UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549





**FORM
      10-K**





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





For
      the
      fiscal year ended June 30, 2007


or


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





For
      the
      transition period from ___________  to
      ____________________





Commission
      File Number 001-32490





**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


£Yes                      SNo





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


£Yes                      SNo





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.


SYes                      £No





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.
£





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


Large accelerated
                filer £
            
            Accelerated
                filer  S
            
            Non-accelerated
                filer  £





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


£Yes                      SNo





As
      of
      December 29, 2006, the aggregate market value of the registrant’s common
      stock held by non-affiliates of the registrant was $99,174,742 based on the
      closing sale price as reported on the American Stock Exchange.  We had
      55,520,371 shares of common stock outstanding on September 28,
      2007.







*Table
          of Contents*


Part
                  I
              
              4Item
                  1.
              Business
              4Item
                  1A.
              Risk
                  Factors
              8Item
                  1B
              Unresolved
                  Staff Comments
              16Item
                  2
              Properties
              16Item
                  3
              Legal
                  Proceedings
              20Item
                  4
              Submission
                  of Matters to a Vote of Securities
                  Holders
              22Part
                  II
              
              22Item
                  5
              Market
                  for Registrant’s Common Equity, Related Shareholder
                  Matters and Issuer Purchases of Equity Securities
              22Item
                  6
              Selected
                  Financial Data
              27Item
                  7
              Management’s
                  Discussion and Analysis of Financial Condition
                  and Results of Operation
              27Item
                  7A
              Quantitative
                  and Qualitative Disclosures About Market
                  Risk
              36Item
                  8
              Financial
                  Statements and Supplementary
                  Data
              36Item
                  9
              Changes
                  in and Disagreements With Accountants on Accounting
                  and Financial Disclosure
              37Item
                  9B
              Other
                  Information
              40Part
                  III
              
              40Item
                  10
              Directors,
                  Executive Officers and Corporate
                  Governance
              40Item
                  11
              Executive
                  Compensation
              43Item
                  12
              Security
                  Ownership of Certain Beneficial Owners and
                  Management and Related Stockholder Matters
              50Item
                  13
              Certain
                  Relationships and Related Transactions, and Director
                  Independence
              52Item
                  14
              Principal
                  Accounting Fees and Services
              54Item
                  15
              Exhibits,
                  Financial Statement Schedules
              54SIGNATURES
              
              55




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 in this report (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
        iswww.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.
 
 The
        Web
        site of the Commission is www.sec.gov.  That website 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 report, 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.  Business**
  **General
        Introduction**
  Hyperdynamics
        Corporation is among the
        most unique emerging independent oil and gas exploration and production
        companies in the world today.  We own exclusive rights for exploration
        and exploitation of oil and gas in a 31,000 square mile concession off the
        coast
        of the Republic of Guinea in West Africa.   This is the largest
        offshore acreage position of any company involved in exploration and production
        in West Africa.  We entered the oil and gas industry in 2002 under
        difficult economics with the price of oil at less than $20 per barrel. We
        nevertheless considered the hydrocarbon potential in Guinea, West Africa
        to be a
        good opportunity and we made a proposal to Guinea, which was accepted, to
        perform a new regional study of their offshore territory The worldwide demand
        for oil has increased over the last several years and is anticipated to continue
        to increase.  We are continuing our exploration work with a goal to
        enhance our potential to discover world class reserves offshore
        Guinea.
  In
        addition to our Guinea concession,
        we hold working interests in several oil and gas properties in Northeast
        Louisiana.  At June 30, 2007, we had 25,133 BOE of proven reserves
        related to these Louisiana properties.  In addition, on July 1, 2007,
        we acquired an 85% working interest in approximately 20 producing wells and
        1,150 acres of oil and gas leases in Louisiana.  These properties are
        subject to overriding royalty interests of up to 27.46%. In addition, the
        seller, who will remain the operator of the properties, retained a 15% working
        interest. However, Hyperdynamics will pay 100% of the working interest expenses
        up to $4,000,000. We plan to continue acquiring and developing proved reserves
        on a global basis
  We
        operate two business segments,
        domestic and international, under the structure of five separate corporations
        as
        follows:
  HDY
              “Hyperdynamics
                  Corporation” is the parent company listed on the American Stock
                  Exchange under the stock symbol “HDY”.HYDR
              “HYD
                  Resources Corporation” is a subsidiary that handles all of our oil and
                  gas operations in Louisiana. HYDR owns a work-over rig and oil
                  field
                  maintenance equipment. HDY owns 100% of HYDR.  HYDR is our
                  business segment that explores for and produces oil domestically
                  in
                  Louisiana.TPC
              “Trendsetter
                  Production Company” is an authorized oil and gas operator in
                  Louisiana. TPC is owned 100% by HYDR and is in our HYDR business
                  segment.SCS
              “SCS
                  Corporation” is a subsidiary engaged in oil and gas exploration
                  activities located offshore Guinea, West Africa. HDY owns 100% of
                  SCS. “SCS” is the name of a business segment of HDY that is composed of
                  our oil and gas exploration activity in Guinea.SCSG
              “SCS
                  Corporation Guinee SARL” is a Guinea limited liability company located
                  in Conakry, Guinea. We own 100% of SCSG, which was formed to manage
                  the
                  business associated with SCS's farmed out 2002 Oil and Gas Production
                  and
                  Sharing Contract and the 2006 PSC discussed below with the government
                  of
                  the Republic of Guinea.  SCSG is owned 100% by SCS and is part
                  of our SCS business segment operating in
                  Guinea.
  **Guinea
        Production Sharing Contract**
 
 On
        September 22, 2006, after approximately thirteen months of open and transparent
        negotiations, the Republic of Guinea and our wholly owned subsidiary, SCS
        Corporation signed a new 2006 Production Sharing Contract (“2006 PSC”). This new
        contract reset the entire exploration program for Guinea and recognized SCS
        Corporation for the work it had accomplished since 2002.  The contract
        was filed as an exhibit attached to the company's 8K filed on September 28,
        2006.
 
 The
        2006
        PSC gives us exclusive rights to explore and develop approximately 31,000
        square
        miles off the coast of Guinea. However, certain provisions of the contract
        would
        require us to surrender 64% (approximately 20,000 square miles) of the contract
        area upon the passage of a “Project of Law”, a Presidential Decree and a Supreme
        Court ruling.  The area ultimately surrendered would be selected by
        Hyperdynamics, but we would retain a priority non-exclusive right to participate
        in the development of the surrendered contract area. Although the PSC is
        a
        legally binding contract under Guinea’s 1986 Petroleum Code, the process of
        passing a law, obtaining a Presidential Decree and a Supreme Court ruling
        effectively codifies the PSC into Guinea law, thereby strengthening our
        concession within the contract area. Furthermore, we expect, through the
        priority rights granted in the PSC, to continue our participation in the
        surrendered contract area and still have exclusive rights to the remaining
        36%
        (approximately 11,000 square miles)of the contract area. Until the passages
        of
        the events mentioned above, we retain the exclusive right to explore and
        exploit
        100% of the 31,000 square mile concession. As such, we expect to continue
        aggressively pursuing our exploration efforts within the
        concession.
 
 4
 *Table
            of Contents*
  To
        explain in more detail, the 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 31,000 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
                  retained  by us in (a) above or in the area which exclusive
                  rights are surrendered and which totals approximately 20,000 square
                  miles
                  from the original contract area of 31,000 square miles. The ultimate
                  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 resulting 20,000 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.
        .  Refer to item 2 for additional information.
  **Primary
        Multi-Channel Exploration Strategies**
 
 Our
        business plan incorporates a multi-channel approach to exploring and developing
        our extensive contract area. We will continue on our own to perfect drilling
        targets and ultimately implement a drilling program on one or more of our
        targets.  Simultaneously, we will continue to consider the possibility
        for exploration partners to work with us on all or parts of our
        concession.  While we have used geological and geophysical talents of
        consulting firms such as GeoExperts and GlobalSanteFe’s Applied Drilling
        Technologies, we are currently in the process of hiring internal staff to
        match
        up with the development requirements of our world class asset. While our
        internal exploration team is coming together, Geoexperts is providing staff
        on a
        contractual basis. Geoexperts consultants include individuals that have the
        experience of developing hundreds of successful offshore drilling targets
        in
        over 40 major basins around the world.  Going forward, our
        geo-scientists will fulfill our work programs and develop scientifically
        sound
        drilling targets.
 
 While
        on
        an ongoing basis we intend to maintain an open invitation to oil companies
        as
        possible partners for joint exploration and development, we are not relying
        on
        such partnerships to move our exploration efforts forward.  As
        indicated by our multi-channel business plan strategy, we recognize that
        certain
        Guinea industries (such as the aluminum industry) are dependent on natural
        gas
        and we are evaluating special programs to help accelerate natural gas discovery
        within our concession.
  **Political
        Climate, US Interests, and Social Responsibility in Guinea**
 
 We
        have
        made substantial investments in our Guinea operations through our wholly-owned
        subsidiary SCSG, which was established in 2005. In addition, our Chief
        Executive, Kent Watts, and our Vice President of Guinea Affairs, Famourou
        Kourouma have made substantial social investments to establish goodwill among
        the Guinea people and its government.  Our board of directors has
        recognized a serious need for making investments in socially responsible
        programs benefiting the people of Guinea.  We have implemented a
        public relations program to educate the Guinea people and its government
        about
        the importance of their petroleum resources and our role in helping Guinea
        realize the benefits from exploiting these resources. Guinea is an emerging
        democracy and it has unique social, political and economic
        challenges.  Public opinion strongly influences the political
        decision-making process.    Therefore, our public relations
        and social programs will remain a strong strategy to maintain a positive
        public
        opinion about us in Guinea.
 
 5
 *Table
            of Contents*
  While
        we
        see a need for strong public relations and socially responsible programs
        we have
        also worked very hard to develop a close working relationship with our
        government and the US embassy in Guinea.   We have worked with
        the outgoing Ambassador Jackson McDonald and now we are beginning to work
        with
        the newly appointed Ambassador Phillip Carter.  We communicate with
        the State Department of the US government so that they are fully informed
        as to
        our legal position, contractual rights, and any potential problems that arise.
        Additionally, in the last several months, we have begun the process of raising
        awareness among government officials in the US congress about our efforts
        and
        our potential to discover world class oil resources offshore Guinea. To achieve
        that end, we engaged the firm of Patton Boggs as our lobbyist firm in Washington
        DC. The lobbying firm has assisted us in coordinating our efforts to interface
        with the government of Guinea with those of the United States.
  **Current
        and Future Exploration Programs Off the Coast of Guinea**
 
 On
        August
        22, 2007, we announced our 2007 work program, which includes the new acquisition
        and study of: aeromagnetic and gravity survey data; additional 2-D seismic
        survey data; and the acquisition and analysis of onshore oil
        seeps.  We have acquired approximately 5,000 kilometers of proprietary
        2-D seismic data from previous exploration programs that occurred in 2002
        and
        2003.  Our key technical contractor, GeoExperts, studied this data and
        many other proprietary studies during 2006 and 2007. Most importantly, and
        of
        great value, is that these studies comprise the largest knowledge base in
        existence concerning the Guinean Offshore.  The 2007 program is
        expected to build substantially on this technical foundation.  The
        2007 forward exploration program is an important step toward fulfillment
        of the
        first period work requirements under the 2006 PSC. This work period requires
        us
        to acquire, process, and interpret new seismic in a scientific process to
        result
        in exploration well targets we are ready to drill.  We have been
        studying the available data with members of the international petroleum
        community and will continue to work to better identify and confirm the numerous
        hydrocarbon plays and leads, with the ultimate goal of defining drillable
        prospects. At the beginning of the 2007 exploration program the possible
        plays
        and leads identified included the Guinea-Bissau salt province, shelf carbonate
        build-ups, Paleozoic tilted fault blocks, Mesozoic half grabens, deltas and
        turbidites along with tertiary channel sands.
 
 Our
        geoscientists believe that the path to identifying actual drilling targets
        will
        include the acquisition of both new 2-D and 3-D seismic data and subsequent
        processing and interpretation of this data. In the next month, the 2007
        exploration program will culminate with a design for this seismic acquisition
        program that is based on all of the foundation of technical knowledge we
        have
        obtained thus far. From this data acquisition program design, we can move
        aggressively forward towards our goal of an exploratory drilling
        program.
  **New
        Producing Properties Purchased in Louisiana**
 
 On
        July
        1, 2007, pursuant to the Working Interest Purchase Agreement between Rabb
        Resources Limited, Rabb Contracting Company, LLC, Claude L. Rabb (collectively,
        RABB”), and our subsidiaries HYDR and TPC, we acquired an 85% working interest
        in approximately 20 producing wells and 1,150 acres of oil and gas leases
        in
        Louisiana.  The purchase was effective June 12, 2007.  The
        properties purchased under this agreement are subject to overriding royalty
        interests of up to 27.46%. In addition, the seller, who will remain the operator
        of the properties, retained a 15% working interest. However, Hyperdynamics
        will
        pay 100% of the working interest expenses, including work-over and new
        development costs, up to $4,000,000.  Subsequent working interest
        expenses are shared according to the working interest.
 
 When
        we
        purchased the RABB leases the daily production was approximately 40 to 50
        barrels per day. By the end of October we project that daily gross production
        will reach approximately 130 to as high as 200 barrels per day solely from
        the
        RABB leases, and without drilling new wells on those leases. We are continuing
        to work to increase this production and working to reach these goals and
        then
        maximize our lease production from there.
  While
        the
        company continues to explore its major asset offshore West Africa, we continue
        our strategy to increase the company’s production revenues to provide positive
        cash flow from operations, cover corporate overhead, and allow the company
        to
        make a profit on an operating basis.
  **History
        of the Company's Concession Offshore the Republic of Guinea, West
        Africa**
 
 In
        early
        2002, SCS management began to evaluate the viability of an 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
        various agreements to revitalize the exploration work in the region. We are
        currently operating under the 2006 PSC.   From the inception of
        our involvement in Guinea beginning in 2002, we, in conjunction with certain
        key
        vendors, have accomplished critical exploration work including:
 6
 *Table
              of Contents*
 (1)
              a
                  1,000 kilometer 2-D 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.
 (2)
              a
                  4,000 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.
 (3)
              Acquisition
                  and geochemical analysis of core samples from the concession area,
                  performed by TDI – Brooks and a satellite seeps study performed by
                  Infoterra
 (4)
              Third
                  party interpretation and analysis of our seismic data, performed
                  by
                  PGS
 (5)
              Reconnaissance
                  within Guinea to evaluate drilling infrastructure, support services,
                  and
                  the operating environment, performed by Applied Drilling Technologies
                  (Global Santa Fe)
  **History
        of HYDR's Domestic Oil Field Service and Production**
  In
        April
        2004, we acquired HYD Resources Corporation. At the time of the acquisition,
        HYD
        Resources Corporation had approximately $375,000 worth of oil field equipment
        and other assets. HYD Resources Corporation also had no prior history of
        operations. HYD Resources Corporation currently engages in oil and gas
        exploration and production, and services within the United States. Thus far,
        all
        of our 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”).
 
 In
        the
        last fiscal year, we have endeavored to improve our operating efficiency
        through
        improvements to production infrastructure and service capability. During
        this
        same time, we sold approximately 21,142 barrels of oil as compared to 14,091
        barrels in the previous fiscal year.  The increased volume is
        attributable to workover of existing wells and improvements to the lease
        infrastructure.
  Going
        forward HYDR plans to continue performing work to improve its production
        on its
        existing leaseholds and drill new development wells on these leases to most
        fully exploit the production potential. We are also evaluating new opportunities
        such as acquiring additional shallow production acreage in areas that have
        previously or are currently producing oil, drilling new wells on acquired
        properties, re-completing wells that have produced in the past, and updating
        the
        related production facilities associated with those wells.
  **Employees
        and Independent Contractors**
 
 We
        currently have 23 full time employees and two part time employees. Additionally,
        we use independent contractors to minimize fixed overhead. No employees are
        represented by a union. We believe that our labor relations are
        good.
 
 **Alliance
        Partnerships, Key Vendors and Technical Certifications**
 
 Our
        oil
        industry vendors include the following:
  Spectrum
        Geophysical Processing Company (“Spectrum”) provides 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 seismic acquisition and independent data
        interpretation services. PGS provides a broad range of seismic and reservoir
        services, including data acquisition, processing andinterpretation. PGS operates
        on a worldwide basis with headquarters in Oslo, Norway..
  TDI-Brooks
        International (“TDI”) provides geochemical core analysis of our concession.
 TDI is the recognized leader in offshore surface geochemical exploration
        and heat flow measurement.
  7
 *Table
            of Contents*
  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 .
 
 GeoExperts
        has access to expert geoscientists and engineers who can assist clients in
        the
        interpretation and evaluation of any hydrocarbon play in any part of the
        world.
        Through their expertise and years of experience gained through working with
        major oil and gas fields on every international and domestic province, the
        GeoExperts' experts have the knowledge and skills to interpret seismic, well
        and
        engineering data. They can quickly evaluate all the key factors controlling
        all
        hydrocarbon plays and field developments.
  IHS
        Energy provides a comprehensive suite of information services to the oil
        and gas
        industry – from well and production data to economic and consulting products and
        services. Energy segment services and solutions support oil and gas
        professionals as they evaluate subsurface issues related to geology, technology,
        and reserves potential, and as they assess the economic impact of political,
        fiscal and environmental risks. IHS helps its customers make informed decisions
        quickly, while managing and understanding the risks associated with finding
        and
        producing oil and gas. With 17 technical teams positioned worldwide and
        proficiencies in 42 languages, IHS covers the petroleum industry in over
        90
        countries.
  **Competition.**
 
 Many
        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.**
 
 During
        the fiscal year, oil production from our Louisiana properties was purchased
        by two customers, Plains Marketing LLC and Shell Trading. In 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, in certain circumstances, 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 prohibitive to our operations since our inception. There was
        a
        cleanup that occurred in January of 2007 as a result of an oil transfer line
        rupture on one of our leases in Concordia Parish Louisiana. The cost of the
        cleanup and remediation was covered by insurance. We have abided by and are
        in
        compliance with all applicable environmental laws.
  **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.
  8
 *Table
            of Contents*
  **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;
  -
              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.
  9
 *Table
            of Contents*
  **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.
 
 **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.
  **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.
  10
 *Table
            of Contents*
  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 PSC.
  **GEOPOLITICAL
        POLITICS.**
 
 We
        entered into a 2006 Production Sharing Contract with the Republic of Guinea.
        The
        government of the Republic of Guinea could unlawfully terminate this
        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.
 
 11
 *Table
            of Contents*
 
 **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).
  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.
 
 12
 *Table
            of Contents*
 
 **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 OIL AND GAS 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.
  **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.
 
 **PRICE
        OF OIL AND GAS 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.
 
 **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.
 
 13
 *Table
            of Contents*
 
 **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.
  **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 seven puts on the equity line of credit
        since February 2006 in the aggregate amount of $1,370,075. At September 28,
        2007, the remaining amount available for us to draw down on the equity line
        of
        credit is $18,629,925. 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 $18,629,925 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, 2007, approximately 9,084,482 shares of our common stock were
        restricted shares, and we have outstanding warrants and options to purchase
        11,722,782 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 own or control approximately 19% of our voting power (including
        stock, warrants, options and 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.
 
 14
 *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 a
        discount to the then market price. Sales of such common stock could cause
        the
        market price of our common stock to decline. 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;
  -
              stock
                  market analyst reports, news and
                  speculation.
 
 15
 *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.
 
 **Item
        2 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 performed
        any drilling off the coast of Guinea.
 
 In
        2002
        we obtained a 100% interest in a Production and Sharing Agreement (“2002 PSA”)
        with the Republic of Guinea.  The 2002 PSA was framed out to SCS on
        December 10, 2002. The 2002 PSA gave exclusive rights for exploration and
        production across the concession of 16 million acres. We conducted all of
        our
        work from 2002 until June 27, 2005 under the 2002 PSA and our work led up
        to our
        request for a drilling permit. The permit was not immediately issued as expected
        in July of 2005, as claims were made by USOil, the former farmout
        partner,  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, SCS and Guinea
        entered
        into a new 2006 Production Sharing Contract (2006 PSC) directly with Guinea.
        As
        of the filing of this report, we have exclusive rights to explore, develop,
        and
        produce approximately 31,000 square miles (approx. 20,000,000 acres) of Guinea's
        offshore territory. This concession contains shallow, medium depth and deep
        water potential. 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 automatic
        one year extensions available for a total of four 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 $10 million.  The second exploration period starts after the
        end of the first and is four years long with an automatic extension of four
        years for a total of eight 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 $6 million and drill two exploration wells for
        an
        estimated minimum cost of $15 million to $20million each and minimum
        well depth of 2,500 meters from the surface of the water.  Fulfilling the
        work obligation in all cases exempts us from fulfilling any minimum expenditure
        obligation. We have the right to perform the second 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.
 
 16
 *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 20,000 square miles of the 31,000
        square miles.  Our revised contract area with respect to this new
        contract will govern an area of our choosing totaling approximately 11,000
        square miles of the original 31,000 square mile concession.  At that time,
        should this occur we will have another category of asset whereby we retain
        priority rights of participation to this 20,000 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. The priority rights of
        participation are expected to be defined during any surrender process should
        it
        actually occur.
  **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.
  
  17
 *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, 2007, we drilled in Louisiana
        an
        aggregate of eight wells, and reworked eight shut in wells that predate our
        acquisition of the leases.
 
 Our
        domestic energy operations are conducted by our business segment HYD Resources
        (“HYDR”). HYDR.  operates and develops oil properties and provides
        incidental drilling and workover internally. HYDR has approximately 314 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 100% working interest,
        and
        two Magee Smith leases in Concordia Parish, in which we own 100% working
        interest.
 
 Effective
        July 1, 2007, we acquired working interest of more than 1,100 acres of leasehold
        property. These properties are operated by a third party and are described
        in
        the business section.
 
 **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
        2007 was $68.23 per barrel.
 
 **Lifting
        Costs.**
 
 The
        average production cost (lifting cost) per barrel of oil produced in fiscal
        2007
        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, 2007 was as follows:
  **June
                  30, 2007**
              
              **(1)
                  Gross**
              
              
              **(2)
                  Net**Crude
                  Oil Wells:United
                  StatesOnshore
              
              
              5
              
              
              
              5International:GuineaOffshore
              
              
              0
              
              
              
              0Total
              
              
              5
              
              
              
              5
  (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.
  18
 *Table
            of Contents*
  **Acreage.**
 
 The
        developed and undeveloped acreage (including both leases and concessions)
        that
        we held as of June 30, 2007 are as follows:
  **Developed
                  Acreage (1) (2)**
              
              
              **Undeveloped
                  Acreage (2) (3)****Location**
              
              **Gross
                  Acres**
              
              
              **Net
                  Acres**
              
              
              **Gross
                  Acres**
              
              
              **Net
                  Acres**United
                  StatesOnshoreLouisiana
              
              
              234
              
              
              
              234
              
              
              
              80
              
              
              
              80ForeignOffshoreGuinea
              
              
              0
              
              
              
              0
              
              
              
              20,251,000
              
              
              
              20,251,000Total
              
              
              234
              
              
              
              234
              
              
              
              20,251,080
              
              
              
              20,251,080
  (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, 2007, the number of net exploratory
        and development wells we drilled in the fiscal year ended June 30, 2007.
        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
        2007,
        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****Year
                  Ended June 30, 2007**
              **Productive
                  (1)**
              
              
              **Dry
                  (2)**
              
              
              **Productive
                  (1)**
              
              
              **Dry
                  (2)****US**
              
              **Int'l**
              
              
              **US**
              
              
              **Int'l**
              
              
              **US**
              
              
              **Int'l**
              
              
              **US**
              
              
              **Int'l**0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              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, 2007, 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%.
 
 19
 *Table
            of Contents*
  **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.
 
 **Description
        of Physical Facilities--Description of Admjinistrative 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 had a 3 month free rent period.  We prepaid 3 months of
        rent and gave 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 on October
        31,
        2007. The monthly rent is $11,816 per month. The build-out 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, negligence and other causes of action for failure
        to
        deliver 574,500 shares of our common stock to Dixon Financial Services upon
        the
        expiration of certain trading restrictions.  Prior to the transfer,
        although always owned in certificate form by Dixon, these shares were held
        in a
        nominee name.  However, prior to being able to deliver common stock
        certificates in Dixon’s name as free trading shares, the Erin Oil Exploration
        parties, filed a lawsuit and obtained a temporary restraining order preventing
        the transfer of the shares.  The restraining order was obtained on the
        affidavit of the lawyers for the Erin Oil parties.  The Erin Oil
        parties and their attorneys alleged that these shares were subject to certain
        claims they had against other persons.  We demonstrated that these
        shares were not subject to the Erin Oil parties’ claims and the temporary
        injunction was removed as to us.  However, our stock transfer agent
        continued to refuse to transfer the shares based on threats and other comments
        made by the Erin Oil parties’ attorneys.  As a result, the transfer of
        the shares into Dixon’s name was delayed more than three
        months.  During this period, the share price declined from $7.00 per
        share to slightly more than $1.00 per share.
 
 Both
        Dixon Financial and the company brought claims against the Erin Oil parties
        and
        their legal counsel for their wrongful conduct in preventing the transfer
        of the
        shares.  As a defense the Erin Oil parties’ legal
        counsel asserted a litigation privilege under Texas law.  Based
        on this assertion, the Erin Oil parties and their legal counsel filed motions
        for summary judgment.  The trial court granted all such motions for
        summary judgment.
 
