invest an estimated $10,000,000 in drilling at least one exploratory
      well
      offshore Guinea during the next six years. Although we have several years to
      complete this work, we wish to initiate a drilling program as soon as possible.
      Thus, we are considering all of our options or any combination of these options
      to: (a) increase revenues from operations; (b) raise additional capital to
      support at least the minimum required drilling program; (c) negotiate one or
      more transactions with oil company partners who share in the required work
      and
      financing risk; and, (d) negotiate work program related deals with oil industry
      vendors such as seismic acquisition companies. We believe that our ability
      to
      manage and effect one or more of these options will determine our significant
      current ratio and financial position in the future.





Because
      SCS has significant work requirements to accomplish a 3D seismic acquisition
      program, processing, and analysis thereof, and to drill exploration wells,
      we
      are beginning to look at more than one option to raise additional funds. We
      are
      confident in our ability to raise additional capital under more conventional
      financing structures such as an underwritten secondary financing, but also
      believe we will be able to secure oil and gas working interest partners to
      fund
      and carry significant portions of the capital investment burden.




We
      have
      been successful in raising our necessary capital through private placements.
      Based on our relatively low overhead in comparison to the rather large task
      at
      hand, most of our capital is going to improve our drilling
      prospects.




We
      expect
      to exploit our leases in Louisiana by operating numerous low volume wells that
      produce 20 barrels a day or less. We believe the relatively high price of oil
      will help make these wells more economically viable. Because of the
      geological features of the Louisiana leases and our oil production to date,
      we
      consider this an attractive prospect for oil and gas investors.




As
      a
      public company, the health of the market for our common stock is paramount
      to be
      able to raise capital. In May 2005, we began trading on the American Stock
      Exchange. We believe this will directly and indirectly help to strengthen and
      provide more stability to the price of our common stock and that financing
      options for us will expand as a result.




We
      are
      obligated on a contingent $350,000 note payable that is only payable with 25%
      of
      the profits of SCS Corporation. We have the right to pay this note off using
      common stock.




In
      conjunction with our purchase of HYD, have two notes payable to one individual
      totaling $506,000. The notes are to be paid quarterly over the five years ending
      June 30, 2009. Payments will be due only if HYD has a net income according
      to
      accounting principles generally accepted in the United States of America.
      Payment amount will be 25% of the net income for the period, unless there was
      a
      net loss in previous period(s). If there is a net loss, subsequent net income
      must completely offset the losses before any amounts are due. After the loss
      is
      offset, payment of 25% of the remaining net income will be due.




We
      could
      obtain additional capital also upon the exercise of outstanding warrants and
      options for common stock.








**Item
      7A. Quantitative and Qualitative Disclosures About Market
      Risk.**




Our
      functional currency is the US dollar. Our revenue is directly related to the
      price of oil and gas. Assuming that we sell one barrel of oil, then a one dollar
      decrease in the price that we get for that barrel of oil will lower our revenue
      by one dollar, and correspondingly so for a one dollar increase in price. The
      same is true for changes in the price of natural gas. We intend to sell oil
      and
      gas immediately upon lifting to the wellhead. We do not contemplate retaining
      any oil and gas inventory. We do not hedge any market risk. Although the prices
      of oil and gas have recently increased substantially, there is no assurance
      that
      the price of oil and gas will not fall dramatically in the future.






**Item
      8.Financial Statements and Supplementary
      Data.**





The
      Financial Statements and Supplementary Data information required hereunder
      is
      included in this report as set forth in the "Index to Financial Statements
      on
      page F-1.





45
 *Table
          of Contents*


**TABLE
        OF CONTENTS**





Report
                of Independent Registered Public Accounting Firm
            
            F-2Consolidated
                Balance Sheets
            
            F-3Consolidated
                Statements of Operations
            
            F-4Consolidated
                Statements of Shareholders’ Equity
            
            F-5Consolidated
                Statements of Cash Flows
            
            F-7Notes
                to Consolidated Financial Statements
            
            F-9





F-1
 *Table
          of Contents*




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Board of Directors and Shareholders of


Hyperdynamics
      Corporation


Houston,
      Texas





We
      have
      audited the accompanying consolidated balance sheets of Hyperdynamics
      Corporation as of June 30, 2006 and 2005, and the related consolidated
      statements of operations, shareholders' equity and cash flows for each of the
      three years in the period ended June 30, 2006. These consolidated financial
      statements are the responsibility of the Company's management. Our
      responsibility is to express an opinion on these consolidated financial
      statements based on our audits.





We
      conducted our audits in accordance with auditing standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. The Company has determined that
      it
      is not required to have, nor were we engaged to perform, an audit of its
      internal control over financial reporting. An audit includes examining, on
      a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of Hyperdynamics
      Corporation at June 30, 2006 and 2005, and the results of their operations
      and their cash flows for each of the three years in the period ended June 30,
      2006 in conformity with accounting principles generally accepted in the United
      States of America.





Malone
      and Bailey, PC


www.malone-bailey.com


Houston,
      Texas




September 30, 2006




F-2
 *Table
            of Contents*





**HYPERDYNAMICS
      CORPORATION**


**CONSOLIDATED
      BALANCE SHEETS**


**(In
      Thousands, Except Number of Shares and Per Share Amounts)**





June
                302006
            
            2005ASSETSCurrent
                assets:Cash
            
            $
            3,435
            
            $
            259Restricted
                certificate of deposit
            
            
            75
            
            
            65Trade
                accounts receivable, net of allowances for doubtful accounts of $13,000
                and $31,000 as of June 30, 2006 and 2005, respectively
            
            
            58
            
            
            20Inventories,
                net
            
            
            -
            
            
            4Prepaid
                expenses and other current assets
            
            
            578
            
            
            167Total
                current assets
            
            
            4,146
            
            
            515Property
                and equipment, net of accumulated depreciation of $125,000 and $190,000
                as
                of June 30, 2006 and 2005, respectively
            
            
            93
            
            
            108Oil
                and gas properties using full cost accounting, net of accumulated
                depreciation and depletion of $169,000 and $124,000 as of June 30,
                2006 and 2005, respectively
            
            
            4,437
            
            
            4,564Deposits
            
            
            3
            
            
            22Total
                assets
            
            $
            8,679
            
            $
            5,209LIABILITIES
                AND SHAREHOLDERS' EQUITYCurrent
                liabilities:Current
                portion of long-term debt
            
            $
            106
            
            $
            248Accounts
                payable and accrued expenses
            
            
            637
            
            
            558Accounts
                payable seismic data
            
            
            650
            
            
            650Asset
                retirement obligation
            
            
            12
            
            
            -Deferred
                gain
            
            
            159
            
            
            73Convertible
                debenture, net of discount of $2,068,000
            
            
            1,932
            
            
            -Dividends
                payable
            
            
            372
            
            
            372Dividends
                payable to related party
            
            
            136
            
            
            27Total
                current liabilities
            
            
            4,004
            
            
            1,928Deferred
                rent
            
            
            67
            
            
            135Total
                liabilities
            
            
            4,071
            
            
            2,053Commitments
                and contingencies (Note 17)Shareholders'
                equity:Convertible
                preferred stock, par value $0.001; stated value $1,000; 20,000,000
                authorizedSeries
                A - 1,945 shares issued and outstanding
            
            
            -
            
            
            -Series
                B - 2,725 shares issued and outstanding
            
            
            -
            
            
            -Common
                stock, $0.001 par value, 100,000,000 shares authorized; 46,132,595
                and
                42,168,410 shares issued and outstanding
            
            
            46
            
            
            42Additional
                Paid-in capital
            
            
            31,627
            
            
            22,916Accumulated
                deficit
            
            
            (27,065
            )
            
            (19,812
            )Total
                shareholders' equity
            
            
            4,608
            
            
            3,146Total
                liabilities and shareholders' equity
            
            $
            8,679
            
            $
            5,209





The
      accompanying notes are an integral part of these consolidated financial
      statements





F-3
 *Table
            of Contents*




**HYPERDYNAMICS
      CORPORATION**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(In
      Thousands, Except Number of Shares and Per Share Amounts)**





Years
                Ended June 30,2006
            
            2005
            
            2004Sales
            
            $
            656
            
            $
            173
            
            $
            38Operating
                ExpensesCost
                of revenues
            
            
            1,747
            
            
            1,349
            
            
            207Selling
            
            
            4
            
            
            63
            
            
            49General
                and administrative expenses
            
            
            3,779
            
            
            3,536
            
            
            2,838Depreciation,
                depletion and amortization
            
            
            167
            
            
            125
            
            
            61Total
                Operating Expenses
            
            
            5,697
            
            
            5,073
            
            
            3,155Loss
                from operations
            
            
            (5,041
            )
            
            (4,900
            )
            
            (3,117
            )Other
                income (Expense)Interest
                expense
            
            
            (1,962
            )
            
            (239
            )
            
            (474
            )Interest
                income
            
            
            2
            
            
            17
            
            
            8Loss
                on retirement of assets
            
            
            (278
            )
            
            (17
            )
            
            -Loss
                on retirement of mandatorily redeemable preferred stock
            
            
            -
            
            
            (77
            )
            
            -Gain
                on lease agreement settlement
            
            
            135Gain
                on debt payoff
            
            
            -
            
            
            -
            
            
            92Total
                Other Income (Expense)
            
            
            (2,103
            )
            
            (316
            )
            $
            (374
            )Net
                loss
            
            
            (7,144
            )
            
            (5,216
            )
            
            (3,491
            )Preferred
                stock dividend
            
            
            (109
            )
            
            (128
            )
            
            (187
            )Net
                loss attributable to common shareholders
            
            $
            (7,253
            )
            $
            (5,344
            )
            $
            (3,678
            )Basic
                and diluted loss per common share
            
            $
            (0.17
            )
            $
            (0.13
            )
            $
            (0.12
            )Weighted
                average shares outstanding
            
            
            43,318,773
            
            
            41,646,844
            
            
            31,938,926





The
      accompanying notes are an integral part of these consolidated financial
      statements




F-4
 *Table
          of Contents*




**HYPERDYNAMICS
      CORPORATION**


**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY**


**(In
      Thousands, Except Number of Shares)**





Series
                A Preferred
            
            Series
                B Preferred
            
            Common
                Stock
            
            AdditionalShares
            
            Amount
            
            Shares
            
            Amount
            
            Shares
            
            Amount
            
            Paid-in
              Capital
            
            Accumulated
                Deficit
            
            TotalBalance,
                June 30, 2003 (restated)
            
            
            1,945
            
            $
            -
            
            
            2,725
            
            $
            -
            
            
            27,631,507
            
            $
            28
            
            $
            10,445
            
            $
            (10,790
            )
            $
            (317
            )Common
                stock issued for:·cash,
                net
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            8,575,543
            
            
            8
            
            
            5,871
            
            
            
            
            
            5,879·exercise
                of options for cash
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            179,000
            
            
            -
            
            
            67
            
            
            
            
            
            67·cashless
                exercise of options, net of 257,070 shares returned
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,976,263
            
            
            3
            
            
            (28
            )
            
            
            
            
            (25
            )·services
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            181,250
            
            
            -
            
            
            394
            
            
            
            
            
            394·accounts
                payable
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            35,489
            
            
            -
            
            
            76
            
            
            
            
            
            76·conversion
                of notes payable
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,595,573
            
            
            2
            
            
            266
            
            
            
            
            
            268·acquisition
                of HYD Resources
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            32,328
            
            
            -
            
            
            94
            
            
            
            
            
            94Issuance
                of stock options and warrants
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,784
            
            
            
            
            
            1,784Preferred
                stock dividends
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (187
            )
            
            (187
            )Funds
                raised from sale of warrants to purchase Hyperdynamics Corporation
                stock
                in association with SCS Corp. units
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            119
            
            
            
            
            
            119Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (3,491
            )
            
            (3,491
            )Balance,
                June 30, 2004
            
            
            1,945
            
            $
            -
            
            
            2,725
            
            $
            -
            
            
            41,206,953
            
            $
            41
            
            $
            19,088
            
            $
            (14,468
            )
            $
            4,661Common
                stock issued for:·exercise
                of options
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            321,500
            
            
            1
            
            
            167
            
            
            
            
            
            168·services
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            155,756
            
            
            -
            
            
            390
            
            
            
            
            
            390·conversion
                of mandatorily redeemable preferred stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            269,634
            
            
            -
            
            
            849
            
            
            
            
            
            849·accounts
                payable
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            25,372
            
            
            -
            
            
            63
            
            
            
            
            
            63·acquisition
                of HYD Resources
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            101,480
            
            
            -
            
            
            281
            
            
            
            
            
            281Issuance
                of stock options and warrants
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,833
            
            
            
            
            
            1,833Preferred
                stock dividends
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (128
            )
            
            (128
            )





F-5
 *Table
            of Contents*




Payment
                of preferred stock dividends in common stock
            
            
            
            
            
            
            
            
            
            87,715
            
            -
            
            245
            
            
            
            245Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (5,216)
            
            (5,216)Balance,
                June 30, 2005
            
            
            1,945
            
            $
            -
            
            
            2,725
            
            $
            -
            
            
            42,168,410
            
            $
            42
            
            $
            22,916
            
            $
            (19,812
            )
            $
            3,146Common
                stock issued for:·exercise
                of options for cash
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,130,000
            
            
            1
            
            
            564
            
            
            
            
            
            565·cashless
                exercise of options, net of 2,437 shares returned
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,563
            
            
            -
            
            
            -
            
            
            
            
            
            -·services
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            179,266
            
            
            -
            
            
            397
            
            
            
            
            
            397·to
                repurchase working interest
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            197,416
            
            
            -
            
            
            581
            
            
            
            
            
            581·options
                exercised associated with convertible debentures
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            500,000
            
            
            1
            
            
            449
            
            
            
            
            
            450·conversion
                of convertible debentures
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,692,845
            
            
            2
            
            
            1,918
            
            
            
            
            
            1,920·cash
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            135,095
            
            
            -
            
            
            387
            
            
            
            
            
            387Beneficial
                conversion costs associated with issuance of convertible notes payables
                and debentures
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            127,000
            
            
            -
            
            
            3,560
            
            
            
            
            
            3,560Issuance
                of stock options and warrants
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            855
            
            
            
            
            
            855Preferred
                stock dividends
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (109
            )
            
            (109
            )Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (7,144
            )
            
            (7,144
            )Balance,
                June 30, 2006
            
            
            1,945
            
            $
            -
            
            
            2,725
            
            $
            -
            
            
            46,132,595
            
            
            46
            
            
            31,627
            
            
            (27,065
            )
            
            4,608





The
      accompanying notes are an integral part of these consolidated financial
      statements.




