UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-K





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





For the
fiscal year ended June 30, 2008


or


o TRANSITION REPORT
UNDER SECTION 13 OR 15(D) OF THE SECURITIES 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       (IRS
Employer


of
incorporation or organization) 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 RegisteredCommon
      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
              x
  No
 
 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
              x
  No
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13  or  15(d) of the Securities Exchange
Act during the preceding 12 months (or for such shorter period  that
the registrant was required to file such reports), and (2) has been
subject  to  such  filing  requirements  for  the  past  90
days.
 xYes
               ̈  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, a non-accelerated  filer, or a smaller reporting
company.
 Large
      accelerated filer   ̈
              Accelerated
      filer  x
              Non-accelerated
      filer   ̈
 
 Smaller
reporting company  ̈
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12-b-2 of the Exchange Act)
  ̈Yes
              x  No
 As of
December 31, 2007, the aggregate market value of the registrant’s common
stock held by non-affiliates of the registrant was $81,531,392 based on the
closing sale price as reported on the American Stock Exchange.  We
had 62,276,091
shares of common stock outstanding on September 30,
2008.





Part I
            4Item 1.  Business
            4Item 1A.  Risk Factors
            12Item 1B  Unresolved Staff
    Comments
            22Item 2 Properties
            22Item 3 Legal Proceedings
            23Item 4 Submission of Matters to a Vote of Securities
      Holders
            25Part
      II
            25Item 5 Market for Registrant’s Common Equity, Related
      Shareholder Matters and Issuer Purchases of Equity
      Securities
            25Item 6 Selected Financial Data
            28Item 7 Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
            29Item 7A Quantitative and Qualitative Disclosures About Market
      Risk
            40Item 8 Financial Statements and Supplementary
      Data
            40Item 9 Changes in and Disagreements With Accountants on
      Accounting and Financial Disclosure
            41Item 9A.    Controls and
      Procedures
            41Item 9B Other Information
            44Part
      III
            44Item 10 Directors, Executive Officers and Corporate
      Governance
            44Item 11 Executive Compensation
            47Item 12 Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
            56Item 13 Certain Relationships and Related Transactions, and
      Director Independence
            60Item 14 Principal Accounting Fees and
    Services
            61Item 15 Exhibits, Financial Statement
      Schedules
            62SIGNATURES
            62


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 registered
public accounting firm 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: Sarah Berel-Harrop,
Hyperdynamics Corporation, One Sugar Creek Center Blvd., #125, Sugar Land, Texas
77478, voice: (713) 353-9400, fax: (713) 353-9421. Our Web site iswww.hyperdynamics.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.





Members
of the public may read and copy any materials we file with the SEC at the SEC's
Public Reference Room at 100 F Street, NE., and Washington, DC 20549. Members of
the public may obtain information on the operation of the Public Reference Room
by calling the SEC at 1–800–SEC–0330.  The Web site of the Commission
is www.sec.gov.  That
website contains reports, proxy and information statements and other information
regarding issuers, like Hyperdynamics, 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





Hyperdynamics
Corporation, a Delaware corporation formed in 1996, is an emerging independent
oil and gas exploration and production company.  We own exclusive
rights for exploration and exploitation of oil and gas in an approximately
31,000 square mile concession off the coast of the Republic of Guinea (“Guinea”)
in West Africa.    We believe this is the largest offshore
acreage position of any company involved in exploration and production in West
Africa.





In
addition to our Guinea concession, we hold working interests in several oil and
gas properties in Northeast Louisiana.  At June 30, 2008, we had
150,435 barrels of oil equivalent (BOE) of proved reserves related to these
Louisiana properties.   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 also the name of 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
      Guinea.  SCSG is owned 100% by SCS and is part of our SCS
      business segment operating in
Guinea.





Financial
information pertaining to our operating segments is provided in Note 12 to our
Consolidated Financial Statements.




INTERNATIONAL
OPERATIONS





Hyperdynamics
is conducting exploration work pertaining to the offshore area of Guinea. We
have been conducting exploration work related to offshore Guinea since 2002. On
September 22, 2006, the government of Guinea and our wholly owned subsidiary,
SCS Corporation signed a 2006 Production Sharing Contract (“2006
PSC”).  The contract was filed as an exhibit attached to the company's
Form 8-K filed on September 28, 2006.  We are conducting our current
work under the 2006 PSC.





The 2006
PSC gives us exclusive rights to explore and develop approximately 31,000 square
miles off the coast of Guinea. 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” in the National Assembly of Guinea, a
Presidential Decree, and a Supreme Court ruling (“Project of Law
process”).  Hyperdynamics would select the area ultimately surrendered
and we would retain a priority non-exclusive right to participate in the
development of the surrendered contract area.


4
 Table of Contents


The
minimum rights that we will maintain if the Project of Law process is completed
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 approximately 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 approximately 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 with the government of
      Guinea.


Although
the 2006 PSC is a legally binding contract under Guinea’s 1986 Petroleum Code,
the Project of Law process effectively codifies the 2006 PSC into a new Guinea
law in and of itself.  Whether the Project of Law process is completed
or not is entirely up to the Guinea government.  We are proceeding
with our work under the 2006 PSC in any respect. Unless and until the government
of Guinea completes all the steps in the Project of Law process, we retain the
exclusive right to explore and exploit 100% of the approximately 31,000 square
mile concession.  Our 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.
 
 Terms
of the 2006 PSC
 
 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 from the effective date of September 22,
2006.  We are required by the 2006 PSC to meet certain milestones on
the following timeline:
 
 
 ·
              The
      first exploration period lasts two years, until September 2008. Two one
      year extensions are available which would extend the first exploration
      period to a total of four years.  By the terms of the PSC, when we
      notify the government that we wish to extend an exploration period, it
      will be automatically granted.  We submitted our extension
      notification; accordingly, it has been extended to September
      2009.  During the first exploration period we are required to
      acquire, evaluate, and analyze 2D or 3D seismic with an estimated
      expenditure of $10 million. Fulfilling the work obligation in all cases
      exempts us from fulfilling any minimum expenditure
      obligation.  We believe we have completed the work requirements
      of the first exploration period.
 ·
              The
      second exploration period starts after the end of the first exploration
      period, as extended.  The second exploration period lasts four
      years. One four year extension is available for a total of eight years.
      During the second exploration period we are required to acquire additional
      2D or 3D seismic, evaluate it, and analyze it with an estimated cost of $6
      million.  We are also required to drill two exploration wells
      with minimum well depths of 2,500 meters from the surface of the water.
      The estimated cost of the wells is $15 million to $20 million
      each.  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, during the
      first exploration period.  Such work, even though completed
      during the first exploration period, will accrue to the requirements in
      the second exploration
period.
 ·
              We
      can secure as many “Exploitation Areas”, in shapes defined by us, as we
      discover to be capable of commercial production.  Each Exploitation
      Area, defined as a contiguous block surrounding a discovery, shall be
      500 square kilometers in size. Each Exploitation Area is held for an
      initial period of twenty-five (25) years.  If we show the area
      remains productive after the initial period, we will get two additional
      extensions for ten years each so the total exploitation period becomes
      effectively forty-five (45) years.  Each well has its own
      exploitation period that starts when it begins producing.
  5
 Table of Contents
  Under the
provisions of the agreement, if we take all of the extensions available to us
and complete the work requirements, the first exploration period will expire in
September 2010 and the second exploration period expires in September
2018.  We believe we have met the work requirements of the first
exploration period, but we have nevertheless requested and received an extension
of the first exploration period.  Accordingly, we are in the first
exploration period.
 
 When, if
and as there is production in Guinea that falls under the terms of the 2006 PSC,
we will pay a 10% royalty to Guinea.  Of the remaining 90% of the first
production, we receive 75% of the revenue for cost recovery and Guinea will
receive 25%.  After cost recovery, revenue will be split as outlined
in the table below:
   Daily
      production (b/d)(1)
              Guinea
      Share
              HDY
      ShareFrom
      0 to 2,000
              25%
              75%From
      2,001 to 5,000
              30%
              70%From
      5,001 to 100,000
              40%
              60%Over
      100,001
              60%
              40%
 
 
 1After
75% cost recovery
 
 
 Exploration
Strategies and Work to Date
 
 Our
business plan incorporates a multi-channel approach to exploring and developing
our extensive contract area. We will continue independently to perfect drilling
targets and ultimately to 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.
 
 From
the inception of our involvement in Guinea beginning in 2002, we, in conjunction
with certain key vendors, have accomplished critical exploration work
including:
 
 (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 and a
      satellite seeps study.
 (4)
              Third
      party interpretation and analysis of our seismic data, performed by
      Petroleum GeoServices (PGS)
 (5)
              Reconnaissance
      within Guinea to evaluate drilling infrastructure, support services, and
      the operating environment.
 (6)
              A
      2,800 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.
 (7)
              Preparation
      for a 3D seismic shoot planned to begin in fiscal
  2009.
 
 On August
22, 2007, we announced our 2007 work program, which included 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.  As of September 30, 2008, we have acquired approximately 8,000
kilometers of proprietary 2-D seismic data from previous exploration programs
that occurred in 2002, 2003, and 2008.   We believe our studies
comprise the largest knowledge base in existence concerning the Guinean
offshore.  Our 2007 forward exploration program, including the 2008
2-D seismic data shoot, fulfilled the first period work requirements under the
2006 PSC. This work period required us to acquire, process, and interpret new
seismic in a scientific process to result in exploration well targets we are
ready to drill.
  6
 Table of Contents
  Political
Climate and Social Responsibility in Guinea
 
 Our
wholly-owned subsidiary SCSG was established in 2005. SCSG’s results are
included in the SCS operating segment.  SCSG maintains a visible
in-country presence and conducts public relations programs 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.
As part of the public relations program, SCSG makes donations to projects which
improve conditions in villages, to non-governmental organizations, to schools,
and to religious organizations in order to cultivate positive public sentiment
towards Hyperdynamics in Guinea.  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 support a strategy to maintain a positive public opinion about us in
Guinea.
 
 There are
risks associated with operating in Guinea.  See Item 1A – Risk Factors
– Geopolitical
Instability Item 1A – Risk Factors – Geopolitical Politics, Item
1A – Risk Factors – We Operate
in Guinea.
 
 DOMESTIC
OPERATIONS
  In April
2004, we acquired HYD Resources Corporation.  HYD Resources
Corporation engages in oil and gas exploration and production within the United
States. Thus far, all of our domestic 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 is an authorized operator in the state of
Louisiana. 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 HYDR.  HYDR operates oil and gas
wells and holds non-operating working interests in oil and gas wells. Over 90%
of HYDR’s revenues derive from oil production.
 
 During
July 2007, we purchased an 85% working interest in over 1,100 gross acres under
lease, various oil wells, and oil and gas equipment in Louisiana, USA (“RABB
properties”). In connection with the acquisition, we paid $1,867,000 in cash and
common stock in Hyperdynamics and assumed an asset retirement obligation of
$407,000.  Under the purchase agreement, the seller remained the
operator of the properties and retained a 15% working interest therein; however,
we were required to pay 100% of all working interest costs, including work-over
and new development and exploration costs, up to $4,000,000 (“Promised Funds”)
over the eighteen months ending December 31, 2008. After the investment of the
Promised Funds, working interest costs, except the cost of new drilling, will be
shared pro rata according to the working interest percentage. We will continue
to pay 100% of the costs of any new drilling performed on these properties.
After any new drill is completed, the working interest cost will be shared pro
rate according to the working interest percentage.
 
 The
Promised Funds obligation was completed in July 2008, after we assigned a 15%
working interest in wells we owned to our operator in exchange for a credit of
$1,600,000 against the investment obligation. Effective July 1, 2008, HYDR
retains working interest in oil and gas properties but no longer operates oil
and gas wells itself.
 
 Going
forward, HYDR plans to continue to improve production on its existing leaseholds
and to drill new development wells to exploit the production
potential.  In addition, we continue to evaluate new leases for their
potential to add to our proven reserves.  See Item 1A – Risk Factors –
Investment in the Oil and Gas
Industry is Risky.
  7
 Table of Contents
  DESCRIPTION
OF OIL AND GAS PROPERTIES
 
 Location
of properties
 
 Guinea
 
 The
Contract Area for our Guinea concession is represented on the attached map and
consists of an area deemed equal to approximately 31,000 square miles (80,000
square kilometers).
 
 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 direct line between Point A and Point I.
  
    8
 Table of Contents
  An
alternative map is below:
 
  
  Louisiana
 
 As of
June 30, 2008, HYDR has a working interest in approximately 1,699 gross acres of
land in Louisiana, USA under lease for oil and gas development.
 
 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
following table shows our annual sales volume, average sales prices per barrel
of oil, and average production costs per barrel of oil.  Production
costs are costs incurred to operate and maintain our wells and related
equipment.  Production costs include cost of labor, well service and
repair, location maintenance, power and fuel, property taxes, and severance
taxes.  Certain amounts from prior years have been reclassified to
conform to the current presentation.
 
 2008
              
              
              2007
              
              
              2006United
      StatesBarrels
      of oil soldGross
              
              
              43,457
              
              
              
              20,740
              
              
              
              13,869Net
              
              
              28,197
              
              
              
              14,726
              
              
              
              9,439Sales
      price per barrel
              
              $
              101.72
              
              
              $
              61.66
              
              
              $
              65.16Production
      cost per barrel
              
              $
              92.35
              
              
              $
              44.75
              
              
              $
              76.49Republic of
      GuineaBarrels
      of oil soldGross
              
              
              -
              
              
              
              -
              
              
              
              -Net
              
              
              -
              
              
              
              -
              
              
              
              -Sales
      price per barrel
              
              
              N/A
              
              
              
              N/A
              
              
              
              N/AProduction
      cost per barrel
              
              
              N/A
              
              
              
              N/A
              
              
              
              N/A
  9
 Table of Contents
  Reserves.
 
 As of
June 30, 2008, we had 150,435 barrels of proved reserves, broken down as
follows:
 
 
 Proved
      developed producing
              116,993Proved
      developed non-producing
              9,219Proved
      undeveloped
              24,223
 
 
 Our
reserves were estimated by an independent third party, Ryder Scott Company,
LP.  Proved oil reserves are the estimated quantities of crude oil
which geological and engineering data demonstrate with reasonable certainty to
be recoverable in future years from known reservoirs under existing economic and
operating conditions, i.e., prices and costs as of the date the estimate is
made.
 
 Productive
Crude Oil Wells.
 
 The
number of productive crude oil wells in which we held an interest as of
June 30, 2008 was as follows:
  Gross(1)
              
              
              Net(2)United
      StatesOnshore
              
              
              17
              
              
              
              15ForeignGuineaOffshore
              
              
              0
              
              
              
              0Total
              
              
              17
              
              
              
              15
  (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.
  Acreage.
 
 The
developed and undeveloped acreage (including both leases and concessions) that
we held as of June 30, 2008 are as follows:
  Developed
      Acreage (1)(
      2)
              
              
              Undeveloped
      Acreage (2)(
      3)Gross
      Acres
              
              
              Net
      Acres
              
              
              Gross
      Acres
              
              
              Net
      AcresUnited
      StatesOnshoreLouisiana
              
              
              1,460
              
              
              
              1,276
              
              
              
              239
              
              
              
              215ForeignOffshoreGuinea
              
              
              0
              
              
              
              0
              
              
              
              20,251,000
              
              
              
              20,251,000Total
              
              
              1,460
              
              
              
              1,276
              
              
              
              20,251,239
              
              
              
              20,251,215
  (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.
  10
 Table of Contents
  Net
Exploratory and Development Wells.
 
 The
following table sets forth, for each of the years ended June 30, 2008, 2007, and
2006, the number of net exploratory and development wells we drilled. 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 the relevant
fiscal year, 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 WellsProductive
      (1)
              Dry
      (2)
              Productive
      (1)
              Dry
      (2)US
              Int'l
              US
              Int'l
              US
              Int'l
              US
              Int'lJune
      30, 2008
              0
              0
              2
              0
              1
              0
              0
              0June
      30, 2007
              0
              0
              0
              0
              0
              0
              0
              0June
      30, 2006
              0
              0
              1
              0
              1
              0
              0
              0
 
  (1)
              A productive well is an
      exploratory or development well that is not a dry
    hole.
 
 (2)
              A
      dry hole is an exploratory or development well determined to be incapable
      of producing either crude oil or natural gas in sufficient quantities to
      justify completion as an oil or gas
well.
 
 Present
Activities
 
 As of
September 30, 2008, there was no drilling in progress.
  Delivery
Commitments
 
 We have
no delivery commitments in the USA or Guinea.
 
 Employees and Independent
Contractors
 
 As of
September 30, 2008, we have 17 full time employees based in the USA and
approximately 40 independent contractors in Guinea. Additionally, we use
independent contractors in the USA to minimize fixed overhead. No employees are
represented by a union. We believe that our labor relations are
good.
  11
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  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.
 
 Key
Customers.
 
 During
the year ended June 30, 2008, we derived approximately 80% of our revenues, or
$2,269,000, from sales to Plains Marketing LLC and approximately 20% of our
revenues, or $599,000, from sales to Shell Trading.  The number of oil
transporters in northern Louisiana is limited and this results in a
concentration risk.  The loss of both customers could have an adverse
effect on Hyperdynamics.
  Geographical
Information
 
 The
following table sets out certain geographical information about our
operations:
 
 
 2008
              
              
              2007
              
              
              2006United
      StatesRevenues
              
              $
              2,899,000
              
              
              $
              1,006,000
              
              
              $
              615,000Long-lived
      assets related to the USA
              
              
              3,275,000
              
              
              
              379,000
              
              
              
              366,000Republic of
      GuineaRevenues
              
              
              N/A
              
              
              
              N/A
              
              
              
              N/ALong-lived
      assets related to Guinea
              
              $
              7,617,000
              
              
              $
              4,476,000
              
              
              $
              4,167,000
 
 Long-lived
assets related to Guinea include our investment in the concession offshore
Guinea, an intangible asset.  The data we have collected and our
geological and geophysical work product are maintained in our offices in the
USA.  There are risks associated with operating in Guinea. See Item 1A
– Risk Factors – Geopolitical
Instability Item 1A – Risk Factors – Geopolitical Politics, Item
1A – Risk Factors – We Operate
in Guinea.
 
 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. We have abided
by and are in compliance with all applicable environmental laws.
 
 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, weather, natural events, and price limitations imposed by federal
and state regulatory agencies.
 
  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 annual report 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.
  12
 Table of Contents
  RISKS
RELATED TO 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 throughout the world;
 
 -
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;
 
 -
value of the U.S. dollar.
 
 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.
  13
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  THERE ARE
DRILLING AND OPERATIONAL HAZARDS ASSOCIATED WITH THE OIL AND GAS
INDUSTRY.
 
 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 adversely affect our liquidity 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.
  14
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  The Oil
Pollution Act of 1990 and its implementing regulations impose a variety of
requirements related to the prevention of oil spills, and liability for damages
resulting from such spills in United States waters. OPA 90 imposes strict joint
and several liability on responsible parties for oil removal costs and a variety
of public and private damages, including natural resource damages. While
liability limits apply in some circumstances, a party cannot take advantage of
liability limits if the spill was caused by gross negligence or willful
misconduct or resulted from violation of a Federal safety, construction or
operation regulation. If a party fails to report a spill or to cooperate fully
in a cleanup, liability limits likewise do not apply. Even if applicable, the
liability limits for offshore facilities require the responsible party to pay
all removal costs, plus up to $75 million in other damages. For onshore
facilities, the total liability limit is $350 million. OPA 90 also requires a
responsible party at an offshore facility to submit proof of its financial
ability to cover environmental cleanup and restoration costs that could be
incurred in connection with an oil spill.
 
 The
Comprehensive Environmental Response, Compensation, and Liability Act, also
known as the “Superfund” law, and analogous state laws impose joint and several
liability on certain classes of persons that are considered to have contributed
to the release of a “hazardous substance” into the environment. These parties
include the owner or operator of the site where the release occurred, and those
that disposed or arranged for the disposal of hazardous substances found at the
site. Responsible parties under CERCLA may be subject to joint and several
liability for remediation costs at the site, and may also be liable for natural
resource damages. Additionally, it is not uncommon for neighboring landowners
and other third parties to file tort claims for personal injury and property
damage allegedly caused by hazardous substances released into the
environment.
 
 State and
local statutes and regulations require permits for drilling operations, drilling
bonds and reports concerning operations. In addition, there are state statutes,
rules and regulations governing conservation matters, including the unitization
or pooling of oil and gas properties, establishment of maximum rates of
production from oil and gas wells and the spacing, plugging and abandonment of
such wells. Such statutes and regulations may limit the rate at which oil and
gas could otherwise be produced from our properties and may restrict the number
of wells that may be drilled on a particular lease or in a particular
field.
 
 RISKS
RELATED TO 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. 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 2006
Production Sharing Contract.
 
 GEOPOLITICAL
POLITICS.
 
 We
entered into a 2006 Production Sharing Contract with the Republic of Guinea
(“2006 PSA”).  The government of the Republic of Guinea could
unlawfully terminate this contract.
 
 WE
OPERATE IN GUINEA, A COUNTRY WHERE CORRUPT BEHAVIOR EXISTS THAT COULD IMPAIR OUR
ABILITY TO DO BUSINESS IN THE FUTURE OR RESULT IN SIGNIFICANT FINES OR
PENALTIES.
 
 We
operate in Guinea, a country where governmental corruption has been known to
exist. While we are committed to conducting business in a legal and ethical
manner, there is a risk of violating either the U.S. Foreign Corrupt Practices
Act (“FCPA”) or laws or legislation promulgated pursuant to the 1997 OECD
Convention on Combating Bribery of Foreign Public Officials in International
Business Transactions or other applicable anti-corruption regulations that
generally prohibit the making of improper payments to foreign officials for the
purpose of obtaining or keeping business. Some of the identified internal
control deficiencies contributing to our material weakness in financial
reporting relate to our operations in Guinea. This material weakness makes it
more likely that a violation could have occurred. Violation of these laws could
result in monetary penalties against us or our subsidiaries and could damage our
reputation and, therefore, our ability to do business.  In addition,
the future success of our Guinea operations may be adversely affected by risks
associated with international activities, including economic and labor
conditions, political instability, risk of war, expropriation, renegotiation or
modification of existing contracts, tax laws and changes in exchange
rates.  For information concerning our internal control procedures,
see Item 9A – Controls and Procedures.
  15
 Table of Contents
  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 from Ryder Scott
Company, LP 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. Unavailability, shortages or increases in the cost of drilling
rigs, equipment, supplies or personnel could delay or adversely affect our
Guinea operations. There can be no assurance that we will be able to obtain the
necessary equipment or that services will be available at economical
prices.
 
 FAILURE
TO FIND OIL AND GAS.
 
 We may
not be able to find oil and gas in commercial quantities, and if not, our future
revenue potential would be substantially reduced.
 
 WE MAY BE
UNABLE TO ACQUIRE OIL AND GAS LEASES.
 
 To engage
in oil and gas exploration, we must first acquire rights to conduct exploration
and recovery activities on identified prospects. We may not be successful in
acquiring farmouts, permits, lease options, leases or other rights to explore
for or recover oil and gas. Other major and independent oil and gas companies
with financial resources significantly greater than ours may bid against us for
the purchase of oil and gas leases. If we or our subsidiaries are unsuccessful
in acquiring these leases, permits, options and other interests, our prospect
inventory for exploration and drilling could be significantly reduced, and our
business, results of operations and financial condition could be substantially
harmed.
  16
 Table of Contents
  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.
 
 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.
  17
 Table of Contents
  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.
 
 RISK OF
VOLATILE MARKET PRICE OF OIL AND GAS.
 
 Our
functional currency is the U.S. 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.
 
 DOLLAR
VERSUS EURO DENOMINATION FOR OIL AND GAS TRANSACTIONS.
 
 Most
international oil and gas transactions are currently denominated in U.S.
dollars.  There could be a desire by some oil producing nations to
denominate the price of oil transactions in Euros.  The Euro has
recently increased in value relative to the dollar.  If we later
engage in Euro denominated transactions we could face a foreign currency
exchange risk of the Euro decreasing in value relative to the U.S.
dollar.
 
 RISKS
RELATED TO OUR FINANCIAL OPERATIONS
 
 THERE IS
A MATERIAL WEAKNESS IN OUR FINANCIAL CONTROLS AND PROCEDURES.
 
 A
material weakness is a control deficiency, or a combination of control
deficiencies, that results in there being more than a remote likelihood that a
material misstatement in our financial statements will not be prevented or
detected. We have determined that our financial 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. The actions that we have taken to date have not been effective in
remediating this material weakness. We do not know when this material weakness
will be corrected. This could result in a material misstatement in our financial
statements.
  18
 Table of Contents
  THERE IS
A MATERIAL WEAKNESS IN OUR INTERNAL CONTROLS AND PROCEDURES; EXISTING
DEFICIENCIES MAY NOT BE ADEQUATELY REMEDIATED.
 
 A
material weakness is a control deficiency, or a combination of control
deficiencies, that results in there being more than a remote likelihood that a
material misstatement in our financial statements will not be prevented or
detected.  We have determined that our internal 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 and reported within the time periods specified in the rules
and forms of the SEC.  Some of the deficiencies our management
identified in our internal controls over financial reporting relate to our
operations in Guinea. These deficiencies increase the likelihood of
misstatements in our financial statements or violations of law. Our internal
controls and procedures were developed through a process in which our management
applied its judgment in assessing the costs and benefits of such internal
controls and procedures, which, by their nature, can provide only reasonable
assurance regarding the control objectives. The design of any system of internal
controls and procedures is based in part upon various assumptions about the
likelihood of future events.  The actions taken to date have not been
effective in remediation of this material weakness.  We do not know
when this material weakness will be corrected.  Any failure to
remediate the deficiencies noted in connection with our audits or to implement
required new or improved controls, or difficulties encountered in their
implementation, could cause us to fail to meet our reporting obligations or
result in material misstatements in our financial statements. Ineffective
internal controls could also cause investors to lose confidence in our reported
financial information, which could result in a lower trading price of our
stock.
 
 WE HAVE A
HISTORY OF LOSSES.
 
 We have
experienced substantial operating losses. We expect to incur significant
operating losses until sales increase. We will also need to raise sufficient
funds to finance our activities. We may be unable to achieve or sustain
profitability.
 
 WE HAVE
AN ACCUMULATED DEFICIT AND MAY INCUR ADDITIONAL LOSSES.
 
 We have a
substantial accumulated deficit. We may not be able to meet our debts as they
become due. If we are unable to generate sufficient cash flow or obtain funds to
pay debt, we will be in default.
 
 WE MAY
EXPERIENCE POTENTIAL FLUCTUATIONS IN RESULTS OF OPERATIONS.
 
 Our
future revenues may be affected by a variety of factors, many of which are
outside our control, including (a) the success of project results; (b) swings in
availability of drilling services needed to implement projects and the pricing
of such services; (c) a volatile oil and gas pricing market which may make
certain projects that we undertake uneconomic; (d) our ability to attract
qualified employees and consultants; 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.
  19
 Table of Contents
  IF WE
CANNOT OBTAIN ADDITIONAL FINANCING, WE MAY HAVE TO CURTAIL OPERATIONS AND MAY
ULTIMATELY CEASE TO EXIST.
 
 Our
financial statements reflect recurring, ongoing and substantial yearly net
losses, and negative cash flows from operations. These conditions require
sufficient additional funding or alternative sources of capital to meet our
working capital needs. We have raised capital by selling common stock, selling
warrants, issuing convertible debentures and using 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.
 
 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 we will need to
raise additional funds.
 
 TIME
LIMIT  AND CONTRACTUAL RESTRICTIONS ON EQUITY LINE OF
CREDIT.
 
 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 30,
2008, 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 it
has not been fully utilized by us. As of September 30, 2008, there would be time
to make approximately 20 “puts” to the equity line of credit until its
expiration which would represent approximately up to $10 million in additional
financing to us should we decide to use the equity line of credit.
 