 Our
        transfer agent, Fidelity Transfer, claimed that it was not subject to
        jurisdiction in Texas on the Dixon claims.  In addition, we determined
        that Fidelity Transfer was not 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 entered into an agreement with Dixon Financial to settle
        and resolve this litigation.  The agreement provided, among other
        things, that we would work together with Dixon to appeal the summary
        judgments.  We agreed to bear the costs of the appeal of those summary
        judgments.  The agreement further provided 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.  Dixon Financial agreed postpone enforcement of
        the judgment until the appeal process is concluded or the Erin Oil parties
        are
        determined not to be liable for any other reason.  Furthermore, by our
        agreement with Dixon Financial we will pay only $240,000, payable at $10,000
        per
        month for 24 months, if the appeal of the summary judgments is
        unsuccessful.  If the appeal is successful, we will seek to recover
        our damages and costs from the Erin Oil parties and their legal
        counsel.  Any recoveries from the Erin Oil parties or their legal
        counsel is expected to be from insurance coverage.
 
 20
 *Table
            of Contents*
  The
        proposed agreed judgment described above was submitted to the court on at
        least
        five occasions beginning in May 2005.  In June 2006, the Court issued
        an order 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 against Knollenberg and Erin Oil, as the remaining Erin Oil parties,
        was
        tried to a jury in January 2007.  The jury found in favor or
        Hyperdynamics and Dixon and awarded damages against
        Knollenberg.  However, at the request of the Erin Oil parties and
        their counsel, the trial court set aside the jury award and entered a “take
        nothing” judgment on all issues.  That judgment is now on appeal under
        our agreement with Dixon.  We believe that our liability to Dixon will
        not arise, if at all, prior to September 2008.   As of June 30,
        2007, we have not recorded an accrual associated with legal fees from this
        lawsuit because it is our policy to expense legal costs as they are
        incurred.  Additionally, because we do not consider a loss from this
        lawsuit to be probable, we have not accrued any losses associated with this
        legal contingency as of June 30, 2007.
 
 **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 attorneys 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.****
  The
        Georgia Court of Appeals rejected our appeal of the trial court’s order
        dismissing the non-Georgia defendants because it was not a “final order,” though
        it was in effect as to the dismissed defendants. The Court of Appeals’ action
        returned the case to the trial court where a Motion for Reconsideration was
        filed due to a dramatic change in the law of personal jurisdiction in Georgia.
        (See *Innovative Clinical & Consulting v. First National Bank of
        Ames*, 279 Ga. 672 (2005).) That Motion is still pending and all activity
        in
        the case is halted until the trial court rules.
  21
 *Table
            of Contents*
 
 **USOil
        Corporation.**
 
 This
        lawsuit was dismissed in light of very favorable discovery responses from
        Plaintiff that established our right to proceed under the newly negotiated
        production agreement with the Guinean Government. However, in August 2007,
        USOil
        Corporation re-filed this lawsuit in Ft. Bend County claiming it was
        the actions or omissions of SCS that caused the 2002 PSA to be cancelled
        by the
        Government. We have successfully transferred the case back to the original
        court
        in Harris County and will be filing legal motions seeking judgment against
        USOil in the very near future. Discovery is expected to also start which
        will
        show USOil’s allegations to be blatantly false and unfounded. However, all work
        is currently on hold pending the administrative process of transferring the
        case
        from Ft. Bend County to Harris County and reactivating the old
        court file. In addition to denying all claims in the Answer on file, SCS
        has
        also filed a counterclaim seeking damages for frivolous litigation and tortuous
        interference of a contract.
 
 **Trendsetter
        Investors, LLC and Manning, Moore, and Long**
 
 Two
        cases, 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*
        and *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* were settled in a single settlement agreement and both cases
        were dismissed June 2007.  In the Trendsetter case, the Plaintiff
        alleged Fraud or Deceit in the Sale of Securities, Common Law Fraud, Fraud
        by
        Omission and Control Person Liability. Plaintiff seeks unspecified monetary
        damages.  In the Manning case, the Plaintiffs alleged that they had
        the pre-emptive right to invest in Hyperdynamics Corporation's common
        stock.  In conjunction with the settlement agreement,
 
 a)
              Trendsetter
                  Investors received warrants to purchase 3,480,000 shares of restricted
                  common stock in Hyperdynamics Corporation exerciseable at $4.00
                  per share,
                  with a price reset provision that would reduce the exercise price
                  to $2.40
                  under certain conditions, until June 14, 2017.  The fair value
                  of the warrants as determined using the Black-sholes option pricing
                  model
                  was $8,959,000.
 b)
              Kent
                  Watts would facilitate an exchange of the warrants for 1,740,000
                  shares of
                  common stock.  Several Hyperdynamics Series B preferred
                  stockholders effected this exchange in June
                  2007.
 c)
              Trendsetter
                  conveyed its 30% working interest in certain oil and gas properties
                  it had
                  purchased back to Hyperdynamics.
 d)
              Geoffrey
                  Long received 30,000 shares of Hyperdynamics common stock valued
                  at the
                  market price on the agreement date of
                  $82,000.
 e)
              Hyperdynamics
                  agreed to pay $280,000 in cash to Trendsetter Investors, LLC for
                  legal
                  fees.
 
 As
        of
        June 30, 2007, Hyperdynamics had issued all the stock and warrants associated
        with this settlement and had paid $40,000.  A short term note payable
        for $240,000, the balance of the legal fees that Hyperdynamics had agreed
        to
        pay, remained on Hyperdynamics’ balance sheet as of June 30,
        2007.  Hyperdynamics paid the note on July 10, 2007.
 
 **Item
        4 Submission of Matters to a Vote of Securities
        Holders**
 
 None.
 
 **Part
        II**
 
 **Item
        5 Market for Registrant’sCommon Equity, Related Shareholder
        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.
  22
 *Table
            of Contents*
  **High
                  Bid**
              
              
              **Low
                  Bid****Fiscal
                  2007**First
                  Quarter
              
              $
              2.85
              
              
              $
              1.81Second
                  Quarter
              
              
              2.96
              
              
              
              2.26Third
                  Quarter
              
              
              2.23
              
              
              
              1.70Fourth
                  Quarter
              
              
              3.24
              
              
              
              1.48**Fiscal
                  2006**First
                  Quarter
              
              $
              2.5700
              
              
              $
              0.8700Second
                  Quarter
              
              
              2.3700
              
              
              
              1.09000Third
                  Quarter
              
              
              3.4200
              
              
              
              1.6800Fourth
                  Quarter
              
              
              3.4200
              
              
              
              2.0500**Fiscal
                  2005**First
                  Quarter
              
              $
              2.7200
              
              
              $
              .7600Second
                  Quarter
              
              
              3.5000
              
              
              
              2.1700Third
                  Quarter
              
              
              3.400
              
              
              
              1.7500Fourth
                  Quarter
              
              
              3.200
              
              
              
              1.990
  On
        September 27, 2007, the last price for our common stock as reported by the
        AMEX
        was $2.99 per share. On September 28, 2007, there were approximately 244
        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.
 
 23
 *Table
            of Contents*
  **Equity
        Compensation Plan Information**
 
 The
        following table gives aggregate information under all equity compensation
        plans
        of Hyperdynamics as of June 30, 2007.
  **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
              3,159,999
              3.96
              4,453,311Equity
                  compensation plans not approved by security holders
              942,000
              0.27
              -0-Total
              4,101,999
              3.11
              4,453,311
 
 24
 *Table
            of Contents*
  The
        Stock
        and Stock Option Plan (the “Plan”) of Hyperdynamics was adopted May 7, 1997 and
        amended on December 3, 2001 and on January 21, 2005.  The total number
        of shares issuable under the Plan, as amended, is
        10,000,000.   The Board of Directors voted to amend the Plan on
        May 5, 2007 by extending the expiration date of the Plan from May 7, 2007
        to May
        7, 2010.
 
 As
        of
        June 30, 2006, we had 4,771,597 shares available to be issued or granted
        pursuant to the Plan. We issued 318,286 shares under the Plan this fiscal
        year,
        leaving us with 4,453,311 shares available to be issued or granted pursuant
        to
        the Plan as of June 30, 2007.
 
 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 942,000 shares of common stock which are currently
        outstanding and were issued pursuant to such agreements at a weighted average
        price of $0.27 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.
 
 25
 *Table
            of Contents*
  **PERFORMANCE
        GRAPH**
 
 The
        following graph compares the five year cumulative total return of our Common
        Stock to the cumulative total return on the Amex Oil Index and the Russell
        2000
        Stock Index.  Our Common Stock commenced trading on the American Stock
        Exchange on May 5, 2005.  Our Common Stock was previously traded on
        the OTCBB.  The graph assumes that a $100 investment (Index =100) was
        made in our Common Stock, the Amex Oil Index and the Russell 2000 Stock Index
        on
        June 30, 2002 and that all dividends were reinvested.  The stock
        performance for our Common Stock is historical and should not be construed
        as
        being indicative of future performance.
 
 
  Performance
                  Graph Index Data PointsFiscal
                  Year Ended June 30,2002
              
              
              2003
              
              
              2004
              
              
              2005
              
              
              2006
              
              
              2007Hyperdynamics
                  Corporation
              
              
              100
              
              
              
              348
              
              
              
              1,096
              
              
              
              1,122
              
              
              
              913
              
              
              
              1,365Amex
                  Oil Index
              
              
              100
              
              
              
              86
              
              
              
              116
              
              
              
              162
              
              
              
              210
              
              
              
              257Russell
                  2000 Index
              
              
              100
              
              
              
              97
              
              
              
              128
              
              
              
              138
              
              
              
              157
              
              
              
              180
 
 26
 *Table
            of Contents*
 
 **Item
        6 Selected FinancialData**
 
 The
        selected historical consolidated financial data set forth below for each
        of the
        years in the five-year period ended June 30, 2007 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 report.
  **Years
                  Ended June 30,****2007**
              
              
              **2006**
              
              
              **2005**
              
              
              **2004**
              
              
              **2003****(in
                  thousands, except per share amounts)**Consolidated
                  Statement of Operations Data:Revenues
              
              $
              1,006
              
              
              $
              615
              
              
              $
              173
              
              
              $
              38
              
              
              $
              468Loss
                  from operations
              
              
              (20,243
              )
              
              
              (5,041
              )
              
              
              (4,927
              )
              
              
              (3,117
              )
              
              
              (2,415
              )Basic
                  and diluted loss per common share
              
              $
              (0.49
              )
              
              $
              (0.17
              )
              
              $
              (0.13
              )
              
              $
              (0.12
              )
              
              $
              (0.12
              )Weighted
                  average shares outstanding
              
              
              47,723,298
              
              
              
              43,318,773
              
              
              
              41,646,844
              
              
              
              31,938,926
              
              
              
              22,580,526Balance
                  Sheet Data:Working
                  capital (deficit)
              
              $
              4,004
              
              
              $
              154
              
              
              $
              (1,413
              )
              
              $
              1,625
              
              
              $
              (1,267
              )Capital
                  expenditure
              
              
              527
              
              
              
              517
              
              
              
              1,517
              
              
              
              2,030
              
              
              
              357Long-term
                  liabilities
              
              
              133
              
              
              
              79
              
              
              
              135
              
              
              
              726
              
              
              
              256Stockholders'
                  equity
              
              
              8,726
              
              
              
              4,608
              
              
              
              3,146
              
              
              
              4,660
              
              
              
              (317
              )Total
                  Assets
              
              $
              11,480
              
              
              $
              8,303
              
              
              $
              5,209
              
              
              $
              7,283
              
              
              $
              1,480
  **Item
        7 Management’sDiscussion and Analysis of Financial Condition
        and Results of Operation**
  **CAUTIONARY
        STATEMENT ON FORWARD-LOOKING INFORMATION**
 
 The
        Company is 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, or on behalf
        of,
        the Company. This annual report on Form 10K 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. The Company's expectations, beliefs and projections are expressed
        in
        good faith and are believed by the Company to have a reasonable basis, including
        without limitations, management's examination of historical operating trends,
        data contained in the Company's records and other data available from third
        parties, but there can be no assurance that management's 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 the view of the Company, could cause actual results to differ
        materially from those discussed in the forward-looking statements: the ability
        of the Company to respond to changes in the oil exploration and production
        environment, competition, the availability of financing, and, if available,
        on
        terms and conditions acceptable to the Company, and the availability of
        personnel in the future to support its activities and external
        customers.
 
 Overview
 
 Our
        corporate mission is to explore for and develop new sources of energy worldwide.
        On September 22, 2006, our wholly owned subsidiary, SCS Corporation signed
        a
        Production Sharing Contract (the “2006 PSC”) with the Republic of Guinea. The
        2006 PSC gives us exclusive rights to explore and develop approximately 31,000
        square miles off the coast of Guinea. However, certain provisions of the
        contract require us to surrender 64% (approximately 20,000 square miles)
        of the
        contract area upon the passage of a “Project of Law”, a Presidential Decree, and
        a Supreme Court ruling. We would retain a priority non-exclusive right.to be defined in the future,to
        participate in the development of the surrendered contract area. Although
        the
        PSC is a legally binding contact under Guinea’s 1986 Petroleum Code, the process
        of passing a law, obtaining a Presidential Decree and a Supreme Court ruling
        effectively codifies the PSC into Guinea law, thereby strengthening our
        concession within the contract area. Furthermore, we expect, through the
        priority rights granted in the PSC, to continue our participation in the
        surrendered contract area and still have exclusive rights to the remaining
        36%
        (approximately 11,000 square miles) of the contract area. Until the passages
        of
        the events mentioned above, we retain the exclusive right to explore and
        exploit
        100% of the 31,000 square mile concession. As such, we expect to continue
        aggressively pursuing our exploration efforts within the
        concession.
 
 27
 *Table
            of Contents*
  In
        December 31, 2006, we traveled to Germany at the invitation of the Guinea
        Ministry of Mines and Geology and made a presentation to numerous participants
        from various ministries of the Guinea government. At the meeting, we notified
        the Guinea Ministry of Mines that we had begun our exploration work pursuant
        to
        the requirements of the 2006 PSC with the ultimate goal to begin drilling
        exploration wells.
 
 In
        October 2006, we engaged Global SanteFe's Applied Drilling Technologies to
        evaluate resources in the Country of Guinea that can support the needs of
        offshore drilling operations. Thus, during the quarter, a team traveled to
        Guinea to survey the facilities, ports, and capabilities there by six to
        nine
        months.
 
 In
        November 2006, we traveled to Guinea together with our lobbyist, former
        Secretary of State for African Affairs, Herman Cohen. We met with numerous
        ministers of the Guinea government in meetings whereby they publicly gave
        support for our contract. We addressed the National Assembly in the presence
        of
        the President of the National Assembly of Guinea, Mr. Aboubacar Somparé. Our
        trip was highly publicized in Guinea and was carried extensively on Guinea's
        national RTG television.
 
 While
        we
        were in Guinea, our geoscientists at our corporate offices prepared for the
        farm-out program, which was announced in January 2007. We launched a program
        to
        provide the opportunity for oil companies to license and study our proprietary
        data and then submit proposals to us later this year. We have now begun
        presentations to companies under confidentiality agreements.
  As
        previously discussed, we signed the 2006 PSC on September 22, 2006. This
        contract is substantially better than the previous 2002 PSC agreement. In
        addition, the 2006 PSC is in full accordance with Guinea law known as the
        1986
        petroleum code, and it is being considered by the National Assembly of Guinea
        for special action that ultimately would codified the 2006 PSC as a new law
        in
        and of itself as we disclosed in our 8K filed on April 16, 2007. All of this
        is
        positive for Hyperdynamics Corporation. Additionally, the world demand for
        oil
        has remained strong and the west coast of Africa is expected to remain one
        of
        the most active areas in the world for exploration. For these reasons we
        believe
        that the value of the concession has greatly increased over the last several
        months.
 
 As
        part
        of their political process the Guinea government has decided, as is entirely
        their prerogative, to send the 2006 PSC to the National Assembly to be
        considered for a special status of a “project of law”.  The National
        Assembly's working political process for the “project of law” is a process
        whereby the Guinea government informs its people of the benefits of the
        government's contracts. It also allows law makers to understand the major
        contracts themselves so that they can make new laws that can positively affect
        the people in the future. In our case, the 2006 PSC also has a special contract
        provision under article 5.1 whereby certain terms, conditions, and rights
        of the
        contract will change.  For the National Assembly to pass or not pass a
“project of law” on our contract has no bearing on the legality or
        enforceability of the contract. While the legality of the contract is not
        affected by passing a “project of law”, management may see a need to review the
        farm-out process and adapt to any changes that may be brought about if it
        indeed
        passes and other certain actions explained in previous filings occur as
        well.
 
 28
 *Table
            of Contents*
  **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.   HYDR is engaged in oil and gas exploration and
        production activities in Louisiana, USA. 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,****2007**
              
              **2006**
              
              **2005****(in
                  Thousands)****Revenues**SCS
              
              $
              -
              
              $
              -
              
              
              $
              3HYDR
              
              
              1,006
              
              
              615
              
              
              
              170**Total
                  Revenues**
              
              **$**
              **1,006**
              
              **$**
              **615**
              
              
              **$**
              **173**
  **Results
        of Operations ---LouisianaOperations
        (“HYDR”)**
  **Comparison
        for Fiscal Year 2007 and 2006**
  Revenues.
          Our revenue for the year ended June 30, 2007 was $1,006,000 in comparison
        to $615,000 in 2006. This represents an increase of 64% or $391,000. The
        increase is due to equipment upgrades and less downtime, which resulted in
        higher production of oil and gas. The revenues for 2007 are derived from
        oil and
        gas production of $908,000 and $98,000 in oilfield services, compared to
        $615,000 in oil and gas production and $0 in oilfield service work in 2006.
        We
        expect to derive most of our future revenues from oil and gas production
        with
        incidental oilfield service revenue as good business opportunities
        arise.
 
 Lease
        operating costs for the year ended June 30, 2007 was $387,000 in comparison
        to $657,000 in 2006.  This represents a decrease of 42% or $270,000
        due to upgrade in equipment resulting in better maintenance and higher
        performance.
 
 Severance
        tax for the year ended June 30, 2007 was $104,000 in comparison to $65,000
        in 2006. This represents an increase of 60% or $39,000.  Severance tax
        varies directly with production revenues.
 
 Our
        depreciation, depletion and amortization from Oil and Gas Properties was
        $162,000 and $116,000 for the years ended June 30, 2007 and 2006, respectively.
        This represents a decrease of 40% or $46,000.   The decrease is
        attributable to past sales of oilfield equipment, which reduced the periodic
        depreciation charge.
 
 Other
        operational costs for the year ended June 30, 2007 was $725,000 in
        comparison to $922,000 in 2006.  This represents a decrease of 21% or
        $197,000 due to decrease in expenses related to repairs and maintenance,
        tools
        and yard costs, field work labor and decrease in number or field
        employees.
 
 Settlement
        expensefor the year
        ended June 30, 2007 was
        $8,870,000 and $0 in 2006.  We were sued by an investor in working
        interest in some of our oil and gas properties.Pursuant to
        the settlement agreement, we issued 3,480,000 warrants to purchase our common
        stock at an adjusted exercise price of $2.40 per share. The expenses are calculated
        using the
        fair value of the warrants as of the date they were granted as estimated
        by the
        Black-Scholes option pricing model and based
        upon
        $2.40 exercise
        price.
 
 Our
        selling, general and administrative expense decreased 2%, or $17,000,
        from $608,000 to $591,000 for the years ended June 30, 2006 and June 30,
        2007,
        respectively. The change is due to a decrease in administrative
        expenses.
 
 Our
        loss from operations from this segment was ($9,835,000) and ($1,753,000) for
        the years ended June 30 2007 and 2006, respectively.
 
 Other
        income and expenses decreased by $180,000. The decrease is due to two main
        factors.  We repurchased working interest in some oil and gas
        properties in 2006 at a loss of $370,000.  This was a one time
        charge.  Additionally, we had a loss on disposal of assets of $96,000
        in 2007, whereas in 2006 we recognized a gain on sales of assets of
        $89,000.
 
 29
 *Table
            of Contents*
  **Comparison
        for Fiscal Year 2006 and 2005**
  Revenues.
          Our revenue for the year ended June 30, 2006 was $615,000 compared to
        $170,000 in 2005. This represents an increase of 262% or $445,000. The revenues
        increased due to higher oil prices and increase in production. The revenues
        for
        2006 are all derived from oil and gas production. The revenues in 2005 include
        $52,000 from oil and gas revenues and $118,000 from oilfield service
        work..
  Lease
        operating costs for the year ended June 30, 2006 was $657,000 in
        comparison to $265,000 in 2005.  This represents an increase of 147%
        or $392,000.  This increase is attributable to start up
        costs.
 
 Severance
        tax for the year ended June 30, 2006 was $65,000 in comparison to $6,000
        in
        2005. This represents an increase of 983%, or $59,000, due to increase in
        production revenues.
 
 Our
        depreciation, depletion and amortization expense was $116,000 and $77,000
        for the years ended June 30, 2006 and 2005, respectively. This represents
        a
        decrease of 51% or $39,000 due to increase in purchases of field equipment
        assets.
 
 Other
        operational costs for the year ended June 30, 2006 totaled $922,000 in
        comparison to $956,000 in 2005.   This represents an
        insignificant decrease of 3% or $34,000.
 
 Our
        selling, general and administrative expenses increased 63%, or $235,000,
        from $374,000 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
        breakdown for these expenses in 2005 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 $68,000. Thus, the main
        factors
        contributing to the $234,000 change are: a $74,000 decrease in payroll costs,
        a
        $199,000 increase in bad debt expense and an $109,000 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
        loss from operations from this segment was ($1,754,000) and ($1,508,000) for
        the years ended June 30 2006 and 2005, respectively.
 
 Other
        expense was $370,000 and $0 for the years ended June 30, 2006 and 2005,
        respectively. The increase is due to the working interest buyback.
 
 **Results
        of Operations ---GuineaAnd Seismic Data Management
        (“SCS”)**
 
 **Comparison
        for Fiscal Year 2007 and 2006**
  Revenues.  There
        were no revenues for the years ended June 30, 2007 and 2006.   We
        have focused on the acquisition and interpretation of seismic data for our
        concession in Guinea.
 
 Other
        operational costs were $8,000 and $62,000 for the years ended June 30, 2007
        and 2006, respectively.  The decrease of 87%, or $54,000, is due
        to reduction of expenses incurred on the evaluation of a potential project
        not
        related to our Guinea concession.
 
 Selling,
        General and Administrative Expenses.
 
 Our
        selling, general and administrative expenses were $2,825,000 and $732,000
        for
        the years ended June 30, 2007 and 2006, respectively. This represents an
        increase of 286% or $2,093,000.
 
 The
        increase in selling, general and administrative expenses is attributable
        to
        increases in various areas including salaries, equity based compensation,
        rent
        and utilities, travel expenses, professional expenses and consulting
        expenses.   Salary expense increased 180% or $246,000 from
        $133,000 in 2006 to $384,000 in 2007 due to increase in officer salaries
        and
        increased allocation of salaries from corporate office in connection with
        work
        on the Guinea concession.  Equity based compensation of $461,000 was
        incurred in 2007, whereas no such compensation occurred in 2006. Office
        rent and utilities increased 18% or $31,000 due an additional office set up
        in Guinea.  Travel expenses to West Africa in connection with the Guinea
        concession increased 171%, or  $198,000, from $116,000 in 2006 to
        $314,000 in 2007.  Professional  expenses increased by 165%
        or $182,000 because of legal expenses relating to the Guinea concession and
        lawsuit. Consulting, advertising and public relations expenses increased by
        526% or $837,000 from $159,000 in 2006 to $996,000 in 2007, due to expenses
        related to government relations, lobbyist, geoscientists and geophysical
        consulting services and contract officers fees.  General expenses
        increased by $138,000 due to increase in office supplies and other
        administrative expenses compared to $33,000 during the years
        ended  June 30, 2007 and 2006, respectively.
 
 30
 *Table
            of Contents*
  Our
        depreciation decreased 16% or $5,000, from $31,000 down to $26,000 for years
        ended June 30, 2006 and 2007, respectively, due to retirement and disposal
        of
        assets.
  Loss
        from Operations. Based on the factors discussed above, our loss from
        operations from this segment increased by 246%, or ($2,034,000), for the
        year
        ended June 30, 2006 to ($825,000) to ($2,859,000) for the years ended June
        30,
        2007 and June 30, 2006, respectively.
 
 **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. We receive occasional revenues from tape transcription and
        seismic
        data processing services. We do not actively pursue revenues of this nature
        and
        they occur very irregularly.
  Other
        operational costs  were $62,000 and $80,000 for the years ended
        June 30, 2006 and 2005, respectively. This represents a decrease of 29% or
        $18,000 due to reduction of employee and non Guinea farm-out
        expenses.
  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.
 
 We
        experienced an increase of $391,000 in the following general and administrative
        expenses: 1) An increase of $71,000 or 113% in salary expenses from $63,000
        to
        $133,000 for the years 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; 2) An increase of $48,000 or 70% on travel expenses to Africa
        in
        connection with the Guinea concession from $68,000 to $116,000 for the years
        ended June 30, 2005 and 2006,
        respectively;  3)  Professional and consulting expenses
        increased of 2600% or $260,000 attributable to legal and consultation expenses
        relating to the Guinea concession; 4) Increase in auto, bank and other
        administrative expenses of $12,000 from $6,000 to $18,000 for the years ended
        June 30, 2005 and 2006, respectively. We experienced a decrease of $82,000
        of
        which our selling expenses decreased $46,000 to $0 for the years ended June
        30,
        2005 and 2006, respectively. A decrease of $36,000 on rent, insurance and
        other
        office expenses $231,000 down to $195,000 for the years ended June 30, 2005
        and
        2006, respectively. The decrease is attributable to the following: 1) 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;  2) 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; 3) 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.
 
 Our
        depreciation 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.
 
 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.
 
 *Other
        Items.*
 
 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
 
 We
        also
        experienced a gain of $67,000 from the settlement of our lease agreement
        for our
        previous office space.
 