F-6
 *Table
            of Contents*




**HYPERDYNAMICS
      CORPORATION**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(In
      Thousands)**





Years
                Ended June 302006
            
            2005
            
            2004CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                Loss
            
            $
            (7,144
            )
            $
            (5,216
            )
            $
            (3,491
            )Adjustments
                to reconcile net income to net cash provided by (used in) operating
                activities --Depreciation
                and amortization
            
            
            167
            
            
            125
            
            
            61Shares
                issued for services
            
            
            359
            
            
            48
            
            
            -Options
                and warrants issued
            
            
            855
            
            
            1,833
            
            
            1,782Beneficial
                conversion feature associated with convertible notes payable
            
            
            -
            
            
            -
            
            
            249Loss
                on disposition of assets
            
            
            278
            
            
            17
            
            
            -Gain
                on settlement
            
            
            (135
            )
            
            -
            
            
            -Bad
                debt expense
            
            
            233
            
            
            15
            
            
            -Amortization
                of discount and financing costs on convertible debenture
            
            
            1,650
            
            
            -
            
            
            -Accretion
                of interest and amortization of offering costs of mandatory redeemable
                preferred stock
            
            
            -
            
            
            232
            
            
            232Loss
                on retirement of mandatory redeemable preferred stock
            
            
            
            
            
            77
            
            
            -Shares
                withheld from cashless exercise of Options
            
            
            -
            
            
            -
            
            
            (25
            )Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (272
            )
            
            (6
            )
            
            (21
            )Inventories
            
            
            4
            
            
            46
            
            
            (28
            )Prepaid
                expenses and other current assets
            
            
            (34
            )
            
            (37
            )
            
            -Accounts
                payable and accrued expenses
            
            
            91
            
            
            302
            
            
            (98
            )Customer
                deposits
            
            
            -
            
            
            (3
            )
            
            -Deferred
                rent
            
            
            67
            
            
            (7
            )
            
            10Net
                cash used in operating activities
            
            
            (3,881
            )
            
            (2,574
            )
            
            (1,329
            )CASH
                FLOWS FROM INVESTING ACTIVITIES:Purchase
                of property and equipment
            
            
            (78
            )
            
            (267
            )
            
            (129
            )(Increase)/decrease
                in restricted cash
            
            
            (10
            )
            
            130
            
            
            86Proceeds
                from the sale of assets
            
            
            204
            
            
            13
            
            
            -Investment
                in oil and gas properties
            
            
            (439
            )
            
            (1,250
            )
            
            (1,901
            )Payment
                of deposit
            
            
            (1
            )
            
            (1
            )
            
            -Return
                of deposit
            
            
            21
            
            
            -
            
            
            2Net
                cash used in investing activities
            
            
            (303
            )
            
            (1,375
            )
            
            (1,942
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Proceeds
                from sale of common stock, net
            
            
            387
            
            
            -
            
            
            5,879Proceeds
                from exercise of options, net
            
            
            1,015
            
            
            168
            
            
            68Proceeds
                from sale of units consisting of warrants in Hyperdynamics and preferred
                stock in subsidiary, net of $ -0-, $39,500, and $12,000 offering
                cost,
                respectively
            
            
            -
            
            
            -
            
            
            355Proceeds
                from sale of working interest in oil and gas properties,
                net
            
            
            726
            
            
            814
            
            
            -Proceeds
                from convertible notes
            
            
            5,620
            
            
            -
            
            
            -Payments
                on convertible debentures and convertible notes payable
            
            
            (247
            )
            
            -
            
            
            -Proceeds
                from installment debt
            
            
            207
            
            
            227
            
            
            -Payments
                on installment debt
            
            
            (348
            )
            
            (150
            )
            
            (58
            )Net
                cash provided by financing activities
            
            
            7,360
            
            
            1,059
            
            
            6,244(DECREASE)
                INCREASE IN CASH
            
            
            3,176
            
            
            (2,890
            )
            
            2,973CASH
                AT BEGINNING OF YEAR
            
            
            259
            
            
            3,149
            
            
            176CASH
                AT END OF YEAR
            
            $
            3,435
            
            $
            259
            
            $
            3,149





The
      accompanying notes are an integral part of these consolidated financial
      statements.





F-7
 *Table
            of Contents*




**HYPERDYNAMICS
      CORPORATION**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS (Continued)**


**(In
      Thousands)**





Years
                Ended June 302006
            
            2005
            
            2004SUPPLEMENTAL
                DISCLOSURES:Interest
                paid in cash
            
            $
            175
            
            $
            7
            
            $
            10Income
                taxes paid in cash
            
            
            -
            
            
            -
            
            
            -NON-CASH
                TRANSACTIONSIssuance
                of common stock for accounts payable
            
            
            -
            
            $
            63
            
            $
            76Payment
                of preferred stock dividends in common shares
            
            
            -
            
            $
            245
            
            
            -Conversion
                of notes payable to common stock
            
            
            -
            
            
            -
            
            $
            268Conversion
                of mandatory redeemable preferred stock
            
            
            -
            
            $
            849
            
            
            -Issuance
                of stock for oil and gas properties
            
            $
            37
            
            $
            342
            
            $
            394Purchase
                of HYD Resources for stock and notes payable
            
            
            -
            
            
            -
            
            $
            375Accrued
                and unpaid dividends
            
            $
            109
            
            $
            109
            
            $
            109Stock
                issued for notes payable
            
            $
            1,893
            
            $
            281
            
            
            -





The
      accompanying notes are an integral part of these consolidated financial
      statements.





F-8
 *Table
            of Contents*





**HYPERDYNAMICS
      CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**








**1.
      ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES**





Nature
      of
      business. Hyperdynamics Corporation (Hyperdynamics) is a Delaware corporation
      formed in March 1996. Hyperdynamics utilizes its integrated technology
      infrastructure to provide support to its wholly-owned subsidiaries, SCS
      Corporation (SCS), HYD Resources Corporation (HYD), and Trendsetter Production
      Company (Trendsetter). Through SCS, Hyperdynamics focuses on oil and gas
      exploration offshore the coast of West Africa. SCS began operations in oil
      and
      gas exploration, seismic data acquisition, processing, and interpretation in
      late fiscal 2002. In April 2004, Hyperdynamics acquired HYD, and in January
      2005, Hyperdynamics acquired Trendsetter, an oil and gas operator in Louisiana
      that had been under common ownership with HYD. Trendsetter owns oil and gas
      leases. It contracts with its sister company, HYD, which drills new wells in
      shallow, proven areas and implements production facilities on Trendsetter leases
      to produce oil and gas. The fiscal year-end is June 30.





**Principles
      of Consolidation and Presentation**





The
      accompanying consolidated financial statements include the accounts of the
      Company and its wholly owned subsidiaries. All significant intercompany accounts
      and transactions have been eliminated in consolidation.





The
      preparation of the consolidated financial statements in conformity with
      accounting principles generally accepted in the United States of America
      requires management to make estimates and assumptions that affect the reported
      amounts of assets, liabilities, revenue and expenses at the balance sheet date
      and for the period then ended. Actual results could differ from these estimates.
      Significant estimates are required for proved oil and gas reserves which, as
      described in Note 20 - Oil and Gas Properties, have a material impact on the
      carrying value of oil and gas property. Actual results could differ from these
      estimates and such differences could be material. Certain prior year amounts
      have been reclassified to conform with the 2006 presentation.





**Cash
      and cash equivalents**





For
      purposes of the Consolidated Statements of Cash Flows, Hyperdynamics considers
      all highly liquid investments purchased with an original maturity of three
      months or less to be cash equivalents.





Restricted
      cash at June 30, 2006 consists of a certificate of deposit at a bank that
      secures a letter of credit serving as the underlying collateral for a
      Hyperdynamics’ lease commitment. The CD matures on January 6, 2008 and accrues
      interest at 4.03% annually. Hyperdynamics plans to renew the CD next year and
      the amount will be reduced to coincide with a reduction in the Letter of Credit
      in favor of Hyperdynamics’ Landlord. The letter of credit will be returned to us
      on June 30, 2007.





Restricted
      cash at June 30, 2005 consists of a certificate of deposit at a bank secured
      a
      letter of credit serving as the underlying collateral for a Hyperdynamics'
      lease
      commitment. The CD matured in November 2005 and accrued interest at .75%
      annually. The restriction on the CD expired on November 1, 2005.





**Concentration
      of Credit Risk**





Accounts
      receivable are written down to reflect management's best estimate based upon
      known specific analysis, historical experience, and other currently available
      evidence of the net collectible amount.




**Inventories**





Inventory
      consists of oil field equipment and is stated at the lower of cost or market
      using the first-in first-out basis (FIFO).





**Other
      Current Assets**





As
      of
      June 30, 2006, other current assets consist of deferred financing costs of
      $376,000, $143,000 in prepaid insurance and $59,000 other prepaid expenses,
      for
      a total of $578,000.





As
      of
      June 30, 2005, other current assets consist of $167,000 in prepaid
      insurance.





F-9
 *Table
            of Contents*




**Property
      and Equipment**





Property,
      equipment and a building are stated on the basis of historical cost less
      accumulated depreciation. Depreciation is provided using the straight-line
      method over the estimated useful lives of the assets of 3 - 15
      years.





**Provision
      for Impairments of Long-lived Assets**





The
      Company follows Statement of Financial Accounting Standards No. 144, Accounting
      for the Impairment or Disposal of Long-Lived Assets, by reviewing such assets
      for impairment whenever events or changes in circumstances indicate that the
      carrying amount of an asset may not be recoverable. Impairment loss recognized
      is the excess of the carrying amount over the fair value of the asset.
      Hyperdynamics has no impairment in the year ended June 30, 2006.





**Revenue
      recognition.**





Revenue,
      if any, from tape conversions, consulting, and oil field services is recognized
      when services are rendered. Revenues for oil and gas sales are recognized at
      the
      point when title to the oil or gas passes to the customer. For oil sales, this
      occurs when the customer's truck takes delivery of oil from Trendsetter's
      storage tanks.





**Federal
      Income Taxes**





Income
      taxes are computed using the tax liability method of accounting, whereby
      deferred income taxes are determined based on differences between financial
      reporting and tax bases of assets and liabilities and are measured using the
      enacted tax rates that will be in effect when the differences
      reverse.




**Stock-Based
      Compensation**




On
        January 1, 2006, Hyperdynamics adopted SFAS No. 123(R), "Share-Based Payment".
        SFAS 123(R) replaced SFAS No. 123 and supersedes APB Opinion No. 25. SFAS
        123(R)
        requires all share-based payments to employees, including grants of employee
        stock options, to be recognized in the financial statements based on their
        fair
        values. The pro forma disclosures previously permitted under SFAS 123 are
        no
        longer an alternative to financial statement recognition. Hyperdynamics adopted
        SFAS 123(R) using the modified prospective method which requires the application
        of the accounting standard as of January 1, 2006.
 
 Prior
        to
        January 1, 2006, compensation was recorded for stock-based compensation grants
        based on the excess of the estimated fair value of the common stock on the
        measurement date over the exercise price. For the years ended June 30, 2006,
        2005 and 2004, Hyperdynamics did not issue any such stock-based compensation
        prior to January 1, 2006.




**2.
      MERGER AND ACQUISITIONS**




In
      April
      2004, Hyperdynamics purchased 100% of the stock of HYD for $375,000 to be paid
      in Hyperdynamics common stock in four quarterly installments between April
      2004
      and January 2005. At the time of acquisition, HYD had no operations and
      consisted solely of assets donated to the company by its initial shareholders.
      As of June 30, 2005, the entire purchase price had been paid. The final purchase
      price allocation was:




Inventory
            
            $
            15,000Field
                equipment
            
            
            360,000Total
                assets
            
            
            375,000Liabilities
            
            
            -Net
                Assets
            
            $
            375,000








HYD
      is a
      dealer of used equipment and it provides oil field services, such as well
      workovers, drilling services, and the repair and leasing of equipment to oil
      field operators. The owners of HYD also owned Trendsetter Production Company
      (Trendsetter), a Louisiana oil and gas operator. In January 2005, Hyperdynamics
      acquired Trendsetter. Trendsetter at that time had no operations and one oil
      lease of nominal cost. This transaction was involved entities under common
      control; accordingly, Trendsetter's asset was recorded at historical
      cost.





In
      conjunction with the purchase of HYD, Hyperdynamics entered into two employment
      agreements with HYD's prior owners under which Hyperdynamics agreed to pay
      each
      of the two employees $3,500 per month. Under the contracts, Hyperdynamics had
      the right to terminate the employment agreements for cause, or if HYD
      experiences a cumulative net loss any time after the first nine months of
      operation. One of the employees was terminated early in fiscal 2005 and the
      other was terminated mid-year.





F-10
 *Table
            of Contents*





The
      initial employment agreements stipulated that bonuses, in the form of three
      contingent notes payable, of up to $856,000 will be paid based upon HYD's net
      income over the next five years. The payments will be 25% of the net income
      for
      each quarter, if there is net income after offsetting any losses from previous
      quarters. As part of the one of the employee’s separation agreement dated March
      1, 2006, he agreed to forgo his contingent note payable in the amount of
      $350,000. Thus, as of June 30, 2006,  we
      were
      obligated on two contingent notes payable to one individual totaling $506,000.
      As of June 30, 2006, HYD had a cumulative net loss of approximately $2,479,000.
      This amount would need to be earned as net income in current and future periods
      prior to having to pay the contingent note with 25% of net income in excess
      of
      the recovery amount.








**3.
      PROPERTY AND EQUIPMENT**





A
      summary
      of property and equipment as of June 30, 2006 and 2005 are as
      follows:





**June
                30,****2006**
            
            **2005****(in
                Thousands)**Computer
                equipment and software
            
            
            3
                years
            
            $
            142
            
            $
            154Office
                equipment and furniture
            
            
            5
                years
            
            
            23
            
            
            14Other
                equipment
            
            
            5
                years
            
            
            
            
            
            80Building
            
            
            15
                years
            
            
            25
            
            
            25Leasehold
                improvements
            
            
            3
                years
            
            
            3
            
            
            -Land
            
            
            
            
            
            25
            
            
            25Total
                cost
            
            
            
            
            
            218
            
            
            298Less
                - Accumulated depreciation
            
            
            
            
            
            (125
            )
            
            (190
            )Net
                carrying value
            
            
            
            
            $
            93
            
            $
            108





Hyperdynamics
      reviews assets for impairment whenever events or changes in circumstances
      indicate that the carrying amount of an asset may not be recoverable. As at
      June
      30, 2006 and 2005, there were no impairments of Hyperdynamics’ Property and
      Equipment.








**4.
      INVESTMENT IN OIL AND GAS PROPERTIES**





Investment
      in Oil and Gas properties consist of Hyperdynamics' concession in offshore
      West
      Africa, as previously disclosed, and leaseholds in Louisiana, USA. Proved Oil
      and Gas Properties relate to three leases in Louisiana, USA. The following
      table
      provides detail of costs (in thousands) to date by country as of June 30:


**Republic
                of**
              **Guinea**
            
            **USA**
            
            **Total****2006**
            
            **2005**
            
            **2006**
            
            **2005**
            
            **2006**
            
            **2005**Lease
                Acquisition CostsProved
            
            $
            -
            
            $
            -
            
            $
            2
            
            $
            -
            
            $
            2
            
            $
            -Unproved
            
            
            291
            
            
            291
            
            
            34
            
            
            17
            
            
            325
            
            
            308Exploration
                CostsGeological
                and geophysicalCost
            
            
            3,848
            
            
            3,782
            
            
            -
            
            
            -
            
            
            3,848
            
            
            3,782Drilling
            
            
            -
            
            
            -
            
            
            829
            
            
            568
            
            
            829
            
            
            568Development
                Costs
            
            
            -
            
            
            -
            
            
            231
            
            
            90
            
            
            231
            
            
            90Purchased
                Proved Reserves
            
            
            -
            
            
            -
            
            
            65
            
            
            65
            
            
            65
            
            
            65Cost
                Recovery (sale of working interest)
            
            
            -
            
            
            -
            
            
            (1,161
            )
            
            (740
            )
            
            (1,161
            )
            
            (740
            )Equipment
            
            
            
            
            
            
            
            
            467
            
            
            615
            
            
            467
            
            
            6154,139
            
            
            4,073
            
            
            467
            
            
            615
            
            
            4,606
            
            
            4,688Less:
                AccumulatedDepletion
                and Depreciation
            
            
            
            
            
            
            
            
            (169
            )
            
            (124
            )
            
            (169
            )
            
            (124
            )$
            4,139
            
            $
            4,073
            
            $
            298
            
            $
            $
                491
            
            $
            4,437
            
            $
            4,564




F-11
 *Table
            of Contents*





**Sale
      of working interest**





During
      March 2005, Hyperdynamics began to market working interest units in one lease
      in
      Louisiana, USA. The working interest units were priced at $55,000 for each
      one
      percent working interest. 49 units were available for sale. Marketing costs
      related to these units was 20% of the sales price. As of June 30, 2005, 18.5
      units had been sold, resulting in total proceeds of $814,000, net of marketing
      costs.