 Whether
as a result of any contractual agreement with others or as a result of our
discretion, between now and February 2009, we may not have drawn down the
approximately $10 million that is functional amount that is available to us from
the equity line of credit at this time.  We have such a contractual
agreement with an investor restricting the use of our equity line of
credit.
 
 RISKS
RELATED TO 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
September 30, 2008, approximately 10,413,173 shares of our common stock were
restricted shares, and we have outstanding warrants and options to purchase
approximately 16,250,753 shares of 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 23% 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.
  20
 Table of Contents
  IF WE
ISSUE COMMON STOCK PURSUANT TO THE EQUITY LINE OF CREDIT, THEN EXISTING
STOCKHOLDERS WILL EXPERIENCE DILUTION.
 
 We may
utilize an equity line of credit. The sale of shares pursuant to the 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 DRAWS ON SHARE PRICE
 
 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;
 
 -
availability of credit;
 
 -
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;
 
 -
political turmoil in Guinea;
 
 -
natural disasters such as hurricane, flooding, earthquake, acts of
God.
  21
 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, and in the sole
discretion of our Board of Directors.
 
 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 of 1933 may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
 
 
 Item
1B.  Unresolved Staff Comments
 
 None.
 
 
 Item
2. Properties
 
 Information
on Oil and Gas Properties is included in Item 1, Business, in this
10-K.
  22
 Table of Contents
  Description
of Physical Facilities
 
 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.
We purchased this property in December 2005 for $50,000. The building and land
is included in Property, Plant, and Equipment in our Consolidated Balance
Sheets.  The property is used in the HYDR (domestic) business
segment.  During June and July 2008, we reduced staff in this location
and turned over the production and drilling operations to another
operator.  We are currently evaluating the future use of this
property.
 
 Administrative
Office Property.
 
 Our
executive and administrative offices are located at One Sugar Creek
Center Blvd., Suite 125, Sugar Land, Texas 77478 where we lease 6,752
square feet of space. The lease term was amended to 87 months commencing on
August 1, 2006. We had a 3 month free rent period at the commencement of the
lease.  The monthly rent is $12,000 per month.
 
 
 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 to 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 recovery from the Erin Oil parties or their legal
counsel is expected to be from insurance coverage.
  23
 Table of Contents
  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 [the Greenberg appeal].  The Greenberg appeal was
unsuccessful.  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 of 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 awaiting oral argument and ruling in the Court of
Appeals.  However, we expect the same result as the Greenberg
appeal.
 
 As of
June 30, 2008, we have not recorded an accrual associated with future legal fees
from this lawsuit because it is our policy to expense legal costs as they are
incurred.  Because of recent developments in the case, we consider a
loss from this lawsuit to be probable, and we have accrued $240,000 the amount
of the agreed settlement, associated with this legal contingency as of June 30,
2008.
 
 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.
  24
 Table of Contents
  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.
 
 USOil
Corporation.
 
 US Oil vs. SCS Corporation and
Hyperdynamics Corporation; Cause No. 2007-55700; in the 133rd Judicial
District Court of Harris County, Texas.
 
 In August
2007, USOil Corporation re-filed a previously dismissed 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 Harris County.  Discovery is expected to also start which will
show USOil’s allegations to be blatantly false and unfounded. 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.   The Court has extended the trial docket for this case
in light of its international nature. We are not currently set for trial and do
not expect a trial setting in the near future.
 
 In the US
Oil v. SCS and HDY case, we are preparing discovery to be sent to Plaintiff.
Initial efforts by Plaintiff to resolve this case without further litigation is
in the very early stages. It is unknown at this time the chance of success of
these resolution efforts.  We remain in the discovery
stage.  Management considers the probability of loss from this case
remote.
 
 Raymond
Thomas et al v. Ashley Investment et al.
 
 Trendsetter
Production Company was named in a lawsuit, Raymond Thomas et al v. Ashley
Investment et al., No. 38,839 “C”, 5th
Judicial District Court, Parish of Richland, State of Louisiana. The case is an environmental
cleanup case involving wells operated by Trendsetter prior to our acquisition of
the company. All operators in two fields, about fifty separate defendants, are
named in the suit. The case is in the early discovery stage and our attorneys
are developing strategies to defend the suit. We believe a loss from this case
is possible; however, the loss or range of loss cannot be reasonably
estimated.
 
  Item
4. Submission of Matters to a Vote of Securities
Holders
 
 None.
 
 Part II
 
 Item
5. Market for Registrant’s Common 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 AMEX. The bid prices reflect
inter-dealer quotations, do not include retail markup, markdown, or commission
and do not necessarily reflect actual transactions.
  25
 Table of Contents
 
 High
      Bid
              
              
              Low
      BidFiscal
      2008Fourth
      Quarter
              
              $
              2.73
              
              
              $
              1.10Third
      Quarter
              
              
              1.73
              
              
              
              1.13Second
      Quarter
              
              
              2.84
              
              
              
              1.54First
      Quarter
              
              
              3.13
              
              
              
              2.37Fiscal
      2007Fourth
      Quarter
              
              $
              3.80
              
              
              $
              1.48Third
      Quarter
              
              
              2.24
              
              
              
              1.70Second
      Quarter
              
              
              2.96
              
              
              
              2.26First
      Quarter
              
              
              2.85
              
              
              
              1.81Fiscal
      2006Fourth
      Quarter
              
              $
              3.42
              
              
              $
              2.05Third
      Quarter
              
              
              3.65
              
              
              
              1.72Second
      Quarter
              
              
              2.37
              
              
              
              1.09First
      Quarter
              
              
              2.57
              
              
              
              0.87
 
 
 On
September 29, 2008, the last price for our common stock as reported by the AMEX
was $1.18 per share. On September 30, 2008, there were approximately 228
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.
 
 Equity
Compensation Plan Information
 
 The
following table gives aggregate information under all equity compensation plans
of Hyperdynamics as of June 30, 2008.
 
 Equity
      Compensation Plan InformationPlan
      Category
              
              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))A
              
              
              B
              
              
              CEquity
      compensation plans approved by security holders
              
              
              3,810,839
              
              
              
              3.60
              
              
              
              7,140,155Equity
      compensation plans not approved by security holders
              
              
              N/A
              
              
              
              N/A
              
              
              
              N/ATotal
              
              
              3,810,839
              
              
              
              3.60
              
              
              
              7,140,155
  26
 Table of Contents
  The Stock
and Stock Option Plan (the “1997 Plan”) of Hyperdynamics was adopted May 7, 1997
and amended on December 3, 2001, on January 21, 2005, and on February 20,
2008.  The total number of shares issuable under the Plan, as amended,
is 14,000,000 and the current expiration date of the 1997 Plan is May 7,
2010.  Under the 1997 Plan, the Compensation Committee of the Board of
Directors, which is comprised of independent directors, may grant common stock,
warrants, or options to employees, directors, or consultants.  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.
 
 Shareholders
approved the adoption of the 2008 Restricted Stock Award Plan (the “2008 Plan”)
at Hyperdynamics’ Annual Meeting on February 20, 2008.  The total
number of shares issuable under the 2008 Plan is 3,000,000.   The
Plan expires on February 20, 2018.  Under the 2008 Plan, the
Compensation Committee of the Board of Directors, which is comprised of
independent directors, may grant common stock, warrants, or options to
employees, directors, vendors, or consultants.
 
 The
following table provides a reconciliation of the securities available for
issuance as of June 30, 2008 under the Plans.
 
 1997
      Plan
              
              
              2008
      Plan
              
              
              All
      PlansShares
      available for issuance, June 30, 2007
              
              
              4,453,311
              
              
              
              -
              
              
              
              4,453,311Increase
      in shares issuable
              
              
              4,000,000
              
              
              
              3,000,000
              
              
              
              7,000,000Shares
      issued
              
              
              (428,664
              )
              
              
              (73,653
              )
              
              
              (502,317
              )Options
      outstanding
              
              
              (3,810,839
              )
              
              
              -
              
              
              
              (3,810,839
              )Shares
      available for issuance, June 30, 2008
              
              
              4,213,808
              
              
              
              2,926,347
              
              
              
              7,140,155
 
 The
purpose of the Plans are 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, directors, and vendors 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 Plans to
augment our compensation packages.
 
 
 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, 2003 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.
  27
 Table of Contents
  
  Item
6 Selected Financial Data
 
 The
selected historical consolidated financial data set forth below for each of the
years in the five-year period ended June 30, 2008 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 30,2008
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004(in
      thousands, except per share amounts)Consolidated
      Statement of Operations Data:Revenues
              
              $
              2,899
              
              
              $
              1,006
              
              
              $
              615
              
              
              $
              173
              
              
              $
              38Loss
      from operations
              
              
              (9,045
              )
              
              
              (20,339
              )
              
              
              (5,319
              )
              
              
              (4,917
              )
              
              
              (3,117
              )Net
      loss
              
              
              (9,505
              )
              
              
              (23,199
              )
              
              
              (7,144
              )
              
              
              (5,216
              )
              
              
              (3,491
              )Basic
      and diluted loss per common share
              
              $
              (0.17
              )
              
              $
              (0.49
              )
              
              $
              (0.17
              )
              
              $
              (0.13
              )
              
              $
              (0.12
              )Weighted
      average shares outstanding
              
              
              56,330,846
              
              
              
              47,723,298
              
              
              
              43,318,773
              
              
              
              41,646,844
              
              
              
              31,938,926Balance
      Sheet Data:Working
      capital (deficit)
              
              $
              (2,200
              )
              
              $
              3,630
              
              
              $
              142
              
              
              $
              (1,413
              )
              
              $
              (1,625
              )Total
      Assets
              
              $
              12,950
              
              
              $
              11,480
              
              
              $
              8,303
              
              
              $
              5,209
              
              
              $
              7,283Long-term
      liabilities
              
              
              2,019
              
              
              
              133
              
              
              
              79
              
              
              
              135
              
              
              
              726Stockholders'
      equity
              
              
              6,673
              
              
              
              8,726
              
              
              
              4,608
              
              
              
              3,146
              
              
              
              4,660
  28
 Table of Contents
  Item
7 Management’s Discussion and Analysis of Financial Condition and
Results of Operations
 
 CAUTIONARY
STATEMENT ON FORWARD-LOOKING INFORMATION
 
 Hyperdynamics
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,
Hyperdynamics. This annual report on Form 10-K contains forward-looking
statements. Forward-looking statements include statements concerning plans,
objectives, goals, strategies, expectations, future events or performance and
underlying assumptions and other statements which are other than statements of
historical facts. Certain statements contained herein are forward-looking
statements and, accordingly, involve risks and uncertainties which could cause
actual results or outcomes to differ materially from those expressed in the
forward-looking statements. Our expectations, beliefs and projections are
expressed in good faith and are believed by us to have a reasonable basis,
including without limitations, management's examination of historical operating
trends, data contained in our 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 Hyperdynamics, could cause actual results to differ
materially from those discussed in the forward-looking statements: our ability
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 us, and the availability of personnel in the future to
support our activities.
 
 
 Overview
 
 Our
corporate mission is to provide energy for the future by exploring for,
developing new, and re-establishing pre-existing sources of energy
worldwide.  Through our domestic and international business segments,
we produce oil in Louisiana, USA and we explore for oil in Guinea, West
Africa.
 
 Domestic
Operations
 
 Our
operations in Louisiana produce oil and provide revenues and cash
flows.  The business model is that the domestic production will
provide sufficient cash flow to support our corporate overhead, so that capital
raised can be devoted to work on our concession in Guinea.  We have
not yet experienced sufficient cash flow to accomplish the goal of covering
overhead with net cash flows from oil production.   However, we
did double oil production and triple our revenue in the past fiscal year ended
June 30, 2008.  The increase in production is attributable to our Rabb
acquisition of working interest in over 1,100 gross acres on July 1,
2007.  We acquired the working interest with the knowledge that the
wells we acquired would require significant workover and repair to re-establish
and optimize production.  We made the investment required and have
seen the results. In the quarter ended June 30, 2008, we averaged gross
production of 5,000 barrels per month.  Our production cost per barrel
decreased over the quarter ended June 30, 2008 due to the completion of the
workover work.
 
 We expect
the quarter ended September 30, 2008 to have lower production than the quarter
ended June 30, 2008 due to the hurricane season. However, once production that
was disrupted by the storms returns to normal, we believe that we have
established a reserve base that is large enough that economies of scale will
reduce our cost per barrel and that the strong price of oil will support our
revenues.   In order to maintain or increase our reserve base, we
are continually evaluating new leases and opportunities for
drilling.
 
 29
 Table of Contents
  International
Operations
 
 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, develop, and produce the
petroleum resources in an area of approximately 31,000 square miles off the
coast of Guinea.  Developments of our work on the 2006 PSC over the
past year include the following:
   ●
              We
      have developed operational plans for our 2008 exploration efforts. Our
      staff has reinterpreted and clarified our past 2002 and 2003, 2-D seismic
      data and have identified approximately twenty-five potential drilling
      targets.  We have decided to focus on the transform margin play
      offshore the Republic of Guinea. Over the last three years, this play has
      resulted in at least 40 new field discoveries offshore West Africa that we
      know of to date which total to an approximate number of eight billion
      barrels of proved oil equivalent
reserves.
 
 ·
              We
      moved forward with the exploration work to fulfill the first exploration
      period obligations of our 2006 PSC. We engaged a contractor to perform
      seismic work offshore Guinea (“2008 2-D seismic”). The survey area of
      2,800 kilometers included specific quadrants of the original acquisition
      grid so that we could focus on areas that we had a particular interest
      in.  We focused efforts along the shelf-slope complex of the
      Transform Margin running through the offshore Guinea contract area so that
      we could better verify various potential drilling
  targets.
 
 ·
              During
      the fourth quarter ended June 30, 2008 and the quarter ended September 30,
      2008, we received the 2008 2-D seismic, reprocessed it, and interpreted
      it. We also negotiated a contract with a contractor to acquire up to 4,100
      square kilometers of 3-D seismic data.  We believe that the 3-D
      seismic data will provide us with a portfolio of drillable
      prospects.
 
 Sources
of financing during the year ended June 30, 2008
 
 The
financing obtained during the year included:
 
 In
December 2007, a warrant holder exercised warrants that provided $544,000 in new
capital to the company.
 
 On
December 21, 2007, we filed an S-3 registration statement to establish a shelf
registration of securities to allow the company to obtain up to fifty million
dollars ($50,000,000) in new capital.  The S-3 was declared effective
in February 2008.
 
 On
February 8, 2008, we borrowed $910,526 in a financing transaction from YA Global
Investments, L.P. (“YA Global”).  On March 3, 2008, as part of the
same financing transaction, we borrowed an additional $1,089,474 from
YA Global bringing the total borrowed to $2,000,000.  The
loans were non-convertible unless we defaulted.  In connection with
these loans, we executed mortgages on our Louisiana oil and gas producing
properties and filed a UCC-1 financing statement on the assets of our
subsidiary, Trendsetter Production Company.
 
 On May
11, 2008, we entered into a Securities Purchase Agreement with two investors who
purchased 2,424,243 shares of common stock. They received 2,424,243 warrants
with an exercise price of $3.27 and the total net proceeds for the company was
$3,625,000 after paying commission and expenses.  These funds were
used to pay for the 2008 2-D seismic data acquisition and processing and for
general business purposes.  This transaction triggered the repricing
of warrants held by others, resulting in an additional expense of
$518,000.
 
 Analysis
of changes in financial position
 
 Our
current assets decreased 67%, or $4,193,000, from $6,251,000 on June 30, 2007 to
$2,058,000 on June 30, 2008.  The most significant factor in the
decrease is the Stock subscription receivable of $5,250,000 which was collected
in July 2007.  The proceeds from that and other capital raises funded
our operations and the capital investments we made during the year.
 
 Our
long-term assets increased 108%, or $5,663,000, from $5,229,000 on June 30, 2007
to $10,892,000 on June 30, 2008.  We made significant investments in
Oil and gas properties in both the USA and in Guinea (See Note 3 to the
Consolidated Financial Statements).  We invested $3,035,000 in the
Guinea concession.  Our major accomplishment with regard to the Guinea
concession was the completion of the acquisition of approximately 2,800
kilometers of 2-D seismic data.  We invested $2,579,000 in our Oil and
gas properties in the USA.  We acquired existing reserves and we also
conducted some drilling and development activity.  As a result of our
investment in the domestic Oil and gas properties, we increased our reserve base
465%.  Proved developed producing reserves attributable to our net
revenue interest as of June 30, 2008 and 2007, respectively, were 116,993 and
25,133.  This represents an increase of 91,860
barrels.
  30
 Table of Contents
  Our
current liabilities increased 62%, or $1,637,000, from $2,621,000 on June 30,
2007 to $4,258,000 on June 30, 2008.  The main factor in the increase
is accounts payable, particularly accounts payable relating to the investments
we had made in Oil and gas properties, which totaled $1,146,000, and joint
interest billing amounts due for lease operating expense of
$171,000.  These outstanding balances were paid during the quarter
ended September 30, 2008.  We also accrued a legal settlement of
$240,000, which we believe may begin a payout of $10,000 per month as early as
January 2009.
 
 Our long
term liabilities increased 1,418%, from $133,000 as of June 30, 2007 to
$2,019,000 as of June 30, 2008, due to increases in asset retirement obligations
(See Note 4 of the Consolidated Financial Statements) and new debt (See Note 7
of the Consolidated Financial Statements).
 
 Results of
Operations.
 
 Based on
the factors discussed below for each segment and for the corporate overhead, the
Net loss attributable to common shareholders decreased $13,704,000, or 59%, from
$(23,308,000), or $(0.49) per share in 2007 to $(9,604,000), or $(0.17) per
share in 2008.  The decrease in the net loss is due to a decrease in
the net loss from operations for HYD of $8,856,000 and a decrease in the net
loss from operations for corporate of $3,462,000, partially offset by an
increase in the net loss from operations of SCS of $1,024,000.  The
net loss chargeable to common shareholders includes a provision for preferred
stock dividends of $99,000 in 2008 and $109,000 in 2007.
 
 Reportable
segments
  Hyperdynamics
has two reportable segments: our international 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.
 
 Results of Operations ---
Domestic (“HYDR”)
  Comparison
for Fiscal Year 2008 and 2007
  
 The
following table summarizes certain production, cost, and revenue
information:
 
 Twelve
      months ended June 30,
              
              
              Numeric
              
              
              %2008
              
              
              2007
              
              
              Increase
              
              
              IncreaseGross
      barrels sold
              
              
              43,457
              
              
              
              20,740
              
              
              
              22,717
              
              
              
              109
              %Net
      barrels sold
              
              
              28,197
              
              
              
              14,726
              
              
              
              13,471
              
              
              
              91
              %Revenues
      from oil and gas production
              
              $
              2,868,000
              
              
              $
              908,000
              
              
              $
              1,960,000
              
              
              
              216
              %Lease
      operating costs
              
              
              2,604,000
              
              
              
              659,000
              
              
              
              1,945,000
              
              
              
              295
              %Average
      sales price per barrel
              
              $
              101.72
              
              
              $
              61.66
              
              
              
              40.06
              
              
              
              65
              %
  31
 Table of Contents
  Revenues.   Our
revenue from oil and gas production increased due to higher oil production and
higher sales prices for oil. We have no revenues from gas
production.  The production increase is almost entirely attributable
to production from the oil wells acquired in the Rabb acquisition in July
2007.
 
 Lease operating costs
include severance tax, which varies with revenue, of $249,000 during the year
ended June 30, 2008 in comparison to $104,000 in 2006.  This
represents an increase of 140% or $146,000, which is attributable to the
increased revenues during the year ended June 30, 2008.  The increase
in other lease operating costs of $1,800,000, or 324%, is primarily attributable
to the expenses of operating the RABB properties acquired in July 2007. These
expenses include significant repairs that we performed in an effort to increase
future production. During 2008,  we worked over or reworked twelve oil
wells and four service wells for a cost of $665,000. Our increase in routine
lease operating expenses related to the operation of oil wells acquired in July
2007 averaged about $95,000 per month or about $1,140,000.
 
 Accretion
expense.  In accordance with SFAS 143, we discount the fair
value of our asset retirement obligations and record accretion expense due to
the passage of time using the interest method of
allocation.   Accordingly, the accretion expense is a function of
the balance of the asset retirement obligation.  As of July 1, 2007
and 2006, respectively, our asset retirement obligation was $128,000 and
$12,000, respectively.  Additional liabilities incurred during the
current year were $428,000 and revisions in estimate of the asset retirement
obligations increased the liability by an additional $139,000. Total accretion
expenses for the year ended June 30, 2008 was $58,000 compared to $1,000 in
2007.  The increase is due to the higher asset retirement obligation
balance.  As of June 30, 2008, the asset retirement obligation is
$730,000.
 
 Our depreciation, depletion
and amortizationwas $730,000 and $163,000 for the years ended June 30,
2008 and 2007, respectively. The increase of 348% or $567,000 is due to higher
depletion expenses attributable to additions to the full cost pool, partially
offset by a decrease in the depletion rate per barrel of oil equivalent
produced.  The full cost pool increased $3,756,000 with the RABB
properties acquisition, improvements to the production facilities at our
Magee-Smith lease, development costs, drilling costs for three oil wells, and
additional geological and geophysical expenses.  The depletion rate
decreased because of the reserves added with the purchase of the RABB properties
and the completion of a new successful well.
 
 Settlement expense
for the year ended June 30, 2008 was $0 and $8,870,000 in 2007.  We
were sued by an investor in working interest in some of our oil and gas
properties in the year ended June 30, 2007.  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.  The expense occurred only once.
 
 Selling, general, and
administrative - related party was $23,000 for the year ended June 30,
2008 compared to $0 for the year ended June 30, 2007. Mike Watts, the brother of
Kent Watts, provides investor relations, public relations, financial consulting,
and general advisory services in conjunction with a contract entered into during
March 2007 for services he will deliver through March 2010.  The
$23,000 represents reimbursements for his expenses as authorized by his
contract.
 
 Our selling, general and
administrative expense decreased 55%, or $686,000, from $1,244,000 to
$558,000 for the years ended June 30, 2007 and June 30, 2008, respectively.
Selling, general, and administrative expense includes administrative expenses,
other operational costs, and gains or losses on sales and disposals of
assets.  Significant drivers in the change in selling, general, and
administrative expenses were:
 
 Other operational costs for
the year ended June 30, 2008 was $351,000 in comparison to $557,000 in
2007.  This represents a decrease of 37%, or $206,000, due to
decreases in expenses related to repairs and maintenance, tools and yard costs,
field labor and decrease in number of field employees.   During
the quarter ended June 30, 2008, we restructured the field office and discharged
all but one administrative employee.  Thus, future operational costs
should be minimal.
 
 Loss on sales of assets
decreased by $100,000.  We recognized a gain on sales of assets of
$4,000 as opposed to a loss on disposal of assets of $96,000 in
2007.
  32
 Table of Contents
  Administrative expensesdecreased by $380,000.  The main driver in this decrease was
legal and professional expenses, which decreased by $369,000.  The
reduction in legal costs is comprised of two factors: they are reduced by a
$130,000 reimbursement that we received in August 2007 from our insurance
company for legal expenses associated with a suit that was settled during the
year ended June 30, 2007 and a general reduction in legal expenses because we
were not defending a lawsuit during the year ended June 30,
2008.   In addition, we experienced a net decrease in
administrative expenses of $11,000.
 
 Our loss from
operations from this segment was ($1,075,000) and ($9,931,000) for the
years ended June 30 2008 and 2007, respectively.
 
 
 Comparison
for Fiscal Year 2007 and 2006
  
 The
following table summarizes certain production, cost, and revenue
information:
 
 Twelve
      months ended June 30,
              
              
              Increase
              
              
              %2007
              
              
              2006
              
              
              (decrease)
              
              
              ChangeGross
      barrels sold
              
              
              20,740
              
              
              
              13,869
              
              
              
              6,871
              
              
              
              50
              %Net
      barrels sold
              
              
              14,726
              
              
              
              9,439
              
              
              
              5,287
              
              
              
              56
              %Revenues
      from oil and gas production
              
              $
              908,000
              
              
              $
              615,000
              
              
              $
              293,000
              
              
              
              48
              %Lease
      operating costs
              
              
              659,000
              
              
              
              722,000
              
              
              
              (62,000
              )
              
              
              9
              %Average
      sales price per barrel
              
              $
              61.66
              
              
              $
              65.16
              
              
              
              (3.50
              )
              
              
              6
              %
 
 
 Revenues.   Our
revenue from oil and gas production increased due to equipment upgrades and less
downtime, which resulted in higher production of oil.  We had no gas
production.
 
 Lease operating costs
include severance tax, which varies with revenue, of $104,000 during the year
ended June 30, 2007 in comparison to $65,000 in 2006.  This represents
an increase of 60% or $39,000.  The decrease in other lease operating
costs of $101,000, or 15%, was due to upgrades and maintenance of equipment
resulting in higher performance.
 
 Our depreciation, depletion
and amortizationwas $163,000 and $118,000 for the years ended June 30,
2007 and 2006, respectively. This represents an increase of 38% or
$45,000.   This is attributable to more depletion because of
additions to the full cost pool during 2007.
 
 Settlement expense
for 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 31%, or $566,000, from $1,810,000 to
$1,244,000 for the years ended June 30, 2006 and June 30, 2007, respectively.
Selling, general, and administrative expense includes administrative expenses,
other operational costs, and gains or losses on sales and disposals of
assets.  The most significant drivers in the change in selling,
general, and administrative expenses were other operational costs and a loss on
sales of assets as follows:
 
 Other operational costs for
the year ended June 30, 2007 was $557,000 in comparison to $922,000 in
2006.  This represents a decrease of 40% or $365,000 due to decreases
in expenses related to repairs and maintenance, tools and yard costs, field
labor and decrease in number of field employees.
  33
 Table of Contents
  Loss on sales of assets
decreased by $184,000. The decrease is due to two main factors.  We
issued common stock in Hyperdynamics to repurchase working interest in some oil
and gas properties that had previously been sold in 2006.  We recorded
the amount received at the time the investor originally purchased the working
interest as an adjustment to the full cost pool, effectively rescinding the
sale.  The excess in the value of the stock over the original
investment was recorded as a loss of $369,000.  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.
 
 Our loss from
operations from this segment was ($9,931,000) and ($2,034,000) for the
years ended June 30 2007 and 2006, respectively.
 
 Results of Operations ---
International (“SCS”)
 
 Comparison
for Fiscal Year 2008 and 2007
  Revenues.  There
were no revenues for the years ended June 30, 2008 and 2007.   We
have focused on the acquisition and interpretation of seismic data for our
concession in Guinea.
 
 Our depreciation
increased 223%, or $59,000 due to additional depreciation associated with assets
placed in service at the beginning of fiscal 2008. Depreciation expense was
$85,000 and $26,000 in the years ended June 30, 2008 and 2007,
respectively.
 
 Selling, General and
Administrative Expenses.
 
 Our
selling, general and administrative expenses were $3,799,000 and $2,833,000 for
the years ended June 30, 2008 and 2007, respectively. This represents an
increase of 34%, or $966,000.
 
 The major
drivers of the cost increase were consulting, advertising, and public relations
expense in Guinea, compensation expense, travel expenses, and legal expenses.
Consulting, advertising, and public relations expenses, increased by 42%, or
$515,000, from $1,214,000 in 2007 to $1,729,000 in 2008.  The increase
is due to expenses related to government lobbyists in the U.S. and in Guinea and
public relations and village outreach programs in Guinea.  Travel
expenses to West Africa in connection with the Guinea concession increased 53%,
or $167,000, from $314,000 in 2007 to $481,000 in 2008.  Professional
expenses increased by 367% or $297,000, mainly because of legal expenses
relating to defending lawsuits filed in the US and to retainers for attorneys
providing general services in Guinea.  Other administrative expenses
decreased by $42,000, mainly due to the decrease in start-up costs for our
in-country office in Guinea, which we established during the year ended June 30,
2007.
  Loss from Operations.
Based on the factors discussed above, our loss from operations from this segment
increased by 36%, or ($1,024,000), from ($2,859,000) in the year ended June 30,
2007 to ($3,883,000) for the year ended June 30, 2008.
 