 31
 *Table
            of Contents*
 
 **Results
        of Operations --- Corporate Overhead**
 
 **Comparison
        for Fiscal Year 2007 and 2006**
  Settlement
        expenses for the year ended June 30,2007 was $249,000 and $0 in
        2006.
 Consulting
        - related party
        expensesfor the year
        ended June 30, 2007 was $4,240,000 and  $284,000 in
        2006.  This represents an increase of $3,956,000 or 1392% due to the
        grant of 1,500,000 warrants with an exercise price of $4.00 per share.We
        record the expense of equity based compensation using the fair value of the
        warrants as of the date they were granted as estimated by the Black-Scholes
        option pricing model and based upon $4.00 exercise price.
 
 Selling,
        General and Administrative Expenses.  Selling, general and
        administrative expenses increased by $870,000
        or 40%, from $2,158,000 to $3,028,000 for the years ended June 30, 2006 and
        2007, respectively.  The increase is due higher administrative
        expenses of $1,126,000 offset by a decrease of $255,000 in other general
        administrative expenses. The increase is attributable to the
        following:  1) Stock based compensation increased by $369,000 or 273%,
        from $512,000 to $1,909,000.  The equity instruments were issued to
        officers, directors and employees and the value was calculated using the
        Black-Scholes option pricing model. 2) Salaries and payroll taxes increased
        by
        $268,000 or 73% from $365,000 to $633,000 due to an increase in employees
        and
        wage increases resulting in increased of payroll taxes. 3) Professional expenses
        increased by $141,000, from $414,000  to $555,000  due to
        higher legal costs resulting from various lawsuits and an increase in accounting
        and audit fees; 4) Our general expenses increased by $165,000 or 45% from
        $365,000 in 2006 to $530,000 in 2007 attributable to increase in American
        Stock
        Exchange listing fees, increase in annual shareholder meeting expenses, transfer
        agent and reporting fees, as well as office relocation, supplies, auto and
        insurance expenses.  5)
        Public
        relations expenses was $183,000 and $76,000 for the years ending June 30,
        2007
        and 2006, respectively. This represents an increase of $107,000 or 140%
        attributable to expenses for retaining public relations firm and investor
        relations. Although there was an increase in expenses, we also
        experience a decrease in rent and utilities by $69,000 due to reduction in
        rent
        and consumption of utilities; Travel decreased by $48,000 due to less travel
        by
        directors and officers and bank charges decreased by $5,000 due to increase
        in
        funding and consulting of non-related party decreased $134,000.
 
 Depreciation
        was $31,000 and $19,000 for the years ended June 30, 2007 and 2006,
        respectively.  The increase is due to addition of assets such as
        furniture and fixtures.
 
 *Other
        Items.*
  Gain
        on settlementof debt was $0 and $34,000 for the years ended June 30,
        2007 and 2006 respectively.
 
 Interest
        expense was $2,982,000 and $1,961,000 for the year ended June 30, 2007 and
        2006, respectively. This represents an increase of $1,021,000 or 52%
        attributable to payments made on our private financing related to a convertible
        note payable and debenture.
 
 Interest
        income was $96,000 and $2,000 for the years ended June 30, 2007 and 2006,
        respectively.  This represents an increase of $93,000 derived from
        interest received on the cash we received during the year which was
        invested in a money market account.
 
 Net
        Loss. Based on the factors discussed for each segment, the Net Loss
        attributable to common shareholders increased ($16,055,000), or 221% from
        ($7,253,000) or ($0.17) per share in 2006 to ($23,308,000), or ($.49) per
        share
        in 2007. The net loss chargeable to common shareholders includes a provision
        for
        preferred stock dividends of $109,000 in 2006 and 2007. The negative results
        are
        due to the factors discussed above.
 
 **Comparison
        for Fiscal Year 2006 and 2005**
  Other
        operational costs for the years ended June 30, 2006 and 2005 was $0 and
        $69,000, respectively, a decrease of $69,000 or 100%, attributable to our
        system
        engineer's payroll costs for work not attributable to generating revenues,
        but
        instead for administrative tasks.
 
 Selling,
        General and Administrative Expenses.  Selling, general and
        administrative expenses were $2,443,000 and $2,802,000 for the years ended
        June
        30, 2006 and 2005, respectively. This represents a decrease of 13% or $359,000,
        due to increase in expenses by $1,085,000 and offset in decrease of some
        expenses by $1,446,000.
 
 32
 *Table
            of Contents*
  Consulting
        expenses for the year ended June 30, 2007 was $284,000 and $0 in
        2005.
  The
        increase in expenses was attributable to following factors: 1) Equity based
        compensation increased by $443,000 from $69,000 in 2005 to $512,000 in 2006;
        2)
        Professional expenses are comparable at $130,000 for 2006 and 2005; 3) Travel
        expenses increased by $120,000 from $3,000 in 2005 to $123,000 in 2006 due
        to
        increase in directors meeting and shareholder meeting travel expenses; 4)
        Salaries and payroll taxes increased by $81,000 due to new employee hire;
        5)
        Public relations and investor relations increased by $76,000 due increase
        in
        public relations expenses, American Stock Exchange listing fees, increase
        in
        annual shareholder meeting expenses, and transfer agent fees; 6) Insurance
        expenses increase by $28,000 due to increase in general liability, umbrella
        and
        control of oil well policy; 7) other general expenses increased by $55,000
        due
        to increase in auto expense, office supplies and postage and bank
        charges.
 
 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.
 
 The
        decrease in some expenses are attributable to the following: 1) consultant
        expenses decreased by $1,353,000 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; 2) Office rent
        and
        utilities expense decreased by  $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;
        4)
        Taxes and reporting expenses decreased by $11,000. Our payroll expense includes
        an offset of a refund from the IRS in the amount of $46,000.
 
 Depreciation
        and amortization is comparable at $19,000 for the years ended June 30, 2005
        and 2006, respectively.
 
 *Other
        Items.*
  Interest
        expense was $316,000 and $1,961,000 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.
 
 We
        experienced a gain of $34,000 from the settlement of our lease agreement for
        our previous office space.
 
 Net
        Loss. Based on the factors discussed for each segment, entity-wide, the
        Net Loss attributable to common shareholders increased ($1,909,000), or 36%
        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**
 
 The
        Company uses the full cost method of accounting for exploration and development
        activities as defined by the SEC. Under this method of accounting, the costs
        of
        unsuccessful, as well as successful, exploration and development activities
        are
        capitalized as properties and equipment. This includes any internal costs
        that
        are directly related to exploration and development activities but does not
        include any costs related to production, general corporate overhead or similar
        activities. Gain or loss on the sale or other disposition of oil and gas
        properties is not recognized, unless the gain or loss would significantly
        alter
        the relationship between capitalized costs and proved reserves of oil and
        natural gas attributable to a country. The application of the full cost method
        of accounting for oil and gas properties generally results in higher capitalized
        costs and higher DD&A rates compared to the successful efforts method of
        accounting for oil and gas properties.
 
 **Costs
        Excluded**
 
 Properties
        and equipment include costs that are excluded from costs being depreciated
        or
        amortized. Oil and gas costs excluded represent investments in unproved
        properties and major development projects in which we own a direct interest.
        These unproved property costs include nonproducing leasehold, geological
        and
        geophysical costs associated with leasehold or drilling interests and
        exploration drilling costs. We exclude these costs on a country-by-country
        basis
        until proved reserves are found or until it is determined that the costs
        are
        impaired. All costs excluded are reviewed at least quarterly to determine
        if
        impairment has occurred. The amount of any impairment is transferred to the
        capitalized costs being amortized (the DD&A pool) or a charge is made
        against earnings for those international operations where a reserve base
        has not
        yet been established. Impairments transferred to the DD&A pool increase the
        DD&A rate for that country. For international operations where a reserve
        base has not yet been established, an impairment requiring a charge to earnings
        may be indicated through evaluation of drilling results, relinquishing drilling
        rights or other information.
 
 33
 *Table
            of Contents*
  **Ceiling
        Test**
 
 The
        full
        cost ceiling test is an impairment test prescribed by SEC Regulation S-X
        Rule
        4-10.   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 condition, 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. As of June 30, 2007, we have capitalized $43,000 in oil and gas
        properties, which is subject to the ceiling test for impairment.  At
        June 30, 2007, there was no impairment indicated.
 
 **Impairment**
 
 At
        June,
        30, 2007, we had $4,279,000 of capitalized costs associated with our Guinea
        operations. Based on an impairment analysis performed by our Economist, Dr.
        Kenneth Lehrer and the execution of the new 2006 Production Sharing Contract
        between SCS Corporation and the Republic of Guinea, , no impairment of these
        assets was indicated as of June 30, 2007.
 
 **Environmental
        Obligations and Other Contingencies**
 
 Management
        makes judgments and estimates in accordance with applicable accounting rules
        when it establishes reserves for environmental remediation, litigation and
        other
        contingent matters. Provisions for such matters are charged to expense when
        it
        is probable that a liability has been incurred and reasonable estimates of
        the
        liability can be made. Estimates of environmental liabilities are based on
        a
        variety of matters, including, but not limited to, the stage of investigation,
        the stage of the remedial design, evaluation of existing remediation
        technologies, and presently enacted laws and regulations. In future periods,
        a
        number of factors could significantly change our estimate of environmental
        remediation costs, such as changes in laws and regulations, or changes in
        their
        interpretation or administration, revisions to the remedial design,
        unanticipated construction problems, identification of additional areas or
        volumes of contaminated soil and groundwater, and changes in costs of labor,
        equipment and technology. Consequently, it is not possible for management
        to
        reliably estimate the amount and timing of all future expenditures related
        to
        environmental or other contingent matters and actual costs may vary
        significantly from our estimates.
 
 **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.
 
 **Asset
        Retirement Obligations**
 
 Our
        asset
        retirement obligations 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.
 
 34
 *Table
            of Contents*
  **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.
 
 **Share-Based
        Compensation**
 
 On
        January 1, 2006, we 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. In addition, we account for stock warrants issued for goods and services
        to non-employees pursuant to EITF 96-18 “Accounting for Equity Instruments That
        Are Issued to Other Than Employees for Acquiring, or in Conjunction with
        Selling, Goods or Services.” We used the Black-Scholes option pricing model to
        determine the fair value of stock options and stock warrants at the grant
        date.
 
 **Contingent
        Obligations**
 
 We
        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.
        Also, in conjunction with our purchase of HYD Resources Corporation in April
        2004, we have two contingent obligations to pay $506,000. These obligations
        are
        payable over the five years ending in April 2009 and they are payable only
        in
        the event that HYD Resources is profitable. The determination of net income
        will
        be made quarterly and the pay down of the obligations is 25% of the net income
        per quarter.
  **Disclosure
        of Contractual Obligations as of June 30, 2007**
  **Payments
                    due by period ($)****Contractual**
                  **Obligations**
                
                **Total**
                
                
                **Less
                    than**
                  **1
                    year**
                
                
                **1-3
                    years**
                
                
                **3-5
                    years**
                
                
                **More
                    than**
                  **5
                    years**Installment
                    Obligations
                
                $
                375,000
                
                
                $
                375,000
                
                
                
                -
                
                
                
                -
                
                
                
                -Capital
                    Lease Obligations
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Operating
                    Lease Obligations
                
                
                910,000
                
                
                
                141,000
                
                
                $
                284,000
                
                
                
                284,000
                
                
                $
                201,000Purchase
                    Obligations
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Other
                    Long-Term Liabilities
                
                
                133,000
                
                
                
                -
                
                
                
                48,000
                
                
                
                76,000
                
                
                
                9,000Total
                
                $
                1,868,000
                
                
                
                516,000
                
                
                $
                332,000
                
                
                
                360,000
                
                
                $
                210,000
 
 **Liquidity
        and Capital Resources**
 
 Our
        ratio
        of current assets to current liabilities (current ratio) was $2.53 to one
        and
        $1.04 to one at June 30, 2007 and 2006, respectively.  With the new
        acquisition of producing properties in June 2007, the company continues to
        work
        toward sustained positive operating cash flow and income from domestic
        operations altogether including corporate overhead. Cash funds to be used
        for
        investing in our exploration work will continue to come from new financing
        activities, financial partnerships, or working interest deals with oil
        companies.
 
 35
 *Table
            of Contents*
  We
        believe that we are now prepared to structure our financing to allow us to
        expand and accelerate our exploration activity offshore Guinea. As discussed
        hereunder we expect our liquidity ratios to be reasonably maintained and
        possibly improved by having access to our Dutchess equity line and by increasing
        our domestic production to where we are making a positive operating net
        income.  We believe we can do this without having to do any additional
        financing at this time to cover corporate overhead.  As of this filing
        we maintain the Dutchess equity line and could raise as much as an additional
        $18,629,775 out of the original line which started at $20,000,000.
 
 While
        some of the equity line funds could be used to fund additional exploration,
        we
        are looking to greatly enhance our exploration efforts to a much greater
        level.
        To fund our exploration offshore Guinea, we have growing options that include
        taking on working interest partners wanting to join our efforts to explore
        offshore Guinea or by working with potential financing partners to obtain
        financial commitments to fund exploration   Any funds would be
        used on a planned and incremental basis on perfecting targets and drilling
        offshore exploration wells over the next few years. While we are working
        to
        structure our financing of the exploration of offshore Guinea, we are already
        taking steps to put in place a world renowned exploration team to go along
        with
        our world class asset. We believe the financing commitment will go hand in
        hand
        with showing the technical team capable of making a discovery.  While
        we are working to obtain a financial partner and solidify our in-house
        geo-technical capabilities, we will continue talking with oil companies under
        confidentiality agreements, continuing the possibility to bring on working
        interest partners to share in the risk on some of our more expensive wells
        to be
        drilled in the future.
 
 Thus,
        in
        summary, in addition to our commitment to operate domestic operations at
        a
        profitable level and ultimately covering Corporate’s fixed overhead, we are
        considering all of our financing options or any combination of these options
        for
        financing our Guinea forward exploration programs. These options include:
        a) use
        our equity line to support at least the minimum work requirements for offshore
        Guinea; b) negotiate and structure a deal on a financial commitment basis;
        c)
        negotiate one or more transactions with oil company partners who share in
        the
        required work and financing risk; and d) Structure a creative financing
        mechanism to execute a major secondary financing, giving us the ability to
        execute our exploration work offshore Guinea on our own..
 
 Our
        cash
        from operations was a deficit in 2007. We have taken steps to reduce overhead
        and reduce non-operational costs. We acquired additional leases in July 2007
        in
        an effort to put our domestic operations on a positive cash flow basis and
        soon
        in a profitable mode. We plan to spend most of the capital we raise in the
        future 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 acquired
        additional producing properties to build up our production revenues for HYDR
        in
        Louisiana.
 
 In
        June, 2007, the remaining
        outstanding convertible debt, originally totaling $6,000,000 and owed to
        Cornell
        Capital Partners, LP, (Cornell) was converted to
        equity.  Additionally, warrants held by Cornell were re-priced to
        $2.50 per share and Cornell subsequently exercised all of its outstanding
        2.1
        million warrants. As a result we received $5.25 million in cash.
 
 We
        currently maintain an equity line of credit with Dutchess Capital.  We
        have made seven puts on the equity line of credit since February 2006 in
        the
        aggregate amount of $1,370,225.   As of September 28, 2007, the
        remaining amount available for us to draw down on the equity line of credit
        is
        $18,629,775. The equity line of credit expires in February 2009, after which
        we
        may no longer utilize the equity line of credit.
 
 **Item
        7A Quantitativeand 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 Statementsand 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.
  36
 *Table
            of Contents*
  HYPERDYNAMICS
        CORPORATION
 Index
        To
        Financial Statements
 
  **TABLE
        OF CONTENTS**
  Report
                  of Independent Registered Public Accounting Firm on Internal Control
                  over
                  Financial Reporting
              
              F-2Report
                  of Independent Registered Public Accounting Firm on Consolidated
                  Financial
                  Statements
              
              F-4Consolidated
                  Balance Sheets as of June 30, 2007 and 2006
              
              F-5Consolidated
                  Statements of Operations for the fiscal years ended June 30, 2007,
                  2006
                  and 2005
              
              F-6Consolidated
                  Statements of Shareholders' Equity for the fiscal years ended June
                  30,
                  2007, 2006 and 2005
              
              F-7Consolidated
                  Statements of Cash Flows for the fiscal years ended June 30, 2007,
                  2006
                  and 2005
              
              F-9Notes
                  to Consolidated Financial Statements
              
              F-11
 
 F-1
 *Table
            of Contents*
  **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 To
        the
        Board of Directors and Stockholders of
 Hyperdynamics
        Corporation
 Houston,
        Texas
 
 We
        have
        audited Hyperdynamics Corporation’s (“Hyperdynamics”) internal control over
        financial reporting as of June 30, 2007, based on criteria established in
        *Internal Control-Integrated Framework* issued by the Committee of
        Sponsoring Organizations of the Treadway Commission
        (COSO).  Hyperdynamics management is responsible for maintaining
        effective internal control over financial reporting and for its assessment
        of
        the effectiveness of internal control over financial reporting included in
        Management’s Report on Internal Control over Financial Reporting appearing under
        Item 9A.  Our responsibility is to express an opinion on the
        effectiveness of Hyperdynamics’ internal control over financial reporting based
        upon our audit.
 
 We
        conducted our audit of internal control over financial reporting in accordance
        with the 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 effective internal control over
        financial reporting was maintained in all material respects.  Our
        audit included obtaining an understanding of internal control over financial
        reporting, assessing the risk that a material weakness exists, testing and
        evaluating the design and operating effectiveness of internal control based
        on
        the assessed risk, and performing such other procedures as we consider necessary
        in the circumstances.  We believe that our audit provides a reasonable
        basis for our opinion.
 
 A
        company’s internal control over financial reporting is a process designed by, or
        under the supervision of, the company’s principal executive and principal
        financial officers, or persons performing similar functions, and effected
        by the
        company’s board of directors, management, and other personnel, to provide
        reasonable assurance regarding the reliability of financial reporting and
        the
        preparation of financial statements for external purposes in accordance with
        generally accepted accounting principles, and includes those policies and
        procedures that:
 
 1.
              Pertain
                  to the maintenance of records that, in reasonable detail, accurately
                  and
                  fairly reflect the transactions and dispositions of the assets
                  of the
                  Company;
 2.
              Provide
                  reasonable assurance that transactions are recorded as necessary
                  to permit
                  preparation of financial statements in accordance with generally
                  accepted
                  accounting principles, and that receipts and expenditures of the
                  company
                  are being made only in accordance with authorizations of management
                  and
                  directors of the
                  company;  and
 3.
              Provide
                  reasonable assurance regarding prevention or timely detection of
                  unauthorized acquisition, use, or disposition of the company’s assets that
                  could have a material effect on the financial
                  statements.
 
 Because
        of inherent limitations, internal control over financial reporting may not
        prevent or detect misstatements.  Also, projections of any evaluation
        of effectiveness to future periods are subject to the risk that controls
        may
        become inadequate because of changes in conditions, or that the degree of
        compliance with the policies or procedures may deteriorate.
 
 A
        material weakness is a deficiency, or a combination of deficiencies, in internal
        control over financial reporting, such that there is a reasonable possibility
        that a material misstatement of the company’s annual or interim financial
        statements will not be prevented or detected on a timely basis.  The
        following material weaknesses have been identified at June 30, 2007 and included
        in management’s assessment:
 
 1.
              An
                  ineffective entity level control environment, including: a)  the
                  ineffective implementation and enforcement of the limits on the
                  delegation
                  of authority for expenditure from the Board of Directors to management,
                  including the failure by management to obtain the requisite Board
                  of
                  Director’s approvals for certain expenditures; b) the lack of an effective
                  process for identification of fraud risks; c) a failure to implement
                  and
                  ensure consistent acknowledgment of the Company’s Code of Ethics; d) the
                  lack of an internal audit function or other effective mechanism
                  for
                  ongoing monitoring of the effectiveness of internal controls; and
                  e) lack
                  of documentation and communication of Hyperdynamics’ accounting policies
                  and procedures.
 
 F-2
 *Table
            of Contents*
 2.
              Limited
                  number of qualified accounting personnel with expertise with SEC
                  reporting
                  and generally accepted accounting
                  principles.
 
 3.
              Ineffective
                  application of generally accepted accounting principles and ineffective
                  accounting system controls that resulted in incomplete and inaccurate
                  disclosures in the notes to Hyperdynamics’ financial statements and the
                  identification of $4.03 million of equity transactions that were
                  not
                  properly recorded and $104,000 of property, plant and equipment,
                  net that
                  was not in existence as of the balance sheet
                  date.
 
 4.
              Lack
                  of effective segregation of duties, resulting in the inability
                  of the
                  Chief Financial Officer and the Chief Executive Officer to perform
                  an
                  independent review and quality assurance function within the accounting
                  and financial reporting group.  Additionally, management and
                  accounting personnel have widespread access to create and post
                  entries
                  within Hyperdynamics’ accounting system without the appropriate level of
                  review.
 
 These
        material weaknesses were considered in determining the nature, timing and
        extent
        of audit tests applied in our audit of the financial statements as of and
        for
        the year ended June 30, 2007, and this report does not affect our report
        dated
        September 26, 2007 on those financial statements.
 
 In
        our
        opinion, because of the effects of the material weaknesses described above
        on
        the achievement of the criteria established in *Internal Control-Integrated
        Framework* issued by COSO, Hyperdynamics did not maintain effective internal
        control over financial reporting  as of June 30, 2007.
  /s/
                  Malone & Bailey, PCHouston,
                  TexasSeptember
                  26, 2007
 
 F-3
 *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, 2007 and 2006, and the related consolidated
        statements of operations, shareholders' equity and cash flows for each of
        the
        three years in the period ended June 30, 2007. 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.. 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 as of June 30, 2007 and 2006, and the results of their
        operations and their cash flows for each of the three years in the period
        ended
        June 30, 2007 in conformity with accounting principles generally accepted
        in the
        United States of America.
 
 We
        have
        also audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), Hyperdynamics Corporation’s internal control
        over financial reporting as of June 30, 2007 based on the criteria established
        in *Internal Control-Integrated Framework* issued by the Committee of
        Sponsoring Organizations of the Treadway Commission, and our report dated
        September 26, 2007 expressed an adverse opinion on the effectiveness of
        Hypderdynamics Corporation’s internal control over financial
        reporting.
 