During
      the year ended June 30, 2006, Hyperdynamics sold an additional 16.5% of its
      working interests in Norris field for total proceeds of $726,000, net of
      marketing costs. During the year, four investors who owned, collectively, five
      units returned their units to Hyperdynamics in exchange for 179,266 shares
      of
      Hyperdynamics common stock. The market value of the common stock issued pursuant
      to this settlement was $581,000. $220,000 was deducted from the net proceeds
      from sale of working interest and the balance, $361,000, is reflected as a
      loss
      on retirement of assets as of June 30, 2006.  Thus
      net
      proceeds from sales of 11.5 units of working interest in fiscal 2006 were
      $506,000.




In
      August
      2005, Hyperdynamics’ operating agreement with the working interest investors was
      modified to add the Kelly lease to the operating agreement. This applied to
      the
      18.5% working interest sold as of June 30, 2005 and the 11.5% during the year
      ended June 30, 2006. Thus, as of June 30, 2006, working interest investors
      held
      30% working interest in both the Kelly and Norris leases and Hyperdynamics
      had
      retained 70% working interest in these properties. The total net proceeds to
      purchase the 30% working interest was $1,320,000.




In
      2006
      and 2005, net proceeds of $421,000 and $740,000, respectively, were applied
      against the full cost pool related to the oil and gas properties in the USA
      as a
      cost recovery. As of June 30, 2006, deferred gain in conjunction with the sales
      of working interests totaled approximately $159,000.





**Republic
      of Guinea Concession**




SCS
      performed work on its oil concession in Guinea based on its 100% farmout
      agreement of USOil Corporation’s (“USOil”) December 2002 Production and Sharing
      Agreement. Accumulated costs as of June 30, 2005 included permit fees paid
      to
      the government of Guinea, seismic exploration work, coring, and seismic
      interpretation.  On
      June
      27, 2005, SCS made a request for a drilling permit to the Guinea Government
      through USOil. The drilling permit was not immediately issued, claims were
      made
      by USOil stating the 2002 PSA was terminated which resulted in us filing a
      lawsuit against USOil (See the Legal Disclosure for USOil Corporation). At
      the
      request of the Government of Guinea, we negotiated a production sharing contract
      directly between SCS Corporation and the Republic of Guinea. With these events
      occurring during the fiscal year, only a small amount of additional exploration
      work occurred during the year ended June 30, 2006.




In
      September 2006, a new production sharing contract between SCS and the government
      of Guinea was executed (see Note 20). This is the contract we are now operating
      under to continue our work in Guinea as we at the same time are pursuing damages
      in our lawsuit against USOil.








**5.
      OIL AND GAS ACCOUNTING POLICIES**





Hyperdynamics
      follows the full cost accounting method to account for the costs incurred in
      the
      acquisition, exploration, development and production of oil and gas reserves.
      Under this method, all costs including internal costs that are directly related
      to acquisition, exploration, and development activities are capitalizable as
      oil
      and gas property costs. Amortization of unproved property costs begins when
      the
      properties become proved or their values become impaired. Hyperdynamics assesses
      the realizability of unproved properties on at least an annual basis or when
      there has been an indication that an impairment in value may have occurred.
      Impairment of unproved properties is assessed based on management's intention
      with regard to future exploration and development of individually significant
      properties and the ability of Hyperdynamics to obtain funds to finance such
      exploration and development. If the results of an assessment indicate that
      the
      properties are impaired, the amount of the impairment is added to the
      capitalized costs to be amortized.





Under
      full cost accounting rules for each cost center, capitalized costs of proved
      properties, less accumulated amortization and related deferred income taxes,
      shall not exceed an amount (the "cost ceiling") equal to the sum of (a) the
      present value of future net cash flows from estimated production of proved
      oil
      and gas reserves, based on current economic and operating conditions, discounted
      at 10 percent, plus (b) the cost of properties not being amortized, plus (c)
      the
      lower of cost or estimated fair value of any unproved properties included in
      the
      costs being amortized, less (d) any income tax effects related to differences
      between the book and tax basis of the properties involved. If capitalized costs
      exceed this limit, the excess is charged as an impairment expense.





Given
      the
      volatility of oil and gas prices, it is reasonably possible that the estimate
      of
      discounted future net cash flows from proved oil and gas reserve could change
      in
      the near term. If oil and gas prices decline in the future, even if only for
      a
      short period of time, it is possible that impairment of oil and gas properties
      could occur. In addition, it is reasonably possible that impairment could occur
      if costs are incurred in excess of any increases in the present value of future
      net cash flows from proved oil and gas reserves, or if properties are sold
      for
      proceeds less than the discounted present value of the related proved oil and
      gas reserves.





F-12
 *Table
            of Contents*




**6** **.
      ASSET RETIREMENT OBLIGATIONS**





SFAS
      No. 143, “Accounting for Asset Retirement Obligations,” addresses financial
      accounting and reporting for obligations associated with the retirement of
      tangible long-lived assets and the associated asset retirement costs. This
      statement requires that the fair value of a liability for an asset retirement
      obligation be recognized in the period in which it is incurred. The associated
      asset retirement costs are capitalized as part of the carrying cost of the
      asset. The company’s asset retirement obligations consist of estimated costs for
      dismantlement, removal, site reclamation and similar activities associated
      with
      its oil and gas properties. An asset retirement obligation and the related
      asset
      retirement cost are recorded when an asset is first drilled, constructed or
      purchased. The asset retirement cost is determined and discounted to present
      value using a credit-adjusted risk-free rate. After initial recording, the
      liability is increased for the passage of time, with the increase being
      reflected as accretion expense in the statement of operations. Subsequent
      adjustments in the cost estimate are reflected in the asset retirement
      obligation liability and the amounts continue to be amortized over the useful
      life of the related long-lived asset.





The
      reconciliation of the beginning and ending asset retirement obligations for
      the
      period ending June 30, 2006 is as follows (in thousands):





Asset
                retirement obligation at June 30, 2005
            
            $
            -Liabilities
                incurred
            
            
            12Liabilities
                settled
            
            
            -Accretion
                expense
            
            
            -Asset
                retirement obligation at June 30, 2006
            
            $
            12








**7.
      ACCOUNTS PAYABLE AND ACCRUED EXPENSES**





Accounts
      payable and accrued expenses as of June 30, 2006 and 2005 include the
      following:





**2006**
            
            **2005****(in
                Thousands)**Accounts
                payable
            
            $
            436
            
            $
            333Accrued
                payroll and payroll related expenses
            
            
            19
            
            
            112Accrued
                insurance
            
            
            146
            
            
            110Accrued
                revenue interest payable
            
            
            30Taxes
                payable
            
            
            6
            
            
            2Accrued
                warranty
            
            
            -
            
            
            1$
            637
            
            $
            558








**8.**  **ACCOUNTS
      PAYABLE SEISMIC DATA**





In
      February 2003, SCS agreed to pay $650,000 to Offshore Seismic Surveys, Inc.
      (OSS), an offshore seismic company, for OSS agreeing to release GHRC from the
      $550,000 due to OSS for the Guinea seismic data. The additional $100,000 as
      charged to expense in 2003. OSS maintains a lien on the ownership and sale
      of
      1,000 kilometers of the seismic data acquired in 2002, for the $650,000 less
      any
      payments made on this amount.





Any
      user
      license sales proceeds generated from user licenses of the 2002 acquired data
      shall first go to payoff the $650,000 liability at a rate of 90 percent of
      gross
      user license sales proceeds for OSS and 10 percent for SCS until the $650,000
      is
      paid in full. Any funding arrangement SCS enters into with respect to the Guinea
      PSA, whereby all rights and obligations under the PSA are transferred, shall
      cause the $650,000 to become immediately due upon signing and funding of such
      agreement.





F-13
 *Table
            of Contents*





**9.
      INSTALLMENT NOTES PAYABLE**





Installment
      notes payable consist of the following as of June 30:





**2006**
            
            **2005****(in
                Thousands)**Lease
                payable in approximately 6 equal remaining monthly installments of
                $1,693
                including interest at 10% APR, and secured by electrical
                equipment
            
            $
            -
            
            $
            10Vendor
                settlement payable in 9 equal monthly installments of $1,000 plus
                a
                balloon payment of $24,500 due May 1, 2006, no interest and no
                collateral
            
            
            -
            
            
            33Lease/Purchase
                payable for acquisition of oil and gas operations center with 5 equal
                remaining monthly installments of $6,541.09 including interest of
                12% APR,
                and secured by a metal building of approximately 7,000 sq. ft. located
                on
                about 7/10 of an acre of land
            
            
            -
            
            
            32Directors
                and Officers Liability Insurance premium notes payable with $20,994
                down
                and the balance in 9 monthly installments of $9,545. including interest
                of
                5.5% APR for the period ended June 30, 2005;
            
            
            
            
            
            105Directors
                and Officers Liability Insurance premium notes payable with $23,800
                down
                and the balance in 9 monthly installments of $10,866 including interest
                of
                6.5% APR for the period ended June 30, 2006;
            
            
            95Workman’s
                Compensation finance agreement payable with $10,117 down and balance
                in 9
                monthly installments of $4,826
            
            
            -
            
            
            50Auto
                insurance finance agreement payable with $7,000 down and balance
                in 9
                monthly installments of $2,000 and $1,276 for 2006 and 2005,
                respectively.
            
            
            11
            
            
            17106
            
            
            248Less:
                current portion of long-term debts
            
            
            (106
            )
            
            (248
            )Long-term
                portion
            
            $
            -
            
            $
            -








**10** . **CONVERTIBLE
      NOTES PAYABLE**





During
      the year ended June 30, 2006, the company entered into two note agreements.
      Both
      notes were repaid during the year. They are described below:





Convertible
      Note Payable





In
      August
      2005, Hyperdynamics closed a private financing convertible note payable with
      Dutchess Private Equities Fund II, LP (Dutchess). The proceeds from the
      transaction were received in two tranches. The first tranche of $1,000,000
      was
      received at closing and the second tranche of $500,000 was received upon the
      filing of a registration statement with the SEC. The registration statement
      was
      filed with the SEC in October 2005. Upon effectiveness of the registration
      statement, Dutchess may elect to receive loan payments in the form of stock
      at a
      conversion price based upon the prevailing market price of Hyperdynamics' common
      stock but in no event less than $1.00 per share. In conjunction with the
      transaction, Hyperdynamics issued a detachable warrant to Duchess to purchase
      500,000 shares of common stock at $1.00 per share. The relative fair value
      of
      the warrants was $305,000 and the intrinsic value of the conversion feature
      of
      the two tranches was $580,000. Effective February 9, 2006, Hyperdynamics has
      the
      option to enter into another debenture with Dutchess for an additional
      $1,500,000. During the quarter ending March 31, 2006 this note was converted
      into common stock.




F-14
 *Table
            of Contents*





Short
      Term Note Payable





In
      December 2005, Hyperdynamics issued 127,000 shares of stock with a market value
      of $240,030 and a non-interest bearing note to Dutchess in exchange for
      $640,000. Upon effectiveness of the aforementioned registration statement,
      Dutchess may elect to receive loan payments in the form of stock at a conversion
      price based upon the prevailing market price of Hyperdynamics' common stock.
      The
      intrinsic value of the conversion feature was $575,000. In June 2006 this note
      was paid off via the aforementioned conversion feature.





Hyperdynamics
      analyzed its convertible notes payable instruments for derivative accounting
      consideration under SFAS 133 and EITF 00-19. Hyperdynamics determined the
      conversion feature met the criteria for classification in stockholders' equity
      under SFAS 133 and EITF 00-19. Therefore, derivative accounting is not
      applicable for the convertible instruments.





The
      activity on the notes during the year ended June 30, 2006 is as
      follows:





Face
                value of debentures
            
            $
            2,140,000Less:
                  Discount related to warrants
            
            
            (305,000
            )Discount
                related to conversion feature
            
            
            (1,155,000
            )Discount
                related to financing costs
            
            
            (155,000
            )Subtotal
            
            
            525,000Add:  
                Amortization of discount
            
            
            1,615,000Total
                principal
            
            
            2,140,000Less
                payments:Conversion
                to common shares
            
            
            (1,893,000
            )Cash
                payments
            
            
            (247,000
            )Balance
                of debentures at June 30, 2006
            
            $
            -








**11** . **CONVERTIBLE
      DEBENTURES**





In
      June
      2006, Hyperdynamics entered into a financing arrangement with Cornell Capital
      Partners, LP whereby Hyperdynamics received net proceeds of $5,440,000 in
      exchange for three debentures and warrants to purchase 955,000, 715,000 and
      430,000 shares of our common stock at exercise prices of $2.50, $3.50 and $4.00
      per share, respectively.





The
      first
      two debentures were funded at closing and upon the filing of a registration
      statement with the SEC, in June 2006. The third debenture of $1,800,000 was
      funded in August 2006 when the aforementioned registration statement became
      effective.





The
      debentures bear interest at an annual rate of 10% and are to be repaid in
      monthly installments of $175,000 plus interest. The debenture maturity date
      is
      June 19, 2009. The debentures may be converted into shares of our common
      stock at the option of the holder. The debentures are secured by substantially
      all of the assets of the company, except for the assets of our subsidiaries
      SCS
      Corp and SCS Guinea SARL and our assets and operations in the Republic of
      Guinea.





Hyperdynamics
      analyzed the convertible debentures for derivative accounting consideration
      under SFAS 133 and EITF 00-19. Hyperdynamics determined the conversion feature
      met the criteria for classification in stockholders' equity under SFAS 133
      and
      EITF 00-19. Therefore, derivative accounting is not applicable for the
      convertible instruments.





The
      carrying value of the debentures at June 30, 2006 is as follows:




Face
                value of debentures
            
            $
            4,000,000Less:  
                Discount related to warrants
            
            
            (1,331,000
            )Discount
                related to conversion feature
            
            
            (759,000
            )Add:  
                Amortization of discount
            
            
            32,000Carrying
                value of debentures at June 30, 2006
            
            $
            1,932,000





F-15
 *Table
            of Contents*





**12** . **LETTER
      OF CREDIT**





Hyperdynamics
      opened a Time Certificate of Deposit with Frost Bank on January 6, 2006 for
      an
      initial deposit amount of $75,000 securing a letter of credit. The purpose
      of
      the letter of credit is to serve as a guarantee the lease payments on
      Hyperdynamics' new office space in Sugar Land, TX. The letter of credit is
      guaranteed by a security interest in a certificate of deposit with Frost Bank
      that may not be redeemed until the letter of credit expires. There were no
      draws
      against this letter of credit as of June 30, 2006. The letter will not be
      renewed upon expiration and the funds will be free of restriction at that time.
      The term is 24 months and the maturity date is January 6, 2008.







**13.
      INCOME TAXES** **:**





Income
      taxes are not due since Hyperdynamics has had losses since inception.
      Hyperdynamics has net operating loss carryforwards of approximately $18,800,000
      at June 30, 2006. Components of income tax expense for the years ended June
      30,
      2006, 2005 and 2004 are as follows:





2006
            
            2005
            
            2004Deferred
                Tax asset
            
            $
            6,393,000
            
            
            4,389,000
            
            
            2,255,000Increase
                in valuation allowance for deferred tax assets
            
            $
            (6,393,000
            )
            
            (4,389,000
            )
            
            (2,255,000
            )Income
                tax expense
            
            $
            -
            
            
            -
            
            
            -





Internal
      Revenue Section 382 restricts the ability to use these carryforwards whenever
      an
      ownership change as defined occurs. Hyperdynamics incurred such an ownership
      change on January 14, 1998 and again on June 30, 2001, As a result of the first
      ownership change, Hyperdynamics' use of net operating losses as of January
      14,
      1998 of $949,000 are restricted to $151,000 per year. The availability of losses
      from that date through June 30, 2001 of $3,313,000 are restricted to $784,000
      per year. Losses in fiscal 2002 and beyond are not restricted. The net operating
      loss carryforwards expire from 2011 to 2026.






