UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM 10-K /A


AMENDMENT NO.
1





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





For the
fiscal year ended June 30, 2007


or


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





For the
transition period from ___________  to
____________________





Commission
File Number 001-32490





HYPERDYNAMICS
CORPORATION


(Exact
name of registrant as specified in its charter)





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





One Sugar Creek
Center  Blvd., #125


Sugar Land,
Texas 77478


(Address  of  principal  executive  offices,  including  zip  code)





(713) 353-9400


(Issuer's  telephone  number,  including  area  code)





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





Title
      of Each Class
            
            Name
      of Each Exchange on Which 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                      SNo





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


£Yes                      SNo





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


SYes                      £No





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





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


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





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


£Yes                      SNo





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















EXPLANATORY
NOTE
  On
September 28, 2007,  Hyperdynamics Corporation filed with the
Securities and Exchange Commission its Annual Report on Form 10-K for the
year ended June 30, 2007 (“Form 10-K”).
  This
Amendment No. 1 to the Form 10-K is being filed in response to comments
received from the Securities and Exchange Commission:
     ·
              Page
      4, Add additional disclosures related to our net revenue interest and net
      production projections.
 ·
              Page
      11, Disclose the author of our third-party reserve
    report.
 ·
              Page
      17, Add an additional map of our concession offshore Republic of
      Guinea
 ·
              Page
      18, Add additional disclosure relating to oil and gas
      production
 ·
              Page
      19, Add additional disclosure related to our Production Sharing
      Contract
 ·
              Page
      18, Correct a clerical error in the unit production cost to read
      $233.6734/BO.
 ·
              Page
      F-35, Add additional disclosure related to our 2006 proved reserve
      additions
  The
changes set forth above are the only portions of the Form 10-K being
amended herein. This Amendment No. 1 does not change any other information
set forth in the Form 10-K.




Table of
Contents


Part I
              
              5Item
      1.
              Business
              5Item
      1A.
              Risk Factors
              9Item
      1B
              Unresolved Staff Comments
              17Item
      2
              Properties
              17Item
      3
              Legal Proceedings
              22Item
      4
              Submission of Matters to a Vote of Securities
      Holders
              24Part
      II
              
              24Item
      5
              Market for Registrant’s Common Equity, Related Shareholder
      Matters and Issuer Purchases of Equity Securities
              24Item
      6
              Selected Financial Data
              29Item
      7
              Management’s Discussion and Analysis of Financial Condition
      and Results of Operation
              29Item
      7A
              Quantitative and Qualitative Disclosures About Market
      Risk
              38Item
      8
              Financial Statements and Supplementary
    Data
              38Item
      9
              Changes in and Disagreements With Accountants on Accounting
      and Financial Disclosure
              39Item
      9B
              Other Information
              42Part
      III
              
              42Item
      10
              Directors, Executive Officers and Corporate
      Governance
              42Item
      11
              Executive Compensation
              42Item
      12
              Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
              52Item
      13
              Certain Relationships and Related Transactions, and Director
      Independence
              54Item
      14
              Principal Accounting Fees and Services
              56Item
      15
              Exhibits, Financial Statement Schedules
              56SIGNATURES
              
              57




3
 Table of
Contents




AVAILABLE
INFORMATION
  We are
currently subject to the reporting requirements of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”). We file periodic reports, proxy
materials and other information with the Securities and Exchange Commission (the
“Commission”). In addition, we will furnish stockholders with annual reports
containing audited financial statements certified by our independent accountants
and interim reports containing unaudited financial information as may be
necessary or desirable. We will provide without charge to each person who
receives a copy of this report, upon written or oral request, a copy of any
information that is incorporated by reference in this report (not including
exhibits to the information that is incorporated by reference unless the
exhibits are themselves specifically incorporated by reference). Such request
should be directed to: Kent Watts, Hyperdynamics Corporation, One Sugar Creek
Center Blvd., #125, Sugar Land, Texas 77478, voice: (713) 353-9400, fax: (713)
353-9421. Our Web site iswww.hypd.com  .
 
 We
provide free of charge on our Web site our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act as soon as reasonably practicable.
 
 The Web
site of the Commission is www.sec.gov.  That
website contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission. Visitors to the
Commission's Web site may access such information by searching the EDGAR
database.
 
 INFORMATION ABOUT
 FORWARD-LOOKING
STATEMENTS
  Some of
the statements contained in this report, including, without limitation,
statements containing the words “believes,” “anticipates,” “expects,” and other
words of similar import, are “forward-looking statements.” Forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause our actual results, performance or achievements to be materially
different from any future results, performance, or achievements expressed or
implied by forward-looking statements. Given these uncertainties, readers are
cautioned not to place undue reliance on forward-looking
statements.
 
 4
 Table of
Contents
  Part I
 
 Item 1.  Business
  General
Introduction
  Hyperdynamics Corporation is among the
most unique emerging independent oil and gas exploration and production
companies in the world today.  We own exclusive rights for exploration
and exploitation of oil and gas in a 31,000 square mile concession off the coast
of the Republic of Guinea in West Africa.   This is the largest
offshore acreage position of any company involved in exploration and production
in West Africa.  We entered the oil and gas industry in 2002 under
difficult economics with the price of oil at less than $20 per barrel. We
nevertheless considered the hydrocarbon potential in Guinea, West Africa to be a
good opportunity and we made a proposal to Guinea, which was accepted, to
perform a new regional study of their offshore territory The worldwide demand
for oil has increased over the last several years and is anticipated to continue
to increase.  We are continuing our exploration work with a goal to
enhance our potential to discover world class reserves offshore
Guinea.
  In addition to our Guinea concession,
we hold working interests in several oil and gas properties in Northeast
Louisiana.  At June 30, 2007, we had 25,133 BOE of proven reserves
related to these Louisiana properties.  In addition, on July 1, 2007,
we acquired an 85% working interest in approximately 20 producing wells and
1,150 acres of oil and gas leases in Louisiana.  These properties are
subject to overriding royalty interests of up to 27.46%. In addition, the
seller, who will remain the operator of the properties, retained a 15% working
interest. However, Hyperdynamics will pay 100% of the working interest expenses
up to $4,000,000. We plan to continue acquiring and developing proved reserves
on a global basis
  We operate two business segments,
domestic and international, under the structure of five separate corporations as
follows:
  HDY
              “Hyperdynamics
      Corporation” is the parent company listed on the American Stock
      Exchange under the stock symbol “HDY”.HYDR
              “HYD Resources
      Corporation” is a subsidiary that handles all of our oil and gas
      operations in Louisiana. HYDR owns a work-over rig and oil field
      maintenance equipment. HDY owns 100% of HYDR.  HYDR is our
      business segment that explores for and produces oil domestically in
      Louisiana.TPC
              “Trendsetter Production
      Company” is an authorized oil and gas operator in Louisiana. TPC is
      owned 100% by HYDR and is in our HYDR business segment.SCS
              “SCS
      Corporation” is a subsidiary engaged in oil and gas exploration
      activities located offshore Guinea, West Africa. HDY owns 100% of
      SCS. “SCS” is the name of a business segment of HDY that is composed of
      our oil and gas exploration activity in Guinea.SCSG
              “SCS Corporation Guinee
      SARL” is a Guinea limited liability company located in Conakry,
      Guinea. We own 100% of SCSG, which was formed to manage the business
      associated with SCS's farmed out 2002 Oil and Gas Production and Sharing
      Contract and the 2006 PSC discussed below with the government of the
      Republic of Guinea.  SCSG is owned 100% by SCS and is part of
      our SCS business segment operating in
Guinea.
  Guinea Production Sharing
Contract
 
 On
September 22, 2006, after approximately thirteen months of open and transparent
negotiations, the Republic of Guinea and our wholly owned subsidiary, SCS
Corporation signed a new 2006 Production Sharing Contract (“2006 PSC”). This new
contract reset the entire exploration program for Guinea and recognized SCS
Corporation for the work it had accomplished since 2002.  The contract
was filed as an exhibit attached to the company's 8K filed on September 28,
2006.
 
 The 2006
PSC gives us exclusive rights to explore and develop approximately 31,000 square
miles off the coast of Guinea. However, certain provisions of the contract would
require us to surrender 64% (approximately 20,000 square miles) of the contract
area upon the passage of a “Project of Law”, a Presidential Decree and a Supreme
Court ruling.  The area ultimately surrendered would be selected by
Hyperdynamics, but we would retain a priority non-exclusive right to participate
in the development of the surrendered contract area. Although the PSC is a
legally binding contract under Guinea’s 1986 Petroleum Code, the process of
passing a law, obtaining a Presidential Decree and a Supreme Court ruling
effectively codifies the PSC into Guinea law, thereby strengthening our
concession within the contract area. Furthermore, we expect, through the
priority rights granted in the PSC, to continue our participation in the
surrendered contract area and still have exclusive rights to the remaining 36%
(approximately 11,000 square miles)of the contract area. Until the passages of
the events mentioned above, we retain the exclusive right to explore and exploit
100% of the 31,000 square mile concession. As such, we expect to continue
aggressively pursuing our exploration efforts within the
concession.
 
 5
 Table of
Contents
  To
explain in more detail, the minimum rights that we will maintain going forward
include:
 
 a)
              Exclusive
      rights for exploration, development, and production for approximately
      11,000 square miles of our choosing from the total contract area
      consisting of 31,000 square miles. All benefits and obligations
      surrounding these minimum exclusive rights are determined by the
      provisions of the 2006 PSC; and
 
 b)
              Non-exclusive
      right to participate in any other development of the area not
      retained  by us in (a) above or in the area which exclusive
      rights are surrendered and which totals approximately 20,000 square miles
      from the original contract area of 31,000 square miles. The ultimate
      benefits to us regarding these rights could be controlled by several
      factors. We could negotiate additional contracts on a priority basis or
      participate with others on an equal basis, both of which could be
      controlled by new agreements that we
negotiate.
 
 Thus, if
and when any surrender occurs as explained above, the non-exclusive priority
participation rights do not prevent us from acquiring additional exclusive
rights in the surrendered area directly from Guinea on a priority basis through
additional contracts. Short of entering into any additional exclusive contracts,
we will have the priority right to participate on an equal basis with anyone
else within the resulting 20,000 square mile nonexclusive area.
 
 The
Exclusive Rights allow us to develop the exclusive contract area at our
discretion and expense subject to the terms and conditions of the 2006 PSC. Some
of the major terms to the 2006 PSC are that the Royalty to the Government will
be 10%. The cost recovery percentage available to us will be 75%. The
exploitation period(s) for each area specified as an exploitation area will be
for 25 years with two ten year automatic extensions available for a total of 45
years. Each well in the exploitation area will have its own exploitation period.
..  Refer to item 2 for additional information.
  Primary Multi-Channel Exploration
Strategies
 
 Our
business plan incorporates a multi-channel approach to exploring and developing
our extensive contract area. We will continue on our own to perfect drilling
targets and ultimately implement a drilling program on one or more of our
targets.  Simultaneously, we will continue to consider the possibility
for exploration partners to work with us on all or parts of our
concession.  While we have used geological and geophysical talents of
consulting firms such as GeoExperts and GlobalSanteFe’s Applied Drilling
Technologies, we are currently in the process of hiring internal staff to match
up with the development requirements of our world class asset. While our
internal exploration team is coming together, Geoexperts is providing staff on a
contractual basis. Geoexperts consultants include individuals that have the
experience of developing hundreds of successful offshore drilling targets in
over 40 major basins around the world.  Going forward, our
geo-scientists will fulfill our work programs and develop scientifically sound
drilling targets.
 
 While on
an ongoing basis we intend to maintain an open invitation to oil companies as
possible partners for joint exploration and development, we are not relying on
such partnerships to move our exploration efforts forward.  As
indicated by our multi-channel business plan strategy, we recognize that certain
Guinea industries (such as the aluminum industry) are dependent on natural gas
and we are evaluating special programs to help accelerate natural gas discovery
within our concession.
  Political Climate, US Interests, and
Social Responsibility in Guinea
 
 We have
made substantial investments in our Guinea operations through our wholly-owned
subsidiary SCSG, which was established in 2005. In addition, our Chief
Executive, Kent Watts, and our Vice President of Guinea Affairs, Famourou
Kourouma have made substantial social investments to establish goodwill among
the Guinea people and its government.  Our board of directors has
recognized a serious need for making investments in socially responsible
programs benefiting the people of Guinea.  We have implemented a
public relations program to educate the Guinea people and its government about
the importance of their petroleum resources and our role in helping Guinea
realize the benefits from exploiting these resources. Guinea is an emerging
democracy and it has unique social, political and economic
challenges.  Public opinion strongly influences the political
decision-making process.    Therefore, our public relations
and social programs will remain a strong strategy to maintain a positive public
opinion about us in Guinea.
 
 6
 Table of
Contents
  While we
see a need for strong public relations and socially responsible programs we have
also worked very hard to develop a close working relationship with our
government and the US embassy in Guinea.   We have worked with
the outgoing Ambassador Jackson McDonald and now we are beginning to work with
the newly appointed Ambassador Phillip Carter.  We communicate with
the State Department of the US government so that they are fully informed as to
our legal position, contractual rights, and any potential problems that arise.
Additionally, in the last several months, we have begun the process of raising
awareness among government officials in the US congress about our efforts and
our potential to discover world class oil resources offshore Guinea. To achieve
that end, we engaged the firm of Patton Boggs as our lobbyist firm in Washington
DC. The lobbying firm has assisted us in coordinating our efforts to interface
with the government of Guinea with those of the United States.
  Current and Future Exploration
Programs Off the Coast of Guinea
 
 On August
22, 2007, we announced our 2007 work program, which includes the new acquisition
and study of: aeromagnetic and gravity survey data; additional 2-D seismic
survey data; and the acquisition and analysis of onshore oil
seeps.  We have acquired approximately 5,000 kilometers of proprietary
2-D seismic data from previous exploration programs that occurred in 2002 and
2003.  Our key technical contractor, GeoExperts, studied this data and
many other proprietary studies during 2006 and 2007. Most importantly, and of
great value, is that these studies comprise the largest knowledge base in
existence concerning the Guinean Offshore.  The 2007 program is
expected to build substantially on this technical foundation.  The
2007 forward exploration program is an important step toward fulfillment of the
first period work requirements under the 2006 PSC. This work period requires us
to acquire, process, and interpret new seismic in a scientific process to result
in exploration well targets we are ready to drill.  We have been
studying the available data with members of the international petroleum
community and will continue to work to better identify and confirm the numerous
hydrocarbon plays and leads, with the ultimate goal of defining drillable
prospects. At the beginning of the 2007 exploration program the possible plays
and leads identified included the Guinea-Bissau salt province, shelf carbonate
build-ups, Paleozoic tilted fault blocks, Mesozoic half grabens, deltas and
turbidites along with tertiary channel sands.
 
 Our
geoscientists believe that the path to identifying actual drilling targets will
include the acquisition of both new 2-D and 3-D seismic data and subsequent
processing and interpretation of this data. In the next month, the 2007
exploration program will culminate with a design for this seismic acquisition
program that is based on all of the foundation of technical knowledge we have
obtained thus far. From this data acquisition program design, we can move
aggressively forward towards our goal of an exploratory drilling
program.
  New Producing Properties Purchased in
Louisiana
  On
July 1, 2007, pursuant to the Working Interest Purchase Agreement between Rabb
Resources Limited, Rabb Contracting Company, LLC, Claude L. Rabb (collectively,
“RABB”), and our subsidiaries HYDR and TPC, we acquired an 85% working interest
in approximately 20 producing wells and 1,150 acres of oil and gas leases in
Louisiana.  The purchase was effective June 12, 2007.  The
properties purchased under this agreement are subject to overriding royalty
interests of up to 27.46%. In addition, the seller, who will remain the operator
of the properties, retained a 15% working interest. Accordingly, Hyperdynamics
owns approximately 57.54% net revenue interest in the new
properties.  Hyperdynamics will pay 100% of the working interest
expenses, including work-over and new development costs, up to
$4,000,000.  Subsequent working interest expenses, except drilling
costs, for which Hyperdynamics will pay 100%, are shared pro rata according to
the working interest.
 
 When
we purchased the RABB leases the daily production was approximately 40 to 50
barrels, or net production of 23 – 28 barrels per day. By the end of October we
project that daily gross production will reach approximately 130 to as high as
200 barrels per day solely from the RABB leases, and without drilling new wells
on those leases. This would result in net production of 74 – 115 barrels per
day.  We are continuing to work to increase this production and
working to reach these goals and then maximize our lease production from
there.
  While the
company continues to explore its major asset offshore West Africa, we continue
our strategy to increase the company’s production revenues to provide positive
cash flow from operations, cover corporate overhead, and allow the company to
make a profit on an operating basis.
 History of the Company's Concession
Offshore the Republic of Guinea, West Africa
 
 In early
2002, SCS management began to evaluate the viability of an oil and gas
concession off the coast of The Republic of Guinea, West Africa (“Guinea”).
After SCS's review of older seismic data collected from that concession, we
decided that the concession provided a good business opportunity. We negotiated
various agreements to revitalize the exploration work in the region. We are
currently operating under the 2006 PSC.   From the inception of
our involvement in Guinea beginning in 2002, we, in conjunction with certain key
vendors, have accomplished critical exploration work including:
 7
 Table of
Contents
 (1)
              a
      1,000 kilometer 2-D seismic data shoot, the processing of the seismic data
      acquired, and the evaluation of that data and data that had been acquired
      in the past.
 (2)
              a
      4,000 kilometer 2D seismic data shoot, the processing of the seismic data
      acquired, and the evaluation of that data and data that had been acquired
      in the past.
 (3)
              Acquisition
      and geochemical analysis of core samples from the concession area,
      performed by TDI – Brooks and a satellite seeps study performed by
      Infoterra
 (4)
              Third
      party interpretation and analysis of our seismic data, performed by
      PGS
 (5)
              Reconnaissance
      within Guinea to evaluate drilling infrastructure, support services, and
      the operating environment, performed by Applied Drilling Technologies
      (Global Santa Fe)
  History of HYDR's Domestic Oil Field
Service and Production
  In April
2004, we acquired HYD Resources Corporation. At the time of the acquisition, HYD
Resources Corporation had approximately $375,000 worth of oil field equipment
and other assets. HYD Resources Corporation also had no prior history of
operations. HYD Resources Corporation currently engages in oil and gas
exploration and production, and services within the United States. Thus far, all
of our activity is in Louisiana.
  In
January 2005, Hyperdynamics acquired an inactive company from the
former owners of HYD Resources Corporation named Trendsetter Production
Company (“TPC”). TPC is an authorized operator in the state of Louisiana. This
immediately made us an oil and gas operator.
 
 We
evaluate the performance of these two companies (HYD Resources Corporation and
Trendsetter Production Company) as a single business unit through our business
segment named HYD Resources (“HYDR”).
 
 In the
last fiscal year, we have endeavored to improve our operating efficiency through
improvements to production infrastructure and service capability. During this
same time, we sold approximately 21,142 barrels of oil as compared to 14,091
barrels in the previous fiscal year.  The increased volume is
attributable to workover of existing wells and improvements to the lease
infrastructure.
  Going
forward HYDR plans to continue performing work to improve its production on its
existing leaseholds and drill new development wells on these leases to most
fully exploit the production potential. We are also evaluating new opportunities
such as acquiring additional shallow production acreage in areas that have
previously or are currently producing oil, drilling new wells on acquired
properties, re-completing wells that have produced in the past, and updating the
related production facilities associated with those wells.
  Employees and Independent
Contractors
 
 We
currently have 23 full time employees and two part time employees. Additionally,
we use independent contractors to minimize fixed overhead. No employees are
represented by a union. We believe that our labor relations are
good.
 
 Alliance Partnerships, Key Vendors
and Technical Certifications
 
 Our oil
industry vendors include the following:
  Spectrum
Geophysical Processing Company (“Spectrum”) provides professional data
processing services. Spectrum is a member of a UK registered group of companies
providing seismic data processing, nonexclusive surveys and electronic data
management services to a wide range of international clients. Spectrum has its
headquarters in Woking, England, with operational centers in Houston and
Cairo.
 
 Petroleum
Geophysical Services (“PGS”) provides seismic acquisition and independent data
interpretation services. PGS provides a broad range of seismic and reservoir
services, including data acquisition, processing andinterpretation. PGS operates
on a worldwide basis with headquarters in Oslo, Norway..
  TDI-Brooks
International (“TDI”) provides geochemical core analysis of our concession.
 TDI is the recognized leader in offshore surface geochemical exploration
and heat flow measurement.
  8
 Table of
Contents
  GlobalSantaFe
Corporation is a leading provider of offshore oil and gas drilling and drilling
management services. The company owns or operates a mobile fleet of marine
drilling rigs that operates in major drilling regions around the world,
including premium and heavy-duty, harsh-environment jackups, semisubmersibles,
and dynamically positioned ultra-deepwater drillships. More information can be
found at www.globalsantafe.com .
 
 GeoExperts
has access to expert geoscientists and engineers who can assist clients in the
interpretation and evaluation of any hydrocarbon play in any part of the world.
Through their expertise and years of experience gained through working with
major oil and gas fields on every international and domestic province, the
GeoExperts' experts have the knowledge and skills to interpret seismic, well and
engineering data. They can quickly evaluate all the key factors controlling all
hydrocarbon plays and field developments.
  IHS
Energy provides a comprehensive suite of information services to the oil and gas
industry – from well and production data to economic and consulting products and
services. Energy segment services and solutions support oil and gas
professionals as they evaluate subsurface issues related to geology, technology,
and reserves potential, and as they assess the economic impact of political,
fiscal and environmental risks. IHS helps its customers make informed decisions
quickly, while managing and understanding the risks associated with finding and
producing oil and gas. With 17 technical teams positioned worldwide and
proficiencies in 42 languages, IHS covers the petroleum industry in over 90
countries.
  Competition.
 
 Many
companies and individuals engage in drilling for gas and oil and there is
competition for the most desirable prospects. We will encounter intense
competition from other companies and other entities in the sale of our oil and
gas. We could be competing with numerous gas and oil companies which may have
financial resources significantly greater than ours. The quantities of oil and
gas that we may produce and deliver may be affected by factors beyond our
control, such as the inability of the wells to deliver at the necessary
quality and pressure, premature exhaustion of reserves, changes in governmental
regulations affecting allowable production and priority allocations, and price
limitations imposed by federal and state regulatory agencies.
  Key Customers.
 
 During
the fiscal year, oil production from our Louisiana properties was purchased
by two customers, Plains Marketing LLC and Shell Trading. In September
2006, we entered a contract with Shell Trading to be the sole purchaser of our
oil production in Louisiana.  Louisiana Office of Conservation rules
prohibit us from maintaining more than one purchaser at any given
time.
  Research and
Development.
 
 We do not
expend a material amount on research and development.
  Cost of Compliance with Environmental
Laws.
 
 Because
we are engaged in extracting natural resources, our business is subject to
various Federal, state and local provisions regarding the environment.
Compliance with environmental laws may, in certain circumstances, necessitate
significant capital outlays, affect our earnings potential, and cause material
changes in our current and proposed business activities. At the present time,
however, the environmental laws do not materially hinder nor adversely affect
our business. Capital expenditures relating to environmental control facilities
have not been prohibitive to our operations since our inception. There was a
cleanup that occurred in January of 2007 as a result of an oil transfer line
rupture on one of our leases in Concordia Parish Louisiana. The cost of the
cleanup and remediation was covered by insurance. We have abided by and are in
compliance with all applicable environmental laws.
  Item 1A.  Risk Factors
  You
should carefully consider the following risk factors before purchasing our
common stock. The risks and uncertainties described below are not the only ones
we face. There may be additional risks and uncertainties that are not known to
us or that we do not consider to be material at this time. If the events
described in these risks occur, our business, financial condition and results of
operations would likely suffer. This prospectus contains forward-looking
statements that involve risks and uncertainties. Our actual results may differ
significantly from the results discussed in the forward-looking statements. This
section discusses the risk factors that might cause those
differences.
  9
 Table of
Contents
  Risks about the Oil and Gas
Industry
  OIL AND GAS PRICES ARE
VOLATILE.
 
 Our
revenues, cash flow, operating results, financial condition and ability to
borrow funds or obtain additional capital depend substantially on the prices
that we receive for oil and gas production. Declines in oil and gas prices may
adversely affect our financial condition, liquidity, ability to obtain financing
and operating results. Lower oil and gas prices also may reduce the amount of
oil and gas that we can produce economically. High oil and gas prices could
preclude acceptance of our business model. Depressed prices in the future could
have a negative effect on our future financial results. Historically, oil and
gas prices and markets have been volatile, with prices fluctuating widely, and
they are likely to continue to be volatile. Prices for oil and gas are subject
to wide fluctuations in response to relatively minor changes in supply and
demand, market uncertainty and a variety of additional factors that are beyond
our control. These factors include:
  -
              the
      domestic and foreign supplies of
oil;
  -
              the
      level of consumer product demand;
  -
              weather
      conditions;
  -
              political
      conditions in oil producing regions, including the Middle
      East;
  -
              the
      ability of the members of the Organization of Petroleum Exporting
      Countries to agree to and maintain oil price and production
      controls;
 
 -
              the
      price of foreign imports;
  -
              actions
      of governmental authorities;
  -
              domestic
      and foreign governmental
regulations;
  -
              the
      price, availability and acceptance of alternative
  fuels;
  -
              overall
      economic conditions.
  These factors and the volatile
nature of the energy markets make it impossible to predict with any certainty
future oil and gas prices. Our inability to respond appropriately to changes in
these factors could negatively affect our profitability.
  INVESTMENT IN THE OIL AND GAS
BUSINESS IS RISKY.
 
 Oil and
gas exploration and development are inherently speculative activities. There is
no certain method to determine whether or not a given lease will produce oil or
gas or yield oil or gas in sufficient quantities and quality to result in
commercial production. There is always the risk that development of a lease may
result in dry holes or in the discovery of oil or gas that is not commercially
feasible to produce. There is no guarantee that a producing asset will continue
to produce. Because of the high degree of risk involved, there can be no
assurance that we will recover any portion of our investment or that our
investment in leases will be profitable.
  10
 Table of
Contents
  THERE ARE DRILLING AND OPERATIONAL
HAZARDS.
 
 The oil
and gas business involves a variety of operating risks, including:
 
 -
              blowouts,
      cratering and explosions;
 
 -
              mechanical
      and equipment problems;
 
 -
              uncontrolled
      flows of oil and gas or well
fluids;
 
 -
              fires;
 
 -
              marine
      hazards with respect to offshore
operations;
 
 -
              formations
      with abnormal pressures;
 
 -
              pollution
      and other environmental risks;
 
 -
              natural
      disasters.
  Any of
these events could result in loss of human life, significant damage to property,
environmental pollution, impairment of our operations and substantial losses.
Locating pipelines near populated areas, including residential areas, commercial
business centers and industrial sites, could increase these risks. In accordance
with customary industry practice, we will maintain insurance against some, but
not all, of these risks and losses. The occurrence of any of these events not
fully covered by insurance could have an adverse effect on our financial
position and results of operations.
 
 WE ARE SUBJECT TO GOVERNMENTAL
REGULATIONS.
 
 Oil and
gas operations in the United States are subject to extensive government
regulation and to interruption or termination by governmental authorities on
account of ecological and other considerations. The Environmental Protection
Agency of the United States and the various state departments of environmental
affairs closely regulate gas and oil production effects on air, water and
surface resources. Furthermore, proposals concerning regulation and taxation of
the gas and oil industry are constantly before Congress. It is impossible to
predict future proposals that might be enacted into law and the effect they
might have on us. Thus, restrictions on gas and oil activities, such as
production restrictions, price controls, tax increases and pollution and
environmental controls may have an adverse effect on us.
  THE OIL AND GAS INDUSTRY IS SUBJECT
TO HAZARDS RELATED TO POLLUTION AND ENVIRONMENTAL ISSUES.
 
 Hazards
in the drilling and/or the operation of gas and oil properties, such as
accidental leakage or spillage, are sometimes encountered. Such hazards may
cause substantial liabilities to third parties or governmental entities, the
payment of which could reduce distributions or result in the loss of our leases.
Although it is anticipated that insurance will be obtained by third party
operators for our benefit, we may be subject to liability for pollution and
other damages due to environmental events which cannot be insured against due to
prohibitive premium costs, or for other reasons. Environmental regulatory
matters also could increase substantially the cost of doing business, may cause
delays in producing oil and gas or require the modification of operations in
certain areas.
 
 Our
operations are subject to numerous stringent and complex laws and regulations at
the Federal, state and local levels governing the discharge of materials into
the environment or otherwise relating to environmental protection. Failure to
comply with these laws and regulations may result in the assessment of
administrative, civil and criminal penalties, the imposition of remedial
requirements, and the imposition of injunctions to force future
compliance.
 
 The Oil
Pollution Act of 1990 and its implementing regulations impose a variety of
requirements related to the prevention of oil spills, and liability for damages
resulting from such spills in United States waters. OPA 90 imposes strict joint
and several liability on responsible parties for oil removal costs and a variety
of public and private damages, including natural resource damages. While
liability limits apply in some circumstances, a party cannot take advantage of
liability limits if the spill was caused by gross negligence or willful
misconduct or resulted from violation of a Federal safety, construction or
operation regulation. If a party fails to report a spill or to cooperate fully
in a cleanup, liability limits likewise do not apply. Even if applicable, the
liability limits for offshore facilities require the responsible party to pay
all removal costs, plus up to $75 million in other damages. For onshore
facilities, the total liability limit is $350 million. OPA 90 also requires a
responsible party at an offshore facility to submit proof of its financial
ability to cover environmental cleanup and restoration costs that could be
incurred in connection with an oil spill.
  11
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Contents
  The
Comprehensive Environmental Response, Compensation, and Liability Act, also
known as the “Superfund” law, and analogous state laws impose joint and several
liability on certain classes of persons that are considered to have contributed
to the release of a “hazardous substance” into the environment. These parties
include the owner or operator of the site where the release occurred, and those
that disposed or arranged for the disposal of hazardous substances found at the
site. Responsible parties under CERCLA may be subject to joint and several
liability for remediation costs at the site, and may also be liable for natural
resource damages. Additionally, it is not uncommon for neighboring landowners
and other third parties to file tort claims for personal injury and property
damage allegedly caused by hazardous substances released into the
environment.
  State and
local statutes and regulations require permits for drilling operations, drilling
bonds and reports concerning operations. In addition, there are state statutes,
rules and regulations governing conservation matters, including the unitization
or pooling of oil and gas properties, establishment of maximum rates of
production from oil and gas wells and the spacing, plugging and abandonment of
such wells. Such statutes and regulations may limit the rate at which oil and
gas could otherwise be produced from our properties and may restrict the number
of wells that may be drilled on a particular lease or in a particular
field.
 
 Risks About Our
Business
  GEOPOLITICAL
INSTABILITY.
 
 We
conduct business in Guinea, which is in a region of the world where there have
been recent civil wars, revolutionary wars, and internecine conflicts. Although
Guinea is a peaceful nation, external or internal political forces could
potentially create a political or military climate that might cause a change in
political leadership or the outbreak of hostilities. Such a change could result
in our having to cease our Guinea operations and result in the loss or delay of
our rights under the PSC.
  GEOPOLITICAL
POLITICS.
 
 We
entered into a 2006 Production Sharing Contract with the Republic of Guinea. The
government of the Republic of Guinea could unlawfully terminate this
contract.
  WE MAY HAVE WRITE DOWNS OF OUR ASSETS
DUE TO PRICE VOLATILITY.
 
 SEC
accounting rules require us to review the carrying value of our oil and gas
properties on a quarterly basis for possible write down or impairment. Under
these rules, capitalized costs of proved reserves may not exceed a ceiling
calculated at the present value of estimated future net revenues from those
proved reserves. Capital costs in excess of the ceiling must be permanently
written down. A decline in oil and natural gas prices could cause a write down
which would negatively affect our net income.
  ESTIMATES OF OIL AND GAS RESERVES ARE
UNCERTAIN AND MAY VARY SUBSTANTIALLY FROM ACTUAL PRODUCTION.
 
 We do not
have any reserve reports or geology or petroleum engineering reports related to
our foreign property. We do have a third-party reserve report for our Louisiana
properties
prepared by Ryder Scott Company, LP. There are numerous
uncertainties inherent in estimating quantities of proved reserves and in
projecting future rates of production and timing of expenditures, including many
factors beyond our control. A reserve report is the estimated quantities of oil
and gas based on reports prepared by third party reserve engineers. Reserve
reporting is a subjective process of estimating underground accumulations of oil
and natural gas that cannot be measured in an exact manner. The accuracy of any
reserve estimate is a function of the quality of available geological,
geophysical, engineering and economic data and the precision of engineering and
judgment. As a result, estimates of different engineers often vary. The
estimates of reserves, future cash flows and present value are based on various
assumptions, including those prescribed by the SEC relating to oil and natural
gas prices, drilling and operating expenses, capital expenditures, taxes and
availability of funds, and are inherently imprecise.
  THE UNAVAILABILITY OR HIGH COST OF
DRILLING RIGS, EQUIPMENT, SUPPLIES, PERSONNEL AND OILFIELD SERVICES COULD
ADVERSELY IMPACT US.
 
 Drilling
activity offshore Guinea will require that we have access to an offshore
drilling rig. Either unavailability, shortages or increases in the cost of
drilling rigs, equipment, supplies or personnel could delay or adversely affect
our Guinea operations. There can be no assurance that we will be able to obtain
the necessary equipment or that services will be available at economical
prices.
 