 Malone &
        Bailey, PC
 www.malone-bailey.com
 Houston,
        Texas
  September
        26, 2007
 
 F-4
 *Table
            of Contents*
  **HYPERDYNAMICS
        CORPORATION**
 **CONSOLIDATED
        BALANCE SHEETS**
 **(In
        Thousands, Except Number of Shares and Per Share Amounts)**
 
 June
                  302007
              
              
              2006ASSETSCurrent
                  assets:Cash
              
              $
              618
              
              
              $
              3,435Restricted
                  certificate of deposit
              
              
              75
              
              
              
              75Trade
                  accounts receivable, net of allowances for doubtful accounts of
                  $0 and
                  $13
              
              
              109
              
              
              
              58Subscription
                  receivable
              
              
              5,250
              
              
              
              -Deposit
                  on acquisition of oil and gas assets
              
              
              374
              
              
              
              -Prepaid
                  expenses and other current assets
              
              
              199
              
              
              
              202Total
                  current assets
              
              
              6,625
              
              
              
              3,770Property
                  and equipment, net of accumulated depreciation of $149 and
                  $125
              
              
              366
              
              
              
              93Oil
                  and gas properties:Evaluated
                  properties, using full cost accounting, net of
                  accumulated  depreciation and depletion of $174 and
                  $169
              
              
              204
              
              
              
              298Unevaluated
                  properties excluded from amortization
              
              
              4,279
              
              
              
              4,139Deposits
              
              
              6
              
              
              
              3Total
                  assets
              
              $
              11,480
              
              
              $
              8,303LIABILITIES
                  AND SHAREHOLDERS' EQUITYCurrent
                  liabilities:Short
                  term notes payable
              
              $
              375
              
              
              $
              106Accounts
                  payable and accrued expenses
              
              
              895
              
              
              
              637Accounts
                  payable seismic data
              
              
              650
              
              
              
              650Asset
                  retirement obligation
              
              
              84
              
              
              
              -Deferred
                  gain
              
              
              -
              
              
              
              159Convertible
                  debenture, net of discount of $0 and $2,444
              
              
              -
              
              
              
              1,556Dividends
                  payable
              
              
              372
              
              
              
              372Dividends
                  payable to related party
              
              
              245
              
              
              
              136Total
                  current liabilities
              
              
              2,621
              
              
              
              3,616Asset
                  retirement obligation
              
              
              44
              
              
              
              12Deferred
                  Rent
              
              
              89
              
              
              
              67Total
                  liabilities
              
              
              2,754
              
              
              
              3,695Commitments
                  and contingencies (Note 15)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 2,487 and 2,725 sharesoutstanding
              
              
              -
              
              
              
              -Common
                  stock, $0.001 par value, 250,000,000 shares authorized; 54,467,902
                  and
                  46,132,595 shares issued and outstanding
              
              
              54
              
              
              
              46Additional
                  paid-in capital
              
              
              59,045
              
              
              
              31,627Accumulated
                  deficit
              
              
              (50,373
              )
              
              
              (27,065
              )Total
                  shareholders' equity
              
              
              8,726
              
              
              
              4,608Total
                  liabilities and shareholders' equity
              
              $
              11,480
              
              
              $
              8,303
  The
          accompanying notes are an integral part of these consolidated financial
          statements
  F-5
 *Table
            of Contents*
  **HYPERDYNAMICS
        CORPORATION**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 **(In
        Thousands, Except Number of Shares and Per Share Amounts)**
  Years
                    Ended June 30,2007
                
                
                2006
                
                
                2005RevenuesOil
                    and gas production
                
                $
                908
                
                
                $
                615
                
                
                $
                55Other
                    revenues
                
                
                98
                
                
                
                -
                
                
                
                118Total
                
                
                1,006
                
                
                
                615
                
                
                
                173Costs
                    and expensesLease
                    operating costs
                
                
                387
                
                
                
                657
                
                
                
                265Severance
                    tax
                
                
                104
                
                
                
                65
                
                
                
                6Accretion
                    expense
                
                
                1
                
                
                
                -
                
                
                
                -Depreciation,
                    depletion and amortization from Oil and Gas Properties
                
                
                162
                
                
                
                116
                
                
                
                77Other
                    operational costs
                
                
                733
                
                
                
                984
                
                
                
                1,105Settlement
                    expense
                
                
                9,118
                
                
                
                -
                
                
                
                -Consulting
                    – related party
                
                
                4,240
                
                
                
                284
                
                
                
                1,101Selling,
                    general and administrative, including $59, $51 and $48 of administrative
                    depreciation
                
                
                6,504
                
                
                
                3,550
                
                
                
                2,546Total
                
                
                21,249
                
                
                
                5,656
                
                
                
                5,100Loss
                    from operations
                
                
                (20,243
                )
                
                
                (5,041
                )
                
                
                (4,927
                )Other
                    income (expense)Interest
                    expense
                
                
                (2,984
                )
                
                
                (1,962
                )
                
                
                (239
                )Interest
                    income
                
                
                96
                
                
                
                2
                
                
                
                17Gain/
                    (Loss) on retirement of assets
                
                
                (96
                )
                
                
                (278
                )
                
                
                10Loss
                    on retirement of mandatorily redeemable preferred stock
                
                
                -
                
                
                
                -
                
                
                
                (77
                )Gain/
                    (Loss) on settlement of debt
                
                
                28
                
                
                
                135
                
                
                
                -Total
                    Other Income (Expense)
                
                
                (2,956
                )
                
                
                (2,103
                )
                
                
                (289
                )Net
                    loss
                
                
                (23,199
                )
                
                
                (7,144
                )
                
                
                (5,216
                )Preferred
                    stock dividend to related party
                
                
                (109
                )
                
                
                (109
                )
                
                
                (128
                )Net
                    loss attributable to common shareholders
                
                $
                (23,308
                )
                
                $
                (7,253
                )
                
                $
                (5,344
                )Basic
                    and diluted loss per common share
                
                $
                (0.49
                )
                
                $
                (0.17
                )
                
                $
                (0.13
                )Weighted
                    average shares outstanding
                
                
                47,723,298
                
                
                
                43,318,773
                
                
                
                41,646,844
  The
        accompanying notes are an integral part of these
        consolidated financial statements
  F-6
 *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
                  
                  
                  Accumulated
                  
                  
                  TotalCapital
                  
                  
                  DeficitBalance,
                      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
                  
                  
                  
                  
                  
                  
                  
                  168Services
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  155,756
                  
                  
                  
                  
                  
                  
                  
                  390
                  
                  
                  
                  
                  
                  
                  
                  390Conversion
                      of mandatorily redeemable preferred stock
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  269,634
                  
                  
                  
                  
                  
                  
                  
                  849
                  
                  
                  
                  
                  
                  
                  
                  849Accounts
                      payable
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  25,372
                  
                  
                  
                  
                  
                  
                  
                  63
                  
                  
                  
                  
                  
                  
                  
                  63Note
                      payable from acquisition of HYD Resources
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  101,480
                  
                  
                  
                  
                  
                  
                  
                  281
                  
                  
                  
                  
                  
                  
                  
                  281Issuance
                      of stock options and warrantsWarrants
                      issued for services
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  732
                  
                  
                  
                  
                  
                  
                  
                  732Warrants
                      issued for services  to  related
                      parties
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,101
                  
                  
                  
                  
                  
                  
                  
                  1,101Preferred
                      stock dividend – related parties
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (128
                  )
                  
                  
                  (128
                  )Payment
                      of preferred stock dividends in common stock to related
                      party
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  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
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  120,000
                  
                  
                  
                  
                  
                  
                  
                  60
                  
                  
                  
                  
                  
                  
                  
                  60
 The
              accompanying notes are an integral part of these
              consolidated financial statements
  F-7
 *Table
                  of Contents*
 -by
                      related party
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,010,000
                  
                  
                  
                  1
                  
                  
                  
                  504
                  
                  
                  
                  
                  
                  
                  
                  505Cashless
                      exercise of options, net of 2,437 shares returned
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,563
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  -Services
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  179,266
                  
                  
                  
                  
                  
                  
                  
                  397
                  
                  
                  
                  
                  
                  
                  
                  397To
                      repurchase working interest
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  197,416
                  
                  
                  
                  
                  
                  
                  
                  581
                  
                  
                  
                  
                  
                  
                  
                  581Options
                      exercised associated with convertible debentures
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  500,000
                  
                  
                  
                  1
                  
                  
                  
                  449
                  
                  
                  
                  
                  
                  
                  
                  450Conversion
                      of convertible debentures
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,692,845
                  
                  
                  
                  2
                  
                  
                  
                  1,918
                  
                  
                  
                  
                  
                  
                  
                  1,920Cash
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  135,095
                  
                  
                  
                  
                  
                  
                  
                  387
                  
                  
                  
                  
                  
                  
                  
                  387Beneficial
                      conversion costs associated with issuance of convertible notes
                      payables
                      and debentures
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  127,000
                  
                  
                  
                  
                  
                  
                  
                  3,560
                  
                  
                  
                  
                  
                  
                  
                  3,560Issuance
                      of  warrantsFor
                      services
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  189
                  
                  
                  
                  
                  
                  
                  
                  189For
                      services to related party
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  284
                  
                  
                  
                  
                  
                  
                  
                  284Employee
                      stock options
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  382
                  
                  
                  
                  
                  
                  
                  
                  382Preferred
                      stock dividends to related party
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (109
                  )
                  
                  
                  (109
                  )Net
                      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (7,144
                  )
                  
                  
                  (7,144
                  )Balance,
                      June 30, 2006
                  
                  
                  1,945
                  
                  
                  $
                  -
                  
                  
                  
                  2,725
                  
                  
                  $
                  -
                  
                  
                  
                  46,132,595
                  
                  
                  $
                  46
                  
                  
                  $
                  31,627
                  
                  
                  $
                  (27,065
                  )
                  
                  $
                  4,608Common
                      stock issued for:Exercise
                      of options for cash
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  8,910
                  
                  
                  
                  
                  
                  
                  
                  19
                  
                  
                  
                  
                  
                  
                  
                  19Exercise
                      of warrants for cash
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  724,898
                  
                  
                  
                  1
                  
                  
                  
                  403
                  
                  
                  
                  
                  
                  
                  
                  404Exercise
                      of warrants for cash – related party
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  188,242
                  
                  
                  
                  
                  
                  
                  
                  94
                  
                  
                  
                  
                  
                  
                  
                  94Exercise
                      of warrants for subscription receivable
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,100,000
                  
                  
                  
                  2
                  
                  
                  
                  5,248
                  
                  
                  
                  
                  
                  
                  
                  5,250
 The
              accompanying notes are an integral part of these
              consolidated financial statements
 F-8
 *Table
                  of Contents*
 Cashless
                      exercise of options, net of 25,587 shares returned
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  17,503Cashless
                      exercise of warrants by related parties, net of 61,877 shares
                      returned
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  139,880Services
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  232,816
                  
                  
                  
                  
                  
                  
                  
                  485
                  
                  
                  
                  
                  
                  
                  
                  485Settlement
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  30,000
                  
                  
                  
                  
                  
                  
                  
                  82
                  
                  
                  
                  
                  
                  
                  
                  82Deposit
                      on acquisition of oil and gas properties
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  100,000
                  
                  
                  
                  
                  
                  
                  
                  274
                  
                  
                  
                  
                  
                  
                  
                  274Conversion
                      of convertible debentures
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3,000,000
                  
                  
                  
                  3
                  
                  
                  
                  5,997
                  
                  
                  
                  
                  
                  
                  
                  6,000Conversion
                      of Series B Preferred Stock by related parties
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (238
                  )
                  
                  
                  
                  
                  
                  
                  1,762,962
                  
                  
                  
                  2
                  
                  
                  
                  (2
                  )Cash
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  97,000
                  
                  
                  
                  -
                  
                  
                  
                  268
                  
                  
                  
                  
                  
                  
                  
                  268Common
                      stock returned and canceled in accordance with legal
                      settlement
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (66,904
                  )Beneficial
                      conversion costs associated with issuance of convertible notes
                      payables
                      and debentures
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  80
                  
                  
                  
                  
                  
                  
                  
                  80Warrants
                      issued in connection with settlement agreement
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  8,959
                  
                  
                  
                  
                  
                  
                  
                  8,959Employee
                      stock options
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,089
                  
                  
                  
                  
                  
                  
                  
                  1,089Warrants
                      issued for services – related party
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4,227
                  
                  
                  
                  
                  
                  
                  
                  4,227Warrants
                      issued for services
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  195
                  
                  
                  
                  
                  
                  
                  
                  195Deemed
                      Dividend
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (5,058
                  )Deemed
                      Dividend
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  5,058
                  
                  
                  
                  
                  
                  
                  
                  5,223Preferred
                      stock dividends to related party
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (109
                  )
                  
                  
                  (109
                  )Net
                      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (23,199
                  )
                  
                  
                  (23,199
                  )Balance,
                      June 30, 2007
                  
                  
                  1,945
                  
                  
                  $
                  -
                  
                  
                  
                  2,487
                  
                  
                  $
                  -
                  
                  
                  
                  54,467,902
                  
                  
                  $
                  54
                  
                  
                  $
                  59,045
                  
                  
                  $
                  (50,373
                  )
                  
                  $
                  8,726
  The
          accompanying notes are an integral part of these
          consolidated financial statements
  F-9
 *Table
              of Contents*
  **HYPERDYNAMICS
        CORPORATION**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **(In
        Thousands)**
 
 Years
                      Ended June 302007
                  
                  
                  2006
                  
                  
                  2005CASH
                      FLOWS FROM OPERATING ACTIVITIES:Net
                      Loss
                  
                  $
                  (23,199
                  )
                  
                  $
                  (7,144
                  )
                  
                  $
                  (5,216
                  )Adjustments
                      to reconcile net income to net cash provided by (used in) operating
                      activities -Depreciation,
                      depletion and amortization
                  
                  
                  221
                  
                  
                  
                  167
                  
                  
                  
                  125Accretion
                      expense
                  
                  
                  1
                  
                  
                  
                  -
                  
                  
                  
                  -Shares
                      issued for services
                  
                  
                  485
                  
                  
                  
                  359
                  
                  
                  
                  48Shares
                      issued for Settlement
                  
                  
                  82
                  
                  
                  
                  -
                  
                  
                  
                  -Warrants
                      issued for legal settlement, net
                  
                  
                  8,959
                  
                  
                  
                  -
                  
                  
                  
                  -Employee
                      stock options
                  
                  
                  1,089
                  
                  
                  
                  381
                  
                  
                  
                  -Warrants
                      issued for services –related party
                  
                  
                  4,227
                  
                  
                  
                  284
                  
                  
                  
                  1,101Warrants
                      issued for services
                  
                  
                  195
                  
                  
                  
                  190
                  
                  
                  
                  732Loss
                      on disposition of assets
                  
                  
                  96
                  
                  
                  
                  278
                  
                  
                  
                  17Gain
                      on settlement of debt
                  
                  
                  (28
                  )
                  
                  
                  (135
                  )
                  
                  
                  -Bad
                      debt expense
                  
                  
                  27
                  
                  
                  
                  233
                  
                  
                  
                  15Amortization
                      of discount and financing costs on convertible debenture
                  
                  
                  2,719
                  
                  
                  
                  1,650
                  
                  
                  
                  -Accretion
                      of interest and amortization of offering costs of mandatory
                      redeemable
                      preferred stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  232Loss
                      on retirement of mandatory redeemable preferred stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  77Changes
                      in operating assets and liabilities:Accounts
                      receivable
                  
                  
                  (83
                  )
                  
                  
                  (272
                  )
                  
                  
                  (6
                  )Other
                      current assets
                  
                  
                  (10
                  )
                  
                  
                  (30
                  )
                  
                  
                  9Accounts
                      payable and accrued expenses
                  
                  
                  273
                  
                  
                  
                  91
                  
                  
                  
                  299Other
                      liabilities
                  
                  
                  77
                  
                  
                  
                  -
                  
                  
                  
                  -Deferred
                      rent
                  
                  
                  38
                  
                  
                  
                  67
                  
                  
                  
                  (7
                  )Net
                      cash used in operating activities
                  
                  
                  (4,831
                  )
                  
                  
                  (3,881
                  )
                  
                  
                  (2,574
                  )CASH
                      FLOWS FROM INVESTING ACTIVITIES:Purchase
                      of property and equipment
                  
                  
                  (332
                  )
                  
                  
                  (78
                  )
                  
                  
                  (267
                  )(Increase)
                      decrease in restricted cash
                  
                  
                  -
                  
                  
                  
                  (10
                  )
                  
                  
                  130Proceeds
                      from the sale of assets
                  
                  
                  36
                  
                  
                  
                  204
                  
                  
                  
                  13Investment
                      in oil and gas properties
                  
                  
                  (225
                  )
                  
                  
                  (439
                  )
                  
                  
                  (1,250
                  )Payment
                      of deposit
                  
                  
                  (100
                  )
                  
                  
                  (1
                  )
                  
                  
                  (1
                  )Return
                      of deposit
                  
                  
                  -
                  
                  
                  
                  21
                  
                  
                  
                  -Net
                      cash used in investing activities
                  
                  
                  (621
                  )
                  
                  
                  (303
                  )
                  
                  
                  (1,375
                  )CASH
                      FLOWS FROM FINANCING ACTIVITIES:Proceeds
                      from sale of common stock, net
                  
                  
                  268
                  
                  
                  
                  387
                  
                  
                  
                  -Proceeds
                      from exercise of options
                  
                  
                  518
                  
                  
                  
                  1,015
                  
                  
                  
                  168Proceeds
                      from sale of working interest in oil and gas properties, net
                      of $0, $182
                      and $203 payment to related party
                  
                  
                  -
                  
                  
                  
                  726
                  
                  
                  
                  814Proceeds
                      from convertible notes
                  
                  
                  1,820
                  
                  
                  
                  5,620
                  
                  
                  
                  -Payments
                      on convertible debentures and convertible notes payable
                  
                  
                  -
                  
                  
                  
                  (247
                  )
                  
                  
                  -Proceeds
                      from notes payable
                  
                  
                  199
                  
                  
                  
                  207
                  
                  
                  
                  227Payments
                      on notes payable
                  
                  
                  (170
                  )
                  
                  
                  (348
                  )
                  
                  
                  (150
                  )Net
                      cash provided by financing activities
                  
                  
                  2,635
                  
                  
                  
                  7,360
                  
                  
                  
                  1,059(DECREASE)
                      INCREASE IN CASH
                  
                  
                  (2,817
                  )
                  
                  
                  3,176
                  
                  
                  
                  (2,890
                  )CASH
                      AT BEGINNING OF YEAR
                  
                  
                  3,435
                  
                  
                  
                  259
                  
                  
                  
                  3,149CASH
                      AT END OF YEAR
                  
                  $
                  618
                  
                  
                  $
                  3,435
                  
                  
                  $
                  259
  The
        accompanying notes are an integral part of these
        consolidated financial statements
 F-10
 *Table
            of Contents*
  **HYPERDYNAMICS
        CORPORATION**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS (Continued)**
 **(In
        Thousands)**
 
 Years
                  Ended June 302007
              
              
              2006
              
              
              2005SUPPLEMENTAL
                  DISCLOSURES:Interest
                  paid in cash
              
              $
              277
              
              
              $
              175
              
              
              $
              7Income
                  taxes paid in cash
              
              
              -
              
              
              
              -
              
              
              
              -NON-CASH
                  TRANSACTIONSIssuance
                  of common stock for accounts payable
              
              $
              -
              
              
              $
              -
              
              
              $
              63Payment
                  of preferred stock dividends in common shares to related
                  party
              
              
              -
              
              
              
              -
              
              
              
              245Issuance
                  of common stock on acquisition of oil and gas properties
              
              
              274
              
              
              
              -
              
              
              
              -Exercise
                  of option for stock subscription receivable
              
              
              5,250
              
              
              
              -Conversion
                  of Series B Preferred Stock to common stock by related
                  parties
              
              
              2
              
              
              
              -Deemed
                  dividend
              
              
              5,058
              
              
              
              -
              
              
              
              -Deemed
                  dividend
              
              
              (5,058
              )
              
              
              -Debt
                  discount on convertible debt
              
              
              80
              
              
              
              3,565Stock
                  issued for notes payable
              
              
              6,000
              
              
              
              1,893
              
              
              
              281Conversion
                  of mandatory redeemable preferred stock
              
              
              -
              
              
              
              -
              
              
              
              849Issuance
                  of stock for oil and gas properties
              
              
              -
              
              
              
              37
              
              
              
              342Accrued
                  and unpaid dividend to related parties
              
              
              109
              
              
              
              109
              
              
              
              109
  The
        accompanying notes are an integral part of these
        consolidated financial statements
  F-11
 *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 has two wholly-owned subsidiaries, SCS
        Corporation (SCS), HYD Resources Corporation (HYD).  HYD has a
        wholly-owned subusidiary, Trendsetter Production Company (Trendsetter). Through
        SCS’s wholly owned subsidiary, SCS Corporation Guinee SARL which is a Guinea
        limited liability company located in Conakry, Guinea.  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, HYD acquired Trendsetter, an oil and gas operator in
        Louisiana that had been under common ownership with HYD. Trendsetter owns
        and
        operates oil and gas leases in the USA.
  **Principles
        of Consolidation and Use of Estimates**
 
 The
        accompanying consolidated financial statements include the accounts of
        Hyperdynamics and its wholly owned subsidiaries. All significant intercompany
        accounts and transactions have been eliminated in consolidation.  The
        financial statements have been prepared in conformity with accounting principles
        generally accepted in the United States of America.  Certain prior
        year amounts have been reclassified to conform with the current
        presentation.  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 19 – Supplemental Oil and Gas
        Properties Information (unaudited), 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.
 
 **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, 2007 and 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. The contractual obligation to provide a letter
        of
        credit will end and the letter of credit will be returned to us on October
        31,
        2007.
 
 **Accounts
        receivable, allowance for doubtful accounts and key
        customers**
  Hyperdynamics
        does not require collateral from its customers.  Accounts receivable
        are written down to reflect management's best estimate or realizability based
        upon known specific analysis, historical experience, and other currently
        available evidence of the net collectible amount.  During the fiscal
        year, two customers, Plains Marketing LLC and Shell Trading, purchased all
        oil production from our Louisiana properties. In September 2006, we entered
        a
        contract with Shell Trading to be the sole purchaser of our oil production
        in
        Louisiana.
  **Other
        Current Assets**
  As
        of
        June 30, 2007, other current assets consist of $151,000 in prepaid insurance,
        $35,000 other prepaid expenses, and $13,000 of inventory, for a total of
        $199,000.
 
 As
        of
        June 30, 2006, other current assets consist of $143,000 in prepaid insurance
        and
        $59,000 other prepaid expenses, for a total of $202,000.
 
 As
        of
        June 30, 2007, an investor had exercised warrants to purchase 2,100,000 shares
        of common stock at $2.50 per share.  The investor paid the exercise
        price, $5,250,000, on July 2, 2007.  The stock is reflected as issued
        on June 30, 2007 and the $5,250,000 is reflected as a stock subscription
        receivable.
 
 F-12
 *Table
            of Contents*
  **Oil
        and Gas Properties**
 
 *Full
        Cost Method*
 
 The
        Company uses the full cost method of accounting for exploration and development
        activities as defined by the SEC. Under this method of accounting, the costs
        of
        unsuccessful, as well as successful, exploration and development activities
        are
        capitalized as properties and equipment. This includes any internal costs
        that
        are directly related to exploration and development activities but does not
        include any costs related to production, general corporate overhead or similar
        activities. Gain or loss on the sale or other disposition of oil and gas
        properties is not recognized, unless the gain or loss would significantly
        alter
        the relationship between capitalized costs and proved reserves of oil and
        natural gas attributable to a country. The application of the full cost method
        of accounting for oil and gas properties generally results in higher capitalized
        costs and higher DD&A rates compared to the successful efforts method of
        accounting for oil and gas properties.
 
 *Costs
        Excluded*
 
 Properties
        and equipment include costs that are excluded from costs being depreciated
        or
        amortized. Oil and gas costs excluded represent investments in unproved
        properties and major development projects in which we own a direct interest.
        These unproved property costs include nonproducing leasehold, geological
        and
        geophysical costs associated with leasehold or drilling interests and
        exploration drilling costs. We exclude these costs on a country-by-country
        basis
        until proved reserves are found or until it is determined that the costs
        are
        impaired. All costs excluded are reviewed at least quarterly to determine
        if
        impairment has occurred. The amount of any impairment is transferred to the
        capitalized costs being amortized (the DD&A pool) or a charge is made
        against earnings for those international operations where a reserve base
        has not
        yet been established. Impairments transferred to the DD&A pool increase the
        DD&A rate for that country. For international operations where a reserve
        base has not yet been established, an impairment requiring a charge to earnings
        may be indicated through evaluation of drilling results, relinquishing drilling
        rights or other information.
 
 *Ceiling
        Test*
 
 The
        full
        cost ceiling test is an impairment test prescribed by SEC Regulation S-X
        Rule
        4-10.   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 condition, 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. As of June 30, 2007, we have capitalized $43,000 in oil and gas
        properties, which is subject to the ceiling test for impairment.  At
        June 30, 2007, there was no impairment indicated.
 
 *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.
 
 **Property
        and Equipment, other than Oil and Gas**
 
 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 annually or 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. Based on our impairment analysis, we did not recognize any impairment
        charges in the years ended June 30, 2007 or June 30, 2006.
  F-13
 *Table
            of Contents*
  **Asset
        Retirement Obligations**
 
 Our
        asset
        retirement obligations 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.
 
 **Deferred
        Rent**
 
 Deferred
        rent arises because Hyperdynamics had a free rent period within its lease
        contract.  Monthly rent expense is calculated as the average monthly
        cost for all payments scheduled to be made over the entire term of the
        lease.  During the free rent period, expense was accrued, and as cash
        payments are made, the accrual will be reduced.  The short-term
        portion, which is scheduled to reverse within twelve months of the balance
        sheet
        date, is included in accounts payable and accrued expenses.  The long
        term portion is included in the caption “Long term
        liabilities”.   During the free rent period, which began in
        January 2006 and ended in November 2006, $115,000 in rent expense was
        accrued.  As of June 30, 2007 and 2006, $105,000 and $67,000,
        respectively, had been accrued.  As of June 30, 2007, $89,000 was
        long-term and $16,000 was short term.  The accrual will reverse
        $16,000 in each of the years ended June 30, 2008 through June 30, 2013 and
        $9,000 in the year ended June 30, 2014.
 
 **Revenue
        recognition**
 
 Revenues
        derive primarily from oil and gas sales and they 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.  Revenue, if any, from tape conversions, consulting, and oil
        field services is recognized when services are rendered.
 
 **Federal
        Income Taxes**
 
 We
        account for income taxes in accordance with SFAS No. 109, “Accounting for Income
        Taxes,” which requires the recognition of deferred tax assets and liabilities
        for the expected future tax consequences of temporary difference between
        the tax
        and financial reporting basis of assets and liabilities and for loss and
        credit
        carryforwards. Valuation allowances are provided when recovery of deferred
        tax
        assets is not considered likely.
  **Stock-Based
        Compensation**
 
 Effective
        July 1, 2005, we adopted SFAS No. 123R, “Share-Based Payment,” which was
        issued in December 2004, using the modified prospective transition method.
        SFAS
        No. 123R revises SFAS No. 123 “Accounting for Stock Based Compensation,”
and supersedes APB No. 25, “Accounting for Stock Issued to Employees,” and
        its related interpretations. SFAS No. 123R requires recognition of the cost
        of
        employee services received in exchange for an award of equity instruments
        in the
        financial statements over the period the employee is required to perform
        the
        services in exchange for the award (presumptively the vesting period). SFAS
        No.
        123R also requires measurement of the cost of employee services received
        in
        exchange for an award based on the grant-date fair value of the
        award.  Prior to July 1, 2005, we measured compensation cost for stock
        based compensation using the fair value based method of accounting as specified
        in SFAS 123.  See Note 13.
 
 F-14
 *Table
            of Contents*
  **Earnings
        Per Share**
 
 Hyperdynamics’
        basic earnings per share (EPS) amounts have been computed based on the average
        number of shares of common stock outstanding for the period. Diluted EPS
        amounts
        would include the effect of outstanding stock options, warrants, and other
        convertible securities if including such potential shares of common stock
        is
        dilutive.  Basic and diluted earnings per share are the same in all
        periods presented because losses are anti-dilutive.
  **Contingencies**
  *Legal*
  Hyperdynamics
        is subject to legal proceedings, claims and liabilities which arise in the
        ordinary course of its business. Hyperdynamics accrues for losses associated
        with legal claims when such losses are probable and can be reasonably estimated.
        These accruals are adjusted as additional information becomes available or
        circumstances change.  Legal fees are charged to expense as they are
        incurred.
 