**14.
      SHAREHOLDERS' EQUITY:**





**Series
      A and B Preferred Stock**




Series
      A
      Convertible Preferred Stock was issued in January 2000 for net proceeds of
      $2,604,190. The stated value is $1,000 per share and par value is $.001. By
      terms of the agreement, it is convertible into Hyperdynamics' common stock
      at a
      price of the lower of the trading price when purchased at $5.25 or 80% of the
      current 5-day trading average. All or any of the stock may be converted at
      any
      time at the holder's option, and all shares outstanding as of January 30, 2002
      were to be automatically converted. This series is non-voting and has a dividend
      rate of 4%, payable at conversion in either cash or shares of common stock,
      at
      Hyperdynamics' option. 1,055 shares were converted to common in 2000 and 2001.
      Hyperdynamics has not converted any of the Series A shares since fiscal 2001
      because of claims filed in November 2001 in our lawsuit with the Series A
      shareholders. Since the outcome is not known and no conversion had been
      effected, Hyperdynamics continued to accrue the dividend through September
      30,
      2004. Management evaluated the accrual as of September 30, 2004, and considers
      the accrual as of that date to be adequate to cover the liability, if any,
      pursuant to the lawsuit.





As
      of
      June 30, 2004, $352,953 in dividends were accrued. In 2005 dividends of $19,445
      were accrued resulting in total accrued Series A dividends of $372,398 as of
      June 30, 2005 and 2006. No dividends have been accrued in 2006.





22,725
      shares of Series B Convertible Preferred Stock were issued for the acquisition
      of SCS Corporation on May 31, 2001. The stated value is $1,000 per share and
      the
      par value is $0.001. Each Series B share may vote 7,408 common shares for a
      total of 20,186,800 votes. The shares are convertible to common stock at the
      lesser of $0.135 or 50% of the current 5- day average trading price. Series
      B
      stockholders are entitled to a 4% cumulative dividend on the stated value,
      which
      is payable only upon conversion of the preferred stock. Dividends may be paid
      in
      stock or cash at Hyperdynamics' option. Dividends accrued on the Series B as
      of
      June 30, 2004 were $163,500. In 2005 dividends of $81,750 were accrued for
      the
      first three (3) quarters of FYE 2005, resulting in accrued dividends as of
      March
      31, 2005 of $245,250. The board of directors approved the issuance of 87,715
      shares of restricted common stock to pay the March 31, 2005 accrued series
      B
      dividend. Dividends were accrued for the fourth quarter leaving a balance of
      $27,250 as of June 30, 2005. In 2006 dividends of $109,000 were accrued. The
      resulting balance in accrued dividends was $136,000 as of June 30,
      2006.





Accrued
      dividends on Series A and Series B stock as of June 30, 2005 totaled $
      508,000.




F-16
 *Table
            of Contents*





If
      all
      Preferred Series A and B shares were converted as of June 30, 2006, total common
      shares outstanding would be approximately 66,962,000 shares.





**Common
      Stock**





*For
      exercise of options and warrants:*





In
      November 2005, a warrant to purchase 25,000 shares of common stock at $0.50
      per
      share was exercised for gross proceeds of $12,500.




In
      December 2005, a warrant to purchase 25,000 shares of common stock at $0.50
      per
      share was exercised for gross proceeds of $12,500.





In
      February 2006, a warrant to purchase 20,000 shares of common stock at $0.50
      per
      share was exercised for gross proceeds of $10,000.





In
      February 2006, a warrant to purchase 510,000 shares of common stock at $0.50
      per
      share was exercised for gross proceeds of $255,000.





In
      February 2006, a warrant to purchase 300,000 shares of common stock at $0.50
      per
      share was exercised for gross proceeds of $150,000.





In
      March
      2006, a warrant to purchase 100,000 shares of common stock at $0.50 per share
      was exercised for gross proceeds of $50,000.





In
      April
      2006, a warrant to purchase 100,000 shares of common stock at $0.50 per share
      was exercised for gross proceeds of $50,000.





In
      April
      2006, a warrant to purchase 25,000 shares of common stock at $0.50 per share
      was
      exercised for gross proceeds of $12,500.





In
      June
      2006, a warrant to purchase 25,000 shares of common stock at $0.50 per share
      was
      exercised for gross proceeds of $12,500.





In
      May
      2006, the Company issued 2,563 shares of common stock upon the cashless exercise
      of a warrant to purchase 5,000 shares of common stock.





*For
      services:*


During
      the year ended June 30, 2006, Hyperdynamics issued 179,266 shares of common
      stock for consulting services valued at $397,000.





*To
      repurchase working interest:*


In
      February 2006, 197,416 shares of common stock were issued to four investors
      who
      had purchased 5% working interest in leases owned by Trendsetter Production
      Company, ( a wholly owned subsidiary of Hyperdynamics) in a transaction by
      which
      their working interest was returned to Trendsetter Production Company. The
      settlement was recorded at Hyperdynamics’ common stock price as of the date of
      settlement, $581,000.





*For
      options exercised associated with convertible note payable:*


In
      August, 2005, Hyperdynamics entered into financing agreement in which an outside
      investor purchased a convertible note payable and a short-term note payable.
      (see note 10) In connection with the convertible note payable, Hyperdynamics
      issued a detachable warrant to purchase 500,000 shares of common stock at $1.00
      per share. The exercise price was adjusted to $0.90 per share as a penalty
      for
      filing the S-1 to register the stock associated with the financing after a
      contractually stipulated date. These warrants were exercised for In February
      2006 for $450,000.





*For
      conversion of convertible notes payable:*


1,488,817
      shares of common stock were issued as conversion of principal payments of
      $1,313,000 and to pay interest of $27,000 on the convertible note payable (see
      Note 10) during February and March 2006. 204,028 shares of common stock were
      issued as conversion of principal payments of $580,000 on the short-term note
      payable (see Note 10). Thus, a total of 1,692,845 shares of common stock were
      issued associated with the payment of $1,695,000 of principal and interest
      on
      the financing agreement entered into during August 2005.





F-17
 *Table
            of Contents*





*For
      cash:*


During
      April and May 2006, 135,095 shares of common stock were sold at current market
      prices, which then ranged from $2.21 to $3.00 per share, for
      $387,000.





*Beneficial
      conversion costs:*


Hyperdynamics
      entered into a short-term note as described in Note 10 in December 2005. 127,000
      shares of common stock with a market value of $240,000 were issued in
      conjunction with the note closing. The value of the stock issued is a component
      of the beneficial conversion feature associated with the transaction. Discounts
      related to the beneficial conversion feature and to the detachable warrant
      totaled $1,460,000.





During
      June 2006, Hyperdynamics entered into a convertible debenture agreement with
      another investor (see Note 11). Discounts related to the beneficial conversion
      feature and to the detachable warrant issued with these debentures totaled
      $2,100,000.





Thus,
      total discounts associated with the issuance of convertible notes payable and
      convertible debentures totaled $3,560,000.








**15.
      STOCK OPTIONS AND WARRANTS**





Hyperdynamics'
      Stock Option Plan provides for the grant of non-qualified options to directors,
      employees and consultants, and opportunities for directors, officers, employees
      and consultants to make purchases of stock in Hyperdynamics. In addition,
      Hyperdynamics issues stock warrants from time to time to employees, consultants,
      stockholders and creditors as additional financial incentives. The plans and
      warrant issuances are administered by the Board of Directors, who have
      substantial discretion to determine which persons, amounts, time, price,
      exercise terms, and restrictions, if any. Options differ from warrants in that
      the options awards are immediately exercisable and are assignable. In contrast,
      warrants have employment termination restrictions, vesting periods and are
      non-transferable.





During
      2005, Hyperdynamics did not grant any compensatory warrants or options. In
      2004,
      Hyperdynamics granted 2,360,000 warrants to consultants, which vested during
      2004, 2005 and 2006. The compensation cost recognized for these warrants was
      $474,000, $1,833,000 and $1,518,000 for the years ended June 30, 2006, 2005
      and
      2004, respectively, based on the Black-Scholes option pricing
      model.





During
      2006, 2005 and 2004, respectively, Hyperdynamics issued 640,000, 0 and 333,333
      options or warrants to employees. The compensation cost recognized for this
      share-based compensation was $381,000, $0 and $266,000 for the years ended
      June
      30, 2006, 2005 and 2004, based on the Black-Scholes option pricing model.





In
      addition to warrants and options issued to consultants and employees, warrants
      to purchase 2,939,373 shares were issued in conjunction with two convertible
      debenture arrangements in 2006 and investors purchased 3,732,403 warrants in
      conjunction with purchases of SCS preferred stock and Hyperdynamics common
      stock
      in 2005.





The
      weighted average fair value of the employee and consultant stock options and
      warrants vested during 2006, 2005 and 2004 was $1.26, $2.29 and $1.45,
      respectively. Variables used in the Black-Scholes option-pricing model include
      (1) risk-free interest rates ranging from 1% to 2.5%, depending on the grant
      dates and the expected lives of the options, (2) expected option life is the
      actual remaining life of the options as of the grant date, (3) expected
      volatility is the actual historical stock price fluctuation volatility and
      (4)
      zero expected dividends.




F-18
 *Table
            of Contents*





Summary
      information regarding options and warrants is as follows:





Options
            
            Weighted
              Average
              Share
                Price
            
            Warrants
            
            Weighted
              Average
              Share
                PriceOutstanding
                at year ended June 30, 2003
            
            
            -
            
            
            -
            
            
            4,625,000
            
            $
            1.16Granted
            
            
            -
            
            
            -
            
            
            6,425,736
            
            
            1.31Exercised
            
            
            -
            
            
            -
            
            
            (3,412,333
            )
            
            .28Expired
            
            
            -
            
            
            -
            
            
            (355,000
            )
            
            .83Outstanding
                at year ended June 30, 2004
            
            
            -
            
            
            -
            
            
            7,283,403
            
            $
            1.69Granted
            
            
            -
            
            
            -
            
            
            250,000
            
            
            .55Exercised
            
            
            -
            
            
            -
            
            
            (321,500
            )
            
            .52Expired
            
            
            -
            
            
            -
            
            
            (600,000
            )
            
            6.50Outstanding
                at year ended June 30, 2005
            
            
            -
            
            
            -
            
            
            6,611,903
            
            $
            1.27Granted
            
            
            640,000
            
            $
            1.30
            
            
            2,600,000
            
            $
            2.72Exercised
            
            
            (5,000
            )
            
            1.55
            
            
            (1,630,000
            )
            
            .62Expired
            
            
            -
            
            
            -
            
            
            (10,000
            )
            
            .28Outstanding
                at year ended June 30, 2006
            
            
            635,000
            
            $
            1.30
            
            
            7,571,903
            
            $
            1.90








**Warrants
                outstanding and exercisable as of June 30, 2005****Exercise**
              **Price**
            
            **Outstanding**
              **Number
                of**
              **Shares**
            
            **Remaining
                Life**
            
            **Exercisable**
              **Number
                of**
              **Shares**$
                .23
            
            
            800,000
            
            
            2
                years
            
            
            800,000.25
            
            
            175,000
            
            
            3
                years
            
            
            175,000.28
            
            
            10,000
            
            
            1
                year
            
            
            10,000.50
            
            
            100,000
            
            
            1
                year
            
            
            100,000.50
            
            
            1,992,000
            
            
            2
                years
            
            
            1,392,0002.00
            
            
            3,534,903
            
            
            2
                years
            
            
            3,534,9036,611,903
            
            
            
            
            
            6,011,903**Warrants
                outstanding and exercisable as of June 30,
                2006****Exercise**
              **Price**
            
            
            **Outstanding**
              **Number**
              **of
                Shares**
            
            
            **Remaining
                Life**
            
            
            **Exercisable**
              **Number
                of**
              **Shares**$.23
            
            
            800,000
            
            
            1
                year
            
            
            800,000$.25
            
            
            175,000
            
            
            2
                years
            
            
            175,000$.50
                - $1.00
            
            
            962,000
            
            
            1
                year
            
            
            962,000$2.00
            
            
            3,534,903
            
            
            1
                year
            
            
            3,534,9032.50
            
            
            955,000
            
            
            5
                years
            
            
            955,0003.50
            
            
            715,000
            
            
            5
                years
            
            
            715,0004.00
            
            
            430,000
            
            
            5
                years
            
            
            430,0007,571,903
            
            
            
            
            
            7,571,903





F-19
 *Table
            of Contents*




**Options
                outstanding and exercisable as of June 30, 2006****Exercise**
              **Price**
            
            **Outstanding**
              **Number
                of**
              **Shares**
            
            **Remaining**
              **Life**
            
            **Exercisable**
              **Number
                of**
              **Shares**$1.00
                - 1.49
            
            
            400,000
            
            
            1
                year
            
            
            40,000$1.50
                - 1.99
            
            
            120,000
            
            
            1
                year
            
            
            120,000$2.00
                - 2.49
            
            
            115,000
            
            
            3
                years
            
            
            115,000635,000
            
            
            
            
            
            275,000






**16.
      SEGMENT INFORMATION**





**Reportable
      segments**





Hyperdynamics
      management has two reportable segments: SCS Corporation ("SCS") and its
      Louisiana operations (“HYD"). SCS is engaged in oil and gas exploration
      activities pertaining to offshore Guinea, West Africa. Additionally, to provides
      seismic data transcription and management services to support its activities
      and
      to external customers. The seismic data work is performed in the USA. HYD is
      engaged in oil and gas exploration and production activities in Louisiana,
      USA;
      it also provides some oilfield services to external customers. Hyperdynamics
      evaluates performance based on profit or loss from operations. The reportable
      segments are managed by separate management teams who are valuated based on
      their segment's performance.





The
      following tables summarize certain balance sheet and income statement data
      about
      Hyperdynamics' reportable segments and corporate overhead:





**Year
                ended June 30, 2006 (in Thousands)****SCS**
            
            **HYD**
            
            **Corporate**
            
            **Total**Revenues
                from external customers
            
            $
            -
            
            $
            656
            
            $
            -
            
            $
            656Depreciation,
                Depletion and Amortization
            
            
            31
            
            
            116
            
            
            19
            
            
            167Loss
                from Operations
            
            
            (825
            )
            
            (1,754
            )
            
            (2,462
            )
            
            (5,041
            )Expenditures
                for long-lived assets
            
            
            93
            
            
            450
            
            
            11
            
            
            554




**Year
                ended June 30, 2005 (in Thousands)****SCS**
            
            **HYD**
            
            **Corporate**
            
            **Total**Revenues
                from external customers
            
            $
            3
            
            $
            170
            
            $
            -
            
            $
            173Depreciation,
                Depletion and Amortization
            
            
            28
            
            
            77
            
            
            20
            
            
            125Loss
                from Operations
            
            
            (529
            )
            
            (1,508
            )
            
            (2,863
            )
            
            (4,900
            )Expenditures
                for long-lived assets
            
            
            889
            
            
            958
            
            
            17
            
            
            1,864




**Year
                ended June 30, 2004 (in Thousands)****SCS**
            
            **HYD**
            
            **Corporate**
            
            **Total**Revenues
                from external customers
            
            $
            18
            
            $
            10
            
            $
            10
            
            $
            38Depreciation,
                Depletion and Amortization
            
            
            24
            
            
            19
            
            
            18
            
            
            61Loss
                from Operations
            
            
            (408
            )
            
            (92
            )
            
            (2,618
            )
            
            (3,117
            )Expenditures
                for long-lived assets
            
            
            2,339
            
            
            359
            
            
            1
            
            
            2,699




F-20
 *Table
            of Contents*




**17.
      COMMITMENTS AND CONTINGENCIES**




From
      time
      to time, Hyperdynamics and its subsidiaries are involved in a number of routine
      business disputes that may occur in the ordinary course of business.
      Hyperdynamics is unable to predict the outcome of such matters when they arise.
      Other than disputes currently disclosed under litigation, the company is unaware
      of any other disputes that exist and does not believe that the ultimate
      resolution of such matters would have a material adverse effect on the financial
      statements of Hyperdynamics.