 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.
 
 Our depreciation
decreased 16% or $5,000 due to retirement and disposal of assets. It reduced
from $31,000 in the year ended June 30, 2006 down to $26,000 for the year ended
June 30, 2007.
 
 Selling, General and
Administrative Expenses.
 Our
selling, general and administrative expenses were $2,833,000 and $794,000 for
the years ended June 30, 2007 and 2006, respectively. This represents an
increase of 257% or $2,039,000.
  34
 Table of Contents
  The major
drivers of the cost increase were consulting, advertising, and public relations
expense, including office operating expense in Guinea, compensation expense,
travel expenses, and office administration, particularly in Guinea. Consulting,
advertising, and public relations expenses increased by 251%, or $868,000, from
$346,000 in 2006 to $1,214,000 in 2007, due to expenses related to government
lobbyists, public relations contractors, geoscientists and geophysical
consulting services, and contract officers’ fees. Compensation expense,
including equity based compensation of $461,000, increased $707,000, or 512%,
from $138,000 in 2006 to $845,000 in 2007.   The increase in
compensation expense was attributable to the vesting of an option award in 2007
and an increase in officer salaries and corporate office salaries in connection
with work on the Guinea concession.  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.  Other administrative expenses increased
by 363% or $298,000, from $82,000 in 2006 to $380,000 in 2007. The main driver
in this difference is the establishment of an office in Guinea, including
staffing the in-country office.  Professional expenses decreased by
$29,000.
 
 Loss from Operations.
Based on the factors discussed above, our loss from operations from this segment
increased by 247%, or ($2,034,000), from ($825,000) in the year ended June 30,
2006 to ($2,859,000) for the year ended June 30, 2007.
 
 Results of Operations ---
Corporate Overhead
 
 Comparison for Fiscal Year 2008 and
2007
 
 Depreciation was
$40,000 and $31,000 for the years ended June 30, 2008 and 2007,
respectively.  The increase is due to addition of assets such as
furniture and fixtures.
 
 Settlement expense
for the years ended June 30, 2008 and 2007, respectively, was $481,000 and
$249,000.  We accrued a settlement agreement in 2008 based on
developments in the Dixon case, as discussed in Item 3 – Legal Proceedings and
in the consolidated financial statements.  In addition, a repricing of
warrants that had previously been issued in connection with the settlement of a
lawsuit in 2007 resulted in additional settlement expense of
$241,000.  The settlement expense of $240,000 in 2007 was related to
this lawsuit.
 
 Selling, general and
administrative - related party expenses for the year ended June 30, 2008
was $31,000 and $4,240,000 in 2007.  This represents a decrease of
$4,209,000, or 99%, due to the grant of 1,500,000 warrants with an exercise
price of $4.00 per share in 2007. 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.  The warrants were granted to compensate Michael
Watts, the brother of Hyperdynamics’ CEO, Kent Watts, for consulting services to
be provided from March 2007 through March 2010.  The expenses in 2008
are reimbursements for business expenditures made in conjunction with Mr. Watts’
contract.
 
 Selling, General and
Administrative Expenses.  Selling, general and administrative
expenses increased by
 $505,000
or 17%, from $3,029,000 to $3,534,000 for the years ended June 30, 2007 and
2008, respectively.  Two main factors, compensation expense and
professional expense, drove the increase.  Compensation expense
includes salaries, equity based compensation to employees and directors, and
payroll tax expense.  Compensation expense was $1,833,000 and
$1,514,000 during the years ended June 30, 2008 and 2007,
respectively.  The increase, $319,000, or 21%, was attributable to
increased staff and an increase in equity based compensation
costs.   Professional expense includes consulting, legal,
accounting, and public relations consulting expenses.  Professional
expense increased 19%, or $170,000, from $887,000 in the year ended June 30,
2007 to $1,057,000 in the year ended June 30, 2008.  The increase in
professional expense is mainly attributable to increased accounting
fees.  Other administrative expenses increased $16,000.
 
 Other
Items.
  Interest expense, net
was $435,000 and $2,886,000 for the years ended June 30, 2008 and 2007,
respectively. This represents a decrease of $2,451,000, or 85%, attributable to
a convertible note payable and debenture that was prepaid in 2007 and thus did
not exist in 2008.
  35
 Table of Contents
  Net Loss. Based
on the factors discussed for each segment, the Net Loss attributable to common
shareholders decreased $(13,801,000), or 59%, from ($23,308,000) or ($0.49) per
share in 2007 to ($9,507,000), or ($.17) per share in 2008. The net loss
chargeable to common shareholders includes a provision for preferred stock
dividends of $109,000 and $99,000 in 2007 and 2008, respectively.
 
 Comparison
for Fiscal Year 2007 and 2006
 
 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.
 
 Settlement expense
for the years ended June 30, 2007 and 2006, respectively, was $249,000 and
$0.
 
 Selling, general and
administrative - 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 1393%, 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.  The warrants were granted to
compensate Michael Watts, the brother of Hyperdynamics’ CEO, Kent Watts, for
consulting services to be provided from March 2007 through March
2010.
 
 Selling, General and
Administrative Expenses.  Selling, general and administrative
expenses increased by $870,000
or 40%, from $2,159,000 to $3,029,000 for the years ended June 30, 2006 and
2007, respectively.  Two main factors, compensation expense and
professional expense, drove the increase.  Compensation expense
includes salaries, equity based compensation to employees and directors, and
payroll tax expense.  Compensation expense was $1,513,000 and $877,000
during the years ended June 30, 2007 and 2006, respectively.  The
increase, $636,000, or 73%, was attributable both to an increase in number of
employees and an increase in equity based compensation
costs.   Professional expense includes consulting, legal,
accounting, and public relations consulting expenses.  Professional
expense increased 27%, or $190,000, from $697,000 in the year ended June 30,
2006 to $887,000 in the year ended June 30, 2007.  The increase in
professional expense is mainly attributable to increased accounting and legal
fees.  Other administrative expenses increased $41,000.
 
 Other
Items.
  Interest expense, net
was $2,886,000 and $1,959,000 for the year ended June 30, 2007 and 2006,
respectively. This represents an increase of $927,000 or 47% attributable to a
convertible note payable that was prepaid in 2007, which accelerated the
interest expense on the note.
 
 
 CRITICAL
ACCOUNTING POLICIES
 
 We
account for our oil and natural gas producing activities using the full cost
method of accounting as prescribed by the United States Securities and Exchange
Commission (SEC). Accordingly, all costs incurred in the acquisition,
exploration, and development of proved oil and natural gas properties, including
the costs of abandoned properties, dry holes, geophysical costs, and annual
lease rentals are capitalized. All general and administrative corporate
costs unrelated to drilling activities are expensed as incurred. Sales or
other dispositions of oil and natural gas properties are accounted for as
adjustments to capitalized costs, with no gain or loss recorded unless the ratio
of cost to proved reserves would significantly change. Depletion of
evaluated oil and natural gas properties is computed on the units of production
method based on proved reserves. The net capitalized costs of proved oil
and natural gas properties are subject to a full cost ceiling limitation in
which the costs are not allowed to exceed their related estimated future net
revenues discounted at 10%, net of tax considerations. In accordance with Staff
Accounting Bulletin Topic 12.D.3.c., we utilize the prices in effect on a date
subsequent to the end of a reporting period in which the full cost ceiling
limitation was exceeded at the end of a reporting period.  The
application of the full cost method of accounting for oil and gas properties
generally results in higher capitalized costs and higher depreciation, depletion
and amortization rates compared to the successful efforts method of accounting
for oil and gas properties.
  36
 Table of Contents
  Costs
Excluded
 
 Costs
associated with unevaluated properties are excluded from the full cost pool
until we have made a determination as to the existence of proved reserves. We
review our unevaluated properties at the end of each quarter to determine
whether the costs incurred should be transferred to the full cost pool and
thereby subject to amortization.
 
 We assess
all items classified as unevaluated property on a quarterly basis for possible
impairment or reduction in value. We assess properties on an individual basis or
as a group if properties are individually insignificant. The assessment includes
consideration of the following factors, among others: intent to drill; remaining
lease term; geological and geophysical evaluations; drilling results and
activity; the assignment of proved reserves; and the economic viability of
development if proved reserves are assigned. We assess our unevaluated
properties on a country-by-country basis. During any period in which these
factors indicate an impairment, the cumulative drilling costs incurred to date
for such property and all or a portion of the associated leasehold costs are
transferred to the full cost pool and are then subject to amortization. However,
if proved reserves have not yet been established in a full cost pool, these
costs are charged against earnings in the respective country. For these
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 conditions,
discounted at 10 percent, plus (b) the cost of properties not being amortized,
plus (c) the lower of cost or estimated fair value of any unproved properties
included in the costs being amortized, less (d) any income tax effects related
to differences between the book and tax basis of the properties involved. If
capitalized costs exceed this limit, the excess is charged as an impairment
expense. As of June 30, 2008, we have capitalized $3,157,000 in oil and gas
properties, which is subject to the ceiling test for impairment. At June 30,
2008, there was no impairment indicated.
 
 Impairment
 
 At June,
30, 2008, we had $7,314,000 of capitalized costs associated with our Guinea
operations. Based on an impairment analysis performed by an independent
economist and the completion of work requirements under the 2006 Production
Sharing Contract between SCS Corporation and Guinea, no impairment of these
assets was indicated as of June 30, 2008.
 
 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.
  37
 Table of Contents
  Proved
reserves
 
 Estimates
of our proved reserves included in this report are prepared in accordance with
accounting principles generally accepted in the United States of America and SEC
guidelines. Our engineering estimates of proved oil and natural gas reserves
directly impact financial accounting estimates, including depreciation,
depletion and amortization expense and the full cost ceiling limitation. Proved
oil and natural gas reserves are the estimated quantities of oil and natural gas
reserves that geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under
period-end economic and operating conditions. The process of estimating
quantities of proved reserves is very complex, requiring significant subjective
decisions in the evaluation of all geological, engineering and economic data for
each reservoir. The accuracy of a reserve estimate is a function of:
(i) the quality and quantity of available data; (ii) the
interpretation of that data; (iii) the accuracy of various mandated
economic assumptions and (iv) the judgment of the persons preparing the
estimate. The data for a given reservoir may change substantially over time as a
result of numerous factors, including additional development activity, evolving
production history and continual reassessment of the viability of production
under varying economic conditions. Changes in oil and natural gas prices,
operating costs and expected performance from a given reservoir also will result
in revisions to the amount of our estimated proved reserves. 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.
 
 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
 
 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. We
account for non-employee share-based awards in accordance with EITF No. 96-18,
“Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquisition, or in Conjunction with Selling, Goods or
Services.”
  38
 Table of Contents
  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, 2008Payments
      due by period ($)Contractual
      Obligations
              
              Total
              
              
              Less
      than 1 year
              
              
              1-3
      years
              
              
              3-5
      years
              
              
              More
      than 5 yearsInstallment
      Obligations
              
              $
              2,118,,000
              
              
              $
              597,000
              
              
              $
              1,512,000
              
              
              $
              9,000
              
              
              
              -Capital
      Lease Obligations
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              -
              
              
              
              -Operating
      Lease Obligations
              
              
              867,000
              
              
              
              214,000
              
              
              
              320,000
              
              
              
              284,000
              
              
              $
              49,000Purchase
      Obligations
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Other
      Long-Term Liabilities
              
              
              631,000
              
              
              
              -
              
              
              
              178,000
              
              
              
              18,000
              
              
              
              435,000Total
              
              $
              3,615,000
              
              
              $
              811,000
              
              
              $
              2,010,000
              
              
              $
              311,000
              
              
              $
              484,000
 
 Liquidity and Capital
Resources
 
 Liquidity
 
 Our ratio
of current assets to current liabilities (current ratio) was $0.48 to one and
$2.38 to one at June 30, 2008 and 2007,
respectively.    However, current liabilities contain
several items that are payable in stock or are the subject of deferred payment
arrangements whereby the vendor will not get paid except out of future revenues
or cash received from a joint venture partner.  Dividends payable of
$372,000 and dividends payable to related party of $343,000 are payable in
stock.  Approximately $170,000 of the accounts payable was paid with
common stock after the balance sheet date.  Accounts payable – seismic
data of $650,000 is payable only when we sell the data to third parties or if we
get cash infusion for the Guinea concession.  See Note 6 of the
Consolidated Financial Statements.  Additionally, $65,000 is accrued
in accounts payable to a vendor who, by the terms of his agreement, will not be
paid until we obtain funding from a financial or joint venture partner for
Guinea.  Finally, $70,000 of the asset retirement obligation – short
term was transferred to the buyer of our Kelly and Norris leases during July
2008. This amounts to approximately $1,670,000 of the $4,258,000 reflected in
current liabilities which either will not result in a cash outflow or will not
be paid until we have adequate funds to pay them.
 
 Our
negative working capital highlights our need for additional funding and cash
flows from operations. With the new acquisition of producing properties in June
2007, and the steady progress made in growing our reserves and production
revenues in fiscal 2008, our domestic operations are providing growing cash flow
from operations to help cover its monthly expenses.  Without the
expenses and investment pertaining to our oil and gas contract area pursuant to
the 2006 PSC, we would be generating positive cash flow from
operations.
 
 Management
has assessed that we have the liquidity necessary to continue to meet current
obligations as they become due throughout the coming year. We sold convertible
debentures in September 2008 and raised, after fees and the payoff of a note
payable to another investor, YA Global, approximately $2,400,000 (See Note 15 of
the Consolidated Financial Statements).  We have evaluated our
operating cash flow and believe that the funds we raised will cover our
deficit.  We have also identified areas of our operations where we can
achieve cost savings, if necessary.
  39
 Table of Contents
  This cash
flow does not include any additional development of our production or adjustment
to our operating budget. We have three development wells that we are considering
drilling that we estimate would increase our production and
revenues.  Our Board has authorized us to proceed with the drilling on
one of the locations.  The drilling cost associated with the site is
$350,000, of which we can pay $100,000 in stock.  The cost to complete
to the point of production is estimated as an additional $470,000.  If
we drill and complete a productive well, it will provide additional revenues.
All the mortgages associated with our producing oil properties have been
released with the payoff of the YA Global notes.  We are evaluating
structuring a reserve-based development loan to maximize our producing leases in
Louisiana. Management believes that it will be able to obtain development
capital and significantly raise production revenues to a level to be able to pay
all operating expenses including overhead for Guinea operations, and the
geological and geophysical staff working to explore offshore
Guinea.
 
 Our top
corporate priority at this time is to attract a joint venture or financial
partner so that we can fund an accelerated exploration work program offshore
Guinea.  We now expect these major funds to come primarily from
selling working interest to financial partners or joint venture partners that
invest in our Guinea offshore contract area. We believe that together with the
success of the interpretive work performed by our geoscientists on the 2008
seismic data and the work we have performed since 2002, that we will be able to
obtain a joint venture with one or more viable oil company
operators.  We have mapped our prospects and prepared an in-depth
technical presentation and data room available for review by potential partners
under confidentiality agreements. Such joint ventures and the related liquidity
would position us to acquire our 3-D seismic that we have planned to start in
December 2008.
 We can
conduct work with our existing staff and data, but we prefer to stay on our
accelerated exploration work schedule rather than slowing down for any
reason.
 
 In
summary, we believe that between our production, possible cost cutting measures,
and the funding we have in place, we can meet our overhead.  We are
seeking reserve based financing so that we can increase our production and
maintain and increase our reserve base.  We are seeking joint venture
or financial partners to assist with the capital intensive exploration work
offshore Guinea.
 
 
 Item
7A Quantitative and Qualitative Disclosures About Market
Risk
 
 We
are exposed to various risks including energy commodity price risk,
specifically, risk associated with changing prices of oil. We expect oil prices
to remain volatile and unpredictable. If oil prices were to decline
significantly, revenues and cash flow would significantly decline, and our
ability to borrow to finance our operations could be adversely
impacted.   We do not hedge the oil commodity price risk at this
time.  We believe this is appropriate to the size and scope of our
operations.
 
 Our
functional currency is the US dollar. We have some foreign currency exchange
rate risk resulting from our in-country office in Guinea. US dollars are
accepted in Guinea and many of our purchases and purchase obligations, such as
our office lease in Guinea, are denominated in US dollars. However, our costs
for labor, supplies, and fuel could increase if the Guinea Franc appreciates
against the US dollar. We do not hedge the exposure to currency rate
changes.
 
 
 Item
8 Financial Statements and Supplementary Data
 
 The  Financial  Statements
and Supplementary Data information  required  hereunder is
included in this report as set forth in the  "Index to Financial
Statements" on page F-1.
  40
 Table of Contents
  HYPERDYNAMICS
CORPORATION
 Index To
Financial Statements
 
 TABLE
OF CONTENTS
 
 
 Report
      of Independent Registered Public Accounting Firm - Internal Control over
      Financial Reporting
              
              F-2Report
      of Independent Registered Public Accounting Firm - Consolidated Financial
      Statements
              
              F-4Consolidated
      Balance Sheets as of June 30, 2008 and 2007
              
              F-5Consolidated
      Statements of Operations for the fiscal years ended June 30, 2008, 2007
      and 2006
              
              F-6Consolidated
      Statements of Shareholders' Equity for the fiscal years ended June 30,
      2008, 2007 and 2006
              
              F-7Consolidated
      Statements of Cash Flows for the fiscal years ended June 30, 2008, 2007
      and 2006
              
              F-10Notes
      to Consolidated Financial Statements
              
              F-12
 F-1
 Table of Contents
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To the
Board of Directors and Shareholders of
 Hyperdynamics
Corporation
 Houston,
Texas
 
 We have
audited Hyperdynamics Corporation’s (“Hyperdynamics” or the “Company”) internal
control over financial reporting as of June 30, 2008, 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 (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the Company; (ii) 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
(iii)
 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, 2008 and included
in management’s assessment:
 
 1.
              The
      control environment, which is the responsibility of senior management,
      sets the tone of the organization, influences the control consciousness of
      its people, and is the foundation for all other components of internal
      control over financial reporting. The Company did not maintain an
      effective control environment due to the aggregate effect of multiple
      deficiencies in internal controls, which affect the Company’s control
      environment, including:
  F-2
 Table of Contents
  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; e) lack of documentation and communication of Hyperdynamics’
accounting policies and procedures; and f) a failure to develop and implement
adequate internal accounting controls over the Company’s Guinea operations to
ensure that receipts and expenditures are made only in accordance with
authorizations of management, that the resulting records properly reflect the
purpose and recipient of payments, an that these records, in reasonable detail,
accurately and fairly reflect the underlying transaction and disposition of
assets.
 
 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 $518,000 of additional expense attributable to the
      accounting treatment of warrant
repricings.
 
 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 the
      Company’s accounting system without the appropriate level of
      review.
  5.
                The
      departure of a member of financial management responsible for overseeing
      all aspects of Guinea finance and accounting in March 2008, resulting in a
      lack of direct finance and accounting oversight in Guinea through the end
      of the 2008 fiscal year.
 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, 2008, and this report does not affect our report dated
September 30, 2008 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' control over financial
reporting as of June 30, 2008 was not effective.
 
 
 /s/
Malone & Bailey, PC
 Houston,
Texas
 September
30, 2008
  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, 2008 and 2007, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended June 30, 2008. 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, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2008 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, 2008 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 30, 2008 expressed an
adverse opinion on the effectiveness of Hyperdynamics Corporation’s internal
control over financial reporting.
 
 Malone &
Bailey, PC
 www.malone-bailey.com
 Houston,
Texas
 September
30, 2008
  F-4
 Table of Contents
  HYPERDYNAMICS
CORPORATION
 CONSOLIDATED
BALANCE SHEETS
 (In
Thousands, Except Number of Shares and Per Share Amounts)
 
 June
      30,2008
              
              
              2007ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              1,480
              
              
              $
              618Restricted
      certificate of deposit
              
              
              -
              
              
              
              75Trade
      accounts receivable
              
              
              396
              
              
              
              109Subscription
      receivable
              
              
              -
              
              
              
              5,250Prepaid
      expenses and other current assets
              
              
              151
              
              
              
              199Assets
      held for sale
              
              
              31
              
              
              
              -Total
      current assets
              
              
              2,058
              
              
              
              6,251Property
      and equipment, net of accumulated depreciation of $240 and
      $174
              
              
              409
              
              
              
              366Oil
      and gas properties:Evaluated
      properties, using full cost accounting, net of
      accumulated depreciation and depletion of $758 and
      $169
              
              
              3,157
              
              
              
              204Unevaluated
      properties excluded from amortization
              
              
              7,314
              
              
              
              4,279Deposits,
      including deposit on acquisition of oil and gas assets of
    $374
              
              
              12
              
              
              
              380Total
      assets
              
              $
              12,950
              
              
              $
              11,480LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable and accrued expenses
              
              
              2,393
              
              
              
              895Accounts
      payable - seismic data
              
              
              650
              
              
              
              650Asset
      retirement obligation, current
              
              
              99
              
              
              
              84Dividends
      payable
              
              
              372
              
              
              
              372Dividends
      payable to related party
              
              
              343
              
              
              
              245Short
      term notes payable and current portion of long term debt, net of discount
      of $196 and $0
              
              
              401
              
              
              
              375Total
      current liabilities
              
              
              4,258
              
              
              
              2,621Long
      term debt, net of discount of $206 and $0
              
              
              1,315
              
              
              
              -Asset
      retirement obligation, non current
              
              
              631
              
              
              
              44Deferred
      rent
              
              
              73
              
              
              
              89Total
      liabilities
              
              
              6,277
              
              
              
              2,754Commitments
      and contingencies (Note 13)Shareholders'
      equity:Convertible
      preferred stock, par value $0.001; stated value $1,000; 20,000,000
      authorizedSeries
      A – 3,000 shares issued and 1,945 shares issued and
      outstanding
              
              
              -
              
              
              
              -Series
      B - 2,725 shares issued and 2,446 and 2,487 shares
    outstanding
              
              
              -
              
              
              
              -Common
      stock, $0.001 par value, 250,000,000 shares authorized; 59,339,481 and
      54,467,902 shares issued and outstanding
              
              
              59
              
              
              
              54Additional
      paid-in capital
              
              
              65,443
              
              
              
              57,996Accumulated
      deficit
              
              
              (58,829
              )
              
              
              (49,324
              )Total
      shareholders' equity
              
              
              6,673
              
              
              
              8,726Total
      liabilities and shareholders' equity
              
              $
              12,950
              
              
              $
              11,480
 
 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 30,2008
              
              
              2007
              
              
              2006Revenues:Oil
      and gas production
              
              $
              2,868
              
              
              $
              908
              
              
              $
              615Other
      revenues
              
              
              31
              
              
              
              98
              
              
              
              -Total
      revenues
              
              
              2,899
              
              
              
              1,006
              
              
              
              615Costs
      and expenses:Lease
      operating costs
              
              
              2,604
              
              
              
              659
              
              
              
              722Accretion
      expense
              
              
              58
              
              
              
              1
              
              
              
              -Depreciation,
      depletion and amortization
              
              
              856
              
              
              
              221
              
              
              
              167Settlement
      expense
              
              
              481
              
              
              
              9,118
              
              
              
              -Selling,
      general and administrative – related party
              
              
              54
              
              
              
              4,240
              
              
              
              284Selling,
      general and administrative
              
              
              7,891
              
              
              
              7,106
              
              
              
              4,761Total
      costs and expenses
              
              
              11,944
              
              
              
              21,345
              
              
              
              5,934Loss
      from operations
              
              
              (9,045
              )
              
              
              (20,339
              )
              
              
              (5,319
              )Other
      income (expense):Interest
      expense, net
              
              
              (470
              )
              
              
              (2,888
              )
              
              
              (1,960
              )Gain on
      settlement of debt
              
              
              10
              
              
              
              28
              
              
              
              135Total
      other expense
              
              
              (460
              )
              
              
              (2,860
              )
              
              
              (1,825
              )Net
      loss
              
              
              (9,505
              )
              
              
              (23,199
              )
              
              
              (7,144
              )Preferred
      stock dividend to related party
              
              
              (99
              )
              
              
              (109
              )
              
              
              (109
              )Net
      loss attributable to common shareholders
              
              $
              (9,604
              )
              
              $
              (23,308
              )
              
              $
              (7,253
              )Basic
      and diluted loss per common share
              
              $
              (0.17
              )
              
              $
              (0.49
              )
              
              $
              (0.17
              )Weighted
      average shares outstanding (basic and diluted)
              
              
              56,330,846
              
              
              
              47,723,298
              
              
              
              43,318,773
 
 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
              
              
              Additional
      Paid-in
              
              
              AccumulatedShares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Capital
              
              
              Deficit
              
              
              TotalBalance,
      June 30, 2005
              
              
              1,945
              
              
              $
              -
              
              
              
              2,725
              
              
              $
              -
              
              
              
              42,168,410
              
              
              $
              42
              
              
              $
              22,085
              
              
              $
              (18,981
              )
              
              $
              3,146Common
      stock issued for:Exercise
      of options for cash
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              120,000
              
              
              
              
              
              
              
              60
              
              
              
              
              
              
              
              60Exercise
      of warrants for cash - 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
              
              
              
              
              
              
              
              581Warrants
      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:Warrants
      for services
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              189
              
              
              
              
              
              
              
              189Warrants
      for 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
              
              
              $
              30,687
              
              
              $
              (26,125
              )
              
              $
              4,608
 
 The
accompanying notes are an integral part of these consolidated financial
statements
  F-7
 Table of Contents
  HYPERDYNAMICS
CORPORATION
 CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
 (In
Thousands, Except Number of Shares)
 Series
      A Preferred
              
              
              Series
      B Preferred
              
              
              Common
      Stock
              
              
              Additional
      Paid-in
              
              
              AccumulatedShares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Capital
              
              
              Deficit
              
              
              TotalBalance,
      June 30, 2006
              
              
              1,945
              
              
              $
              -
              
              
              
              2,725
              
              
              $
              -
              
              
              
              46,132,595
              
              
              $
              46
              
              
              $
              30,687
              
              
              $
              (26,125
              )
              
              $
              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
              
              
              
              
              
              
              
              5,250Cashless
      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 the issuance of convertible notes payable
      and debentures
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              80
              
              
              
              
              
              
              
              80Issuance
      of:Warrants
      in connection with settlement  agreement
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              8,959
              
              
              
              
              
              
              
              8,959Employee
      stock options
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,089
              
              
              
              
              
              
              
              1,089Warrants
      for services – related party
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              4,227
              
              
              
              
              
              
              
              4,227Warrants
      for services
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              195
              
              
              
              
              
              
              
              195Deemed
      Dividend
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (5,058
              )
              
              
              
              
              
              
              (5,058
              )Deemed
      Dividend
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              5,058
              
              
              
              
              
              
              
              5,058Preferred
      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
              
              
              $
              57,996
              
              
              $
              (49,324
              )
              
              $
              8,726
 
 The
accompanying notes are an integral part of these consolidated financial
statements
  F-8
 Table of Contents
  HYPERDYNAMICS
CORPORATION
 CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
 (In
Thousands, Except Number of Shares)
 Series
      A Preferred
              
              
              Series
      B Preferred
              
              
              Common
      Stock
              
              
              Additional
      Paid-in
              
              
              AccumulatedShares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Capital
              
              
              Deficit
              
              
              TotalBalance,
      June 30, 2007
              
              
              1,945
              
              
              $
              -
              
              
              
              2,487
              
              
              $
              -
              
              
              
              54,467,902
              
              
              $
              54
              
              
              $
              57,996
              
              
              $
              (49,324
              )
              
              $
              8,726Common
      stock issued for:Exercise
      of options for cash
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,500
              
              
              
              -
              
              
              
              6
              
              
              
              
              
              
              
              6Exercise
      of options for cash – related party
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              50,000
              
              
              
              -
              
              
              
              100
              
              
              
              
              
              
              
              100Exercise
      of warrants for cash
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              544,000
              
              
              
              1
              
              
              
              543
              
              
              
              
              
              
              
              544Cashless
      exercise of options, net of 7,129 shares returned
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,923
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              -Cashless
      exercise of options, net of 61,749 shares returned – related
      parties
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              738,251
              