 12
 Table of
Contents
 
 FAILURE TO FIND OIL AND
GAS.
 
 We may
not be able to find oil and gas in commercial quantities, and if not, our future
revenue potential would be substantially reduced.
  WE MAY BE UNABLE TO ACQUIRE OIL AND
GAS LEASES.
 
 To engage
in oil and gas exploration, we must first acquire rights to conduct exploration
and recovery activities on identified prospects. We may not be successful in
acquiring farmouts, permits, lease options, leases or other rights to explore
for or recover oil and gas. Other major and independent oil and gas companies
with financial resources significantly greater than ours may bid against us for
the purchase of oil and gas leases. If we or our subsidiaries are unsuccessful
in acquiring these leases, permits, options and other interests, our prospect
inventory for exploration and drilling could be significantly reduced, and our
business, results of operations and financial condition could be substantially
harmed.
  EXPANSION OF OUR EXPLORATION PROGRAM
WILL REQUIRE CAPITAL FROM OUTSIDE SOURCES.
 
 We do not
currently have the financial resources to explore and drill all of our currently
identified prospects. Absent raising additional capital or entering into joint
venture agreements, we will not be able to increase our exploration and drilling
operations at the projected rate. This could limit the size of our business.
There is no assurance that capital will be available in the future to us or that
capital will be available under terms acceptable to us. We will need to raise
additional money, either through the sale of equity securities (which could
dilute the existing stockholders' interest), through the entering of joint
venture agreements (which, while limiting our risk, could reduce our ownership
interest in particular assets), or from borrowings from third parties (which
could result in additional assets being pledged as collateral and which would
increase our debt service requirements).
  Additional
capital could be obtained from a combination of funding sources, many of which
could have an adverse effect on our business, results of operations and
financial condition. These potential funding sources, and the potential adverse
effects attributable thereto, include:
 
 -
              cash
      flow from operating activities, which is sensitive to prices we receive
      for oil and natural gas and the success of current and future
      operations;
  -
              borrowings
      from financial institutions, which may subject us to certain restrictive
      covenants, including covenants restricting our ability to raise additional
      capital or pay dividends;
 
 -
              debt
      offerings, which would increase our leverage and add to our need for cash
      to service such debt (which could result in additional assets being
      pledged as collateral and which could increase our debt service
      requirements);
  -
              additional
      offerings of equity securities, which would cause dilution of our common
      stock;
  -
              sales
      of prospects generated by the exploration program, which would reduce
      future revenues from that program;
  -
              additional
      sales of interests in our projects, which could reduce future
      revenues.
 
 Our
ability to raise additional capital will depend on the results of operations and
the status of various capital and industry markets at the time such additional
capital is sought. Capital may not become available to us from any particular
source or at all. Even if additional capital becomes available, it may not be on
terms acceptable to us. Failure to obtain additional financing on acceptable
terms may have an adverse effect on our business, results of operations and
financial condition.
 
 13
 Table of
Contents
 
 WE HAVE COMPETITION FROM OTHER
COMPANIES.
 
 A large
number of companies and individuals engage in drilling for gas and oil, and
there is competition for the most desirable prospects. We will encounter intense
competition from other companies and other entities in the sale of our gas and
oil production. We could be competing with numerous gas and oil companies which
may have financial resources significantly greater than ours. Further, the
quantities of gas and oil to be delivered by us may be affected by factors
beyond our control, such as the inability of the wells to deliver at the
necessary quality and pressure, premature exhaustion of reserves, changes in
governmental regulations affecting allowable production and priority
allocations, and price limitations imposed by Federal and state regulatory
agencies.
  WE DEPEND ON OIL AND GAS INDUSTRY
VENDORS AND MAY NOT BE ABLE TO OBTAIN ADEQUATE SERVICES.
 
 We are
and will continue to be dependent on industry vendors for the success of our oil
and gas exploration projects. These contracted services include, but are not
limited to, accounting, drilling, completion, workovers (remedial down hole work
on a well) and reentries (entering an existing well and changing the direction
and/or depth of a well), geological evaluations, engineering, leasehold
acquisition (landmen), operations, legal, investor relations/public relations,
and prospect generation. We could be harmed if we fail to attract quality
industry vendors to participate in the drilling of prospects which we identify
or if our industry vendors do not perform satisfactorily. We often have, and
will continue to have, little control over factors that would influence the
performance of our vendors.
  WE RELY ON THIRD PARTIES FOR
PRODUCTION SERVICES AND PROCESSING FACILITIES.
 
 The
marketability of our production depends upon the proximity of our reserves to,
and the capacity of, facilities and third party services, including oil and
natural gas gathering systems, pipelines, trucking or terminal facilities, and
processing facilities. The unavailability or lack of capacity of such services
and facilities could result in the shut-in of producing wells or the delay or
discontinuance of development plans for properties. A shut-in or delay or
discontinuance could adversely affect our financial condition. In addition,
Federal and state regulation of oil and natural gas production and
transportation affect our ability to produce and market oil and natural gas on a
profitable basis.
  OUR APPROACH TO TITLE ASSURANCE COULD
ADVERSELY AFFECT OUR BUSINESS AND OPERATIONS.
 
 We intend
to purchase oil and gas interests and leases from third parties or directly from
the mineral fee owners as the inventory upon which we will perform our
exploration activities. The existence of a title deficiency can render a lease
worthless and can result in a large expense to us. Title insurance covering the
mineral leaseholds is not generally available and in all instances, we forego
the expense of retaining lawyers to examine the title to the mineral interest to
be placed under lease or already placed under lease until the drilling block is
assembled and ready to be drilled. We rely upon the judgment of oil and gas
lease brokers or experienced landmen who perform the field work in examining
records in the appropriate governmental office before attempting to acquire or
place under lease a specific mineral interest. This is customary practice in the
oil and gas industry. However, if there is a defect in title, the amount that we
paid for such oil and gas leases or interests is generally lost. If the
defective lease covers acreage which is critical to the success of a particular
project, the loss could have an adverse effect by making the target area
potentially not drillable.
 
 PRICE OF OIL AND GAS MARKET
RISK
 
 Our
functional currency is the US dollar. Our revenue is directly related to the
price of oil and gas. Assuming that we sell one barrel of oil, then a one dollar
decrease in the price that we get for that barrel of oil will lower our revenue
by one dollar, and correspondingly so for a one dollar increase in price. The
same is true for changes in the price of natural gas. We intend to sell oil and
gas immediately upon lifting to the wellhead. We do not contemplate retaining
any oil and gas inventory. We do not hedge any market risk. Although the prices
of oil and gas have recently increased substantially, there is no assurance that
the price of oil and gas will not fall dramatically in the future.
 
 RISKS RELATED TO OUR
FINANCIAL OPERATIONS
  WE HAVE A HISTORY OF
LOSSES.
 
 We have
experienced substantial operating losses. We expect to incur significant
operating losses until sales increase. We will also need to raise sufficient
funds to finance our activities. We may be unable to achieve or sustain
profitability.
 
 14
 Table of
Contents
 
 WE HAVE AN ACCUMULATED DEFICIT AND
MAY INCUR ADDITIONAL LOSSES.
 
 We have a
substantial accumulated deficit. We may not be able to meet our debts as they
become due. If we are unable to generate sufficient cash flow or obtain funds to
pay debt, we will be in default.
  WE MAY EXPERIENCE POTENTIAL
FLUCTUATIONS IN RESULTS OF OPERATIONS.
 
 Our
future revenues may be affected by a variety of factors, many of which are
outside our control, including (a) the success of project results; (b) swings in
availability of drilling services needed to implement projects and the pricing
of such services; (c) a volatile oil and gas pricing market which may make
certain projects that we undertake uneconomic; (d) the ability to attract new
independent professionals with prospects in a timely and effective manner; and
(e) the amount and timing of operating costs and capital expenditures relating
to conducting our business operations and infrastructure. As a result of our
limited operating history and the emerging nature of our business plan, it is
difficult to forecast revenues or earnings accurately, which may fluctuate
significantly from quarter to quarter.
  IF WE CANNOT OBTAIN ADDITIONAL
FINANCING, WE MAY HAVE TO CURTAIL OPERATIONS AND MAY ULTIMATELY CEASE TO
EXIST.
 
 Our
financial statements reflect recurring, ongoing and substantial yearly net
losses, and negative cash flows from operations. These conditions require
sufficient additional funding or alternative sources of capital to meet our
working capital needs. We have raised capital by selling common stock, issuing
convertible debentures and our equity line of credit which will also requires us
to issue common stock. However, future financing may not be available in amounts
or on terms acceptable to us, if at all. If we cannot raise funds on acceptable
terms, or achieve positive cash flow, we may be forced to curtail operations or
may ultimately cease to exist.
  WE MAY NOT BE ABLE TO RAISE THE
REQUIRED CAPITAL TO CONDUCT OUR OPERATIONS; EQUITY LINE OF
CREDIT.
 
 We may
require additional capital resources in order to conduct our operations. If we
cannot obtain additional funding, we may make reductions in the scope and size
of our operations. In order to grow and expand our business, and to introduce
our services to the marketplace, we will need to raise additional funds. We have
an equity line of credit. We have made seven puts on the equity line of credit
since February 2006 in the aggregate amount of $1,370,075. At September 28,
2007, the remaining amount available for us to draw down on the equity line of
credit is $18,629,925. The equity line of credit expires in February 2009, after
which we will not be able to draw down on the equity line of credit even if has
not been fully utilized by us. The Cornell agreements limit our use of the
equity line of credit. Whether as a result of the Cornell Agreements or as a
result of our discretion, between now and February 2009, we may not have drawn
down the full $18,629,925 currently available in the equity line of
credit.
 
 RISKS ABOUT OUR
SECURITIES
  WE MAY ISSUE ADDITIONAL SHARES OF
COMMON STOCK IN THE FUTURE, WHICH COULD CAUSE DILUTION TO ALL
SHAREHOLDERS.
 
 We may
seek to raise additional equity capital in the future. Any issuance of
additional shares of our common stock will dilute the percentage ownership
interest of all shareholders and may dilute the book value per share of our
common stock.
  SHAREHOLDERS COULD INCUR NEGATIVE
IMPACT DUE TO THE REMOVAL OF THE LEGEND ON A SIGNIFICANT PERCENTAGE OF OUR
OUTSTANDING SHARES OF COMMON STOCK, OR THE EXERCISE OF OPTIONS AND
WARRANTS.
 
 As of
June 30, 2007, approximately 9,084,482 shares of our common stock were
restricted shares, and we have outstanding warrants and options to purchase
11,722,782 shares of our common stock. If these options and warrants are
exercised, the underlying shares will ultimately become subject to resale
pursuant to Rule 144. We do not know when or if these options will be exercised.
In the event that a substantial number of these shares are offered for sale in
the market by several holders, the market price of our common stock could be
adversely affected.
  OUR MANAGEMENT CONTROLS A SIGNIFICANT
PERCENTAGE OF OUR CURRENT OUTSTANDING COMMON STOCK; THEIR INTERESTS MAY CONFLICT
WITH THOSE OF OUR SHAREHOLDERS.
 
 Our
Directors and Executive Officers and their affiliates collectively and
beneficially own or control approximately 19% of our voting power (including
stock, warrants, options and Series B Preferred Stock). This concentration of
voting control gives our Directors and Executive Officers and their respective
affiliates substantial influence over any matters which require a shareholder
vote, including, without limitation, the election of Directors, even if their
interests may conflict with those of other shareholders. It could also have the
effect of delaying or preventing a change in control of or otherwise
discouraging a potential acquirer from attempting to obtain control of us. This
could have an adverse effect on the market price of our common stock or prevent
our shareholders from realizing a premium over the then prevailing market prices
for their shares of common stock.
 
 15
 Table of
Contents
 
 IF WE ISSUE COMMON STOCK PURSUANT TO
THE EQUITY LINE OF CREDIT, THEN EXISTING STOCKHOLDERS MAY EXPERIENCE SIGNIFICANT
DILUTION.
 
 We
utilize an equity line of credit. The sale of shares pursuant to equity line of
credit will have a dilutive impact on our stockholders. As a result, our net
income per share could decrease in future periods, and the market price of our
common stock could decline. In addition, the lower our stock price at the time
we exercise draw down on the equity line of credit, the more shares we will have
to issue. If our stock price decreases, then our existing stockholders would
experience greater dilution.
  IMPACT OF THE EQUITY LINE OF
CREDIT
 
 As we
draw down on the equity line of credit, our common stock will be purchased at a
discount to the then market price. Sales of such common stock could cause the
market price of our common stock to decline. The lower our stock price at the
time we exercise draw down on the equity line of credit, the more shares we will
have to issue. If our stock price decreases, then our existing stockholders
would experience greater dilution.
  OUR STOCK PRICE IS HIGHLY VOLATILE
AND YOU MAY LOSE SOME OR ALL OF YOUR INVESTMENT.
 
 Trading
prices of our common stock may fluctuate in response to a number of events and
factors, such as:
 
 -
              general
      economic conditions changes in interest
rates;
  -
              conditions
      or trends in the oil and gas
business;
  -
              fluctuations
      in the stock market in general and market prices for oil and gas companies
      in particular;
  -
              quarterly
      variations in our operating
results;
  -
              new
      products, services, innovations, and strategic developments by our
      competitors or us, or business combinations and investments by our
      competitors or us;
  -
              changes
      in environmental regulation;
 
 -
              changes
      in our capital structure, including issuance of additional debt or equity
      to the public;
  -
              additions
      or departures of our key personnel;
  -
              corporate
      restructurings, including layoffs or closures of
    facilities;
  -
              stock
      market analyst reports, news and
speculation.
 
 16
 Table of
Contents
 
 WE DO NOT INTEND TO PAY DIVIDENDS IN
THE FORESEEABLE FUTURE; THEREFORE, YOU MAY NEVER SEE A RETURN ON YOUR
INVESTMENT.
 
 We do not
anticipate the payment of cash dividends on our common stock in the foreseeable
future. We anticipate that any profits from our operations will be devoted to
our future operations. Any decision to pay dividends will depend upon our
profitability at the time, cash available and other factors.
  SINCE WE HAVE NOT PAID ANY DIVIDENDS
ON OUR COMMON STOCK AND DO NOT INTEND TO DO SO IN THE FUTURE, A PURCHASER OF OUR
COMMON STOCK WILL ONLY REALIZE A GAIN ON THEIR INVESTMENT IF THE MARKET PRICE OF
OUR COMMON STOCK INCREASES.
 
 We have
never paid, and do not intend to pay, any cash dividends on our common Stock for
the foreseeable future. An investor in this offering, in all likelihood, will
only realize a profit on their investment if the market price of our common
stock increases in value.
 
 MATERIAL RISKS RELATED TO
OUR CORPORATE GOVERNANCE
  OUR DIRECTORS AND OFFICERS HAVE
RIGHTS TO INDEMNIFICATION.
 
 The
Delaware General Corporation Law provides that we will indemnify our directors
and officers if they are a party to any civil or criminal action. This may
discourage claimants from making claims against the directors and officers
even if the claims have merit. The cost of indemnification could be
high.
 
 Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, we have been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
 
 Item 1B  Unresolved Staff Comments
 
 None.
 
 Item 2 Properties
 
 Description of Oil and Gas
Properties--Foreign.
 
 We are
engaged in oil and gas operations. In West Africa, offshore Guinea, we
are engaged in oil and gas geophysical exploration. We have not yet performed
any drilling off the coast of Guinea.
 
 In 2002
we obtained a 100% interest in a Production and Sharing Agreement (“2002 PSA”)
with the Republic of Guinea.  The 2002 PSA was framed out to SCS on
December 10, 2002. The 2002 PSA gave exclusive rights for exploration and
production across the concession of 16 million acres. We conducted all of our
work from 2002 until June 27, 2005 under the 2002 PSA and our work led up to our
request for a drilling permit. The permit was not immediately issued as expected
in July of 2005, as claims were made by USOil, the former farmout
partner,  stating the 2002 PSA was terminated. This resulted in us
filing a lawsuit against USOil (See the Legal Disclosure for USOil Corporation).
At the request of the Government of Guinea, we negotiated a production sharing
contract directly between SCS Corporation and the Republic of Guinea. After over
14 months of work directly with the Government of Guinea, SCS and Guinea entered
into a new 2006 Production Sharing Contract (2006 PSC) directly with Guinea. As
of the filing of this report, we have exclusive rights to explore, develop, and
produce approximately 31,000 square miles (approx. 20,000,000 acres) of Guinea's
offshore territory. This concession contains shallow, medium depth and deep
water potential. All time frames to achieve our exploration work according to
the 2006 PSC begin with the effective date of September 22, 2006.
 
 The
minimum remaining term of our new 2006 PSC with Guinea is described as
follows: The first exploration period is for two years with two automatic
one year extensions available for a total of four years for the first
exploration period.  In the first exploration period we are required to
acquire, evaluate, and analyze 2D or 3D seismic with an estimated minimum
expenditure of $10 million.  The second exploration period starts after the
end of the first and is four years long with an automatic extension of four
years for a total of eight years. In the second exploration period we are
required to acquire additional 2D or 3D seismic, evaluate it and analyze it with
an estimated minimum cost of $6 million and drill two exploration wells for an
estimated minimum cost of $15 million to $20million each and minimum
well depth of 2,500 meters from the surface of the water.  Fulfilling the
work obligation in all cases exempts us from fulfilling any minimum expenditure
obligation. We have the right to perform the second exploration period work such
as drilling in the first exploration period and such work will accrue to the
requirements in the second exploration period.  Once we determine an area
to be capable of commercial production, SCS can secure as many “Exploitation
Areas” it can find in a shape defined by us.  Each Exploitation Area,
defined as a contiguous block surrounding a discovery, shall be 500 square
kilometers in size. Each Exploitation Area is held for 25 years but if we show
the area can still produce we will get two additional extensions for 10 years
each so the total exploitation period becomes effectively 45 years.  Each
well has its own exploitation period that starts when it begins producing.
 
 17
 Table of
Contents
  Upon the
government entering our new contract into government law, as described under
article 5.1 and 5.2 of the new 2006 PSC, we will surrender our exclusive rights
under this contract area to approximately 20,000 square miles of the 31,000
square miles.  Our revised contract area with respect to this new
contract will govern an area of our choosing totaling approximately 11,000
square miles of the original 31,000 square mile concession.  At that time,
should this occur we will have another category of asset whereby we retain
priority rights of participation to this 20,000 square mile area and all the
work requirements above will pertain specifically to the exclusive rights area
we choose of approximately 11,000 square miles. The priority rights of
participation are expected to be defined during any surrender process should it
actually occur.
  Contract Area
 
 The
Contract Area represented on the attached map consists of an area deemed equal
to approximately 80,000 sq. km.
 
 The
points indicated on this map are defined hereinafter with WGS 84 (World Geodetic
System 1984) datum.
 
 Point
              Latitude
      LongitudeA
              10:49:55:N
              15:10:33:WB
              10:39:49:N
              15:20:32:WC
              10.39:49:N
              15.34:16:WD
              09.23:27:N
              17:35:00:WE
              08.30:00:N
              17.30:00:WF
              08.10:00:N
              16:30:00:WG
              08.35:00:N
              15:30:00:WH
              08.10:30:N
              14:21:12:WI
              09:00:50:N
              13:23:54:W
 
 The
coastal boundary is the line between Point A and Point I wherever the water
depth is greater than 25 meters.
  
 An
alternative map is below:
  18
 Table of
Contents
  Description of Oil and Gas
Properties--Domestic.
 
 Beginning
in 2004, in Louisiana (onshore), we started drilling for and produced oil.
During that time we also started drilling for gas, sometimes in the same
borehole as was drilled for oil. As of June 30, 2007, we drilled in Louisiana an
aggregate of eight wells, and reworked eight shut in wells that predate our
acquisition of the leases.
 
 Our
domestic energy operations are conducted by our business segment HYD Resources
(“HYDR”). HYDR.  operates and develops oil properties and provides
incidental drilling and workover internally. HYDR has approximately 314 acres of
land under lease for oil and gas development. Of this total, leases held by
production total approximately 234 acres. The leases held by production include
the Kelly lease in La Salle Parish, in which we own 100% working interest, and
two Magee Smith leases in Concordia Parish, in which we own 100% working
interest.
 
 Effective
July 1, 2007, we acquired working interest of more than 1,100 acres of leasehold
property. These properties are operated by a third party and are described in
the business section.
 
 Reserves Reported To Other
Agencies.
 
 We did
not report any estimates of total, proved net oil or gas reserves to any other
federal authority or agency.
  Production.
 
 The
following table shows our annual average sales prices 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.
  2007
                
                
                2006
                
                
                2005United
      StatesSales
      Price
                
                $
                61.66
                
                
                $
                65.16
                
                
                $
                47.59Production
      cost
                
                
                33.34
                
                
                
                76.49
                
                
                
                234.43Republic
      of GuineaSales
      Price
                
                
                N/A
                
                
                
                N/A
                
                
                
                N/AProduction
      cost
                
                
                N/A
                
                
                
                N/A
                
                
                
                N/A
  Productive
Crude Oil Wells and Natural Gas Wells.
 
 The
number of productive crude oil and natural gas wells in which we held an
interest as of June 30, 2007 was as follows:
  June
      30, 2007
                  
                  (1)
      Gross
                  
                  
                  (2)
      NetCrude
      Oil Wells:United
      StatesOnshore
                  
                  
                  5
                  
                  
                  
                  5International:GuineaOffshore
                  
                  
                  0
                  
                  
                  
                  0Total
                  
                  
                  5
                  
                  
                  
                  5
  (1) 
Productive wells are producing wells and wells capable of production. A
gross well is a well in which a working interest is owned. The number of
gross wells is the total number of wells in which a working interest is
owned.
 (2) 
A net well is deemed to exist when the sum of fractional ownership
working interests in gross wells equals one. The number of net wells is the
sum of the fractional working interests owned in gross wells expressed as
whole numbers and fractions thereof. One or more completions in the same
borehole are counted as one well in this table.
 19
 Table of
Contents
  Acreage.
 
 The
developed and undeveloped acreage (including both leases and concessions) that
we held as of June 30, 2007 are as follows:
  Developed
      Acreage (1) (2)
                
                
                Undeveloped
      Acreage (2) (3)Location
                
                Gross
      Acres
                
                
                Net
      Acres
                
                
                Gross
      Acres
                
                
                Net
      AcresUnited
      StatesOnshoreLouisiana
                
                
                234
                
                
                
                234
                
                
                
                80
                
                
                
                80ForeignOffshoreGuinea
                
                
                0
                
                
                
                0
                
                
                
                20,251,000
                
                
                
                20,251,000Total
                
                
                234
                
                
                
                234
                
                
                
                20,251,080
                
                
                
                20,251,080
  (1)  Developed acreage is acreage spaced or
assignable to productive wells.
 (2) A
gross acre is an acre in which a working interest is owned. A net acre
is deemed to exist when the sum of fractional ownership working interests
in gross acres equals one. The number of net acres is the sum of the fractional
working interests owned in gross acres expressed as whole numbers and fractions
thereof. Undeveloped acreage is considered to be those leased acres on which
wells have not been drilled or completed to a point that would permit the
production of commercial quantities of crude oil and natural gas regardless of
whether or not such acreage contains proved reserves.
 (3) Included
within undeveloped acreage are those leased acres (held by production under
the terms of a lease) that are not within the spacing unit containing, or
acreage assigned to, the productive well so holding such
lease.
  Net
Exploratory and Development Wells.
 
 The
following table sets forth, for each of the years ending June 30, 2007, 2006,
and 2005, 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)Year
      Ended
                
                US
                
                
                Int'l
                
                
                US
                
                
                Int'l
                
                
                US
                
                
                Int'l
                
                
                US
                
                
                Int'lJune
      30, 2007
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0June
      30, 2006
                
                
                0
                
                
                
                0
                
                
                
                1
                
                
                
                0
                
                
                
                1
                
                
                
                0
                
                
                
                0
                
                
                
                0June
      30, 2005
                
                
                8
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
 ___________________________
  (1)
                A
      productive well is an exploratory or development well that is not a dry
      hole.
 
 (2)
                A
      dry hole is an exploratory or development well determined to be incapable
      of producing either crude oil or natural gas in sufficient quantities to
      justify completion as an oil or gas
well.
  20
 Table of
Contents
 Drilling
In Progress
 
 At
June 30, 2007, there was no drilling in progress.
  Delivery Commitments--Offshore
Guinea.
 
 When, if
and as there is production in Guinea that falls under the terms of the 2006 PSC,
a 10% royalty will be paid to the Republic of Guinea.  Of the remaining 90%
of the first production, 75% comes to us for cost recovery and 25% goes to
Guinea, then up to the first 100,000 barrel per day of production we get 60% and
Guinea gets 40%. Over 100,000 barrels per day of production, Guinea gets 60% and
we get 40%.
  HDY
signed the 2006 PSC on September 22, 2006 with the government of Guinea, in
accordance with the country’s Petroleum Code. Terms are considered favorable to
HDY, as the government of Guinea seeks to attract foreign investment and
encourage a heightened pace of activity in its emerging oil & gas industry.
The 2006 PSC grants HDY exclusive rights for exploration, development, and
production of approximately 31,000 square miles offshore the Republic of Guinea.
The 2006 PSC contains a unique provision that, if the contract is registered as
a new Guinea law, then 64% of the contract area will convert from exclusive to
priority rights of participation that HDY will then maintain in perpetuity. The
areas to be converted would be determined solely by HDY. The process to convert
these rights will entail codification of the contract by the National Parliament
of Guinea, with affirmation by the country’s Supreme Court, and an issuance of a
Guinea Presidential decree. For any areas that may become non-exclusive, HDY can
acquire additional exclusive rights directly from Guinea on a priority basis
through additional contracts.
  Short
of entering into any additional exclusive contracts,  HDY will still
maintain priority rights to participate within the non-exclusive
area.
  Our
production sharing is 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
 Other
significant terms of the agreement include the imposition of a 10% royalty and a
sharing of profit oil. Profit oil is determined based on daily production (see
table above), net of royalties and after recovery of 75% of upfront costs. As
part of the Company’s work commitments, HDY is required to complete additional
seismic acquisition by September 2008 and drill a minimum of two exploration
wells by 2018. HDY plans to exceed these minimum requirements. The exploitation
periods for each area specified will be for 25 years with two 10-year automatic
extensions available. Each well in the exploitation area will have its own
exploitation period.
  21
 Delivery Commitments--Onshore
Louisiana.
 
 We have
no domestic delivery commitments.
 
 Description of Physical
Facilities--Description of Operations Center in
Louisiana.
 
 We own
7/10 acre of highway frontage land containing a metal building of approximately
7,000 square feet that we use for our oil and gas operations in Jena, Louisiana.
In December 2005, we paid $50,000 for this property. The property is well
located and well suited to facilitate the organization and mobilization of our
oil and gas drilling and production in Louisiana.
 
 Description of Physical
Facilities--Description of Admjinistrative Office Property.
 
 Our
executive and administrative offices are located at One Sugar Creek
Center Blvd., Suite 125, Sugar Land, Texas 77478 where we lease 6,752
square feet of space. The lease term was amended to 87 months commencing on
August 1, 2006. We had a 3 month free rent period.  We prepaid 3 months of
rent and gave the landlord a $75,000 letter of credit for 24 months to secure
the cost of the build-out. The letter of credit will be released on October 31,
2007. The monthly rent is $11,816 per month. The build-out was completed in
August 2006.
 
 Item 3 Legal
Proceedings
 
 Dixon Financial
Services.
 
 In 2001,
we were named as a defendant in a lawsuit styled Dixon Financial Services, Ltd. v.
Fidelity Transfer Company, Erin Oil Exploration, Inc., Bill Knollenberg, Ron
Bearden, R.F. Bearden Associates, Inc., James Chang, Nick H. Johnson, Riley L.
Burnett, Jr., Johnson, Burnett & Chang, L.L.P., Greenberg, Peden, Siegmyer
& Oshman, P.C., George Siegmyer and Hyperdynamics Corporation; Cause
No. 2001-06263; In the 215th Judicial District Court of Harris County,
Texas.
  This suit
alleged breach of contract, negligence and other causes of action for failure to
deliver 574,500 shares of our common stock to Dixon Financial Services upon the
expiration of certain trading restrictions.  Prior to the transfer,
although always owned in certificate form by Dixon, these shares were held in a
nominee name.  However, prior to being able to deliver common stock
certificates in Dixon’s name as free trading shares, the Erin Oil Exploration
parties, filed a lawsuit and obtained a temporary restraining order preventing
the transfer of the shares.  The restraining order was obtained on the
affidavit of the lawyers for the Erin Oil parties.  The Erin Oil
parties and their attorneys alleged that these shares were subject to certain
claims they had against other persons.  We demonstrated that these
shares were not subject to the Erin Oil parties’ claims and the temporary
injunction was removed as to us.  However, our stock transfer agent
continued to refuse to transfer the shares based on threats and other comments
made by the Erin Oil parties’ attorneys.  As a result, the transfer of
the shares into Dixon’s name was delayed more than three
months.  During this period, the share price declined from $7.00 per
share to slightly more than $1.00 per share.
 
 Both
Dixon Financial and the company brought claims against the Erin Oil parties and
their legal counsel for their wrongful conduct in preventing the transfer of the
shares.  As a defense the Erin Oil parties’ legal
counsel asserted a litigation privilege under Texas law.  Based
on this assertion, the Erin Oil parties and their legal counsel filed motions
for summary judgment.  The trial court granted all such motions for
summary judgment.
 
 Our
transfer agent, Fidelity Transfer, claimed that it was not subject to
jurisdiction in Texas on the Dixon claims.  In addition, we determined
that Fidelity Transfer was not solvent for purposes of any judgment against it
in this matter.  Fidelity Transfer is no longer a party to this
lawsuit at this time, but we have a formal agreement allowing us to pursue
recovery against Fidelity Transfer at a later time.
 
 At the
end of April 2005, we entered into an agreement with Dixon Financial to settle
and resolve this litigation.  The agreement provided, among other
things, that we would work together with Dixon to appeal the summary
judgments.  We agreed to bear the costs of the appeal of those summary
judgments.  The agreement further provided that we agree to a judgment
in the amount of $2,015,264 for the failure to deliver the shares into the name
of Dixon Financial.  Dixon Financial agreed postpone enforcement of
the judgment until the appeal process is concluded or the Erin Oil parties are
determined not to be liable for any other reason.  Furthermore, by our
agreement with Dixon Financial we will pay only $240,000, payable at $10,000 per
month for 24 months, if the appeal of the summary judgments is
unsuccessful.  If the appeal is successful, we will seek to recover
our damages and costs from the Erin Oil parties and their legal
counsel.  Any recoveries from the Erin Oil parties or their legal
counsel is expected to be from insurance coverage.
 
 22
 Table of
Contents
  The
proposed agreed judgment described above was submitted to the court on at least
five occasions beginning in May 2005.  In June 2006, the Court issued
an order severing some of the Erin Oil parties from the main case so that the
summary judgments entered in favor of those parties could be
appealed.  That appeal is proceeding.  The remainder of the
case against Knollenberg and Erin Oil, as the remaining Erin Oil parties, was
tried to a jury in January 2007.  The jury found in favor or
Hyperdynamics and Dixon and awarded damages against
Knollenberg.  However, at the request of the Erin Oil parties and
their counsel, the trial court set aside the jury award and entered a “take
nothing” judgment on all issues.  That judgment is now on appeal under
our agreement with Dixon.  We believe that our liability to Dixon will
not arise, if at all, prior to September 2008.   As of June 30,
2007, we have not recorded an accrual associated with legal fees from this
lawsuit because it is our policy to expense legal costs as they are
incurred.  Additionally, because we do not consider a loss from this
lawsuit to be probable, we have not accrued any losses associated with this
legal contingency as of June 30, 2007.
 
 Wellington, LLC.
 
 On April
9, 2001, we were named as a defendant in a lawsuit styled Wellington, LLC vs.
Hyperdynamics Corporation et al. Civil Action# 18811-NC, The Court of Chancery
of Delaware.
  The
Plaintiff claims that we did not carry out conversion of Series A preferred
stock to common stock. On August 9, 2002 Plaintiff, Defendant, and their
respective counsels executed an “Agreement for Transfer of Claims in Delaware
Action to Georgia. Subsequently, the lawsuit was moved in its entirety to
Atlanta, Georgia to be litigated under the lawsuit discussed below. Under the
agreement, the Plaintiff in the Delaware action, Wellington, LLC. would become
the Defendant in Atlanta. During the fiscal year ended June 30, 2004, the Court
of Chancery of Delaware dismissed the Delaware case.
  On
November 5, 2001, we filed a lawsuit styled Hyperdynamics Corporation,
Plaintiff, v. J.P. Carey Securities, Inc., J.P. Carey Asset Management LLC,
Joseph C. Canouse, John C. Canouse, James P. Canouse, Jeffrey Canouse,
Southridge Capital Management LLC, Stephen Hicks a/k/a Steve Hicks, Thomson
Kernaghan & Co., Limited, Mark Valentine, Talya Davies, Cache Capital (USA),
L.P., Carpe Diem, Carpe Diem LTD., Wellington, LLC, Minglewood Capital, LLC,
Falcon Securities, LTD, Navigator Management LTD., David Sims, and Citco
Trustees (Cayman) Limited, Defendants; and Wellington LLC,
Counterclaim/Third-Party Plaintiff, v. Hyperdynamics Corporation, a Delaware
corporation, Kent Watts, Michael Watts, Robert Hill, Harry J. Briers, DJX, Ltd.,
a Belize corporation, and Does 1-10, Counterclaim/Third-Party Defendants, Civil
Action File No. 2001CV44988, In The Superior Court of Fulton County, State of
Georgia.
 