Hyperdynamics
      is granted the option to terminate the lease on the current headquarters office
      lease at the end of month sixty (60) by providing the landlord with written
      notice not less than nine months prior to such termination date.





In
      addition, Hyperdynamics is involved in a dispute with its series A preferred
      shareholders over conversion rights to common stock and whether monetary damages
      are due for various claims against the preferred shareholders. The economic
      effects of and the probable outcome of this contingency are not known.
      Hyperdynamics' subsidiary, SCS, has $350,000 remaining of a contingent note
      payable due to Seacon Computer Systems Inc., the former owners of SCS
      Corporation's assets.





Hyperdynamics'
      subsidiary, SCS, has arrangements with one individual and one corporation to
      provide geological and geophysical services in exchange for Hyperdynamics common
      stock. This arrangement was temporarily put on hold beginning in July 2005.
      Should SCS continue with the 2002 PSA or proceed with rights to explore and
      exploit the concession off the coast of Guinea, Hyperdynamics may be obligated
      under these agreements to issue 41,250 - 46,250 shares per quarter, depending
      upon the price of Hyperdynamics common stock, or it may, at the company's option
      renegotiate or cancel such agreements going forward in any respect.






**18.
      RELATED PARTY TRANSACTIONS**





Related
      party transactions include payments to the CEO's brother, Michael Watts, as
      follows: during the year ended June 30, 2004, Michael Watts, the CEO's brother,
      received payment of $700,000 cash to pay for offering costs on private
      subscription agreements and warrants exercised. Additional offering costs will
      also be paid on 3,732,403 warrants purchased by private investors should they
      be
      exercised in the future. If all of these warrants were exercised, Mr. Watts
      would receive approximately $712,000 to pay these additional costs.





Additionally,
      warrants to purchase 1,200,000 shares of common stock with an exercise price
      of
      $.50 per share were issued to a company of which Michael Watts is president
      for
      public relations/investor relations services. The warrants vest quarterly from
      January 2004 through December 2005 and expire July 18, 2007. As of June 30,
      2006
      all of these warrants had vested. The value of the 1,200,000 warrants, as
      computed using the Black-Scholes model, was $2,257,000 of which $196,000,
      $1,101,000 and $960,000 was recognized in 2006, 2005 and 2004, respectively.





On
      February 9, 2005 the Audit Committee of Hyperdynamics Corporation, acting under
      the Audit Committee Charter adopted by the board of directors on October 18,
      2005 (see Exhibit 14.1 hereunder), pre-approved a contract with Geoserve
      Marketing, an assumed name for Michael E. Watts, the brother of the Chief
      Executive Officer. The contract was executed by Trendsetter Production Company,
      (our wholly owned subsidiary) with Geoserve Marketing. Under the Agreement
      Geoserve Marketing was to sell up to 49% of the working interest in certain
      oil
      and gas properties owned by Trendsetter. At $55,000 per point, this was to
      bring
      in gross proceeds of $2,695,000 once sold out. Geoserve Marketing was given
      the responsibilities to sell working interest on the company's oil and gas
      leases; obtain executed documents for such sales as required by the company;
      help prepare the marketing materials for working interest sales; obtain investor
      non-disclosure agreements and other representations from all prospective
      non-operators; obtain a check or wired funds from and signatures of
      non-operators on all pertinent operating agreement forms; pay expenses for
      working interest promotion including but not limited to any brokerage fees
      and
      referral fees. Trendsetter agreed to pay 20% of the proceeds to Geoserve
      Marketing in return for these services. On June 30, 2005, the independent audit
      committee pre-approved an extension of the working interest sales contract
      through July 30, 2005. As of June 30, 2005, 18.5% working interest, or
      $1,017,500, had been sold and Geoserve Marketing had been paid promotion fees
      of
      $204,000.





On
      July
      29, 2005, the audit committee pre-approved that Trendsetter Production Company
      may extend the term of the contract with Geoserve Marketing until a total of
      gross sales of $2,695,000 has occurred or it has been determined that HYDR
      is
      cash flowing, as a whole, or the company otherwise reaches a cash position
      net
      of current liabilities equal to at least $1,500,000 with projected cash surplus
      to last a minimum of one year based on current operations. As of June 30, 2006,
      and additional 16.5% or $908,000 had been sold and an additional $181,000 in
      promotion fees have been paid to Geoserve Marketing. Total fees paid in
      conjunction with this arrangement were $385,000.





On
      May 9,
      2005, Harry James Briers, Executive Vice President, requested and obtained
      pre-approval from the audit committee to rehire Mr. Jeremy Driver (son-in-law
      of
      Michael E. Watts, brother of the Chief Executive Officer), a past employee
      of
      Hyperdynamics Corporation, to work as General Manager for HYD Resources
      Corporation. Mr. Driver had just been honorably discharged from the United
      States Air Force with the rank of Lieutenant. The audit committee approved
      the
      request and Mr. Driver was hired by Mr. Briers at an initial salary of $45,000
      annually.





F-21
 *Table
            of Contents*




In
      September, 2006, Harry James Briers, Executive Vice President, requested and
      obtained pre-approval from the Audit Committee to give Christopher M. Watts,
      a
      related party of Mr. Kent Watts, our CEO, a bonus for work performed in Guinea
      and a raise in pay as the company’s Investor Relations Coordinator. He received
      a bonus of $2,000 and a raise from $29,000 annually to $32,480 annually. The
      raise of $3,480 represents a 12% increase.





In
      October, 2006, the Company hired Glen Driver as a manager in our Louisiana
      operations. Mr. Driver is the father of Jeremy Driver, a related party of Mr.
      Kent Watts, our CEO. The audit committee pre-approved the hiring in accordance
      with the Company’s conflict of interest policy.








**19.
      SUBSEQUENT EVENTS**





**New
      2006 Production Sharing Contract (2006 PSC) Between the Republic of Guinea
      and
      SCS**





Under
      the
      new 2006 PSC signed on September 22, 2006, SCS has the following
      obligations:





a.
              The
                  2006 PSC specifies royalties and production sharing if oil and/or
                  gas is
                  discovered.





b.
              During
                  the first exploration period that started on September 22, 2006,
                  SCS must
                  perform 2-D or 3-D seismic and other work on the seismic to be
                  acquired.
                  The estimated expenditure is $10,000,000. The completion of the
                  work
                  exempts SCS from the expenditure obligation. SCS has 2 years with
                  two 1
                  year extensions provided for in the 2006 PSC or a minimum of 4
                  years to
                  complete the work in the first exploration period.





c.
              During
                  the second exploration period, SCS is required to drill at least
                  two
                  exploratory wells at an estimated cost of $15 to $20 million each.
                  The
                  time frame for SCS has to complete this requirement is at least
                  four years
                  with a four year extension or 8 years.





d.
              SCS
                  may conduct second exploration period work during the first exploration
                  period and the work performed will accrue to the requirement of
                  the second
                  exploration period. SCS has at least 12 years to complete its work
                  obligations and the completion of any of our work obligations will
                  exempt
                  us from the expenditure obligation.





e.
              Upon
                  a commercial discovery, SCS can choose a 500 square kilometer area
                  as an
                  exploitation area and SCS may have as many exploitation areas as
                  it
                  decides. Each well within an exploitation area will have a separate
                  25
                  year exploitation term with two 10 year extensions (by SCS showing
                  the
                  well can still be produced) for a total of 45 years total to produce
                  each
                  producing well.




**Debt
        Conversion**
 
 In
        August
        and September 2006, the holder of our convertible debentures elected to convert
        a portion of the convertible debentures into our common stock. $2,125,000
        of
        debt was converted through the issuance of 1,062,000 shares of our common
        stock.






**20** **.**  **SUPPLEMENTAL
      OIL AND GAS INFORMATION (UNAUDITED)**




The
      following supplemental information regarding the oil and gas activities of
      the
      Hyperdynamics is presented pursuant to the disclosure requirements promulgated
      by the SEC and Statement of Financial Standards (“SFAS”) No. 69, Disclosures
      About Oil and Gas Producing Activities. Since there were no proved reserves
      the
      oil and gas properties located in the Republic of Guinea, the following
      supplemental information only include the oil and gas activities in Louisiana,
      USA.





The
      following estimates of reserve quantities and related standardized measure
      of
      discounted net cash flows are estimates only, and are not intended to reflect
      realizable values or fair market values of the Hyperdynamics’ reserves. The
      Hyperdynamics emphasizes that reserve estimates are inherently imprecise and
      that estimates of new discoveries are more imprecise than producing oil and
      gas
      properties. Additionally, the price of oil has been very volatile and downward
      changes in prices can significantly affect quantities that are economically
      recoverable. Accordingly, these estimates are expected to change as future
      information becomes available and these changes may be significant.





Proved
      reserves are estimated reserves of crude oil and natural gas that geological
      and
      engineering data demonstrate with reasonable certainty to be recoverable in
      future years from known reservoirs under existing economic and operating
      conditions. Proved developed reserves are those expected to be recovered through
      existing wells, equipment and operating methods.





The
      standardized measure of discounted future net cash flows is computed by applying
      year-end prices of oil and gas (with consideration of price changes only to
      the
      extent provided by contractual arrangements) to the estimated future production
      of proved oil and gas reserves, less estimated future expenditures (based on
      a
      year-end costs) to be incurred in developing and producing the proved reserves,
      less estimated future income tax expenses. The estimated future net cash flows
      are then discounted using a rate of 10% per year to reflect the estimated timing
      of the future cash flows.




F-22
 *Table
            of Contents*





**Proved
      Reserves**





The
      following reserve schedule summarizes the Hyperdynamics’ net ownership interests
      in estimated quantities of proved oil reserves and changes in proved reserves,
      all of which are located in the continental United States. Reserve estimates
      for
      crude oil contained below were prepared by Ryder Scott Hyperdynamics,
      independent petroleum engineers.




JUNE
                30, 2006PROVED
                RESERVES AS OF:
            
            OIL
              (BARRELS)
            
            GAS
                (MMCF)Beginning
                of the period (1)
            
            
            -
            
            
            -Revisions
                of previous estimates
            
            
            -
            
            
            -Extensions,
                discoveries and other additions
            
            
            57,514
            
            
            -Production
            
            
            (13,869
            )
            
            -Purchase
                (Sales) of minerals in place
            
            
            (2,040
            )
            
            -End
                of the year
            
            
            41,605
            
            
            -







**Oil
      and Gas Operations**




**Costs
      Incurred in Oil and Gas Activities**




Costs
      incurred in connection with the Hyperdynamics’ crude oil and natural gas
      acquisition, exploration and development activities for each of the years
      are shown below:




USA
              
              YEAR
                  ENDED
                JUNE
                  30, 2006
              
              YEAR
                  ENDED
                JUNE
                  30, 2005Property
                  acquisition costs:Proved
              
              $
              2,000
              
              $
              -Unproved
              
              
              17,000
              
              
              17,000Total
                  acquisition costs
              
              
              19,000
              
              
              17,000Exploration
                  costs
              
              
              261,000
              
              
              568,000Development
                  costs
              
              
              141,000
              
              
              90,000Purchase
                  of reserves
              
              
              -
              
              
              65,000Cost
                  Recovery (sales of working interests)
              
              
              (421,000
              )
              
              (740,000
              )Total
                  US operations
              
              $
              -
              
              $
              -




REPUBLIC
                  OF GUINEA
              
              YEAR
                  ENDED
                JUNE
                  30, 2006
              
              YEAR
                  ENDED
                JUNE
                  30, 2005Property
                  acquisition costs:Proved
              
              $
              -
              
              $
              -Unproved
              
              
              -
              
              
              -Total
                  acquisition costs
              
              
              -
              
              
              -Exploration
                  costs
              
              
              66,000
              
              
              590,000Development
                  costs
              
              
              -
              
              
              -Purchase
                  of reserves
              
              
              -
              
              
              -Cost
                  Recovery (sales of working interests)
              
              
              -
              
              
              -Total
                  Republic of Guinea operations
              
              $
              66,000
              
              $
              590,000
  **Aggregate
        Capitalized Costs**
 
 Aggregate
        capitalized costs relating to the Hyperdynamics’ crude oil and natural gas
        producing activities, including asset retirement costs and related accumulated
        DD&A, as of June 30 are shown below **:**
 
 2006
              
              2005Unproved
                  oil and gas properties
              
              $
              738,000
              
              
              585,000Proved
                  oil and gas properties
              
              
              423,000
              
              
              155,000Oilfield
                  equipment
              
              
              467,000
              
              
              615,000Cost
                  Recovery (sales of working interests)
              
              
              (1,161,000
              )
              
              (740,000
              )Total
                  oil and gas properties
              
              
              467,000
              
              
              615,000Accumulated
                  DD&A
              
              
              (169,000
              )
              
              (124,000
              )Net
                  capitalized costs in the US
              
              
              298,000
              
              
              491,000
 Unproved
                  oil and gas properties
              
              $
              4,139,000
              
              
              4,073,000Proved
                  oil and gas properties
              
              
              -
              
              
              -Oilfield
                  equipment
              
              
              -
              
              
              -Cost
                  Recovery (sales of working interests)
              
              
              -
              
              
              -Total
                  oil and gas properties
              
              
              4,139,000
              
              
              4,073,000Accumulated
                  DD&A
              
              
              -
              
              
              -Net
                  capitalized costs in the Republic of Guinea
              
              
              4,139,000
              
              
              4,073,000Total
                  net capital costs
              
              
              4,437,000
              
              
              4,564,000


F-23
 *Table
            of Contents*





**Standardized
      Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas
      Reserves**





The
      following table presents the standardized measure of future net cash flows
      from
      proved oil reserves in accordance with SFAS No. 69. All components of the
      standardized measure are from proved reserves, all of which are located within
      the continent of the United States. As prescribed by this statement, the amounts
      shown are based on prices and costs at June 30, 2006 and 2005, and assume
      continuation of existing economic conditions. Future income taxes are based
      on
      year-end statutory rates, adjusted for tax credits. A discount factor of 10
      percent was used to reflect the timing of future net cash flows. Extensive
      judgments are involved in estimating the timing of production and the costs
      that
      will be incurred through the remaining lives of the fields. Accordingly, the
      estimates of future net revenues from proved reserves and the present value
      thereof may not be materially correct when judged against actual subsequent
      results. Further, since prices and costs do not remain static, and no price
      or
      cost changes have been considered, and future production and development costs
      are estimated to be incurred in developing and producing the estimated proved
      oil reserves, the results are not necessarily indicative of the fair market
      value of estimate proved reserves, and the results may not be comparable to
      estimates by other oil producers.