              
              
              1
              
              
              
              (1
              )
              
              
              
              
              
              
              -Cashless
      exercise of warrants, net of 22,611 shares returned
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              119,389
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              -Services
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              417,894
              
              
              
              1
              
              
              
              757
              
              
              
              
              
              
              
              758Purchase
      of working interest
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              100,000
              
              
              
              -
              
              
              
              285
              
              
              
              
              
              
              
              285Stock
      payable
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              30,000
              
              
              
              -
              
              
              
              95
              
              
              
              
              
              
              
              95Cash
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              48,160
              
              
              
              -
              
              
              
              135
              
              
              
              
              
              
              
              135Cash
      for registered direct offering
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,424,243
              
              
              
              2
              
              
              
              3,998
              
              
              
              
              
              
              
              4,000Costs
      of registered direct offering
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (375
              )
              
              
              
              
              
              
              (375
              )Conversion
      of Series B Preferred Stock and accrued dividends
              
              
              
              
              
              
              
              
              
              
              (41
              )
              
              
              
              
              
              
              300,320
              
              
              
              -
              
              
              
              1
              
              
              
              
              
              
              
              1Discount
      on convertible debt
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              94,899
              
              
              
              -
              
              
              
              346
              
              
              
              
              
              
              
              346Issuance
      of employee stock options
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              1,138
              
              
              
              
              
              
              
              1,138Warrant
      repricings:Related
      party
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              241
              
              
              
              
              
              
              
              241Debt
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              277
              
              
              
              
              
              
              
              277Deemed
      Dividend
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (153
              )
              
              
              
              
              
              
              (153
              )Deemed
      Dividend
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              153
              
              
              
              
              
              
              
              153Preferred
      stock dividends to related party
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (99
              )
              
              
              
              
              
              
              (99
              )Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (9,505
              )
              
              
              (9,505
              )Balance,
      June 30, 2008
              
              
              1,945
              
              
              $
              -
              
              
              
              2,446
              
              
              $
              -
              
              
              
              59,339,481
              
              
              $
              59
              
              
              $
              65,443
              
              
              $
              (58,829
              )
              
              $
              6,673
 
 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 30,2008
              
              
              2007
              
              
              2006CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
              
              $
              (9,505
              )
              
              $
              (23,199
              )
              
              $
              (7,144
              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation,
      depletion and amortization
              
              
              856
              
              
              
              221
              
              
              
              167Accretion
      expense
              
              
              58
              
              
              
              1
              
              
              
              -Shares
      issued for services
              
              
              758
              
              
              
              485
              
              
              
              359Shares
      issued for settlement
              
              
              -
              
              
              
              82
              
              
              
              -Warrants
      issued for legal settlement, net
              
              
              -
              
              
              
              8,959
              
              
              
              -Employee
      stock options
              
              
              1,127
              
              
              
              1,089
              
              
              
              381Repricing
      of warrants
              
              
              277
              
              
              
              -
              
              
              
              -Repricing
      of warrants – related party
              
              
              241
              
              
              
              -
              
              
              
              -Warrants
      issued for services –related party
              
              
              -
              
              
              
              4,227
              
              
              
              284Warrants
      issued for services
              
              
              -
              
              
              
              195
              
              
              
              190Loss
      on disposition of assets
              
              
              14
              
              
              
              96
              
              
              
              278Gain
      on settlement of debt
              
              
              (10
              )
              
              
              (28
              )
              
              
              (135
              )Bad
      debt expense
              
              
              -
              
              
              
              27
              
              
              
              233Amortization
      of discount and financing costs on debt
              
              
              59
              
              
              
              2,719
              
              
              
              1,650Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              (286
              )
              
              
              (83
              )
              
              
              (272
              )Other
      current assets
              
              
              185
              
              
              
              (10
              )
              
              
              (30
              )Accounts
      payable and accrued expenses
              
              
              458
              
              
              
              273
              
              
              
              91Other
      liabilities
              
              
              (22
              )
              
              
              77
              
              
              
              -Deferred
      rent
              
              
              (16
              )
              
              
              38
              
              
              
              67Net
      cash used in operating activities
              
              
              (5,806
              )
              
              
              (4,831
              )
              
              
              (3,881
              )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of property and equipment
              
              
              (164
              )
              
              
              (332
              )
              
              
              (78
              )(Increase)
      decrease in restricted cash
              
              
              75
              
              
              
              -
              
              
              
              (10
              )Proceeds
      from the sale of assets
              
              
              18
              
              
              
              36
              
              
              
              204Investment
      in oil and gas properties
              
              
              (4,385
              )
              
              
              (225
              )
              
              
              (439
              )Proceeds
      from sale of working interest in oil and gas properties, net of $0, $0 and
      $182 payment to related party
              
              
              -
              
              
              
              -
              
              
              
              726Change
      in deposits
              
              
              -
              
              
              
              (100
              )
              
              
              20Net
      cash (used in) provided by investing activities
              
              
              (4,456
              )
              
              
              (621
              )
              
              
              423CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from sale of common stock, net
              
              
              3,760
              
              
              
              268
              
              
              
              387Proceeds
      from exercise of options
              
              
              106
              
              
              
              19
              
              
              
              60Proceeds
      from exercise of warrants
              
              
              544
              
              
              
              499
              
              
              
              955Proceeds
      from stock subscription receivable
              
              
              5,250
              
              
              
              -
              
              
              
              -Proceeds
      from convertible debt, net of financing costs
              
              
              1,885
              
              
              
              1,820
              
              
              
              5,620Payments
      on convertible debt
              
              
              -
              
              
              
              -
              
              
              
              (247
              )Proceeds
      from notes payable
              
              
              -
              
              
              
              199
              
              
              
              207Payments
      on notes payable
              
              
              (421
              )
              
              
              (170
              )
              
              
              (348
              )Net
      cash provided by financing activities
              
              
              11,124
              
              
              
              2,635
              
              
              
              6,634(DECREASE)
      INCREASE IN CASH AND CASH EQUIVALENTS
              
              
              862
              
              
              
              (2,817
              )
              
              
              (3,176
              )CASH
      AND CASH EQUIVALENTS AT BEGINNING OF YEAR
              
              
              618
              
              
              
              3,435
              
              
              
              259CASH
      AND CASH EQUIVALENTS  AT END OF YEAR
              
              $
              1,480
              
              
              $
              618
              
              
              $
              3,435SUPPLEMENTAL
      DISCLOSURES:Interest
      paid in cash
              
              $
              191
              
              
              $
              277
              
              
              $
              175Income
      taxes paid in cash
              
              
              -
              
              
              
              -
              
              
              
              -NON-CASH
      TRANSACTIONSCommon
      stock issued for accounts payable
              
              $
              95
              
              
              $
              -
              
              
              $
              -Payment
      of preferred stock dividends in common shares
              
              
              1
              
              
              
              -
              
              
              
              -Common
      stock issued for oil and gas properties
              
              
              285
              
              
              
              274
              
              
              
              37Employee
      stock option for oil and gas properties
              
              
              11
              
              
              
              -
              
              
              
              -Exercise
      of option for stock subscription receivable
              
              
              -
              
              
              
              5,250
              
              
              
              -Conversion
      of Series B Preferred Stock to common stock by related
    parties
              
              
              -
              
              
              
              2
              
              
              
              -Deemed
      dividend attributable to repriced warrants originally issued as part of
      convertible debt
              
              
              153
              
              
              
              5,058
              
              
              
              -Debt
      discount on convertible debt
              
              
              346
              
              
              
              80
              
              
              
              3,565Conversion
      of notes payable to common stock
              
              
              -
              
              
              
              6,000
              
              
              
              1,920Acquisition
      of asset retirement obligation
              
              
              407
              
              
              
              -
              
              
              
              -Asset
      retirement obligations incurred and revisions of estimates
              
              
              161
              
              
              
              -
              
              
              
              -Accounts
      payable for oil and gas property
              
              
              1,146
              
              
              
              -
              
              
              
              -Note
      payable for fixed assets
              
              
              30
              
              
              
              -
              
              
              
              -Note
      payable for prepaid insurance
              
              
              143
              
              
              
              -
              
              
              
              -Assets
      transferred to vendor to extinguish account payable
              
              
              8
              
              
              
              -
              
              
              
              -Accrued
      and unpaid dividend to related parties
              
              
              99
              
              
              
              109
              
              
              
              109
 
 The
accompanying notes are an integral part of these consolidated financial
statements
  F-10
 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) and HYD Resources Corporation (HYD). Through SCS and its
wholly owned subsidiary, SCS Corporation Guinea 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 Production Company (Trendsetter), an oil and gas
operator in Louisiana that had been under common ownership with HYD. Trendsetter
owns working interests in 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 17 – 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,
cash equivalents and restricted cash
  Cash
equivalents are highly liquid investments with an original maturity of three
months or less.
  Restricted
cash at June 30, 2007 consists of a certificate of deposit at a bank that
secured a letter of credit serving as the underlying collateral for a
Hyperdynamics' lease commitment. The contractual obligation ended and the letter
of credit was returned to us on October 31, 2007. There are no restrictions on
cash balances as of June 30, 2008.
 
 Accounts
receivable, allowance for doubtful accounts and key customers
  Hyperdynamics
does not require collateral from its customers. The Company establishes
provisions for losses on accounts receivable if it determines that it will not
collect all or part of the outstanding balance. 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. There is no allowance for doubtful accounts as of
June 30, 2008 or 2007.
 
 During
the fiscal year, two customers, Plains Marketing LLC and Shell Trading,
purchased all oil production from our Louisiana properties. The number of oil
transporters in Louisiana is limited and this results in a concentration
risk.  The loss of both customers could have an adverse effect on
Hyperdynamics.
  Other
Current Assets
 
 As of
June 30, 2008, other current assets consist of $133,000 in prepaid insurance and
$18,000 in other prepaid expenses, for a total of $151,000.
  F-11
 Table of Contents
  As of
June 30, 2007, other current assets consist of $151,000 in prepaid insurance,
$35,000 in other prepaid expenses, and $13,000 of inventory, for a total of
$199,000.
 
 Stock
subscription receivable was $0 and $5,250,000 as of June 30, 2008 and 2007,
respectively. 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 stock is
reflected as issued on June 30, 2007 and the $5,250,000 is reflected as a stock
subscription receivable. The investor paid the exercise price, $5,250,000, on
July 2, 2007.
 
 Assets
held for sale
 
 Assets
held for sale were $31,000 and $0 as of June 30, 2008 and June 30, 2007,
respectively. Assets held for sale as of June 30, 2008 consist of one work-over
oil rig, which is carried at net book value, which is lower than the net
realizable value.
 
 Oil
and Gas Properties
 
 Full
Cost Method
 
 We
account for oil and natural gas producing activities using the full cost method
of accounting as prescribed by the United States Securities and Exchange
Commission (SEC). Accordingly, all costs incurred in the acquisition,
exploration, and development of proved oil and natural gas properties, including
the costs of abandoned properties, dry holes, geophysical costs, and annual
lease rentals are capitalized. All general and administrative corporate
costs unrelated to drilling activities are expensed as incurred. Sales or
other dispositions of oil and natural gas properties are accounted for as
adjustments to capitalized costs, with no gain or loss recorded unless the ratio
of cost to proved reserves would significantly change. Depletion of
evaluated oil and natural gas properties is computed on the units of production
method based on proved reserves. The net capitalized costs of proved oil
and natural gas properties are subject to a full cost ceiling limitation in
which the costs are not allowed to exceed their related estimated future net
revenues discounted at 10%, net of tax considerations. In accordance with Staff
Accounting Bulletin Topic 12.D.3.c., we utilize the prices in effect on a date
subsequent to the end of a reporting period in which the full cost ceiling
limitation was exceeded at the end of a reporting period.  The
application of the full cost method of accounting for oil and gas properties
generally results in higher capitalized costs and higher depreciation, depletion
and amortization rates compared to the successful efforts method of accounting
for oil and gas properties.
 
 Costs
Excluded
 
 Costs
associated with unevaluated properties are excluded from the full cost pool
until we have made a determination as to the existence of proved reserves. We
review our unevaluated properties at the end of each quarter to determine
whether the costs incurred should be transferred to the full cost pool and
thereby subject to amortization.
 
 We assess
all items classified as unevaluated property on a quarterly basis for possible
impairment or reduction in value. We assess properties on an individual basis or
as a group if properties are individually insignificant. The assessment includes
consideration of the following factors, among others: intent to drill; remaining
lease term; geological and geophysical evaluations; drilling results and
activity; the assignment of proved reserves; and the economic viability of
development if proved reserves are assigned. We assess our unevaluated
properties on a country-by-country basis. During any period in which these
factors indicate an impairment, the cumulative drilling costs incurred to date
for such property and all or a portion of the associated leasehold costs are
transferred to the full cost pool and are then subject to amortization. However,
if proved reserves have not yet been established in a full cost pool, these
costs are charged against earnings in the respective country. For these
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.
  F-12
 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 conditions,
discounted at 10 percent, plus (b) the cost of properties not being amortized,
plus (c) the lower of cost or estimated fair value of any unproved properties
included in the costs being amortized, less (d) any income tax effects related
to differences between the book and tax basis of the properties involved. If
capitalized costs exceed this limit, the excess is charged as an impairment
expense. As of June 30, 2008, we have capitalized $3,157,000 in oil and gas
properties, which is subject to the ceiling test for impairment. At June 30,
2008, there was no impairment indicated.
 
 Proved
reserves
 
 Estimates
of our proved reserves included in this report are prepared in accordance with
accounting principles generally accepted in the United States of America and SEC
guidelines. Our engineering estimates of proved oil and natural gas reserves
directly impact financial accounting estimates, including depreciation,
depletion and amortization expense and the full cost ceiling limitation. Proved
oil and natural gas reserves are the estimated quantities of oil and natural gas
reserves that geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under
period-end economic and operating conditions. The process of estimating
quantities of proved reserves is very complex, requiring significant subjective
decisions in the evaluation of all geological, engineering and economic data for
each reservoir. The accuracy of a reserve estimate is a function of:
(i) the quality and quantity of available data; (ii) the
interpretation of that data; (iii) the accuracy of various mandated
economic assumptions and (iv) the judgment of the persons preparing the
estimate. The data for a given reservoir may change substantially over time as a
result of numerous factors, including additional development activity, evolving
production history and continual reassessment of the viability of production
under varying economic conditions. Changes in oil and natural gas prices,
operating costs and expected performance from a given reservoir also will result
in revisions to the amount of our estimated proved reserves. 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, during the quarter ended March 31,
2008, we recognized impairment charges of $6,000 on oilfield service
equipment.  The equipment was subsequently sold during May 2008. The
impairment charge is included in depreciation, depletion, and amortization
expense.   We recognized no impairment charge in the year ended
June 30, 2007.
 
 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.
  F-13
 Table of Contents
  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 a 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
 
 Accounting
principles generally accepted in the United States of America require rent
expense to be recognized on a straight-line basis over the lease term. Rent
holidays, rent concessions, rent escalation clauses and certain other lease
provisions are recorded on a straight-line basis over the lease term (including
one renewal option period if renewal is reasonably assured based on the
imposition of an economic penalty for failure to exercise the renewal option).
The difference between the rent due under the stated lease agreement compared to
that of the straight-line basis is recorded as deferred rent. The short-term
portion is the portion which is scheduled to reverse within twelve months of the
balance sheet date and it is included in accounts payable and accrued expenses.
The long term portion is included in the caption “Deferred rent” under Long term
liabilities. At the beginning of our facility lease, we received a free rent
period, which began in January 2006 and ended in November 2006. During the free
rent period, we recorded $115,000 of deferred rent, which is being amortized
over the life of the lease.
 
 Revenue
recognition
 
 Revenues
from the sale of oil and natural gas are recognized when the product is
delivered at a fixed or determinable price, title has transferred,
collectability is reasonably assured and evidenced by a contract. We follow the
“sales method” of accounting for oil and natural gas revenue, so we recognize
revenue on all natural gas or crude oil sold to purchasers, regardless of
whether the sales are proportionate to our ownership in the property. A
receivable or liability is recognized only to the extent that we have an
imbalance on a specific property greater than our share of the expected
remaining proved reserves. For oil sales, this occurs when the customer's truck
takes delivery of oil from the operators’ storage tanks.
 
 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.
 
 In June
2006, the FASB issued Interpretation No. 48 "Accounting for Uncertainty in
Income Taxes, and Interpretation of FASB Statement No. 109" (FIN 48). We adopted
FIN 48 on July 1, 2007. Under FIN 48, tax benefits are recognized only for tax
positions that are more likely than not to be sustained upon examination by tax
authorities. The amount recognized is measured as the largest amount of benefit
that is greater than 50 percent likely to be realized upon ultimate settlement.
Unrecognized tax benefits are tax benefits claimed in our tax returns that do
not meet these recognition and measurement standards.
  F-14
 Table of Contents
  Upon the
adoption of FIN 48, we had no liabilities for unrecognized tax benefits and, as
such, the adoption had no impact on our financial statements, and we have
recorded no additional interest or penalties. The adoption of FIN 48 did not
impact our effective tax rates.
 
 Our
policy is to recognize potential interest and penalties accrued related to
unrecognized tax benefits within income tax expense. For the year ended June 30,
2008, we did not recognize any interest or penalties in our Consolidated
Statement of Operations, nor did we have any interest or penalties accrued on
our Consolidated Balance Sheet at June 30, 2008 relating to unrecognized
benefits.
 
 The tax
years 2004-2007 remain open to examination for federal income tax purposes and
by the other major taxing jurisdictions to which we are subject.
  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 in the financial
statements of the cost of employee services received in exchange for an award of
equity instruments 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. We
account for non-employee share-based awards in accordance with EITF No. 96-18,
“Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquisition, or in Conjunction with Selling, Goods or Services.”
 
 Earnings Per
Share
 
 Basic
loss per share is computed using the weighted average number of shares of common
stock outstanding during each period. Diluted loss per share includes the
dilutive effects of common stock equivalents on an “as if converted” basis. For
the years ended June 30, 2008, 2007 and 2006, potential dilutive securities had
an anti-dilutive effect and were not included in the calculation of diluted net
loss per common share.
  Contingencies
  Legal
  We are
subject to legal proceedings, claims and liabilities which arise in the ordinary
course of business. We accrue 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.  See Note 13. Commitments
and Contingencies for more information on Legal proceedings.
  Environmental
 
 We accrue
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
  In
December 2007, the FASB issued Statement SFAS No. 141, Business
Combinations (SFAS 141R), and Statement of Financial Accounting Standards
No. 160, Accounting and
Reporting of Noncontrolling Interest in Consolidated Financial Statements, an
amendment of ARB No.51 (SFAS 160).
SFAS 141R and SFAS 160 will significantly change the accounting for
and reporting of business combination transactions and noncontrolling (minority)
interests in consolidated financial statements. SFAS 141R retains the
fundamental requirements in Statement 141, Business Combinations, while
providing additional definitions, such as the definition of the acquirer in a
purchase and improvements in the application of how the acquisition method is
applied. SFAS 160 will change the accounting and reporting for minority
interests, which will be recharacterized as noncontrolling interests, and
classified as a component of equity. These Statements become simultaneously
effective January 1, 2009. Early adoption is not permitted. We do not
expect the adoption of this pronouncement to have an immediate impact on our
operating results, financial position or cash flows.
  F-15
 Table of Contents
  In May
2007, the FASB issued FSP No. FIN 48-1, Definition of Settlement in FASB
Interpretation No.48, (FIN 48-1) which amends
FIN 48 and provides guidance concerning how an entity should determine whether a
tax position is “effectively,” rather than the previously required “ultimately,”
settled for the purpose of recognizing previously unrecognized tax benefits. In
addition, FIN 48-1 provides guidance on determining whether a tax position has
been effectively settled. The guidance in FIN 48-1 is effective upon the initial
January 1, 2007 adoption of FIN 48. Companies that have not applied this
guidance must retroactively apply the provisions of this FSP to the date of the
initial adoption of FIN 48. The Company has adopted FIN 48-1 and no retroactive
adjustments were necessary.
 
 In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities Including an Amendment of FASB Statement
No.115(SFAS 159), which permits
entities to choose to measure many financial instruments and certain other items
at fair value (the Fair Value Option). Election of the Fair Value Option is made
on an instrument-by-instrument basis and is irrevocable. At the adoption date,
unrealized gains and losses on financial assets and liabilities for which the
Fair Value Option has been elected would be reported as a cumulative adjustment
to beginning retained earnings. If the Company elects the Fair Value Option for
certain financial assets and liabilities, the Company will report unrealized
gains and losses due to changes in fair value in earnings at each subsequent
reporting date. The provisions of SFAS 159 are effective January 1, 2008.
We do not expect the adoption of this pronouncement to have an immediate impact
our or operating results, financial position or cash flows.
 
 In
September 2006, the FASB issued SFAS 157, Fair Value Measurements(SFAS
157), which defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. This pronouncement
applies to other standards that require or permit fair value measurements.
Accordingly, this statement does not require any new fair value measurement. The
provisions of SFAS 157 are effective for the Company on January 1, 2008. We
do not expect the adoption of this pronouncement to have an immediate impact our
or operating results, financial position or cash flows.
 
 
 2.
PROPERTY AND EQUIPMENT
 
 A summary
of property and equipment as of June 30, 2008 and 2007 is as
follows:
 
 June
      30,2008
              
              
              2007(in
      Thousands)Computer
      equipment and software
              3
      years
              
              $
              128
              
              
              $
              170Office
      equipment and furniture
              5
      years
              
              
              107
              
              
              
              107Vehicles
              3
      years
              
              
              290
              
              
              
              120Building
              15
      years
              
              
              25
              
              
              
              25Leasehold
      improvements
              3
      years
              
              
              74
              
              
              
              68Land
              
              
              
              25
              
              
              
              25Total
      cost
              
              
              
              649
              
              
              
              515Less
      - Accumulated depreciation
              
              
              
              (240
              )
              
              
              (149
              )Net
      carrying value
              
              
              $
              409
              
              
              $
              366
  F-16
 Table of Contents
  We review
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. As of June 30, 2008 and
2007, there were no impairments of Hyperdynamics' administrative Property and
Equipment.
 
 Loss
on disposition of assets
 
 During
the year ended June 30, 2008, we decommissioned computer equipment with
historical cost of $60,000 and a net book value of $18,000, which resulted in a
loss on disposition of asset of $18,000 from this equipment.
 
 During
the year ended June 30, 2008, Hyperdynamics sold, retired, or removed from
service all of its oilfield equipment.  The gain on sales of oilfield
service equipment during the year ended June 30, 2008 was
$4,000.  Hyperdynamics conducted a physical inventory of oilfield
service equipment and concluded that, as of June 30, 2007, oilfield service
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 in the year ended June 30, 2007.
 
 
 3.
INVESTMENT IN OIL AND GAS PROPERTIES
 
 Investment
in Oil and Gas properties consist of our concession in offshore West Africa and
leaseholds in Louisiana, USA. As of June 30, 2008 and 2007, all costs associated
with properties in the USA were included in the amortization base and all costs
associated with the concession offshore 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
                
                
                Total2008
                
                
                2007
                
                
                2008
                
                
                2007
                
                
                2008
                
                
                2007Lease
      Acquisition Costs
                
                $
                291
                
                
                $
                291
                
                
                $
                146
                
                
                $
                47
                
                
                $
                437
                
                
                $
                338Exploration
      CostsGeological
      and geophysical Cost
                
                
                7,023
                
                
                
                3,988
                
                
                
                23
                
                
                
                -
                
                
                
                7,046
                
                
                
                3,988Drilling
                
                
                -
                
                
                
                -
                
                
                
                1,360
                
                
                
                829
                
                
                
                1,360
                
                
                
                829Development
      Costs
                
                
                -
                
                
                
                -
                
                
                
                1,149
                
                
                
                378
                
                
                
                1,149
                
                
                
                378Purchased
      Proved Reserves
                
                
                -
                
                
                
                -
                
                
                
                2,398
                
                
                
                65
                
                
                
                2,398
                
                
                
                65Cost
      Recovery (sale of working interest)
                
                
                -
                
                
                
                -
                
                
                
                (1,161
                )
                
                
                (1,161
                )
                
                
                (1,161
                )
                
                
                (1,161
                )Equipment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                220
                
                
                
                -
                
                
                
                2207,314
                
                
                
                4,279
                
                
                
                3,915
                
                
                
                378
                
                
                
                11,230
                
                
                
                4,657Less:
      AccumulatedDepletion
      and Depreciation
                
                
                -
                
                
                
                -
                
                
                
                (758
                )
                
                
                (174
                )
                
                
                (758
                )
                
                
                (174
                )$
                7,314
                
                
                $
                4,279
                
                
                $
                3,157
                
                
                $
                204
                
                
                $
                10,471
                
                
                $
                4,483
 Excluded
Costs
 
 Hyperdynamics
excludes capitalized costs of unevaluated oil and gas properties from
amortization. Currently, geological and geophysical information pertaining to
the Guinea is being collected and evaluated and no reserves have been attributed
to this concession. The costs associated with such unproved properties of
$7,314,000 and $4,279,000 as of June 30, 2008 and 2007, respectively, are
excluded from amounts subject to amortization. The majority of the evaluation
activities are expected to be completed within the next three years.
Hyperdynamics evaluates excluded costs for impairment as discussed in Note 1. As
of June 30, 2008, based on our impairment review, there was no impairment
indicated for our excluded costs.  See Note 17 for detailed
information about the excluded costs.
  F-17
 Table of Contents
  We
incurred $3,035,000 of geological and geophysical costs for our Guinea
concession during the year ended June 30, 2008. The costs were incurred as
follows: consulting for our Forward Exploration Program of $91,000; payroll
costs directly associated with the evaluation of our Guinea concession of
$67,000; data purchases of $78,000; costs associated with our 2008 seismic shoot
of $2,782,000; and geophysical and geological software for $17,000.
 
 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.  Of the remaining 90% of
the first production, we will receive 75% of the revenue for cost recovery and
Guinea will receive 25%. After cost recovery, revenue will be split as outlined
in the table below:
  Daily
      production (b/d)
              Guinea
      Share
              HDY
      ShareFrom
      0 to 2,000
              25%
              75%From
      2,001 to 5,000
              30%
              70%From
      5,001 to 100,000
              40%
              60%Over
      100,001
              60%
              40%
 
 
 The
Guinea Government may elect to take a 15% working interest in any exploitation
area.
 
 All time
frames to achieve our exploration work according to the 2006 PSC begin from the
effective date of September 22, 2006.  We are required by the 2006 PSC
to meet certain milestones on the following timeline:
  ·
              The
      first exploration period lasts two years, until September 2008. Two one
      year extensions are available which would extend the first exploration
      period to a total of four years.  By the terms of the PSC, when we
      notify the government that we wish to extend an exploration period, it
      will be automatically granted.  We submitted our extension
      notification; accordingly, it has been extended to September
      2009.  During the first exploration period we are required to
      acquire, evaluate, and analyze 2D or 3D seismic with an estimated
      expenditure of $10 million. Fulfilling the work obligation in all cases
      exempts us from fulfilling any minimum expenditure
      obligation.  We believe we have completed the work requirements
      of the first exploration period.
 ·
              The
      second exploration period starts after the end of the first exploration
      period, as extended.  The second exploration period lasts four
      years. One four year extension is available for a total of eight years.
      During the second exploration period we are required to acquire additional
      2D or 3D seismic, evaluate it, and analyze it with an estimated cost of $6
      million.  We are also required to drill two exploration wells
      with minimum well depths of 2,500 meters from the surface of the water.
      The estimated cost of the wells is $15 million to $20 million
      each.  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, during the
      first exploration period.  Such work, even though completed
      during the first exploration period, will accrue to the requirements in
      the second exploration
period.
  F-18
 Table of Contents
  ·
              We
      can secure as many “Exploitation Areas”, in shapes defined by us, as we
      discover to be capable of commercial production.  Each Exploitation
      Area, defined as a contiguous block surrounding a discovery, shall be
      500 square kilometers in size. Each Exploitation Area is held for an
      initial period of twenty-five (25) years.  If we show the area
      remains productive after the initial period, we will get two additional
      extensions for ten years each so the total exploitation period becomes
      effectively forty-five (45) years.  Each well has its own
      exploitation period that starts when it begins producing.
 