 We filed
our First Amended Complaint against Defendants on September 12, 2002 in which we
presented thirteen counts for Causes of Action against defendants including
“Violations of Georgia Racketeer Influenced and Corrupt Organizations” (RICO)
Act (O.C.G.A. SS 16-14-1, ET SEO).
  We
believe that more than one of the Defendants worked together to create the
appearance of providing initial long term financing ($3,000,000) and additional
financing commitments (up to additional $5,000,000), all from reputable sources,
while the Defendants' real plan was to manipulate our stock through
contractually prohibited short selling and multiple breaches of the
contractually agreed to selling covenants.
  We are
subject to counterclaims in this Georgia litigation. The counterclaimants allege
that Hyperdynamics and its Officers and Directors breached their fiduciary
duties to shareholders and committed other tortuous acts. We intend to continue
to vigorously pursue damages and defend all counterclaims. Discovery is being
primarily focused on jurisdictional issues at this time. During the litigation
we have made numerous claims of discovery abuse resulting in certain defendants
and defense attorneys involved being sanctioned by the court. They have filed
for sanctions against us as well. The court dismissed all non-Georgia
defendants. We have filed a notice of appeal of that ruling.
  The
Georgia Court of Appeals rejected our appeal of the trial court’s order
dismissing the non-Georgia defendants because it was not a “final order,” though
it was in effect as to the dismissed defendants. The Court of Appeals’ action
returned the case to the trial court where a Motion for Reconsideration was
filed due to a dramatic change in the law of personal jurisdiction in Georgia.
(See Innovative Clinical &
Consulting v. First National Bank of Ames, 279 Ga. 672 (2005).) That
Motion is still pending and all activity in the case is halted until the trial
court rules.
  23
 Table of
Contents
 
 USOil
Corporation.
 
 This
lawsuit was dismissed in light of very favorable discovery responses from
Plaintiff that established our right to proceed under the newly negotiated
production agreement with the Guinean Government. However, in August 2007, USOil
Corporation re-filed this lawsuit in Ft. Bend County claiming it was
the actions or omissions of SCS that caused the 2002 PSA to be cancelled by the
Government. We have successfully transferred the case back to the original court
in Harris County and will be filing legal motions seeking judgment against
USOil in the very near future. Discovery is expected to also start which will
show USOil’s allegations to be blatantly false and unfounded. However, all work
is currently on hold pending the administrative process of transferring the case
from Ft. Bend County to Harris County and reactivating the old
court file. In addition to denying all claims in the Answer on file, SCS has
also filed a counterclaim seeking damages for frivolous litigation and tortuous
interference of a contract.
 
 Trendsetter Investors, LLC and
Manning, Moore, and Long
 
 Two
cases, styled Trendsetter
Investors, LLC, Plaintiff vs. Hyperdynamics Corporation, Trendsetter Production
Co., Kent Watts, Michael Watts, Christopher Watts and Harry Briers, Defendants;
Civil Action No. H 06-0746; in the United States District Court for the Southern
District of Texas, Houston Division and Jack Manning, Sue Manning, Stephen
Moore and Geoffrey Long, Plaintiffs versus Hyperdynamics Corporation and Kent
Watts, defendants. The suit was filed in the 189th District Court of Harris
County, Texas with cause no. 2006-22135 were settled in a single
settlement agreement and both cases were dismissed June 2007.  In the
Trendsetter case, the Plaintiff alleged Fraud or Deceit in the Sale of
Securities, Common Law Fraud, Fraud by Omission and Control Person Liability.
Plaintiff seeks unspecified monetary damages.  In the Manning case,
the Plaintiffs alleged that they had the pre-emptive right to invest in
Hyperdynamics Corporation's common stock.  In conjunction with the
settlement agreement,
 
 a)
              Trendsetter
      Investors received warrants to purchase 3,480,000 shares of restricted
      common stock in Hyperdynamics Corporation exerciseable at $4.00 per share,
      with a price reset provision that would reduce the exercise price to $2.40
      under certain conditions, until June 14, 2017.  The fair value
      of the warrants as determined using the Black-sholes option pricing model
      was $8,959,000.
 b)
              Kent
      Watts would facilitate an exchange of the warrants for 1,740,000 shares of
      common stock.  Several Hyperdynamics Series B preferred
      stockholders effected this exchange in June
  2007.
 c)
              Trendsetter
      conveyed its 30% working interest in certain oil and gas properties it had
      purchased back to Hyperdynamics.
 d)
              Geoffrey
      Long received 30,000 shares of Hyperdynamics common stock valued at the
      market price on the agreement date of
$82,000.
 e)
              Hyperdynamics
      agreed to pay $280,000 in cash to Trendsetter Investors, LLC for legal
      fees.
 
 As of
June 30, 2007, Hyperdynamics had issued all the stock and warrants associated
with this settlement and had paid $40,000.  A short term note payable
for $240,000, the balance of the legal fees that Hyperdynamics had agreed to
pay, remained on Hyperdynamics’ balance sheet as of June 30,
2007.  Hyperdynamics paid the note on July 10, 2007.
 
 Item 4 Submission of
Matters to a Vote of Securities Holders
 
 None.
 
 Part II
 
 Item 5 Market for
Registrant’sCommon Equity, Related Shareholder Matters and Issuer Purchases
of Equity Securities
 
 Price Range of Common
Stock.
 
 Our
common stock is traded on the American Stock Exchange under the trading symbol
““HDY”. The following table sets forth the quarterly high and low bid prices per
share for the common stock, as reported by the OTCBB (our previous trading
market) or the AMEX as the case may be. The bid prices reflect inter-dealer
quotations, do not include retail markup, markdown, or commission and do not
necessarily reflect actual transactions.
  24
 Table of
Contents
  High Bid
              
              
              Low
  BidFiscal
    2007First
      Quarter
              
              $
              2.85
              
              
              $
              1.81Second
      Quarter
              
              
              2.96
              
              
              
              2.26Third
      Quarter
              
              
              2.23
              
              
              
              1.70Fourth
      Quarter
              
              
              3.24
              
              
              
              1.48Fiscal
    2006First
      Quarter
              
              $
              2.5700
              
              
              $
              0.8700Second
      Quarter
              
              
              2.3700
              
              
              
              1.09000Third
      Quarter
              
              
              3.4200
              
              
              
              1.6800Fourth
      Quarter
              
              
              3.4200
              
              
              
              2.0500Fiscal
    2005First
      Quarter
              
              $
              2.7200
              
              
              $
              .7600Second
      Quarter
              
              
              3.5000
              
              
              
              2.1700Third
      Quarter
              
              
              3.400
              
              
              
              1.7500Fourth
      Quarter
              
              
              3.200
              
              
              
              1.990
  On
September 27, 2007, the last price for our common stock as reported by the AMEX
was $2.99 per share. On September 28, 2007, there were approximately 244
stockholders of record of the common stock.
 
 We have
not paid, and we do not currently intend to pay in the foreseeable future, cash
dividends on our common stock. The current policy of our Board of Directors is
to retain all earnings, if any, to provide funds for operation and expansion of
our business. The declaration of dividends, if any, will be subject to the
discretion of the Board of Directors, which may consider such factors as our
results of operations, financial condition, capital needs and acquisition
strategy, among others.
 
 25
 Table of
Contents
  Equity Compensation Plan
Information
 
 The
following table gives aggregate information under all equity compensation plans
of Hyperdynamics as of June 30, 2007.
  Equity Compensation Plan
      InformationNumber of Securities to be
      Issued Upon Exercise of Outstanding Options, Warrants, and
      Rights
              Weighted-Average Exercise Price
      of Outstanding Options, Warrants and Rights
              Number of Securities Remaining
      Available for Future Issuance Under Equity Compensation Plans (Excluding
      Securities Reflected in Column (a))Plan
      Category
              (a)
              (b)
              (c)Equity
      compensation plans approved by security holders
              3,159,999
              3.96
              4,453,311Equity
      compensation plans not approved by security holders
              942,000
              0.27
              -0-Total
              4,101,999
              3.11
              4,453,311
 
 26
 Table of
Contents
  The Stock
and Stock Option Plan (the “Plan”) of Hyperdynamics was adopted May 7, 1997 and
amended on December 3, 2001 and on January 21, 2005.  The total number
of shares issuable under the Plan, as amended, is
10,000,000.   The Board of Directors voted to amend the Plan on
May 5, 2007 by extending the expiration date of the Plan from May 7, 2007 to May
7, 2010.
 
 As of
June 30, 2006, we had 4,771,597 shares available to be issued or granted
pursuant to the Plan. We issued 318,286 shares under the Plan this fiscal year,
leaving us with 4,453,311 shares available to be issued or granted pursuant to
the Plan as of June 30, 2007.
 
 Under the
Plan, options will vest over a five year or other negotiated period and will
have a strike price set at the time of grant based on the then current market
value of the stock.
 
 Our
President has the authority as given by the Board of Directors to negotiate
stock option agreements with corporate consultants as well. We presently have
warrants to purchase 942,000 shares of common stock which are currently
outstanding and were issued pursuant to such agreements at a weighted average
price of $0.27 per share.
 
 The
purpose of the Plan is to further our interest, and the interest of our
subsidiaries and our stockholders by providing incentives in the form of stock
or stock options to key employees, consultants and Directors who contribute
materially to our success and profitability. We believe that our future success
will depend in part on our continued ability to attract and retain highly
qualified personnel as employees, independent consultants and attorneys.
The issuance of stock and grants of options and warrants will recognize and
reward outstanding individual performances and contributions and will give such
persons a proprietary interest in us, thus enhancing their personal interest in
our continued success and progress. We pay wages, salaries, and consulting rates
that we believe are competitive. We use the Plan and individual compensation
arrangements to augment our compensation packages.
 
 27
 Table of
Contents
  PERFORMANCE GRAPH
 
 The
following graph compares the five year cumulative total return of our Common
Stock to the cumulative total return on the Amex Oil Index and the Russell 2000
Stock Index.  Our Common Stock commenced trading on the American Stock
Exchange on May 5, 2005.  Our Common Stock was previously traded on
the OTCBB.  The graph assumes that a $100 investment (Index =100) was
made in our Common Stock, the Amex Oil Index and the Russell 2000 Stock Index on
June 30, 2002 and that all dividends were reinvested.  The stock
performance for our Common Stock is historical and should not be construed as
being indicative of future performance.
 
 
  Performance
      Graph Index Data PointsFiscal
      Year Ended June 30,2002
              
              
              2003
              
              
              2004
              
              
              2005
              
              
              2006
              
              
              2007Hyperdynamics
      Corporation
              
              
              100
              
              
              
              348
              
              
              
              1,096
              
              
              
              1,122
              
              
              
              913
              
              
              
              1,365Amex
      Oil Index
              
              
              100
              
              
              
              86
              
              
              
              116
              
              
              
              162
              
              
              
              210
              
              
              
              257Russell
      2000 Index
              
              
              100
              
              
              
              97
              
              
              
              128
              
              
              
              138
              
              
              
              157
              
              
              
              180
 
 28
 Table of
Contents
 
 Item 6 Selected
FinancialData
 
 The
selected historical consolidated financial data set forth below for each of the
years in the five-year period ended June 30, 2007 has been derived from our
audited consolidated financial statements. This information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
thereto included elsewhere in this report.
  Years Ended June
      30,2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003(in thousands, except per share
      amounts)Consolidated
      Statement of Operations Data:Revenues
              
              $
              1,006
              
              
              $
              615
              
              
              $
              173
              
              
              $
              38
              
              
              $
              468Loss
      from operations
              
              
              (20,243
              )
              
              
              (5,041
              )
              
              
              (4,927
              )
              
              
              (3,117
              )
              
              
              (2,415
              )Basic
      and diluted loss per common share
              
              $
              (0.49
              )
              
              $
              (0.17
              )
              
              $
              (0.13
              )
              
              $
              (0.12
              )
              
              $
              (0.12
              )Weighted
      average shares outstanding
              
              
              47,723,298
              
              
              
              43,318,773
              
              
              
              41,646,844
              
              
              
              31,938,926
              
              
              
              22,580,526Balance
      Sheet Data:Working
      capital (deficit)
              
              $
              4,004
              
              
              $
              154
              
              
              $
              (1,413
              )
              
              $
              1,625
              
              
              $
              (1,267
              )Capital
      expenditure
              
              
              527
              
              
              
              517
              
              
              
              1,517
              
              
              
              2,030
              
              
              
              357Long-term
      liabilities
              
              
              133
              
              
              
              79
              
              
              
              135
              
              
              
              726
              
              
              
              256Stockholders'
      equity
              
              
              8,726
              
              
              
              4,608
              
              
              
              3,146
              
              
              
              4,660
              
              
              
              (317
              )Total
      Assets
              
              $
              11,480
              
              
              $
              8,303
              
              
              $
              5,209
              
              
              $
              7,283
              
              
              $
              1,480
  Item 7 Management’sDiscussion and Analysis of Financial Condition and Results of
Operation
  CAUTIONARY STATEMENT ON
FORWARD-LOOKING INFORMATION
 
 The
Company is including the following cautionary statement to make applicable and
take advantage of the safe harbor provision of the Private Securities Litigation
Reform Act of 1995 for any forward-looking statements made by, or on behalf of,
the Company. This annual report on Form 10K contains forward-looking statements.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, expectations, future events or performance and underlying
assumptions and other statements which are other than statements of historical
facts. Certain statements contained herein are forward-looking statements and,
accordingly, involve risks and uncertainties which could cause actual results or
outcomes to differ materially from those expressed in the forward-looking
statements. The Company's expectations, beliefs and projections are expressed in
good faith and are believed by the Company to have a reasonable basis, including
without limitations, management's examination of historical operating trends,
data contained in the Company's records and other data available from third
parties, but there can be no assurance that management's expectations, beliefs
or projections will result or be achieved or accomplished. In addition to other
factors and matters discussed elsewhere herein, the following are important
factors that, in the view of the Company, could cause actual results to differ
materially from those discussed in the forward-looking statements: the ability
of the Company to respond to changes in the oil exploration and production
environment, competition, the availability of financing, and, if available, on
terms and conditions acceptable to the Company, and the availability of
personnel in the future to support its activities and external
customers.
 
 Overview
 
 Our
corporate mission is to explore for and develop new sources of energy worldwide.
On September 22, 2006, our wholly owned subsidiary, SCS Corporation signed a
Production Sharing Contract (the “2006 PSC”) with the Republic of Guinea. The
2006 PSC gives us exclusive rights to explore and develop approximately 31,000
square miles off the coast of Guinea. However, certain provisions of the
contract require us to surrender 64% (approximately 20,000 square miles) of the
contract area upon the passage of a “Project of Law”, a Presidential Decree, and
a Supreme Court ruling. We would retain a priority non-exclusive right.to be defined in the future,to
participate in the development of the surrendered contract area. Although the
PSC is a legally binding contact under Guinea’s 1986 Petroleum Code, the process
of passing a law, obtaining a Presidential Decree and a Supreme Court ruling
effectively codifies the PSC into Guinea law, thereby strengthening our
concession within the contract area. Furthermore, we expect, through the
priority rights granted in the PSC, to continue our participation in the
surrendered contract area and still have exclusive rights to the remaining 36%
(approximately 11,000 square miles) of the contract area. Until the passages of
the events mentioned above, we retain the exclusive right to explore and exploit
100% of the 31,000 square mile concession. As such, we expect to continue
aggressively pursuing our exploration efforts within the
concession.
 
 29
 Table of
Contents
  In
December 31, 2006, we traveled to Germany at the invitation of the Guinea
Ministry of Mines and Geology and made a presentation to numerous participants
from various ministries of the Guinea government. At the meeting, we notified
the Guinea Ministry of Mines that we had begun our exploration work pursuant to
the requirements of the 2006 PSC with the ultimate goal to begin drilling
exploration wells.
 
 In
October 2006, we engaged Global SanteFe's Applied Drilling Technologies to
evaluate resources in the Country of Guinea that can support the needs of
offshore drilling operations. Thus, during the quarter, a team traveled to
Guinea to survey the facilities, ports, and capabilities there by six to nine
months.
 
 In
November 2006, we traveled to Guinea together with our lobbyist, former
Secretary of State for African Affairs, Herman Cohen. We met with numerous
ministers of the Guinea government in meetings whereby they publicly gave
support for our contract. We addressed the National Assembly in the presence of
the President of the National Assembly of Guinea, Mr. Aboubacar Somparé. Our
trip was highly publicized in Guinea and was carried extensively on Guinea's
national RTG television.
 
 While we
were in Guinea, our geoscientists at our corporate offices prepared for the
farm-out program, which was announced in January 2007. We launched a program to
provide the opportunity for oil companies to license and study our proprietary
data and then submit proposals to us later this year. We have now begun
presentations to companies under confidentiality agreements.
  As
previously discussed, we signed the 2006 PSC on September 22, 2006. This
contract is substantially better than the previous 2002 PSC agreement. In
addition, the 2006 PSC is in full accordance with Guinea law known as the 1986
petroleum code, and it is being considered by the National Assembly of Guinea
for special action that ultimately would codified the 2006 PSC as a new law in
and of itself as we disclosed in our 8K filed on April 16, 2007. All of this is
positive for Hyperdynamics Corporation. Additionally, the world demand for oil
has remained strong and the west coast of Africa is expected to remain one of
the most active areas in the world for exploration. For these reasons we believe
that the value of the concession has greatly increased over the last several
months.
 
 As part
of their political process the Guinea government has decided, as is entirely
their prerogative, to send the 2006 PSC to the National Assembly to be
considered for a special status of a “project of law”.  The National
Assembly's working political process for the “project of law” is a process
whereby the Guinea government informs its people of the benefits of the
government's contracts. It also allows law makers to understand the major
contracts themselves so that they can make new laws that can positively affect
the people in the future. In our case, the 2006 PSC also has a special contract
provision under article 5.1 whereby certain terms, conditions, and rights of the
contract will change.  For the National Assembly to pass or not pass a
“project of law” on our contract has no bearing on the legality or
enforceability of the contract. While the legality of the contract is not
affected by passing a “project of law”, management may see a need to review the
farm-out process and adapt to any changes that may be brought about if it indeed
passes and other certain actions explained in previous filings occur as
well.
 
 30
 Table of
Contents
  Results of Operations ---
Reportable segments.
  Hyperdynamics
has two reportable segments: our operations in Guinea (“SCS”) and our
domestic Louisiana operations (“HYDR”). SCS is engaged in oil and gas
exploration activities pertaining to offshore Guinea, West
Africa.   HYDR is engaged in oil and gas exploration and
production activities in Louisiana, USA. Hyperdynamics evaluates performance
based on profit or loss from operations. The reportable segments are managed by
separate management teams who are evaluated based on their segment's
performance.
  Year ended June
      30,2007
              
              2006
              
              2005(in
      Thousands)RevenuesSCS
              
              $
              -
              
              $
              -
              
              
              $
              3HYDR
              
              
              1,006
              
              
              615
              
              
              
              170Total
      Revenues
              
              $
              1,006
              
              $
              615
              
              
              $
              173
  Results of Operations ---LouisianaOperations
(“HYDR”)
  Comparison for Fiscal Year 2007 and
2006
  Revenues.   Our
revenue for the year ended June 30, 2007 was $1,006,000 in comparison to
$615,000 in 2006. This represents an increase of 64% or $391,000. The increase
is due to equipment upgrades and less downtime, which resulted in higher
production of oil and gas. The revenues for 2007 are derived from oil and gas
production of $908,000 and $98,000 in oilfield services, compared to $615,000 in
oil and gas production and $0 in oilfield service work in 2006. We expect to
derive most of our future revenues from oil and gas production with incidental
oilfield service revenue as good business opportunities arise.
 
 Lease operating costs
for the year ended June 30, 2007 was $387,000 in comparison to $657,000 in
2006.  This represents a decrease of 42% or $270,000 due to upgrade in
equipment resulting in better maintenance and higher performance.
 
 Severance tax for the
year ended June 30, 2007 was $104,000 in comparison to $65,000 in 2006. This
represents an increase of 60% or $39,000.  Severance tax varies
directly with production revenues.
 
 Our depreciation, depletion
and amortization from Oil and Gas Properties was $162,000 and $116,000
for the years ended June 30, 2007 and 2006, respectively. This represents a
decrease of 40% or $46,000.   The decrease is attributable to
past sales of oilfield equipment, which reduced the periodic depreciation
charge.
 
 Other operational
costs for the year ended June 30, 2007 was $725,000 in comparison to
$922,000 in 2006.  This represents a decrease of 21% or $197,000 due
to decrease in expenses related to repairs and maintenance, tools and yard
costs, field work labor and decrease in number or field employees.
 
 Settlement
expensefor the
year ended June 30, 2007 was $8,870,000 and $0 in 2006.  We were sued
by an investor in working interest in some of our oil and gas
properties.Pursuant to the settlement agreement, we issued
3,480,000 warrants to purchase our common stock at an adjusted exercise price of
$2.40 per share. The expenses are
calculated using the fair value of the warrants as of the date they were granted
as estimated by the Black-Scholes option pricing model and based upon
$2.40 exercise
price.
 
 Our selling, general and
administrative expense decreased 2%, or $17,000, from $608,000 to
$591,000 for the years ended June 30, 2006 and June 30, 2007, respectively. The
change is due to a decrease in administrative expenses.
 
 Our loss from
operations from this segment was ($9,835,000) and ($1,753,000) for the
years ended June 30 2007 and 2006, respectively.
 
 Other income and
expenses decreased by $180,000. The decrease is due to two main
factors.  We repurchased working interest in some oil and gas
properties in 2006 at a loss of $370,000.  This was a one time
charge.  Additionally, we had a loss on disposal of assets of $96,000
in 2007, whereas in 2006 we recognized a gain on sales of assets of
$89,000.
 
 31
 Table of
Contents
  Comparison for Fiscal Year 2006 and
2005
  Revenues.   Our
revenue for the year ended June 30, 2006 was $615,000 compared to $170,000 in
2005. This represents an increase of 262% or $445,000. The revenues increased
due to higher oil prices and increase in production. The revenues for 2006 are
all derived from oil and gas production. The revenues in 2005 include $52,000
from oil and gas revenues and $118,000 from oilfield service work..
  Lease operating
costs for the year
ended June 30, 2006 was $657,000 in comparison to $265,000 in
2005.  This represents an increase of 147% or
$392,000.  This increase is attributable to start up
costs.
 
 Severance tax for the
year ended June 30, 2006 was $65,000 in comparison to $6,000 in 2005. This
represents an increase of 983%, or $59,000, due to increase in production
revenues.
 
 Our depreciation, depletion
and amortization expense was $116,000 and $77,000 for the years ended
June 30, 2006 and 2005, respectively. This represents a decrease of 51% or
$39,000 due to increase in purchases of field equipment assets.
 
 Other operational
costs for the year ended June 30, 2006 totaled $922,000 in comparison to
$956,000 in 2005.   This represents an insignificant decrease of
3% or $34,000.
 
 Our selling, general and
administrative expenses increased 63%, or $235,000, from $374,000 to
$609,000 for the years ended June 30, 2005 and June 30, 2006, respectively. The
breakdown for these expenses in 2006 includes $4,000 in selling expenses,
$60,000 of administrative payroll costs, an establishment of a reserve for bad
debt on uncollectible working interest billing of $233,000, professional fees of
$172,000 due to legal expenses stemming from various lawsuits filed by our
working interest partner, insurance expenses of $43,000 and office and
administrative expenses of $97,000.  In comparison, the breakdown for
these expenses in 2005 includes $133,000 of payroll costs, professional fees of
$62,000, insurance costs of $77,000, bad debt expense of $34,000 and office and
administrative expense of $68,000. Thus, the main factors contributing to the
$234,000 change are: a $74,000 decrease in payroll costs, a $199,000 increase in
bad debt expense and an $109,000 increase in professional fees. We also
experienced a gain of $34,000 from the settlement of our lease agreement for our
previous office space.
 
 Our loss from
operations from this segment was ($1,754,000) and ($1,508,000) for the
years ended June 30 2006 and 2005, respectively.
 
 Other
expense was $370,000 and $0 for the years ended June 30, 2006 and
2005, respectively. The increase is due to the working interest
buyback.
 
 Results of Operations ---GuineaAnd Seismic Data Management
(“SCS”)
 
 Comparison for Fiscal Year 2007 and
2006
  Revenues.  There
were no revenues for the years ended June 30, 2007 and 2006.   We
have focused on the acquisition and interpretation of seismic data for our
concession in Guinea.
 
 Other operational
costs were $8,000 and $62,000 for the years ended June 30, 2007 and 2006,
respectively.  The decrease of 87%, or $54,000, is due to
reduction of expenses incurred on the evaluation of a potential project not
related to our Guinea concession.
 
 Selling, General and
Administrative Expenses.
 
 Our
selling, general and administrative expenses were $2,825,000 and $732,000 for
the years ended June 30, 2007 and 2006, respectively. This represents an
increase of 286% or $2,093,000.
 
 The
increase in selling, general and administrative expenses is attributable to
increases in various areas including salaries, equity based compensation, rent
and utilities, travel expenses, professional expenses and consulting
expenses.   Salary expense increased 180% or $246,000 from
$133,000 in 2006 to $384,000 in 2007 due to increase in officer salaries and
increased allocation of salaries from corporate office in connection with work
on the Guinea concession.  Equity based compensation of $461,000 was
incurred in 2007, whereas no such compensation occurred in 2006. Office
rent and utilities increased 18% or $31,000 due an additional office set up
in Guinea.  Travel expenses to West Africa in connection with the Guinea
concession increased 171%, or  $198,000, from $116,000 in 2006 to
$314,000 in 2007.  Professional  expenses increased by 165%
or $182,000 because of legal expenses relating to the Guinea concession and
lawsuit. Consulting, advertising and public relations expenses increased by
526% or $837,000 from $159,000 in 2006 to $996,000 in 2007, due to expenses
related to government relations, lobbyist, geoscientists and geophysical
consulting services and contract officers fees.  General expenses
increased by $138,000 due to increase in office supplies and other
administrative expenses compared to $33,000 during the years
ended  June 30, 2007 and 2006, respectively.
 
 32
 Table of
Contents
  Our depreciation
decreased 16% or $5,000, from $31,000 down to $26,000 for years ended June 30,
2006 and 2007, respectively, due to retirement and disposal of
assets.
  Loss from Operations.
Based on the factors discussed above, our loss from operations from this segment
increased by 246%, or ($2,034,000), for the year ended June 30, 2006 to
($825,000) to ($2,859,000) for the years ended June 30, 2007 and June 30, 2006,
respectively.
 
 Comparison for Fiscal Year 2006 and
2005
  Revenues.  Our
revenues for the years ended June 30, 2006 and 2005 were $0 and $3,000,
respectively. We receive occasional revenues from tape transcription and seismic
data processing services. We do not actively pursue revenues of this nature and
they occur very irregularly.
  Other operational
costs  were $62,000 and $80,000 for the years ended June 30,
2006 and 2005, respectively. This represents a decrease of 29% or $18,000 due to
reduction of employee and non Guinea farm-out expenses.
  Selling, General and
Administrative Expenses.
 
 Our
selling, general and administrative expenses were $732,000 and $424,000 for the
years ended June 30, 2006 and 2005, respectively. This represents an increase of
73% or $308,000.
 
 We
experienced an increase of $391,000 in the following general and administrative
expenses: 1) An increase of $71,000 or 113% in salary expenses from $63,000 to
$133,000 for the years ended June 30, 2005 and 2006, respectively, due to the
hiring of our new SCS Vice President of Guinea Affairs and increased allocation
of salaries from corporate office in connection with work on the Guinea
concession; 2) An increase of $48,000 or 70% on travel expenses to Africa in
connection with the Guinea concession from $68,000 to $116,000 for the years
ended June 30, 2005 and 2006,
respectively;  3)  Professional and consulting expenses
increased of 2600% or $260,000 attributable to legal and consultation expenses
relating to the Guinea concession; 4) Increase in auto, bank and other
administrative expenses of $12,000 from $6,000 to $18,000 for the years ended
June 30, 2005 and 2006, respectively. We experienced a decrease of $82,000 of
which our selling expenses decreased $46,000 to $0 for the years ended June 30,
2005 and 2006, respectively. A decrease of $36,000 on rent, insurance and other
office expenses $231,000 down to $195,000 for the years ended June 30, 2005 and
2006, respectively. The decrease is attributable to the following: 1) A decrease
of $14,000 on rent and utilities expenses from $179,000 to $165,000 for the
years ended June 30, 2005 and 2006, respectively. This decrease is attributable
to the settlement of our lease from our old office. Our new office lease
agreement decreased our monthly rent payments and usage on
electricity;  2) Insurance expenses decreased $11,000 from $24,000 to
$13,000 for the year ended June 30, 2005 and 2006 respectively, due to reduction
of staff; 3) Office supplies and expenses decreased $11,000 from $20,000 to
$9,000 for the year ended June 30, 2005 and 2006, respectively, due to decrease
in repairs and maintenance on our office equipments and reduction of purchases
on supplies.
 
 Our depreciation
increased 10% or $3,000, from $28,000 to $31,000 for year ended June 30, 2005
and 2006, respectively, due to additional assets in place at our new office in
Guinea, West Africa.
 
 Loss from Operations.
Based on the factors discussed above, our loss from operations from this segment
increased by 56%, or ($296,000), for the year ended June 30, 2006 to ($825,000)
from ($529,000) for the year ended June 30, 2005.
 
 Other Items.
 
 Our
interest expense decreased 100% due to no retirement on preferred stock or no
redemption of option by investor and no loss occurred on debt retirement for the
year ended June 30, 2006. Our
 
 We also
experienced a gain of $67,000 from the settlement of our lease agreement for our
previous office space.
 
 33
 Table of
Contents
 
 Results of Operations ---
Corporate Overhead
 
 Comparison for Fiscal Year 2007 and
2006
  Settlement
expenses for the year ended June 30,2007 was $249,000 and $0 in
2006.
 Consulting - related party
expensesfor the
year ended June 30, 2007 was $4,240,000 and  $284,000 in
2006.  This represents an increase of $3,956,000 or 1392% due to the
grant of 1,500,000 warrants with an exercise price of $4.00 per share.We
record the expense of equity based compensation using the fair value of the
warrants as of the date they were granted as estimated by the Black-Scholes
option pricing model and based upon $4.00 exercise price.
 
 Selling, General and
Administrative Expenses.  Selling, general and administrative
expenses increased by $870,000
or 40%, from $2,158,000 to $3,028,000 for the years ended June 30, 2006 and
2007, respectively.  The increase is due higher administrative
expenses of $1,126,000 offset by a decrease of $255,000 in other general
administrative expenses. The increase is attributable to the
following:  1) Stock based compensation increased by $369,000 or 273%,
from $512,000 to $1,909,000.  The equity instruments were issued to
officers, directors and employees and the value was calculated using the
Black-Scholes option pricing model. 2) Salaries and payroll taxes increased by
$268,000 or 73% from $365,000 to $633,000 due to an increase in employees and
wage increases resulting in increased of payroll taxes. 3) Professional expenses
increased by $141,000, from $414,000  to $555,000  due to
higher legal costs resulting from various lawsuits and an increase in accounting
and audit fees; 4) Our general expenses increased by $165,000 or 45% from
$365,000 in 2006 to $530,000 in 2007 attributable to increase in American Stock
Exchange listing fees, increase in annual shareholder meeting expenses, transfer
agent and reporting fees, as well as office relocation, supplies, auto and
insurance expenses.  5) Public
relations expenses was $183,000 and $76,000 for the years ending June 30, 2007
and 2006, respectively. This represents an increase of $107,000 or 140%
attributable to expenses for retaining public relations firm and investor
relations. Although there was an increase in expenses, we also
experience a decrease in rent and utilities by $69,000 due to reduction in rent
and consumption of utilities; Travel decreased by $48,000 due to less travel by
directors and officers and bank charges decreased by $5,000 due to increase in
funding and consulting of non-related party decreased $134,000.
 
 Depreciation was
$31,000 and $19,000 for the years ended June 30, 2007 and 2006,
respectively.  The increase is due to addition of assets such as
furniture and fixtures.
 
 Other Items.
  Gain on
settlementof
debt was $0 and $34,000 for the years ended June 30, 2007 and 2006
respectively.
 
 Interest expense was
$2,982,000 and $1,961,000 for the year ended June 30, 2007 and 2006,
respectively. This represents an increase of $1,021,000 or 52% attributable to
payments made on our private financing related to a convertible note payable and
debenture.
 
 Interest income was
$96,000 and $2,000 for the years ended June 30, 2007 and 2006,
respectively.  This represents an increase of $93,000 derived from
interest received on the cash we received during the year which was
invested in a money market account.
 
 Net Loss. Based
on the factors discussed for each segment, the Net Loss attributable to common
shareholders increased ($16,055,000), or 221% from ($7,253,000) or ($0.17) per
share in 2006 to ($23,308,000), or ($.49) per share in 2007. The net loss
chargeable to common shareholders includes a provision for preferred stock
dividends of $109,000 in 2006 and 2007. The negative results are due to the
factors discussed above.
 