June
                30,2006Future
                cash inflows
            
            $
            2,963,000Future
                production costs
            
            
            (1,690,000
            )Future
                development costs
            
            
            -Future
                income tax expenses
            
            
            (339,000
            )Future
                net cash flows
            
            
            934,00010%
                annual discount for estimated timing of cash flows
            
            
            (80,000
            )Standardized
                measure of discounted future net cash flows at the end of the
                year
            
            $
            854,000





The
      standardized measure of discounted future net cash flows as of June 30, 2006
      and
      2005 was calculated using prices in effect as of that date. See the following
      table for average prices.




JUNE
                30,2006Average
                crude oil price per Barrel
            
            $
            69.44





**Sources
      of Changes in Discounted Future Net Cash Flows**





Principal
      changes in the aggregate standardized measure of discounted future net cash
      flows attributable to the Hyperdynamics’ proved crude oil reserves, as required
      by SFAS No. 69, at year end are set forth in the table below (in
      thousands). Since there were no productions or proved reserves for the year
      ended 2004 and minimal oil production volume for the year ended June 30, 2005,
      no available data to compute the changes in discounted future cash flows for
      year ended June 30, 2005.




YEAR
                ENDED
              JUNE
                30, 2006Standardized
                measure of discounted future net cash flows at the beginning of the
                year
            
            $
            -Net
                changes in prices and production costs
            
            
            (55,000
            )Changes
                in estimated future development costs
            
            
            -Sales
                of oil and gas produced, net of production costs
            
            
            222,000Extensions,
                discoveries and improved recovery, less related costs
            
            
            364,000Purchases
                (sales) of minerals in place
            
            
            (9,000
            )Revisions
                of previous quantity estimates
            
            
            261,000Previously
                estimated development costs incurred
            
            
            -Net
                change in income taxes
            
            
            (72,000
            )Accretion
                of discount
            
            
            143,000Standardized
                measure of discounted future net cash flows at the end of the
                year
            
            $
            854,000




F-24
 *Table
            of Contents*





**Item
      9. Changes In and Disagreements with Accountants on Accounting and Financial
      Disclosure.**





None.








**Item
      9A. Controls and Procedures.**





Our
      Chief
      Executive Officer and our Chief Financial Officer, have concluded that our
      disclosure controls and procedures are appropriate and effective. They have
      evaluated these controls and procedures as of the end of the period covered
      by
      this report on Form 10-K. There were no significant changes in the our internal
      controls or in other factors that could significantly affect these controls
      subsequent to the date of their evaluation, including any corrective actions
      with regard to significant deficiencies and material weaknesses.





There have
        been
        no changes in our internal control over financial reporting identified in
        connection with the evaluation required by Rule 13a-15(d) or Rule 15d-14(b)
        that
        occurred during the quarter ended June 30, 2006 that have materially affected,
        or are reasonably likely to materially affect, our internal control over
        financial reporting.








**Item
      9B. Other Information.**





None.






**PART
      III**







**Item
      10. Directors and Executive Officers of the
      Registrant.**




**DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS**





**Executive
      Officers and Directors.**





The
      following table sets forth the names and positions of each of our Executive
      Officers and Directors.





**Name**
            
            **Position**
            
            **Age**Kent
                Watts
            
            Director,
                Chief Executive Officer, Chairman and President
            
            48Harry
                J. Briers
            
            Director
                and Executive Vice President
            
            43Harold
                A. Poling
            
            Director
            
            81Albert
                F. Young
            
            Director
            
            69Steven
                Plumb
            
            Chief
                Financial Officer
            
            47L.
                Gene Stohler
            
            Director
            
            77








Directors
      are elected annually and hold office until the next annual meeting of our
      stockholders or until their successors are elected and qualified. We have no
      standing committees of the Board of Directors. Officers are elected annually
      and
      serve at the discretion of the Board of Directors. There is no family
      relationship between or among any of the Directors and our Executive Officers.
      Board vacancies are filled by a majority vote of the Board. We have determined
      that our Vice-President for Guinea Affairs, Famourou Kourouma, is not an
      executive officer. We have a corporate Secretary who we have also determined
      is
      not an executive officer.





46
 *Table
            of Contents*




Kent
      Watts, age 48, became Chairman of the Board of Directors and was named
      our President Chief Executive Officer (CEO) on June 4, 1997. Mr.
      Watts has been a certified public accountant in Texas since 1985 and a licensed
      real estate broker since 1979. He received a Bachelor of Business Administration
      Degree from the University of Houston in 1983. Mr. Watts founded MicroData
      Systems, Inc., our former subsidiary, in 1988 and was MicroData's CEO until
      he
      became President and Chief Executive Officer of Hyperdynamics Corporation.
      . In
      2005 he traveled to Guinea and established Hyperdynamics’ foreign subsidiary and
      laid the groundwork for a new 2006 production sharing contract.  As our CEO
      and Chairman of the Board, he remains primarily responsible for managing our
      strategic direction and focus on the vertical oil and gas industry. Mr. Watts
      is
      the founder, president and director of American Friends of Guinea, established
      in March of 2005 as a non-profit with a 501(c) 3 designation for the purpose
      of
      making donations for medical relief agendas in the Republic of Guinea.





Harry
      James Briers, age 43, has been a Director since March 2, 2000. He began as
      our
      Director of Integrated Information Systems when he joined us in May 1998. He
      was
      elected as Vice President of Operations for Hyperdynamics Corporation in 1999
      and named the Chief Operating Officer in 1999. He became our Executive Vice
      President in October 2002, which is the only position and title he now holds.
      From 1988 until May 1998, Mr. Briers owned and operated Perfect Solutions,
      a
      software consulting firm in Houston, Texas. He has extensive experience in
      the
      sale and implementation of mission critical software applications. Prior work
      experience included consulting for Ernst & Young in its Entrepreneurial
      Services Group. Mr. Briers has a B.S. in Accounting and an MBA from the
      University of Houston-Clear Lake. As Executive Vice President he is responsible
      for managing the daily operations of the organization. He holds no other
      directorships.




Mr.
      Harold A. Poling, age 81 was elected as our fourth Director on June 2, 2004.
      He
      is a former Chairman of the Board and CEO of Ford Motor Co. After finishing
      his
      MBA in accounting, he took a job with Ford in 1951. Ford of Europe had record
      earnings during his tenure as head of that subsidiary. He moved to Ford's North
      American Operations prior to being named President and COO, then Vice-chairman
      and CEO of , and later Chairman and CEO of Ford Motor Co., the world's second
      largest auto maker. He served as a member of Ford's Board of Directors from
      May
      1979 until January 1994, and was elected Chairman in March 1990. He became
      a
      member of the Office of the Chief Executive of Ford in November 1984. He retired
      from Ford in January 1994. Currently, Mr. Poling serves as the Chairman of
      The
      PGA Tournament Players Club of Michigan and is also the chairman for
      Eclipse Aviation Corp. He is a
      Director of, Monmouth, IL. College Senate, and William Beaumont Hospital where
      he is also a trustee. He is also a member of the Board of Trustees of Spring
      Arbor University. In the past, Mr. Poling served on the Boards of ArvinMeritor,
      Flint Ink Corporation, Royal Dutch Shell, Kellogg, and is past Director of
      the
      Professional Golf Association's (PGA) Tour Policy Board.





Albert
      F.
      Young, age 68, was elected to the Board of Directors on October 18, 2004. He
      currently owns and operates Al Young Sales and Consulting. He retired from
      Venture Industries, where he had spent the preceding 14 years, in 2003.
      Currently, he continues to consult with Venture and is the Executive Assistant
      to its Chairman. During his tenure at Venture, Mr. Young was responsible for
      building his division's sales to approximately $500 million annually.
      Additionally, Mr. Young was instrumental in formulating and orchestrating
      several acquisitions and joint ventures including Venture's purchase of a Ford
      plastic plant, design center and two (2) tool shops in Melbourne, Australia.
      These acquisitions made Venture a supplier of automotive design projects.
      Additionally, Mr. Young helped Venture acquire Bailey Corporation and a third
      tool shop in Michigan and became a joint venture partner with Visteon in the
      purchase of Atlantic Automotive in Benton Harbor, Michigan. He holds no other
      public company directorships.




Steven
      Plumb, age 47, has been our CFO since November 2005. He is a CPA licensed to
      practice in Texas. Mr. Plumb is a financial manager and senior executive
      experienced in operations, finance and marketing. He has Big 4 CPA experience,
      a
      background in IT, biotech, Fortune 500 firms, medical and utility companies,
      distribution, real estate, construction, governmental entities, and non-profit
      organizations. During 1981-1982, Mr. Plumb was a staff accountant at
      PriceWaterhouseCoopers. During 1982-1984, Mr. Plumb was a staff accountant
      at
      Kalman Phillips & Leon, P.C. During 1984-1987, Mr. Plumb was a supervising
      senior accountant at KPMG. During 1987-1990, Mr. Plumb was the controller of
      Memorial Hermann Rehabilitation Hospital. During 1990-1992, Mr. Plumb was the
      CFO of DePelchin Children's Center. During 1992-present, Mr. Plumb was the
      President of Steven M. Plumb, P.C. During 1997-2001, Mr. Plumb was the President
      of Orchard Consulting Group, Inc. During 2002-2004, Mr. Plumb was the CFO of
      ADVENTRX Pharmaceuticals, Inc. During 2003-present, Mr. Plumb was the President
      of Clear Financial Solutions, Inc. Mr. Plumb is also the CFO of Bluegate
      Corporation, a public company. Mr. Plumb is a member of: American Institute
      of
      Certified Public Accountants; Texas Society of Certified Public Accountants;
      Houston Chapter of Texas Society of Certified Public Accountants; Houston
      Technology Center; and Association for Corporate Growth. Mr. Plumb is active
      in
      BioHouston and the Rice Alliance. Mr. Plumb has a Bachelor of Business
      Administration degree from the University of Texas at Austin, Austin, Texas,
      1981. There is no family relationship between Mr. Plumb and any of our officers
      or directors. We have a one year contract with Clear Financial Solutions, Inc.,
      a company owned by Mr. Plumb, which has agreed to provide us with a so called
      “contract” CFO, namely Mr. Plumb. We will pay a fee directly to Clear
      Financial Solutions, Inc. in the estimated amount of approximately $3,300 to
      $4,950 per month for Mr. Plumb's services as our CFO and some additional
      services provided to us by Clear Financial Solutions, Inc.





47
 *Table
            of Contents*




L.
      Gene
      Stohler, age 77, is a Director. One of Mr. Stohler's early activities in 1959
      was supporting the inventor of the cruise control system for automobiles. Mr.
      Stohler provided marketing, sales and manufacturing support assistance to the
      inventor. In 1970, Mr. Stohler began working for Rockwell International as
      the
      General Manager of the Service Parts Group of Rockwell. In 1978, Mr. Stohler
      was
      promoted to Director of Marketing for Rockwell. In 1983, Mr. Stohler joined
      ITT
      Automotive as Vice President, World Wide Sales and Marketing. His activities
      at
      ITT Automotive included sales management for the Anti-Lock Brake System sales
      to
      the automotive industry. In 1989, Mr. Stohler joined Masco Corporation as the
      Vice President--Marketing and Planning for the Masco Tech Automotive Group
      which
      had $750 million in sales, including projects such as engineering and building
      the Ford Mustang Convertible from a basic chassis. Mr. Stohler retired from
      MascoTech in 2003 and joined Bankers Integration Group, a startup company at
      that time, as the VP--Business Development, reporting to the Chairman. Bankers
      Integration Group, Inc. is a technology and software development company that
      provides decision support tools and services to the automotive industry for
      the
      purpose of assisting automobile dealers and financial institutions with
      interpretation of credit data, and matching buyers with available loan programs.
      Mr. Stohler is a past Board member of the Automotive Hall of Fame, Oakland
      University and a member of the Board of Breed Technologies, a supplier of safety
      equipment to the automotive industry.




**Information
      Concerning the Board of Directors and its Committees.**




We
      have
      an Audit Committee. The Audit Committee was created during October 2004. Mr.
      Poling, Mr. Stohler and Mr. Young are the members of the Audit Committee. All
      committee members are independent. Mr. Poling is the financial expert based
      on
      his work as Chairman and CEO of Ford Motor Co. The Audit Committee has a written
      charter, which was included in our proxy statement filed on December 28, 2004.
      During the year ended June 30, 2006, the Audit Committee met 7 times and took
      action by Unanimous Consent 1 time.





We
      have a
      compensation committee that started its work during fiscal 2006. Mr. Young
      and
      Mr. Stohler are members of the Compensation Committee. Both committee members
      are independent. During the year ended June 30, 2006, the Compensation Committee
      met 4 times and took no action by Unanimous Consent .





We
      do not
      have a nominating committee. Decisions concerning nominees for Director and
      for
      fiscal 2005 were made by the full Board of Directors. The Board has not adopted
      formal policies with regard to the process to be used for identifying and
      evaluating nominees for Director. However, we are currently in the process
      of
      developing these policies and procedures. At this time, the consideration of
      candidates nominated by Directors are in the Board's discretion. We believe
      this
      is adequate based on our size and each current Board member's
      qualifications.





The
      Board
      has not adopted formal policies with regard to shareholder communications with
      individual Board members. However, we are currently in the process of developing
      these policies and procedures.





The
      Board
      of Directors held special meetings on 5 occasions during the fiscal year ended
      June 30, 2006. The Board of Directors also took action by written consent on
      22
      occasions during the fiscal year ended June 30, 2006, in which all present
      Directors took part.





**Section
      16(a) Beneficial Ownership Reporting Compliance.**





We
      have
      reviewed the Forms 3, 4 and 5 submitted to us relating to fiscal 2005. We have
      found that Harry Briers, Harold Poling, Albert F. Young, L. Gene Stohler, Steven
      Plumb DJX Ltd, and Kent Watts have filed all required Forms 3, 4 and 5 during
      fiscal 2006.




The
      following table summarizes the results of our review:




**Name**
            
            **Form
                Type**
            
            **Number
                of forms filed late**
            
            **Number
                of transactions reported late**Harry
                Briers
            
            4
            
            1
            
            3Harold
                Poling
            
            4
            
            1
            
            1Albert
                F. Young
            
            4
            
            1
            
            1DJX
                Ltd
            
            4
            
            1
            
            1L.
                Gene Stohler
            
            3
            
            1
            
            N/AL.
                Gene Stohler
            
            4
            
            1
            
            1Steven
                Plumb
            
            3
            
            1
            
            N/ASteven
                Plumb
            
            4
            
            1
            
            1




48
 *Table
            of Contents*




**Code
      of Ethics.**





We
      have
      adopted a Code of Ethics for our senior Executive Officers and Financial
      Officers, which was filed in our 10-KSB Amendment on May 16, 2005. We will
      provide without charge a copy of our Code of Ethics upon request. Such request
      should be directed in writing to: Kent Watts, Hyperdynamics Corporation, One
      Sugar Creek Center Blvd., #125, Sugar Land, Texas 77478, voice: (713) 353-9400,
      fax: (713) 353-9421. Our Web site is www.hypd.com.






**Item
      11. Executive Compensation.**




**Summary
      Compensation Table**





The
      following table reflects all forms of compensation for the fiscal years ended
      June 30, 2004, 2005, and 2006 for services provided by our named Executive
      Officers.