 Under the
provisions of the agreement, if we take all of the extensions available to us
and complete the work requirements, the first exploration period will expire in
September 2010 and the second exploration period expires in September
2018.  We believe we have met the work requirements of the first
exploration period, but we have nevertheless requested and received an extension
of the first exploration period.
 
 Oil
and Gas Properties
 
 During
July 2007, we purchased an 85% working interest in various oil wells, leases,
and oil and gas equipment in Louisiana, USA (“RABB properties”). In connection
with the acquisition, we paid $1,308,000 in cash and issued 200,000 shares of
common stock valued at $559,000. We issued 100,000 shares of common stock in
June 2007 as a deposit and the remaining 100,000 shares of common stock upon
closing of the acquisition in July 2007. The stock was valued using the quoted
price of our common stock on the date the stock was granted and was included in
the purchase price, which was allocated to properties in the full cost pool
based on the estimated fair value of the individual properties. There was no
allocation of the purchase price to unproved properties acquired. The final
estimate of the asset retirement obligation associated with the acquisition of
these properties was $407,000.
 
 Under the
purchase agreement, the seller remained the operator of the properties and
retained a 15% working interest therein; however, we are required to pay 100% of
all working interest costs, including work-over and new development and
exploration costs, up to $4,000,000 (“Promised Funds”) over the eighteen months
ending  December 31, 2008. After the Promised Funds have been
invested, working interest costs, except the cost of new drilling, will be
shared pro rata according to the working interest percentage. We will continue
to pay 100% of the costs of any new drilling performed on these properties. New
drilling is defined as all activities directly involved in the drilling,
completing, and/or abandonment of new wells up to the point of production
capability. The Promised Funds investment obligation was completed in July
2008.
 
 The
properties that were purchased are subject to overriding royalty interests of up
to 27.46%. Accordingly, Hyperdynamics holds net revenue interests of
approximately 61.66% in the properties.
 
 As of
June 30, 2008, we have capitalized $3,157,000 in oil and gas properties, net of
depletion, which is subject to the full cost ceiling test for impairment. At
June 30, 2008, there was no impairment indicated.
 
 Pro
Forma Results
 
 The
acquisition of the RABB Properties occurred on July 1, 2007. Accordingly, the
results of operations for the full year ended June 30, 2008 include the results
of the RABB Properties.
 
 The
unaudited pro forma results presented below for the year ended June 30,
2007  have been prepared to give effect to the purchase of the RABB
Properties described above as if it had been consummated on July 1, 2006. The
unaudited pro forma results do not purport to represent what our results of
operations actually would have been if this acquisition had been completed on
such date or to project our results of operations for any future date or
period.
  F-19
 Table of Contents
  Pro
      Forma:Year
      ended June 30, 2007Revenue
              
              $
              1,589,000Loss
      from operations
              
              
              20,979,000Net
      loss chargeable to common shareholders
              
              
              23,949,000Loss
      per share, basic and diluted
              
              $
              0.50
 
 
 4.
ASSET RETIREMENT OBLIGATIONS
 
 The
following is a reconciliation of our asset retirement obligation liability as of
June 30, 2008 and 2007:
 
 2008
              
              
              2007(in
      Thousands)Asset
      retirement obligation, beginning of period
              
              $
              128
              
              
              $
              12Liabilities
      incurred
              
              
              428
              
              
              
              -Liabilities
      settled
              
              
              (22
              )
              
              
              -Revisions
      of estimates
              
              
              138
              
              
              
              115Accretion
      of discount
              
              
              58
              
              
              
              1Asset
      retirement obligation, end of period
              
              $
              730
              
              
              $
              128
 
 Of the
asset retirement obligation incurred, $407,000 was incurred in the acquisition
of the Rabb properties and $21,000 was incurred when we drilled a new well and
completed development work on our leases.
 
 
 5.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
 
 Accounts
payable and accrued expenses as of June 30, 2008 and 2007 include the
following:
 
 2008
              
              
              2007(in
      Thousands)Accounts
      payable
              
              $
              2,154
              
              
              $
              679Accrued
      payroll
              
              
              29
              
              
              
              30Accrued
      insurance
              
              
              144
              
              
              
              153Taxes
      payable
              
              
              50
              
              
              
              17Deferred
      rent
              
              
              16
              
              
              
              16$
              2,393
              
              
              $
              895
 
 
 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 and to accept a
deferred payment arrangement. The additional $100,000 was charged to interest
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.
  F-20
 Table of Contents
  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, 2008. The agreement does not
provide for interest payments.  Accordingly, we have not accrued
interest on this payable.
 
 
 7.
SHORT TERM NOTES PAYABLE AND LONG TERM DEBT
 
 Short
term notes payable and long term debt as of June 30, 2008 and 2007 consist of
the following:
 
 
 2008
              
              
              2007Short
      term note payable
              
              $
              -
              
              
              $
              240,000Installment
      notes payable
              
              
              118,000
              
              
              
              135,000YA
      GlobalGross
              
              
              2,000,000
              
              
              
              -Unamortized
      discount
              
              
              (402,000
              )
              
              
              -Net
              
              
              1,598,000
              
              
              
              -Total
      short term notes payable and long term debt
              
              
              1,716,000
              
              
              
              375,000Less:
      current portion
              
              
              (401,000
              )
              
              
              (375,000
              )Long
      term debt as of June 30, 2008
              
              $
              1,315,000
              
              
              $
              -
 
 
 Short
term notes payable
 
 During
the year ended June 30, 2008, Hyperdynamics repaid an installment note payable
for legal settlement that was originally payable in six monthly installments of
$40,000 each. The original amount of the note was $240,000. The noteholder
accepted $230,000 in full payment of the note, resulting in a gain on the
settlement of debt of $10,000.
 
 Installment
notes payable
 
 During
the year ended June 30, 2008, Hyperdynamics entered into an installment note
payable in the amount of $30,000 for the purchase of a vehicle. The note bears
imputed interest of 10% per annum and is payable in installments of principal
and interest of $600 per month for 60 months and is secured by the vehicle. As
of June 30, 2008, the net amount outstanding on this note was
$26,000.
 
 During
the year ended June 30, 2008, Hyperdynamics financed four insurance policies for
an aggregate amount of $143,000. The notes are payable over nine months from
inception in installments of approximately $15,000 per month. As of June 30,
2008, the net amount outstanding on these notes was $92,000.
 
 YA
Global
 
 On
February 6, 2008, Hyperdynamics entered into a financing agreement (the
Financing Agreement) with YA Global Investments, LP (“YA Global”). Under the
Financing Agreement, we would issue, and YA Global would purchase, up to
$3,000,000 of notes. On February 6, 2008, we completed the first closing and
issued $911,000 of notes under the Financing Agreement. We issued an additional
$1,089,000 of notes in March 2008, and the remaining $1,000,000 of notes were
not issued.
  F-21
 Table of Contents
  We issued
an aggregate 94,899 shares of common stock and a total of 550,000 warrants with
an exercise price of $2.00 per share on February 6, 2008 in connection with the
first closing. The exercise price of the warrants is subject to “reset”
provisions in the event we subsequently issue common stock, stock warrants,
stock options or convertible debt with a stock price, exercise price or
conversion price lower than $2.00. If these provisions are triggered, YA Global
will receive warrants to purchase additional shares of common stock and a
reduction in the exercise price of all their warrants.  A repricing
event occurred on May 12, 2008, resulting in additional interest expense of
$277,000, as computed using the Black-Sholes option pricing model (See Note
10).  The following table details the significant assumptions used to
computing the fair market values of warrants granted in this
transaction:
 
 
 2008Risk-free
      interest rate
              
              
              2.67
              %Dividend
      yield
              
              
              0
              %Volatility
      factor
              
              
              99.74
              %Expected
      life (years)
              
              
              5
 
 Notes
issued under this arrangement are collateralized by substantially all of the
assets of Hyperdynamics and its subsidiaries, except the assets of SCS
Corporation and SCS Guinea. Further, this new agreement limits our ability to
draw down on our equity line of credit with Dutchess Capital, which expires in
February 2009.
 
 We issued
$2,000,000 of notes under the arrangement and received net proceeds of
$1,885,000. The notes carry an annual interest rate equal to 20% and mature on
July 6, 2010. The notes will be repaid in monthly installments of $50,000 and
interest installments will also be paid monthly on the outstanding balance.
Interest installments commenced on May 31, 2008 and principal installments
commence on September 1, 2008. At our option, we can redeem the notes at an
earlier date and pay an “early redemption premium” of 15% of the principal
amount being redeemed.
 
 Hyperdynamics
repaid the notes on September 12, 2008 (See Note 15).
 
 The note
agreement contains several default provisions. Events of default include
non-payment of principal or interest, default on notes payable to other parties
where the notes exceed $250,000, bankruptcy, delisting from a stock exchange in
which our stock is quoted; any change of control transaction; and various other
default provisions. Upon default, the notes become immediately due and payable.
In addition, any time following an event of default, the notes become
convertible at the option of the holder into shares of the Company’s common
stock. The conversion price is equal to the lesser of $2.00 or 70% of the lowest
closing bid price of the common stock during the 15 consecutive trading days
prior to the conversion date. At the inception of the notes, the potential
intrinsic value of the contingent conversion feature was
$1,453,000.
 
 In the
event we issue or sell shares of common stock at a price that is less than the
conversion price, the conversion price is automatically reset to the new lower
price. The maximum aggregate number of shares issuable under the notes is
approximately 20% of the number of shares outstanding as of the date we entered
into the transaction, or approximately 11,000,000 shares, unless we obtain
shareholder approval to exceed this limit. In accordance with our agreement, we
have reserved 11,000,000 shares.
 
 Hyperdynamics
has evaluated the warrants for derivative accounting consideration under SFAS
133 and EITF 00-19. We have concluded that the warrants meet the criteria for
classification in stockholders' equity under SFAS 133 and EITF 00-19. Therefore,
derivative accounting is not applicable for the warrants.
  F-22
 Table of Contents
  The fair
value of the investment was allocated among the notes, common stock, and warrant
as follows:
 
 Relative
      fair value of warrants
              
              $
              276,000Relative
      fair value of stock
              
              
              70,000Relative
      fair value of note payable
              
              
              1,654,000
  The
relative fair value of the warrants, stock, and financing costs of $115,000 were
recorded as a discount to the notes. These discounts, totaling $461,000, will be
amortized and charged to interest expense over the life of the notes using the
effective interest rate method. As of June 30, 2008, $59,000 of the discount had
been amortized. The effective interest rate on the notes, including the
discount, is 37%.
  Future
minimum debt payments
 
 Year
ending June 30:
 
 2009
                
                $
                597,0002010
                
                
                606,0002011
                
                
                906,0002012
                
                
                7,0002,000Total
      minimum payments required
                
                $
                2,118,000
 
 Gain
on settlement
 
 Gain on
settlement of debt is $10,000, $28,000, and $135,000 in the years ended June 30,
2008, 2007, and 2006, respectively.  The gain on settlement in 2008
arises from the early repayment of a short term note payable, as described
above.  The gain on settlement in 2007 and 2006 occurred because of
negotiated settlements with two different vendors.
 
 
 8.
INCOME TAXES:
 
 Income
taxes are not due since Hyperdynamics has had losses since inception.
Hyperdynamics has net operating loss carryforwards of approximately $34,000,000
at June 30, 2008.  Components of deferred tax assets as of June 30,
2008, 2007 and 2006 are as follows:
  2008
              
              
              2007
              
              
              2006Net
      operating loss carryforward
              
              $
              11,564,000
              
              
              $
              9,566,000
              
              
              $
              6,393,000Valuation
      allowance for deferred tax assets
              
              
              (11,564,000
              )
              
              
              (9,566,000
              )
              
              
              (6,393,000
              )Net
      deferred tax asset
              
              $
              -
              
              
              $
              -
              
              
              $
              -
 
 The
deferred tax asset generated by the loss carry-forward has been fully reserved
due to the uncertainty that the Company will be able to realize the benefit from
it.
 
 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
2028.
 
 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.
 
  9.
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, 2008. By terms of the original
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 further
described in Note 13.
  F-23
 Table of Contents
  Since the
outcome was 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, 2008, $372,000 in dividends had been accrued, which represents accruals
through September 30, 2004. No dividends have been accrued in 2008 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 14). 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. Management evaluated
the conversion feature of these preferred shares under FAS 133 and EITF 00-19 to
determine whether the instruments contained the characteristics of a liability.
Because these preferred shares are held by family members of our Chief Executive
Officer, who had agreed not to convert the stock at values lower than $0.135,
management concluded that the conversion of these shares is within the control
of management and are not considered a derivative liability under FAS 133 and
EITF 00-19.
 
 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. In each of the years ended 2008, 2007,
and 2006, dividends of $99,000, $109,000 and $109,000 were accrued. The
resulting balance in accrued dividends was $343,000, $245,000, and $136,000 as
of June 30, 2008, June 30, 2007 and June 30, 2006, respectively.
 
 As of
June 30, 2007, 2,487 shares of preferred stock remained outstanding after
conversion of 238 shares into 1,762,962 shares of common stock during June
2007.
 
 During
March 2008, a related party converted 27 shares of Series B Preferred Stock into
200,000 shares of common stock. During May 2008, 13.5 shares of Series B
Preferred Stock were converted into 100,000 shares of common stock. As a result,
2,446.5 shares of Series B Preferred Stock remain outstanding.
 
 If all
Preferred Series A and B shares were converted as of June 30, 2008, based on the
then-market price of the stock, total common shares outstanding would be
approximately 77,982,723 shares.
 
 Common
stock, options, and warrants
  For
exercise of options for cash:
 
 During
the year ended June 30, 2008, options to purchase 2,500 shares of common stock
at $2.15 per share were exercised for gross proceeds of $6,000.
  F-24
 Table of Contents
  For
exercise of options for cash, related party:
 
 A related
party exercised options to purchase 50,000 shares of common stock at $2.00 per
share for proceeds of $100,000.
 
 For
exercise of warrants for cash:
 
 Warrants
to purchase 544,000 shares of common stock at $1.00 per share were exercised for
gross proceeds of $544,000.
 
 For
cashless exercise of options:
 
 We issued
1,923 shares of common stock upon the cashless exercise of options to purchase
9,052 shares of common stock.
 
 For
cashless exercise of options, related party:
 
 During
the year ended June 30, 2008, two officers of the company exercised their
options to purchase stock at $.23 per share. We issued 738,251 shares of common
stock upon the cashless exercise of these options to purchase 800,000 shares of
common stock.
 
 For
cashless exercise of warrants:
 
 We also
issued 119,389 shares of common stock to an investor upon the cashless exercise
of warrants to purchase 142,000 shares of common stock.
 
 For
services:
 
 During
the year ended June 30, 2008, Hyperdynamics issued 417, 894 shares of common
stock for services rendered by consultants, employees, and independent members
of the board of directors with a total value of $758,000. Services were valued
using the market close price on the date of grant.
 
 For  purchase
of working interests:
 
 100,000
shares of common stock were issued for the purchase of the Rabb oil & gas
properties in Louisiana. They were valued at $2.85 per share for
$285,000.
 
 For
stock  payable:
 
 During
the year ended June 30, 2008, Hyperdynamics issued 30,000 shares of common stock
for services earned by a consultant during June 2007.  The value of
the services, $95,000, was determined using the market close price on the date
the award was earned and accrued as of June 30, 2007.
 
 For
cash:
 
 In July
2007, an investor purchased 48,160 shares of common stock for $135,000 cash when
we exercised a put on our Dutchess equity line of credit.  This line
of credit expires in February 2009.
 
 During
May 2008, Hyperdynamics placed a registered direct offering. In the offering, an
investor purchased 2,424,243 shares of common stock and 2,243,243 warrants with
an exercise price of $3.27 per share expiring in May 2015 for $4,000,000.
Hyperdynamics has evaluated the warrants for derivative accounting consideration
under SFAS 133 and EITF 00-19. We have concluded that the warrants meet the
criteria for classification in stockholders' equity under SFAS 133 and EITF
00-19. Therefore, derivative accounting is not applicable for the
warrants.
  F-25
 Table of Contents
  Offering
costs were $375,000, resulting in net proceeds of $3,625,000. We determined the
fair value of both the common stock and warrants as of the date the transaction
was initially entered into. The fair value of the common stock was the market
price at the closing date, while the fair value of the warrants was determined
by the Black-Scholes method. The following table details the significant
assumptions used to computing the fair market values of warrants granted in this
transaction:
 
 2008Risk-free
      interest rate
              
              
              3.33
              %Dividend
      yield
              
              
              0
              %Volatility
      factor
              
              
              121.65
              %Expected
      life (years)
              
              
              7
              %
 
 Hyperdynamics
allocated the proceeds between the warrants and the stock based on the relative
fair values as follows:
 
 Relative
      fair value of warrants
              
              $
              1,889,000Relative
      fair value of stock
              
              $
              2,111,000
 
 Other
items affecting equity
 
 Discount
on convertible debt
 
 In
conjunction with the YA financing, we issued 94,899 shares of common stock and
warrants to purchase 550,000 shares of common stock  (See Note 7). The
relative fair values of the stock and warrants, $346,000, was recorded as a
discount to the note.
 
 Employee
stock options
 
 During
the year ended June 30, 2008, we granted options to purchase 1,047,500 shares of
common stock to Hyperdynamics employees and directors.   The
compensation cost associated with employee stock options which vested during the
year ended June 30, 2008 was $1,138,000 including capitalized costs of $11,000.
(See Note 11).
 
 Warrant
repricings
 
 Warrants,
which were owned by a related party, to purchase 3,480,000 shares of common
stock at $2.40 per share were modified by reducing the exercise price from $2.40
per share to $1.65 per share, resulting in settlement expense of
$241,000.  (See Note 10).
 
 Warrants,
originally issued in conjunction with convertible debt, which was outstanding at
the time of modification, were modified by reducing the exercise price from
$2.00 per share to $1.65 per share.  This resulted in interest expense
of $277,000. (See Note 10).
 
 Warrants,
originally issued in conjunction with convertible debt, which had been converted
at the time of modification, were modified by reducing the exercise price from
$2.50 per share to $1.00 per share.  This resulted in a deemed
dividend of $153,000. (See Note 10).
  F-26
 Table of Contents
  10.
WARRANT REPRICINGS
 
 Hyperdynamics
repriced warrants three times during the year.
 
 In
December 2007, Hyperdynamics modified the terms of certain warrants previously
issued in June 2006 in connectionwith the sale of convertible debt. All of the convertible debt was converted
prior to the modification. The price of the warrants was reduced from $2.50 to
$1.00. The modification resulted in a deemed dividend of $153,000, which was
calculated using the Black-Scholes method. The following table details
the significant assumptions used to compute the fair market values of the
modification to these warrants:
 
 Before
              
              
              AfterRisk-free
      interest rate
              
              
              3.12
              %
              
              
              3.12
              %Dividend
      yield
              
              
              0
              %
              
              
              0
              %Volatility
      factor
              
              
              96.41
              %
              
              
              96.41
              %Remaining
      term (years)
              
              
              3.5
              
              
              
              3.5
 
 In May
2008, the Company modified the terms of certain warrants previously issued to YA
Global during February 2008. According to the YA warrant agreement, the
warrant exercise price and the number of shares of common stock issuable would
be adjusted under certain circumstances. The stock issued for cash during May
2008 was priced at $1.65 per share, which triggered these contractual
provisions. Accordingly, the price of the YA warrants was reduced from $2.00 to
$1.65 and the number of shares issuable increased from 550,000 to 666,000. The
modification resulted in additional expenses of $277,000, which was calculated
using the Black-Scholes method. The following table details the significant
assumptions used to compute the fair market values of the warrant
modification:
 
 Before
              
              
              AfterRisk-free
      interest rate
              
              
              2.98
              %
              
              
              2.98
              %Dividend
      yield
              
              
              0
              %
              
              
              0
              %Volatility
      factor
              
              
              94.88
              %
              
              
              94.88
              %Expected
      life (years)
              
              
              4.7
              
              
              
              4.7
 
 
 In May
2008, the company also modified the exercise price of certain warrants
previously issued during June 2007 to settle a lawsuit.  Related
parties had acquired the warrants subsequent to the settlement of the
suit.  The warrant agreement specifies that the exercise price will be
adjusted if Hyperdynamics issues warrants at a price lower than the existing
exercise price. The modification of the exercise price of YA warrants triggered
this provision and the price of the warrants was reduced from $2.40 to $1.65.
The modification resulted in additional settlement expense of $241,000, which
was calculated using the Black-Scholes method. 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 modified in May 2008:
 
 Before
              
              
              AfterRisk-free
      interest rate
              
              
              2.98
              %
              
              
              2.98
              %Dividend
      yield
              
              
              0
              %
              
              
              0
              %Volatility
      factor
              
              
              113.22
              %
              
              
              113.22
              %Expected
      life (years)
              
              
              6.10
              
              
              
              6.10
 
 
 11.
STOCK OPTIONS AND WARRANTS
 
 Hyperdynamics
has two stock award plans: the 1997 Stock and Stock Option Plan (“1997 Plan”)
and the 2008 Stock and Stock Option Plan (“2008 Plan”). The 1997 Plan provides
for the grant of common stock, incentive stock options and /or non qualified
stock options or warrants to purchase the common stock of the company to
selected employees, directors, officers, agents, consultants, attorneys and
advisors of the company. The shares of common stock, options, or warrants may be
granted under this plan only within 20 years from the effective date of the
plan, as amended. A maximum of 14,000,000 shares are issuable under the 1997
Plan.
  F-27
 Table of Contents
  The 2008
Plan provides for grant of shares of common stock or incentive stock options
and/or nonqualified stock options or warrants to purchase the common stock of
the company to selected employees, directors, officers, agents, consultants,
attorneys, vendors and advisors of the company or of any parent or subsidiary
thereof. The shares of common stock, options, or warrants may be granted under
this plan only within 10 years from the effective date of this plan. A maximum
of 3,000,000 shares are issuable under the 2008 Plan.
  These
plans provide a means to attract and retain the services of participants and
also to provide added incentive to such persons by encouraging stock ownership
in the company. Plan grants are administered by the Compensation Committee, who
have substantial discretion to determine which persons, amounts, time, price,
exercise terms, and restrictions, if any. Options granted generally are
exercisable immediately as of the effective date of the option
grant.
  The fair
value of each option or warrant award is estimated using the Black-Scholes
valuation model. Expected volatility is based solely on historical volatility of
our common stock over the period commensurate with the expected term of the
stock options. We rely solely on historical volatility as we do not have traded
options. The expected term calculation for stock options is based on the
simplified method as described in the Securities and Exchange Commission Staff
Accounting Bulletin number 107. We use this method because we do not have
sufficient historical information on exercise patterns to develop a model for
expected term. The risk-free interest rate is based on the U. S. Treasury yield
in effect at the time of grant for an instrument with a maturity that is
commensurate with the expected term of the stock options. The dividend yield
rate of zero is based on the fact that we have never paid cash dividends on our
common stock and we do not intend to pay cash dividends on our common
stock.
 
 Additionally,
from time to time, Hyperdynamics issues non-compensatory warrants, such as
warrants issued to investors.
 
 2008
Restricted Stock Award Plan
 
 During
the year ended June 30, 2008 no options or warrants were issued under the
plan.
 
 1997
Stock and Stock Option Plan
 
 Options
granted to employees and directors:
 
 The
following table provides information about options granted during the years
ended June 30,
 
 2008
              
              
              2007
              
              
              2006Number
      of options granted
              
              
              1,047,500
              
              
              
              1,126,999
              
              
              
              640,000Compensation
      expense recognized
              
              $
              1,127,000
              
              
              $
              1,089,000
              
              
              $
              381,000Compensation
      cost capitalized
              
              
              11,000
              
              
              
              -
              
              
              
              -Weighted
      average fair value of options
              
              $
              2.34
              
              
              $
              3.89
              
              
              $
              1.30
 
 
 The
following table details the significant assumptions used to compute the fair
market values of employee stock options granted:
 
 2008
              
              
              2007
              
              
              2006Risk-free
      interest rate
              
              
              1.62-4.97
              %
              
              
              5
              %
              
              
              1.50-2.50
              %Dividend
      yield
              
              
              0
              %
              
              
              0
              %
              
              
              0
              %Volatility
      factor
              
              
              75-109
              %
              
              
              105-107
              %
              
              
              124
              %Expected
      life (years)
              
              
              1-1.5
              
              
              
              1-1.5
              
              
              
              2
  F-28
 Table of Contents
  At June
30, 2008, there was $105,000 of unrecognized compensation costs related to
non-vested share based compensation arrangements granted to employees under the
plan.
 
 Summary
information regarding employee stock options issued and outstanding as of June
30, 2008 is as follows:
 
 Options
              
              
              Weighted
      Average Share Price
              
              
              Aggregate
      intrinsic value
              
              
              Weighted
      average remaining contractual life (years)Outstanding
      at year ended June 30, 2005
              
              
              -
              
              
              
              -Granted
              
              
              640,000
              
              
              $
              1.30Exercised
              
              
              (5,000
              )
              
              
              1.55Expired
              
              
              -
              
              
              
              -Outstanding
      at year ended June 30, 2006
              
              
              635,000
              
              
              
              1.3
              
              
              
              508,000
              
              
              
              1.51Granted
              
              
              1,126,999
              
              
              $
              5.05Exercised
              
              
              (152,000
              )
              
              
              1.72Expired
              
              
              -
              
              
              
              -Outstanding
      at year ended June 30, 2007
              
              
              1,609,999
              
              
              $
              3.89
              
              
              
              1,413,000
              
              
              
              2.09Granted
              
              
              1,047,500
              
              
              $
              2.34Exercised
              
              
              (54,423
              )
              
              
              2.01Expired
              
              
              (364,380
              )
              
              
              2.38Outstanding
      at year ended June 30, 2008
              
              
              2,238,696
              
              
              $
              3.45
              
              
              $
              320,000
              
              
              
              1.79
 
 
 Options
      outstanding and exercisable as of June 30, 2008Exercise
      Price
              
              
              Outstanding
      Number of Shares
              
              Remaining
      Life
              
              Exercisable
      Number of Shares$
              1.00
      - $1.49
              
              
              
              360,000
              
              1
      year or less
              
              
              360,000$
              1.00
      - $1.49
              
              
              
              52,500
              
              2
      years
              
              
              52,500$
              1.00
      - $1.49
              
              
              
              70,000
              
              3
      years
              
              
              70,000$
              1.50
      - $1.99
              
              
              
              40,000
              
              1
      year or less
              
              
              40,000$
              1.50
      - $1.99
              
              
              
              45,000
              
              2
      years
              
              
              45,000$
              1.50
      - $1.99
              
              
              
              75,000
              
              3
      years
              
              
              75,000$
              2 -
      $2.49
              
              
              
              40,000
              
              1
      year or less
              
              
              40,000$
              2 -
      $2.49
              
              
              
              348,447
              
              2
      years
              
              
              348,447$
              2 -
      $2.49
              
              
              
              170,000
              
              3
      years
              
              
              170,000$
              2.50
      - $2.99
              
              
              
              40,000
              
              1
      year or less
              
              
              40,000$
              2.50
      - $2.99
              
              
              
              105,000
              
              2
      years
              
              
              105,000$
              2.50
      - $2.99
              
              
              
              187,749
              
              3
      years
              
              
              187,749$
              3 -
      $3.50
              
              
              
              40,000
              
              2
      years
              
              
              40,000$
              3 -
      $3.50
              
              
              
              65,000
              
              3
      years
              
              
              65,000$
              5.00
              
              
              
              300,000
              
              3
      years
              
              
              -$
              10.00
              
              
              
              300,000
              
              3
      years
              
              
              -2,
      238,696
              
              
              
              
              1,638,696
  F-29
 Table of Contents
  Options
      outstanding and exercisable as of June 30, 2007Exercise
      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$
              2.50
      - 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
 
 
 Warrants
granted to consultants:
 
 The
following table provides information about warrants granted to consultant using
the 1997 Stock and stock option plan during the years ended June
30,
 
 2007
              
              
              2006Number
      of warrants granted
              
              
              131,778
              
              
              
              -Compensation
      cost recognized
              
              $
              195,000
              
              
              $
              190,000
              (1)Weighted
      average fair value of warrants
              
              $
              2.38
              
              
              $
              1.18
 
 (1)
              Vesting
      of an award that was granted during the year ended June 30,
      2004.
 