 Comparison for Fiscal Year 2006 and
2005
  Other operational
costs for the years ended June 30, 2006 and 2005 was $0 and $69,000,
respectively, a decrease of $69,000 or 100%, attributable to our system
engineer's payroll costs for work not attributable to generating revenues, but
instead for administrative tasks.
 
 Selling, General and
Administrative Expenses.  Selling, general and administrative
expenses were $2,443,000 and $2,802,000 for the years ended June 30, 2006 and
2005, respectively. This represents a decrease of 13% or $359,000, due to
increase in expenses by $1,085,000 and offset in decrease of some expenses by
$1,446,000.
 
 34
 Table of
Contents
  Consulting
expenses for the year ended June 30, 2007 was $284,000 and $0 in
2005.
  The
increase in expenses was attributable to following factors: 1) Equity based
compensation increased by $443,000 from $69,000 in 2005 to $512,000 in 2006; 2)
Professional expenses are comparable at $130,000 for 2006 and 2005; 3) Travel
expenses increased by $120,000 from $3,000 in 2005 to $123,000 in 2006 due to
increase in directors meeting and shareholder meeting travel expenses; 4)
Salaries and payroll taxes increased by $81,000 due to new employee hire; 5)
Public relations and investor relations increased by $76,000 due increase in
public relations expenses, American Stock Exchange listing fees, increase in
annual shareholder meeting expenses, and transfer agent fees; 6) Insurance
expenses increase by $28,000 due to increase in general liability, umbrella and
control of oil well policy; 7) other general expenses increased by $55,000 due
to increase in auto expense, office supplies and postage and bank
charges.
 
 During
the year ended June 30, 2006, our compensatory equity based options and warrants
were valued at $855,000, of which $381,000 are options issued to employees,
directors and officers; and $473,000 were warrants granted to four consultants
in 2004, and the remaining part of their warrants vested during the first and
second quarter of fiscal year 2006. We record the expense associated with these
warrants using the fair value of the warrants as of the date they vest as
estimated by the Black-Scholes option pricing model. Equity-based compensation
does not impact our liquidity or net worth because the consulting expense is
offset by an increase to additional paid-in capital.
 
 The
decrease in some expenses are attributable to the following: 1) consultant
expenses decreased by $1,353,000 due to decrease in consultation services and
quarterly expenses associated with prior year warrants issued and vested in the
last two quarters of fiscal year 2006, using the fair value of the warrants as
of the date they vest as estimated by the Black-Scholes option pricing model and
based upon the market price of our common stock in each quarter. The warrants
vesting date ended the second quarter of fiscal year 2006; 2) Office rent and
utilities expense decreased by  $82,000 due to the termination of our
old office lease agreement, a reduction in rent on our new office lease
agreement and decrease in consumption of utilities on reduced office space; 4)
Taxes and reporting expenses decreased by $11,000. Our payroll expense includes
an offset of a refund from the IRS in the amount of $46,000.
 
 Depreciation and
amortization is comparable at $19,000 for the years ended June 30, 2005
and 2006, respectively.
 
 Other Items.
  Interest expense was
$316,000 and $1,961,000 for the year ended June 30, 2005 and 2006, respectively.
The increase is attributable to payments made on our private financing related
to a convertible note payable and debenture.
 
 We experienced a gain
of $34,000 from the settlement of our lease agreement for our previous office
space.
 
 Net Loss. Based
on the factors discussed for each segment, entity-wide, the Net Loss
attributable to common shareholders increased ($1,909,000), or 36% from,
($5,344,000), or ($.13) per share in 2005 to ($7,253,000), or ($0.17) per share
in 2006. The net loss chargeable to common shareholders includes a provision for
preferred stock dividends of $128,000 in 2005 and $109,000 in 2006. The negative
results are due to the factors discussed above.
 
 
 CRITICAL ACCOUNTING
POLICIES
 
 The
Company uses the full cost method of accounting for exploration and development
activities as defined by the SEC. Under this method of accounting, the costs of
unsuccessful, as well as successful, exploration and development activities are
capitalized as properties and equipment. This includes any internal costs that
are directly related to exploration and development activities but does not
include any costs related to production, general corporate overhead or similar
activities. Gain or loss on the sale or other disposition of oil and gas
properties is not recognized, unless the gain or loss would significantly alter
the relationship between capitalized costs and proved reserves of oil and
natural gas attributable to a country. The application of the full cost method
of accounting for oil and gas properties generally results in higher capitalized
costs and higher DD&A rates compared to the successful efforts method of
accounting for oil and gas properties.
 
 Costs Excluded
 
 Properties
and equipment include costs that are excluded from costs being depreciated or
amortized. Oil and gas costs excluded represent investments in unproved
properties and major development projects in which we own a direct interest.
These unproved property costs include nonproducing leasehold, geological and
geophysical costs associated with leasehold or drilling interests and
exploration drilling costs. We exclude these costs on a country-by-country basis
until proved reserves are found or until it is determined that the costs are
impaired. All costs excluded are reviewed at least quarterly to determine if
impairment has occurred. The amount of any impairment is transferred to the
capitalized costs being amortized (the DD&A pool) or a charge is made
against earnings for those international operations where a reserve base has not
yet been established. Impairments transferred to the DD&A pool increase the
DD&A rate for that country. For international operations where a reserve
base has not yet been established, an impairment requiring a charge to earnings
may be indicated through evaluation of drilling results, relinquishing drilling
rights or other information.
 
 35
 Table of
Contents
  Ceiling
Test
 
 The full
cost ceiling test is an impairment test prescribed by SEC Regulation S-X Rule
4-10.   Under full cost accounting rules for each cost center,
capitalized costs of proved properties, less accumulated amortization and
related deferred income taxes, shall not exceed an amount (the "cost ceiling")
equal to the sum of (a) the present value of future net cash flows from
estimated production of proved oil and gas reserves, based on current economic
and operating condition, discounted at 10 percent, plus (b) the cost of
properties not being amortized, plus (c)
the lower of cost or estimated fair value of any unproved properties included in
the costs being amortized, less (d) any income tax effects related to
differences between the book and tax basis of the properties involved. If
capitalized costs exceed this limit, the excess is charged as an impairment
expense. As of June 30, 2007, we have capitalized $43,000 in oil and gas
properties, which is subject to the ceiling test for impairment.  At
June 30, 2007, there was no impairment indicated.
 
 Impairment
 
 At June,
30, 2007, we had $4,279,000 of capitalized costs associated with our Guinea
operations. Based on an impairment analysis performed by our Economist, Dr.
Kenneth Lehrer and the execution of the new 2006 Production Sharing Contract
between SCS Corporation and the Republic of Guinea, , no impairment of these
assets was indicated as of June 30, 2007.
 
 Environmental Obligations and Other
Contingencies
 
 Management
makes judgments and estimates in accordance with applicable accounting rules
when it establishes reserves for environmental remediation, litigation and other
contingent matters. Provisions for such matters are charged to expense when it
is probable that a liability has been incurred and reasonable estimates of the
liability can be made. Estimates of environmental liabilities are based on a
variety of matters, including, but not limited to, the stage of investigation,
the stage of the remedial design, evaluation of existing remediation
technologies, and presently enacted laws and regulations. In future periods, a
number of factors could significantly change our estimate of environmental
remediation costs, such as changes in laws and regulations, or changes in their
interpretation or administration, revisions to the remedial design,
unanticipated construction problems, identification of additional areas or
volumes of contaminated soil and groundwater, and changes in costs of labor,
equipment and technology. Consequently, it is not possible for management to
reliably estimate the amount and timing of all future expenditures related to
environmental or other contingent matters and actual costs may vary
significantly from our estimates.
 
 Proved reserves
 
 Our
estimates of proved reserves are based on quantities of oil and gas reserves
which current engineering data indicates are recoverable from known reservoirs
under existing economic and operation conditions. Estimates of proved reserves
are key elements in determining our depreciation, depletion and amortization
expense and our full-cost ceiling limitation. Estimates of proved reserves are
inherently imprecise because of uncertainties in projecting rates of production
and timing of developmental expenditures, interpretations of geological,
geophysical, engineering and production data and the quality and quantity of
available data. Changing economic conditions also may affect our estimates of
proved reserves due to changes in developmental costs and changes in commodity
prices that may impact reservoir economics. We utilize independent reserve
engineers to estimate our proved reserves.
 
 Asset Retirement
Obligations
 
 Our asset
retirement obligations represent our best estimate of the fair value of our
future abandonment costs associated with our oil and gas properties, including
the costs of removal and disposition of tangible equipment, site and
environmental restoration. We estimate the fair value of our retirement costs in
the period in which the liability is incurred, if a reasonable estimate can be
made. The determination of the fair value of an asset retirement obligation
generally involves estimating the fair value of the obligation at the end of the
property's useful life and then discounting it to present value using our credit
adjusted, risk free rate of return. Estimating future asset removal costs is
difficult and requires management to make estimates and judgments regarding the
expected removal and site restoration costs, timing and present value discount
rates. Changes in the estimated useful life and the fair value of the asset
retirement obligation are imprecise since the removal activities will generally
occur several years in the future and asset removal technologies and costs are
constantly changing, as are political, environmental and safety considerations
that may ultimately impact the amount of the obligations.
 
 36
 Table of
Contents
  Fair Value of our debt and equity
transactions
 
 Many of
our various debt and equity transactions require us to determine the fair value
of a debt or equity instrument in order to properly record the transaction in
our financial statements. Fair value is generally determined by applying widely
acceptable valuation models, (e.g., the Black Scholes valuation model) using the
trading price of the underlying instrument or by comparison to instruments with
comparable maturities and terms.
 
 Share-Based
Compensation
 
 On
January 1, 2006, we adopted SFAS No. 123(R), "Share-Based Payment". SFAS 123(R)
replaced SFAS No. 123 and supersedes APB Opinion No. 25. SFAS 123(R) requires
all share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair
values. In addition, we account for stock warrants issued for goods and services
to non-employees pursuant to EITF 96-18 “Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services.” We used the Black-Scholes option pricing model to
determine the fair value of stock options and stock warrants at the grant
date.
 
 Contingent
Obligations
 
 We have a
contingent $350,000 note payable that is only payable with 25% of the profits of
SCS Corporation. We have the right to pay this note off using common stock.
Also, in conjunction with our purchase of HYD Resources Corporation in April
2004, we have two contingent obligations to pay $506,000. These obligations are
payable over the five years ending in April 2009 and they are payable only in
the event that HYD Resources is profitable. The determination of net income will
be made quarterly and the pay down of the obligations is 25% of the net income
per quarter.
  Disclosure of Contractual
Obligations as of June 30, 2007
  Payments due by period
      ($)Contractual
                  Obligations
                
                Total
                
                
                Less than
                  1 year
                
                
                1-3
years
                
                
                3-5
years
                
                
                More than
                  5 yearsInstallment
      Obligations
                
                $
                375,000
                
                
                $
                375,000
                
                
                
                -
                
                
                
                -
                
                
                
                -Capital
      Lease Obligations
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Operating
      Lease Obligations
                
                
                910,000
                
                
                
                141,000
                
                
                $
                284,000
                
                
                
                284,000
                
                
                $
                201,000Purchase
      Obligations
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Other
      Long-Term Liabilities
                
                
                133,000
                
                
                
                -
                
                
                
                48,000
                
                
                
                76,000
                
                
                
                9,000Total
                
                $
                1,868,000
                
                
                
                516,000
                
                
                $
                332,000
                
                
                
                360,000
                
                
                $
                210,000
 
 Liquidity and Capital
Resources
 
 Our ratio
of current assets to current liabilities (current ratio) was $2.53 to one and
$1.04 to one at June 30, 2007 and 2006, respectively.  With the new
acquisition of producing properties in June 2007, the company continues to work
toward sustained positive operating cash flow and income from domestic
operations altogether including corporate overhead. Cash funds to be used for
investing in our exploration work will continue to come from new financing
activities, financial partnerships, or working interest deals with oil
companies.
 
 37
 Table of
Contents
  We
believe that we are now prepared to structure our financing to allow us to
expand and accelerate our exploration activity offshore Guinea. As discussed
hereunder we expect our liquidity ratios to be reasonably maintained and
possibly improved by having access to our Dutchess equity line and by increasing
our domestic production to where we are making a positive operating net
income.  We believe we can do this without having to do any additional
financing at this time to cover corporate overhead.  As of this filing
we maintain the Dutchess equity line and could raise as much as an additional
$18,629,775 out of the original line which started at $20,000,000.
 
 While
some of the equity line funds could be used to fund additional exploration, we
are looking to greatly enhance our exploration efforts to a much greater level.
To fund our exploration offshore Guinea, we have growing options that include
taking on working interest partners wanting to join our efforts to explore
offshore Guinea or by working with potential financing partners to obtain
financial commitments to fund exploration   Any funds would be
used on a planned and incremental basis on perfecting targets and drilling
offshore exploration wells over the next few years. While we are working to
structure our financing of the exploration of offshore Guinea, we are already
taking steps to put in place a world renowned exploration team to go along with
our world class asset. We believe the financing commitment will go hand in hand
with showing the technical team capable of making a discovery.  While
we are working to obtain a financial partner and solidify our in-house
geo-technical capabilities, we will continue talking with oil companies under
confidentiality agreements, continuing the possibility to bring on working
interest partners to share in the risk on some of our more expensive wells to be
drilled in the future.
 
 Thus, in
summary, in addition to our commitment to operate domestic operations at a
profitable level and ultimately covering Corporate’s fixed overhead, we are
considering all of our financing options or any combination of these options for
financing our Guinea forward exploration programs. These options include: a) use
our equity line to support at least the minimum work requirements for offshore
Guinea; b) negotiate and structure a deal on a financial commitment basis; c)
negotiate one or more transactions with oil company partners who share in the
required work and financing risk; and d) Structure a creative financing
mechanism to execute a major secondary financing, giving us the ability to
execute our exploration work offshore Guinea on our own..
 
 Our cash
from operations was a deficit in 2007. We have taken steps to reduce overhead
and reduce non-operational costs. We acquired additional leases in July 2007 in
an effort to put our domestic operations on a positive cash flow basis and soon
in a profitable mode. We plan to spend most of the capital we raise in the
future on enhancing the value of our offshore oil and gas concession. These
expenditures, however, do not improve cash flow from operations. In order to
improve our operating cash flow situation for future periods, we acquired
additional producing properties to build up our production revenues for HYDR in
Louisiana.
 
 In June, 2007, the remaining
outstanding convertible debt, originally totaling $6,000,000 and owed to Cornell
Capital Partners, LP, (Cornell) was converted to
equity.  Additionally, warrants held by Cornell were re-priced to
$2.50 per share and Cornell subsequently exercised all of its outstanding 2.1
million warrants. As a result we received $5.25 million in cash.
 
 We
currently maintain an equity line of credit with Dutchess Capital.  We
have made seven puts on the equity line of credit since February 2006 in the
aggregate amount of $1,370,225.   As of September 28, 2007, the
remaining amount available for us to draw down on the equity line of credit is
$18,629,775. The equity line of credit expires in February 2009, after which we
may no longer utilize the equity line of credit.
 
 Item 7A Quantitativeand Qualitative Disclosures About Market Risk
 
 Our
functional currency is the US dollar. Our revenue is directly related to the
price of oil and gas. Assuming that we sell one barrel of oil, then a one dollar
decrease in the price that we get for that barrel of oil will lower our revenue
by one dollar, and correspondingly so for a one dollar increase in price. The
same is true for changes in the price of natural gas. We intend to sell oil and
gas immediately upon lifting to the wellhead. We do not contemplate retaining
any oil and gas inventory. We do not hedge any market risk. Although the prices
of oil and gas have recently increased substantially, there is no assurance that
the price of oil and gas will not fall dramatically in the future.
 
 Item 8 Financial Statementsand Supplementary Data
  The  Financial  Statements
and Supplementary Data information  required  hereunder is
included in this report as set forth in
the  "Index  to  Financial  Statements  on  page  F-1.
  38
 Table of
Contents
  HYPERDYNAMICS
CORPORATION
 Index To
Financial Statements
 
  TABLE OF CONTENTS
  Report
      of Independent Registered Public Accounting Firm on Internal Control over
      Financial Reporting
              
              F-2Report
      of Independent Registered Public Accounting Firm on Consolidated Financial
      Statements
              
              F-4Consolidated
      Balance Sheets as of June 30, 2007 and 2006
              
              F-5Consolidated
      Statements of Operations for the fiscal years ended June 30, 2007, 2006
      and 2005
              
              F-6Consolidated
      Statements of Shareholders' Equity for the fiscal years ended June 30,
      2007, 2006 and 2005
              
              F-7Consolidated
      Statements of Cash Flows for the fiscal years ended June 30, 2007, 2006
      and 2005
              
              F-9Notes
      to Consolidated Financial Statements
              
              F-11
 
 F-1
 Table of
Contents
  REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
 
 
 To the
Board of Directors and Stockholders of
 Hyperdynamics
Corporation
 Houston,
Texas
 
 We have
audited Hyperdynamics Corporation’s (“Hyperdynamics”) internal control over
financial reporting as of June 30, 2007, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).  Hyperdynamics management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting
included in Management’s Report on Internal Control over Financial Reporting
appearing under Item 9A.  Our responsibility is to express an opinion
on the effectiveness of Hyperdynamics’ internal control over financial reporting
based upon our audit.
 
 We
conducted our audit of internal control over financial reporting in accordance
with the standards of the Public Company Accounting Oversight Board (United
States).  Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects.  Our
audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we consider necessary
in the circumstances.  We believe that our audit provides a reasonable
basis for our opinion.
 
 A
company’s internal control over financial reporting is a process designed by, or
under the supervision of, the company’s principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company’s board of directors, management, and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles, and includes those policies and
procedures that:
 
 1.
              Pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of the assets of the
      Company;
 2.
              Provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company
      are being made only in accordance with authorizations of management and
      directors of the
company;  and
 3.
              Provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use, or disposition of the company’s assets that
      could have a material effect on the financial
  statements.
 
 Because
of inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
 
 A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company’s annual or interim financial
statements will not be prevented or detected on a timely basis.  The
following material weaknesses have been identified at June 30, 2007 and included
in management’s assessment:
 
 1.
              An
      ineffective entity level control environment, including: a)  the
      ineffective implementation and enforcement of the limits on the delegation
      of authority for expenditure from the Board of Directors to management,
      including the failure by management to obtain the requisite Board of
      Director’s approvals for certain expenditures; b) the lack of an effective
      process for identification of fraud risks; c) a failure to implement and
      ensure consistent acknowledgment of the Company’s Code of Ethics; d) the
      lack of an internal audit function or other effective mechanism for
      ongoing monitoring of the effectiveness of internal controls; and e) lack
      of documentation and communication of Hyperdynamics’ accounting policies
      and procedures.
 
 F-2
 Table of
Contents
 2.
              Limited
      number of qualified accounting personnel with expertise with SEC reporting
      and generally accepted accounting
principles.
 
 3.
              Ineffective
      application of generally accepted accounting principles and ineffective
      accounting system controls that resulted in incomplete and inaccurate
      disclosures in the notes to Hyperdynamics’ financial statements and the
      identification of $4.03 million of equity transactions that were not
      properly recorded and $104,000 of property, plant and equipment, net that
      was not in existence as of the balance sheet
  date.
 
 4.
              Lack
      of effective segregation of duties, resulting in the inability of the
      Chief Financial Officer and the Chief Executive Officer to perform an
      independent review and quality assurance function within the accounting
      and financial reporting group.  Additionally, management and
      accounting personnel have widespread access to create and post entries
      within Hyperdynamics’ accounting system without the appropriate level of
      review.
 
 These
material weaknesses were considered in determining the nature, timing and extent
of audit tests applied in our audit of the financial statements as of and for
the year ended June 30, 2007, and this report does not affect our report dated
September 26, 2007 on those financial statements.
 
 In our
opinion, because of the effects of the material weaknesses described above on
the achievement of the criteria established in Internal Control-Integrated
Framework issued by COSO, Hyperdynamics did not maintain effective
internal control over financial reporting  as of June 30,
2007.
  /s/
      Malone & Bailey, PCHouston,
      TexasSeptember
      26, 2007
 
 F-3
 Table of
Contents
  REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors and Shareholders of
 Hyperdynamics
Corporation
 Houston,
Texas
 
 We have
audited the accompanying consolidated balance sheets of Hyperdynamics
Corporation as of June 30, 2007 and 2006, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended June 30, 2007. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
 
 We
conducted our audits in accordance with auditing standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Hyperdynamics
Corporation as of June 30, 2007 and 2006, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2007 in conformity with accounting principles generally accepted in the
United States of America.
 
 We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Hyperdynamics Corporation’s internal control
over financial reporting as of June 30, 2007 based on the criteria established
in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission, and our report dated September 26, 2007 expressed an
adverse opinion on the effectiveness of Hypderdynamics Corporation’s internal
control over financial reporting.
 
 Malone &
Bailey, PC
 www.malone-bailey.com
 Houston,
Texas
  September
26, 2007
 
 F-4
 Table of
Contents
  HYPERDYNAMICS
CORPORATION
 CONSOLIDATED BALANCE
SHEETS
 (In Thousands, Except Number of
Shares and Per Share Amounts)
 
 June
      302007
              
              
              2006ASSETSCurrent
      assets:Cash
              
              $
              618
              
              
              $
              3,435Restricted
      certificate of deposit
              
              
              75
              
              
              
              75Trade
      accounts receivable, net of allowances for doubtful accounts of $0 and
      $13
              
              
              109
              
              
              
              58Subscription
      receivable
              
              
              5,250
              
              
              
              -Deposit
      on acquisition of oil and gas assets
              
              
              374
              
              
              
              -Prepaid
      expenses and other current assets
              
              
              199
              
              
              
              202Total
      current assets
              
              
              6,625
              
              
              
              3,770Property
      and equipment, net of accumulated depreciation of $149 and
      $125
              
              
              366
              
              
              
              93Oil
      and gas properties:Evaluated
      properties, using full cost accounting, net of
      accumulated  depreciation and depletion of $174 and
      $169
              
              
              204
              
              
              
              298Unevaluated
      properties excluded from amortization
              
              
              4,279
              
              
              
              4,139Deposits
              
              
              6
              
              
              
              3Total
      assets
              
              $
              11,480
              
              
              $
              8,303LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilities:Short
      term notes payable
              
              $
              375
              
              
              $
              106Accounts
      payable and accrued expenses
              
              
              895
              
              
              
              637Accounts
      payable seismic data
              
              
              650
              
              
              
              650Asset
      retirement obligation
              
              
              84
              
              
              
              -Deferred
      gain
              
              
              -
              
              
              
              159Convertible
      debenture, net of discount of $0 and $2,444
              
              
              -
              
              
              
              1,556Dividends
      payable
              
              
              372
              
              
              
              372Dividends
      payable to related party
              
              
              245
              
              
              
              136Total
      current liabilities
              
              
              2,621
              
              
              
              3,616Asset
      retirement obligation
              
              
              44
              
              
              
              12Deferred
      Rent
              
              
              89
              
              
              
              67Total
      liabilities
              
              
              2,754
              
              
              
              3,695Commitments
      and contingencies (Note 15)Shareholders'
      equity:Convertible
      preferred stock, par value $0.001; stated value $1,000; 20,000,000
      authorizedSeries
      A - 1,945 shares issued and outstanding
              
              
              -
              
              
              
              -Series
      B - 2,725 shares issued and 2,487 and 2,725 sharesoutstanding
              
              
              -
              
              
              
              -Common
      stock, $0.001 par value, 250,000,000 shares authorized; 54,467,902 and
      46,132,595 shares issued and outstanding
              
              
              54
              
              
              
              46Additional
      paid-in capital
              
              
              59,045
              
              
              
              31,627Accumulated
      deficit
              
              
              (50,373
              )
              
              
              (27,065
              )Total
      shareholders' equity
              
              
              8,726
              
              
              
              4,608Total
      liabilities and shareholders' equity
              
              $
              11,480
              
              
              $
              8,303
  The
accompanying notes are an integral part of these consolidated financial
statements
  F-5
 Table of
Contents
  HYPERDYNAMICS
CORPORATION
 CONSOLIDATED STATEMENTS OF
OPERATIONS
 (In Thousands, Except Number of
Shares and Per Share Amounts)
  Years
      Ended June 30,2007
                
                
                2006
                
                
                2005RevenuesOil
      and gas production
                
                $
                908
                
                
                $
                615
                
                
                $
                55Other
      revenues
                
                
                98
                
                
                
                -
                
                
                
                118Total
                
                
                1,006
                
                
                
                615
                
                
                
                173Costs
      and expensesLease
      operating costs
                
                
                387
                
                
                
                657
                
                
                
                265Severance
      tax
                
                
                104
                
                
                
                65
                
                
                
                6Accretion
      expense
                
                
                1
                
                
                
                -
                
                
                
                -Depreciation,
      depletion and amortization from Oil and Gas Properties
                
                
                162
                
                
                
                116
                
                
                
                77Other
      operational costs
                
                
                733
                
                
                
                984
                
                
                
                1,105Settlement
      expense
                
                
                9,118
                
                
                
                -
                
                
                
                -Consulting
      – related party
                
                
                4,240
                
                
                
                284
                
                
                
                1,101Selling,
      general and administrative, including $59, $51 and $48 of administrative
      depreciation
                
                
                6,504
                
                
                
                3,550
                
                
                
                2,546Total
                
                
                21,249
                
                
                
                5,656
                
                
                
                5,100Loss
      from operations
                
                
                (20,243
                )
                
                
                (5,041
                )
                
                
                (4,927
                )Other
      income (expense)Interest
      expense
                
                
                (2,984
                )
                
                
                (1,962
                )
                
                
                (239
                )Interest
      income
                
                
                96
                
                
                
                2
                
                
                
                17Gain/
      (Loss) on retirement of assets
                
                
                (96
                )
                
                
                (278
                )
                
                
                10Loss
      on retirement of mandatorily redeemable preferred stock
                
                
                -
                
                
                
                -
                
                
                
                (77
                )Gain/
      (Loss) on settlement of debt
                
                
                28
                
                
                
                135
                
                
                
                -Total
      Other Income (Expense)
                
                
                (2,956
                )
                
                
                (2,103
                )
                
                
                (289
                )Net
      loss
                
                
                (23,199
                )
                
                
                (7,144
                )
                
                
                (5,216
                )Preferred
      stock dividend to related party
                
                
                (109
                )
                
                
                (109
                )
                
                
                (128
                )Net
      loss attributable to common shareholders
                
                $
                (23,308
                )
                
                $
                (7,253
                )
                
                $
                (5,344
                )Basic
      and diluted loss per common share
                
                $
                (0.49
                )
                
                $
                (0.17
                )
                
                $
                (0.13
                )Weighted
      average shares outstanding
                
                
                47,723,298
                
                
                
                43,318,773
                
                
                
                41,646,844
  The accompanying notes are an integral part of these
consolidated financial statements
  F-6
 Table of
Contents
  HYPERDYNAMICS
CORPORATION
 CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
 (In Thousands, Except Number of
Shares)
 Series
      A Preferred
                  
                  
                  Series
      B Preferred
                  
                  
                  Common
      Stock
                  
                  
                  AdditionalShares
                  
                  
                  Amount
                  
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  Paid-in
                  
                  
                  Accumulated
                  
                  
                  TotalCapital
                  
                  
                  DeficitBalance,
      June 30, 2004
                  
                  
                  1,945
                  
                  
                  $
                  -
                  
                  
                  
                  2,725
                  
                  
                  $
                  -
                  
                  
                  
                  41,206,953
                  
                  
                  $
                  41
                  
                  
                  $
                  19,088
                  
                  
                  $
                  (14,468
                  )
                  
                  $
                  4,661Common
      stock issued for:Exercise
      of options
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  321,500
                  
                  
                  
                  1
                  
                  
                  
                  167
                  
                  
                  
                  
                  
                  
                  
                  168Services
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  155,756
                  
                  
                  
                  
                  
                  
                  
                  390
                  
                  
                  
                  
                  
                  
                  
                  390Conversion
      of mandatorily redeemable preferred stock
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  269,634
                  
                  
                  
                  
                  
                  
                  
                  849
                  
                  
                  
                  
                  
                  
                  
                  849Accounts
      payable
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  25,372
                  
                  
                  
                  
                  
                  
                  
                  63
                  
                  
                  
                  
                  
                  
                  
                  63Note
      payable from acquisition of HYD Resources
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  101,480
                  
                  
                  
                  
                  
                  
                  
                  281
                  
                  
                  
                  
                  
                  
                  
                  281Issuance
      of stock options and warrantsWarrants
      issued for services
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  732
                  
                  
                  
                  
                  
                  
                  
                  732Warrants
      issued for services  to  related
    parties
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,101
                  
                  
                  
                  
                  
                  
                  
                  1,101Preferred
      stock dividend – related parties
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (128
                  )
                  
                  
                  (128
                  )Payment
      of preferred stock dividends in common stock to related
    party
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  87,715
                  
                  
                  
                  
                  
                  
                  
                  245
                  
                  
                  
                  
                  
                  
                  
                  245Net
      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (5,216
                  )
                  
                  
                  (5,216
                  )Balance,
      June 30, 2005
                  
                  
                  1,945
                  
                  
                  $
                  -
                  
                  
                  
                  2,725
                  
                  
                  $
                  -
                  
                  
                  
                  42,168,410
                  
                  
                  $
                  42
                  
                  
                  $
                  22,916
                  
                  
                  $
                  (19,812
                  )
                  
                  $
                  3,146Common
      stock issued for:Exercise
      of options for cash
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  120,000
                  
                  
                  
                  
                  
                  
                  
                  60
                  
                  
                  
                  
                  
                  
                  
                  60
 The accompanying notes are an integral part of these
consolidated financial statements
  F-7
 Table of
Contents
 -by
      related party
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,010,000
                  
                  
                  
                  1
                  
                  
                  
                  504
                  
                  
                  
                  
                  
                  
                  
                  505Cashless
      exercise of options, net of 2,437 shares returned
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,563
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  -Services
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  179,266
                  
                  
                  
                  
                  
                  
                  
                  397
                  
                  
                  
                  
                  
                  
                  
                  397To
      repurchase working interest
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  197,416
                  
                  
                  
                  
                  
                  
                  
                  581
                  
                  
                  
                  
                  
                  
                  
                  581Options
      exercised associated with convertible debentures
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  500,000
                  
                  
                  
                  1
                  
                  
                  
                  449
                  
                  
                  
                  
                  
                  
                  
                  450Conversion
      of convertible debentures
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,692,845
                  
                  
                  
                  2
                  
                  
                  
                  1,918
                  
                  
                  
                  
                  
                  
                  
                  1,920Cash
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  135,095
                  
                  
                  
                  
                  
                  
                  
                  387
                  
                  
                  
                  
                  
                  
                  
                  387Beneficial
      conversion costs associated with issuance of convertible notes payables
      and debentures
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  127,000
                  
                  
                  
                  
                  
                  
                  
                  3,560
                  
                  
                  
                  
                  
                  
                  
                  3,560Issuance
      of  warrantsFor
      services
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  189
                  
                  
                  
                  
                  
                  
                  
                  189For
      services to related party
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  284
                  
                  
                  
                  
                  
                  
                  
                  284Employee
      stock options
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  382
                  
                  
                  
                  
                  
                  
                  
                  382Preferred
      stock dividends to related party
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (109
                  )
                  
                  
                  (109
                  )Net
      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (7,144
                  )
                  
                  
                  (7,144
                  )Balance,
      June 30, 2006
                  
                  
                  1,945
                  
                  
                  $
                  -
                  
                  
                  
                  2,725
                  
                  
                  $
                  -
                  
                  
                  
                  46,132,595
                  
                  
                  $
                  46
                  
                  
                  $
                  31,627
                  
                  
                  $
                  (27,065
                  )
                  
                  $
                  4,608Common
      stock issued for:Exercise
      of options for cash
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  8,910
                  
                  
                  
                  
                  
                  
                  
                  19
                  
                  
                  
                  
                  
                  
                  
                  19Exercise
      of warrants for cash
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  724,898
                  
                  
                  
                  1
                  
                  
                  
                  403
                  
                  
                  
                  
                  
                  
                  
                  404Exercise
      of warrants for cash – related party
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  188,242
                  
                  
                  
                  
                  
                  
                  
                  94
                  
                  
                  
                  
                  
                  
                  
                  94Exercise
      of warrants for subscription receivable
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,100,000
                  
                  
                  
                  2
                  
                  
                  
                  5,248
                  
                  
                  
                  
                  
                  
                  
                  5,250
 The accompanying notes are an integral part of these
consolidated financial statements
 F-8
 Table of
Contents
 Cashless
      exercise of options, net of 25,587 shares returned
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  17,503Cashless
      exercise of warrants by related parties, net of 61,877 shares
      returned
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  139,880Services
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  232,816
                  
                  
                  
                  
                  
                  
                  
                  485
                  
                  
                  
                  
                  
                  
                  
                  485Settlement
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  30,000
                  
                  
                  
                  
                  
                  
                  
                  82
                  
                  
                  
                  
                  
                  
                  
                  82Deposit
      on acquisition of oil and gas properties
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  100,000
                  
                  
                  
                  
                  
                  
                  