**Annual
                  Compensation**
                **Awards**
              
              **Long
                  Term Compensation**
                **Payouts****Compensation**
                **Name
                  and**
                **Principal**
                **Position**
              
              **Year**
              
              **Salary**
              
              
              **Bonus**
              
              **Other
                  Annual Compensation**
              
              
              
              **Restricted
                  Stock Awards**
              
              **Securities
                  Underlying Options SARS**
              
              **LTIP
                  Payouts**
              
              **All
                  Other Compensation**Kent
                  Watts
              
              
              2006
              
              $
              100,000
              
              (1
              )
              
              -0-
              
              $
              16,000
              
              
              (4
              )
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-Chief
                  Executive
              
              
              2005
              
              $
              100,000
              
              
              
              
              -0-
              
              $
              9,746
              
              
              (4
              )
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-Officer
              
              
              2004
              
              $
              100,000
              
              
              
              
              -0-
              
              $
              171,062
              
              
              (2
              )
              
              -0-
              
              
              
              
              
              -0-
              
              
              -0-Harry
                  Briers
              
              
              2006
              
              $
              99,000
              
              
              
              
              -0-
              
              
              16,000
              
              
              (4
              )
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-Executive
                  Vice
              
              
              2005
              
              $
              95,000
              
              
              
              
              -0-
              
              
              9,746
              
              
              (4
              )
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-President
              
              
              2004
              
              $
              95,000
              
              
              
              
              -0-
              
              $
              132,861
              
              
              (3
              )
              
              -0-
              
              
              -0-
              
              
              -0-
              
              
              -0-








(1)
      On
      July 21, 1999, our Board of Directors unanimously agreed to the terms of an
      “Executive Employment Agreement” for Kent Watts. The Agreement was duly executed
      on July 21, 1999 which establishes Mr. Watts as our President, Chief Executive
      Officer (CEO). The contract provides for a base salary of $100,000 annually
      with
      a performance based incentive salary based on 5% of adjusted net income, up
      to
      an additional $100,000 in salary. Therefore, maximum salary under the Agreement
      is $200,000 annually. This Agreement has been renewed on a year-by-year basis
      under the same terms.


(2)
      On
      August 26, 2002, the strike price of warrants to purchase 1,100,000 shares
      of
      common stock that vested in fiscal 2004 and 2003 was reduced to $0.23 per share.
      The repricing of the warrants was valued as a new grant in fiscal 2003. This
      table reflects the $129,686 original fair value of the 400,000 warrants earned
      during 2004, $3,175 attributable to the repricing of these warrants, and bonus
      income of $38,201, for a total of $171,062.


(3)
      On
      August 26, 2002, the strike price of warrants to purchase 1,100,000 shares
      of
      common stock that vested in fiscal 2004 and 2003 was reduced to $0.23 per share.
      The repricing of the warrants was valued as a new grant in fiscal 2003. For
      the
      year ended June 30, 2004, 400,000 warrants were earned. The original fair value
      of these warrants, $129,686, and $3,175 attributable to the repricing of these
      warrants is included in 2004 bonus income.


(4)
      For
      the year ended June 30, 2005, Mr. Briers and Mr. Watts each received 4,051
      shares of common stock as $9,746 compensation for service on the Board of
      Directors. For the year ended June 30, 2006, Mr. Briers and Mr. Watts each
      received 8,244 shares of common stock as $16,000 compensation for Board of
      Directors service.




49
 *Table
            of Contents*




**Option/SAR
      Grants.**





We
      did
      not grant any options or SARS to any of our Officers during the year ended
      June
      30, 2006. We granted options to our independent directors as discussed in the
      Director Compensation section.




**Aggregate
                Options Exercised In Last Fiscal Year And Fiscal Year End Option**
              **Values
                (*)****Name**
            
            **Shares**
              **Acquired
                on**
              **Exercise**
            
            **Value**
              **Realized**
            
            **Number
                of Unexercised Securities Underlying Options at FYE
                Exercisable/Unexercisable(*)**
            
            **Value
                of Unexercised in the Money Options**
              **at
                FYE Exercisable/Unexercisable**Kent
                Watts
              Chief
                Executive Officer
            
            
            -0-
            
            
            -0-
            
            
            400,000/0
            
            $
            840,000/0Harry
                Briers
              Executive
                Vice President
            
            
            -0-
            
            
            -0-
            
            
            400,000/0
            
            $
            840,000/0


________________________________


(*)  These
      are
      all of the remaining warrants that were in the money at fiscal year end 2006.
      Mr. Watts and Mr. Briers each hold 400,000 warrants for restricted common
      stock each that are vested but have not been exercised.





**Option/SAR
      Repricings.**





There
      were no option repricings during fiscal 2006.





**Long-term
      Incentive Plan Awards.**





There
      were no long-term incentive plan awards to any of our Officers during the year
      ended June 30, 2006.




**Pension
      Plan Table**





We
      do not
      have a pension plan.





**Director
      Compensation.**





During
      the year ended June 30, 2006, our non-independent directors, Harry Briers and
      Kent Watts, received compensation of $4,000 per quarter, or $16,000. The
      compensation was paid with 8,244 shares of common stock.





During
      the year ended June 30, 2006, compensation for independent directors was $8,000
      per quarter. Our independent directors are Harold Poling, Al Young, and L.
      Gene
      Stohler. Mr. Young and Mr. Poling served for the entire year; thus compensation
      of $18,000 was paid in with 12,415 shares of common stock during the year and
      $8,000 was accrued as of June 30, 2006. Mr. Stohler became a director during
      the
      third quarter, so $8,000 was paid with 3,077 shares of common stock and $8,000
      was accrued as of June 30, 2006. In addition, options to purchase 25,000 shares
      of common stock at $2.08 per share were granted to each director on May 24,
      2006
      as a bonus for their efforts with relation to our Guinea concession.





Effective
      fourth quarter 2006, independent directors who serve on the audit committee
      receive quarterly additional compensation of $5,000 and options to purchase
      7,500 shares of common stock at a price per share determined based on the market
      price of our common stock on the day after the quarter ends.





Effective
      fourth quarter 2006, independent directors who serve on the compensation
      committee receive quarterly additional compensation of $2,500 and options to
      purchase 5,000 shares of common stock at a price per share determined based
      on
      the market price of our common stock on the day after the quarter ends.





Effective
      fourth quarter 2006, independent directors who serve on the nomination committee
      receive quarterly additional compensation of $2,500 and options to purchase
      2,500 shares of common stock at a price per share determined based on the market
      price of our common stock on the day after the quarter ends.





Mr.
      Poling serves on the audit and compensation committees; accordingly, his
      compensation for committee service for the fourth quarter of 2006 was options
      to
      purchase 10,000 shares of common stock at $2.08 and $7,500, which was accrued
      as
      of June 30, 2006.





50
 *Table
            of Contents*




Mr.
      Stohler serves on the audit, nomination, and compensation committees;
      accordingly, his compensation for committee service for the fourth quarter
      of
      2006 was options to purchase 15,000 shares of common stock at $2.08 and $10,000,
      which was accrued as of June 30, 2006.





Mr.
      Young
      serves on the audit, nomination, and compensation committees; accordingly,
      his
      compensation for committee service for the fourth quarter of 2006 was options
      to
      purchase 15,000 shares of common stock at $2.08 and $10,000, which was accrued
      as of June 30, 2006.





There
      was
      no other compensation granted by the Board for services rendered during the
      fiscal year ended 2006. There were no Director meeting expense reimbursements
      for 2005. Director meeting expense reimbursements submitted in 2006 totaled
      $88,700. We paid $37,000 during the year and the balance of $51,700 is accrued
      as of June 30, 2006.




**Employment
      Contracts And Termination Of Employment And Change-In-Control
      Arrangements.**





On
      August
      14, 2006, we entered into a new employment agreement with our CEO and President,
      Kent Watts. The effective date of the employment agreement is deemed to be
      July
      1, 2006. Pursuant to the employment agreement, Mr. Watts will devote his best
      efforts and his full business time and attention to the performance of the
      services customarily incident to such offices and position and to such other
      services of a senior executive nature as may be reasonably requested by our
      Board of Directors.





Term.
      The
      initial term of employment ends on July 1, 2009, provided, however, that as
      of
      the expiration date of each of the initial Term of Employment and if applicable,
      any Renewal Period the term of employment will automatically be extended for
      a
      two (2) year periods unless either we or Mr. Watts provides 2 months' notice
      to
      the contrary.





Cash
      Compensation. Mr. Watts’ base salary is $250,000 per year. Mr. Watts is entitled
      to receive a bonus equal 1% our net income before interest, taxes and the bonus.
      If there is no net income, the bonus is zero.





Stock
      compensation. Mr. Watts will receive 40,000 stock options per quarter during
      the
      term of the employment agreement beginning on the effective date for a total
      of
      480,000 options. The shares underlying these options have been or will be
      registered shares. The options will expire 3 years after their issuance date.
      The exercise price of these options will be the greater of $2.00 or the closing
      price on the date of each quarterly option grant. In the event that we cannot
      issue the full amount of these quarterly options grants because we are or may
      become contractually bound to limit such option issuances, then number of
      options not granted for any one quarter pursuant to such a limitation will
      be
      carried forward and granted at a late date when we are not so restricted even
      if
      such future date is beyond the term of the employment agreement.





Mr.
      Watts
      is entitled to participate in any of our life, health and long-term disability
      insurance programs, pension and retirement programs, stock option and other
      incentive compensation programs, and other fringe benefit programs made
      available to senior executive employees, and such other fringe benefits as
      may
      be granted to him from time to time such as a corporate automobile lease and
      a
      membership in a country club. Mr. Watts can take a 4 week vacation each year
      with pay.





Mr.
      Watts
      will be added as an additional named insured under all liability insurance
      policies now in force or hereafter obtained covering any officer or director
      in
      his capacity as an officer or director. We will indemnify hold harmless Mr.
      Watts from any cost, expense or liability arising out of or relating to any
      acts
      or decisions made by him on behalf of or in the course of performing services
      for us.





Severance
      Agreement. We have a separate Severance Agreement with Mr. Watts. In the event
      his employment is terminated (a) by us other than for Cause, Disability or
      Death
      or (b) by Mr. Watts for good reason, then Mr. Watts shall receive:





(i)
            His
                base salary during the period commencing on the effective date of
                such
                termination and ending 2 years later; and




(ii)
            Medical
                insurance premium reimbursement through age 66 for himself and his
                spouse,
                and his children through age 25.





On
      October 9, 2006, we entered into a new employment agreement with our Executive
      Vice President, Harry Briers. The effective date of the employment agreement
      is
      deemed to be July 1, 2006. Pursuant to the employment agreement, Mr. Briers
      will
      devote his best efforts and his full business time and attention to the
      performance of the services customarily incident to such offices and position
      and to such other services of a senior executive nature as may be reasonably
      requested by our Board of Directors which may include services for one or more
      of our subsidiaries or affiliates.





51
 *Table
            of Contents*




Compensation.
      We will pay Mr. Briers a base annual salary of $190,000.00. In addition to
      the
      base compensation he may receive performance bonus as determined by the Chief
      Executive Officer and the Board of Directors.





Long
      Term
      Incentive/Stock Options. We will grant to Mr. Briers 25,000 stock options every
      quarter during the term of this Agreement. These options shall have an exercise
      price of the greater of $2.oo per share or the closing last trade price on
      the
      date of each option grant. However, grants are limited in quantity to insure
      compliance with our financing agreement with Cornell Capital, and any options
      not granted to Mr. Briers to maintain compliance with the Cornell financing
      agreement will be carried forward and granted in future quarters to the extent
      such grants do not exceed the Cornell limitation.





Mr.
      Brier’s Fringe Benefits During the Term of Employment:




(a) Any
      life,
      health and long-term disability insurance programs, pension and retirement
      programs, stock option and other incentive compensation programs, and other
      fringe benefit programs made available to other senior executive employees,
      and
      other fringe benefits as may be granted to him from time to time by the Board
      of
      Directors including a corporate lease vehicle approved by the Chief Executive
      Officer.




(b) Four
      weeks of vacation with pay on the same basis as other senior executive
      employees.




(c) Reimburse
      for reasonable business expenses incurred in performing duties and promoting
      the
      our business.




(d) Adding
      him as an additional named insured under all liability insurance policies now
      in
      force or hereafter obtained covering any officer or director of the Company
      in
      his or her capacity as an officer or director. We will indemnify him in his
      capacity as an officer or director and hold him harmless from any cost, expense
      or liability arising out of or relating to any acts or decisions made by him
      on
      behalf of or in the course of performing services to us.





Term;
      Termination of Employment. The term of employment commenced on the effective
      date and ends two years later; provided, however, that the term of employment
      will automatically be extended for a one year periods unless either we or Mr.
      Briers gives two notice to the contrary. Notwithstanding the above, the term
      of
      employment shall expire on the first to occur of the following:




(a)
      Termination by the Company. Notwithstanding anything to the contrary in this
      Agreement we may terminate Mr. Briers by giving him 60 days written notice
      of
      the effective date of termination. We may terminate his employment for cause,
      death or disability without prior notice.




(b)
      Termination by Executive. In the event that his employment with the Company
      is
      voluntarily terminated by Mr. Briers, we shall have no further obligation to
      him
      except as may be provided in the Separation and Severance Agreement.




(c)
      Salary, Benefits, and Severance Pay Upon Termination. In the event of
      termination of employment, Mr. Briers will receive all regular Base Salary
      due
      up to the date of termination, and any bonus.




Mr.
      Briers’s stock options remain be subject to the terms of our stock option plan.





Confidential
      Information, Non-Solicitation and Non-Competition. Mr. Briers may not disclose
      our confidential information. In the event that he terminate his employment
      he
      will deliver to us any and all property owned by us.





Taxes.
      All payments to be made to Executive under this Agreement will be subject to
      any
      applicable withholding of federal, state and local income and employment taxes.





Severance
      Agreement. We have a separate Severance Agreement with Mr. Briers. In the event
      his employment is terminated by us other than for: cause, disability; death;
      or
      by Mr. Briers for good reason, then Mr. Briers shall receive his base salary
      during the period commencing on the effective date of such termination and
      ending one year later.





We
      have a
      one year contract (expiring in November 2006) with Clear Financial Solutions,
      Inc., a company owned by Mr. Plumb, which has agreed to provide us with a so
      called “contract” CFO, namely Mr. Plumb. We will pay a fee directly to
      Clear Financial Solutions, Inc. in the estimated amount of approximately $3,300
      to $4,950 per month for Mr. Plumb's services as our CFO and some additional
      services provided to us by Clear Financial Solutions, Inc. The CFO contract
      terminates in November 2006 unless otherwise extended.




In
      August
      2005, we hired Mr. Famourou Kourouma as our new Vice President of Guinea
      Affairs. Famourou Kourouma will receive compensation from us in the amount
      of
      $2,000 per month and he may also receive between 200,000 and 400,000 options
      based upon our relations with the government of Guinea.





52
 *Table
            of Contents*





**Board
      Compensation Committee Report On Executive Compensation**





The
      compensation committee began its work in fiscal 2006 but did not make any
      compensation decisions until August 2006.




**Item
      12. Security Ownership of Certain Beneficial Owners and
      Management and**


**Related
      Stockholder Matters.**





**Related
      Stockholder Matters.**





Securities
      authorized for issuance under equity compensation plans as of  June
      30,
      2006.




**Equity
                Compensation Plan Information****Number
                of Securities to be Issued Upon Exercise of Outstanding Options,
                Warrants,
                and Rights**
            
            **Weighted-Average
                Exercise Price of Outstanding Options, Warrants and
                Rights**
            
            **Number
                of Securities Remaining Available for Future Issuance Under Equity
                Compensation Plans (Excluding Securities Reflected in Column
                (a))**Plan
                Category
            
            (a)
            
            (b)
            
            (c)Equity
                compensation plans
              approved
                by security holders
            
            
            635,000
            
            
            $1.30
            
            
            4,771,597Equity
                compensation plans not
              approved
                by security holders
            
            
            1,762,000
            
            
            $0.38
            
            
            -0-Total
            
            
            2,397,000
            
            
            $0.62
            
            
            4,771,597





The
      Stock
      and Stock Option Plan (the “Plan”) of Hyperdynamics was adopted May 7, 1997 and
      amended on December 3, 2001. On June 30, 2005, we had 4,879,075 shares available
      to be issued or granted pursuant to the Plan. We issued 107,478 shares under
      the
      Plan this fiscal year, leaving us with 4,771,597 shares available to be issued
      or granted pursuant to the Plan as of June 30, 2006.