 During
2008, Hyperdynamics did not grant any warrants to consultants.
 
 The
following table details the significant assumptions used to computing the fair
market values of warrants granted to consultants:
 
 2007
              
              
              2006Risk-free
      interest rate
              
              
              5
              %
              
              
              2.50
              %Dividend
      yield
              
              
              0
              %
              
              
              0
              %Volatility
      factor
              
              
              98-107
              %
              
              
              114
              %Expected
      life (years)
              
              
              1
              
              
              
              3.5
 
 Warrants
granted to consultant – related party:
  F-30
 Table of Contents
  The
following table provides information about warrants granted to Michael Watts,
the brother of Hyperdynamics’ CEO, Kent Watts, during the years ended June
30,
 
 2007
              
              
              2006Number
      of warrants granted
              
              
              1,500,000
              
              
              
              -Compensation
      cost recognized
              
              $
              4,227,000
              
              
              $
              284,000
              (1)Weighted
      average fair value of warrants
              
              $
              2.81
              
              
              $
              1.18
 
 (1)
              Vesting
      of an award that was granted during the year ended June 30,
      2004.
 
 During
2008, Hyperdynamics did not grant any warrants to Mr. Watts.
 
 The
following table details the significant assumptions used to compute the fair
market values of warrants granted to consultant – related party:
 
 
 2007
              
              
              2006Risk-free
      interest rate
              
              
              5
              %
              
              
              2.50
              %Dividend
      yield
              
              
              0
              %
              
              
              0
              %Volatility
      factor
              
              
              134
              %
              
              
              114
              %Expected
      life (years)
              
              
              3
              
              
              
              3.5
 
 As of
June 30, 2008, there was $28,000 of unrecognized compensation expenses
associated with outstanding warrants.  No cash proceeds were received
from the exercise of compensatory warrants during the year ended June 30,
2008.
 
 The
following table summarizes information about share-based payment arrangements to
employees and non-employees.
 
 2008
              
              
              2007
              
              
              2006Total
      compensation cost recognized in net loss
              
              $
              1,885,000
              
              
              $
              6,085,000
              
              
              $
              1,556,000Recognized
      tax benefits related to compensation costs (1)
              
              
              -
              
              
              
              -
              
              
              
              -Capitalized
      share based compensation cost
              
              
              11,000
              
              
              
              -
              
              
              
              37,000Cash
      received from exercise of share options
              
              
              106,000
              
              
              
              19,000
              
              
              
              -Tax
      benefits realized from option exercises(1)
              
              
              -
              
              
              
              -
              
              
              
              -
 
 (1)
              Because
      Hyperdynamics has sustained losses, any tax benefits associated with
      share-based compensation payment arrangements are
      deferred.  Hyperdynamics’ valuation allowance has offset any
      potential tax benefit.  (See Note
8).
 
 Warrants
 
 In
addition to the compensatory warrants granted, as discussed above, Hyperdynamics
issued or modified the following warrants during the year ended June 30,
2008:
 
 In
December 2007, Hyperdynamics modified the terms of warrants to purchase 544,000
shares.  The exercise price of the warrants was reduced from $2.50 per
share to $1.00 per share (See Note 10).  The warrants were
subsequently exercised for cash.
 
 In
February 2008, Hyperdynamics issued 550,000 warrants with an exercise price of
$2.00 per share in connection with the first closing of notes payable to YA
Global (see Note 7).
 
 In May
2008, Hyperdynamics issued 2,424,243 warrants at an exercise price of $3.27 per
share in conjunction with the sale of stock  (See Note
9).
 
 In May
2008, Hyperdynamics modified the terms of the warrants to purchase 550,000
shares previously issued to YA Global.  Under the modification, the
warrants price was reduced from $2.00 per share to $1.65 per share and YA Global
received warrants to purchase an additional 116,000 shares exercisable at $1.65
per share (See Note 10).
  F-31
 Table of Contents
  In May
2008, Hyperdynamics modified the terms of warrants to purchase 3,480,000
shares.  Under the modification, the exercise price of the warrants
was reduced from $2.40 per share to $1.65 per share (See Note 10).
 
 Summary
information regarding common stock warrants issued and outstanding as of June
30, 2008 is as follows:
 
 Warrants
              
              
              Weighted
      Average Share Price
              
              
              Aggregate
      intrinsic value
              
              
              Weighted
      average remaining contractual life(years)Outstanding
      at year ended June 30, 2005
              
              
              6,611,903
              
              
              $
              1.27Granted
              
              
              2,600,000
              
              
              
              2.72Exercised
              
              
              (1,630,000
              )
              
              
              0.62Expired
              
              
              (10,000
              )
              
              
              0.28Outstanding
      at year ended June 30, 2006
              
              
              7,571,903
              
              
              $
              1.90
              
              
              
              3,680,000
              
              
              
              1.99Granted
              
              
              17,224,344
              
              
              
              3.13Exercised
              
              
              (3,093,809
              )
              
              
              1.87Expired
              
              
              (11,589,655
              )
              
              
              3.36Outstanding
      at year ended June 30, 2007
              
              
              10,112,783
              
              
              $
              2.46
              
              
              
              8,209,000
              
              
              
              4.04Granted
              
              
              7,664,909
              
              
              $
              2.14Exercised
              
              
              (1,401,640
              )
              
              
              0.55Expired
              
              
              (4,658,360
              )
              
              
              2.33Outstanding
      at year ended June 30, 2008
              
              
              11,717,692
              
              
              $
              2.54
              
              
              $
              346,000
              
              
              
              4.42
 
 Warrants
      outstanding and exercisable as of June 30, 2008Exercise
      Price
              
              
              Outstanding
      Number of Shares
              
              Remaining
      Life
              
              Exercisable
      Number of Shares$
              0.25
              
              
              
              125,000
              
              1
      year or less
              
              
              125,000$
              1.65
              
              
              
              666,666
              
              5
      years
              
              
              666,666$
              1.65
              
              
              
              3,480,000
              
              6
      years
              
              
              3,480,000$
              2.50
              
              
              
              3,471,783
              
              1
      year or less
              
              
              3,471,783$
              3.27
              
              
              
              2,424,243
              
              7
      years
              
              
              2,424,243$
              4.00
              
              
              
              1,500,000
              
              6
      years
              
              
              1,500,000$
              5.00
              
              
              
              50,000
              
              3
      years
              
              
              -11,717,692
              
              
              
              
              11,667,692
  F-32
 Table of Contents
  Warrants
      outstanding and exercisable as of June 30, 2007Exercise
      Price
              
              
              Outstanding
      Number of Shares
              
              Remaining
      Life
              
              Exercisable
      Number of Shares$
              .23
              
              
              
              800,000
              
              1
      year or less
              
              
              800,000$
              .25
              
              
              
              125,000
              
              1
      year
              
              
              125,000$
              0.50
              
              
              
              142,000
              
              1
      year or less
              
              
              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
      year
              
              
              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
 
 
 12.
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. 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 evaluated based on their segment's
performance.
 
 The
following tables summarize certain balance sheet and income statement data about
Hyperdynamics' reportable segments and corporate overhead:
  Balance
      Sheet Data (in Thousands)SCS
              
              
              HYD
              
              
              Corporate
              
              
              TotalSegment
      assets as of June 30, 2008
              
              $
              7,590
              
              
              $
              3,774
              
              
              $
              1,586
              
              
              $
              12,950Segment
      assets as of June 30, 2007
              
              
              4,467
              
              
              
              804
              
              
              
              6,209
              
              
              
              11,480
 
 Year
      ended June 30, 2008 (in Thousands)SCS
              
              
              HYD
              
              
              Corporate
              
              
              TotalRevenues
      from external customers
              
              
              -
              
              
              $
              2,899
              
              
              
              -
              
              
              $
              2,899Depreciation,
      Depletion and Amortization
              
              
              85
              
              
              
              731
              
              
              
              40
              
              
              
              856Loss
      from Operations
              
              
              (3,883
              )
              
              
              (1,075
              )
              
              
              (4,087
              )
              
              
              (9,045
              )Expenditures
      for long-lived assets
              
              
              3,174
              
              
              
              3,401
              
              
              
              14
              
              
              
              6,589
 
 Year
      ended June 30, 2007 (in Thousands)SCS
              
              
              HYD
              
              
              Corporate
              
              
              TotalRevenues
      from external customers
              
              
              -
              
              
              $
              1,006
              
              
              
              -
              
              
              $
              1,006Depreciation,
      Depletion and Amortization
              
              
              26
              
              
              
              164
              
              
              
              31
              
              
              
              221Loss
      from Operations
              
              
              (2,859
              )
              
              
              (9,931
              )
              
              
              (7,548
              )
              
              
              (20,338
              )Expenditures
      for long-lived assets
              
              
              319
              
              
              
              85
              
              
              
              153
              
              
              
              557
  F-33
 Table of Contents
  Year
      ended June 30, 2006 (in Thousands)SCS
              
              
              HYD
              
              
              Corporate
              
              
              TotalRevenues
      from external customers
              
              
              -
              
              
              $
              615
              
              
              
              -
              
              
              $
              615Depreciation,
      Depletion and Amortization
              
              
              31
              
              
              
              116
              
              
              
              20
              
              
              
              167Loss
      from Operations
              
              
              (825
              )
              
              
              (2,034
              )
              
              
              (2,460
              )
              
              
              (5,319
              )Expenditures
      for long-lived assets
              
              
              93
              
              
              
              450
              
              
              
              11
              
              
              
              554
 
 
 13.
COMMITMENTS AND CONTINGENCIES
  LITIGATION
AND OTHER LEGAL MATTERS
 
 From time
to time, Hyperdynamics and its subsidiaries are involved in 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.
 
 Wellington
Lawsuit
 
 On April
9, 2001, holders of our Series A preferred stock claimed that we did not carry
out conversion of Series A preferred stock to common stock resulting in damages.
In November 2001, we filed a countersuit against the holders of our Series A
preferred stock claiming damages related to multiple breaches of the original
preferred share agreement, including actions by the holders of our Series A
preferred stock to manipulate our common stock through prohibited short selling.
Wellington’s suit was dismissed in June 2004; however, we are subject to certain
counterclaims from our November 2001 lawsuit. The counterclaimants allege that
Hyperdynamics and its Officers and Directors breached their fiduciary duties to
shareholders and committed other acts. We intend to continue to vigorously
pursue damages and defend all counterclaims. Management considers a loss from
this case remote.
 
 Dixon
Lawsuit
 
 Hyperdynamics
is a party to a lawsuit involving damages sustained by an investor when there
was a delay in removing a restrictive legend from the investor’s stock. In
conjunction with the lawsuit, Hyperdynamics has entered into an agreed
settlement with the plaintiff. Under the agreement, liability to the plaintiff
is contingent upon the outcome of certain appeals in the case. If Hyperdynamics
and the plaintiff lose in the appeals, Hyperdynamics will be obligated to pay
$240,000, payable in installments of $10,000 per month for 24 months. If the
appeals are successful, Hyperdynamics and the plaintiff will seek to recover its
damages, costs and attorneys fees from other defendants in the case.
Hyperdynamics would have no further liability. Because of recent developments in
this case, management considers a loss from this case probable. As of June 30,
2008, the amount of the settlement agreement, $240,000, is accrued.
 
 Ashley
Lawsuit
 
 Trendsetter
Production Company was named in a lawsuit, Raymond Thomas et al v. Ashley
Investment et al. The case is an environmental cleanup case involving wells
operated by Trendsetter prior to our acquisition of the company. All operators
in two fields, about fifty separate defendants, are named in the suit. The case
is in the early discovery stage and our attorneys are developing strategies to
defend the suit. We believe a loss from this case is possible; however, the loss
or range of loss cannot be reasonably estimated.
  F-34
 Table of Contents
  USOil
Lawsuit
  In August
2007, USOil Corporation re-filed a previously dismissed lawsuit claiming it was
the actions or omissions of SCS that caused the 2002 PSA to be cancelled by the
Guinea Government. USOil’s allegations are blatantly false and unfounded. In
addition to denying all claims, SCS filed a counterclaim seeking damages for
frivolous litigation and tortuous interference of a contract.   We
believe that this case is frivolous and without merit. Consequently, we believe
that the probability of loss related to this suit is remote.
 
 Trendsetter
Settlement
  During
fiscal year 2005, we sold approximately 30% of our working interest in our Kelly
and Norris leases to outside investors, including Trendsetter Investors, LLC. On
March 8, 2006, Trendsetter Investors, LLC filed a lawsuit alleging breach of
contract, among other things, which was settled in June 2007. 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. The remaining balance of this note, $240,000,
was paid in July 2007.  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.
 
 Magee
Smith Lawsuit
 
 The
entity that originally conveyed the Magee Smith leases to us have requested a
judicial determination of the status of our Magee Smith A lease and the net
revenue interest attributable to owners of the leases.  The case has
been tried in a bench trial but the judge has not ruled.  The judge’s
options include returning a portion of the lease to the original sellers and
adjusting our net revenue interest in the Magee Smith A well from approximately
73% to 75% in order to reflect the terms of the lease.  We do not plan
to drill on the land that would be returned.  Accordingly, we consider
the probability of loss from this case remote.
  COMMITMENTS
AND CONTINGENCIES
 
 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.  The notes expire in April
2009.
 
 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.
  F-35
 Table of Contents
  The
following is a schedule by years of minimum future rental payments required
under operating leases that have initial or remaining noncancellable lease terms
in excess of one year as of June 30, 2008:
 
 Years
ending June 30:
 
 2009
              
              $
              214,0002010
              
              
              178,0002011
              
              
              142,0002012
              
              
              142,0002013
              
              
              142,000Later
      years
              
              
              49,000Total
      minimum payments required
              
              $
              867,000
 
 Rent
expense included in net loss from operations:
 
 2008
              
              
              2007
              
              
              2006$
              199,000
              
              
              $
              184,000
              
              
              $
              204,000
 
 
 Consultant
and employee performance bonuses
 
 Certain
employees and consultants will receive cash bonuses upon the achievement of
performance benchmarks.  These bonuses include:
 
 $90,000
payable to two Geological and Geophysical department employees after seismic
data from offshore Guinea has been acquired and interpreted; this bonus was paid
using common Hyperdynamics Common Stock during September 2008;
 
 $90,000
payable to two Geological and Geophysical department employees upon the signing
of a drilling contract relating to Guinea;
 
 $90,000
payable to two Geological and Geophysical department employees upon completion
of any farmouts relating to Guinea;
 
 $100,000
payable to two Geological and Geophysical department employees for each drilling
operation offshore Guinea;
 
 $70,000
payable to a Geological and Geophysical department employee upon achievement of
targets associated with domestic operations;
 
 $20,000
payable to a consultant as a success fee if the projet de loi is passed;
and
 
 $50,000
payable as a success fee to the consultant if Hyperdynamics receives a
management agreement covering the relinquished area after the projet de loi is
passed.
 
 Contract
commitments
 
 During
the year ended June 30, 2008, Hyperdynamics signed a contract with Geophysical
Service Incorporated (“GSI”) for the acquisition of up to 6,000 kilometers of
2-D seismic data in our Guinea concession area. Under the agreement,
Hyperdynamics paid a $555,500 mobilization fee, a $275,000 demobilization fee,
data acquisition and processing fees totaling $525 per kilometer, and other fees
and reimbursements. GSI ultimately shot approximately 2,800 km. The total cost
of the shoot was approximately $2,736,000, of which $1,107,000 was included in
accounts payable as of June 30, 2008.  This balance due was paid
during the quarter ended September 30, 2008.
  F-36
 Table of Contents
  In
addition to the above, GSI acquired a revenue interest in the data. If
Hyperdynamics, on its own or with a JV partner as an operator, engages in
drilling, production, or development activities (excluding the acquisition of
additional seismic data) in the area covered by the survey, an additional $355
per kilometer will be paid to GSI. The data is to be owned by Hyperdynamics but
GSI has exclusive marketing rights and is entitled to an additional fee of
approximately $355 per kilometer at a split revenue ration of 75% for GSI up to
the $355 per kilometer. Based on the total 2,800 kilometer shoot, this could
total up to an additional cost of $994,000. Any license fees that GSI receives
from third parties would be subtracted from the $355 per kilometer of additional
compensation amount potentially due. After GSI receives its $355 additional
compensation, either from a drilling operator or from License fees from the
75/25% split, any new license fees will be shared 50% by GSI and 50% by
Hyperdynamics.
 
 Environmental
Contingencies
 
 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. We have abided
by and are in compliance with all applicable environmental laws.
  
 14.
RELATED PARTY TRANSACTIONS
 
 Michael
Watts
 
 Selling,
general, and administrative – related party
 
 Selling,
general and administrative – related party consists of the following payments
made to Michael Watts, the brother of the CEO, Kent Watts:
 
 
 2008
              
              
              2007
              
              
              2006Compensation
      costs – warrants
              
              
              
              
              $
              4,227,000
              
              
              $
              284,000Business
      expense reimbursements
              
              $
              54,000
              
              
              
              13,000
              
              
              
              -Total
              
              $
              54,000
              
              
              $
              4,250,000
              
              
              $
              284,000
 
 
 In March
2007, the audit committee approved a consulting contract with Michael Watts
under which he will provide investor relations, public relations, financial
consulting and general advisory services from March 2007 through March 2010. 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 sole
compensation associated with this agreement. The fair value of the warrants, as
computed using the Black-Scholes option pricing model, was $4,227,000. The
warrants expire in June 2014. Warrants previously granted to a company
affiliated with Mr. Michael Watts during the year ended June 30, 2004 vested
during the year ended June 30, 2006. The vesting of the warrants resulted in
compensation costs of $284,000.  In addition, Mr. Michael Watts
receives reimbursement of business expenses.
 
 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 Watts. 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 audit
committee 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 received payments totalling $385,000.
  F-37
 Table of Contents
  Offering
costs
 
 In
addition, during the year ended June 30, 2007, Michael Watts, the CEO's brother,
received payment of $13,000 cash to pay for offering costs of 10% of the
proceeds from private subscription agreements and warrants exercised. The
offering costs reduced the proceeds from the stock issued.  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.
 
 Exercise
of warrants
 
 A company
affiliated with Mr. Michael Watts had been granted warrants to purchase
1,300,000 shares of common stock during the year ended June 30, 2004 for
consulting services.  During the year ended June 30, 2006, this
company exercised 1,010,000 warrants for $505,000. In December 2006, this
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, this company exercised its remaining warrants to purchase 188,242
shares of common stock for $94,122.
 
 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. As of
June 30, 2008 and June 30, 2007, the owners of Series B Preferred stock were
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 13). 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. On May 12, 2008, the price was again reset in
accordance with this feature to $1.65 per share, resulting in settlement expense
of $244,000 (See Note 10).
 
 Series B
Preferred stock accrues a dividend at 4% per year.
 
 
 15.
SUBSEQUENT EVENTS
 
 Contracts
 
 In July
2008, Hyperdynamics entered a contract for 3-D seismic work offshore Guinea. The
contract is open in scope and provides the price for various activities
associated with the work.  We will finalize the scope when we
determine the total area we plan to cover. We estimate the cost of the 3-D
seismic work to be approximately $15,000,000 but the cost could increase to as
high as an estimated $45,000,000 based on options we have to expand the
work.  The contract provides for Hyperdynamics to issue 2,500,000
shares common stock to the vendor as a deposit. The value ascribed to the stock
by the parties in the contract is $6.00 per share. The 2,500,000 shares were
issued during August 2008. The contract provides that the stock may be sold to
pay invoices after the seismic work begins. Under the agreement a deposit share
account must be established that will have leak out provisions applied if and
when the stock is sold.  Any proceeds from the sale of this stock may
be applied by the direction of us to any legitimate outstanding
invoices.  Should we pay for the seismic work without the stock being
sold, and once the cost of the seismic work has been paid, any remaining unsold
stock will be returned to us.  We may replace the stock with a cash
deposit at the rate of $6 per share at any time and have the stock returned
prior to it being sold.  The stock was valued at $3,825,000 based on
the closing market price of the stock on the date of issuance.
  F-38
 Table of Contents
  In July
2008, we entered an agreement with Patton Boggs, LLP, an international law firm,
to support our 2006 PSC.  The agreement estimates the value of their
work through March 2009 at $630,000.  During July 2008, we issued
350,000 shares of common stock valued at current market prices of $543,000 as a
payment on the new engagement and for approximately $132,000 of fees that had
been incurred in the past.   In accordance with accounting
standards governing share-based payments to non-employees, the expense
associated with the stock issuance are recorded when the shares were
granted.  Accordingly, we charged $411,000 of compensation costs
associated with this stock grant to expense in the quarter ended September 30,
2008.  The contract also provides for performance bonuses of an
additional 350,000 shares of common stock upon the achievement of certain
criteria.
 
 Stock
issuances
 
 In July
and August 2008, Hyperdynamics issued 436,610 shares of common stock for
services valued using the stock close price on the date of grant, which totaled
$686,000.
 
 Options
granted
 
 In July
2008, we granted options to purchase 85,000 shares of Hyperdynamics common stock
with a term of three years and an exercise price of $2.00 to three employees in
accordance with their employment contracts.   The compensation
cost associated with these options was $52,000, valued using the Black-Sholes
option pricing model.
 
 Additionally
in July, we granted options to purchase 45,000 shares of common stock at $1.68
per share to four independent members of our Board of Directors in conjunction
with their compensation arrangements. The options have a two year
term.  The compensation cost associated with these options was
$26,000, valued using the Black-Sholes option pricing model.
 
 Oil
and Gas Properties
 
 During
July 2008, Hyperdynamics sold 100% of its working interest in the Kelly and
Norris leases for $150,000. The sales proceeds will be collected from revenues,
if any, derived by the buyer from these leases. No gain or loss was recognized
for this transaction in accordance with full cost rules.
 
 During
July 2008, Hyperdynamics assigned 15% of its working interest in the Magee-smith
leases to Rabb Resources. Under the terms of the assignment, Rabb became the
operator of the properties and $1,600,000 was credited to the Promised Funds
obligation (see Note 3) under our agreement with Rabb. With this assignment and
the operating costs for June 2008, the Promised Funds obligation was completed.
Beginning with July 2008, Rabb became responsible to pay 15% of costs other than
drilling in accordance with the agreement. No gain or loss was recognized for
this transaction in accordance with full cost rules.
 
 Sale
of Convertible Debentures
 
 In
September 2008, Hyperdynamics sold $5,000,000 convertible debentures,
convertible at $2.25 per share, to an investor in a registered direct
offering.  Placement costs totaled $450,000, with $330,000 payable in
cash and $103,000 payable with 66,000 shares of Hyperdynamics common
stock.  This resulted in net proceeds of
$4,567,000.   The investor also received warrants to purchase
1,111,111 shares of common stock at $3.00 per share and warrants to purchase
1,111,111 shares of common stock at $2.75 per share.
  F-39
 Table of Contents
  Hyperdynamics
has evaluated the warrants for derivative accounting consideration under SFAS
133 and EITF 00-19. We have concluded that the warrants meet the criteria for
classification in stockholders' equity under SFAS 133 and EITF 00-19. Therefore,
derivative accounting is not applicable for the warrants.
 
 Hyperdynamics
analyzed its convertible notes payable instruments for derivative accounting
consideration under SFAS 133 and EITF 00-19. Hyperdynamics determined the
conversion feature met the criteria for classification in stockholders' equity
under SFAS 133 and EITF 00-19. Therefore, derivative accounting is not
applicable for the convertible instruments.
 
 The fair
value of the investment was allocated among the debentures and warrants as
follows:
 
 Relative
      fair value of $3.00 warrant
              
              $
              947,000Relative
      fair value of $2.75 warrant
              
              
              939,000Relative
      fair value of note payable
              
              
              3,114,000
 
 The fair
value of the warrant was calculated using the Black-Scholes method, assuming
volatility of 113%, expected term of 7 years, and a risk adjusted interest rate
of 3.45%.
 
 We
analyzed the convertible notes payable instruments for the existence of a
beneficial conversion feature under EITF 98-5 and 00-27.  The
intrinsic value of the beneficial conversion feature was $486,000.
 
 The
relative fair value of the warrants, the intrinsic value of the beneficial
conversion feature, and $433,000 of financing costs were recorded as a discount
to the notes. These discounts, totaling $2,805,000, will be amortized and
charged to interest expense over the life of the notes using the effective
interest rate method. The effective interest rate on the notes, including the
discount, is 52%.
 
 The
debentures carry an annual interest rate equal to 10% and mature on September
12, 2012. The notes will be repaid in monthly installments of $139,000 beginning
September 12, 2009.  Interest installments will also be paid quarterly
on the outstanding balance. Interest installments commence on October 1, 2008.
At our option, we can redeem the notes within 120 days of the closing date,
September 12, 2008, and pay an “early redemption premium” of 10% of the
principal amount being redeemed.   After 120 days, we will pay
the investor a “make-whole” payment with each conversion or redemption of 40% of
the principal, less interest previously paid.    We have the
option to pay, if we meet certain conditions, our principal installments,
interest payments, and make-whole payments using Hyperdynamics common stock
using a formula based on current market prices of the stock.
 
 The
investors in the debentures had received warrants to purchase 2,424,243 warrants
to purchase common stock with an exercise price of $3.27 per share in the
registered direct offering completed in May 2008.  The provisions of
the warrants include a reduction in the exercise price in the event stock or
convertible securities were issued with a lower exercise price. By agreement
with the investors, the exercise price of the warrants was reduced from $3.27 to
$3.00. The modification resulted in a deemed dividend of $29,000.
 
 The
proceeds of the debentures were used to repay all outstanding principal,
interest, and redemption premium, which totaled $2,254,000, on the YA Global
note (See Note 7) on September 12, 2008.
  F-40
 Table of Contents
  16.
QUARTERLY FINANCIAL DATA (UNAUDITED)
 
 Summarized
quarterly financial data are as follows (in thousands, except per-share
amounts).
 
 2008
              
              First
      Quarter
              
              
              Second
      Quarter
              
              
              Third
      Quarter
              
              
              Fourth
      QuarterRevenues
              
              $
              314
              
              
              $
              531
              
              
              $
              792
              
              
              $
              1,262Loss
      from Operations
              
              
              (3,313
              )
              
              
              (2,106
              )
              
              
              (1,743
              )
              
              
              (1,883
              )Net
      Loss attributable to common shareholders
              
              
              (3,292
              )
              
              
              (2,121
              
              
              
              (1,880
              )
              
              
              (2,311
              )Basic
      and Diluted loss per common share
              
              
              (0.06
              )
              
              
              (0.04
              )
              
              
              (0.03
              )
              
              
              (0.04
              )
 
 
 2007
              
              First
      Quarter
              
              
              Second
      Quarter
              
              
              Third
      Quarter
              
              
              Fourth
      QuarterRevenues
              
              $
              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
              )
 
 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 13). 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.
 