                  274
                  
                  
                  
                  
                  
                  
                  
                  274Conversion
      of convertible debentures
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3,000,000
                  
                  
                  
                  3
                  
                  
                  
                  5,997
                  
                  
                  
                  
                  
                  
                  
                  6,000Conversion
      of Series B Preferred Stock by related parties
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (238
                  )
                  
                  
                  
                  
                  
                  
                  1,762,962
                  
                  
                  
                  2
                  
                  
                  
                  (2
                  )Cash
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  97,000
                  
                  
                  
                  -
                  
                  
                  
                  268
                  
                  
                  
                  
                  
                  
                  
                  268Common
      stock returned and canceled in accordance with legal
      settlement
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (66,904
                  )Beneficial
      conversion costs associated with issuance of convertible notes payables
      and debentures
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  80
                  
                  
                  
                  
                  
                  
                  
                  80Warrants
      issued in connection with settlement agreement
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  8,959
                  
                  
                  
                  
                  
                  
                  
                  8,959Employee
      stock options
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,089
                  
                  
                  
                  
                  
                  
                  
                  1,089Warrants
      issued for services – related party
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4,227
                  
                  
                  
                  
                  
                  
                  
                  4,227Warrants
      issued for services
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  195
                  
                  
                  
                  
                  
                  
                  
                  195Deemed
      Dividend
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (5,058
                  )Deemed
      Dividend
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  5,058
                  
                  
                  
                  
                  
                  
                  
                  5,223Preferred
      stock dividends to related party
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (109
                  )
                  
                  
                  (109
                  )Net
      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (23,199
                  )
                  
                  
                  (23,199
                  )Balance,
      June 30, 2007
                  
                  
                  1,945
                  
                  
                  $
                  -
                  
                  
                  
                  2,487
                  
                  
                  $
                  -
                  
                  
                  
                  54,467,902
                  
                  
                  $
                  54
                  
                  
                  $
                  59,045
                  
                  
                  $
                  (50,373
                  )
                  
                  $
                  8,726
  The accompanying notes are an integral part of these
consolidated financial statements
  F-9
 Table of
Contents
  HYPERDYNAMICS
CORPORATION
 CONSOLIDATED STATEMENTS OF CASH
FLOWS
 (In Thousands)
  Years
      Ended June 302007
                        
                        
                        2006
                        
                        
                        2005CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      Loss
                        
                        $
                        (23,199
                        )
                        
                        $
                        (7,144
                        )
                        
                        $
                        (5,216
                        )Adjustments
      to reconcile net income to net cash provided by (used in) operating
      activities -Depreciation,
      depletion and amortization
                        
                        
                        221
                        
                        
                        
                        167
                        
                        
                        
                        125Accretion
      expense
                        
                        
                        1
                        
                        
                        
                        -
                        
                        
                        
                        -Shares
      issued for services
                        
                        
                        485
                        
                        
                        
                        359
                        
                        
                        
                        48Shares
      issued for Settlement
                        
                        
                        82
                        
                        
                        
                        -
                        
                        
                        
                        -Warrants
      issued for legal settlement, net
                        
                        
                        8,959
                        
                        
                        
                        -
                        
                        
                        
                        -Employee
      stock options
                        
                        
                        1,089
                        
                        
                        
                        381
                        
                        
                        
                        -Warrants
      issued for services –related party
                        
                        
                        4,227
                        
                        
                        
                        284
                        
                        
                        
                        1,101Warrants
      issued for services
                        
                        
                        195
                        
                        
                        
                        190
                        
                        
                        
                        732Loss
      on disposition of assets
                        
                        
                        96
                        
                        
                        
                        278
                        
                        
                        
                        17Gain
      on settlement of debt
                        
                        
                        (28
                        )
                        
                        
                        (135
                        )
                        
                        
                        -Bad
      debt expense
                        
                        
                        27
                        
                        
                        
                        233
                        
                        
                        
                        15Amortization
      of discount and financing costs on convertible debenture
                        
                        
                        2,719
                        
                        
                        
                        1,650
                        
                        
                        
                        -Accretion
      of interest and amortization of offering costs of mandatory redeemable
      preferred stock
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        232Loss
      on retirement of mandatory redeemable preferred stock
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        77Changes
      in operating assets and liabilities:Accounts
      receivable
                        
                        
                        (83
                        )
                        
                        
                        (272
                        )
                        
                        
                        (6
                        )Other
      current assets
                        
                        
                        (10
                        )
                        
                        
                        (30
                        )
                        
                        
                        9Accounts
      payable and accrued expenses
                        
                        
                        273
                        
                        
                        
                        91
                        
                        
                        
                        299Other
      liabilities
                        
                        
                        77
                        
                        
                        
                        -
                        
                        
                        
                        -Deferred
      rent
                        
                        
                        38
                        
                        
                        
                        67
                        
                        
                        
                        (7
                        )Net
      cash used in operating activities
                        
                        
                        (4,831
                        )
                        
                        
                        (3,881
                        )
                        
                        
                        (2,574
                        )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of property and equipment
                        
                        
                        (332
                        )
                        
                        
                        (78
                        )
                        
                        
                        (267
                        )(Increase)
      decrease in restricted cash
                        
                        
                        -
                        
                        
                        
                        (10
                        )
                        
                        
                        130Proceeds
      from the sale of assets
                        
                        
                        36
                        
                        
                        
                        204
                        
                        
                        
                        13Investment
      in oil and gas properties
                        
                        
                        (225
                        )
                        
                        
                        (439
                        )
                        
                        
                        (1,250
                        )Payment
      of deposit
                        
                        
                        (100
                        )
                        
                        
                        (1
                        )
                        
                        
                        (1
                        )Return
      of deposit
                        
                        
                        -
                        
                        
                        
                        21
                        
                        
                        
                        -Net
      cash used in investing activities
                        
                        
                        (621
                        )
                        
                        
                        (303
                        )
                        
                        
                        (1,375
                        )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from sale of common stock, net
                        
                        
                        268
                        
                        
                        
                        387
                        
                        
                        
                        -Proceeds
      from exercise of options
                        
                        
                        518
                        
                        
                        
                        1,015
                        
                        
                        
                        168Proceeds
      from sale of working interest in oil and gas properties, net of $0, $182
      and $203 payment to related party
                        
                        
                        -
                        
                        
                        
                        726
                        
                        
                        
                        814Proceeds
      from convertible notes
                        
                        
                        1,820
                        
                        
                        
                        5,620
                        
                        
                        
                        -Payments
      on convertible debentures and convertible notes payable
                        
                        
                        -
                        
                        
                        
                        (247
                        )
                        
                        
                        -Proceeds
      from notes payable
                        
                        
                        199
                        
                        
                        
                        207
                        
                        
                        
                        227Payments
      on notes payable
                        
                        
                        (170
                        )
                        
                        
                        (348
                        )
                        
                        
                        (150
                        )Net
      cash provided by financing activities
                        
                        
                        2,635
                        
                        
                        
                        7,360
                        
                        
                        
                        1,059(DECREASE)
      INCREASE IN CASH
                        
                        
                        (2,817
                        )
                        
                        
                        3,176
                        
                        
                        
                        (2,890
                        )CASH
      AT BEGINNING OF YEAR
                        
                        
                        3,435
                        
                        
                        
                        259
                        
                        
                        
                        3,149CASH
      AT END OF YEAR
                        
                        $
                        618
                        
                        
                        $
                        3,435
                        
                        
                        $
                        259
 The accompanying notes are an integral part of these
consolidated financial statements
  F-10
 Table of
Contents
  HYPERDYNAMICS
CORPORATION
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
 (In Thousands)
 
 Years
      Ended June 302007
              
              
              2006
              
              
              2005SUPPLEMENTAL
      DISCLOSURES:Interest
      paid in cash
              
              $
              277
              
              
              $
              175
              
              
              $
              7Income
      taxes paid in cash
              
              
              -
              
              
              
              -
              
              
              
              -NON-CASH
      TRANSACTIONSIssuance
      of common stock for accounts payable
              
              $
              -
              
              
              $
              -
              
              
              $
              63Payment
      of preferred stock dividends in common shares to related
    party
              
              
              -
              
              
              
              -
              
              
              
              245Issuance
      of common stock on acquisition of oil and gas properties
              
              
              274
              
              
              
              -
              
              
              
              -Exercise
      of option for stock subscription receivable
              
              
              5,250
              
              
              
              -Conversion
      of Series B Preferred Stock to common stock by related
    parties
              
              
              2
              
              
              
              -Deemed
      dividend
              
              
              5,058
              
              
              
              -
              
              
              
              -Deemed
      dividend
              
              
              (5,058
              )
              
              
              -Debt
      discount on convertible debt
              
              
              80
              
              
              
              3,565Stock
      issued for notes payable
              
              
              6,000
              
              
              
              1,893
              
              
              
              281Conversion
      of mandatory redeemable preferred stock
              
              
              -
              
              
              
              -
              
              
              
              849Issuance
      of stock for oil and gas properties
              
              
              -
              
              
              
              37
              
              
              
              342Accrued
      and unpaid dividend to related parties
              
              
              109
              
              
              
              109
              
              
              
              109
  The accompanying notes are an integral part of these
consolidated financial statements
  F-11
 Table of
Contents
  HYPERDYNAMICS
CORPORATION
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
  1. ORGANIZATION AND SIGNIFICANT
ACCOUNTING POLICIES
  Nature of
business. Hyperdynamics Corporation (Hyperdynamics) is a Delaware corporation
formed in March 1996. Hyperdynamics has two wholly-owned subsidiaries, SCS
Corporation (SCS), HYD Resources Corporation (HYD).  HYD has a
wholly-owned subusidiary, Trendsetter Production Company (Trendsetter). Through
SCS’s wholly owned subsidiary, SCS Corporation Guinee SARL which is a Guinea
limited liability company located in Conakry, Guinea.  Hyperdynamics
focuses on oil and gas exploration offshore the coast of West Africa. SCS began
operations in oil and gas exploration, seismic data acquisition, processing, and
interpretation in late fiscal 2002. In April 2004, Hyperdynamics acquired HYD,
and in January 2005, HYD acquired Trendsetter, an oil and gas operator in
Louisiana that had been under common ownership with HYD. Trendsetter owns and
operates oil and gas leases in the USA.
  Principles of Consolidation and Use
of Estimates
 
 The
accompanying consolidated financial statements include the accounts of
Hyperdynamics and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.  The
financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America.  Certain prior
year amounts have been reclassified to conform with the current
presentation.  The preparation of the consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenue and expenses at
the balance sheet date and for the period then ended. Actual results could
differ from these estimates. Significant estimates are required for proved oil
and gas reserves, which, as described in Note 19 – Supplemental Oil and Gas
Properties Information (unaudited), have a material impact on the carrying value
of oil and gas property. Actual results could differ from these estimates and
such differences could be material.
 
 Cash and cash
equivalents
  For
purposes of the Consolidated Statements of Cash Flows, Hyperdynamics considers
all highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents.
  Restricted
cash at June 30, 2007 and 2006 consists of a certificate of deposit at a bank
that secures a letter of credit serving as the underlying collateral for a
Hyperdynamics' lease commitment. The CD matures on January 6, 2008 and accrues
interest at 4.03% annually. The contractual obligation to provide a letter of
credit will end and the letter of credit will be returned to us on October 31,
2007.
 
 Accounts receivable, allowance for
doubtful accounts and key customers
  Hyperdynamics
does not require collateral from its customers.  Accounts receivable
are written down to reflect management's best estimate or realizability based
upon known specific analysis, historical experience, and other currently
available evidence of the net collectible amount.  During the fiscal
year, two customers, Plains Marketing LLC and Shell Trading, purchased all
oil production from our Louisiana properties. In September 2006, we entered a
contract with Shell Trading to be the sole purchaser of our oil production in
Louisiana.
  Other Current
Assets
  As of
June 30, 2007, other current assets consist of $151,000 in prepaid insurance,
$35,000 other prepaid expenses, and $13,000 of inventory, for a total of
$199,000.
 
 As of
June 30, 2006, other current assets consist of $143,000 in prepaid insurance and
$59,000 other prepaid expenses, for a total of $202,000.
 
 As of
June 30, 2007, an investor had exercised warrants to purchase 2,100,000 shares
of common stock at $2.50 per share.  The investor paid the exercise
price, $5,250,000, on July 2, 2007.  The stock is reflected as issued
on June 30, 2007 and the $5,250,000 is reflected as a stock subscription
receivable.
 
 F-12
 Table of
Contents
  Oil and Gas
Properties
 
 Full Cost Method
 
 The
Company uses the full cost method of accounting for exploration and development
activities as defined by the SEC. Under this method of accounting, the costs of
unsuccessful, as well as successful, exploration and development activities are
capitalized as properties and equipment. This includes any internal costs that
are directly related to exploration and development activities but does not
include any costs related to production, general corporate overhead or similar
activities. Gain or loss on the sale or other disposition of oil and gas
properties is not recognized, unless the gain or loss would significantly alter
the relationship between capitalized costs and proved reserves of oil and
natural gas attributable to a country. The application of the full cost method
of accounting for oil and gas properties generally results in higher capitalized
costs and higher DD&A rates compared to the successful efforts method of
accounting for oil and gas properties.
 
 Costs
Excluded
 
 Properties
and equipment include costs that are excluded from costs being depreciated or
amortized. Oil and gas costs excluded represent investments in unproved
properties and major development projects in which we own a direct interest.
These unproved property costs include nonproducing leasehold, geological and
geophysical costs associated with leasehold or drilling interests and
exploration drilling costs. We exclude these costs on a country-by-country basis
until proved reserves are found or until it is determined that the costs are
impaired. All costs excluded are reviewed at least quarterly to determine if
impairment has occurred. The amount of any impairment is transferred to the
capitalized costs being amortized (the DD&A pool) or a charge is made
against earnings for those international operations where a reserve base has not
yet been established. Impairments transferred to the DD&A pool increase the
DD&A rate for that country. For international operations where a reserve
base has not yet been established, an impairment requiring a charge to earnings
may be indicated through evaluation of drilling results, relinquishing drilling
rights or other information.
 
 Ceiling
Test
 
 The full
cost ceiling test is an impairment test prescribed by SEC Regulation S-X Rule
4-10.   Under full cost accounting rules for each cost center,
capitalized costs of proved properties, less accumulated amortization and
related deferred income taxes, shall not exceed an amount (the "cost ceiling")
equal to the sum of (a) the present value of future net cash flows from
estimated production of proved oil and gas reserves, based on current economic
and operating condition, discounted at 10 percent, plus (b) the cost of
properties not being amortized, plus (c)
the lower of cost or estimated fair value of any unproved properties included in
the costs being amortized, less (d) any income tax effects related to
differences between the book and tax basis of the properties involved. If
capitalized costs exceed this limit, the excess is charged as an impairment
expense. As of June 30, 2007, we have capitalized $43,000 in oil and gas
properties, which is subject to the ceiling test for impairment.  At
June 30, 2007, there was no impairment indicated.
 
 Proved reserves
 
 Our
estimates of proved reserves are based on quantities of oil and gas reserves
which current engineering data indicates are recoverable from known reservoirs
under existing economic and operation conditions. Estimates of proved reserves
are key elements in determining our depreciation, depletion and amortization
expense and our full-cost ceiling limitation. Estimates of proved reserves are
inherently imprecise because of uncertainties in projecting rates of production
and timing of developmental expenditures, interpretations of geological,
geophysical, engineering and production data and the quality and quantity of
available data. Changing economic conditions also may affect our estimates of
proved reserves due to changes in developmental costs and changes in commodity
prices that may impact reservoir economics. We utilize independent reserve
engineers to estimate our proved reserves.
 
 Property and Equipment, other than
Oil and Gas
 
 Property,
equipment and a building are stated on the basis of historical cost less
accumulated depreciation. Depreciation is provided using the straight-line
method over the estimated useful lives of the assets of 3 - 15
years.
 
 Provision for Impairments of
Long-lived Assets
 
 The
Company follows Statement of Financial Accounting Standards No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, by reviewing such assets
for impairment annually or whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Impairment loss
recognized is the excess of the carrying amount over the fair value of the
asset. Based on our impairment analysis, we did not recognize any impairment
charges in the years ended June 30, 2007 or June 30, 2006.
  F-13
 Table of
Contents
  Asset Retirement
Obligations
 
 Our asset
retirement obligations represent our best estimate of the fair value of our
future abandonment costs associated with our oil and gas properties, including
the costs of removal and disposition of tangible equipment, site and
environmental restoration. We estimate the fair value of our retirement costs in
the period in which the liability is incurred, if a reasonable estimate can be
made. The determination of the fair value of an asset retirement obligation
generally involves estimating the fair value of the obligation at the end of the
property's useful life and then discounting it to present value using our credit
adjusted, risk free rate of return. Estimating future asset removal costs is
difficult and requires management to make estimates and judgments regarding the
expected removal and site restoration costs, timing and present value discount
rates. Changes in the estimated useful life and the fair value of the asset
retirement obligation are imprecise since the removal activities will generally
occur several years in the future and asset removal technologies and costs are
constantly changing, as are political, environmental and safety considerations
that may ultimately impact the amount of the obligations.
 
 Deferred Rent
 
 Deferred
rent arises because Hyperdynamics had a free rent period within its lease
contract.  Monthly rent expense is calculated as the average monthly
cost for all payments scheduled to be made over the entire term of the
lease.  During the free rent period, expense was accrued, and as cash
payments are made, the accrual will be reduced.  The short-term
portion, which is scheduled to reverse within twelve months of the balance sheet
date, is included in accounts payable and accrued expenses.  The long
term portion is included in the caption “Long term
liabilities”.   During the free rent period, which began in
January 2006 and ended in November 2006, $115,000 in rent expense was
accrued.  As of June 30, 2007 and 2006, $105,000 and $67,000,
respectively, had been accrued.  As of June 30, 2007, $89,000 was
long-term and $16,000 was short term.  The accrual will reverse
$16,000 in each of the years ended June 30, 2008 through June 30, 2013 and
$9,000 in the year ended June 30, 2014.
 
 Revenue
recognition
 
 Revenues
derive primarily from oil and gas sales and they are recognized at the point
when title to the oil or gas passes to the customer. For oil sales, this occurs
when the customer's truck takes delivery of oil from Trendsetter's storage
tanks.  Revenue, if any, from tape conversions, consulting, and oil
field services is recognized when services are rendered.
 
 Federal Income
Taxes
 
 We
account for income taxes in accordance with SFAS No. 109, “Accounting for Income
Taxes,” which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary difference between the tax
and financial reporting basis of assets and liabilities and for loss and credit
carryforwards. Valuation allowances are provided when recovery of deferred tax
assets is not considered likely.
  Stock-Based
Compensation
 
 Effective
July 1, 2005, we adopted SFAS No. 123R, “Share-Based Payment,” which was
issued in December 2004, using the modified prospective transition method. SFAS
No. 123R revises SFAS No. 123 “Accounting for Stock Based Compensation,”
and supersedes APB No. 25, “Accounting for Stock Issued to Employees,” and
its related interpretations. SFAS No. 123R requires recognition of the cost of
employee services received in exchange for an award of equity instruments in the
financial statements over the period the employee is required to perform the
services in exchange for the award (presumptively the vesting period). SFAS No.
123R also requires measurement of the cost of employee services received in
exchange for an award based on the grant-date fair value of the
award.  Prior to July 1, 2005, we measured compensation cost for stock
based compensation using the fair value based method of accounting as specified
in SFAS 123.  See Note 13.
 
 F-14
 Table of
Contents
  Earnings Per
Share
 
 Hyperdynamics’
basic earnings per share (EPS) amounts have been computed based on the average
number of shares of common stock outstanding for the period. Diluted EPS amounts
would include the effect of outstanding stock options, warrants, and other
convertible securities if including such potential shares of common stock is
dilutive.  Basic and diluted earnings per share are the same in all
periods presented because losses are anti-dilutive.
  Contingencies
  Legal
  Hyperdynamics
is subject to legal proceedings, claims and liabilities which arise in the
ordinary course of its business. Hyperdynamics accrues for losses associated
with legal claims when such losses are probable and can be reasonably estimated.
These accruals are adjusted as additional information becomes available or
circumstances change.  Legal fees are charged to expense as they are
incurred.
 
 Environmental
 
 Hyperdynamics
accrues for losses associated with environmental remediation obligations when
such losses are probable and can be reasonably estimated. These accruals are
adjusted as additional information becomes available or circumstances change.
Costs of future expenditures for environmental remediation obligations are not
discounted to their present value. Recoveries of environmental remediation costs
from other parties are recorded at their undiscounted value as assets when their
receipt is deemed probable.
  Recently issued accounting
pronouncements
  We do not expect adoption of recently
issued accounting pronouncements to have a significant impact on our results or
operations, financial position or cash flow.
  2. PROPERTY AND
EQUIPMENT
 
 A summary
of property and equipment as of June 30, 2007 and 2006 are as
follows:
  June 30,2007
              
              
              2006(in
      Thousands)Computer
      equipment and software
              3
      years
              
              $
              170
              
              
              $
              142Office
      equipment and furniture
              5
      years
              
              
              107
              
              
              
              23Vehicles
              3
      years
              
              
              120Building
              15
      years
              
              
              25
              
              
              
              25Leasehold
      improvements
              3
      years
              
              
              68
              
              
              
              3Land
              
              
              
              25
              
              
              
              25Total
      cost
              
              
              
              515
              
              
              
              218Less
      - Accumulated depreciation
              
              
              
              (149
              )
              
              
              (125
              )Net
      carrying value
              
              
              $
              366
              
              
              $
              93
 
 Hyperdynamics
reviews assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. As at June
30, 2007 and 2006, there were no impairments of Hyperdynamics' Property and
Equipment.
  F-15
 Table of
Contents
  3. INVESTMENT IN OIL AND GAS
PROPERTIES
 
 Investment
in Oil and Gas properties consist of Hyperdynamics' concession in offshore West
Africa and leaseholds in Louisiana, USA. As of June 30, 2007 and 2006, all costs
associated with properties in the USA were included in the amortization base and
all costs associated with the concession in the Republic of Guinea were excluded
from the amortization base. The following table provides detail of costs (in
thousands) to date by country as of June 30:
 
 Republic of
      Guinea
              
              
              USA
              
              
              Total2007
              
              
              2006
              
              
              2007
              
              
              2006
              
              
              2007
              
              
              2006Lease
      Acquisition Costs
              
              $
              291
              
              
              $
              291
              
              
              $
              47
              
              
              $
              36
              
              
              $
              338
              
              
              $
              327Exploration
      CostsGeological
      and geophysical Cost
              
              
              3,988
              
              
              
              3,848
              
              
              
              -
              
              
              
              -
              
              
              
              3,988
              
              
              
              3,848Drilling
              
              
              -
              
              
              
              -
              
              
              
              829
              
              
              
              829
              
              
              
              829
              
              
              
              829Development
      Costs
              
              
              -
              
              
              
              -
              
              
              
              378
              
              
              
              231
              
              
              
              378
              
              
              
              231Purchased
      Proved Reserves
              
              
              -
              
              
              
              -
              
              
              
              65
              
              
              
              65
              
              
              
              65
              
              
              
              65Cost
      Recovery (sale of working interest)
              
              
              -
              
              
              
              -
              
              
              
              (1,161
              )
              
              
              (1,161
              )
              
              
              (1,161
              )
              
              
              (1,161
              )Equipment
              
              
              
              
              
              
              
              
              
              
              220
              
              
              
              467
              
              
              
              220
              
              
              
              4674,279
              
              
              
              4,139
              
              
              
              378
              
              
              
              467
              
              
              
              4,657
              
              
              
              4,606Less:
      AccumulatedDepletion
      and Depreciation
              
              
              
              
              
              
              
              
              
              
              (174
              )
              
              
              (169
              )
              
              
              (174
              )
              
              
              (169
              )$
              4,279
              
              
              $
              4,139
              
              
              $
              204
              
              
              $
              298
              
              
              $
              4,483
              
              
              $
              4,437
 
 Excluded
Costs
 
 Hyperdynamics
excludes capitalized costs of unevaluated oil and gas properties from
amortization.  Currently, geological and geophysical information
pertaining to the Republic of Guinea is being collected and evaluated and no
reserves have been found.  The costs associated with such unproved
properties related to continuing operations of $4,279,000 and $4,139,000 as of
June 30, 2007 and 2006, respectively, are excluded from amounts subject to
amortization. The majority of the evaluation activities are expected to be
completed within three years. See Note 19 for detailed information about the
excluded costs.
 
 Trendsetter
Settlement
  During
fiscal year 2005, we sold approximately 30% of our working interest, through a
series of transactions, in the Kelly and Norris leases to outside investors,
including Trendsetter Investors, LLC. Net proceeds from the sale totaled
$1,320,000, of which $1,161,000 was applied against our USA full-cost property
pool. At June 30, 2006, we had recognized a deferred gain related to the sale of
this working interest.
  On March
8, 2006, Trendsetter Investors, LLC filed a lawsuit alleging breach of contract,
among other things, which was settled in June 2007. (see Note 15) Pursuant to
the settlement agreement, we issued 3,480,000 warrants to purchase our common
shares at an adjusted exercise price of $2.40 per share. The value of the
warrant, computed using the Black-Scholes option pricing model, was $8,959,000.
In addition, we issued 30,000 shares of restricted common stock valued at
$82,000 and agreed to pay $280,000 in legal costs associated with the case. As
of June 30, 2007, $40,000 had been paid leaving a balance of $240,000. The
remaining balance of this note was paid in July 2007. In addition, at June 30,
2007, the deferred gain of $159,000 was reduced to $0. The total loss recognized
in fiscal year 2007 related to this settlement was $8,850,000.
  Also in
connection with the settlement agreement, the 30% working interest was conveyed
back to us and was assigned a zero value.
  Acquisition of Oil and Gas
Properties
 
 During
June 2007, Hyperdynamics entered into an agreement with an operator to purchase
a non-operating 85% working interest in various wells, leases, and oil and gas
equipment in Louisiana, USA.  The closing date of the agreement was
July 1, 2007.  Prior to closing, Hyperdynamics paid $100,000 in cash
and 100,000 shares of common stock when the quoted market price of the stock was
$2.74 per share.  The consideration paid as of June 30, 2007,
$374,000, is carried as a deposit on Hyperdynamics’ consolidated balance
sheet.
 
 F-16
 Table of
Contents
  Under the
agreement, Hyperdynamics paid an additional $1,150,000 in cash and 100,000
shares of common stock.  Hyperdynamics made the cash payment in July
2007 and the stock payment in August 2007. The properties purchased under this
agreement are subject to overriding royalty interests of up to 27.46%. In
addition, the seller, who will remain the operator of the properties, retained a
15% working interest. However, Hyperdynamics will pay 100% of the working
interest expenses, including work-over and new development costs, up to
$4,000,000.  Subsequent working interest expenses are shared pro rata
according to the working interest.
 
 Guinea Assets
 
 On
September 22, 2006, we signed a Production Sharing Contract (the “2006 PSC”)
with the Republic of Guinea. Under this contract, we have the exclusive right to
explore and develop approximately 31,000 square miles off the coast of Guinea.
However, upon the passage of a “Project of Law,” a Presidential Decree and a
Guinea Supreme Court Ruling, we will be required to surrender our exclusive
rights to 64% (approximately 20,000 acres) of the concession. The area
ultimately surrendered would be selected by Hyperdynamics, but, we would retain
a priority non-exclusive right to participate in the development of the
surrendered contract area. The Guinea concession is subject to a 10% overriding
royalty interest to the Guinea Government and we are entitled to recover 75% of
our cost. In addition, the Guinea Government may elect to take a 15% working
interest in any exploitation area.
 
 The first
exploration period runs for two years from the date of the 2006 PSC, with two
automatic extensions. In the first exploration period we are required to
acquire, evaluate, and analyze 2D or 3D seismic with an estimated minimum
expenditure of $10 million. The second exploration period begins at the end of
the first exploration period and runs for 4 years with an automatic extension of
4 years. In the second exploration period we are required to acquire additional
2D or 3D seismic, evaluate it and analyze it with an estimated minimum cost of
$6MM, and drill two exploration wells for an estimated minimum cost of $15
million to $20 million each and minimum well depth of 2,500 meters from the
surface of the water.  The fulfillment of the work scope during each
exploration period relieves us from any minimum expenditure obligation. The
exploitation period(s) for each exploitation area (as specified) will be for 25
years with two ten year automatic extensions available for a total of 45 years.
Each well in the exploitation area will have its own exploitation
period.
 
 Loss on disposal of
equipment
 
 Hyperdynamics
conducted a physical inventory of oilfield equipment and concluded that, at
year-end, oilfield equipment with a cost basis of $234,000 and a net book value
of $104,000 were no longer in service.  As a result, we recorded a
$104,000 charge for loss on retirement of equipment
 
 
 4. ASSET RETIREMENT
OBLIGATIONS
 
 SFAS
No. 143, “Accounting for Asset Retirement Obligations,” addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. This
statement requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred. The associated
asset retirement costs are capitalized as part of the carrying cost of the
asset. The company's asset retirement obligations consist of estimated costs for
dismantlement, removal, site reclamation and similar activities associated with
its oil and gas properties. An asset retirement obligation and the related asset
retirement cost are recorded when an asset is first drilled, constructed or
purchased. The asset retirement cost is determined and discounted to present
value using a credit-adjusted risk-free rate. After initial recording, the
liability is increased for the passage of time, with the increase being
reflected as accretion expense in the statement of operations. Subsequent
adjustments in the cost estimate are reflected in the asset retirement
obligation liability and the amounts continue to be amortized over the useful
life of the related long-lived asset.
 
 F-17
 Table of
Contents
  The following is a reconciliation of
our asset retirement obligation liability as of June 30, 2007 and
2006:
  2007
              
              
              2006(in
      Thousands)Asset
      retirement obligation, beginning of period
              
              $
              12
              
              
              $
              -Liabilities
      incurred
              
              
              -
              
              
              
              12Revisions
      of estimates
              
              
              115
              
              
              
              -Accretion
      of discount
              
              
              1
              
              
              
              -Asset
      retirement obligation, end of period
              
              $
              128
              
              
              $
              12
  5. ACCOUNTS PAYABLE AND ACCRUED
EXPENSES
 
 Accounts
payable and accrued expenses as of June 30, 2007 and 2006 include the
following:
 
 2007
              
              
              2006(in
      Thousands)Accounts
      payable
              
              $
              679
              
              
              $
              436Accrued
      payroll
              
              
              30
              
              
              
              19Accrued
      insurance
              
              
              153
              
              
              
              146Taxes
      payable
              
              
              17
              
              
              
              6Deferred
      rent
              
              
              16
              
              
              
              -Accrued
      revenue interest payable
              
              
              -
              
              
              
              30$
              895
              
              
              $
              637
  6. ACCOUNTS PAYABLE SEISMIC
DATA
 
 In
February 2003, SCS agreed to pay $650,000 to Offshore Seismic Surveys, Inc.
(OSS), an offshore seismic company, in exchange for OSS agreeing to release SCS
from the $550,000 due to OSS for the Guinea seismic data. The additional
$100,000 was charged to expense in 2003. OSS maintains a lien on the ownership
and sale of 1,000 kilometers of the seismic data acquired in 2002, as security
for the $650,000.
 
 Any user
license sales proceeds generated from user licenses of the this data shall first
go to payoff the $650,000 liability at a rate of 90 percent of gross user
license sales proceeds for OSS and 10 percent to SCS until the $650,000 is paid
in full. Any funding arrangement SCS enters into with respect to the Guinea
PSC,, whereby all rights and obligations under the PSC are transferred, shall
cause the $650,000 to become immediately due upon signing and funding of such
agreement.  The payable is accrued at June 30, 2005.
 
 7. SHORT TERM NOTES
PAYABLE
 
 Short  term
notes payable consist of the following as of June 30:
  2007
              
              
              2006(in
      Thousands)Directors
      and Officers Liability Insurance premium notes payable with $24,000 down
      and the balance payable in 9 monthly installments of $11,000 including
      interest of 6.5% APR for the period ended June 30, 2007 and June 30,
      2006;
              
              
              119
              
              
              
              95Auto
      insurance finance agreement payable with $4,000 and $7,000 down,
      respectively,  and the balance payable in monthly installments
      of $2,000.
              
              
              16
              
              
              
              11Note
      payable for legal settlement in six monthly installments of $40,000
      principal plus 18% interest
              
              
              240$
              375
              
              
              $
              106
 
 F-18
 Table of
Contents
 
 8. CONVERTIBLE
DEBENTURES
 
 In June
2006, we issued, in three tranches, an aggregate of $6,000,000 in 10%
convertible debentures due June 19, 2009 pursuant to a financing arrangement
with Cornell Capital Partners, LP. The debentures were secured by substantially
all of the assets of the company, except for the assets of our subsidiaries SCS
Corp and SCS Guinea SARL and our assets and operations in the Republic of
Guinea.
 
 In
connection with these debentures, we received net aggregate proceeds of
$5,440,000 and issued warrant to purchase 2,100,000 shares of our common stock
at a weighted-average exercise price of $3.15. The warrants were valued at
$1,314,000 using the Black-Scholes option pricing model. In addition, the
debentures contained a beneficial conversion feature totaling
$866,000.
 