 *Environmental*
 
 Hyperdynamics
        accrues for losses associated with environmental remediation obligations
        when
        such losses are probable and can be reasonably estimated. These accruals
        are
        adjusted as additional information becomes available or circumstances change.
        Costs of future expenditures for environmental remediation obligations are
        not
        discounted to their present value. Recoveries of environmental remediation
        costs
        from other parties are recorded at their undiscounted value as assets when
        their
        receipt is deemed probable.
  **Recently
        issued accounting pronouncements**
  We
        do not expect adoption of recently
        issued accounting pronouncements to have a significant impact on our results
        or
        operations, financial position or cash flow.
  **2.
        PROPERTY AND EQUIPMENT**
 
 A
        summary
        of property and equipment as of June 30, 2007 and 2006 are as
        follows:
  **June
                  30,****2007**
              
              
              **2006****(in
                  Thousands)**Computer
                  equipment and software
              3
                  years
              
              $
              170
              
              
              $
              142Office
                  equipment and furniture
              5
                  years
              
              
              107
              
              
              
              23Vehicles
              3
                  years
              
              
              120Building
              15
                  years
              
              
              25
              
              
              
              25Leasehold
                  improvements
              3
                  years
              
              
              68
              
              
              
              3Land
              
              
              
              25
              
              
              
              25Total
                  cost
              
              
              
              515
              
              
              
              218Less
                  - Accumulated depreciation
              
              
              
              (149
              )
              
              
              (125
              )Net
                  carrying value
              
              
              $
              366
              
              
              $
              93
 
 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, 2007 and 2006, there were no impairments of Hyperdynamics' Property and
        Equipment.
  F-15
 *Table
            of Contents*
  **3.
        INVESTMENT IN OIL AND GAS PROPERTIES**
 
 Investment
        in Oil and Gas properties consist of Hyperdynamics' concession in offshore
        West
        Africa and leaseholds in Louisiana, USA. As of June 30, 2007 and 2006, all
        costs
        associated with properties in the USA were included in the amortization base
        and
        all costs associated with the concession in the Republic of Guinea were excluded
        from the amortization base. The following table provides detail of costs
        (in
        thousands) to date by country as of June 30:
 
 **Republic
                  of Guinea**
              
              
              **USA**
              
              
              **Total****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Lease
                  Acquisition Costs
              
              $
              291
              
              
              $
              291
              
              
              $
              47
              
              
              $
              36
              
              
              $
              338
              
              
              $
              327Exploration
                  CostsGeological
                  and geophysical Cost
              
              
              3,988
              
              
              
              3,848
              
              
              
              -
              
              
              
              -
              
              
              
              3,988
              
              
              
              3,848Drilling
              
              
              -
              
              
              
              -
              
              
              
              829
              
              
              
              829
              
              
              
              829
              
              
              
              829Development
                  Costs
              
              
              -
              
              
              
              -
              
              
              
              378
              
              
              
              231
              
              
              
              378
              
              
              
              231Purchased
                  Proved Reserves
              
              
              -
              
              
              
              -
              
              
              
              65
              
              
              
              65
              
              
              
              65
              
              
              
              65Cost
                  Recovery (sale of working interest)
              
              
              -
              
              
              
              -
              
              
              
              (1,161
              )
              
              
              (1,161
              )
              
              
              (1,161
              )
              
              
              (1,161
              )Equipment
              
              
              
              
              
              
              
              
              
              
              220
              
              
              
              467
              
              
              
              220
              
              
              
              4674,279
              
              
              
              4,139
              
              
              
              378
              
              
              
              467
              
              
              
              4,657
              
              
              
              4,606Less:
                  AccumulatedDepletion
                  and Depreciation
              
              
              
              
              
              
              
              
              
              
              (174
              )
              
              
              (169
              )
              
              
              (174
              )
              
              
              (169
              )$
              4,279
              
              
              $
              4,139
              
              
              $
              204
              
              
              $
              298
              
              
              $
              4,483
              
              
              $
              4,437
 
 **Excluded
        Costs**
 
 Hyperdynamics
        excludes capitalized costs of unevaluated oil and gas properties from
        amortization.  Currently, geological and geophysical information
        pertaining to the Republic of Guinea is being collected and evaluated and
        no
        reserves have been found.  The costs associated with such unproved
        properties related to continuing operations of $4,279,000 and $4,139,000
        as of
        June 30, 2007 and 2006, respectively, are excluded from amounts subject to
        amortization. The majority of the evaluation activities are expected to be
        completed within three years. See Note 19 for detailed information about
        the
        excluded costs.
 
 **Trendsetter
        Settlement**
  During
        fiscal year 2005, we sold approximately 30% of our working interest, through
        a
        series of transactions, in the Kelly and Norris leases to outside investors,
        including Trendsetter Investors, LLC. Net proceeds from the sale totaled
        $1,320,000, of which $1,161,000 was applied against our USA full-cost property
        pool. At June 30, 2006, we had recognized a deferred gain related to the
        sale of
        this working interest.
  On
        March
        8, 2006, Trendsetter Investors, LLC filed a lawsuit alleging breach of contract,
        among other things, which was settled in June 2007. (see Note 15) Pursuant
        to
        the settlement agreement, we issued 3,480,000 warrants to purchase our common
        shares at an adjusted exercise price of $2.40 per share. The value of the
        warrant, computed using the Black-Scholes option pricing model, was $8,959,000.
        In addition, we issued 30,000 shares of restricted common stock valued at
        $82,000 and agreed to pay $280,000 in legal costs associated with the case.
        As
        of June 30, 2007, $40,000 had been paid leaving a balance of $240,000. The
        remaining balance of this note was paid in July 2007. In addition, at June
        30,
        2007, the deferred gain of $159,000 was reduced to $0. The total loss recognized
        in fiscal year 2007 related to this settlement was $8,850,000.
  Also
        in
        connection with the settlement agreement, the 30% working interest was conveyed
        back to us and was assigned a zero value.
  **Acquisition
        of Oil and Gas Properties**
 
 During
        June 2007, Hyperdynamics entered into an agreement with an operator to purchase
        a non-operating 85% working interest in various wells, leases, and oil and
        gas
        equipment in Louisiana, USA.  The closing date of the agreement was
        July 1, 2007.  Prior to closing, Hyperdynamics paid $100,000 in cash
        and 100,000 shares of common stock when the quoted market price of the stock
        was
        $2.74 per share.  The consideration paid as of June 30, 2007,
        $374,000, is carried as a deposit on Hyperdynamics’ consolidated balance
        sheet.
 
 F-16
 *Table
            of Contents*
  Under
        the
        agreement, Hyperdynamics paid an additional $1,150,000 in cash and 100,000
        shares of common stock.  Hyperdynamics made the cash payment in July
        2007 and the stock payment in August 2007. The properties purchased under
        this
        agreement are subject to overriding royalty interests of up to 27.46%. In
        addition, the seller, who will remain the operator of the properties, retained
        a
        15% working interest. However, Hyperdynamics will pay 100% of the working
        interest expenses, including work-over and new development costs, up to
        $4,000,000.  Subsequent working interest expenses are shared pro rata
        according to the working interest.
 
 **Guinea
        Assets**
 
 On
        September 22, 2006, we signed a Production Sharing Contract (the “2006 PSC”)
        with the Republic of Guinea. Under this contract, we have the exclusive right
        to
        explore and develop approximately 31,000 square miles off the coast of Guinea.
        However, upon the passage of a “Project of Law,” a Presidential Decree and a
        Guinea Supreme Court Ruling, we will be required to surrender our exclusive
        rights to 64% (approximately 20,000 acres) of the concession. The area
        ultimately surrendered would be selected by Hyperdynamics, but, we would
        retain
        a priority non-exclusive right to participate in the development of the
        surrendered contract area. The Guinea concession is subject to a 10% overriding
        royalty interest to the Guinea Government and we are entitled to recover
        75% of
        our cost. In addition, the Guinea Government may elect to take a 15% working
        interest in any exploitation area.
 
 The
        first
        exploration period runs for two years from the date of the 2006 PSC, with
        two
        automatic extensions. In the first exploration period we are required to
        acquire, evaluate, and analyze 2D or 3D seismic with an estimated minimum
        expenditure of $10 million. The second exploration period begins at the end
        of
        the first exploration period and runs for 4 years with an automatic extension
        of
        4 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 two exploration wells for an estimated minimum cost of $15
        million to $20 million each and minimum well depth of 2,500 meters from the
        surface of the water.  The fulfillment of the work scope during each
        exploration period relieves us from any minimum expenditure obligation. The
        exploitation period(s) for each exploitation area (as specified) 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.
 
 **Loss
        on disposal of equipment**
 
 Hyperdynamics
        conducted a physical inventory of oilfield equipment and concluded that,
        at
        year-end, oilfield equipment with a cost basis of $234,000 and a net book
        value
        of $104,000 were no longer in service.  As a result, we recorded a
        $104,000 charge for loss on retirement of equipment
 
 
 **4.
        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.
 
 F-17
 *Table
            of Contents*
  The
        following is a reconciliation of
        our asset retirement obligation liability as of June 30, 2007 and
        2006:
  **2007**
              
              
              **2006****(in
                  Thousands)**Asset
                  retirement obligation, beginning of period
              
              $
              12
              
              
              $
              -Liabilities
                  incurred
              
              
              -
              
              
              
              12Revisions
                  of estimates
              
              
              115
              
              
              
              -Accretion
                  of discount
              
              
              1
              
              
              
              -Asset
                  retirement obligation, end of period
              
              $
              128
              
              
              $
              12
  **5.
        ACCOUNTS PAYABLE AND ACCRUED EXPENSES**
 
 Accounts
        payable and accrued expenses as of June 30, 2007 and 2006 include the
        following:
 
 **2007**
              
              
              **2006****(in
                  Thousands)**Accounts
                  payable
              
              $
              679
              
              
              $
              436Accrued
                  payroll
              
              
              30
              
              
              
              19Accrued
                  insurance
              
              
              153
              
              
              
              146Taxes
                  payable
              
              
              17
              
              
              
              6Deferred
                  rent
              
              
              16
              
              
              
              -Accrued
                  revenue interest payable
              
              
              -
              
              
              
              30$
              895
              
              
              $
              637
  **6.** **ACCOUNTS
        PAYABLE SEISMIC DATA**
 
 In
        February 2003, SCS agreed to pay $650,000 to Offshore Seismic Surveys, Inc.
        (OSS), an offshore seismic company, in exchange for OSS agreeing to release
        SCS
        from the $550,000 due to OSS for the Guinea seismic data. The additional
        $100,000 was 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, as security
        for the $650,000.
 
 Any
        user
        license sales proceeds generated from user licenses of the this 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 to SCS until the $650,000 is
        paid
        in full. Any funding arrangement SCS enters into with respect to the Guinea
        PSC,, whereby all rights and obligations under the PSC are transferred, shall
        cause the $650,000 to become immediately due upon signing and funding of
        such
        agreement.  The payable is accrued at June 30, 2005.
 
 **7.
        SHORT TERM NOTES PAYABLE**
 
 Short  term
        notes payable consist of the following as of June 30:
  **2007**
              
              
              **2006****(in
                  Thousands)**Directors
                  and Officers Liability Insurance premium notes payable with $24,000
                  down
                  and the balance payable in 9 monthly installments of $11,000 including
                  interest of 6.5% APR for the period ended June 30, 2007 and June
                  30,
                  2006;
              
              
              119
              
              
              
              95Auto
                  insurance finance agreement payable with $4,000 and $7,000 down,
                  respectively,  and the balance payable in monthly installments
                  of $2,000.
              
              
              16
              
              
              
              11Note
                  payable for legal settlement in six monthly installments of $40,000
                  principal plus 18% interest
              
              
              240$
              375
              
              
              $
              106
 
 F-18
 *Table
            of Contents*
 
 **8.
        CONVERTIBLE DEBENTURES**
 
 In
        June
        2006, we issued, in three tranches, an aggregate of $6,000,000 in 10%
        convertible debentures due June 19, 2009 pursuant to a financing arrangement
        with Cornell Capital Partners, LP. The debentures were 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.
 
 In
        connection with these debentures, we received net aggregate proceeds of
        $5,440,000 and issued warrant to purchase 2,100,000 shares of our common
        stock
        at a weighted-average exercise price of $3.15. The warrants were valued at
        $1,314,000 using the Black-Scholes option pricing model. In addition, the
        debentures contained a beneficial conversion feature totaling
        $866,000.
 
 During
        fiscal 2007, all of the debentures were converted into common shares. At
        the
        time of conversion, we recognized $2,719,000 in additional interest expense
        due
        to the acceleration of the discount amortization. The following table reflects
        the activity for the years ended June 30, 2007 and 2006:
  **June
                      30,****2007**
                  
                  
                  **2006**Face
                      value of debentures
                  
                  $
                  6,000,000
                  
                  
                  $
                  4,000,000Less:      Discount
                      related to warrants
                  
                  
                  (1,314,000
                  )
                  
                  
                  (1,314,000
                  )Discount
                      related to conversion feature
                  
                  
                  (845,000
                  )
                  
                  
                  (782,000
                  )Discount
                      related to financing costs
                  
                  
                  (560,000
                  )
                  
                  
                  (380,000
                  )Subtotal
                  
                  
                  3,281,000
                  
                  
                  
                  1,524,000Add:      
                      Amortization of discount
                  
                  
                  2,719,000
                  
                  
                  
                  32,000Total
                      principal
                  
                  
                  6,000,000
                  
                  
                  
                  1,556,000Less
                      payments:Conversion
                      to common shares
                  
                  
                  (6,000,000
                  )Balance
                      of debentures at year end
                  
                  $
                  -
                  
                  
                  $
                  1,556,000
  
 At
        the
        time of issuance, we 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.
  **9**.**LETTER OF CREDIT**
 
 We
        obtained a letter of credit in favor of our landlord in the amount of $75,000
        to
        guarantee our lease payments for our corporate office in Sugar Land,
        Texas.  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 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 Certificate of Deposit term is 24 months and the maturity
        date is January 6, 2008.  . There were no draws against this letter of
        credit as of June 30, 2007. The letter was extended until October 31, 2007
        and
        the funds will be free of restriction at that time.
  **10.
        INCOME TAXES:**
 
 Income
        taxes are not due since Hyperdynamics has had losses since inception.
        Hyperdynamics has net operating loss carryforwards of approximately $28,486,000
        at June 30, 2007. Components of income tax expense for the years ended June
        30,
        2007, 2006 and 2005 are as follows:
  2007
              
              
              2006
              
              
              2005Deferred
                  tax asset
              
              $
              9,566,000
              
              
              $
              6,393,000
              
              
              $
              4,389,000Increase
                  in valuation allowance for deferred tax assets
              
              
              (9,566,000
              )
              
              
              (6,393,000
              )
              
              
              (4,389,000
              )Income
                  tax expense
              
              $
              -
              
              
              $
              -
              
              
              $
              -
 
 F-19
 *Table
            of Contents*
  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 2027.
 
 The
        difference between the statutory tax rates and our effective tax rate is
        due to
        the valuation allowance applied against our deferred tax assets generated
        by net
        operating losses.
  **11.
        SHAREHOLDERS' EQUITY:**
 
 **Series
        A Preferred Stock**
  In
        January 2000, we issued 3,000 shares of Series A Convertible Preferred Stock
        for
        net proceeds of $2,604,190. The stated value is $1,000 per share and par
        value
        is $.001.  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. During 2000 and 2001, 1,055 shares were converted
        to
        common stock.  As a result, 1,945 shares remain outstanding at June
        30, 2007.  By terms of the agreement, the preferred shares are
        convertible into Hyperdynamics' common stock at a price equivalent to the
        lower
        of the trading price when purchased of $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.  According to the terms of the agreement, all preferred shares
        outstanding as of January 30, 2002 were to be automatically converted to
        common
        stock.  If the Series A stock had been converted at that time,
        approximately 4,862,000 shares of common stock would have been
        issued.  This conversion did not occur because of legal claims filed
        by both the Series A shareholders and Hyperdynamics against each
        other.  Remaining conversions, if any, would be determined by the
        outcome of the lawsuit.
 
 Hyperdynamics
        has not converted any of the Series A shares since fiscal 2001 because of
        claims
        filed in November 2001 in its lawsuit against the Series A shareholders.
        Since
        the outcome is not known and no conversion had been effected, Hyperdynamics
        continued to accrue dividends on the 1,945 shares through September 30, 2004.
        Management evaluated the accrual as of September 30, 2004 and determined
        the
        accrual should be discontinued.  Management reevaluates the accrual
        periodically and considers the current accrual to be adequate to cover the
        liability, if any, pursuant to the lawsuit.
 
 As
        of
        June 30, 2007, $372,000 in dividends had been accrued, which represents accruals
        through 2005. No dividends have been accrued in 2006 or 2007.
 
 **Series
        B Preferred Stock**
 
 On
        May
        31, 2001, we issued 2,725 shares of Series B Convertible Preferred Stock
        in
        connection with the acquisition of SCS Corporation. Series B stockholders
        are
        related parties (see note 16).  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 were  $27,000 as of June 30, 2005. In each of the years ended 2006
        and 2007, dividends of $109,000 were accrued. The resulting balance in accrued
        dividends was $245,000 as of June 30, 2007.
 
 During
        June 2007, 238 shares of Series B Preferred Stock were converted into 1,762,962
        shares of common stock.  As a result, 2,487 shares of Series B
        Preferred Stock remain outstanding.
 
 If
        all
        Preferred Series A and B shares were converted as of June 30, 2007, based
        on the
        then-market price of the stock, total common shares outstanding would be
        approximately 73,664,000 shares.
 
 **Common
        Stock**
 
 *For
        exercise of options for cash:*
 
 In
        June
        2007, options and warrants to purchase 8,910 shares of common stock at prices
        ranging from $2.15 per share were exercised for gross proceeds of
        $19,157.
 
 F-20
 *Table
            of Contents*
  *For
        exercise of warrants for cash:*
 
 In
        October 2006, warrants to purchase 17,500 shares of common stock at $2.00
        per
        share were exercised for gross proceeds of $35,000.
 
 In
        November 2006, warrants to purchase 4,220 shares of common stock at $2.00
        per
        share were exercised for gross proceeds of $8,440.
 
 In
        December 2006, a warrant to purchase 41,400 shares of common stock at $2.00
        per
        share was exercised for gross proceeds of $82,800.
 
 In
        February 2007, a warrant to purchase 31,778 shares of common stock at $0.01
        per
        share was exercised for gross proceeds of $318.
 
 In
        March
        2007, a warrant to purchase 200,000 shares of common stock at $0.50 per share
        was exercised for gross proceeds of $100,000.
 
 In
        April
        2007, a warrant to purchase 25,000 shares of common stock at $0.01 per share
        was
        exercised for gross proceeds of $250.
 
 In
        June
        2007, warrants to purchase 405,000 shares of common stock at prices ranging
        from
        $.01 per share to $.50 per share were exercised for gross proceeds of
        $177,750.
 
 In
        June
        2007, a related party exercised warrants to purchase 188,242 shares of common
        stock at $.50 per share for gross proceeds of $94,122.
  *For
        cashless exercise of options:*
 
 In
        November 2006, the Company issued 4,356 shares of common stock upon the cashless
        exercise of options to purchase 10,000 shares of common stock.
 
 In
        December 2006, the Company issued 1,646 shares of common stock upon the cashless
        exercise of options and  to purchase 5,000 shares of common
        stock.
 
 In
        June
        2007, the Company issued 59,211 shares of common stock to a related party
        upon
        the cashless exercise of options to purchase 100,000 shares of common
        stock.
 
 In
        June
        2007, the Company issued 11,501 shares of common stock upon the cashless
        exercise of options to purchase 28,090 shares of common stock.
  *For
        cashless exercise of warrants:*
 
 In
        December 2006, a related party exercised his warrant and  the Company
        issued 80,669 shares of common stock upon the cashless exercise of warrants
        to
        purchase 101,757 shares of common stock.
 
 *For
        services and legal settlement:*
 
 During
        the year ended June 30, 2007, Hyperdynamics issued 232,816 shares of common
        stock for consulting services, board of director services and legal fees
        with a
        total value of $485,000.
 
 During
        the year ended June 30, 2007, Hyperdynamics issued 30,000 shares of common
        stock
        for a legal settlement with a total value of $82,000.
 
 *For
        warrants exercised associated with convertible debentures:*
  In
        June
        2006, Hyperdynamics entered into financing agreement in which an outside
        investor purchased a convertible debenture (see Note 8).  In
        connection with the convertible debenture, Hyperdynamics issued three detachable
        warrants to purchase up to 2,100,000 shares of common stock at a
        weighted-average exercise price of $3.15 (see Note 8). In June 2007, the
        warrants were repriced to $2.50 per share in connection with a provision
        in the
        agreement that required a repricing of the warrants upon the event that other
        warrants or options were issued or repriced at a lower exercise
        price.  In June 2007, warrants to purchase 2,100,000 shares of common
        stock at $2.50 per share were exercised for gross proceeds of
        $5,250,000.  The cash was received on July 3, 2007.
 
 F-21
 *Table
            of Contents*
  *For
        conversion of convertible debentures:*
 
 During
        the year ended June 30, 2007, we issued 3,000,000 shares of common
        stock  pursuant to the  conversion of convertible debentures
        with a principal amount of  $6,000,000 (see Note 8) .
 
 *For
        conversion of preferred stock by related party:*
 
 1,762,962
        shares of common stock were issued pursuant to the conversion of 238 shares
        of
        preferred Series B stock during the year ended June 30, 2007.
 
 *For
        cash:*
 
 During
        June 2007, 97,000 shares of common stock were sold at the current market
        price,
        which then was $2.91 per share, for $268,000 in net proceeds.
 
 *For
        acquisitions:*
 
 During
        June 2007, 100,000 shares of common stock were issued as a down payment against
        the purchase of working interest in oil and gas properties in
        Louisiana.  They were valued at the market price on the agreement
        date, which then was $2.74 per share, for $274,000.
 
 During
        August 2006, 66,904 shares of common stock that had been previously issued
        to an
        individual in conjunction with the acquisition of HYD Resources was returned
        to
        Hyperdynamics and canceled.
 
 *Beneficial
        conversion costs:*
  During
        August 2006, Hyperdynamics entered into a convertible debenture agreement
        with
        an investor (see Note 8). Discounts related to the beneficial conversion
        feature
        and to the detachable warrant issued with these debentures totaled
        $80,000.
  **12.
        DEEMED DIVIDENDS**
 
 In
        March
        2007, the Company modified the terms of certain warrants previously issued
        between October 2003 and March 2004.  The term and price of the warrants,
        originally 3 years and $2.00, respectively, were changed to 5 years and $4.00,
        respectively.  The modification resulted in a deemed dividend of
        $2,370,000, which was calculated using the Black-Scholes method assuming
        volatility of 105% and a risk adjusted interest rate of 5%.
 
 In
        June
        2007, the Company again modified the terms of certain warrants previously
        issued
        between October 2003 and March 2004.  The price of the warrants was reduced
        from $4.00 to $2.50.  The modification resulted in a deemed dividend of
        $1,189,000, which was calculated using the Black-Scholes method, assuming
        volatility of 110% and a risk adjusted interest rate of 5%.
 
 In
        June
        2007, the Company modified the terms of certain warrants previously issued
        between June 2006 and August 2006.  The price of the warrants was reduced
        from $4.00 to $2.50.and the 544,000 additional shares became available for
        purchase in accordance with contractual provisions.  The modification
        resulted in a deemed dividend of $1,499,000, which was calculated using the
        Black-Scholes method assuming volatility of 105% and a risk adjusted interest
        rate of 5%..  Also, in accordance with the contract, the
        amended  and re-issued warrants included the right to purchase an
        additional 544,000 shares of common stock at $2.50 per share.
  **13.
        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 or the Compensation
        Committee who have substantial discretion to determine which persons, amounts,
        time, price, exercise terms, and restrictions, if any.
 
 F-22
 *Table
            of Contents*
  *Options
        granted to employees*
 
 During
        2007, 2006 and 2005, respectively, Hyperdynamics issued 1,126,999, 640,000
        and 0
        options or warrants to employees. The compensation cost recognized for this
        share-based compensation was $1,089,000, $381,000, and
        $0 for the
        years ended June 30, 2007, 2006 and 2005, respectively, based on the
        Black-Scholes option pricing model.  The weighted average fair value
        of the employee and consultant stock options and warrants vested during 2007,
        2006 and 2005 was $3.89, $1.26 and $2.29, respectively.
 
 The
        following table details the significant assumptions used to computing the
        fair
        market values of employee stock options granted:
 
 **2007**
              
              
              **2006**
              
              **2005**Risk-free
                  interest rate
              
              
              5
              %
              
              
              1.50-2.50
              %
              N/ADividend
                  yield
              
              
              0
              %
              
              
              0
              %
              N/AVolatility
                  factor
              
              
              105-107
              %
              
              
              124
              %
              N/AExpected
                  life (years)
              
              
              1-1.5
              
              
              
              2
              
              N/A
  *Warrants
        granted to consultants*
 
 During
        2007, Hyperdynamics granted warrants to purchase 1,631,778 shares of common
        stock to consultants, including a grant of 1,500,000 to a related
        party.  The compensation cost recognized for the warrants granted to
        the related party was $4,227,000.   The compensation cost
        recognized for the warrants granted to other consutants was
        $195,000.  During 2005 and 2006, Hyperdynamics did not grant any
        compensatory warrants to consultants. However, in 2004, Hyperdynamics had
        granted 2,360,000 warrants to consultants, which vested during 2004, 2005
        and
        2006. The compensation cost recognized for these warrants was $474,000 and
        $1,833,000 for the years ended June 30, 2006 and 2005, respectively, based
        on
        the Black-Scholes option pricing model.
 
 The
        following table details the significant assumptions used to computing the
        fair
        market values of warrants granted to consultants:
 
 **2007**
              
              
              **2006**
              
              
              **2005**Risk-free
                  interest rate
              
              
              5
              %
              
              
              2.50
              %
              
              
              2.50
              %Dividend
                  yield
              
              
              0
              %
              
              
              0
              %
              
              
              0
              %Volatility
                  factor
              
              
              98-107
              %
              
              
              114
              %
              
              
              114
              %Expected
                  life (years)
              
              
              1
              
              
              
              3.5
              
              
              
              3.5
 
 The
        following table details the significant assumptions used to computing the
        fair
        market values of warrants granted to consultant – related party:
  **2007**
              
              
              **2006**
              
              
              **2005**Risk-free
                  interest rate
              
              
              5
              %
              
              
              2.50
              %
              
              
              2.50
              %Dividend
                  yield
              
              
              0
              %
              
              
              0
              %
              
              
              0
              %Volatility
                  factor
              
              
              134
              %
              
              
              114
              %
              
              
              114
              %Expected
                  life (years)
              
              
              3
              
              
              
              3.5
              
              
              
              3.5
  The
        following table summarizes information about share-based payment arrangements
        regardless of the employment status of the grantee.
 