 
 17. 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.
 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 $7,314,000 and $4,279,000 as of June 30, 2008 and 2007,
respectively, are excluded from amounts subject to amortization. The majority of
the evaluation activities are expected to be completed within three
years.
  F-41
 Table of Contents
  Costs
Excluded by Year Incurred
 
 Excluded
      atYear
      Cost Incurred
              
              
              June
      30,Prior
              
              
              2006
              
              
              2007
              
              
              2008
              
              
              2008Property
      acquisition
              
              $
              291,000
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              291,000Exploration
              
              
              3,782,000
              
              
              
              66,000
              
              
              
              140,000
              
              
              
              3,035,000
              
              
              
              7,023,000Total
              
              $
              4,073,000
              
              
              $
              66,000
              
              
              $
              140,000
              
              
              $
              3,035,000
              
              
              $
              7,314,000
 
 Costs
Excluded by Country
 
 United
              
              
              Republic
      ofStates
              
              
              Guinea
              
              
              TotalCosts
      Excluded by CountryProperty
      acquisition
              
              $
              -
              
              
              $
              291,000
              
              
              $
              291,000Exploration
              
              
              -
              
              
              
              7,023,000
              
              
              
              7,023,000Total
              
              $
              -
              
              
              $
              7,314,000
              
              
              $
              7,314,000
 
 Changes
in Costs Excluded by Country
 
 United
              
              
              Republic
      ofStates
              
              
              Guinea
              
              
              TotalBalance
      at June 30, 2006
              
              $
              -
              
              
              $
              4,139,000
              
              
              $
              4,139,000Additional
      costs incurred
              
              
              -
              
              
              
              140,000
              
              
              
              140,000Costs
      transferred to Depreciation, depletion & amortization
    pool
              
              
              -
              
              
              
              -
              
              
              
              -Balance
      at June 30, 2007
              
              
              -
              
              
              
              4,279,000
              
              
              
              4,279,000Additional
      costs incurred
              
              
              -
              
              
              
              3,035,000
              
              
              
              3,035,000Costs
      transferred to Depreciation, depletion & amortization
    pool
              
              
              -
              
              
              
              -
              
              
              
              -Balance
      at June 30, 2008
              
              $
              -
              
              
              $
              7,314,000
              
              
              $
              7,314,000
 
 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
depreciation, depletion & amortization are shown below:
  F-42
 Table of Contents
  United
              
              
              Republic
      ofStates
              
              
              Guinea
              
              
              TotalJune
      30, 2008Unproved
      properties
              
              $
              1,382,000
              
              
              $
              7,314,000
              
              
              $
              8,696,000Proved
      properties
              
              
              3,694,000
              
              
              
              -
              
              
              
              3,694,000Oilfield
      equipment
              
              
              -
              
              
              
              -
              
              
              
              -5,076,000
              
              
              
              7,314,000
              
              
              
              12,390,000Less
      cost recovery upon sale of working interest
              
              
              (1,161,000
              )
              
              
              -
              
              
              
              (1,161,000
              )Less
      accumulated DD&A
              
              
              (758,000
              )
              
              
              -
              
              
              
              (758,000
              )Net
      capitalized costs
              
              $
              3,157,000
              
              
              $
              7,314,000
              
              
              $
              10,471,000June
      30, 2007Unproved
      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
  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
      ofStates
              
              
              Guinea
              
              
              TotalJune
      30, 2008Property
      acquisitionUnproved
              
              $
              1,000
              
              
              $
              -
              
              
              $
              1,000Proved
              
              
              2,430,000
              
              
              
              -
              
              
              
              2,430,000Exploration
              
              
              554,000
              
              
              
              3,035,000
              
              
              
              3,589,000Development
              
              
              771,000
              
              
              
              -
              
              
              
              771,000-Total
      costs incurred
              
              $
              3,756,000
              
              
              $
              3,035,000
              
              
              $
              6,791,000June
      30, 2007Property
      acquisitionUnproved
              
              $
              -
              
              
              $
              -
              
              
              $
              -Proved
              
              
              11,000
              
              
              
              -
              
              
              
              11,000Exploration
              
              
              -
              
              
              
              140,000
              
              
              
              -Development
              
              
              
              
              
              
              -
              
              
              
              140,000Sale
      of working interest
              
              
              147,000
              
              
              
              -
              
              
              
              147,000Total
      costs incurred
              
              $
              158,000
              
              
              $
              140,000
              
              
              $
              298,000June
      30, 2006Property
      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
  F-43
 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.
 
 2008
              
              
              2007
              
              
              2006Net
      revenues from production
              
              $
              2,868,000
              
              
              $
              908,000
              
              
              $
              615,000Production
      costsOil
      and gas operating
              
              
              2,355,000
              
              
              
              387,000
              
              
              
              657,000Other
      taxes
              
              
              249,000
              
              
              
              104,000
              
              
              
              65,000Total
      production costs
              
              
              2,604,000
              
              
              
              491,000
              
              
              
              722,000Depreciation,
      depletion and amortization
              
              
              686,000
              
              
              
              72,000
              
              
              
              -Total
      costs
              
              
              3,290,000
              
              
              
              563,000
              
              
              
              722,000Income
      (loss) before income taxes
              
              
              (422,000
              )
              
              
              345,000
              
              
              
              (107,000
              )Income
      tax expense
              
              
              -
              
              
              
              -
              
              
              
              -Results
      of operations
              
              $
              (422,000
              )
              
              $
              345,000
              
              
              $
              (107,000
              )DD&A
      rate per net equivalent barrel
              
              $
              24.33
              
              
              $
              3.47
              
              
              $
              0.00DD&A
      and impairment rate per net equivalent barrel
              
              $
              24.33
              
              
              $
              3.47
              
              
              $
              0.00
 F-44
 Table of Contents
  Proved
Reserves
  The
following reserve schedule summarizes 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
      ReservesBalance
      - June 30, 2006
              
              
              41,605
              
              
              
              -Revisions
      of previous estimates
              
              
              (2,668
              )
              
              
              -Extensions,
      discoveries and other additions
              
              
              -
              
              
              
              -Production
              
              
              (14,726
              )
              
              
              -Purchase
      (sales) of minerals in place
              
              
              922
              
              
              
              -Balance
      - June 30, 2007
              
              
              25,133
              
              
              
              -Revisions
      of previous estimates
              
              
              (216
              )
              
              
              -Extensions,
      discoveries and other additions
              
              
              31,172
              
              
              
              -Production
              
              
              (28,197
              )
              
              
              -Purchase
      (sales) of minerals in place
              
              
              122,543
              
              
              
              -Balance
      - June 30, 2008
              
              
              150,435
              
              
              
              -
  As of
June 30, 2008, the proved reserves were categorized as follows:
 
 
 Proved
      developed producing
              116,993Proved
      developed non-producing
              9,219Proved
      undeveloped
              24,223
 
 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, 2008 and 2007, 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-45
 Table of Contents
  Standardized
Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas
Reserves
 
 2008
              
              
              2007
              
              
              2006Future
      cash inflows
              
              $
              18,783,000
              
              
              $
              1,501,000
              
              
              $
              2,963,000Future
      production costs
              
              
              6,541,000
              
              
              
              1,097,000
              
              
              
              1,690,000Future
      development costs
              
              
              1,440,000
              
              
              
              -
              
              
              
              -Future
      income tax expenses
              
              
              -
              
              
              
              -
              
              
              
              339,000Future
      net cash flows
              
              
              10,802,000
              
              
              
              404,000
              
              
              
              934,00010%
      annual discount for estimated timing of cash flows
              
              
              1,960,000
              
              
              
              35,000
              
              
              
              80,000Standardized
      measure of discounted future cash flows at the end of the
    year
              
              $
              8,842,000
              
              
              $
              369,000
              
              
              $
              854,000
 
 The
standardized measure of discounted future net cash flows as of June 30, 2008,
2007 and 2006 was calculated using prices the following average prices in effect
as of that date:
 
 2008
              
              
              2007
              
              
              2006Average
      crude oil price per barrel
              
              $
              136.74
              
              
              $
              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.
 
 2008
              
              
              2007
              
              
              2006Standardized
      measure of discounted future net cash flows at the beginning of the
      year
              
              $
              369,000
              
              
              $
              854,000
              
              
              $
              -Net
      changes in prices and production costs
              
              
              1,332,000
              
              
              
              (666,000
              )
              
              
              (55,000
              )Changes
      in estimated future development costs
              
              
              (1,168,000
              )
              
              
              -
              
              
              
              -Sales
      of oil and gas, net of production costs
              
              
              (1,862,000
              )
              
              
              (333,000
              
              
              
              222,000Extensions,
      discoveries and improved recovery less related costs
              
              
              2,058,000
              
              
              
              -
              
              
              
              364,000Purchases
      (sales) of minerals in place
              
              
              8,090,000
              
              
              
              14,000
              
              
              
              (9,000)Revisions
      of previous quantity estimates
              
              
              (14,000
              )
              
              
              54,000
              
              
              
              261,000Previously
      estimated development costs incurred
              
              
              -
              
              
              
              -
              
              
              
              -Net
      change in income taxes
              
              
              -
              
              
              
              (339,000
              )
              
              
              (72,000
              )Accretion
      of discount
              
              
              37,000
              
              
              
              107,000
              
              
              
              143,000Standardized
      measure of discounted future net cash flows at the end of the
      year
              
              $
              8,842,000
              
              
              $
              369,000
              
              
              $
              854,000
 F-46
 Table of Contents
  Item9 Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
 
 None.
 
 
 Item9A.    Controls and
Procedures
  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, 2008, 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, 2008, 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, 2008, 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 years ended June 30, 2007
and 2008. 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.
  41
 Table of Contents
  In order
to evaluate the effectiveness of our internal control over financial reporting
as of June 30, 2008, 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 five material weaknesses in internal control over
financial reporting as of June 30, 2008:
 
 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; e) insufficient
      documentation and communication of our accounting policies and procedures;
      and f) a failure to develop and implement adequate internal accounting
      controls at our operations in Guinea to ensure that receipts and
      expenditures are made only in accordance with authorizations of
      management, that the resulting records properly reflect the purpose and
      recipient of payments, and that these records, in reasonable detail,
      accurately and fairly reflect the underlying transaction and disposition
      of assets.
 
 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 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.
 
 3.
              Deficiencies
      in the Company's accounting system controls. For the year ended June 30,
      2007, 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 $518,000 of expense
      related to warrant repricing transactions that were recorded in equity.
      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.
  42
 Table of Contents
  5.
              Departure
      of a member of financial management.  In our Report 10-Q for the
      first quarter of fiscal year 2008, we reported in Item 4. Controls and
      Procedures, the following: hiring a full-time accountant,
      who joined the company in July 2007, to serve as the chief financial
      officer of our Guinea operations, overseeing all aspects of Guinea finance
      and accounting.This person resigned in March 2008 resulting
      in a lack of direct finance and accounting oversight in Guinea through the
      of the 2008 fiscal year.
 
 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, 2008, 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 on page F-2.
  Changes
in Internal Control over Financial Reporting
  To
address the issues associated with the material weaknesses, management has been
implementing and will continue to implement changes that are both organizational
and process-focused to improve the control environment. The changes made since
early 2008 and through the date of this annual report include, among
others:
  •
              we
      hired a new Certified Public Accountant to augment our staff, effective
      May 2008;
 
 •
              we
      appointed a full-time Chief Financial Officer, effective June
      2008;
 
 •
              we
      retained 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;
 
 •
              We
      retained a legal firm to assist in developing policies and procedures
      designed to ensure compliance with the Foreign Corrupt Practice
      Act.  The firm is providing training to our employees and has
      assisted with the development of tools such as handbooks, contracts, and
      task orders; and
 
 •
              We
      have hired an experienced controller for our Guinea operations, effective
      September 19, 2008;
  These
organizational and process changes have improved our internal controls
environment and increased the likelihood of our identifying non-routine and
non-systematic transactions. We will continue our efforts to improve our control
environment and to focus on:
  •
              improving
      our organizational structure to help achieve the proper number of, and
      quality of our, accounting and finance
  personnel;
 
 •
              refining
      our period-end financial reporting processes to improve the quality of our
      financial information; and
 
 •
              improving
      our policies, processes and systems to help ensure that our financial
      reporting, operational and business requirements are met in a timely
      manner;
 
 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.
  43
 Table of Contents
  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.
 
 
 Item9B Other Information
 
 None
 
 Part
III
 
 
 Item10 Directors, Executive Officers and Corporate
Governance
 
 Executive
Officers and Directors.
 
 The
following table sets forth the names and positions of each of our Executive
Officers and Directors as of the date of this report.
 
 Name
              
              Position
              
              AgeKent
      Watts
              
              Director,
      Chief Executive Officer, Chairman and President
              
              50Charles
      H. Andrews
              
              Director
              
              76Harry
      J. Briers
              
              Director
      and Executive Vice President
              
              45Roger
      D. Friedberger
              
              Director
              
              57Harold
      A. Poling
              
              Director
              
              82L.
      Gene Stohler
              
              Director
              
              79Sarah
      Berel-Harrop
              
              Chief
      Financial Officer and Principal Accounting Officer
              
              41James
      R. Spear
              
              Executive
      Vice President of Exploration and Production
              
              61
 
 
 Directors
are elected annually and hold office until the next annual meeting of our
stockholders or until their successors are elected and
qualified.  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 an Audit Committee, a
Compensation Committee, and a Nominating Committee.
 
 Kent
Watts 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 of American Friends of Guinea, established in March of 2005 as a
non-profit with a 501(c) 3 designations for the purpose of making donations for
medical relief agendas in the Republic of Guinea.  Mr. Watts holds no
other public company directorships.
  44
 Table of Contents
  Charles H. Andrews joined the
Hyperdynamics Board of Directors in December 2007.Mr. Andrews is a Geoscientist
withover forty years experience in the oil
and gas exploration and geophysical services industries. From 1987 through the present, Mr.
Andrews has been the CEO of Andrews Geoscience, Inc., doing acquisition and
processing quality control and interpretation, where he became experienced in
3-D seismic acquisition design and processing.Mr. Andrews is the principal owner of
Andrews Geoscience, Inc.  From 1997 through 2002, he joined Seismic
Ventures, Inc. as Chief Geophysicist.As Chief Geophysicist and later
Geophysical Advisor/Corporate Development, he evaluated seismic processing
programs, performed design for seismic acquisition surveys, and evaluated
business opportunities involving data purchases, vendor outsourcing, and use of
4D (Time lapse) seismic data. From 2002 through the present, Mr. Andrews has
been with Seismic Wavelet Imaging, Inc. where he is currently a V.P.Seismic Wavelet Imaging, Inc. provides
seismic processing to enhance the resolution of seismic data. From 2007 though
the present, he has been with Precision Wells, Inc. where he is V.P. of
Geophysics. Mr. Andrews holds no other public company
directorships.
 
 Harry
James Briers 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. He became
our Executive Vice President in October 2002. 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.
 Mr.
Briers holds no other directorships.
 
 Roger
D. Friedberger joined the Board of Directors in June
2008.  Mr. Friedberger was the Chief Financial Officer of the
following companies between 1996 and 1997:  ILOG S.A (a public
company), MailFrontier Inc., Insignia Solutions PLC (a public company), SPL
WorldGroup, Inc., and Realm Business Solutions, Inc. He has been since March
2008 the Chief Financial Officer of GrowthForce LLC.  Mr. Friedberger
holds no other public company directorships. He has a Bachelor of Commerce
degree (Accounting) from the University of Leeds, England
(1972).  Mr. Friedberger qualified as a California CPA in
1977.
 
 Harold
“Red” Poling is retired Chairman and Chief Executive Officer of Ford Motor Co.
and has served as a member of the Board of Directors of Hyperdynamics since June
2004.  Mr. Poling is a Director and Chairman of the Board of Eclipse
Aviation Corp., a private jet aircraft manufacturer. He is a past director of
Shell Oil Company, ArvinMeritor, Kellogg and Flint Ink Corp.  Mr.
Poling is a member of the Board of Directors and a Trustee of William Beaumont
Hospital.  He is a member of the Board of Trustees of Spring Arbor
University and a director of the Monmouth (IL) College Senate. Mr. Poling holds
no other public company directorships.
 
 L. Gene
Stohler is an executive serving the automotive industry and has been a member of
the Board of Directors of Hyperdynamics since 2006.  Mr. Stohler
recently resigned from Bankers Integration Group, a technology and software
development company, where he had served as Vice President, Business
Development.  He also serves on the advisory board of Schultze Asset
Management, LLC.  Mr. Stohler retired in 2003 from Masco Corporation,
where he was Vice President, Marketing and Planning, in the Automotive
Group.  He also has held senior positions in automotive equipment and
parts sales and marketing for Rockwell International and ITT
Automotive.  Early in his career, Mr. Stohler provided marketing,
sales and manufacturing support for the inventor of the cruise control
system.  He is a past board member of the Automotive Hall of Fame,
Oakland University and Breed Technologies, a supplier of safety equipment to the
automotive industry.  Mr. Stohler holds no other public company
directorships.
 
 Sarah
Berel-Harrop has been our Corporate Secretary since 2006 and was appointed Chief
Financial Officer in June 2008.  Prior to holding these positions, she
was self-employed as a consultant to us since 2001 in the fields of accounting
and SEC compliance.   She holds a Bachelor of Arts degree in
comparative literature from Cornell University and a Master of Business
Administration degree from University of Texas at Austin. Ms. Berel-Harrop is a
member of the American Society for Quality, the Institute of Management
Accountants and the Texas Society of Certified Public
Accountants.
  45
 Table of Contents
  James R.
Spear was appointed Executive Vice President of Exploration and Production in
March 2008.  He joined Hyperdynamics in November 2007.  From
2007 through his appointment as our V.P. in March 2008, Mr. Spear was
self-employed as a Geophysical / Geological consultant doing business under the
name of Devon Petroleum Consultants.  In 2007, he was also Vice
President of Exploration and Prospect Generation for Providence Energy Group in
frontier basin plays in Belize and Alaska.  During 2006 and 2007, Mr.
Spear was a Senior Geophysical/Geological Advisor to Shell Deepwater New
Ventures as an experienced staff member assigned to working deepwater
exploration and prospect generation in Four Corners area (inclusive of Keathley
Canyon, Alaminos Canyon, East Breaks, and Garden Banks areas).  During
2005, Mr. Spear worked for Maersk Oil and Gas where he worked projects in
UltraDeep Gulf of Mexico in the Walker Ridge, Green Canyon, and Atwater Valley
OCS blocks targeting sands at prospect depths of 31,000’ thru salt canopy at
edge of Sigsbee Escarpment.  From 1998 through 2004, Mr. Spear was
self-employed as a Geophysical / Geological consultant doing business under the
name of Devon Petroleum Consultants.
 
 Information
Concerning the Board of Directors and its Committees.
 Information
about Board Committees
  We have
an Audit Committee consisting of Mr. Poling, Mr. Stohler and Mr. Friedberger
(since June 2008). All committee members are independent. Mr. Friedberger is the
financial expert based on his work as Chief Financial Officer at public
companies. 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, 2008,
the Audit Committee met 5 times and took action by Unanimous Consent 1
time.
 
 We have a
Compensation Committee consisting of Mr. Stohler, Mr. Poling, and Mr. Andrews.
All committee members are independent. The Compensation Committee has a written
charter.  During the year ended June 30, 2008, the Compensation
Committee met 10 times and took action by Unanimous Consent 3
times.
 
 We have a
Nomination Committee consisting of Mr. Stohler, Mr. Poling, and Mr.
Andrews.  During the year ended June 30, 2008, the Nomination
Committee met 4 times and took no actions by Unanimous
Consent.  Decisions concerning the nominees for Director for fiscal
2008 were made by the Nomination Committee.  Mr. Stohler, Mr. Andrews,
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 and evaluating 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.
 
 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 10 occasions during the fiscal year ended June 30,
2008. The Board of Directors also took action by written consent on 13 occasions
during the fiscal year ended June 30, 2008.  No incumbent director
missed more than 75% of the meetings of the Board in the past year.
 
 We
encourage members of the Board of Directors to attend our annual
meetings.  Four out of our six directors attended our last annual
meeting on February 20, 2008.
  46
 Table of Contents
  Section
16(a) Beneficial Ownership Reporting Compliance.
 
 We have
reviewed the Forms 3, 4 and 5 submitted to us relating to fiscal 2008. We have
found that Harry Briers, Harold Poling, L. Gene Stohler, Steven Plumb (CFO
through June 19, 2008), TW Trust, Tyler Watts, Angela Watts, TWJ Navigation,
Inc., Sarah Berel-Harrop, Roger Friedberger, Charles Andrews, James Spear, and
Kent Watts have filed all required Forms 3, 4 and 5 during fiscal
2008.
  The
following table summarizes the results of our review for late filings of Forms
3, 4, and 5:
  Name
              
              Form
      Type
              
              Number
      of forms filed late
              
              Number
      of late transactions reported lateKent
      Watts
              
              4
              
              3
              
              5Harold
      Poling
              
              4
              
              2
              
              2Steven
      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: Sarah Berel-Harrop, 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.hyperdynamics.com.
 
 
 Item11 Executive Compensation
 
 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 2008 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 2008
executive compensation on the following dates:
  47
 Table of Contents
  Date
              
              Committee
      ActionJune
      25, 2008
              
              Approved
      Executive Employment Agreement for Sarah
  Berel-Harrop
 
 Base
Salaries
 
 The
Compensation Committee sets base salaries for officers with individual salaries
based on level of responsibility and individual performance.
 
 Stock
Incentives
 
 Hyperdynamics’
Stock and Stock Option 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.
 
 Hyperdynamics
also has a Restricted Stock Award Plan, under which it can award stock options,
warrants, and restricted stock to employees, consultants, and
vendors.  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.
  COMPENSATION
TABLES
 
 The
following tables show salaries, bonuses, incentive awards, retirement benefits
and other compensation relating to fiscal year 2008 for the Chief Executive
Officer, Chief Financial Officer and the other named executive
officers.
  48
 Table of Contents
  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
      WattsChairman,
      Pres. & CEO (1)
              2008
              
              $
              250,000
              
              
              
              -
              
              
              
              -
              
              
              $
              140,158
              
              
              
              
              -
              
              
              $
              17,148
              
              
              $
              407,306Kent
      WattsChairman,
      Pres.&
      CEO  (1)
      (4)
              2007
              
              
              251,939
              
              
              
              -
              
              
              
              -
              
              
              
              236,355
              
              
              
              
              -
              
              
              
              17,814
              
              
              
              506,108Kent
      WattsChairman,Pres.
      & CEO(2)
      (4)
              2006
              
              
              102,600
              
              
              
              -
              
              
              
              16,000
              
              
              
              -
              
              
              
              
              -
              
              
              
              15,470
              
              
              
              134,070Harry
      BriersExec.
      VicePres.
      (3)
              2008
              
              
              190,000
              
              
              
              -
              
              
              
              -
              
              
              
              87,600
              
              
              
              
              -
              
              
              
              13,458
              
              
              
              291,058Harry
      BriersExec.
      VicePres.
      (3)
      (4)
              2007
              
              
              188,173
              
              
              
              -
              
              
              
              -
              
              
              
              109,677
              
              
              
              
              -
              
              
              
              -
              
              
              
              297,850Harry
      BriersExec.
      VicePres.
      (3)
      (4)
              2006
              
              
              98,654
              
              
              
              -
              
              
              
              16,000
              
              
              
              -
              
              
              
              
              -
              
              
              
              -
              
              
              
              114,654Steven
      PlumbCFO
      (5)
      (6)
              2008
              
              
              78,588
              
              
              
              -
              
              
              
              -
              
              
              
              115,680
              
              
              
              
              -
              
              
              
              -
              
              
              
              194,268Steven
      PlumbCFO
      (5)
              2007
              
              
              78,647
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              
              -
              
              
              
              -
              
              
              
              78,647Steven
      PlumbCFO
      (5)
              2006
              
              
              59,256
              
              
              
              -
              
              
              
              -
              
              
              
              142,523
              
              
              
              
              -
              
              
              
              -
              
              
              
              201,779Sarah
      Berel-Harrop, CFO(6)
              2008
              
              
              83,474
              
              
              
              -
              
              
              
              -
              
              
              
              72,300
              
              
              
              
              -
              
              
              
              -
              
              
              
              153,774James
      R. Spear, Exec.VP
              2008
              
              
              118,826
              
              
              
              -
              
              
              
              -
              
              
              
              95,539
              
              
              
              
              -
              
              
              
              -
              
              
              
              214,366Famourou
      Kourouma, VP(7)
              2008
              
              
              111,500
              
              
              
              -
              
              
              
              -
              
              
              
              123,804
              
              
              
              
              -
              
              
              
              -
              
              
              
              235,304Famourou
      Kourouma, VP(7)
              2007
              
              
              92,846
              
              
              
              -
              
              
              
              -
              
              
              
              521,924
              
              
              
              
              -
              
              
              
              -
              
              
              
              614,770Famourou
      Kourouma, VP(7)
              2006
              
              
              47,579
              
              
              
              -
              
              
              
              -
              
              
              
              54,552
              
              
              
              
              -
              
              
              
              -
              
              
              
              102,131Aissata
      Beavogui(7)
      (8)
              2008
              
              
              58,304
              
              
              
              -
              
              
              
              -
              
              
              
              74,517
              
              
              
              
              -
              
              
              
              -
              
              
              
              132,821
  49
 Table of Contents
  Columns
(d), (g), and (h): No named executive received such compensation for fiscal year
2008.
 
 Columns
(e) and (f): Effective July 1, 2005, 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 11 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 2006, 2007, and 2008 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.
 
 (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 and Chief
Executive Officer. 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 was in force during the year
ended June 30, 2006.
 
 (3) 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.
 
 (4) 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.
 
 (5) We
had a contract with Clear Financial Solutions, Inc., a company owned by Mr.
Plumb, which has agreed to provide us with a “contract” CFO, namely Mr.
Plumb. We paid a fee directly to Clear Financial Solutions, Inc. in the
estimated amount of approximately $3,300 to $5,500 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 Financial
Solutions.  Mr. Plumb resigned as CFO on June 19,
2008.  Compensation for the year ended June 30, 2008 includes
severance pay of $10,916.
 
 (6) Mr.
Plumb resigned as CFO on June 19, 2008.  Ms. Berel-Harrop was
appointed as CFO on June 20, 2008.
 
 (7) Mr.
Kourouma and Ms. Beavogui were not executive officers during the fiscal
year.  They are considered named executives based on their
compensation.
 
 (8) Ms.
Beavogui was the Chief Financial Officer of SCS Corporation from August 2007
through March 2008.  She resigned in March 2008.
 
 Bonuses
and Stock Awards
 
 The
following tables show cash and stock awards made to the named executives in
fiscal year 2008, their outstanding equity awards at the end of fiscal year
2008, and the gains attributable to stock options they exercised during fiscal
year 2008.
  50
 Table of Contents
  GRANTS
OF PLAN-BASED AWARDS IN FISCAL YEAR 2008
  Under
      Non-Equity Incentive Plan
      AwardsAll
      Other Option Awards:
                
                
                Exercise
      or
                
                
                Grant
      DateAction
                Grant
                
                
                
                
                Number
      of Securities
                
                
                Base
      Price of
                
                
                Fair
      Value ofName
                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
                07/02/07
                
                
                
                
                
                40,000
                
                
                $
                3.01
                
                
                $
                62,108Kent
      P. Watts
                08/10/06
                10/01/07
                
                
                
                
                
                40,000
                
                
                
                2.84
                
                
                
                48,070Kent
      P. Watts
                08/10/06
                1/02/08
                
                
                
                
                
                40,000
                
                
                
                2.00
                
                
                
                21,399Kent
      P. Watts
                08/10/06
                4/01/08
                
                
                
                
                
                40,000
                
                
                
                2.00
                
                
                
                8,581Harry
      Briers
                10/07/06
                07/02/07
                
                
                
                
                
                25,000
                
                
                
                3.01
                
                
                
                38,818Harry
      Briers
                10/07/06
                10/01/07
                
                
                
                
                
                25,000
                
                
                
                2.84
                
                
                
                30,044Harry
      Briers
                10/07/06
                1/02/08
                
                
                
                
                
                25,000
                
                
                
                2.00
                
                
                
                13,375Harry
      Briers
                10/07/06
                4/01/08
                
                
                
                
                
                25,000
                
                
                
                2.00
                
                
                
                5,363Steven
      Plumb
                07/09/07
                07/09/07
                
                
                
                
                
                80,000
                
                
                
                2.80
                
                
                
                115,680Sarah
      Berel-Harrop
                07/09/07
                07/09/07
                
                
                
                
                
                50,000
                
                
                
                2.80
                
                
                
                72,300James
      R. Spear
                11/01/07
                11/01/07(1)
                
                
                
                
                
                50,000
                
                
                
                2.11
                
                
                
                42,324James
      R. Spear
                11/01/07
                12/31/07
                
                
                
                
                
                30,000
                
                
                
                1.60
                
                
                
                19,148James
      R. Spear
                11/01/07
                03/31/08
                
                
                
                
                
                30,000
                
                
                
                1.18
                
                
                
                12,899James
      R. Spear
                11/01/07
                06/30/08
                
                
                
                
                
                30,000
                
                
                
                1.69
                
                
                
                21,168Aissata
      Beavogui(2)
                08/07/07
                08/08/07
                
                
                
                
                
                75,000
                
                
                
                2.88
                
                
                
                89,418
  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)
              First
      option award occurred on the date the executive’s contract was
      approved
 
 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, for Mr. Briers
and Mr. Watts.  The exercise price is the closing bid price on the
date of grant for all other recipients.
 