 During
fiscal 2007, all of the debentures were converted into common shares. At the
time of conversion, we recognized $2,719,000 in additional interest expense due
to the acceleration of the discount amortization. The following table reflects
the activity for the years ended June 30, 2007 and 2006:
  June 30,2007
                  
                  
                  2006Face
      value of debentures
                  
                  $
                  6,000,000
                  
                  
                  $
                  4,000,000Less:      Discount
      related to warrants
                  
                  
                  (1,314,000
                  )
                  
                  
                  (1,314,000
                  )Discount
      related to conversion feature
                  
                  
                  (845,000
                  )
                  
                  
                  (782,000
                  )Discount
      related to financing costs
                  
                  
                  (560,000
                  )
                  
                  
                  (380,000
                  )Subtotal
                  
                  
                  3,281,000
                  
                  
                  
                  1,524,000Add:      
      Amortization of discount
                  
                  
                  2,719,000
                  
                  
                  
                  32,000Total
      principal
                  
                  
                  6,000,000
                  
                  
                  
                  1,556,000Less
      payments:Conversion
      to common shares
                  
                  
                  (6,000,000
                  )Balance
      of debentures at year end
                  
                  $
                  -
                  
                  
                  $
                  1,556,000
  
 At the
time of issuance, we analyzed the convertible debentures for derivative
accounting consideration under SFAS 133 and EITF 00-19. Hyperdynamics determined
the conversion feature met the criteria for classification in stockholders'
equity under SFAS 133 and EITF 00-19. Therefore, derivative accounting is not
applicable for the convertible instruments.
  9.LETTER OF CREDIT
 
 We
obtained a letter of credit in favor of our landlord in the amount of $75,000 to
guarantee our lease payments for our corporate office in Sugar Land,
Texas.  The letter of credit is guaranteed by a security interest in a
certificate of deposit with Frost Bank that may not be redeemed until the letter
of credit expires Hyperdynamics opened a Time Certificate of Deposit with Frost
Bank on January 6, 2006 for an initial deposit amount of $75,000 securing a
letter of credit. The Certificate of Deposit term is 24 months and the maturity
date is January 6, 2008.  . There were no draws against this letter of
credit as of June 30, 2007. The letter was extended until October 31, 2007 and
the funds will be free of restriction at that time.
  10. INCOME TAXES:
 
 Income
taxes are not due since Hyperdynamics has had losses since inception.
Hyperdynamics has net operating loss carryforwards of approximately $28,486,000
at June 30, 2007. Components of income tax expense for the years ended June 30,
2007, 2006 and 2005 are as follows:
  2007
              
              
              2006
              
              
              2005Deferred
      tax asset
              
              $
              9,566,000
              
              
              $
              6,393,000
              
              
              $
              4,389,000Increase
      in valuation allowance for deferred tax assets
              
              
              (9,566,000
              )
              
              
              (6,393,000
              )
              
              
              (4,389,000
              )Income
      tax expense
              
              $
              -
              
              
              $
              -
              
              
              $
              -
 
 F-19
 Table of
Contents
  Internal
Revenue Section 382 restricts the ability to use these carryforwards whenever an
ownership change as defined occurs. Hyperdynamics incurred such an ownership
change on January 14, 1998 and again on June 30, 2001, As a result of the first
ownership change, Hyperdynamics' use of net operating losses as of January 14,
1998 of $949,000 are restricted to $151,000 per year. The availability of losses
from that date through June 30, 2001 of $3,313,000 are restricted to $784,000
per year. Losses in fiscal 2002 and beyond are not restricted. The net operating
loss carryforwards expire from 2011 to 2027.
 
 The
difference between the statutory tax rates and our effective tax rate is due to
the valuation allowance applied against our deferred tax assets generated by net
operating losses.
  11. SHAREHOLDERS'
EQUITY:
 
 Series A Preferred
Stock
  In
January 2000, we issued 3,000 shares of Series A Convertible Preferred Stock for
net proceeds of $2,604,190. The stated value is $1,000 per share and par value
is $.001.  This series is non-voting and has a dividend rate of 4%,
payable at conversion in either cash or shares of common stock, at
Hyperdynamics' option. During 2000 and 2001, 1,055 shares were converted to
common stock.  As a result, 1,945 shares remain outstanding at June
30, 2007.  By terms of the agreement, the preferred shares are
convertible into Hyperdynamics' common stock at a price equivalent to the lower
of the trading price when purchased of $5.25 or 80% of the current 5-day trading
average. All or any of the stock may be converted at any time at the holder's
option.  According to the terms of the agreement, all preferred shares
outstanding as of January 30, 2002 were to be automatically converted to common
stock.  If the Series A stock had been converted at that time,
approximately 4,862,000 shares of common stock would have been
issued.  This conversion did not occur because of legal claims filed
by both the Series A shareholders and Hyperdynamics against each
other.  Remaining conversions, if any, would be determined by the
outcome of the lawsuit.
 
 Hyperdynamics
has not converted any of the Series A shares since fiscal 2001 because of claims
filed in November 2001 in its lawsuit against the Series A shareholders. Since
the outcome is not known and no conversion had been effected, Hyperdynamics
continued to accrue dividends on the 1,945 shares through September 30, 2004.
Management evaluated the accrual as of September 30, 2004 and determined the
accrual should be discontinued.  Management reevaluates the accrual
periodically and considers the current accrual to be adequate to cover the
liability, if any, pursuant to the lawsuit.
 
 As of
June 30, 2007, $372,000 in dividends had been accrued, which represents accruals
through 2005. No dividends have been accrued in 2006 or 2007.
 
 Series B Preferred
Stock
 
 On May
31, 2001, we issued 2,725 shares of Series B Convertible Preferred Stock in
connection with the acquisition of SCS Corporation. Series B stockholders are
related parties (see note 16).  The stated value is $1,000 per share
and the par value is $0.001. Each Series B share may vote 7,408 common shares
for a total of 20,186,800 votes. The shares are convertible to common stock at
the lesser of $0.135 or 50% of the current 5- day average trading price. Series
B stockholders are entitled to a 4% cumulative dividend on the stated value,
which is payable only upon conversion of the preferred stock. Dividends may be
paid in stock or cash at Hyperdynamics' option. Dividends accrued on the Series
B were  $27,000 as of June 30, 2005. In each of the years ended 2006
and 2007, dividends of $109,000 were accrued. The resulting balance in accrued
dividends was $245,000 as of June 30, 2007.
 
 During
June 2007, 238 shares of Series B Preferred Stock were converted into 1,762,962
shares of common stock.  As a result, 2,487 shares of Series B
Preferred Stock remain outstanding.
 
 If all
Preferred Series A and B shares were converted as of June 30, 2007, based on the
then-market price of the stock, total common shares outstanding would be
approximately 73,664,000 shares.
 
 Common Stock
 
 For exercise of options for
cash:
 
 In June
2007, options and warrants to purchase 8,910 shares of common stock at prices
ranging from $2.15 per share were exercised for gross proceeds of
$19,157.
 
 F-20
 Table of
Contents
  For exercise of warrants for
cash:
 
 In
October 2006, warrants to purchase 17,500 shares of common stock at $2.00 per
share were exercised for gross proceeds of $35,000.
 
 In
November 2006, warrants to purchase 4,220 shares of common stock at $2.00 per
share were exercised for gross proceeds of $8,440.
 
 In
December 2006, a warrant to purchase 41,400 shares of common stock at $2.00 per
share was exercised for gross proceeds of $82,800.
 
 In
February 2007, a warrant to purchase 31,778 shares of common stock at $0.01 per
share was exercised for gross proceeds of $318.
 
 In March
2007, a warrant to purchase 200,000 shares of common stock at $0.50 per share
was exercised for gross proceeds of $100,000.
 
 In April
2007, a warrant to purchase 25,000 shares of common stock at $0.01 per share was
exercised for gross proceeds of $250.
 
 In June
2007, warrants to purchase 405,000 shares of common stock at prices ranging from
$.01 per share to $.50 per share were exercised for gross proceeds of
$177,750.
 
 In June
2007, a related party exercised warrants to purchase 188,242 shares of common
stock at $.50 per share for gross proceeds of $94,122.
  For cashless exercise of
options:
 
 In
November 2006, the Company issued 4,356 shares of common stock upon the cashless
exercise of options to purchase 10,000 shares of common stock.
 
 In
December 2006, the Company issued 1,646 shares of common stock upon the cashless
exercise of options and  to purchase 5,000 shares of common
stock.
 
 In June
2007, the Company issued 59,211 shares of common stock to a related party upon
the cashless exercise of options to purchase 100,000 shares of common
stock.
 
 In June
2007, the Company issued 11,501 shares of common stock upon the cashless
exercise of options to purchase 28,090 shares of common stock.
  For cashless exercise of
warrants:
 
 In
December 2006, a related party exercised his warrant and  the Company
issued 80,669 shares of common stock upon the cashless exercise of warrants to
purchase 101,757 shares of common stock.
 
 For services and legal
settlement:
 
 During
the year ended June 30, 2007, Hyperdynamics issued 232,816 shares of common
stock for consulting services, board of director services and legal fees with a
total value of $485,000.
 
 During
the year ended June 30, 2007, Hyperdynamics issued 30,000 shares of common stock
for a legal settlement with a total value of $82,000.
 
 For warrants exercised associated
with convertible debentures:
  In June
2006, Hyperdynamics entered into financing agreement in which an outside
investor purchased a convertible debenture (see Note 8).  In
connection with the convertible debenture, Hyperdynamics issued three detachable
warrants to purchase up to 2,100,000 shares of common stock at a
weighted-average exercise price of $3.15 (see Note 8). In June 2007, the
warrants were repriced to $2.50 per share in connection with a provision in the
agreement that required a repricing of the warrants upon the event that other
warrants or options were issued or repriced at a lower exercise
price.  In June 2007, warrants to purchase 2,100,000 shares of common
stock at $2.50 per share were exercised for gross proceeds of
$5,250,000.  The cash was received on July 3, 2007.
 
 F-21
 Table of
Contents
  For conversion of convertible
debentures:
 
 During
the year ended June 30, 2007, we issued 3,000,000 shares of common
stock  pursuant to the  conversion of convertible debentures
with a principal amount of  $6,000,000 (see Note 8) .
 
 For conversion of preferred stock by
related party:
 
 1,762,962
shares of common stock were issued pursuant to the conversion of 238 shares of
preferred Series B stock during the year ended June 30, 2007.
 
 For cash:
 
 During
June 2007, 97,000 shares of common stock were sold at the current market price,
which then was $2.91 per share, for $268,000 in net proceeds.
 
 For
acquisitions:
 
 During
June 2007, 100,000 shares of common stock were issued as a down payment against
the purchase of working interest in oil and gas properties in
Louisiana.  They were valued at the market price on the agreement
date, which then was $2.74 per share, for $274,000.
 
 During
August 2006, 66,904 shares of common stock that had been previously issued to an
individual in conjunction with the acquisition of HYD Resources was returned to
Hyperdynamics and canceled.
 
 Beneficial conversion
costs:
  During
August 2006, Hyperdynamics entered into a convertible debenture agreement with
an investor (see Note 8). Discounts related to the beneficial conversion feature
and to the detachable warrant issued with these debentures totaled
$80,000.
  12. DEEMED
DIVIDENDS
 
 In March
2007, the Company modified the terms of certain warrants previously issued
between October 2003 and March 2004.  The term and price of the warrants,
originally 3 years and $2.00, respectively, were changed to 5 years and $4.00,
respectively.  The modification resulted in a deemed dividend of
$2,370,000, which was calculated using the Black-Scholes method assuming
volatility of 105% and a risk adjusted interest rate of 5%.
 
 In June
2007, the Company again modified the terms of certain warrants previously issued
between October 2003 and March 2004.  The price of the warrants was reduced
from $4.00 to $2.50.  The modification resulted in a deemed dividend of
$1,189,000, which was calculated using the Black-Scholes method, assuming
volatility of 110% and a risk adjusted interest rate of 5%.
 
 In June
2007, the Company modified the terms of certain warrants previously issued
between June 2006 and August 2006.  The price of the warrants was reduced
from $4.00 to $2.50.and the 544,000 additional shares became available for
purchase in accordance with contractual provisions.  The modification
resulted in a deemed dividend of $1,499,000, which was calculated using the
Black-Scholes method assuming volatility of 105% and a risk adjusted interest
rate of 5%..  Also, in accordance with the contract, the
amended  and re-issued warrants included the right to purchase an
additional 544,000 shares of common stock at $2.50 per share.
  13. STOCK OPTIONS AND
WARRANTS
 
 Hyperdynamics'
Stock Option Plan provides for the grant of non-qualified options to directors,
employees and consultants, and opportunities for directors, officers, employees
and consultants to make purchases of stock in Hyperdynamics. In addition,
Hyperdynamics issues stock warrants from time to time to employees, consultants,
stockholders and creditors as additional financial incentives. The plans and
warrant issuances are administered by the Board of Directors or the Compensation
Committee who have substantial discretion to determine which persons, amounts,
time, price, exercise terms, and restrictions, if any.
 
 F-22
 Table of
Contents
  Options granted to
employees
 
 During
2007, 2006 and 2005, respectively, Hyperdynamics issued 1,126,999, 640,000 and 0
options or warrants to employees. The compensation cost recognized for this
share-based compensation was $1,089,000, $381,000, and $0 for the
years ended June 30, 2007, 2006 and 2005, respectively, based on the
Black-Scholes option pricing model.  The weighted average fair value
of the employee and consultant stock options and warrants vested during 2007,
2006 and 2005 was $3.89, $1.26 and $2.29, respectively.
 
 The
following table details the significant assumptions used to computing the fair
market values of employee stock options granted:
 
 2007
              
              
              2006
              
              2005Risk-free
      interest rate
              
              
              5
              %
              
              
              1.50-2.50
              %
              N/ADividend
      yield
              
              
              0
              %
              
              
              0
              %
              N/AVolatility
      factor
              
              
              105-107
              %
              
              
              124
              %
              N/AExpected
      life (years)
              
              
              1-1.5
              
              
              
              2
              
              N/A
  Warrants granted to
consultants
 
 During
2007, Hyperdynamics granted warrants to purchase 1,631,778 shares of common
stock to consultants, including a grant of 1,500,000 to a related
party.  The compensation cost recognized for the warrants granted to
the related party was $4,227,000.   The compensation cost
recognized for the warrants granted to other consutants was
$195,000.  During 2005 and 2006, Hyperdynamics did not grant any
compensatory warrants to consultants. However, in 2004, Hyperdynamics had
granted 2,360,000 warrants to consultants, which vested during 2004, 2005 and
2006. The compensation cost recognized for these warrants was $474,000 and
$1,833,000 for the years ended June 30, 2006 and 2005, respectively, based on
the Black-Scholes option pricing model.
 
 The
following table details the significant assumptions used to computing the fair
market values of warrants granted to consultants:
 
 2007
              
              
              2006
              
              
              2005Risk-free
      interest rate
              
              
              5
              %
              
              
              2.50
              %
              
              
              2.50
              %Dividend
      yield
              
              
              0
              %
              
              
              0
              %
              
              
              0
              %Volatility
      factor
              
              
              98-107
              %
              
              
              114
              %
              
              
              114
              %Expected
      life (years)
              
              
              1
              
              
              
              3.5
              
              
              
              3.5
 
 The
following table details the significant assumptions used to computing the fair
market values of warrants granted to consultant – related party:
  2007
              
              
              2006
              
              
              2005Risk-free
      interest rate
              
              
              5
              %
              
              
              2.50
              %
              
              
              2.50
              %Dividend
      yield
              
              
              0
              %
              
              
              0
              %
              
              
              0
              %Volatility
      factor
              
              
              134
              %
              
              
              114
              %
              
              
              114
              %Expected
      life (years)
              
              
              3
              
              
              
              3.5
              
              
              
              3.5
  The
following table summarizes information about share-based payment arrangements
regardless of the employment status of the grantee.
 
 2007
              
              
              2006
              
              
              2005Total
      compensation cost recognized in net loss
              
              
              6,085
              
              
              
              1,556
              
              
              
              1,881Tax
      benefits
              
              N/A
              
              
              N/A
              
              
              N/ACapitalized
      share based compensation cost
              
              N/A
              
              
              
              37
              
              
              
              342Cash
      received from exercise of share options
              
              
              19
              
              
              
              0
              
              
              
              0Tax
      benefits realized from option exercises
              
              
              0
              
              
              
              0
              
              
              
              0
 
 F-23
 Table of
Contents
 
 Other Warrants
 
 In
addition to warrants and options issued to consultants and employees, the
following transactions occurred:
 
 Warrants
to purchase 3,471,000 shares of common stock at $2.50 per share that had expired
were extended with a new exercise price of $4.00 per share in March 2007 (See
Note 12).  This resulted in a deemed dividend of
$2,370,000.
 
 The
following table details the significant assumptions used to compute the fair
market values of the modifications to warrants to purchase 3,471,000 shares of
common stock  modified in March  2007:
 
 Before
              
              
              AfterRisk-free
      interest rate
              
              
              5.05
              %
              
              
              4.58
              %Dividend
      yield
              
              
              0
              %
              
              
              0
              %Volatility
      factor
              
              
              105
              %
              
              
              105
              %Expected
      life (years)
              
              
              0
              
              
              
              2
 
 The warrants to purchase
3,471,000 shares of common stock at $4.00 per share were repriced in June 2007
with a new exercise price of $2.50 per share.  This resulted in a
deemed dividend of $1,189,000. The following table details the significant
assumptions used to compute the fair market values of
warrants  3,471,000 shares of common stock modified in
June  2007:
 
 
 Before
              
              
              AfterRisk-free
      interest rate
              
              
              4.87
              %
              
              
              4.87
              %Dividend
      yield
              
              
              0
              %
              
              
              0
              %Volatility
      factor
              
              
              109
              %
              
              
              109
              %Expected
      life (years)
              
              
              4
              
              
              
              2.5
 
 Warrants
originally issued in conjunction with the convertible debentures (Note 8) to
purchase 1,145,000 shares of common stock were repriced from $3.00 and $4.00 per
share to $2.50 per share and the number of warrants was increased to provide for
the right to purchase an additional 544,000 shares of common stock at $2.50 per
share in accordance with contractual anti-dilution provisions.  This
resulted in a deemed dividend of $1,499,000.  The following table details the
significant assumptions used to compute the fair market values of warrants to
purchase 1,145,000 shares of common modified in June:
 
 
 Before
              
              
              AfterRisk-free
      interest rate
              
              
              4.90
              %
              
              
              4.90
              %Dividend
      yield
              
              
              0
              %
              
              
              0
              %Volatility
      factor
              
              
              105
              %
              
              
              105
              %Expected
      life (years)
              
              
              4
              
              
              
              4
 
 Warrants
to purchase 3,480,000 shares of common stock at $4.00 per share were issued as
part of a legal settlement.The
following table details the significant assumptions used to compute the fair
market values of warrants to purchase 3,480,000 shares of common stock that were
granted in June 2007 in conjunction with the settlement of a
lawsuit:
 
 Risk-free
      interest rate
              
              
              4.96
              %Dividend
      yield
              
              
              0
              %Volatility
      factor
              
              
              138
              %Expected
      life (years)
              
              
              7
  Warrants
originally issued in conjunction with a legal settlement to purchase 3,480,000
shares of common stock were repriced to $2.40 per share in June 2007 in
accordance with contractual provisions.  At the time of the repricing,
related parties owned the warrants.  This resulted in additional
settlement expense of $167,000, which was calculated using the Black-sholes
method assuming volatility of 137% and a risk adjusted interest rate of
5%.
 
 F-24
 Table of
Contents
  Warrants
to purchase 2,939,373 shares were issued in conjunction with two convertible
debenture arrangements in 2006.
 
 Investors
purchased 3,732,403 warrants in conjunction with purchases of SCS preferred
stock and Hyperdynamics common stock in 2005.
 
 Summary
information regarding options and warrants is as follows:
  Options
              
              
              Weighted
      Average Share Price
              
              
              Warrants
              
              
              Weighted
      Average Share PriceOutstanding
      at year ended June 30, 2004
              
              
              -
              
              
              
              -
              
              
              
              7,283,403
              
              
              $
              1.69Granted
              
              
              -
              
              
              
              -
              
              
              
              250,000
              
              
              
              .55Exercised
              
              
              -
              
              
              
              -
              
              
              
              (321,500
              )
              
              
              .52Expired
              
              
              -
              
              
              
              -
              
              
              
              (600,000
              )
              
              
              6.50Outstanding
      at year ended June 30, 2005
              
              
              -
              
              
              
              -
              
              
              
              6,611,903
              
              
              $
              1.27Granted
              
              
              640,000
              
              
              $
              1.30
              
              
              
              2,600,000
              
              
              
              .2.72Exercised
              
              
              (5,000
              )
              
              
              1.55
              
              
              
              (1,630,000
              )
              
              
              .62Expired
              
              
              -
              
              
              
              -
              
              
              
              (10,000
              )
              
              
              .28Outstanding
      at year ended June 30, 2006
              
              
              635,000
              
              
              
              1.30
              
              
              
              7,571,903
              
              
              $
              1.90Granted
              
              
              1,126,999
              
              
              $
              5.05
              
              
              
              17,224,344
              
              
              
              3.13Exercised
              
              
              (152,000
              )
              
              
              1.72
              
              
              
              (3,093,809
              )
              
              
              1.87Expired
              
              
              -
              
              
              
              -
              
              
              
              (11,589,655
              )
              
              
              3.36Outstanding
      at year ended June 30, 2007
              
              
              1,609,999
              
              
              $
              3.89
              
              
              
              10,112,783
              
              
              $
              2.46
  Warrants outstanding and
      exercisable as of June 30, 2006Exercise
      Price
                
                
                Outstanding Number  of
      Shares
                
                Remaining
      Life
                
                Exercisable  Number of
      Shares$
                .23
                
                
                
                800,000
                
                1
      year
                
                
                800,000$
                .25
                
                
                
                175,000
                
                2
      years
                
                
                175,000$
                .50
      - $1.00
                
                
                
                962,000
                
                1
      year
                
                
                962,000$
                2.00
                
                
                
                3,534,903
                
                1
      year
                
                
                3,534,9032.50
                
                
                
                955,000
                
                5
      years
                
                
                955,0003.50
                
                
                
                715,000
                
                5
      years
                
                
                715,0004.00
                
                
                
                430,000
                
                5
      years
                
                
                430,0007,571,903
                
                
                
                
                7,571,903
  Options outstanding and
      exercisable as of June 30, 2006Exercise
      Price
                
                
                Outstanding Number of
      Shares
                
                Remaining
       Life
                
                Exercisable  Number of
      Shares$
                1.00
      - 1.49
                
                
                
                400,000
                
                1
      year
                
                
                40,000$
                1.50
      - 1.99
                
                
                
                120,000
                
                1
      year
                
                
                120,000$
                2.00
      - 2.49
                
                
                
                115,000
                
                3
      years
                
                
                115,000635,000
                
                
                
                
                275,000
  Warrants outstanding and
      exercisable as of June 30, 2007Exercise
      Price
                  
                  
                  Outstanding Number  of
      Shares
                  
                  Remaining
      Life
                  
                  Exercisable  Number of
      Shares$
                  .23
                  
                  
                  
                  800,000
                  
                  0
      years
                  
                  
                  800,000$
                  .25
                  
                  
                  
                  125,000
                  
                  1
      year
                  
                  
                  125,000$
                  .50
                  
                  
                  
                  142,000
                  
                  0
      years
                  
                  
                  142,000$
                  2.40
                  
                  
                  
                  3,480,000
                  
                  7
      years
                  
                  
                  3,480,000$
                  2.50
                  
                  
                  
                  544,000
                  
                  5
      years
                  
                  
                  544,000$
                  2.50
                  
                  
                  
                  3,471,783
                  
                  2
      years
                  
                  
                  3,471,783$
                  4.00
                  
                  
                  
                  1,500,000
                  
                  7
      years
                  
                  
                  1,500,000$
                  5.00
                  
                  
                  
                  50,000
                  
                  3
      years
                  
                  
                  --10,112,783
                  
                  
                  
                  
                  10,062,783
 F-25
 Table of
Contents
  Options outstanding and
      exercisable as of June 30, 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$
                2.00
      – 2.49
                
                
                
                400,000
                
                1
      year
                
                
                40,000$
                2.50
      - 2.99
                
                
                
                40,000
                
                1
      year
                
                
                40,000$
                2.50
      – 2.99
                
                
                
                65,000
                
                2
      years
                
                
                65,000$
                5.00
                
                
                
                300,000
                
                3
      years
                
                
                -$
                10.00
                
                
                
                300,000
                
                3
      years
                
                
                -1,609,999
                
                
                
                
                1,009,999
  14. SEGMENT
INFORMATION
 
 Reportable
segments
 
 Hyperdynamics
management has two reportable segments: SCS Corporation ("SCS") and its
Louisiana operations (“HYD"). SCS is engaged in oil and gas exploration
activities pertaining to offshore Guinea, West Africa. Additionally, to provides
seismic data transcription and management services to support its activities and
to external customers. The seismic data work is performed in the USA. HYD is
engaged in oil and gas exploration and production activities in Louisiana, USA;
it also provides some oilfield services to external customers. Hyperdynamics
evaluates performance based on profit or loss from operations. The reportable
segments are managed by separate management teams who are valuated based on
their segment's performance.
 
 The
following tables summarize certain balance sheet and income statement data about
Hyperdynamics' reportable segments and corporate overhead:
  Year ended June 30, 2007 (in
      Thousands)SCS
              
              
              HYD
              
              
              Corporate
              
              
              TotalRevenues
      from external customers
              
              $
              -
              
              
              $
              1,006
              
              
              $
              -
              
              
              $
              1,006Depreciation,
      Depletion and Amortization – Oil and Gas Properties
              
              
              
              
              
              
              162
              
              
              
              
              
              
              
              162Depreciation
      – Administration
              
              
              26
              
              
              
              2
              
              
              
              31
              
              
              
              59Loss
      from Operations
              
              
              (2,859
              )
              
              
              (9,835
              )
              
              
              (7,459
              )
              
              
              (20,243
              )Expenditures
      for long-lived assets
              
              
              319
              
              
              
              85
              
              
              
              153
              
              
              
              557
  F-26
 Table of
Contents
 Year ended June 30, 2006 (in
      Thousands)SCS
              
              
              HYD
              
              
              Corporate
              
              
              TotalRevenues
      from external customers
              
              $
              -
              
              
              $
              615
              
              
              $
              -
              
              
              $
              615Depreciation,
      Depletion and Amortization – Oil and Gas Properties
              
              
              
              
              
              
              116
              
              
              
              
              
              
              
              116Depreciation
      - Administration
              
              
              31
              
              
              
              
              
              
              
              19
              
              
              
              50Loss
      from Operations
              
              
              (825
              )
              
              
              (1,754
              )
              
              
              (2,462
              )
              
              
              (5,041
              )Expenditures
      for long-lived assets
              
              
              93
              
              
              
              450
              
              
              
              11
              
              
              
              554
  Year ended June 30, 2005 (in
      Thousands)SCS
                
                
                HYD
                
                
                Corporate
                
                
                TotalRevenues
      from external customers
                
                $
                3
                
                
                $
                170
                
                
                $
                -
                
                
                $
                173Depreciation,
      Depletion and Amortization – Oil and Gas Properties
                
                
                
                
                
                
                77
                
                
                
                
                
                
                
                77Depreciation
      – Administration
                
                
                28
                
                
                
                
                
                
                
                20
                
                
                
                48Loss
      from Operations
                
                
                (529
                )
                
                
                (1,508
                )
                
                
                (2,890
                )
                
                
                (4,927
                )Expenditures
      for long-lived assets
                
                
                889
                
                
                
                958
                
                
                
                17
                
                
                
                1,864
  15. COMMITMENTS AND
CONTINGENCIES
  From time
to time, Hyperdynamics and its subsidiaries are involved in a number of routine
business disputes that may occur in the ordinary course of business.
Hyperdynamics is unable to predict the outcome of such matters when they arise.
Other than disputes currently disclosed under litigation, the Company is unaware
of any other disputes that exist and does not believe that the ultimate
resolution of such matters would have a material adverse effect on the financial
statements of Hyperdynamics.
 
 Legal
Contingencies
  Hyperdynamics
is involved in a dispute with its series A preferred shareholders over
conversion rights to common stock and whether monetary damages are due for
various claims against the preferred shareholders. The economic effects of and
the probable outcome of this contingency are not known.
 
 Hyperdynamics
is a party to a lawsuit styledDixon Financial Services, Ltd. v.
Fidelity Transfer Company, Erin Oil Exploration, Inc., Bill Knollenberg, Ron
Bearden, R.F. Bearden Associates, Inc., James Chang, Nick H. Johnson, Riley L.
Burnett, Jr., Johnson, Burnett & Chang, L.L.P., Greenberg, Peden, Siegmyer
& Oshman, P.C., George Siegmyer and Hyperdynamics Corporation; Cause
No. 2001-06263; In the 215th Judicial District Court of Harris County,
Texas.  In conjunction with the lawsuit, Hyperdynamics has entered
into an agreed settledment with the plaintiff in the case making liability to
the plantiff contingent upon the outcome of appeals in the case.  If
Hyperdynamics loses in the appeal, it will be obligated to pay $240,000, payable
$10,000 per month for 24 months.  If the appeal is successful,
Hyperdynamics will seek to recover its damages, costs and attorneys fees from
other defendants in the case, with Hyperdynamics having no
liability.  Management considers that losses in this case are not
probable and accordingly has made no accrual associated with this
case.
 
 Hyperdynamics
settled two lawsuits with Trendsetter Investors, LLC and certain
individuals  in a single settlement agreement and both cases were
dismissed June 2007.  In conjunction with the settlement
agreement,
 
 a)
              Trendsetter
      Investors received warrants to purchase 3,480,000 shares of restricted
      common stock in Hyperdynamics Corporation exerciseable at $4.00 per share,
      with a price reset provision that would reduce the exercise price to $2.40
      under certain conditions, until June 14, 2017.  The fair value
      of the warrants as determined using the Black-sholes option pricing model
      was $8,959,000.
 b)
              Kent
      Watts would facilitate an exchange of the warrants for 1,740,000 shares of
      common stock.  Several Hyperdynamics Series B preferred
      stockholders effected this exchange in June
  2007.
 c)
              Trendsetter
      conveyed its 30% working interest in certain oil and gas properties it had
      purchased back to Hyperdynamics.
 d)
              Geoffrey
      Long received 30,000 shares of Hyperdynamics common stock valued at the
      market price on the agreement date of
$82,000.
 e)
              Hyperdynamics
      agreed to pay $280,000 in cash to Trendsetter Investors, LLC for legal
      fees.
 
 As of
June 30, 2007, Hyperdynamics had issued all the stock and warrants associated
with this settlement and had paid $40,000.  A short term note payable
for $240,000, the balance of the legal fees that Hyperdynamics had agreed to
pay, remained on Hyperdynamics’ balance sheet as of June 30,
2007.  Hyperdynamics paid the note on July 10, 2007.
 
 F-27
 Table of
Contents
  Contingent notes
payable
 
 Hyperdynamics'
subsidiary, SCS, has $350,000 remaining of a contingent note payable due to
Seacon Computer Systems Inc., the former owners of SCS Corporation's
assets.  It is payable in Hyperdynamics common stock and it is payable
only if SCS has net income in any given quarter.  If SCS experiences
net income in a quarter, 25% of the income will be paid against the
note.
 
 Hyperdynamics’s
subsidiary, HYD, has $506,000 remaining on two contingent notes payable to one
individual.  The notes are to be paid quarterly over the five years
ended June 30, 2009. Payments will be due only if HYD has net income. Payment
amount will be 25% of the net income for the period, unless there was a net loss
in previous period(s). If there is a net loss, subsequent net income must
completely offset the losses before any amounts are due. After the loss is
offset, payment of 25% of the remaining net income will be due.
 
 Operating Leases
 
 Hyperdynamics
leases vehicles and office space under long-term operating leases with varying
terms.  Most of the operating leases contain renewal and purchase
options.  Hyperdynamics expects that in the normal course of business,
the majority of operating leases will be renewed or replaced by other
leases.  As of June 30, 2007, future minimum lease payments under
noncancellable operating leases with initial or remaining terms in excess of one
year include:
  1)
              $142,000
      to be paid in each of the years ended June 30, 2008 through June 30, 2013
      and $58,000 to be paid in the fiscal year ended June 30, 2014 on
      Hyperdynamics’ office lease; and
 2)
              $24,000
      to be paid in the year ended June 30, 2008 and $12,000 to be paid in the
      year ended June 30, 2009 for two
vehicles.
 
 Rent
expense included in net loss from operations was $184,000, $204,000 and $278,000
in 2007, 2006 and 2005, respectively.
  16. RELATED PARTY
TRANSACTIONS
 
 Michael Watts
 
 Consulting –related
party
 
 During
the year ended June 30, 2007, Michael Watts, the CEO's brother, received payment
of $13,000 cash to pay for offering costs on private subscription agreements and
warrants exercised. Additional offering costs will also be paid on 3,471,000
warrants purchased by private investors should they be exercised in the future.
If all of these warrants were exercised, Michael Watts would receive
approximately $867,750 to pay these additional costs.
 
 In March
2007, the audit committee pre-approved a consulting contract with Michael Watts
under which he will provide Investor Relations, Public Relations, Financial
Consulting and general advisory services.  In June 2007, the
compensation committee and audit committee approved a warrant to purchase
1,500,000 shares of common stock at $4.00 per share as the compensation
associated with this agreement.  The fair value of the warrants, as
computed using the Black-sholes option pricing model, was
$4,227,000.  The warrants expire in June 2014.
 