 **2007**
              
              
              **2006**
              
              
              **2005**Total
                  compensation cost recognized in net loss
              
              
              6,085
              
              
              
              1,556
              
              
              
              1,881Tax
                  benefits
              
              N/A
              
              
              N/A
              
              
              N/ACapitalized
                  share based compensation cost
              
              N/A
              
              
              
              37
              
              
              
              342Cash
                  received from exercise of share options
              
              
              19
              
              
              
              0
              
              
              
              0Tax
                  benefits realized from option exercises
              
              
              0
              
              
              
              0
              
              
              
              0
 
 F-23
 *Table
            of Contents*
 
 *Other
        Warrants*
 
 In
        addition to warrants and options issued to consultants and employees, the
        following transactions occurred:
 
 Warrants
        to purchase 3,471,000 shares of common stock at $2.50 per share that had
        expired
        were extended with a new exercise price of $4.00 per share in March 2007
        (See
        Note 12).  This resulted in a deemed dividend of
        $2,370,000.
 
 The
        following table details the significant assumptions used to compute the fair
        market values of the modifications to warrants to purchase 3,471,000 shares
        of
        common stock  modified in March  2007:
 
 **Before**
              
              
              **After**Risk-free
                  interest rate
              
              
              5.05
              %
              
              
              4.58
              %Dividend
                  yield
              
              
              0
              %
              
              
              0
              %Volatility
                  factor
              
              
              105
              %
              
              
              105
              %Expected
                  life (years)
              
              
              0
              
              
              
              2
 
 The
        warrants to purchase
        3,471,000 shares of common stock at $4.00 per share were repriced in June
        2007
        with a new exercise price of $2.50 per share.  This resulted in a
        deemed dividend of $1,189,000. The following table details the significant
        assumptions used to compute the fair market values of
        warrants  3,471,000 shares of common stock modified in
        June  2007:
 
 
 **Before**
              
              
              **After**Risk-free
                  interest rate
              
              
              4.87
              %
              
              
              4.87
              %Dividend
                  yield
              
              
              0
              %
              
              
              0
              %Volatility
                  factor
              
              
              109
              %
              
              
              109
              %Expected
                  life (years)
              
              
              4
              
              
              
              2.5
 
 Warrants
        originally issued in conjunction with the convertible debentures (Note 8)
        to
        purchase 1,145,000 shares of common stock were repriced from $3.00 and $4.00
        per
        share to $2.50 per share and the number of warrants was increased to provide
        for
        the right to purchase an additional 544,000 shares of common stock at $2.50
        per
        share in accordance with contractual anti-dilution provisions.  This
        resulted in a deemed dividend of $1,499,000.  The following table details
        the
        significant assumptions used to compute the fair market values of warrants
        to
        purchase 1,145,000 shares of common modified in June:
 
 
 **Before**
              
              
              **After**Risk-free
                  interest rate
              
              
              4.90
              %
              
              
              4.90
              %Dividend
                  yield
              
              
              0
              %
              
              
              0
              %Volatility
                  factor
              
              
              105
              %
              
              
              105
              %Expected
                  life (years)
              
              
              4
              
              
              
              4
 
 Warrants
        to purchase 3,480,000 shares of common stock at $4.00 per share were issued
        as
        part of a legal settlement.The
        following table details the significant assumptions used to compute the fair
        market values of warrants to purchase 3,480,000 shares of common stock that
        were
        granted in June 2007 in conjunction with the settlement of a
        lawsuit:
 
 Risk-free
                  interest rate
              
              
              4.96
              %Dividend
                  yield
              
              
              0
              %Volatility
                  factor
              
              
              138
              %Expected
                  life (years)
              
              
              7
  Warrants
        originally issued in conjunction with a legal settlement to purchase 3,480,000
        shares of common stock were repriced to $2.40 per share in June 2007 in
        accordance with contractual provisions.  At the time of the repricing,
        related parties owned the warrants.  This resulted in additional
        settlement expense of $167,000, which was calculated using the Black-sholes
        method assuming volatility of 137% and a risk adjusted interest rate of
        5%.
 
 F-24
 *Table
            of Contents*
  Warrants
        to purchase 2,939,373 shares were issued in conjunction with two convertible
        debenture arrangements in 2006.
 
 Investors
        purchased 3,732,403 warrants in conjunction with purchases of SCS preferred
        stock and Hyperdynamics common stock in 2005.
 
 Summary
        information regarding options and warrants is as follows:
  Options
              
              
              Weighted
                  Average Share Price
              
              
              Warrants
              
              
              Weighted
                  Average Share PriceOutstanding
                  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
              
              
              $
              1.90Granted
              
              
              1,126,999
              
              
              $
              5.05
              
              
              
              17,224,344
              
              
              
              3.13Exercised
              
              
              (152,000
              )
              
              
              1.72
              
              
              
              (3,093,809
              )
              
              
              1.87Expired
              
              
              -
              
              
              
              -
              
              
              
              (11,589,655
              )
              
              
              3.36Outstanding
                  at year ended June 30, 2007
              
              
              1,609,999
              
              
              $
              3.89
              
              
              
              10,112,783
              
              
              $
              2.46
  **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
  **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
  **Warrants
                      outstanding and exercisable as of June 30, 2007****Exercise
                      Price**
                  
                  
                  **Outstanding
                      Number  of Shares**
                  
                  **Remaining
                      Life**
                  
                  **Exercisable
                       Number of Shares**$
                  .23
                  
                  
                  
                  800,000
                  
                  0
                      years
                  
                  
                  800,000$
                  .25
                  
                  
                  
                  125,000
                  
                  1
                      year
                  
                  
                  125,000$
                  .50
                  
                  
                  
                  142,000
                  
                  0
                      years
                  
                  
                  142,000$
                  2.40
                  
                  
                  
                  3,480,000
                  
                  7
                      years
                  
                  
                  3,480,000$
                  2.50
                  
                  
                  
                  544,000
                  
                  5
                      years
                  
                  
                  544,000$
                  2.50
                  
                  
                  
                  3,471,783
                  
                  2
                      years
                  
                  
                  3,471,783$
                  4.00
                  
                  
                  
                  1,500,000
                  
                  7
                      years
                  
                  
                  1,500,000$
                  5.00
                  
                  
                  
                  50,000
                  
                  3
                      years
                  
                  
                  --10,112,783
                  
                  
                  
                  
                  10,062,783
 F-25
 *Table
            of Contents*
  **Options
                    outstanding and exercisable as of June 30, 2007****Exercise
                    Price**
                
                
                **Outstanding
                    Number of Shares**
                
                **Remaining  Life**
                
                **Exercisable
                     Number of Shares**$
                1.00
                    - 1.49
                
                
                
                400,000
                
                1
                    year
                
                
                400,000$
                1.50
                    - 1.99
                
                
                
                40,000
                
                2
                    years
                
                
                40,000$
                2.00
                    - 2.49
                
                
                
                155,000
                
                1
                    year
                
                
                155,000$
                2.00
                    – 2.49
                
                
                
                179,999
                
                2
                    years
                
                
                179,999$
                2.00
                    - 2.49
                
                
                
                130,000
                
                3
                    years
                
                
                130,000$
                2.00
                    – 2.49
                
                
                
                400,000
                
                1
                    year
                
                
                40,000$
                2.50
                    - 2.99
                
                
                
                40,000
                
                1
                    year
                
                
                40,000$
                2.50
                    – 2.99
                
                
                
                65,000
                
                2
                    years
                
                
                65,000$
                5.00
                
                
                
                300,000
                
                3
                    years
                
                
                -$
                10.00
                
                
                
                300,000
                
                3
                    years
                
                
                -1,609,999
                
                
                
                
                1,009,999
  **14.
        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, 2007 (in Thousands)****SCS**
              
              
              **HYD**
              
              
              **Corporate**
              
              
              **Total**Revenues
                  from external customers
              
              $
              -
              
              
              $
              1,006
              
              
              $
              -
              
              
              $
              1,006Depreciation,
                  Depletion and Amortization – Oil and Gas Properties
              
              
              
              
              
              
              162
              
              
              
              
              
              
              
              162Depreciation
                  – Administration
              
              
              26
              
              
              
              2
              
              
              
              31
              
              
              
              59Loss
                  from Operations
              
              
              (2,859
              )
              
              
              (9,835
              )
              
              
              (7,459
              )
              
              
              (20,243
              )Expenditures
                  for long-lived assets
              
              
              319
              
              
              
              85
              
              
              
              153
              
              
              
              557
  F-26
 *Table
            of Contents*
 **Year
                  ended June 30, 2006 (in Thousands)****SCS**
              
              
              **HYD**
              
              
              **Corporate**
              
              
              **Total**Revenues
                  from external customers
              
              $
              -
              
              
              $
              615
              
              
              $
              -
              
              
              $
              615Depreciation,
                  Depletion and Amortization – Oil and Gas Properties
              
              
              
              
              
              
              116
              
              
              
              
              
              
              
              116Depreciation
                  - Administration
              
              
              31
              
              
              
              
              
              
              
              19
              
              
              
              50Loss
                  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 – Oil and Gas Properties
                
                
                
                
                
                
                77
                
                
                
                
                
                
                
                77Depreciation
                    – Administration
                
                
                28
                
                
                
                
                
                
                
                20
                
                
                
                48Loss
                    from Operations
                
                
                (529
                )
                
                
                (1,508
                )
                
                
                (2,890
                )
                
                
                (4,927
                )Expenditures
                    for long-lived assets
                
                
                889
                
                
                
                958
                
                
                
                17
                
                
                
                1,864
  **15.
        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.
 
 *Legal
        Contingencies*
  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
        is a party to 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.  In conjunction with the lawsuit, Hyperdynamics has entered
        into an agreed settledment with the plaintiff in the case making liability
        to
        the plantiff contingent upon the outcome of appeals in the case.  If
        Hyperdynamics loses in the appeal, it will be obligated to pay $240,000,
        payable
        $10,000 per month for 24 months.  If the appeal is successful,
        Hyperdynamics will seek to recover its damages, costs and attorneys fees
        from
        other defendants in the case, with Hyperdynamics having no
        liability.  Management considers that losses in this case are not
        probable and accordingly has made no accrual associated with this
        case.
 
 Hyperdynamics
        settled two lawsuits with Trendsetter Investors, LLC and certain
        individuals  in a single settlement agreement and both cases were
        dismissed June 2007.  In conjunction with the settlement
        agreement,
 
 a)
              Trendsetter
                  Investors received warrants to purchase 3,480,000 shares of restricted
                  common stock in Hyperdynamics Corporation exerciseable at $4.00
                  per share,
                  with a price reset provision that would reduce the exercise price
                  to $2.40
                  under certain conditions, until June 14, 2017.  The fair value
                  of the warrants as determined using the Black-sholes option pricing
                  model
                  was $8,959,000.
 b)
              Kent
                  Watts would facilitate an exchange of the warrants for 1,740,000
                  shares of
                  common stock.  Several Hyperdynamics Series B preferred
                  stockholders effected this exchange in June
                  2007.
 c)
              Trendsetter
                  conveyed its 30% working interest in certain oil and gas properties
                  it had
                  purchased back to Hyperdynamics.
 d)
              Geoffrey
                  Long received 30,000 shares of Hyperdynamics common stock valued
                  at the
                  market price on the agreement date of
                  $82,000.
 e)
              Hyperdynamics
                  agreed to pay $280,000 in cash to Trendsetter Investors, LLC for
                  legal
                  fees.
 
 As
        of
        June 30, 2007, Hyperdynamics had issued all the stock and warrants associated
        with this settlement and had paid $40,000.  A short term note payable
        for $240,000, the balance of the legal fees that Hyperdynamics had agreed
        to
        pay, remained on Hyperdynamics’ balance sheet as of June 30,
        2007.  Hyperdynamics paid the note on July 10, 2007.
 
 F-27
 *Table
            of Contents*
  *Contingent
        notes payable*
 
 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.  It is payable in Hyperdynamics common stock and it is payable
        only if SCS has net income in any given quarter.  If SCS experiences
        net income in a quarter, 25% of the income will be paid against the
        note.
 
 Hyperdynamics’s
        subsidiary, HYD, has $506,000 remaining on two contingent notes payable to
        one
        individual.  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.
 
 *Operating
        Leases*
 
 Hyperdynamics
        leases vehicles and office space under long-term operating leases with varying
        terms.  Most of the operating leases contain renewal and purchase
        options.  Hyperdynamics expects that in the normal course of business,
        the majority of operating leases will be renewed or replaced by other
        leases.  As of June 30, 2007, future minimum lease payments under
        noncancellable operating leases with initial or remaining terms in excess
        of one
        year include:
  1)
              $142,000
                  to be paid in each of the years ended June 30, 2008 through June
                  30, 2013
                  and $58,000 to be paid in the fiscal year ended June 30, 2014 on
                  Hyperdynamics’ office lease; and
 2)
              $24,000
                  to be paid in the year ended June 30, 2008 and $12,000 to be paid
                  in the
                  year ended June 30, 2009 for two
                  vehicles.
 
 Rent
        expense included in net loss from operations was $184,000, $204,000 and $278,000
        in 2007, 2006 and 2005, respectively.
  **16.
        RELATED PARTY TRANSACTIONS**
 
 **Michael
        Watts**
 
 *Consulting
        –related party*
 
 During
        the year ended June 30, 2007, Michael Watts, the CEO's brother, received
        payment
        of $13,000 cash to pay for offering costs on private subscription agreements
        and
        warrants exercised. Additional offering costs will also be paid on 3,471,000
        warrants purchased by private investors should they be exercised in the future.
        If all of these warrants were exercised, Michael Watts would receive
        approximately $867,750 to pay these additional costs.
 
 In
        March
        2007, the audit committee pre-approved a consulting contract with Michael Watts
        under which he will provide Investor Relations, Public Relations, Financial
        Consulting and general advisory services.  In June 2007, the
        compensation committee and audit committee approved a warrant to purchase
        1,500,000 shares of common stock at $4.00 per share as the compensation
        associated with this agreement.  The fair value of the warrants, as
        computed using the Black-sholes option pricing model, was
        $4,227,000.  The warrants expire in June 2014.
 
 Additionally,
        we recognized compensation cost of $284,000 and $1,101,000 in the years ended
        June 30, 2006 and 2005, respectively, as warrants which had been granted
        to a
        company affiliated with Michael Watts in January 2004 vested.  All the
        warrants had been exercised as of June 30, 2007.
 
 *Exercise
        of warrants*
 
 During
        the year ended June 30, 2006, the company affiliated with Mr. Watts exercised
        1,010,000 warrants for $505,000.   In December 2006, the company
        exercised warrants to purchase 101,757 shares of common stock on a cashless
        basis and received a net issuance of 80,669 shares of common
        stock.   In June 2007, the company exercised its remaining
        warrants to purchase 188,242 shares of common stock for $94,122.
 
 F-28
 *Table
            of Contents*
  *Compensation
        for working interest sales*
 
 On
        February 9, 2005 the Audit Committee of Hyperdynamics Corporation pre-approved
        a
        contract with Geoserve Marketing, an assumed name for Michael E. Watts, the
        brother of the Chief Executive Officer. 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. Trendsetter agreed to pay 20%
        of the
        proceeds to Geoserve Marketing in return for services associated with the
        marketing of these interests. The independent audit committee pre-approved
        two
        extensions of the working interest sales contract. As of June 30, 2007, 35%
        working interest, or $1,925,000, had been sold and Geoserve Marketing had
        been
        paid promotion fees of $385,000.
 
 **Series
        B Preferred stock**
  In
        March 2007, DJX Ltd, which held
        2,725 shares of Series B Preferred stock in trust for the grandchildren of
        Ernest Watts, the father of Chief Executive Officer Kent Watts,was
        dissolved as it distributed the preferred stock to corporations owned by
        five
        separate trusts on behalf of the former beneficiaries of DJX
        Ltd.   All owners of Series B Preferred stock are family members
        of Kent Watts, Hyperdynamics’ CEO.
 
 In
        June
        2007, four of the new corporations converted a total of 238 shares of Preferred
        Series B stock to 1,762,962 shares of Hyperdynamics common
        stock.  They then exchanged 1,740,000 shares of common stock for
        warrants to purchase 3,480,000 shares of common stock at $4 per share. The
        exchange of stock for warrants facilitated the settlement of Hyperdynamics’
lawsuit with Trendsetter Investors LLC (See Note 15). In accordance with
        a price
        reset provision in the original warrants, the exercise price of the warrants
        was
        reduced from $4.00 per share to $2.40 per share on June 29, 2007.
 
 Series
        B
        Preferred stock accrues a dividend at 4% per year.
 
 **Exercise
        of option**
 
 In
        June
        2007, Hyperdynamics issued 59,211 shares of common stock to the Chief Financial
        Officer upon the cashless exercise of options to purchase 100,000 shares
        of
        common stock.
 
 
 **17.
        SUBSEQUENT EVENTS**
 
 *Contracts*
 
 In
        July
        2007, SCS entered into a consulting agreement for work on the Forward
        Exploration Program.  The Forward Exploration Program includes
        updating the regional techtonic framework for the Guinea concession area,
        interpretation of sedimentary basins in the concession area, an oil seep
        study,
        an evaluation of areas to be surrendered in the event the projet de loi is
        codified, and the design of 2D seismic study to be performed in the
        future.  The consulting agreement extends to December 2007 and the
        cost will be approximately $144,000, plus data acquisition costs from outside
        parties of approximately $90,000.
 
 *Stock
        issuances*
 
 In
        July
        2007, Hyperdynamics issued 46,669 shares of common stock for board of director
        services and legal fees valued at $138,000.
 
 In
        July
        2007, the Company issued 738,251 shares of common stock upon the cashless
        exercise of options to purchase 800,000 shares of common stock
 
 In
        July
        2007, the Company issued 119,389 shares of common stock upon the cashless
        exercise of options to purchase 142,000 shares of common stock
 
 In
        July
        2007, the Company issued 48,160 shares for $135,000 cash.
 
 In
        August
        2007, the Company issued 100,000 shares of common stock in conjunction with
        the
        purchase of working interest in oil and gas property.
 
 *Options
        granted*
 
 In
        July
        2007, we granted options to purchase 231,000 shares of Hyperdynamics common
        stock with a term of three years and an exercise price of $2.80 to 12 employees
        and consultants.
 
 F-29
 *Table
            of Contents*
  Additionally
        in July, we granted options to purchase 90,000 shares of common stock at
        $2.38
        per share to our independent Board of Directors as a bonus.  The
        options have a two year term.
 
 We
        granted an employee options to purchase 75,000 shares of common stock with
        an
        exercise price of $2.88 and a two year term in conjunction with her employment
        agreement.
 
 *Oil
        and Gas Properties*
 
 During
        July and August 2007, the Company paid $1,150,000 and issued 100,000 shares
        of
        common stock in conjunction with the purchase of an 85% working interest
        in oil
        and gas properties in Louisiana, USA as discussed in Note 3.  In
        conjunction with the agreement, Hyperdynamics agreed to fund up to an additional
        $4,000,000 to be for lease operations, drilling, geological and geophysical
        costs and abandonment costs.  As of September 26, 2007, $341,000 of
        the $4,000,000 has been paid or accrued.
 
 During
        August 2007, Trendsetter hired an outside contractor to drill an exploratory
        well on a lease in Louisiana, USA. The well was drilled to the point where
        it
        could be evaluated for commercial viability.  After evaluation, the
        engineering team and management opted not to complete the well.  The
        cost of drilling this well, approximately $192,000, will be added to the
        amortization base in the quarter ended September 30, 2007.
 
 *Other
        subsequent events*
 
 In
        July
        2007, Hyperdynamics received $130,000 from its general liability insurance
        company as a reimbursement of legal costs incurred in Hyperdynamics’ suit with a
        former working interest holder.
  **18.
        QUARTERLY FINANCIAL DATA (UNAUDITED)**
  Summarized
        quarterly financial data are as follows (in thousands, except per-share
        amounts).
 
 **2007**
              
              **First
                  Quarter**
              
              
              **Second
                  Quarter**
              
              
              **Third
                  Quarter**
              
              
              **Fourth
                  Quarter**Revenues
              
              $
              325
              
              
              $
              342
              
              
              $
              113
              
              
              $
              226Loss
                  from Operations
              
              
              (1,996
              )
              
              
              (1,463
              )
              
              
              (2,106
              )
              
              
              (14,678
              )Net
                  Loss attributable to common shareholders
              
              
              (2,862
              )
              
              
              (1,858
              )
              
              
              (2,470
              )
              
              
              (16,118
              ))Basic
                  and Diluted loss per common share
              
              
              (0.06
              )
              
              
              (0.04
              )
              
              
              (0.05
              )
              
              
              (0.34
              )
 
 
 **2006**
              
              **First
                  Quarter**
              
              
              **Second
                  Quarter**
              
              
              **Third
                  Quarter**
              
              
              **Fourth
                  Quarter**Revenues
              
              $
              87
              
              
              $
              108
              
              
              $
              134
              
              
              $
              286Loss
                  from Operations
              
              
              (1,385
              )
              
              
              (1,373
              )
              
              
              (1,646
              )
              
              
              (637
              )Net
                  Loss attributable to common shareholders
              
              
              (1,471
              )
              
              
              (1,505
              )
              
              
              (2,820
              )
              
              
              (1,457
              ))Basic
                  and Diluted loss per common share
              
              
              (0.03
              )
              
              
              (0.04
              )
              
              
              (0.06
              )
              
              
              (0.04
              )
 
 *The
        sum of loss per share for the four quarters may not equal the total loss
        per
        share for the year due to changes in the average number of common shares
        outstanding and rounding.*
 
 The
        net
        loss attributable to common shareholders in fourth quarter 2007 included
        a
        $9,118,000 settlement expense from the settlement of our lawsuit with
        Trendsetter Investors, LLC (See Note 15).  Additionally, we granted a
        consultant (who is a related party) warrants to purchase 1,500,000 shares
        of
        common stock.  The fair value of the award, $4,227,000, was charged to
        expense when the warrants vested in June.
  **19.** **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.
 
 F-30
 *Table
            of Contents*
  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.
 
 **Costs
        Excluded**
 
 Since
        there were no proved reserves the oil and gas properties located in the Republic
        of Guinea, costs associated with such unproved properties related to continuing
        operations of $4,279,000 and $4,139,000 as of June 30, 2007 and 2006,
        respectively, are excluded from amounts subject to amortization. The majority
        of
        the evaluation activities are expected to be completed within three
        years.
 
 **Costs
        Excluded by Year Incurred**
 
 **Excluded
                  at****Year
                  Cost Incurred**
              
              
              **June
                  30,****Prior**
              
              
              **2005**
              
              
              **2006**
              
              
              **2007**
              
              
              **2007**Property
                  acquisition
              
              $
              291,000
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              291,000Exploration
              
              
              3,192,000
              
              
              
              590,000
              
              
              
              66,000
              
              
              
              140,000
              
              
              
              3,988,000Total
              
              $
              3,483,000
              
              
              $
              590,000
              
              
              $
              66,000
              
              
              $
              140,000
              
              
              $
              4,279,000
 
 **Costs
        Excluded by Country**
 
 **United**
              
              
              **Republic
                  of****States**
              
              
              **Guinea**
              
              
              **Total****Costs
                  Excluded by Country**Property
                  acquisition
              
              $
              -
              
              
              $
              291,000
              
              
              $
              291,000Exploration
              
              
              -
              
              
              
              3,988,000
              
              
              
              3,988,000Total
              
              $
              -
              
              
              $
              4,279,000
              
              
              $
              4,279,000
 
 F-31
 *Table
            of Contents*
  **Changes
        in Costs Excluded by Country**
 
 **United**
              
              
              **Republic
                  of****States**
              
              
              **Guinea**
              
              
              **Total****Balance
                  at June 30, 2005**
              
              $
              -
              
              
              $
              4,073,000
              
              
              $
              4,073,000Additional
                  costs incurred
              
              
              -
              
              
              
              66,000
              
              
              
              66,000Costs
                  transferred to DD&A pool
              
              
              -
              
              
              
              -
              
              
              
              -**Balance
                  at June 30, 2006**
              
              
              -
              
              
              
              4,139,000
              
              
              
              4,139,000Additional
                  costs incurred
              
              
              -
              
              
              
              140,000
              
              
              
              140,000Costs
                  transferred to DD&A pool
              
              
              -
              
              
              
              -
              
              
              
              -**Balance
                  at June 30, 2007**
              
              $
              -
              
              
              $
              4,279,000
              
              
              $
              4,279,000
 
 **Capitalized
        Costs Related to Oil and Gas Activities**
 
 Aggregate
        capitalized costs relating to the Hyperdynamics’ crude oil and natural gas
        producing activities, including asset retirement costs and related accumulated
        DD&A are shown below:
 
 **United**
              
              
              **Republic
                  of****States**
              
              
              **Guinea**
              
              
              **Total****June
                  30, 2007**Unproved
                  properties
              
              $
              832,000
              
              
              $
              4,279,000
              
              
              $
              5,111,000Proved
                  properties
              
              
              487,000
              
              
              
              -
              
              
              
              487,000Oilfield
                  equipment
              
              
              220,000
              
              
              
              -
              
              
              
              220,0001,539,000
              
              
              
              4,279,000
              
              
              
              5,818,000Less
                  cost recovery upon sale of working interest
              
              
              (1,161,000
              )
              
              
              -
              
              
              
              (1,161,000
              )Less
                  accumulated DD&A
              
              
              (174,000
              )
              
              
              -
              
              
              
              (174,000
              )Net
                  capitalized costs
              
              $
              204,000
              
              
              $
              4,279,000
              
              
              $
              4,483,000**June
                  30, 2006**Unproved
                  properties
              
              $
              738,000
              
              
              $
              4,139,000
              
              
              $
              4,877,000Proved
                  properties
              
              
              423,000
              
              
              
              -
              
              
              
              423,000Oilfield
                  equipment
              
              
              467,000
              
              
              
              -
              
              
              
              467,0001,628,000
              
              
              
              4,139,000
              
              
              
              5,767,000Less
                  cost recovery upon sale of working interest
              
              
              (1,161,000
              )
              
              
              -
              
              
              
              (1,161,000
              )Less
                  accumulated DD&A
              
              
              (169,000
              )
              
              
              -
              
              
              
              (169,000
              )Net
                  capitalized costs
              
              $
              298,000
              
              
              $
              4,139,000
              
              
              $
              4,437,000
  F-32
 *Table
            of Contents*
  **Costs
        Incurred in Oil and Gas Activities**
 
 Costs
        incurred in connection with Hyperdynamics’ crude oil and natural gas
        acquisition, exploration and development activities are shown
        below:
 
 **United**
              
              
              **Republic
                  of****States**
              
              
              **Guinea**
              
              
              **Total****June
                  30, 2007**Property
                  acquisition
              
              $
              -
              
              
              $
              -
              
              
              $
              -Unproved
              
              
              11,000
              
              
              
              -
              
              
              
              11,000Proved
              
              
              -
              
              
              
              -
              
              
              
              -Exploration
              
              
              
              
              
              
              140,000
              
              
              
              140,000Development
              
              
              147,000
              
              
              
              -
              
              
              
              147,000-Total
                  costs incurred
              
              $
              158,000
              
              
              $
              140,000
              
              
              $
              298,000**June
                  30, 2006**Property
                  acquisitionUnproved
              
              $
              2,000
              
              
              $
              -
              
              
              $
              2,000Proved
              
              
              17,000
              
              
              
              -
              
              
              
              17,000Exploration
              
              
              261,000
              
              
              
              66,000
              
              
              
              327,000Development
              
              
              141,000
              
              
              
              -
              
              
              
              141,000Sale
                  of working interest
              
              
              (421,000
              )
              
              
              -
              
              
              
              (421,000
              )Total
                  costs incurred
              
              $
              -
              
              
              $
              66,000
              
              
              $
              66,000**June
                  30, 2005**Property
                  acquisitionUnproved
              
              $
              17,000
              
              
              $
              -
              
              
              $
              17,000Proved
              
              
              65,000
              
              
              
              -
              
              
              
              65,000Exploration
              
              
              568,000
              
              
              
              590,000
              
              
              
              1,158,000Development
              
              
              90,000
              
              
              
              -
              
              
              
              90,000Sale
                  of working interest
              
              
              (740,000
              )
              
              
              -
              
              
              
              (740,000
              )Total
                  costs incurred
              
              $
              -
              
              
              $
              590,000
              
              
              $
              590,000
 
 F-33
 *Table
            of Contents*
 
 **Results
        of Operations for Producing Activities**
 
 The
        following schedule includes only the revenues from the production and sale
        of
        gas, oil, condensate and NGLs. The income tax expense is calculated by applying
        the current statutory tax rates to the revenues after deducting costs, which
        include DD&A allowances, after giving effect to permanent differences. Due
        to significant net operating loss carryforwards related to producing activities,
        income taxes have not been provided at June 30, 2007. The results of operations
        exclude general office overhead and interest expense attributable to oil
        and gas
        activities.
 