Under
      the
      Plan, options will vest over a five year or other negotiated period and will
      have a strike price set at the time of grant based on the then current market
      value of the stock. Our President has the authority as given by the Board of
      Directors to negotiate stock option agreements with corporate consultants as
      well.





We
      presently have warrants to purchase 1,762,000 shares of common stock which
      are
      currently outstanding and were issued pursuant to the Plan at a weighted average
      price of $0.38 per share.





The
      purpose of the Plan is to further our interest, and the interest of our
      subsidiaries and our stockholders by providing incentives in the form of stock
      or stock options to key employees, consultants and Directors who contribute
      materially to our success and profitability. We believe that our future success
      will depend in part on our continued ability to attract and retain highly
      qualified personnel as employees, independent consultants and attorneys.
      The issuance of stock and grants of options and warrants will recognize and
      reward outstanding individual performances and contributions and will give
      such
      persons a proprietary interest in us, thus enhancing their personal interest
      in
      our continued success and progress. We pay wages, salaries, and consulting
      rates
      that we believe are competitive. We use the Plan and individual compensation
      arrangements to augment our compensation packages.





53
 *Table
            of Contents*





**TABLE
      OF SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT**





The
      following table sets forth certain information at October 10, 2006, with respect
      to the beneficial ownership of shares of Common Stock by (1) each person known
      to us that owns beneficially more than 5% of the outstanding shares of Common
      Stock, (2) each of our Directors, (3) each of our Executive Officers, and (4)
      all of our Executive Officers, Directors as a group.




**Name
                and Address of Beneficial Owner**
            
            **Number
                of Shares of Common Stock Beneficially Owned**
            
            
            **Percent
                of Class**Kent
                WattsOne
                Sugar Creek Center Boulevard. Suite 125Sugar
                Land, TX 77478
            
            
            23,113,000
            
            (1
            )
            
            31
            %Harry
                BriersOne
                Sugar Creek Center Boulevard. Suite 125Sugar
                Land, TX 77478
            
            
            1,954,418
            
            (2
            )
            
            3
            %Harold
                PolingFairlane
                Plaza North290
                Town Center Drive, Suite 322Dearborn,
                Michigan 48126
            
            
            535,558
            
            (3
            )
            
            1
            %Albert
                F. Young2417
                Fox Chase BlvdTroy,
                Michigan 48098-5626
            
            
            144,343
            
            (7
            )
            
            0.2
            %DJX
                Ltd.4438
                West 10th AvenueVancouver,
                BC V6R4R8
            
            
            20,272,900
            
            (4
            )
            
            27
            %Steven
                Plumb5300
                N. Braeswood, #370Houston,
                TX 77096-3317
            
            
            100,000
            
            (6
            )
            
            0.1
            %L.
                Gene StohlerOne
                Sugar Creek Center Boulevard. Suite 125Sugar
                Land, TX 77478
            
            
            81,819
            
            (5
            )
            
            0.1
            %All
                Directors, Director Nominees and Executive Officers as a group (6
                persons)
            
            
            25,929,138
            
            
            
            
            35
            %




_______________________________


(1)
            This
                amount includes 2,360,100 shares of common stock; currently exercisable
                warrants to purchase 400,000 shares of common stock at $0.23 per
                share;
                currently exercisable warrants to purchase 40,000 shares of common
                stock
                at $2.20 per share; currently exercisable options to purchase 40,000
                shares of common stock at $2.74 per share; 20,185,185 shares deemed
                as
                indirectly owned by Kent P. Watts based on his relationship with
                DJX Ltd.,
                whose shares he presently has the authority to vote and which are
                one-half
                owned by his minor children; and 87,715 common stock shares owned
                by DJX
                Ltd. and deemed owned by Kent P.
                Watts.





(2)
            This
                amount includes 1,529,418 shares of common stock; currently exercisable
                warrants to purchase 400,000 shares of common stock at $0.23 per
                share;
                and currently exercisable options to purchase 25,000 shares of common
                stock at $2.88 per share.





54
 *Table
            of Contents*




(3)
            This
                amount includes 355,558 shares of common stock; currently exercisable
                warrants to purchase 125,000 shares of common stock at $0.25 per
                share;
                currently exercisable options to purchase 35,000 shares of common
                stock at
                $2.09 per share; currently exercisable options to purchase 10,000
                shares
                of common stock at $2.08 per share; and currently exercisable options
                to
                purchase 10,000 shares of common stock at $2.74 per
                share.





(4)
            In
                May 2001, we entered into a stock exchange agreement whereby we acquired
                SCS Corporation as our wholly owned subsidiary. We issued 2,725 shares
                of
                Series B Preferred Stock to pay for the acquisition. Each share of
                Series
                B Preferred Stock carries a $1,000 per share face value and is convertible
                into common stock at the lesser of $0.135 per share or 50% of the
                closing
                bid price on conversion. On July 25, 2006 the closing price was $2.05
                per
                share, and if all of the Series B Preferred Stock was converted at
                the
                lesser conversion price, $0.135 per share, we would issue to DJX
                Ltd.
                20,185,185 shares of common stock. DJX Ltd. is a foreign corporation
                whose
                shareholders are the grandchildren of Ernest M. Watts, the father
                of Kent
                P. Watts, our Chairman, and CEO. Kent Watts currently exercises voting
                rights of DJX shares. DJX also owns 87,715 shares of Common Stock
                issued
                in payment of accrued dividends. Accordingly, the total number of
                shares
                of common stock attributed to DJX is 20,272,900
                shares.





(5)
            This
                amount includes 11,819 shares of common stock; currently exercisable
                options to purchase 40,000 shares of common stock at $2.09 per share;
                currently exercisable options to purchase 15,000 shares of common
                stock at
                $2.08 per share; and currently exercisable options to purchase 15,000
                shares of common stock at $2.74 per
                share.





(6)
            Includes
                immediately exercisable option to purchase 100,000 shares of common
                stock
                at $1.55 per share.




(7)
            This
                amount includes 59,343 shares of common stock; currently exercisable
                warrants to purchase 15,000 shares of common stock at $2.00; currently
                exercisable options to purchase 40,000 shares of common stock at
                $2.09 per
                share; currently exercisable options to purchase 15,000 shares of
                common
                stock at $2.08 per share; and currently exercisable options to purchase
                15,000 shares of common stock at $2.74 per
                share.





We
      are
      not aware of any arrangements that could result in a change of
      control.






**Item
      13.Certain Relationships and Related
      Transactions.**





**In
      connection with Michael E. Watts.**





In
      November 2003, a Master Public Relations Consulting Agreement (the “Agreement”)
      was signed with Michael E. Watts, the brother of Kent Watts, our Chairman
      and CEO. The Agreement affirmed and established Michael Watts as the primary
      consultant with the responsibility to help manage public relations, general
      investor relations and shareholder communications. In the Agreement, Michael
      Watts was authorized and required to communicate publicly known information
      to
      shareholders and potential shareholders and to help in all reasonable ways
      to
      convey the history and story of Hyperdynamics with the goal to increase the
      interest of all investors in investing in Hyperdynamics publicly traded stock.
      The agreement additionally authorized Michael Watts to subcontract public
      relations services to other firms and consultants. It was contemplated that
      these subcontracts would include but not necessarily be limited to setting
      up
      public relations agents in different parts of the country. The total
      compensation for the Agreement and all underlying subcontracts is a total of
      2,000,000 warrants with a strike price of $0.50 per share of restricted common
      stock. During January and April 2004, Hyperdynamics granted an aggregate of
      1,200,000 of the warrants (of which 900,000 were vested as of June 30, 2005)
      under the Agreement to a company whose president is Michael Watts. We granted
      800,000 warrants (of which 600,000 were vested as of June 30, 2005) under the
      Agreement to unrelated third parties. This compensation was designed to
      encourage the long term commitment to the market developing work being performed
      in the maintenance of our informed and orderly market. As such, it is believed
      that significant incentive is in place for all public relations consultants,
      agents, and subcontractors to continually work in communicating the
      Hyperdynamics story and opportunity. This agreement with Michael Watts may
      be
      canceled by us at any time by giving a 30 day written notice.





During
      the year ended June 30, 2004, Michael Watts received payment of $699,951 cash
      to
      pay for offering costs on private subscription agreements and exercised
      warrants. Additional offering costs will also be paid on 3,732,403 outstanding
      warrants purchased by private investors should they be exercised in the future.
      If all of these warrants are exercised, Mr. Watts would receive approximately
      $712,000 to pay these additional costs.





On
      February 9, 2005, the Audit Committee of Hyperdynamics Corporation preapproved
      a
      contract (the “Contract”) with Geoserve Marketing, an assumed name for Michael
      E. Watts, the brother of our Chief Executive Officer. The Contract was
      executed by and between Trendsetter Production Company (our wholly owned
      subsidiary) and Geoserve Marketing. Under the Contract, Geoserve Marketing
      was
      to sell up to 49% of the working interest in certain oil and gas properties
      owned by Trendsetter. At $55,000 per point, this was to bring in proceeds of
      $2,695,000. Geoserve Marketing was given the responsibilities to sell working
      interest in our oil and gas leases; obtain executed documents for such sales
      as
      required by us; help prepare the marketing materials for working interest sales;
      obtain investor nondisclosure agreements and other representations from all
      prospective nonoperators; obtain a check or wired funds from and signatures
      of
      nonoperators on all pertinent operating agreement forms; pay expenses for
      working interest promotion including but not limited to any brokerage fees
      and
      referral fees. Trendsetter agreed to pay 20% of the proceeds to Geoserve
      Marketing in return for these services. As of September 26, 2006, 35% of the
      working interest had been sold for proceeds of $1925,000 and a total of $385,000
      has been paid to Geoserve Marketing. We subsequently repurchased 5% of the
      working interest in exchange for common stock.





55
 *Table
            of Contents*




On
      May 9,
      2005, Harry James Briers, Executive Vice President, requested and obtained
      preapproval from the Audit Committee to rehire Mr. Jeremy Driver (son-in-law
      of
      Michael E. Watts, brother of the Chief Executive Officer), a past employee
      of
      Hyperdynamics Corporation, to work as General Manager for HYD. Mr. Driver had
      just been honorably discharged from the United States Air Force with the rank
      of
      Lieutenant. The Audit Committee approved the request and Mr. Driver was hired
      by
      Mr. Briers at an initial salary of $45,000 annually.





In
      September, 2006, Harry James Briers, Executive Vice President, requested and
      obtained pre-approval from the Audit Committee to give Christopher M. Watts,
      a
      related party of Mr. Kent Watts, our CEO, a bonus for work performed in Guinea
      and a raise in pay as the company’s Investor Relations Coordinator. He received
      a bonus of $2,000 and a raise from $29,000 annually to $32,480 annually. The
      raise of $3,480 represents a 12% increase.





In
      October, 2006, the Company hired Glen Driver as a manager in our Louisiana
      operations. Mr. Driver is the father of Jeremy Driver, a related party of Mr.
      Kent Watts, our CEO. The audit committee pre-approved the hiring in accordance
      with the Company’s conflict of interest policy.






**Item
      14. PRINCIPAL ACCOUNTING FEES AND
      SERVICES.**





Audit
      Fees





Malone
      & Bailey, PC billed us in the aggregate amount of $59,000 and $58,091
      professional services rendered for their audit of our annual financial
      statements and their reviews of the financial statements included in our Form
      10-K for the year ended June 30, 2006 and Form 10-KSB for the year ended June
      30, 2005.


Audit-Related
      Fees





Malone
      & Bailey, PC did not bill us for, nor perform professional services rendered
      for assurance and related services that were reasonably related to the
      performance of audit or review of the Company's financial statements for the
      years ended June 30, 2006 and 2005.





Financial
      Information Systems Design And Implementation Fees





For
      the
      fiscal years ended June 30, 2006 and 2005, Malone & Bailey, PC did not bill
      us for, nor perform, any financial information systems design or implementation.
      For the fiscal years ended June 30, 2006 and 2005, we were not billed for
      professional services from any other accounting firm for information systems
      design or implementation.





Tax
      Fees





Malone
      & Bailey, PC billed us in the aggregate amount of $ 0 and $3,740 for
      professional services rendered for tax related services for the years ended
      June
      30, 2006 and 2005.





All
      Other
      Fees





Malone
      & Bailey, PC did not bill us for any other professional services for the
      fiscal year ended June 30, 2006 and 2005.





Auditor
      Independence





Our
      Board
      of Directors considers that the work done for us in the year ended June 30,
      2006
      by Malone & Bailey, PC is compatible with maintaining Malone & Bailey,
      P.C.'s independence.





56
 *Table
            of Contents*




Auditor's
      Time On Task





All
      of
      the work expended by Malone & Bailey, PC on our June 30, 2006 audit was
      attributed to work performed by Malone & Bailey, P.C.'s full-time, permanent
      employees.





**PART
      IV**





**Item
      15. Exhibits, Financial Statement
      Schedules.**





Exhibit
      10.1 - Hydrocarbon Production Sharing Contract - incorporated
      by reference to Form 8-K filed September 28, 2006





Exhibit
      10.12- Employment Agreement of Harry
      Briers





Exhibit
      10.13- Addendum to Employment Agreement of Harry
      Briers





Exhibit
      21 - Subsidiaries of the Registrant





Exhibit
      23.3 - Consent of Ryder Scott





Exhibit
      31.1 - Certification of Chief Executive Officer of
      Hyperdynamics Corporation
      required by Rule 13a-14(1) or Rule 15d-14(a) of the Securities Exchange
      Act of 1934, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley


Act
      of
      2002.





Exhibit
      31.2 - Certification of Chief Financial Officer of
      Hyperdynamics Corporation
      required by Rule 13a-14(1) or Rule 15d-14(a) of the Securities Exchange
      Act of 1934, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley


Act
      of
      2002.





Exhibit
      32.1 - Certification of Chief Executive Officer of
      Hyperdynamics Corporation
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section
      1350 of 18 U.S.C. 63.





Exhibit
      32.2 - Certification of Chief Financial Officer of
      Hyperdynamics Corporation
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section
      1350 of 18 U.S.C. 63.





57
 *Table
            of Contents*




Signatures





In
      accordance with the requirements of Section 13 or 15(d) of the Exchange Act, the
      Registrant caused this report to be signed on its behalf by the undersigned, thereunto
      duly authorized.





Dated
                October 12 , 2006HYPERDYNAMICS
              CORPORATION(signed)By:
              /s/ KENT WATTSKent
              WattsChairman
              of the Board,Chief
              Executive Officer and President








In
      accordance with the Exchange Act, this report has been signed below by the following
      persons on behalf of the registrant and in the capacities and on the dates
      indicated:




(signed)By:/s/ KENT WATTS
            
            Chairman
                of the Board, Chief Executive
            
            October
                12 , 2006(Kent
              Watts)
            
            &
                President(signed)By:
              /s/ STEVEN M. PLUMB
            
            Cheif
              Financial Officer
            
            October
                12 , 2006(Steven
              Plumb)(signed)By:/s/ HARRY BRIERS
            
            Director
            
            October
                12 , 2006(Harry
              Briers)(signed)By:
              /s/
              HAROLD POLING
            
            Director
            
            October
                12 , 2006(Harold
              Poling)(signed)By:/s/ ALBERT YOUNG
            
            Director
            
            October
                12 , 2006(Albert
              Young)(signed)By:/s/ L. Gene Stohler
            
            Director
            
            October
                12 , 2006L.
              Gene Stohler






58