 Additionally,
we recognized compensation cost of $284,000 and $1,101,000 in the years ended
June 30, 2006 and 2005, respectively, as warrants which had been granted to a
company affiliated with Michael Watts in January 2004 vested.  All the
warrants had been exercised as of June 30, 2007.
 
 Exercise of
warrants
 
 During
the year ended June 30, 2006, the company affiliated with Mr. Watts exercised
1,010,000 warrants for $505,000.   In December 2006, the company
exercised warrants to purchase 101,757 shares of common stock on a cashless
basis and received a net issuance of 80,669 shares of common
stock.   In June 2007, the company exercised its remaining
warrants to purchase 188,242 shares of common stock for $94,122.
 
 F-28
 Table of
Contents
  Compensation for working interest
sales
 
 On
February 9, 2005 the Audit Committee of Hyperdynamics Corporation pre-approved a
contract with Geoserve Marketing, an assumed name for Michael E. Watts, the
brother of the Chief Executive Officer. Under the Agreement Geoserve Marketing
was to sell up to 49% of the working interest in certain oil and gas properties
owned by Trendsetter at $55,000 per point. Trendsetter agreed to pay 20% of the
proceeds to Geoserve Marketing in return for services associated with the
marketing of these interests. The independent audit committee pre-approved two
extensions of the working interest sales contract. As of June 30, 2007, 35%
working interest, or $1,925,000, had been sold and Geoserve Marketing had been
paid promotion fees of $385,000.
 
 Series B Preferred
stock
  In March 2007, DJX Ltd, which held
2,725 shares of Series B Preferred stock in trust for the grandchildren of
Ernest Watts, the father of Chief Executive Officer Kent Watts,was
dissolved as it distributed the preferred stock to corporations owned by five
separate trusts on behalf of the former beneficiaries of DJX
Ltd.   All owners of Series B Preferred stock are family members
of Kent Watts, Hyperdynamics’ CEO.
 
 In June
2007, four of the new corporations converted a total of 238 shares of Preferred
Series B stock to 1,762,962 shares of Hyperdynamics common
stock.  They then exchanged 1,740,000 shares of common stock for
warrants to purchase 3,480,000 shares of common stock at $4 per share. The
exchange of stock for warrants facilitated the settlement of Hyperdynamics’
lawsuit with Trendsetter Investors LLC (See Note 15). In accordance with a price
reset provision in the original warrants, the exercise price of the warrants was
reduced from $4.00 per share to $2.40 per share on June 29, 2007.
 
 Series B
Preferred stock accrues a dividend at 4% per year.
 
 Exercise of
option
 
 In June
2007, Hyperdynamics issued 59,211 shares of common stock to the Chief Financial
Officer upon the cashless exercise of options to purchase 100,000 shares of
common stock.
 
 
 17. SUBSEQUENT
EVENTS
 
 Contracts
 
 In July
2007, SCS entered into a consulting agreement for work on the Forward
Exploration Program.  The Forward Exploration Program includes
updating the regional techtonic framework for the Guinea concession area,
interpretation of sedimentary basins in the concession area, an oil seep study,
an evaluation of areas to be surrendered in the event the projet de loi is
codified, and the design of 2D seismic study to be performed in the
future.  The consulting agreement extends to December 2007 and the
cost will be approximately $144,000, plus data acquisition costs from outside
parties of approximately $90,000.
 
 Stock issuances
 
 In July
2007, Hyperdynamics issued 46,669 shares of common stock for board of director
services and legal fees valued at $138,000.
 
 In July
2007, the Company issued 738,251 shares of common stock upon the cashless
exercise of options to purchase 800,000 shares of common stock
 
 In July
2007, the Company issued 119,389 shares of common stock upon the cashless
exercise of options to purchase 142,000 shares of common stock
 
 In July
2007, the Company issued 48,160 shares for $135,000 cash.
 
 In August
2007, the Company issued 100,000 shares of common stock in conjunction with the
purchase of working interest in oil and gas property.
 
 Options granted
 
 In July
2007, we granted options to purchase 231,000 shares of Hyperdynamics common
stock with a term of three years and an exercise price of $2.80 to 12 employees
and consultants.
 
 F-29
 Table of
Contents
  Additionally
in July, we granted options to purchase 90,000 shares of common stock at $2.38
per share to our independent Board of Directors as a bonus.  The
options have a two year term.
 
 We
granted an employee options to purchase 75,000 shares of common stock with an
exercise price of $2.88 and a two year term in conjunction with her employment
agreement.
 
 Oil and Gas
Properties
 
 During
July and August 2007, the Company paid $1,150,000 and issued 100,000 shares of
common stock in conjunction with the purchase of an 85% working interest in oil
and gas properties in Louisiana, USA as discussed in Note 3.  In
conjunction with the agreement, Hyperdynamics agreed to fund up to an additional
$4,000,000 to be for lease operations, drilling, geological and geophysical
costs and abandonment costs.  As of September 26, 2007, $341,000 of
the $4,000,000 has been paid or accrued.
 
 During
August 2007, Trendsetter hired an outside contractor to drill an exploratory
well on a lease in Louisiana, USA. The well was drilled to the point where it
could be evaluated for commercial viability.  After evaluation, the
engineering team and management opted not to complete the well.  The
cost of drilling this well, approximately $192,000, will be added to the
amortization base in the quarter ended September 30, 2007.
 
 Other subsequent
events
 
 In July
2007, Hyperdynamics received $130,000 from its general liability insurance
company as a reimbursement of legal costs incurred in Hyperdynamics’ suit with a
former working interest holder.
  18. QUARTERLY FINANCIAL DATA
(UNAUDITED)
  Summarized
quarterly financial data are as follows (in thousands, except per-share
amounts).
 
 2007
              
              First
      Quarter
              
              
              Second
      Quarter
              
              
              Third
      Quarter
              
              
              Fourth
      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
              )
 
 
 2006
              
              First
      Quarter
              
              
              Second
      Quarter
              
              
              Third
      Quarter
              
              
              Fourth
      QuarterRevenues
              
              $
              87
              
              
              $
              108
              
              
              $
              134
              
              
              $
              286Loss
      from Operations
              
              
              (1,385
              )
              
              
              (1,373
              )
              
              
              (1,646
              )
              
              
              (637
              )Net
      Loss attributable to common shareholders
              
              
              (1,471
              )
              
              
              (1,505
              )
              
              
              (2,820
              )
              
              
              (1,457
              ))Basic
      and Diluted loss per common share
              
              
              (0.03
              )
              
              
              (0.04
              )
              
              
              (0.06
              )
              
              
              (0.04
              )
 
 The sum of loss per share for the
four quarters may not equal the total loss per share for the year due to changes
in the average number of common shares outstanding and
rounding.
 
 The net
loss attributable to common shareholders in fourth quarter 2007 included a
$9,118,000 settlement expense from the settlement of our lawsuit with
Trendsetter Investors, LLC (See Note 15).  Additionally, we granted a
consultant (who is a related party) warrants to purchase 1,500,000 shares of
common stock.  The fair value of the award, $4,227,000, was charged to
expense when the warrants vested in June.
  19. SUPPLEMENTAL OIL AND GAS INFORMATION
(UNAUDITED)
 
 The
following supplemental information regarding the oil and gas activities of the
Hyperdynamics is presented pursuant to the disclosure requirements promulgated
by the SEC and Statement of Financial Standards (“SFAS”) No. 69, Disclosures
About Oil and Gas Producing Activities.
 
 F-30
 Table of
Contents
  The
following estimates of reserve quantities and related standardized measure of
discounted net cash flows are estimates only, and are not intended to reflect
realizable values or fair market values of the Hyperdynamics’ reserves. The
Hyperdynamics emphasizes that reserve estimates are inherently imprecise and
that estimates of new discoveries are more imprecise than producing oil and gas
properties. Additionally, the price of oil has been very volatile and downward
changes in prices can significantly affect quantities that are economically
recoverable. Accordingly, these estimates are expected to change as future
information becomes available and these changes may be significant.
 
 Proved
reserves are estimated reserves of crude oil and natural gas that geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions. Proved developed reserves are those expected to be recovered through
existing wells, equipment and operating methods.
 
 The
standardized measure of discounted future net cash flows is computed by applying
year-end prices of oil and gas (with consideration of price changes only to the
extent provided by contractual arrangements) to the estimated future production
of proved oil and gas reserves, less estimated future expenditures (based on a
year-end costs) to be incurred in developing and producing the proved reserves,
less estimated future income tax expenses. The estimated future net cash flows
are then discounted using a rate of 10% per year to reflect the estimated timing
of the future cash flows.
 
 Costs Excluded
 
 Since
there were no proved reserves the oil and gas properties located in the Republic
of Guinea, costs associated with such unproved properties related to continuing
operations of $4,279,000 and $4,139,000 as of June 30, 2007 and 2006,
respectively, are excluded from amounts subject to amortization. The majority of
the evaluation activities are expected to be completed within three
years.
 
 Costs Excluded by Year
Incurred
 
 Excluded
    atYear Cost
      Incurred
              
              
              June 30,Prior
              
              
              2005
              
              
              2006
              
              
              2007
              
              
              2007Property
      acquisition
              
              $
              291,000
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              291,000Exploration
              
              
              3,192,000
              
              
              
              590,000
              
              
              
              66,000
              
              
              
              140,000
              
              
              
              3,988,000Total
              
              $
              3,483,000
              
              
              $
              590,000
              
              
              $
              66,000
              
              
              $
              140,000
              
              
              $
              4,279,000
 
 Costs Excluded by
Country
 
 United
              
              
              Republic
    ofStates
              
              
              Guinea
              
              
              TotalCosts Excluded by
      CountryProperty
      acquisition
              
              $
              -
              
              
              $
              291,000
              
              
              $
              291,000Exploration
              
              
              -
              
              
              
              3,988,000
              
              
              
              3,988,000Total
              
              $
              -
              
              
              $
              4,279,000
              
              
              $
              4,279,000
 
 F-31
 Table of
Contents
  Changes in Costs Excluded by
Country
 
 United
              
              
              Republic
    ofStates
              
              
              Guinea
              
              
              TotalBalance at June 30,
      2005
              
              $
              -
              
              
              $
              4,073,000
              
              
              $
              4,073,000Additional
      costs incurred
              
              
              -
              
              
              
              66,000
              
              
              
              66,000Costs
      transferred to DD&A pool
              
              
              -
              
              
              
              -
              
              
              
              -Balance at June 30,
      2006
              
              
              -
              
              
              
              4,139,000
              
              
              
              4,139,000Additional
      costs incurred
              
              
              -
              
              
              
              140,000
              
              
              
              140,000Costs
      transferred to DD&A pool
              
              
              -
              
              
              
              -
              
              
              
              -Balance at June 30,
      2007
              
              $
              -
              
              
              $
              4,279,000
              
              
              $
              4,279,000
 
 Capitalized Costs Related to Oil and
Gas Activities
 
 Aggregate
capitalized costs relating to the Hyperdynamics’ crude oil and natural gas
producing activities, including asset retirement costs and related accumulated
DD&A are shown below:
 
 United
              
              
              Republic
    ofStates
              
              
              Guinea
              
              
              TotalJune 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
              
              
              $
              4,483,000June 30,
      2006Unproved
      properties
              
              $
              738,000
              
              
              $
              4,139,000
              
              
              $
              4,877,000Proved
      properties
              
              
              423,000
              
              
              
              -
              
              
              
              423,000Oilfield
      equipment
              
              
              467,000
              
              
              
              -
              
              
              
              467,0001,628,000
              
              
              
              4,139,000
              
              
              
              5,767,000Less
      cost recovery upon sale of working interest
              
              
              (1,161,000
              )
              
              
              -
              
              
              
              (1,161,000
              )Less
      accumulated DD&A
              
              
              (169,000
              )
              
              
              -
              
              
              
              (169,000
              )Net
      capitalized costs
              
              $
              298,000
              
              
              $
              4,139,000
              
              
              $
              4,437,000
  F-32
 Table of
Contents
  Costs Incurred in Oil and Gas
Activities
 
 Costs
incurred in connection with Hyperdynamics’ crude oil and natural gas
acquisition, exploration and development activities are shown
below:
 
 United
              
              
              Republic
    ofStates
              
              
              Guinea
              
              
              TotalJune 30,
      2007Property
      acquisition
              
              $
              -
              
              
              $
              -
              
              
              $
              -Unproved
              
              
              11,000
              
              
              
              -
              
              
              
              11,000Proved
              
              
              -
              
              
              
              -
              
              
              
              -Exploration
              
              
              
              
              
              
              140,000
              
              
              
              140,000Development
              
              
              147,000
              
              
              
              -
              
              
              
              147,000-Total
      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
              
              
              $
              66,000June 30,
      2005Property
      acquisitionUnproved
              
              $
              17,000
              
              
              $
              -
              
              
              $
              17,000Proved
              
              
              65,000
              
              
              
              -
              
              
              
              65,000Exploration
              
              
              568,000
              
              
              
              590,000
              
              
              
              1,158,000Development
              
              
              90,000
              
              
              
              -
              
              
              
              90,000Sale
      of working interest
              
              
              (740,000
              )
              
              
              -
              
              
              
              (740,000
              )Total
      costs incurred
              
              $
              -
              
              
              $
              590,000
              
              
              $
              590,000
 
 F-33
 Table of
Contents
 
 Results of Operations for Producing
Activities
 
 The
following schedule includes only the revenues from the production and sale of
gas, oil, condensate and NGLs. The income tax expense is calculated by applying
the current statutory tax rates to the revenues after deducting costs, which
include DD&A allowances, after giving effect to permanent differences. Due
to significant net operating loss carryforwards related to producing activities,
income taxes have not been provided at June 30, 2007. The results of operations
exclude general office overhead and interest expense attributable to oil and gas
activities.
 
 2007
              
              
              2006
              
              
              2005Net
      revenues from production
              
              $
              908,000
              
              
              $
              615,000
              
              
              $
              55,000Production
      costsOil
      and gas operating
              
              
              387,000
              
              
              
              657,000
              
              
              
              265,000Other
      taxes
              
              
              104,000
              
              
              
              65,000
              
              
              
              6,000Total
      production costs
              
              
              491,000
              
              
              
              722,000
              
              
              
              271,000Depreciation,
      depletion and amortization
              
              
              72,000Total
      costs
              
              
              563,000
              
              
              
              722,000
              
              
              
              271,000Income
      (loss) before income taxes
              
              
              345,000
              
              
              
              (107,000
              )
              
              
              (216,000
              )Income
      tax expense
              
              
              -
              
              
              
              -
              
              
              
              -Results
      of operations
              
              $
              345,000
              
              
              $
              (107,000
              )
              
              $
              (216,000
              )DD&A
      rate per net equivalent barrel
              
              $
              3.47
              
              
              $
              0.00
              
              
              $
              0.00DD&A
      and impairment rate per net equivalent barrel
              
              $
              3.47
              
              
              $
              0.00
              
              
              $
              0.00
 
 F-34
 Table of
Contents
  Proved
Reserves
  The
following reserve schedule summarizes 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, 2005
                
                
                -
                
                
                
                -Revisions
      of previousEstimates(1)
                
                
                41,898
                
                
                
                -Extensions,
      discoveries andother additions (2)
                
                
                11,186
                
                
                
                -Production
                
                
                (9,439
                )
                
                
                -Purchase
      (sales) of minerals in place
                
                
                (2,040
                )
                
                
                -Balance
      - June 30, 2006
                
                
                41,605
                
                
                
                -Revisions
      of previousestimates
                
                
                (2,668
                )
                
                
                -Extensions,
      discoveries andother additions
                
                
                -
                
                
                
                -Production
                
                
                (14,726
                )
                
                
                -Purchase
      (sales) of mineralsin place
                
                
                922
                
                
                
                -Balance
      - June 30, 2007
                
                
                25,133
                
                
                
                -
  (1)
                  This
      is attributable to reserves at our Magee-Smith lease, which was acquired
      during the year ended June 30, 2005.  As of June 30, 2005,
      Hyperdynamics could not determine with reasonable certainty the amount of
      proved reserves on the lease and thus estimated no proved
      reserves.  As of June 30, 2006, we revised the estimate to
      41,898 barrels.
 (2)
                  During
      the year ended June 30, 2006, a productive well was completed at our Kelly
      lease.
  Standardized Measure of Discounted
Future Net Cash Flows Relating to Proved Oil and Gas
Reserves
 
 The
following table presents the standardized measure of future net cash flows from
proved oil reserves in accordance with SFAS No. 69. All components of the
standardized measure are from proved reserves, all of which are located within
the continent of the United States. As prescribed by this statement, the amounts
shown are based on prices and costs at June 30, 2006 and 2005, and assume
continuation of existing economic conditions. Future income taxes are based on
year-end statutory rates, adjusted for tax credits. A discount factor of 10
percent was used to reflect the timing of future net cash flows. Extensive
judgments are involved in estimating the timing of production and the costs that
will be incurred through the remaining lives of the fields. Accordingly, the
estimates of future net revenues from proved reserves and the present value
thereof may not be materially correct when judged against actual subsequent
results. Further, since prices and costs do not remain static, and no price or
cost changes have been considered, and future production and development costs
are estimated to be incurred in developing and producing the estimated proved
oil reserves, the results are not necessarily indicative of the fair market
value of estimate proved reserves, and the results may not be comparable to
estimates by other oil producers.
 
 F-35
 Table of
Contents
  Standardized Measure of Discounted
Future Net Cash Flows Relating to Proved Oil and Gas
Reserves
 
 2007
              
              
              2006
              
              
              2005Future
      cash inflows
              
              $
              1,501,000
              
              
              $
              2,963,000
              
              
              $
              -Future
      production costs
              
              
              1,097,000
              
              
              
              1,690,000
              
              
              
              -Future
      development costs
              
              
              -
              
              
              
              -
              
              
              
              -Future
      income tax expenses
              
              
              -
              
              
              
              339,000
              
              
              
              -Future
      net cash flows
              
              
              404,000
              
              
              
              934,000
              
              
              
              -10%
      annual discount for estimated timing of cash flows
              
              
              35,000
              
              
              
              80,000
              
              
              
              -Standardized
      measure of discounted future cash flows at the end of the
    year
              
              $
              369,000
              
              
              $
              854,000
              
              
              $
              -
 
 The
standardized measure of discounted future net cash flows as of June 30, 2007,
2006 and 2005 was calculated using prices the following average prices in effect
as of that date:
 
 2007
              
              
              2006
              
              
              2005Average
      crude oil price per barrel
              
              $
              68.23
              
              
              $
              69.44
              
              
              $
              -
  Sources
of Changes in Discounted Future Net Cash Flows
 
 Principal
changes in the aggregate standardized measure of discounted future net cash
flows attributable to the Hyperdynamics’ proved crude oil reserves, as required
by SFAS No. 69, at year end are set forth in the table below. Since there
were no productions or proved reserves for the year ended 2004 and minimal oil
production volume for the year ended June 30, 2005, no data was available to
compute the changes in discounted future cash flows for year ended June 30,
2005.
 
 2007
              
              
              2006
              
              
              2005Standardized
      measure of discounted future net cash flows at the beginning of the
      year
              
              $
              854,000
              
              
              $
              -
              
              
              $
              -Net
      changes in prices and production costs
              
              
              (666,000
              )
              
              
              (55,000
              )
              
              
              -Changes
      in estimated future development costs
              
              
              -
              
              
              
              -
              
              
              
              -Sales
      of oil and gas, net of production costs
              
              
              (333,000
              )
              
              
              222,000
              
              
              
              -Extensions,
      discoveries and improved recovery less related costs
              
              
              -
              
              
              
              364,000
              
              
              
              -Purchases
      (sales) of minerals in place
              
              
              14,000
              
              
              
              (9,000
              )
              
              
              -Revisions
      of previous quantity estimates
              
              
              54,000
              
              
              
              261,000
              
              
              
              -Previously
      estimated development costs incurredNet
      change in income taxes
              
              
              339,000
              
              
              
              (72,000
              )
              
              
              -Accretion
      of discount
              
              
              107,000
              
              
              
              143,000
              
              
              
              -Standardized
      measure of discounted future net cash flows at the end of the
      year
              
              $
              369,000
              
              
              $
              854,000
              
              
              $
              -
 
 F-36
 Table of
Contents
  Item 9 Changes inand Disagreements With Accountants on Accounting and Financial
Disclosure
 
 None.
  Item 9A.    Controls andProcedures
  Corporate Disclosure
Controls
  Evaluation of Disclosure Controls
and Procedures
  
 Disclosure
controls and procedures are controls and other procedures of a registrant
designed to ensure that information required to be disclosed by the registrant
in the reports that it files or submits under the exchange Act is properly
recorded, processed, summarized, and reported, within the time periods specified
in the Securities and Exchange Commission's ("SEC") rules and
forms.  Disclosure controls and procedures include processes to
accumulate and evaluate relevant information and communicate such information to
a registrant's management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow for timely decisions regarding
required disclosures.
 
 We
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as of June 30, 2007, as required by Rule 13a-15 of the
Exchange Act. As described below, under "Management's Report on Internal Control
Over Financial Reporting," material weaknesses were identified in our internal
control over financial reporting as of June 30, 2007, relating to our control
environment, staffing of our financial accounting department, accounting system
controls, and segregation of duties. Based on the evaluation described above,
our Chief Executive Officer and Chief Financial Officer have concluded that, as
of June 30, 2007, our disclosure controls and procedures were not effective in
ensuring that the information required to be disclosed by us in reports filed
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the SEC. To
address the material weakness, we performed additional analysis and other
post-closing procedures in an effort to ensure our consolidated financial
statements included in this annual report have been prepared in accordance with
generally accepted accounting principles. Accordingly, management believes that
the financial statements included in this report fairly present in all material
respects our financial condition, results of operations and cash flows for the
periods presented.
  Management’s Report on Internal
Control over Financial Reporting
 
 Effective
December 31, 2006, Hyperdynamics Corporation met the definition of "accelerated
filer," as described by Rule 12b-2 of the Exchange Act. As an accelerated filer,
we are required by the Sarbanes-Oxley Act of 2002 to include an assessment of
our internal control over financial reporting for the year ended June 30, 2007.
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting as that term is defined in Exchange Act Rule
13a-15(f). Our internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of our financial statements for external reporting purposes
in accordance with generally accepted accounting principles (“GAAP”). Our
internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect our transactions and dispositions of our assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of our financial statements in accordance with GAAP, and that
our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect
on our financial statements.
 
 Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent
limitations.  Internal control over financial reporting is a process
that involves human diligence and compliance and is subject to lapses in
judgment and breakdowns resulting from human failures. Internal control over
financial reporting also can be circumvented by collusion or improper management
override. Because of such limitations, there is a risk that material
misstatements may not be prevented or detected on a timely basis by internal
control over financial reporting. However, these inherent limitations are known
features of the financial reporting process. Therefore, it is possible to design
into the process safeguards to reduce, though not eliminate, this
risk.  In addition, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions or that the degree of compliance with the
policies or procedures may deteriorate.
 
 38
 Table of
Contents
  In order
to evaluate the effectiveness of our internal control over financial reporting
as of June 30, 2007, as required by Section 404 of the Sarbanes-Oxley Act
of 2002, our management conducted an assessment, including testing, based on the
criteria set forth in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the “COSO
Framework”).  A material weakness is a control deficiency, or a
combination of control deficiencies, that results in more than a remote
likelihood that a material misstatement of our annual or interim financial
statements will not be prevented or detected.  In assessing the
effectiveness of our internal control over financial reporting, management
identified the following four material weaknesses in internal control over
financial reporting as of June 30, 2007:
 
 1.
              Deficiencies
      in the Company’s Control Environment.  The Company’s control
      environment did not sufficiently promote effective internal control over
      financial reporting throughout the organization. This material weakness
      exists because of the aggregate effect of multiple deficiencies in
      internal control which affect the Company's control environment,
      including: a) a failure to effectively implement, follow, and enforce the
      limits on the delegation of authority for expenditure from the Board of
      Directors to management, including the failure by management to obtain the
      required Board approvals for certain expenditures; b) the lack of an
      effective risk assessment process for the identification of fraud risks;
      c) a failure to implement and ensure the consistent and timely completion
      of employee acknowledgments of the Company's Code of Ethics; d) the lack
      of an internal audit function or other effective mechanism for ongoing
      monitoring of the effectiveness of internal controls; and e) insufficient
      documentation and communication of our accounting policies and
      procedures.
 
 2.
              Deficiencies
      in the staffing of our financial accounting department.  The
      number of qualified accounting personnel with experience in public company
      SEC reporting and GAAP is extremely limited.  This weakness does
      not enable us to maintain adequate controls over our financial accounting
      and reporting processes regarding the accounting for non-routine and
      non-systematic transactions. There is a risk that a material misstatement
      of the financial statements could be caused, or at least not be detected
      in a timely manner, by this shortage of qualified resources. This control
      deficiency resulted in us recording certain adjustments prior to the
      issuance of our consolidated financial
  statements.
 
 3.
              Deficiencies
      in the Company's accounting system controls. We did not effectively and
      accurately close the general ledger in a timely manner and we did not
      provide complete and accurate disclosure in our notes to financial
      statements, as required by GAAP.  The Company failed to perform
      certain control procedures designed to ensure that the financial statement
      presentations and related disclosures were complete and in accordance with
      GAAP. As a result of this weakness, the Company did not identify that
      approximately $4.03 million of equity transactions were not properly
      recorded and $104,000 of property, plant and equipment, net that was not
      in existence as of the balance sheet date. This misstatement was corrected
      before the issuance of Company’s consolidated financial
      statements.
 
 4.
              Deficiencies
      in Segregation of Duties.  The Chief Executive Officer and the
      Chief Financial Officer are actively involved in the preparation of the
      financial statements, and therefore cannot provide an independent review
      and quality assurance function within the accounting and financial
      reporting group.  The limited number of qualified accounting
      personnel discussed above results in an inability to have independent
      review and approval of financial accounting
      entries.  Furthermore, management and financial accounting
      personnel have wide-spread access to create and post entries in the
      Company’s financial accounting system.  There is a risk that a
      material misstatement of the financial statements could be caused, or at
      least not be detected in a timely manner, due to insufficient segregation
      of duties.
 
 39
 Table of
Contents
  Based on
the material weaknesses described above and the criteria set forth by the COSO
Framework, we have concluded that our internal control over financial reporting
at June 30, 2007, was not effective.
 
 The
Company's independent registered public accounting firm, Malone & Bailey,
PC, has issued an  attestation report on the Company's internal
control over financial reporting. That report appears below.
  Changes in Internal Control over
Financial Reporting
 
 No change
in our internal control over financial reporting (as defined in Rule 13a-15(f)
under the Securities Exchange Act of 1934) occurred during the fourth quarter of
fiscal 2007 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting. Management and the Audit
Committee of the Company's Board of Directors have begun to develop remedial
measures to address the internal control deficiencies identified above. The
Company will monitor the effectiveness of planned actions and will make any
other changes and take such other actions as management or the Audit Committee
determines to be appropriate.
  Remediation
Initiatives
 
 During
fiscal 2008, we plan to implement a number of remediation measures to address
the material weaknesses described above. These organizational and process
changes will improve our internal controls environment and increased the
likelihood of our identifying non-routine and non-systematic
transactions.  The change made through the date of this annual report
includes our retention of an outside consulting firm to assist us in the
evaluation and testing of our internal control system and to identify
improvement opportunities related to our accounting and financial reporting
processes in order to streamline and improve the efficiency of these
processes.  The Company's remediation plans include:
 
 1.
              We
      plan to hire additional personnel to assist us with documenting and
      communicating our accounting policies and procedures to ensure the proper
      and consistent application of those policies and procedures throughout the
      Company. Recruitment for this position(s) will begin and the selection
      process is expected to be completed during the second quarter of
      2007.
 
 2.
              We
      plan to (i) require additional training for our current accounting
      personnel; (ii) to hire additional accounting personnel to enable the
      allocation of job functions among a larger group of accounting staff;
      (iii) to engage outside consultants with technical accounting expertise,
      as needed; and (iv) to consider restructuring our accounting department,
      each to increase the likelihood that our accounting personnel will have
      the resources, experience, skills, and knowledge necessary to effectively
      perform the accounting system functions assigned to
  them.
 
 3.
              We
      plan to implement formal processes requiring periodic self-assessments,
      independent tests, and reporting of our personnel's adherence to our
      accounting policies and procedures.
 
 4.
              We
      plan to design effective policies and procedures to control security of
      and access to financial accounting system information. If necessary, we
      will also consider implementing a software solution with automatic control
      checkpoints for day-to-day business
processes.
 
 5.
              We
      plan to refine our period-end financial reporting processes to improve the
      quality and timeliness of our financial
  information.
 
 Management
recognizes that many of these enhancements require continual monitoring and
evaluation for effectiveness. The development of these actions is an iterative
process and will evolve as the Company continues to evaluate and improve our
internal controls over financial reporting.
 
 Management
will review progress on these activities on a consistent and ongoing basis at
the Chief Executive Officer and senior management level in conjunction with our
Audit Committee. We also plan to take additional steps to elevate Company
awareness about and communication of these important issues through formal
channels such as Company meetings, departmental meetings, and
training.
 
 40
 Table of
Contents
  Item 9B Other
Information
 
 None
 
 Part III
 
 Item 10 Directors,
ExecutiveOfficers and Corporate Governance
 
 Executive Officers and
Directors.
 
 The
following table sets forth the names and positions of each of our Executive
Officers and Directors.
 
 Name
              
              Position
              
              AgeKent
      Watts
              
              Director,
      Chief Executive Officer, Chairman and President
              
              48Harry
      J. Briers
              
              Director
      and Executive Vice President
              
              43Harold
      A. Poling
              
              Director
              
              81Albert
      F. Young
              
              Director
              
              69Steven
      Plumb
              
              Chief
      Financial Officer and Principal Accounting Officer
              
              48L.
      Gene Stohler
              
              Director
              
              78
  Directors
are elected annually and hold office until the next annual meeting of our
stockholders or until their successors are elected and qualified. We have no
standing committees of the Board of Directors. Officers are elected annually and
serve at the discretion of the Board of Directors. There is no family
relationship between or among any of the Directors and our Executive Officers.
Board vacancies are filled by a majority vote of the Board. We have determined
that our Vice-President for Guinea Affairs, Famourou Kourouma, is not an
executive officer. We have a corporate Secretary who we have also determined is
not an executive officer.
 
 Kent
Watts, age 48, became Chairman of the Board of Directors and was named
our President and Chief Executive Officer (CEO) on June 4, 1997. Mr.
Watts has been a certified public accountant in Texas since 1985 and a licensed
real estate broker since 1979. He received a Bachelor of Business Administration
Degree from the University of Houston in 1983. Mr. Watts founded MicroData
Systems, Inc., our former subsidiary, in 1988 and was MicroData's CEO until he
became President and Chief Executive Officer of Hyperdynamics Corporation. In
2005 he traveled to Guinea and established Hyperdynamics' foreign subsidiary and
laid the groundwork for a new 2006 production sharing contract.  As our CEO
and Chairman of the Board, he remains primarily responsible for managing our
strategic direction and focus on the vertical oil and gas industry. Mr. Watts is
the founder, president and director of American Friends of Guinea, established
in March of 2005 as a non-profit with a 501(c) 3 designation for the purpose of
making donations for medical relief agendas in the Republic of
Guinea.
 
 Harry
James Briers, age 43, has been a Director since March 2, 2000. He began as our
Director of Integrated Information Systems when he joined us in May 1998. He was
elected as Vice President of Operations for Hyperdynamics Corporation in 1999
and named the Chief Operating Officer in 1999. He became our Executive Vice
President in October 2002, which is the only position and title he now holds.
From 1988 until May 1998, Mr. Briers owned and operated Perfect Solutions, a
software consulting firm in Houston, Texas. He has extensive experience in the
sale and implementation of mission critical software applications. Prior work
experience included consulting for Ernst & Young in its Entrepreneurial
Services Group. Mr. Briers has a B.S. in Accounting and an MBA from the
University of Houston-Clear Lake. As Executive Vice President, he is responsible
for managing the daily operations of the organization. He holds no other
directorships.
  41
 Table of
Contents
  Mr.
Harold A. Poling, age 81, was elected as our fourth Director on June 2, 2004. He
is a former Chairman of the Board and CEO of Ford Motor Co. After finishing his
MBA in accounting, he took a job with Ford in 1951. Ford of Europe had record
earnings during his tenure as head of that subsidiary. He moved to Ford's North
American Operations prior to being named President and COO, then Vice-chairman
and CEO of, and later Chairman and CEO of Ford Motor Co., the world's second
largest auto maker. He served as a member of Ford's Board of Directors from May
1979 until January 1994, and was elected Chairman in March 1990. He became a
member of the Office of the Chief Executive of Ford in November 1984. He retired
from Ford in January 1994. Currently, Mr. Poling serves as the Chairman of The
PGA Tournament Players Club of Michigan and is also the chairman for
Eclipse Aviation Corp. He is a Director of, Monmouth, IL. College Senate, and
William Beaumont Hospital where he is also a trustee. He is also a
member of the Board of Trustees of Spring Arbor University. In the past, Mr.
Poling served on the Boards of ArvinMeritor, Flint Ink Corporation, Royal Dutch
Shell, Kellogg, and is past Director of the Professional Golf Association's
(PGA) Tour Policy Board.
 