 **2007**
              
              
              **2006**
              
              
              **2005**Net
                  revenues from production
              
              $
              908,000
              
              
              $
              615,000
              
              
              $
              55,000Production
                  costsOil
                  and gas operating
              
              
              387,000
              
              
              
              657,000
              
              
              
              265,000Other
                  taxes
              
              
              104,000
              
              
              
              65,000
              
              
              
              6,000Total
                  production costs
              
              
              491,000
              
              
              
              722,000
              
              
              
              271,000Depreciation,
                  depletion and amortization
              
              
              72,000Total
                  costs
              
              
              563,000
              
              
              
              722,000
              
              
              
              271,000Income
                  (loss) before income taxes
              
              
              345,000
              
              
              
              (107,000
              )
              
              
              (216,000
              )Income
                  tax expense
              
              
              -
              
              
              
              -
              
              
              
              -Results
                  of operations
              
              $
              345,000
              
              
              $
              (107,000
              )
              
              $
              (216,000
              )DD&A
                  rate per net equivalent barrel
              
              $
              3.47
              
              
              $
              0.00
              
              
              $
              0.00DD&A
                  and impairment rate per net equivalent barrel
              
              $
              3.47
              
              
              $
              0.00
              
              
              $
              0.00
 
 F-34
 *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 Company, L.P.,
        independent petroleum engineers.
 
 **Oil**
              
              
              **Gas****(Barrels)**
              
              
              **(MMCF)****Proved
                  Reserves**Balance
                  - June 30, 2005
              
              
              -
              
              
              
              -Revisions
                  of previous Estimates
              
              
              -
              
              
              
              -Extensions,
                  discoveries and other additions
              
              
              57,514
              
              
              
              -Production
              
              
              (13,869
              )
              
              
              -Purchase
                  (sales) of minerals in place
              
              
              (2,040
              )
              
              
              -Balance
                  - June 30, 2006
              
              
              41,605
              
              
              
              -Revisions
                  of previous estimates
              
              
              3,345
              
              
              
              -Extensions,
                  discoveries and other additions
              
              
              -
              
              
              
              -Production
              
              
              (20,739
              )
              
              
              -Purchase
                  (sales) of minerals in place
              
              
              922
              
              
              
              -Balance
                  - June 30, 2007
              
              
              25,133
              
              
              
              -
 
 **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.
 
 F-35
 *Table
            of Contents*
  **Standardized
        Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas
        Reserves**
 
 **2007**
              
              
              **2006**
              
              
              **2005**Future
                  cash inflows
              
              $
              1,501,000
              
              
              $
              2,963,000
              
              
              $
              -Future
                  production costs
              
              
              1,097,000
              
              
              
              1,690,000
              
              
              
              -Future
                  development costs
              
              
              -
              
              
              
              -
              
              
              
              -Future
                  income tax expenses
              
              
              -
              
              
              
              339,000
              
              
              
              -Future
                  net cash flows
              
              
              404,000
              
              
              
              934,000
              
              
              
              -10%
                  annual discount for estimated timing of cash flows
              
              
              35,000
              
              
              
              80,000
              
              
              
              -Standardized
                  measure of discounted future cash flows at the end of the
                  year
              
              $
              369,000
              
              
              $
              854,000
              
              
              $
              -
 
 The
        standardized measure of discounted future net cash flows as of June 30, 2007,
        2006 and 2005 was calculated using prices the following average prices in
        effect
        as of that date:
 
 **2007**
              
              
              **2006**
              
              
              **2005**Average
                  crude oil price per barrel
              
              $
              68.23
              
              
              $
              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. 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 data was available
        to
        compute the changes in discounted future cash flows for year ended June 30,
        2005.
 
 **2007**
              
              
              **2006**
              
              
              **2005**Standardized
                  measure of discounted future net cash flows at the beginning of
                  the
                  year
              
              $
              854,000
              
              
              $
              -
              
              
              $
              -Net
                  changes in prices and production costs
              
              
              (666,000
              )
              
              
              (55,000
              )
              
              
              -Changes
                  in estimated future development costs
              
              
              -
              
              
              
              -
              
              
              
              -Sales
                  of oil and gas, net of production costs
              
              
              (333,000
              )
              
              
              222,000
              
              
              
              -Extensions,
                  discoveries and improved recovery less related costs
              
              
              -
              
              
              
              364,000
              
              
              
              -Purchases
                  (sales) of minerals in place
              
              
              14,000
              
              
              
              (9,000
              )
              
              
              -Revisions
                  of previous quantity estimates
              
              
              54,000
              
              
              
              261,000
              
              
              
              -Previously
                  estimated development costs incurredNet
                  change in income taxes
              
              
              339,000
              
              
              
              (72,000
              )
              
              
              -Accretion
                  of discount
              
              
              107,000
              
              
              
              143,000
              
              
              
              -Standardized
                  measure of discounted future net cash flows at the end of the
                  year
              
              $
              369,000
              
              
              $
              854,000
              
              
              $
              -
 
 F-36
 *Table
            of Contents*
  **Item
        9 Changes inand Disagreements With Accountants on Accounting
        and Financial Disclosure**
 
 None.
  **Item 9A.    Controls
        andProcedures**
  ***Corporate
        Disclosure Controls***
  *Evaluation
        of Disclosure Controls and Procedures*
  
 Disclosure
        controls and procedures are controls and other procedures of a registrant
        designed to ensure that information required to be disclosed by the registrant
        in the reports that it files or submits under the exchange Act is properly
        recorded, processed, summarized, and reported, within the time periods specified
        in the Securities and Exchange Commission's ("SEC") rules and
        forms.  Disclosure controls and procedures include processes to
        accumulate and evaluate relevant information and communicate such information
        to
        a registrant's management, including its Chief Executive Officer and Chief
        Financial Officer, as appropriate, to allow for timely decisions regarding
        required disclosures.
 
 We
        evaluated the effectiveness of the design and operation of our disclosure
        controls and procedures as of June 30, 2007, as required by Rule 13a-15 of
        the
        Exchange Act. As described below, under "Management's Report on Internal
        Control
        Over Financial Reporting," material weaknesses were identified in our internal
        control over financial reporting as of June 30, 2007, relating to our control
        environment, staffing of our financial accounting department, accounting
        system
        controls, and segregation of duties. Based on the evaluation described above,
        our Chief Executive Officer and Chief Financial Officer have concluded that,
        as
        of June 30, 2007, our disclosure controls and procedures were not effective
        in
        ensuring that the information required to be disclosed by us in reports filed
        under the Securities Exchange Act of 1934 is recorded, processed, summarized
        and
        reported within the time periods specified in the rules and forms of the
        SEC. To
        address the material weakness, we performed additional analysis and other
        post-closing procedures in an effort to ensure our consolidated financial
        statements included in this annual report have been prepared in accordance
        with
        generally accepted accounting principles. Accordingly, management believes
        that
        the financial statements included in this report fairly present in all material
        respects our financial condition, results of operations and cash flows for
        the
        periods presented.
  *Management’s
        Report on Internal Control over Financial Reporting*
 
 Effective
        December 31, 2006, Hyperdynamics Corporation met the definition of "accelerated
        filer," as described by Rule 12b-2 of the Exchange Act. As an accelerated
        filer,
        we are required by the Sarbanes-Oxley Act of 2002 to include an assessment
        of
        our internal control over financial reporting for the year ended June 30,
        2007.
        Our management is responsible for establishing and maintaining adequate internal
        control over financial reporting as that term is defined in Exchange Act
        Rule
        13a-15(f). Our internal control over financial reporting is a process designed
        to provide reasonable assurance regarding the reliability of financial reporting
        and the preparation of our financial statements for external reporting purposes
        in accordance with generally accepted accounting principles (“GAAP”). Our
        internal control over financial reporting includes those policies and procedures
        that (i) pertain to the maintenance of records that, in reasonable detail,
        accurately and fairly reflect our transactions and dispositions of our assets;
        (ii) provide reasonable assurance that transactions are recorded as necessary
        to
        permit preparation of our financial statements in accordance with GAAP, and
        that
        our receipts and expenditures are being made only in accordance with
        authorizations of our management and directors; and (iii) provide
        reasonable assurance regarding prevention or timely detection of unauthorized
        acquisition, use or disposition of our assets that could have a material
        effect
        on our financial statements.
 
 Internal
        control over financial reporting cannot provide absolute assurance of achieving
        financial reporting objectives because of its inherent
        limitations.  Internal control over financial reporting is a process
        that involves human diligence and compliance and is subject to lapses in
        judgment and breakdowns resulting from human failures. Internal control over
        financial reporting also can be circumvented by collusion or improper management
        override. Because of such limitations, there is a risk that material
        misstatements may not be prevented or detected on a timely basis by internal
        control over financial reporting. However, these inherent limitations are
        known
        features of the financial reporting process. Therefore, it is possible to
        design
        into the process safeguards to reduce, though not eliminate, this
        risk.  In addition, projections of any evaluation of effectiveness to
        future periods are subject to the risk that controls may become inadequate
        because of changes in conditions or that the degree of compliance with the
        policies or procedures may deteriorate.
 
 37
 *Table
            of Contents*
  In
        order
        to evaluate the effectiveness of our internal control over financial reporting
        as of June 30, 2007, as required by Section 404 of the Sarbanes-Oxley Act
        of 2002, our management conducted an assessment, including testing, based
        on the
        criteria set forth in Internal Control—Integrated Framework issued by the
        Committee of Sponsoring Organizations of the Treadway Commission (the “COSO
        Framework”).  A material weakness is a control deficiency, or a
        combination of control deficiencies, that results in more than a remote
        likelihood that a material misstatement of our annual or interim financial
        statements will not be prevented or detected.  In assessing the
        effectiveness of our internal control over financial reporting, management
        identified the following four material weaknesses in internal control over
        financial reporting as of June 30, 2007:
 
 1.
              Deficiencies
                  in the Company’s Control Environment.  The Company’s control
                  environment did not sufficiently promote effective internal control
                  over
                  financial reporting throughout the organization. This material
                  weakness
                  exists because of the aggregate effect of multiple deficiencies
                  in
                  internal control which affect the Company's control environment,
                  including: a) a failure to effectively implement, follow, and enforce
                  the
                  limits on the delegation of authority for expenditure from the
                  Board of
                  Directors to management, including the failure by management to
                  obtain the
                  required Board approvals for certain expenditures; b) the lack
                  of an
                  effective risk assessment process for the identification of fraud
                  risks;
                  c) a failure to implement and ensure the consistent and timely
                  completion
                  of employee acknowledgments of the Company's Code of Ethics; d)
                  the lack
                  of an internal audit function or other effective mechanism for
                  ongoing
                  monitoring of the effectiveness of internal controls; and e) insufficient
                  documentation and communication of our accounting policies and
                  procedures.
 
 2.
              Deficiencies
                  in the staffing of our financial accounting department.  The
                  number of qualified accounting personnel with experience in public
                  company
                  SEC reporting and GAAP is extremely limited.  This weakness does
                  not enable us to maintain adequate controls over our financial
                  accounting
                  and reporting processes regarding the accounting for non-routine
                  and
                  non-systematic transactions. There is a risk that a material misstatement
                  of the financial statements could be caused, or at least not be
                  detected
                  in a timely manner, by this shortage of qualified resources. This
                  control
                  deficiency resulted in us recording certain adjustments prior to
                  the
                  issuance of our consolidated financial
                  statements.
 
 3.
              Deficiencies
                  in the Company's accounting system controls. We did not effectively
                  and
                  accurately close the general ledger in a timely manner and we did
                  not
                  provide complete and accurate disclosure in our notes to financial
                  statements, as required by GAAP.  The Company failed to perform
                  certain control procedures designed to ensure that the financial
                  statement
                  presentations and related disclosures were complete and in accordance
                  with
                  GAAP. As a result of this weakness, the Company did not identify
                  that
                  approximately $4.03 million of equity transactions were not properly
                  recorded and $104,000 of property, plant and equipment, net that
                  was not
                  in existence as of the balance sheet date. This misstatement was
                  corrected
                  before the issuance of Company’s consolidated financial
                  statements.
 
 4.
              Deficiencies
                  in Segregation of Duties.  The Chief Executive Officer and the
                  Chief Financial Officer are actively involved in the preparation
                  of the
                  financial statements, and therefore cannot provide an independent
                  review
                  and quality assurance function within the accounting and financial
                  reporting group.  The limited number of qualified accounting
                  personnel discussed above results in an inability to have independent
                  review and approval of financial accounting
                  entries.  Furthermore, management and financial accounting
                  personnel have wide-spread access to create and post entries in
                  the
                  Company’s financial accounting system.  There is a risk that a
                  material misstatement of the financial statements could be caused,
                  or at
                  least not be detected in a timely manner, due to insufficient segregation
                  of duties.
 
 38
 *Table
            of Contents*
  Based
        on
        the material weaknesses described above and the criteria set forth by the
        COSO
        Framework, we have concluded that our internal control over financial reporting
        at June 30, 2007, was not effective.
 
 The
        Company's independent registered public accounting firm, Malone & Bailey,
        PC, has issued an  attestation report on the Company's internal
        control over financial reporting. That report appears below.
  *Changes
        in Internal Control over Financial Reporting*
 
 No
        change
        in our internal control over financial reporting (as defined in Rule 13a-15(f)
        under the Securities Exchange Act of 1934) occurred during the fourth quarter
        of
        fiscal 2007 that has materially affected, or is reasonably likely to materially
        affect, our internal control over financial reporting. Management and the
        Audit
        Committee of the Company's Board of Directors have begun to develop remedial
        measures to address the internal control deficiencies identified above. The
        Company will monitor the effectiveness of planned actions and will make any
        other changes and take such other actions as management or the Audit Committee
        determines to be appropriate.
  *Remediation
        Initiatives*
 
 During
        fiscal 2008, we plan to implement a number of remediation measures to address
        the material weaknesses described above. These organizational and process
        changes will improve our internal controls environment and increased the
        likelihood of our identifying non-routine and non-systematic
        transactions.  The change made through the date of this annual report
        includes our retention of an outside consulting firm to assist us in the
        evaluation and testing of our internal control system and to identify
        improvement opportunities related to our accounting and financial reporting
        processes in order to streamline and improve the efficiency of these
        processes.  The Company's remediation plans include:
 
 1.
              We
                  plan to hire additional personnel to assist us with documenting
                  and
                  communicating our accounting policies and procedures to ensure
                  the proper
                  and consistent application of those policies and procedures throughout
                  the
                  Company. Recruitment for this position(s) will begin and the selection
                  process is expected to be completed during the second quarter of
                  2007.
 
 2.
              We
                  plan to (i) require additional training for our current accounting
                  personnel; (ii) to hire additional accounting personnel to enable
                  the
                  allocation of job functions among a larger group of accounting
                  staff;
                  (iii) to engage outside consultants with technical accounting expertise,
                  as needed; and (iv) to consider restructuring our accounting department,
                  each to increase the likelihood that our accounting personnel will
                  have
                  the resources, experience, skills, and knowledge necessary to effectively
                  perform the accounting system functions assigned to
                  them.
 
 3.
              We
                  plan to implement formal processes requiring periodic self-assessments,
                  independent tests, and reporting of our personnel's adherence to
                  our
                  accounting policies and procedures.
 
 4.
              We
                  plan to design effective policies and procedures to control security
                  of
                  and access to financial accounting system information. If necessary,
                  we
                  will also consider implementing a software solution with automatic
                  control
                  checkpoints for day-to-day business
                  processes.
 
 5.
              We
                  plan to refine our period-end financial reporting processes to
                  improve the
                  quality and timeliness of our financial
                  information.
 
 Management
        recognizes that many of these enhancements require continual monitoring and
        evaluation for effectiveness. The development of these actions is an iterative
        process and will evolve as the Company continues to evaluate and improve
        our
        internal controls over financial reporting.
 
 Management
        will review progress on these activities on a consistent and ongoing basis
        at
        the Chief Executive Officer and senior management level in conjunction with
        our
        Audit Committee. We also plan to take additional steps to elevate Company
        awareness about and communication of these important issues through formal
        channels such as Company meetings, departmental meetings, and
        training.
 
 39
 *Table
            of Contents*
  **Item
        9B Other Information**
 
 None
 
 **Part
        III**
 
 **Item
        10 Directors, ExecutiveOfficers and Corporate
        Governance**
 
 **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 and Principal Accounting Officer
              
              48L.
                  Gene Stohler
              
              Director
              
              78
  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.
 
 Kent
        Watts, age 48, became Chairman of the Board of Directors and was named
        our President and 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.
  40
 *Table
            of Contents*
  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 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 48, has been our CFO and Principal Accounting Officer 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 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 pay a
        fee directly to Clear Financial Solutions, Inc. in the amount of $5,200 per
        month for Mr. Plumb's services as our CFO and some additional services provided
        to us by Clear Financial Solutions, Inc.
 
 L.
        Gene
        Stohler, age 78, 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.
  41
 *Table
            of Contents*
  **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, 2007, the Audit Committee met 4 times and
        took
        action by Unanimous Consent 3 times.
 
 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, 2007, the Compensation Committee
        met 4 times and took action by Unanimous Consent 4 times.
 
 We
        have a
        nominating committee. The Committee has not adopted formal policies with
        regard
        to the process to be used for identifying and evaluating nominees for Director.
        At this time, the Committee has discretion over the consideration of candidates
        nominated. We believe this is adequate based on our size and each current
        Committee 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 meetings on 8 occasions during the fiscal year ended June
        30,
        2007. The Board of Directors also took action by written consent on 24 occasions
        during the fiscal year ended June 30, 2007, 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 2007. We
        have
        found that Harry Briers, Harold Poling, Albert F. Young, L. Gene Stohler,
        Steven
        Plumb, DJX Ltd, TW Trust, Tyler Watts, Angela Watts, TWJ Navigation, Inc.
        and
        Kent Watts have filed all required Forms 3, 4 and 5 during fiscal
        2007.
  The
        following table summarizes the results of our review:
  **Name**
              
              **Form
                  Type**
              
              **Number
                  of forms filed late**
              
              **Number
                  of transactions reported late**Kent
                  Watts
              
              4
              
              1
              
              1Harold
                  Poling
              
              4
              
              2
              
              3Albert
                  F. Young
              
              4
              
              1
              
              2L.
                  Gene Stohler
              
              4
              
              2
              
              3Steven
                  Plumb
              
              4
              
              1
              
              1
  **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 Number 1 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.
 
 **Information
        about Board Committees**
 
 We
        have a
        Nomination Committee that started its work during fiscal
        2007.  Decisions concerning the nominees for Director for fiscal 2007
        were made by the Nomination Committee.  Mr. Young, Mr. Stohler, and
        Mr. Poling are members of the Nomination Committee.  All nomination
        committee members are independent.
 
 The
        Committee does not have a charter.  The Committee has not adopted a
        policy with regard to the consideration of director candidates recommended
        by
        security holders.  The Committee has not adopted formal policies with
        regard to the process to be used for identifying nominees for
        Director.  However, it is currently in the process of developing
        policies and procedures for identifying and evaluating nominees for Director.
        At
        this time, the consideration of candidates is at the Committee’s
        discretion.  We believe this is adequate based on our size and each
        current Board member's qualifications.
 
 42
 *Table
            of Contents*
  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.
 
 **Item
        11 ExecutiveCompensation**
 
 **COMPENSATION
        DISCUSSION AND ANALYSIS**
 
 **Compensation
        Objectives and Elements**
 
 The
        objectives of the Compensation Committee of the Board of Directors in
        determining executive compensation are to (1) attract and retain key
        individuals who are important to the continued success of Hyperdynamics,
        and
        (2) provide strong financial incentives, at reasonable cost to the
        shareholders, for senior management to enhance the value of the shareholders’
investment.
 
 The
        elements of compensation that the Committee uses to accomplish these objectives
        include base salaries, stock and stock options,  and employment and
        change in control agreements. Base salaries are targeted to attract and retain
        key executives.
 
 The
        company’s compensation plans are designed generally to ensure full tax
        deductibility of compensation paid under the plans. This includes compliance
        with Section 162(m) of the Internal Revenue Code, which limits the company’s tax
        deduction for an executive’s compensation to $1 million unless certain
        conditions are met. For fiscal year 2007 the full amount of all compensation
        provided to all executives was tax deductible to the company.
 
 **Administration
        of Executive Compensation**
 
 The
        Compensation Committee reviews and approves corporate goals and objectives
        relevant to compensation of the Chief Executive Officer, evaluates the CEO’s
        performance and sets his compensation. The Committee also reviews the CEO’s
        recommendations for and sets the salaries of other key officers.
 
 The
        CEO
        attends Committee meetings and makes recommendations to the Committee concerning
        the base salaries of all subordinate officers. Neither the CEO nor any other
        company officer or employee attends periodic executive sessions of the
        Committee.
 
 
 The
        Compensation Committee took action on matters affecting fiscal year 2007
        executive compensation on the following dates:
 
 Date
              
              Committee
                  ActionAugust
                  10, 2006
              
              Approved
                  Executive Employment Agreement and Severance Agreement for Kent
                  P.
                  WattsOctober
                  7, 2006
              
              Approved
                  Executive Employment Agreement and Severance Agreement for Harry
                  BriersDecember
                  14, 2006
              
              Confirmed
                  Approval of Executive Employment Agreement and Severance Agreement
                  for
                  Harry Briers
  **Base
        Salaries**
 
 The
        Compensation Committee sets base salaries for officers with individual salaries
        based on level of responsibility and individual performance. The Committee
        reviewed these salaries in August and October of 2006.
 
 **Stock
        Incentives**
 
 The
        company’s Stock and Stock Option Plan (“Plan”) authorizes the Compensation
        Committee to grant stock options, restricted stock, and S-8 registered stock
        to
        officers and other key employees. The Committee implements this authority
        by
        awarding stock options designed to tie the interests of all senior executives
        to
        the long-term consolidated financial results of the company.
 
 43
 *Table
            of Contents*
 
 **COMPENSATION
        TABLES**
 
 The
        following tables show salaries, bonuses, incentive awards, retirement benefits
        and other compensation relating to fiscal year 2007 for the Chief Executive
        Officer, Chief Financial Officer and the three other most highly compensated
        executives.
 