 (2) Ms.
Beavogui resigned in March 2008.  Options to purchase 50,000 shares
vested during her tenure in accordance with a vesting schedule stipulated in her
contract.  All of her options expired unused when she
resigned.  The expense associated with the vested options was
$52,009.
  51
 Table of Contents
  OUTSTANDING EQUITY AWARDS AT
2008 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
              
              
              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
              
              04/03/10Kent
      P Watts
              
              
              40,000
              
              
              
              
              
              
              
              3.01
              
              07/02/10Kent
      P Watts
              
              
              40,000
              
              
              
              
              
              
              
              2.84
              
              10/01/10Kent
      P Watts
              
              
              30,000
              
              
              
              
              
              
              
              2.00
              
              1/02/11Kent
      P Watts
              
              
              40,000
              
              
              
              
              
              
              
              2.00
              
              4/01/11Harry
      Briers
              
              
              25,000
              
              
              
              
              
              
              
              2.88
              
              10/09/09Harry
      Briers
              
              
              25,000
              
              
              
              
              
              
              
              2.23
              
              01/03/10Harry
      Briers
              
              
              25,000
              
              
              
              
              
              
              
              2.00
              
              04/03/10Harry
      Briers
              
              
              25,000
              
              
              
              
              
              
              
              3.01
              
              07/02/10Harry
      Briers
              
              
              25,000
              
              
              
              
              
              
              
              2.84
              
              10/01/10Harry
      Briers
              
              
              25,000
              
              
              
              
              
              
              
              2.00
              
              1/02/11Harry
      Briers
              
              
              25,000
              
              
              
              
              
              
              
              2.00
              
              4/01/11Steven
      Plumb
              
              NoneSarah
      Berel-Harrop
              
              
              22,000
              
              
              
              
              
              
              
              2.15
              
              07/07/09Sarah
      Berel-Harrop
              
              
              50,000
              
              
              
              
              
              
              
              2.80
              
              07/09/10James
      R. Spear
              
              
              50,000
              
              
              
              
              
              
              
              2.11
              
              11/01/10James
      R. Spear
              
              
              30,000
              
              
              
              
              
              
              
              1.60
              
              12/31/10James
      R. Spear
              
              
              30,000
              
              
              
              
              
              
              
              1.18
              
              03/31/11James
      R. Spear
              
              
              30,000
              
              
              
              
              
              
              
              1.69
              
              06/30/11Famourou
      Kourouma
              
              
              360,000
              
              
              
              
              
              
              
              1.00
              
              09/22/08Famourou
      Kourouma
              
              
              
              
              
              
              300,000
              
              
              
              5.00
              
              TBD
      (1)Famourou
      Kourouma
              
              
              
              
              
              
              300,000
              
              
              
              10.00
              
              TBD
      (1)
  52
 Table of Contents
  Column
(b): options were granted three years prior to the expiration date and vested
immediately.
 
 (1)
              Options
      vest upon satisfaction of performance conditions.  They will
      expire three years from the vesting
date.
 
 
 OPTION
EXERCISES AND STOCK VESTED DURING FISCAL YEAR 2008
 
 No. of
              
              
              
              
              
              No. of
              
              ValueShares
              
              
              Value
              
              
              Shares
              
              RealizedAcquired
              
              
              Realized
              
              
              Acquired
              
              on VestingName
              
              on Exercise
              
              
              on Exercise
              
              
              on Vesting
              
              ($)(a)
              
              (#)
              
              
              ($)
              
              
              (#)Kent
      P Watts
              
              
              369,333
              
              
              $
              1,023,052Harry
      Briers
              
              
              368,918
              
              
              
              1,006,873
 
 During
July 2007, Mr. Watts effected a cashless exercise of options to purchase 400,000
shares with exercise price of $.23 when the stock price was
$3.00.  Net issuance was 369,333 shares of common stock.
 
 During
July 2007, Mr. Briers effected a cashless exercise of options to purchase
400,000 shares with exercise price of $.23 when the stock price was
$2.96.  Net issuance was 368,918 shares of common stock.
 
 AGREEMENTS
WITH EXECUTIVES AND OFFICERS
  On August
10, 2006, our Compensation Committee approved a new Chief Executive Employment
Agreement for Kent Watts.  The contract has an initial term of three
years.  The contract provides for a base salary of $250,000 annually
with a performance based incentive salary based on 1% of adjusted net
income.   Mr. Watts also will receive 40,000 options to purchase
Hyperdynamics common stock each quarter during the term of the
agreement.  Option exercise prices are the higher of the closing
market price on the grant date or $2.00 per share, the options vest immediately
upon grant, and they have a term of three years.  Mr. Watts has a
severance agreement.  Under the terms of the severance agreement, Mr.
Watts will receive his base salary and health insurance costs for two years from
the date of termination by Hyperdynamics for a reason other than cause, death,
or disability.  Additionally, in the event there is a “Good Reason”,
such as a change of control or a requirement to relocate, Mr. Watts may
terminate the contract and receive severance benefits for two years from the
date of termination.
 
 On
October 7, 2006, our Compensation Committee approved a new Executive Vice
President Employment Agreement for Harry Briers.  The contract has an
initial term of two years.  The contract provides for a base salary of
$190,000 annually.   Mr. Briers also will receive 25,000 options
to purchase Hyperdynamics common stock each quarter during the term of the
agreement.  Option exercise prices are the higher of the closing
market price on the grant date or $2.00 per share, the options vest immediately
upon grant, and they have a term of three years.  Mr. Briers has a
severance agreement.  Under the terms of the severance agreement, Mr.
Watts will receive his base salary and health insurance costs for one year from
the date of termination by Hyperdynamics for a reason other than cause, death,
or disability.  Additionally, in the event there is a “Good Reason”,
such as a change of control or a requirement to relocate, Mr. Briers may
terminate the contract and receive severance benefits for one year from the date
of termination.
  53
 Table of Contents
  On
November 1, 2007, we entered into an employment agreement with Mr. James R.
Spear. The agreement has an initial term of three years. Under the agreement,
Mr. Spear’s base salary is $185,000 per year.  Mr. Spear will receive
performance bonuses of up to $300,000 based upon the achievement of particular
criteria.  He also received options to purchase 50,000 shares of
Hyperdynamics common stock upon signing of the contract and he will receive
options to purchase 30,000 shares of Hyperdynamics common stock each quarter
during the life of the contract.   Option exercise prices are the
closing market price on the grant date, the options vest immediately upon grant,
and they have a term of three years.  There is no severance agreement
with Mr. Spear.  Hyperdynamics may terminate Mr. Spear at any time by
providing notice as stipulated in the contract.  During September
2008, the Compensation Committee approved the grant of additional options to
purchase up to 150,000 shares of common stock that will vest upon the
achievement of certain performance conditions.  The exercise price
will be the closing market on the date the conditions are achieved and the
option term will be three years from the vesting date.
  On June
25, 2008, we entered into an employment agreement with our new Chief Financial
Officer, Sarah Berel-Harrop.  The agreement has an initial term of two
years.  Under the agreement, her base salary is $175,000 per
year.  $100,000 per year is payable in cash and $75,000 per year is
payable in stock.  She also will receive 20,000 options to purchase
Hyperdynamics common stock each quarter during the term of the
agreement.  Option exercise prices are the higher of the closing
market price on the grant date or $2.00 per share, the options vest immediately
upon grant, and they have a term of three years.  There is no
severance agreement with Ms. Berel-Harrop.  Hyperdynamics may
terminate Ms. Berel-Harrop at any time by providing notice as stipulated in the
contract.
 
 We had 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 paid 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 2007 with fees increased to approximately $5,500 per
month.  The contract terminated with Mr. Plumb’s resignation in June
2008.
  In August
2005, we hired Mr. Famourou Kourouma as our Vice President of Guinea Affairs. He
later became Vice President of African Affairs.  We entered into a new
employment agreement with Mr. Kourouma in December 2006.  The
agreement term is two years.  Under this agreement, he received 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.  In September 2008, the Compensation Committee
approved a new employment agreement for Mr. Kourouma.  Under the new
agreement, he will receive a base salary of $100,000 per year and a subsidy of
$5,000 per month while in Guinea.  In addition, he will receive 20,000
options to purchase Hyperdynamics common stock each quarter during the term of
the agreement.  Option exercise prices are the higher of the closing
market price on the grant date or $2.00 per share, the options vest immediately
upon grant, and they have a term of three years.  He will receive
additional options to purchase up to 200,000 shares of Hyperdynamics common
stock upon the completion of certain performance conditions.  The
exercise price will be the closing market on the date the conditions are
achieved and the option term will be three years from the vesting
date.  Hyperdynamics may terminate Mr. Kourouma at any time by
providing notice as stipulated in the contract.  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 was for two
years.  Under the agreement, Ms. Beavogui would 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.  The contract terminated with Ms. Beavogui’s resignation in
March 2008.
  54
 Table of Contents
  DIRECTOR
COMPENSATION
  The
following table describes compensation arrangements in effect for independent
directors during the year ended June 30, 2008.
  Type
      of service
                
                Quarterly
      fee(1)
                
                
                Quarterly
      options(2)Board
      of Directors service
                
                $
                8,000
                
                
                
                N/AAudit
      Committee service
                
                $
                5,000
                
                
                
                7,500Compensation
      Committee service
                
                $
                2,500
                
                
                
                5,000Nomination
      Committee service
                
                $
                2,500
                
                
                
                2,500
  (1)
              Fees
      are ordinarily payable with Hyperdynamics common
  stock.
 (2)
              Options
      to purchase common stock vest on the first day of the quarter for each
      quarter at a price per share determined based on the market price of our
      common stock on that date.  The option term is two
      years.
  Our
independent directors during the year were Harold Poling, Al Young (deceased
April 9, 2008), Charles H. Andrews (from December 4, 2007), Roger Friedberger
(from June 20, 2008), and L. Gene Stohler.  Mr. Poling served on the
Audit Committee for the entire year ended June 30, 2008 and on the Compensation
Committee from November 26, 2007 through June 30, 2008.  Mr. Stohler
served on the Audit, Nomination, and Compensation Committees during the entire
year ended June 30, 2008.  Mr. Young served on the Audit, Nomination,
and Compensation Committees from July 1, 2007 through April 9,
2008.  Mr. Andrews served on the Audit Committee from April 17, 2008
through June 20, 2008 and on the Nomination and Compensation Committees from
June 20, 2008 through June 30, 2008.  Mr. Friedberger served on the
audit committee from June 20, 2008 through June 30, 2008.
 
 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
              
              Compensation
              
              Total(a)
              
              ($)
      (b)
              
              
              ($)
      (c)
              
              
              ($)
      (d)
              
              (e)
              
              (f)
              
              ($)
      (g)
              
              ($)
      (h)Al
      Young
              
              $
              18,000
              
              
              $
              72,002
              
              
              $
              78,147
              
              
              
              
              
              
              
              $
              168,149L
      Gene Stohler
              
              
              -
              
              
              
              90,002
              
              
              
              78,147
              
              
              
              
              
              
              
              
              168,149Harold  Poling
              
              
              -
              
              
              
              85,001
              
              
              
              66,703
              
              
              
              
              
              
              
              
              151,704Charles
      H. Andrews
              
              
              14,000
              
              
              
              15,000
              
              
              
              2,613
              
              
              
              
              
              
              
              
              31,613Roger
      Friedberger
              
              
              1,425
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              
              1,425
 
 
 Column
(b): Mr. Young, Mr. Andrews, and Mr. Friedberger opted to receive some fees in
cash.
 
 Column
(c): Stock awards to pay directors fees.  The assumptions used to
determine the valuation of the awards are discussed in note 11 to the
consolidated financial statements.
 
 Column
(d): Amounts are the expenses recorded in the company’s 2008 financial
statements for stock options awarded for that year.  The assumptions
used to determine the valuation of the awards are discussed in note 11 to the
consolidated financial statements.   The notes to the beneficial
ownership table in Item 12 provide detailed information about each director’s
outstanding stock option awards.
  55
 Table of Contents
  Compensation
Committee Interlocks and Insider Participation
 
 The
Compensation Committee is made up of three independent, non-employee directors,
Messrs. Stohler, Poling and Andrews. No executive officer of Hyperdynamics
served as a member of the board of directors of any other public company during
the year ended June 30, 2008.  No member of the Compensation Committee
serves as an executive officer of any other public company during the year ended
June 30, 2008.  No interlocking relationship exists between the
members of our Compensation Committee and the board of directors or compensation
committee of any other company.
 
 Compensation
Committee Report
 
 The
Compensation Committee (“Compensation Committee”), consisting of Mr. L. Gene
Stohler, Mr. Charles H. Andrews, and Mr. Harold Poling, is responsible for
establishing and administering the executive compensation programs of
Hyperdynamics. 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/ L.
Gene Stohler, Chairman
 Harold A.
Poling
 /s/
Charles H. Andrews
 
 
 Item12 Security Ownership of 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, 2008.
 
 Equity
      Compensation Plan InformationPlan
      Category
              
              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))A
              
              
              
              B
              
              
              
              CEquity
      compensation plans approved by security holders
              
              
              3,810,839
              
              
              
              3.60
              
              
              
              7,140,155Equity
      compensation plans not approved by security holders
              
              
              N/A
              
              
              
              N/A
              
              
              
              N/ATotal
              
              
              3,810,839
              
              
              
              3.60
              
              
              
              7,140,155
  56
 Table of Contents
  The Stock
and Stock Option Plan (the “1997 Plan”) of Hyperdynamics was adopted May 7, 1997
and amended on December 3, 2001, on January 21, 2005, and on February 20,
2008.  The total number of shares issuable under the Plan, as amended,
is 14,000,000 and the current expiration date of the 1997 Plan is May 7,
2010.  Under the 1997 Plan, the Compensation Committee of the Board of
Directors, which is comprised of independent directors, may grant common stock,
warrants, or options to employees, directors, or consultants.  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.
 
 Shareholders
approved the adoption of the 2008 Restricted Stock Award Plan (the “2008 Plan”)
at Hyperdynamics’ Annual Meeting on February 20, 2008.  The total
number of shares issuable under the 2008 Plan is 3,000,000.   The
Plan expires on February 20, 2018.  Under the 2008 Plan, the
Compensation Committee of the Board of Directors, which is comprised of
independent directors, may grant common stock, warrants, or options to
employees, directors, vendors, or consultants.
 
 The
following table provides a reconciliation of the securities available for
issuance under the Plans.
 
 
 1997
      Plan
              
              
              2008
      Plan
              
              
              All
      PlansShares
      available for issuance, June 30, 2007
              
              
              4,453,311
              
              
              
              -
              
              
              
              4,453,311Increase
      in shares issuable
              
              
              4,000,000
              
              
              
              3,000,000
              
              
              
              7,000,000Shares
      issued
              
              
              (428,664
              )
              
              
              (73,653
              )
              
              
              (502,317
              )Options
      outstanding
              
              
              (3,810,839
              )
              
              
              -
              
              
              
              (3,810,839
              )Shares
      available for issuance, June 30, 2008
              
              
              4,213,808
              
              
              
              2,926,347
              
              
              
              7,140,155
 
 
 The
purpose of the Plans are 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, directors, and vendors 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 Plans to
augment our compensation packages.
  Security
ownership of certain beneficial owners and management
 
 The
following table sets forth certain information at September 29, 2008, 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.
  57
 Table of Contents
  Name
      and Address of Beneficial Owner
              
              Number
      of Shares of
                Common
      Stock
                Beneficially
      Owned
              
              
              
              
              
              Percent of
      ClassKent
      WattsOne
      Sugar Creek Center Boulevard, Suite 125Sugar
      Land, TX 77478
              
              
              12,733,735
              
              
              
              (1
              )
              
              
              17.6
              %Charles
      H. AndrewsOne
      Sugar Creek Center Boulevard, Suite 125Sugar
      Land, TX 77478
              
              
              26,015
              
              
              
              (7
              )
              
              
              -
              %Harry
      BriersOne
      Sugar Creek Center Boulevard, Suite 125Sugar
      Land, TX 77478
              
              
              2,098,336
              
              
              
              (2
              )
              
              
              3.4
              %Roger
      D. FriedbergerOne
      Sugar Creek Center Boulevard, Suite 125Sugar
      Land, TX 77478
              
              
              7,500
              
              
              
              (4
              )
              
              
              -.
              %Harold
      PolingFairlane Plaza
      North290
      Town Center Drive, Suite 322Dearborn,
      Michigan 48126
              
              
              678,429
              
              
              
              (3
              )
              
              
              1.0
              %L.
      Gene StohlerOne
      Sugar Creek Center Boulevard, Suite 125Sugar
      Land, TX 77478
              
              
              239,605
              
              
              
              (6
              )
              
              
              .4
              %Sarah
      Berel-HarropOne
      Sugar Creek Center Boulevard, Suite 125Sugar
      Land, TX 77478
              
              
              122,984
              
              
              
              (5
              )
              
              
              .2
              %James
      R. SpearOne
      Sugar Creek Center Boulevard, Suite 125Sugar
      Land, TX  77478
              
              
              185,455
              
              
              
              (8
              )
              
              
              .3
              %TW
      TrustOne
      Sugar Creek Center Boulevard, Suite 125Sugar
      Land, Texas 77478
              
              
              9,662,585
              
              
              
              (10
              )
              
              
              13.4
              %Michael
      WattsOne
      Sugar Creek Center Boulevard, Suite 125Sugar
      Land, Texas 77478
              
              
              6,029,626
              
              
              
              (11
              )(12)
              
              
              8.9
              %KW
      TrustOne
      Sugar Creek Center Boulevard, Suite 125Sugar
      Land, Texas 77478
              
              
              3,519,626
              
              
              
              (12
              )
              
              
              5.4
              %CW
      TrustOne
      Sugar Creek Center Boulevard, Suite 125Sugar
      Land, Texas 77478
              
              
              3,519,626
              
              
              
              (12
              )
              
              
              5.4
              %KD
      TrustOne
      Sugar Creek Center Boulevard, Suite 125Sugar
      Land, Texas 77478
              
              
              3,519,626
              
              
              
              (13
              )
              
              
              5.4
              %All
      Directors and Executive Officers as a group (8
      persons)
              
              
              16,092,059
              
              
              
              (9
              )
              
              
              23.0
              %
 
 (1)
              This
      amount includes: 2,765,224 shares of common stock; currently exercisable
      options or warrants to purchase 2,050,000 shares of common stock; and
      7,918,511 shares deemed beneficially owned through TW Trust’s ownership of
      Series B Preferred Stock. TW Trust owns the shares indirectly through 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' children. Kent Watts is the trustee of TW
  Trust.
  58
 Table of Contents
  (2)
              This
      amount includes: 1,898,336 shares of common stock and currently
      exercisable options to purchase 200,000 shares of common
      stock.
 
 (3)
              This
      amount includes: 428,429 shares of common stock and currently exercisable
      options or warrants to purchase 250,000 shares of common
      stock.
 
 (4)
              This
      amount includes currently exercisable options to purchase 7,500 shares of
      common stock.
 
 (5)
              Includes
      30,984 shares of common stock and currently exercisable options to
      purchase 92,000 shares of common
stock.
 
 (6)
              This
      amount includes: 89,605 shares of common stock and currently exercisable
      options to purchase 150,000 shares of common
  stock.
 
 (7)
              This
      amount includes: 11,015 shares of common stock and currently exercisable
      options to purchase 15,000 shares of common
  stock.
 
 (8)
              This
      amount includes: 44,455 shares of common stock and currently exercisable
      options to purchase 140,000 shares of common
  stock.
 
 (9)
              Includes:
      currently exercisable warrants to purchase 2,904,500 shares of common
      stock and 7,918,511 shares deemed beneficially owned through TW Trust’s
      Series B Preferred Stock ownership.
 
 (10)
              TW
      Trust beneficially owns 9,662,585 shares of common stock indirectly though
      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’ children. Kent Watts is the trustee of TW
    Trust.
 
 (11)
              Includes currently
      exercisable warrants to purchase 1,000,000 shares of common
      stock, 94.5 shares of Series B Convertible Preferred stock, which are
      convertible into 699,999 shares of common stock, and 810,000 shares of
      common stock in addition to securities beneficially owned through KW Trust
      (footnote (12)).
 
 (12)
              KW
      Trust beneficially owns 3,519,626 shares of common stock indirectly
      through KW Navigation, Inc.  KW Navigation, Inc. owns 396 shares
      of Series B Preferred Stock, which are convertible into 2,933,330 shares
      of common stock, 6,296 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.
 
 (13)
              CW
      Trust beneficially owns 3,519,626 shares of common stock indirectly
      through CW Navigation, Inc.  CW Navigation, Inc. owns 396 shares
      of Series B Preferred Stock, which are convertible into 2,933,330 shares
      of common stock, 6,296 shares of common stock, and warrants to purchase
      580,000 shares of common stock. The beneficiary of CW Trust is Christopher
      Watts. Christopher Watts is the trustee of CW
  Trust.
 
 (14)
              KD
      Trust beneficially owns 3,519,626 shares of common stock indirectly
      through KD Navigation, Inc.  KD Navigation, Inc. owns 396 shares
      of Series B Preferred Stock, which are convertible into 2,933,330 shares
      of common stock, 6,296 shares of common stock, and warrants to purchase
      580,000 shares of common stock. The beneficiary of KD Trust is Kara
      Driver. Jeremy Driver is the trustee of KD
  Trust.
 
 We are
not aware of any arrangements that could result in a change of
control.
  59
 Table of Contents
  Item13 Certain Relationships and Related Transactions, and
Director Independence
 
 Hyperdynamics
has a conflict of interest policy governing transactions involving related
parties.  In accordance with the policy, transactions involving
related parties must be pre-approved by the Audit Committee, which is comprised
of independent directors.
 
 Other
than as disclosed below, Hyperdynamics did not enter into any transactions
involving amounts in excess of $120,000, excluding employment relationships,
with related parties since July 1, 2007, the beginning of the last fiscal
year.
 
 Potential
offering costs payable to Michael Watts
 
 A
pre-existing arrangement exists with Michael Watts, the brother of
Hyperdynamics’ CEO, under which he will receive offering costs of 10% of the
proceeds from the exercise of 3,471,000  outstanding warrants to
purchase common stock at $2.50 per share 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.
 
 Warrant repricing affecting related
parties
 
 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.  The arrangement, including
the form of the warrants, was approved by the Board of Directors, including the
independent directors.  By operation of a contractual price reset
provision in the warrant, the exercise price of the warrants was reduced from
$2.40 per share to $1.65 per share in May 2008, resulting in a settlement
expense of $241,000.
 
 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 six directors, four of whom are Independent Directors.  Our
Independent Directors are: Charles Andrews, Roger Friedberger, Harold A. Poling,
and L. Gene Stohler.
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  Our Audit
Committee members are Mr. Poling, Mr. Stohler and Mr. Friedberger (since June
2008). All committee members are independent. Mr. Friedberger is the financial
expert based on his work as Chief Financial Officer at public companies. 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, 2008, the Audit
Committee met 5 times and took action by Unanimous Consent 1 time.
 
 Our
Compensation Committee members are Mr. Stohler, Mr. Poling, and Mr. Andrews. All
committee members are independent. During the year ended June 30, 2008, the
Compensation Committee met 10 times and took action by Unanimous Consent 3
times.
 
 Our
Nomination Committee members are Mr. Stohler, Mr. Poling, and Mr.
Andrews.  All committee members are independent.  During the
year ended June 30, 2008, the Nomination Committee met 4 times and took no
actions by Unanimous Consent.
 
 Item14 Principal Accounting Fees and Services
 
 Principal
Accounting Fees and Services
 
 Audit
Fees
  Malone
& Bailey, PC billed us in the aggregate amount of $154,000 and $119,000
respectively for the years ended June 30, 2008 and 2007, for professional
services related to: their audit of our annual financial statements included in
our Form 10-Ks; their reviews of our unaudited quarterly financial statements
included in our Form 10-Qs and registration statements; and their Sarbanes-Oxley
404 attest services for the years ended June 30, 2008 and 2007.
  Audit-Related
Fees
 
 Malone
& Bailey, PC billed us $29,000 and $0, respectively, for 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, 2008 and 2007.
 
 Tax
Fees
 
 Malone
& Bailey, PC billed us in the aggregate amount of $20,000 and $0 for
professional services rendered for tax related services for the years ended June
30, 2008 and 2007.
 
 All Other
Fees
  Malone
& Bailey, PC did not perform, and accordingly did not bill us for,
professional services rendered for any other services for the years ended June
30, 2008 and 2007.
  Auditor
Independence
 
 Our Board
of Directors considers that the work done for us in the year ended June 30, 2008
by Malone & Bailey, PC is compatible with maintaining Malone & Bailey,
PC's independence.
 
 Auditor's
Time on Task
 
 All of
the work expended by Malone & Bailey, PC on our June 30, 2008 audit was
attributed to work performed by Malone & Bailey, PC's full-time, permanent
employees.
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  Item15 Exhibits, Financial Statement Schedules
 
 (A)
 Exhibit
                Number
              Description
 
 21.1
              List
      of Subsidiaries23.1
              Consent
      of Malone and Bailey, PC – provided herewith.23.3
              Consent
      of Ryder Scott Company, L.P.- provided
herewith.
 
 Exhibit  31.1  -  Certification  of  Chief  Executive  Officer
of Hyperdynamics
Corporation  required  by  Rule  13a-14(1)  or  Rule
15d-14(a) of the Securities Exchange  Act  of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley
Act  of  2002.
 
 Exhibit  31.2  -  Certification  of  Chief  Financial  Officer
and Principal Accounting Officer of Hyperdynamics
Corporation  required  by  Rule  13a-14(1)  or  Rule
15d-14(a) of the Securities Exchange  Act  of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley
Act  of  2002.
 
 Exhibit  32.1  -  Certification  of  Chief  Executive  Officer  of
Hyperdynamics
Corporation  pursuant  to  Section  906  of  the  Sarbanes-Oxley
Act of 2002 and
Section  1350  of  18  U.S.C.  63.
 
 Exhibit  32.2  -  Certification  of  Chief  Financial  Officer
and Principal Accounting Officer of Hyperdynamics
Corporation  pursuant  to  Section  906  of  the  Sarbanes-Oxley
Act of 2002 and
Section  1350  of  18  U.S.C.  63.
 
 (B)
  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 40 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
      30, 2008By:
      /s/ Kent WattsKent
      WattsChairman
      of the Board,Director,Chief
      Executive Officer
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  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
      30, 2008Harold
      A. Poling
                Harold
      A. Poling
              
              Director/s/
      Harry J. Briers
                Harry
      J. Briers
              
              Director
      and Executive Vice-President
              
              September
      30, 2008/s/
      Roger Friedberger
                Roger
      Friedberger
              
              Director
              
              September
      30, 2008/s/
      Sarah Berel-Harrop
                Sarah
      Berel-Harrop
              
              Chief
      Financial Officer and Principal Accounting Officer
              
              September
      30, 2008/s/
      L. Gene Stohler
                L.
      Gene Stohler
              
              Director
              
              September
      30, 2008
 
 /s/
      Charles H. Andrews
                Charles
      Andrews
              
              Director
              
              September
      30, 2008
   63