 **SUMMARY
        COMPENSATION TABLE**
  Change inNon-Equity
              
              Pension
                  ValueName &
              
              
              
              
              
              
              
              
              
              
              
              
              
              Incentive Plan
              
              &
                  NonqualifiedPrincipal
              
              
              
              
              
              
              
              
              Stock
              
              
              Option
              
              Compensation
              
              Deferred
                  Compensations
              
              All OtherPosition
              Year
              
              Salary
              
              
              Bonus
              
              
              Awards
              
              
              Awards
              
              ($) (g)
              
              Earnings
              
              Compensation
              
              
              Total(a)
              (b)
              
              ($) (c)
              
              
              ($) (d)
              
              
              ($) (e)
              
              
              ($) (f)
              
              
              
              ($) (h)
              
              ($) (i)
              
              
              ($) (j)Kent
                  Watts
                Chairman,
                  Pres. & CEO (1)
              2007
              
              $
              251,939
              
              
              
              -
              
              
              
              -
              
              
              $
              236,355
              
              
              
              
              
              
              17,814
              
              
              $
              506,108Kent
                  Watts
                Chairman,
                  Pres.&
                  CEO  (2)
                  (5)
              2006
              
              
              102,600
              
              
              
              -
              
              
              $
              16,000
              
              
              
              -
              
              
              
              
              
              
              15,470
              
              
              
              134,070Kent
                  Watts
                Chairman,
                Pres.,  CEO,  &CFO  (2)
                  (3)
                  (5)
              2005
              
              
              93,200
              
              
              
              -
              
              
              
              9,746
              
              
              
              -
              
              
              
              
              
              
              20,022
              
              
              
              122,967Harry
                  Briers
                Exec.
                  VicePres.
                  (4)
              2007
              
              
              188,173
              
              
              
              -
              
              
              
              -
              
              
              
              109,677
              
              
              
              
              
              
              
              
              
              
              297,850Harry
                  Briers
                Exec.
                  VicePres.
                  (4)
                  (5)
              2006
              
              
              98,654
              
              
              
              -
              
              
              
              16,000
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              114,654Harry
                  Briers
                Exec.
                  VicePres.
                  (4)
                  (5)
              2005
              
              
              89,619
              
              
              
              -
              
              
              
              9,746
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              99,365Steven
                  Plumb
                CFO
              2007
              
              
              78,647
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              78,647Steven
                  Plumb
                CFO
              2006
              
              
              59,256
              
              
              
              -
              
              
              
              -
              
              
              
              142,523
              
              
              
              
              
              
              
              
              
              
              201,779
 
 Columns  (d),
        (g),and (h): No named executive received such compensation for fiscal year
        2007.
 
 Columns
        (e) and (f): Effective January 1, 2006, the company adopted Statement of
        Financial Accounting Standards No. 123R,*Share-Based
        Payment*  (FAS No. 123R), which requires the company to recognize
        compensation expense for stock options and other stock-related awards granted
        to
        employees and directors based on the estimated fair value of the equity awards
        at the time of grant. The assumptions used to determine the valuation of
        the
        awards are discussed in note 13 to the consolidated financial statements.
        The
        amounts shown in these columns are the dollar amounts recognized by the company
        for financial statement reporting purposes with respect to fiscal years 2005,
        2006, and 2007 for each named executive in accordance with FAS 123R. Such
        amounts do not correspond to the actual value that will be recognized by
        the
        named executives.
 
 Column
        (i): Payments made on a company leased vehicle for the executive.
 
 44
 *Table
            of Contents*
  (1)
        On August 10, 2006, our Compensation Committee approved a new Chief Executive
        Employment Agreement for Kent Watts.  The contract provides for a base
        salary of $250,000 annually with a performance based incentive salary based
        on
        1% of adjusted net income.
 
 (2)
        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.
 
 (3)
        For
        the year ended June 30, 2005, Kent Watts was the Chief Financial
        Officer.
 
 (4)
        On
        October 7, 2006, our Compensation Committee approved a new Executive Vice
        President Employment Agreement for Harry Briers.  The contract
        provides for a base salary of $190,000 annually.
 
 (5)
        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.
 
 (6)
        We
        have a 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 $5,200
        per
        month for Mr. Plumb's services as our CFO and some additional services provided
        to us by Clear Financial Solutions, Inc.  The amounts reflected in the
        summary compensation table are actual billed amounts from Clear Financials
        Solutions.
 
 **Bonuses
        and Stock Awards**
 
 The
        following tables show cash and stock awards made to the named executives
        in
        fiscal year 2007, their outstanding equity awards at the end of fiscal year
        2007, and the gains attributable to stock options they exercised during fiscal
        year 2007.
 
 
 **GRANTS
        OF PLAN-BASED AWARDS IN FISCAL YEAR 2007**
 **Under
                  Non-Equity Incentive**
                **Plan
                  Awards****All Other Option Awards:**
              **Exercise or**
              **Grant Date****Action**
              **Grant**
              
              
              
              
              **Number of Securities**
              **Base Price of**
              **Fair Value of**Name
              **Date**
              **Date**
              
              **Threshold**
              **Target**
              **Maximum**
              **Underlying Options**
              **Option Awards**
              **Stock & Options**(a)
              **(b)**
              **(b)**
              
              **($) (c)**
              **($) (d)**
              **($) (e)**
              **(#) (f)**
              **($/Share) (g)**
              **Awards ($) (h)**Kent
                  P. Watts
              08/10/06
              8/14/06
              (1)
              
              
              
              40,000
              2.20
              64,775Kent
                  P. Watts
              08/10/06
              10/02/06
              
              
              
              
              40,000
              2.74
              76,411Kent
                  P. Watts
              08/10/06
              1/03/07
              
              
              
              
              40,000
              2.23
              62,189Kent
                  P. Watts
              08/10/06
              4/03/07
              (2)
              
              
              
              40,000
              2.00
              32,980Harry
                  Briers
              10/07/06
              10/09/06
              (1)
              
              
              
              25,000
              2.88
              50,197Harry
                  Briers
              10/07/06
              01/03/07
              
              
              
              
              25,000
              2.23
              38,868Harry
                  Briers
              10/07/06
              04/03/07
              (2)
              
              
              
              25,000
              2.00
              20,612Steven
                  Plumb
              NONE
  Column
        (b): For option awards, the Action Date is the day the Compensation Committee
        approved the executives’ contracts. The contracts specify that the options will
        be granted on the first business day of each quarter, except as
        noted:
  (1)
              The
                  grant date is the date the Board of Directors took action to grant
                  the
                  first installment of options after the contracts were
                  signed.
 (2)
              The
                  contracts stipulate that if the award of the options would trigger
                  a
                  repricing of Cornell Capital’s convertible debentures or warrants, the
                  grant will be deferred to a later date.  In April 2007, we
                  deferred the grant of options by one day in order to comply with
                  the
                  covenants in the Cornell
                  agreements.
 
 45
 *Table
            of Contents*
  Columns
        (f) thru (h): Each named executive received stock options in accordance with
        his
        employment contract’s provisions.  The exercise price is the greater
        of $2.00 per share or the closing bid price on the date of grant.
 
 
 **OUTSTANDING
        EQUITY AWARDS AT 2007 FISCAL YEAR-END**
 No. of Securities
              No. of SecuritiesUnderlying
              Underlying
              
              
              No. of Shares
              Market Value ofUnexercised
              Unexercised
              
              
              or Units of
              Shares or UnitsOptions
              Options
              Option
              Option
              Stock That
              of Stock ThatName
              Exercisable
              Unexercisable
              Exercise Price
              Expiration Date
              Have Not Vested
              Have Not Vested(a)
              (#) (b)
              (#) (c)
              ($/Share) (d)
              (e)
              (#) (f)
              ($) (g)Kent
                  P Watts
              400,000
              
              0.23
              07/26/07Kent
                  P Watts
              40,000
              
              2.20
              08/14/09Kent
                  P Watts
              40,000
              
              2.74
              10/02/09Kent
                  P Watts
              40,000
              
              2.23
              01/03/10Kent
                  P Watts
              40,000
              
              2.00
              04/03/10Harry
                  Briers
              400,000
              
              0.23
              07/26/07Harry
                  Briers
              25,000
              
              2.88
              10/09/09Harry
                  Briers
              25,000
              
              2.23
              01/03/10Harry
                  Briers
              25,000
              
              2.00
              04/03/10Steven
                  Plumb
              none
 
 Column
        (b): Options that expire in 2007 vested on July 26, 2004 and were originally
        granted on July 26, 2001; all other options were granted three years prior
        to
        the expiration date and vested immediately.
 
 
 **OPTION
        EXERCISES AND STOCK VESTED DURING FISCAL YEAR 2007**
 
 No. of
              
              
              No. of
              ValueShares
              
              Value
              Shares
              RealizedAcquired
              
              Realized
              Acquired
              on VestingName
              on Exercise
              
              on Exercise
              on Vesting
              ($)(a)
              (#)
              
              ($)
              (#)Kent
                  P Watts
              NoneHarry
                  Briers
              NoneSteven
                  Plumb
              59,211
              
              133,225
 
 During
        June 2007, Mr. Plumb effected a cashless exercise of options to purchase
        100,000
        shares with exercise price of $1.55 when stock price was $3.80.  Net
        issuance was 59,211 shares of  common stock.
  **AGREEMENTS
        WITH EXECUTIVES AND OFFICERS**
 
 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.
 
 46
 *Table
            of Contents*
  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.
 
 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:
  47
 *Table
            of Contents*
  (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 (renewing 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 $4,900 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
        renewed in November 2006 with fees increased to approximately $5,200 per
        month.
  In
        August
        2005, we hired Mr. Famourou Kourouma as our new Vice President of Guinea
        Affairs. We entered into a new employment agreement with Mr. Kourouma in
        December 2006.  The agreement term is two years.  He will
        receive a base salary of $84,000 per year and a subsidy of $2,500 per month
        while in Guinea.  He may also receive up options to purchase up to
        600,000 shares of Hyperdynamics common stock based on the achievement of
        certain
        performance criteria.  We have determined that Mr. Kourouma is not an
        executive officer.
 
 In
        August
        2006, we hired Ms. Aissata Beavogui as our new Vice President and Chief
        Financial Officer for SCS Corporation.  The agreement term is two
        years.  Ms. Beavogui will receive a base salary of $54,000 per year
        and a subsidy of $2,500 per month while in Guinea.  She also will
        receive options to purchase up to 75,000 shares of Hyperdynamics’ common stock
        that vest between September 2007 and August 2008.  We have determined
        that Ms. Beavogui is not an executive officer.
  48
 *Table
            of Contents*
  **DIRECTOR
        COMPENSATION**
  During
        the year ended June 30, 2007, compensation for independent directors was
        $8,000
        per quarter, ordinarily payable with Hyperdynamics common stock.
  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 first day of the quarter.
  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 first day of the
        quarter.
  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 first day of the quarter.
 
 Our
        independent directors are Harold Poling, Al Young, and L. Gene
        Stohler.  Mr. Poling serves on the audit and compensation
        committees.  Mr. Stohler and Mr. Young serve on the audit, nomination,
        and compensation committees.  Accordingly, Mr. Young and Mr. Stohler
        receive $18,000 and options to purchase 15,000 shares of Hyperdynamics common
        stock each quarter and Mr. Poling receives $15,000 and options to purchase
        10,000 shares of Hyperdynamics common stock each quarter.
  
 **DIRECTOR
        COMPENSATION**
  Change in
                  PensionNon-Equity
              Value
                  and
              AllFees
                  Earned or
              Stock
              Option
              Incentive
                  Plan
              Nonqualified
                  Deferred
              OtherName
              Paid
                  in Cash
              Awards
              Awards
              Compensation
              Compensation
                  Earnings
              Compensaton
              Total(a)
              ($)
                  (b)
              ($)
                  (c)
              ($)
                  (d)
              (e)
              (f)
              ($)
                  (g)
              ($)
                  (h)Albert
                  Young
              20,968
              51,032
              73,994
              
              
              
              145,994L
                  Gene Stohler
              -
              72,000
              73,994
              
              
              
              145,994Harold
                  A Poling
              -
              62,000
              49,330
              
              
              
              111,330
 
 
 Column
        (b): Mr. Young opted to receive his fees for the quarter ended December 31,
        2007
        in cash.
 
 Column
        (c): Stock awards to pay directors fees.  The assumptions used to
        determine the valuation of the awards are discussed in note 13 to the
        consolidated financial statements.
 
 Column
        (d): Amounts are the expenses recorded in the company’s 2007 financial
        statements for stock options awarded for that year.  The assumptions
        used to determine the valuation of the awards are discussed in note 13 to
        the
        consolidated financial statements.   The notes to the beneficial
        ownership table in Item 12 provide detailed information about each directors’
outstanding stock option awards.
 
 ***Compensation
          Committee Interlocks and Insider Participation***
  The
        Compensation Committee is made up of two independent, non-employee directors,
        Messrs. Stohler and Young. No interlocking relationship exists between the
        members of our Compensation Committee and the board of directors or compensation
        committee of any other company.
  49
 *Table
            of Contents*
  ***Compensation
        Committee Report***
  The
        Compensation Committee (“Compensation Committee”), consisting of Mr. L. Gene
        Stohler and Mr. Albert Young, is responsible for establishing and administering
        the executive compensation programs of the Company. The Compensation Committee
        of Hyperdynamics has reviewed and discussed the Compensation Discussion and
        Analysis required by Item 402(b) of Regulation S-K with management and, based
        on
        such review and discussions, the Compensation Committee recommended to the
        Board
        that the Compensation Discussion and Analysis be included in this Annual
        Report.
  THE
        COMPENSATION COMMITTEE
  /s/
        Albert Young, Chairman
 /s/
        L.
        Gene Stohler
  **Item
        12 Security Ownershipof Certain Beneficial Owners and
        Management and Related Stockholder Matters**
 
 **Equity
        Compensation Plan Information**
 
 The
        following table gives aggregate information under all equity compensation
        plans
        of Hyperdynamics as of June 30, 2007.
  **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
              3,159,999
              3.96
              4,453,311Equity
                  compensation plans not approved by security holders
              942,000
              0.27
              -0-Total
              4,101,999
              3.11
              4,453,311
 
 The
        Stock
        and Stock Option Plan (the “Plan”) of Hyperdynamics was adopted May 7, 1997 and
        amended on December 3, 2001 and on January 21, 2005.  The total number
        of shares issuable under the Plan, as amended, is
        10,000,000.   The Board of Directors voted to amend the Plan on
        May 5, 2007 by extending the expiration date of the Plan from May 7, 2007
        to May
        7, 2010.
 
 As
        of  June 30, 2006, we had 4,771,597 shares available to be issued or
        granted pursuant to the Plan. We issued 318,286 shares under the Plan this
        fiscal year, leaving us with 4,453,311 shares available to be issued or granted
        pursuant to the Plan as of June 30, 2007.
 
 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.
 
 50
 *Table
            of Contents*
  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 942,000 shares of common stock which are currently
        outstanding and were issued pursuant to such agreements at a weighted average
        price of $0.27 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.
 
 
 **Security
        ownership of certain beneficial owners and management**
 
 The
        following table sets forth certain information at September 28, 2007, 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
              
              
              12,592,218
              
              
              
              (1
              )
              
              
              15
              %Harry
                  BriersOne
                  Sugar Creek Center Boulevard, Suite 125Sugar
                  Land, TX 77478
              
              
              1,998,336
              
              
              
              (2
              )
              
              
              2
              %Harold
                  PolingFairlane Plaza
                  North290
                  Town Center Drive, Suite 322Dearborn,
                  Michigan 48126
              
              
              623,648
              
              
              
              (3
              )
              
              
              1
              %Albert
                  F. Young2417
                  Fox Chase BlvdTroy,
                  Michigan 48098-5626
              
              
              236,722
              
              
              
              (4
              )
              
              
              -
              %Steven
                  Plumb5300
                  N. Braeswood, #370Houston,
                  TX 77096-3317
              
              
              139,211
              
              
              
              (5
              )
              
              
              -
              %L.
                  Gene StohlerOne
                  Sugar Creek Center Boulevard, Suite 125Sugar
                  Land, TX 77478
              
              
              188,627
              
              
              
              (6
              )
              
              
              -
              %Michael
                  WattsOne
                  Sugar Creek Center Boulevard, Suite 125Sugar
                  Land, Texas 77478
              
              
              6,630,458
              
              
              
              (7
              )(9)
              
              
              8
              %All
                  Directors and Executive Officers as a group (6
                  persons)
              
              
              15,782,836
              
              
              
              (8
              )
              
              
              19
              %
  51
 *Table
            of Contents*
 
 (1)
              This
                  amount includes: 2,733,707 shares of common stock; currently exercisable
                  options or warrants to purchase 1,940,000 shares of common stock;
                  and
                  7,918,511 shares deemed beneficially owned through TW Trust. TW
                  Trust owns
                  the shares indirectly thought its ownership of TWJ Navigation,
                  Inc. TWJ
                  Navigation, Inc. owns 1,069 shares of Series B Preferred Stock
                  which are
                  convertible into 7,918,511 shares of common stock, warrants to
                  purchase
                  1,740,000 shares of common stock, and 4,074 shares of common stock.
                  The
                  beneficiaries of TW Trust are Kent Watts's children. Kent Watts
                  is the
                  trustee of TW Trust.
 
 
 (2)
              This
                  amount includes: 1,898,336 shares of common stock and currently
                  exercisable options to purchase 100,000 shares of common
                  stock.
 
 
 (3)
              This
                  amount includes: 383,648 shares of common stock and currently exercisable
                  options or warrants to purchase 240,000 shares of common
                  stock.
 
 
 (4)
              This
                  amount includes: 76,722 shares of common stock and currently exercisable
                  options or warrants to purchase 160,000 shares of common
                  stock.
 
 
 (5)
              Includes
                  59,211 shares of common stock and currently exercisable options
                  to
                  purchase 80,000 shares of common
                  stock.
 
 
 (6)
              This
                  amount includes: 43,627 shares of common stock and currently exercisable
                  options to purchase 145,000 shares of common
                  stock.
 
 
 (7)
              This
                  amount includes: 6,296 shares of common stock, currently exercisable
                  warrants to purchase 580,000 shares of common stock and 2,933,330
                  shares
                  beneficially owned through KW Trust. KW Trust owns the shares indirectly
                  though its ownership of KW Navigation, Inc. KW Navigation, Inc.
                  owns 396
                  shares of Series B Preferred Stock, which are convertible into
                  2,993,330
                  shares of common stock, 6,269 shares of common stock, and warrants
                  to
                  purchase 580,000 shares of common stock. The beneficiary of KW
                  Trust is
                  Kelly Wheeler. Michael Watts is the trustee of KW
                  Trust.
 
 
 (8)
              Includes:
                  currently exercisable warrants to purchase 2,665,000 shares of
                  common
                  stock and 7,918,511 shares deemed beneficially owned through TW
                  Trust.
  
 (9)
              Includes currently
                  exercisable warrants to purchase 1,500,000 shares of common
                  stock and 1,610,832 shares of common stock in addition to securities
                  beneficially owned through KW
                  Trust.
  We
        are
        not aware of any arrangements that could result in a change of
        control.
  **Item
        13 Certain Relationshipsand Related Transactions, and
        Director Independence**
 
 Related
        party transactions include payments to the CEO's brother, Michael Watts,
        as
        follows: during the year ended June 30, 2007, Michael Watts, the CEO's brother,
        received payment of $13,000 cash to pay for offering costs on private
        subscription agreements and warrants exercised. Additional offering costs
        will
        also be paid on 3,471,000 warrants purchased by private investors should
        they be
        exercised in the future. If all of these warrants were exercised, Mr. Watts
        would receive approximately $867,750 to pay these additional costs.
 
 52
 *Table
            of Contents*
  Warrants
        to purchase 1,200,000 shares of common stock with an exercise price of $0.50
        per
        share were issued to a company of which Michael Watts is president for public
        relations/investor relations services. The warrants vested quarterly from
        January 2004 through December 2005. All the warrants had been exercised as
        of
        June 30, 2007.
 
 In
        March
        2007, the audit committee pre-approved a consulting contract with Mike Watts
        under which Mr. Watts will provide Investor Relations, Public Relations,
        Financial Consulting and general advisory services.  In June 2007, the
        compensation committee and audit committee approved a warrant to purchase
        1,500,000 shares of common stock at $4.00 per share as the compensation
        associated with this agreement.  The warrants expire in June
        2014.
 
 In
        April
        2007, Mr. Jeremy Driver’s (son-in-law of Michael E. Watts, brother of the Chief
        Executive Officer), employment arrangement was amended to add health insurance
        benefits for his dependents and a bonus schedule based on barrels of oil
        produced per day.  The audit committee pre-approved the
        amendment.
 
 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.
  In
        2007,
        an original trust for grandchildren of Earnest Watts (father of Kent Watts)
        was
        divided into five trusts for the same beneficiaries pursuant to the terms
        of the
        original trust. The original trust owned DJX LTD., which in turn held shares
        of
        Series B Preferred Stock. DJX LTD. transferred its Series B Preferred Stock
        to
        five new corporations which are owned by the five trusts.
 
 In
        June
        2007, four of the new corporations converted a total of 238 shares of Preferred
        Series B stock to 1,762,962 shares of Hyperdynamics common
        stock.  They then exchanged 1,740,000 shares of common stock for
        warrants to purchase 3,480,000 shares of common stock at $4 per share. The
        exchange of stock for warrants facilitated the settlement of Hyperdynamics’
lawsuit with Trendsetter Investors LLC.  In accordance with a price
        reset provision in the original warrants, the exercise price of the warrants
        was
        reduced from $4.00 per share to $2.40 per share on June 29, 2007
 
 **Director
        Independence**
 
 Our
        common stock is listed on the American Stock Exchange (AMEX).  We use
        SEC Rule 10A-3 and the AMEX definition of independent director in determining
        whether a director is independent in the capacity of director and in the
        capacity as a member of a board committee.  In determining Director
        independence, we have not relied on any exemptions from any rule’s definition of
        independence.
 
 In
        addition to the requirements of SEC Rule 10A-3 under the Securities Exchange
        Act
        of 1934, the AMEX rules provide that "Independent director" means a person
        other
        than an executive officer or employee of the company.
 
 Directors
        serving on our audit committee must also comply with additional AMEX
        requirements as follows:
 
 (a)           The
        Director must not have participated in the preparation of our financial
        statements or any current subsidiary at any time during the past three years;
        and
 
 (b)           The
        Director is able to read and understand fundamental financial statements,
        including our balance sheet, income statement, and cash flow
        statement.
 
 We
        have a
        total of five directors, three of whom three are independent
        directors.  Our independent directors are: Harold A. Poling, Albert F.
        Young and L. Gene Stohler.
 
 Our
        Audit
        Committee members are Messrs. Poling, Young and Stohler, all of whom are
        independent Directors.   Mr. Poling is the financial expert based
        on his work as Chairman and CEO of Ford Motor Co.  During the year
        ended June 30, 2007, the Audit Committee met 4 times and took action by
        Unanimous Consent 3 times.
 
 53
 *Table
            of Contents*
  Our
        Compensation Committee members are Messrs. Young and Stohler, all of whom
        are
        independent Directors.  During the year ended June 30, 2007, the
        Compensation Committee met 4 times and took action by Unanimous Consent 4
        times.
 
 Our
        Nomination Committee members are Messrs. Poling, Young and Stohler, all of
        whom
        are independent Directors.  During the year ended June 30, 2007, the
        Nomination Committee met 1 times and took action by Unanimous Consent 0
        times.
 
 **Item
        14 Principal AccountingFees and
        Services**
 
 Audit  Fees
 
 Malone
        & Bailey, PC billed us in the aggregate amount of $85,000 and $59,000
        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  years  ended
        June  30,  2007 and 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,  2007 and
        2006.
 
 Financial  Information  Systems  Design  And  Implementation  Fees
 
 For  the
        fiscal years ended June 30, 2007 and 2006, 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 $0 for professional services rendered
        for tax
        related services  for the years ended June 30,  2007 and
        2006.
 
 All  Other  Fees
 
 Malone  &  Bailey,  PC  billed
        us $6,000  for professional services in connection with an S-1
        filing  during the fiscal year ended
        June  30,  2007.
 
 Auditor  Independence
 
 Our  Board  of  Directors  considers
        that the work done for us in the year ended
        June  30,  2007  by  Malone &
Bailey, PC is compatible with maintaining Malone & Bailey,
        P.C.'s  independence.
 
 Auditor's  Time  On  Task
 
 All  of  the
        work expended by Malone & Bailey, PC on our June 30, 2007 audit was
        attributed  to  work  performed  by  Malone  &
Bailey, P.C.'s full-time, permanent employees.
 
 **Item
        15 Exhibits, FinancialStatement
        Schedules**
 
  **(A)**
 **Exibit
                Number**
              **Description**21.1
              List
                  of Subsidiaries23.3
              Consent
                  of Ryder Scott Company, L.P.- provided herewith.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-OxleyAct  of  2002.31.2
              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-OxleyAct  of  2002.32.1
              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.  63.32.2
              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.
 
 54
 *Table
            of Contents*
  **FINANCIAL
        STATEMENT SCHEDULES**
  The
        financial statement schedules required by this item are set forth in the
        notes
        to our financial statements set forth on page 57 and F-1.
  **SIGNATURES**
 Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange Act
        of
        1934, the Registrant has duly caused this report to be signed on its behalf
        by
        the undersigned, thereunto duly  authorized.
  HYPERDYNAMICS
                  CORPORATIONSeptember
                  28, 2007By:
                  /s/ Kent WattsKent
                  WattsChairman
                  of the Board,Director,Chief
                  Executive Officer
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, this report has
        been
        signed below by the following persons on behalf of the registrant and in
        the
        capacities and on the dates indicated.
  /s/
                  Kent Watts
                Kent
                  Watts
              
              Chairman
                  of the Board, Director, President, and Chief Executive
                  Officer
              
              September
                  28, 2007/s/
                  Harold A. Poling
                Harold
                  A. Poling
              
              Director
              
              September
                  28, 2007/s/
                  Harry J. Briers
                Harry
                  J. Briers
              
              Director,
                  Chief Operating Officer and Executive Vice-president
              
              September
                  28, 2007/s/
                  Al Young
                Al
                  Young
              
              Director
              
              September
                  28, 2007/s/
                  Steven M. Plumb
                Steven
                  M. Plumb
              
              Chief
                  Financial Officer and Principal Accounting Officer
              
              September
                  28, 2007/s/
                  L. Gene Stohler
                L.
                  Gene Stohler
              
              Director
              
              September
                  28, 2007
   55