 Albert F.
Young, age 68, was elected to the Board of Directors on October 18, 2004. He
currently owns and operates Al Young Sales and Consulting. He retired from
Venture Industries, where he had spent the preceding 14 years, in 2003.
Currently, he continues to consult with Venture and is the Executive Assistant
to its Chairman. During his tenure at Venture, Mr. Young was responsible for
building his division's sales to approximately $500 million annually.
Additionally, Mr. Young was instrumental in formulating and orchestrating
several acquisitions and joint ventures including Venture's purchase of a Ford
plastic plant, design center and two tool shops in Melbourne, Australia. These
acquisitions made Venture a supplier of automotive design projects.
Additionally, Mr. Young helped Venture acquire Bailey Corporation and a third
tool shop in Michigan and became a joint venture partner with Visteon in the
purchase of Atlantic Automotive in Benton Harbor, Michigan. He holds no other
public company directorships.
  Steven
Plumb, age 48, has been our CFO and Principal Accounting Officer since November
2005. He is a CPA licensed to practice in Texas. Mr. Plumb is a financial
manager and senior executive experienced in operations, finance and marketing.
He has Big 4 CPA experience, a background in IT, biotech, Fortune 500 firms,
medical and utility companies, distribution, real estate, construction,
governmental entities, and non-profit organizations. During 1981-1982, Mr. Plumb
was a staff accountant at PriceWaterhouseCoopers. During 1982-1984, Mr. Plumb
was a staff accountant at Kalman Phillips & Leon, P.C. During 1984-1987, Mr.
Plumb was a supervising senior accountant at KPMG. During 1987-1990, Mr. Plumb
was the controller of Memorial Hermann Rehabilitation Hospital.
During 1990-1992, Mr. Plumb was the CFO of DePelchin Children's Center. During
1992-present, Mr. Plumb was the President of Steven M. Plumb, P.C. During
1997-2001, Mr. Plumb was the President of Orchard Consulting Group, Inc. During
2002-2004, Mr. Plumb was the CFO of ADVENTRX Pharmaceuticals, Inc. During
2003-present, Mr. Plumb was the President of Clear Financial Solutions, Inc. Mr.
Plumb is a member of: American Institute of Certified Public Accountants; Texas
Society of Certified Public Accountants; Houston Chapter of Texas Society of
Certified Public Accountants; Houston Technology Center; and Association for
Corporate Growth. Mr. Plumb is active in BioHouston and the Rice Alliance. Mr.
Plumb has a Bachelor of Business Administration degree from the University of
Texas at Austin, Austin, Texas, 1981. There is no family relationship between
Mr. Plumb and any of our officers or directors. We have a one year contract with
Clear Financial Solutions, Inc., a company owned by Mr. Plumb, which has agreed
to provide us with a so called “contract” CFO, namely Mr. Plumb. We pay a
fee directly to Clear Financial Solutions, Inc. in the amount of $5,200 per
month for Mr. Plumb's services as our CFO and some additional services provided
to us by Clear Financial Solutions, Inc.
 
 L. Gene
Stohler, age 78, is a Director. One of Mr. Stohler's early activities in 1959
was supporting the inventor of the cruise control system for automobiles. Mr.
Stohler provided marketing, sales and manufacturing support assistance to the
inventor. In 1970, Mr. Stohler began working for Rockwell International as the
General Manager of the Service Parts Group of Rockwell. In 1978, Mr. Stohler was
promoted to Director of Marketing for Rockwell. In 1983, Mr. Stohler joined ITT
Automotive as Vice President, World Wide Sales and Marketing. His activities at
ITT Automotive included sales management for the Anti-Lock Brake System sales to
the automotive industry. In 1989, Mr. Stohler joined Masco Corporation as the
Vice President--Marketing and Planning for the Masco Tech Automotive Group which
had $750 million in sales, including projects such as engineering and building
the Ford Mustang Convertible from a basic chassis. Mr. Stohler retired from
MascoTech in 2003 and joined Bankers Integration Group, a startup company at
that time, as the VP--Business Development, reporting to the Chairman. Bankers
Integration Group, Inc. is a technology and software development company that
provides decision support tools and services to the automotive industry for the
purpose of assisting automobile dealers and financial institutions with
interpretation of credit data, and matching buyers with available loan programs.
Mr. Stohler is a past Board member of the Automotive Hall of Fame,
Oakland University and a member of the Board of Breed Technologies, a
supplier of safety equipment to the automotive industry.
  42
 Table of
Contents
  Information Concerning the Board of
Directors and its Committees.
  We have
an Audit Committee. The Audit Committee was created during October 2004. Mr.
Poling, Mr. Stohler and Mr. Young are the members of the Audit Committee. All
committee members are independent. Mr. Poling is the financial expert based on
his work as Chairman and CEO of Ford Motor Co. The Audit Committee has a written
charter, which was included in our proxy statement filed on December 28, 2004.
During the year ended June 30, 2007, the Audit Committee met 4 times and took
action by Unanimous Consent 3 times.
 
 We have a
compensation committee that started its work during fiscal 2006. Mr. Young and
Mr. Stohler are members of the Compensation Committee. Both committee members
are independent. During the year ended June 30, 2007, the Compensation Committee
met 4 times and took action by Unanimous Consent 4 times.
 
 We have a
nominating committee. The Committee has not adopted formal policies with regard
to the process to be used for identifying and evaluating nominees for Director.
At this time, the Committee has discretion over the consideration of candidates
nominated. We believe this is adequate based on our size and each current
Committee member's qualifications.
 
 The Board
has not adopted formal policies with regard to shareholder communications with
individual Board members. However, we are currently in the process of developing
these policies and procedures.
 
 The Board
of Directors held meetings on 8 occasions during the fiscal year ended June 30,
2007. The Board of Directors also took action by written consent on 24 occasions
during the fiscal year ended June 30, 2007, in which all present Directors took
part.
 
 Section 16(a) Beneficial Ownership
Reporting Compliance.
 
 We have
reviewed the Forms 3, 4 and 5 submitted to us relating to fiscal 2007. We have
found that Harry Briers, Harold Poling, Albert F. Young, L. Gene Stohler, Steven
Plumb, DJX Ltd, TW Trust, Tyler Watts, Angela Watts, TWJ Navigation, Inc. and
Kent Watts have filed all required Forms 3, 4 and 5 during fiscal
2007.
  The
following table summarizes the results of our review:
  Name
              
              Form
Type
              
              Number of forms filed
      late
              
              Number of transactions reported
      lateKent
      Watts
              
              4
              
              1
              
              1Harold
      Poling
              
              4
              
              2
              
              3Albert
      F. Young
              
              4
              
              1
              
              2L.
      Gene Stohler
              
              4
              
              2
              
              3Steven
      Plumb
              
              4
              
              1
              
              1
  Code of Ethics.
 
 We have
adopted a Code of Ethics for our senior Executive Officers and Financial
Officers, which was filed in our 10-KSB Amendment Number 1 on May 16, 2005. We
will provide without charge a copy of our Code of Ethics upon request. Such
request should be directed in writing to: Kent Watts, Hyperdynamics Corporation,
One Sugar Creek Center Blvd., #125, Sugar Land, Texas 77478, voice: (713)
353-9400, fax: (713) 353-9421. Our Web site is www.hypd.com.
 
 Information about
Board Committees
 
 We have a
Nomination Committee that started its work during fiscal
2007.  Decisions concerning the nominees for Director for fiscal 2007
were made by the Nomination Committee.  Mr. Young, Mr. Stohler, and
Mr. Poling are members of the Nomination Committee.  All nomination
committee members are independent.
 
 The
Committee does not have a charter.  The Committee has not adopted a
policy with regard to the consideration of director candidates recommended by
security holders.  The Committee has not adopted formal policies with
regard to the process to be used for identifying nominees for
Director.  However, it is currently in the process of developing
policies and procedures for identifying and evaluating nominees for Director. At
this time, the consideration of candidates is at the Committee’s
discretion.  We believe this is adequate based on our size and each
current Board member's qualifications.
 
 43
 Table of
Contents
  We have
an Audit Committee. The Audit Committee was created during October
2004.  Mr. Poling, Mr. Stohler and Mr. Young are the members of the
Audit Committee. All committee members are independent.  Mr. Poling is
the financial expert based on his work as Chairman and CEO of Ford Motor
Co.  The Audit Committee has a written charter, which was included in
our proxy statement filed on December 28, 2004.
 
 Item 11 ExecutiveCompensation
 
 COMPENSATION DISCUSSION AND
ANALYSIS
 
 Compensation Objectives and
Elements
 
 The
objectives of the Compensation Committee of the Board of Directors in
determining executive compensation are to (1) attract and retain key
individuals who are important to the continued success of Hyperdynamics, and
(2) provide strong financial incentives, at reasonable cost to the
shareholders, for senior management to enhance the value of the shareholders’
investment.
 
 The
elements of compensation that the Committee uses to accomplish these objectives
include base salaries, stock and stock options,  and employment and
change in control agreements. Base salaries are targeted to attract and retain
key executives.
 
 The
company’s compensation plans are designed generally to ensure full tax
deductibility of compensation paid under the plans. This includes compliance
with Section 162(m) of the Internal Revenue Code, which limits the company’s tax
deduction for an executive’s compensation to $1 million unless certain
conditions are met. For fiscal year 2007 the full amount of all compensation
provided to all executives was tax deductible to the company.
 
 Administration of Executive
Compensation
 
 The
Compensation Committee reviews and approves corporate goals and objectives
relevant to compensation of the Chief Executive Officer, evaluates the CEO’s
performance and sets his compensation. The Committee also reviews the CEO’s
recommendations for and sets the salaries of other key officers.
 
 The CEO
attends Committee meetings and makes recommendations to the Committee concerning
the base salaries of all subordinate officers. Neither the CEO nor any other
company officer or employee attends periodic executive sessions of the
Committee.
 
 
 The
Compensation Committee took action on matters affecting fiscal year 2007
executive compensation on the following dates:
 
 Date
              
              Committee
      ActionAugust
      10, 2006
              
              Approved
      Executive Employment Agreement and Severance Agreement for Kent P.
      WattsOctober
      7, 2006
              
              Approved
      Executive Employment Agreement and Severance Agreement for Harry
      BriersDecember
      14, 2006
              
              Confirmed
      Approval of Executive Employment Agreement and Severance Agreement for
      Harry Briers
  Base Salaries
 
 The
Compensation Committee sets base salaries for officers with individual salaries
based on level of responsibility and individual performance. The Committee
reviewed these salaries in August and October of 2006.
 
 Stock Incentives
 
 The
company’s Stock and Stock Option Plan (“Plan”) authorizes the Compensation
Committee to grant stock options, restricted stock, and S-8 registered stock to
officers and other key employees. The Committee implements this authority by
awarding stock options designed to tie the interests of all senior executives to
the long-term consolidated financial results of the company.
 
 44
 Table of
Contents
 
 COMPENSATION
TABLES
 
 The
following tables show salaries, bonuses, incentive awards, retirement benefits
and other compensation relating to fiscal year 2007 for the Chief Executive
Officer, Chief Financial Officer and the three other most highly compensated
executives.
 
 SUMMARY COMPENSATION
TABLE
  Change inNon-Equity
              
              Pension
      ValueName &
              
              
              
              
              
              
              
              
              
              
              
              
              
              Incentive Plan
              
              &
      NonqualifiedPrincipal
              
              
              
              
              
              
              
              
              Stock
              
              
              Option
              
              Compensation
              
              Deferred
      Compensations
              
              All OtherPosition
              Year
              
              Salary
              
              
              Bonus
              
              
              Awards
              
              
              Awards
              
              ($) (g)
              
              Earnings
              
              Compensation
              
              
              Total(a)
              (b)
              
              ($) (c)
              
              
              ($) (d)
              
              
              ($) (e)
              
              
              ($) (f)
              
              
              
              ($) (h)
              
              ($) (i)
              
              
              ($) (j)Kent
      Watts
                Chairman,
      Pres. & CEO (1)
              2007
              
              $
              251,939
              
              
              
              -
              
              
              
              -
              
              
              $
              236,355
              
              
              
              
              
              
              17,814
              
              
              $
              506,108Kent
      Watts
                Chairman,
      Pres.&
      CEO  (2)
      (5)
              2006
              
              
              102,600
              
              
              
              -
              
              
              $
              16,000
              
              
              
              -
              
              
              
              
              
              
              15,470
              
              
              
              134,070Kent
      Watts
                Chairman,
                Pres.,  CEO,  &CFO  (2) (3)
      (5)
              2005
              
              
              93,200
              
              
              
              -
              
              
              
              9,746
              
              
              
              -
              
              
              
              
              
              
              20,022
              
              
              
              122,967Harry
      Briers
                Exec.
      VicePres.
      (4)
              2007
              
              
              188,173
              
              
              
              -
              
              
              
              -
              
              
              
              109,677
              
              
              
              
              
              
              
              
              
              
              297,850Harry
      Briers
                Exec.
      VicePres.
      (4)
      (5)
              2006
              
              
              98,654
              
              
              
              -
              
              
              
              16,000
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              114,654Harry
      Briers
                Exec.
      VicePres.
      (4)
      (5)
              2005
              
              
              89,619
              
              
              
              -
              
              
              
              9,746
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              99,365Steven
      Plumb
                CFO
              2007
              
              
              78,647
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              78,647Steven
      Plumb
                CFO
              2006
              
              
              59,256
              
              
              
              -
              
              
              
              -
              
              
              
              142,523
              
              
              
              
              
              
              
              
              
              
              201,779
 
 Columns  (d),
(g),and (h): No named executive received such compensation for fiscal year
2007.
 
 Columns
(e) and (f): Effective January 1, 2006, the company adopted Statement of
Financial Accounting Standards No. 123R,Share-Based
Payment  (FAS No. 123R), which requires the company to
recognize compensation expense for stock options and other stock-related awards
granted to employees and directors based on the estimated fair value of the
equity awards at the time of grant. The assumptions used to determine the
valuation of the awards are discussed in note 13 to the consolidated financial
statements. The amounts shown in these columns are the dollar amounts recognized
by the company for financial statement reporting purposes with respect to fiscal
years 2005, 2006, and 2007 for each named executive in accordance with FAS 123R.
Such amounts do not correspond to the actual value that will be recognized by
the named executives.
 
 Column
(i): Payments made on a company leased vehicle for the executive.
 
 45
 Table of
Contents
  (1)
On August 10, 2006, our Compensation Committee approved a new Chief Executive
Employment Agreement for Kent Watts.  The contract provides for a base
salary of $250,000 annually with a performance based incentive salary based on
1% of adjusted net income.
 
 (2) On
July 21, 1999, our Board of Directors unanimously agreed to the terms of an
“Executive Employment Agreement” for Kent Watts. The Agreement was duly executed
on July 21, 1999 which establishes Mr. Watts as our President, Chief Executive
Officer (CEO). The contract provides for a base salary of $100,000 annually with
a performance based incentive salary based on 5% of adjusted net income, up to
an additional $100,000 in salary. Therefore, maximum salary under the Agreement
is $200,000 annually. This Agreement has been renewed on a year-by-year basis
under the same terms.
 
 (3) For
the year ended June 30, 2005, Kent Watts was the Chief Financial
Officer.
 
 (4) On
October 7, 2006, our Compensation Committee approved a new Executive Vice
President Employment Agreement for Harry Briers.  The contract
provides for a base salary of $190,000 annually.
 
 (5) For
the year ended June 30, 2005, Mr. Briers and Mr. Watts each received 4,051
shares of common stock as $9,746 compensation for service on the Board of
Directors. For the year ended June 30, 2006, Mr. Briers and Mr. Watts each
received 8,244 shares of common stock as $16,000 compensation for Board of
Directors service.
 
 (6) We
have a contract with Clear Financial Solutions, Inc., a company owned by Mr.
Plumb, which has agreed to provide us with a so called “contract”
CFO, namely Mr. Plumb. We will pay a fee directly to Clear Financial
Solutions, Inc. in the estimated amount of approximately $3,300 to $5,200 per
month for Mr. Plumb's services as our CFO and some additional services provided
to us by Clear Financial Solutions, Inc.  The amounts reflected in the
summary compensation table are actual billed amounts from Clear Financials
Solutions.
 
 Bonuses and Stock
Awards
 
 The
following tables show cash and stock awards made to the named executives in
fiscal year 2007, their outstanding equity awards at the end of fiscal year
2007, and the gains attributable to stock options they exercised during fiscal
year 2007.
 
 
 GRANTS OF PLAN-BASED AWARDS IN FISCAL
YEAR 2007
 Under Non-Equity
      Incentive
                Plan
    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
              8/14/06
              (1)
              
              
              
              40,000
              2.20
              64,775Kent
      P. Watts
              08/10/06
              10/02/06
              
              
              
              
              40,000
              2.74
              76,411Kent
      P. Watts
              08/10/06
              1/03/07
              
              
              
              
              40,000
              2.23
              62,189Kent
      P. Watts
              08/10/06
              4/03/07
              (2)
              
              
              
              40,000
              2.00
              32,980Harry
      Briers
              10/07/06
              10/09/06
              (1)
              
              
              
              25,000
              2.88
              50,197Harry
      Briers
              10/07/06
              01/03/07
              
              
              
              
              25,000
              2.23
              38,868Harry
      Briers
              10/07/06
              04/03/07
              (2)
              
              
              
              25,000
              2.00
              20,612Steven
      Plumb
              NONE
  Column
(b): For option awards, the Action Date is the day the Compensation Committee
approved the executives’ contracts. The contracts specify that the options will
be granted on the first business day of each quarter, except as
noted:
  (1)
              The
      grant date is the date the Board of Directors took action to grant the
      first installment of options after the contracts were
    signed.
 (2)
              The
      contracts stipulate that if the award of the options would trigger a
      repricing of Cornell Capital’s convertible debentures or warrants, the
      grant will be deferred to a later date.  In April 2007, we
      deferred the grant of options by one day in order to comply with the
      covenants in the Cornell
agreements.
 
 46
 Table of
Contents
  Columns
(f) thru (h): Each named executive received stock options in accordance with his
employment contract’s provisions.  The exercise price is the greater
of $2.00 per share or the closing bid price on the date of grant.
 
 
 OUTSTANDING EQUITY AWARDS AT
2007 FISCAL YEAR-END
 No. of Securities
              No. of SecuritiesUnderlying
              Underlying
              
              
              No. of Shares
              Market Value ofUnexercised
              Unexercised
              
              
              or Units of
              Shares or UnitsOptions
              Options
              Option
              Option
              Stock That
              of Stock ThatName
              Exercisable
              Unexercisable
              Exercise Price
              Expiration Date
              Have Not Vested
              Have Not Vested(a)
              (#) (b)
              (#) (c)
              ($/Share) (d)
              (e)
              (#) (f)
              ($) (g)Kent
      P Watts
              400,000
              
              0.23
              07/26/07Kent
      P Watts
              40,000
              
              2.20
              08/14/09Kent
      P Watts
              40,000
              
              2.74
              10/02/09Kent
      P Watts
              40,000
              
              2.23
              01/03/10Kent
      P Watts
              40,000
              
              2.00
              04/03/10Harry
      Briers
              400,000
              
              0.23
              07/26/07Harry
      Briers
              25,000
              
              2.88
              10/09/09Harry
      Briers
              25,000
              
              2.23
              01/03/10Harry
      Briers
              25,000
              
              2.00
              04/03/10Steven
      Plumb
              none
 
 Column
(b): Options that expire in 2007 vested on July 26, 2004 and were originally
granted on July 26, 2001; all other options were granted three years prior to
the expiration date and vested immediately.
 
 
 OPTION EXERCISES AND STOCK VESTED
DURING FISCAL YEAR 2007
 
 No. of
              
              
              No. of
              ValueShares
              
              Value
              Shares
              RealizedAcquired
              
              Realized
              Acquired
              on VestingName
              on Exercise
              
              on Exercise
              on Vesting
              ($)(a)
              (#)
              
              ($)
              (#)Kent
      P Watts
              NoneHarry
      Briers
              NoneSteven
      Plumb
              59,211
              
              133,225
 
 During
June 2007, Mr. Plumb effected a cashless exercise of options to purchase 100,000
shares with exercise price of $1.55 when stock price was $3.80.  Net
issuance was 59,211 shares of  common stock.
  AGREEMENTS WITH EXECUTIVES AND
OFFICERS
 
 On August
14, 2006, we entered into a new employment agreement with our CEO and President,
Kent Watts. The effective date of the employment agreement is deemed to be July
1, 2006. Pursuant to the employment agreement, Mr. Watts will devote his best
efforts and his full business time and attention to the performance of the
services customarily incident to such offices and position and to such other
services of a senior executive nature as may be reasonably requested by our
Board of Directors.
 
 47
 Table of
Contents
  Term. The
initial term of employment ends on July 1, 2009, provided, however, that as of
the expiration date of each of the initial Term of Employment and if applicable,
any Renewal Period the term of employment will automatically be extended for a
two (2) year periods unless either we or Mr. Watts provides 2 months' notice to
the contrary.
 
 Cash
Compensation. Mr. Watts' base salary is $250,000 per year. Mr. Watts is entitled
to receive a bonus equal 1% our net income before interest, taxes and the bonus.
If there is no net income, the bonus is zero.
 
 Stock
compensation. Mr. Watts will receive 40,000 stock options per quarter during the
term of the employment agreement beginning on the effective date for a total of
480,000 options. The shares underlying these options have been or will be
registered shares. The options will expire 3 years after their issuance date.
The exercise price of these options will be the greater of $2.00 or the closing
price on the date of each quarterly option grant. In the event that we cannot
issue the full amount of these quarterly options grants because we are or may
become contractually bound to limit such option issuances, then number of
options not granted for any one quarter pursuant to such a limitation will be
carried forward and granted at a late date when we are not so restricted even if
such future date is beyond the term of the employment agreement.
 
 Mr. Watts
is entitled to participate in any of our life, health and long-term disability
insurance programs, pension and retirement programs, stock option and other
incentive compensation programs, and other fringe benefit programs made
available to senior executive employees, and such other fringe benefits as may
be granted to him from time to time such as a corporate automobile lease and a
membership in a country club. Mr. Watts can take a 4 week vacation each year
with pay.
  Mr. Watts
will be added as an additional named insured under all liability insurance
policies now in force or hereafter obtained covering any officer or director in
his capacity as an officer or director. We will indemnify hold harmless Mr.
Watts from any cost, expense or liability arising out of or relating to any acts
or decisions made by him on behalf of or in the course of performing services
for us.
 
 Severance
Agreement. We have a separate Severance Agreement with Mr. Watts. In the event
his employment is terminated (a) by us other than for Cause, Disability or Death
or (b) by Mr. Watts for good reason, then Mr. Watts shall receive:
  (i) His
base salary during the period commencing on the effective date of such
termination and ending 2 years later; and
  (ii) Medical
insurance premium reimbursement through age 66 for himself and his spouse, and
his children through age 25.
  On
October 9, 2006, we entered into a new employment agreement with our Executive
Vice President, Harry Briers. The effective date of the employment agreement is
deemed to be July 1, 2006. Pursuant to the employment agreement, Mr. Briers will
devote his best efforts and his full business time and attention to the
performance of the services customarily incident to such offices and position
and to such other services of a senior executive nature as may be reasonably
requested by our Board of Directors which may include services for one or more
of our subsidiaries or affiliates.
 
 Compensation.
We will pay Mr. Briers a base annual salary of $190,000.00. In addition to the
base compensation he may receive performance bonus as determined by the Chief
Executive Officer and the Board of Directors.
 
 Long Term
Incentive/Stock Options. We will grant to Mr. Briers 25,000 stock options every
quarter during the term of this Agreement. These options shall have an exercise
price of the greater of $2.oo per share or the closing last trade price on the
date of each option grant. However, grants are limited in quantity to insure
compliance with our financing agreement with Cornell Capital, and any options
not granted to Mr. Briers to maintain compliance with the Cornell financing
agreement will be carried forward and granted in future quarters to the extent
such grants do not exceed the Cornell limitation.
 
 Mr.
Brier's Fringe Benefits During the Term of Employment:
  48
 Table of
Contents
  (a)    Any
life, health and long-term disability insurance programs, pension and retirement
programs, stock option and other incentive compensation programs, and other
fringe benefit programs made available to other senior executive employees, and
other fringe benefits as may be granted to him from time to time by the Board of
Directors including a corporate lease vehicle approved by the Chief Executive
Officer.
  (b)    Four
weeks of vacation with pay on the same basis as other senior executive
employees.
  (c)    Reimburse
for reasonable business expenses incurred in performing duties and promoting the
our business.
  (d)    Adding
him as an additional named insured under all liability insurance policies now in
force or hereafter obtained covering any officer or director of the Company in
his or her capacity as an officer or director. We will indemnify him in his
capacity as an officer or director and hold him harmless from any cost, expense
or liability arising out of or relating to any acts or decisions made by him on
behalf of or in the course of performing services to us.
  Term;
Termination of Employment. The term of employment commenced on the effective
date and ends two years later; provided, however, that the term of employment
will automatically be extended for a one year periods unless either we or Mr.
Briers gives two notice to the contrary. Notwithstanding the above, the term of
employment shall expire on the first to occur of the following:
  (a)
Termination by the Company. Notwithstanding anything to the contrary in this
Agreement we may terminate Mr. Briers by giving him 60 days written notice of
the effective date of termination. We may terminate his employment for cause,
death or disability without prior notice.
  (b)
Termination by Executive. In the event that his employment with the Company is
voluntarily terminated by Mr. Briers, we shall have no further obligation to him
except as may be provided in the Separation and Severance
Agreement.
  (c)
Salary, Benefits, and Severance Pay Upon Termination. In the event of
termination of employment, Mr. Briers will receive all regular Base Salary due
up to the date of termination, and any bonus.
  Mr.
Briers's stock options remain be subject to the terms of our stock option
plan.
 
 Confidential
Information, Non-Solicitation and Non-Competition. Mr. Briers may not disclose
our confidential information. In the event that he terminate his employment he
will deliver to us any and all property owned by us.
 
 Taxes.
All payments to be made to Executive under this Agreement will be subject to any
applicable withholding of federal, state and local income and employment
taxes.
 
 Severance
Agreement. We have a separate Severance Agreement with Mr. Briers. In the event
his employment is terminated by us other than for: cause, disability; death; or
by Mr. Briers for good reason, then Mr. Briers shall receive his base salary
during the period commencing on the effective date of such termination and
ending one year later.
 
 We have a
one year contract (renewing in November 2006) with Clear Financial Solutions,
Inc., a company owned by Mr. Plumb, which has agreed to provide us with a so
called “contract” CFO, namely Mr. Plumb. We will pay a fee directly to
Clear Financial Solutions, Inc. in the estimated amount of approximately $3,300
to $4,900 per month for Mr. Plumb's services as our CFO and some additional
services provided to us by Clear Financial Solutions, Inc. The CFO contract
renewed in November 2006 with fees increased to approximately $5,200 per
month.
  In August
2005, we hired Mr. Famourou Kourouma as our new Vice President of Guinea
Affairs. We entered into a new employment agreement with Mr. Kourouma in
December 2006.  The agreement term is two years.  He will
receive a base salary of $84,000 per year and a subsidy of $2,500 per month
while in Guinea.  He may also receive up options to purchase up to
600,000 shares of Hyperdynamics common stock based on the achievement of certain
performance criteria.  We have determined that Mr. Kourouma is not an
executive officer.
 
 In August
2006, we hired Ms. Aissata Beavogui as our new Vice President and Chief
Financial Officer for SCS Corporation.  The agreement term is two
years.  Ms. Beavogui will receive a base salary of $54,000 per year
and a subsidy of $2,500 per month while in Guinea.  She also will
receive options to purchase up to 75,000 shares of Hyperdynamics’ common stock
that vest between September 2007 and August 2008.  We have determined
that Ms. Beavogui is not an executive officer.
  49
 Table of
Contents
  DIRECTOR
COMPENSATION
  During
the year ended June 30, 2007, compensation for independent directors was $8,000
per quarter, ordinarily payable with Hyperdynamics common stock.
  Effective
fourth quarter 2006, independent directors who serve on the audit committee
receive quarterly additional compensation of $5,000 and options to purchase
7,500 shares of common stock at a price per share determined based on the market
price of our common stock on the first day of the quarter.
  Effective
fourth quarter 2006, independent directors who serve on the compensation
committee receive quarterly additional compensation of $2,500 and options to
purchase 5,000 shares of common stock at a price per share determined based on
the market price of our common stock on the first day of the
quarter.
  Effective
fourth quarter 2006, independent directors who serve on the nomination committee
receive quarterly additional compensation of $2,500 and options to purchase
2,500 shares of common stock at a price per share determined based on the market
price of our common stock on the first day of the quarter.
 
 Our
independent directors are Harold Poling, Al Young, and L. Gene
Stohler.  Mr. Poling serves on the audit and compensation
committees.  Mr. Stohler and Mr. Young serve on the audit, nomination,
and compensation committees.  Accordingly, Mr. Young and Mr. Stohler
receive $18,000 and options to purchase 15,000 shares of Hyperdynamics common
stock each quarter and Mr. Poling receives $15,000 and options to purchase
10,000 shares of Hyperdynamics common stock each quarter.
  
 DIRECTOR
COMPENSATION
  Change in
      PensionNon-Equity
              Value
      and
              AllFees
      Earned or
              Stock
              Option
              Incentive
      Plan
              Nonqualified
      Deferred
              OtherName
              Paid
      in Cash
              Awards
              Awards
              Compensation
              Compensation
      Earnings
              Compensaton
              Total(a)
              ($)
      (b)
              ($)
      (c)
              ($)
      (d)
              (e)
              (f)
              ($)
      (g)
              ($)
      (h)Albert
      Young
              20,968
              51,032
              73,994
              
              
              
              145,994L
      Gene Stohler
              -
              72,000
              73,994
              
              
              
              145,994Harold
      A Poling
              -
              62,000
              49,330
              
              
              
              111,330
 
 
 Column
(b): Mr. Young opted to receive his fees for the quarter ended December 31, 2007
in cash.
 
 Column
(c): Stock awards to pay directors fees.  The assumptions used to
determine the valuation of the awards are discussed in note 13 to the
consolidated financial statements.
 
 Column
(d): Amounts are the expenses recorded in the company’s 2007 financial
statements for stock options awarded for that year.  The assumptions
used to determine the valuation of the awards are discussed in note 13 to the
consolidated financial statements.   The notes to the beneficial
ownership table in Item 12 provide detailed information about each directors’
outstanding stock option awards.
 
 Compensation Committee Interlocks
and Insider Participation
  The
Compensation Committee is made up of two independent, non-employee directors,
Messrs. Stohler and Young. No interlocking relationship exists between the
members of our Compensation Committee and the board of directors or compensation
committee of any other company.
  50
 Table of
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  Compensation Committee
Report
  The
Compensation Committee (“Compensation Committee”), consisting of Mr. L. Gene
Stohler and Mr. Albert Young, is responsible for establishing and administering
the executive compensation programs of the Company. The Compensation Committee
of Hyperdynamics has reviewed and discussed the Compensation Discussion and
Analysis required by Item 402(b) of Regulation S-K with management and, based on
such review and discussions, the Compensation Committee recommended to the Board
that the Compensation Discussion and Analysis be included in this Annual
Report.
  THE
COMPENSATION COMMITTEE
  /s/
Albert Young, Chairman
 /s/ L.
Gene Stohler
  Item 12 Security
Ownershipof Certain Beneficial Owners and Management and Related
Stockholder Matters
 
 Equity Compensation Plan
Information
 
 The
following table gives aggregate information under all equity compensation plans
of Hyperdynamics as of June 30, 2007.
  Equity Compensation Plan
      InformationNumber of Securities to be
      Issued Upon Exercise of Outstanding Options, Warrants, and
      Rights
              Weighted-Average Exercise Price
      of Outstanding Options, Warrants and Rights
              Number of Securities Remaining
      Available for Future Issuance Under Equity Compensation Plans (Excluding
      Securities Reflected in Column (a))Plan
      Category
              (a)
              (b)
              (c)Equity
      compensation plans approved by security holders
              3,159,999
              3.96
              4,453,311Equity
      compensation plans not approved by security holders
              942,000
              0.27
              -0-Total
              4,101,999
              3.11
              4,453,311
 
 The Stock
and Stock Option Plan (the “Plan”) of Hyperdynamics was adopted May 7, 1997 and
amended on December 3, 2001 and on January 21, 2005.  The total number
of shares issuable under the Plan, as amended, is
10,000,000.   The Board of Directors voted to amend the Plan on
May 5, 2007 by extending the expiration date of the Plan from May 7, 2007 to May
7, 2010.
 
 As
of  June 30, 2006, we had 4,771,597 shares available to be issued or
granted pursuant to the Plan. We issued 318,286 shares under the Plan this
fiscal year, leaving us with 4,453,311 shares available to be issued or granted
pursuant to the Plan as of June 30, 2007.
 
 Under the
Plan, options will vest over a five year or other negotiated period and will
have a strike price set at the time of grant based on the then current market
value of the stock.
 
 51
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  Our
President has the authority as given by the Board of Directors to negotiate
stock option agreements with corporate consultants as well. We presently have
warrants to purchase 942,000 shares of common stock which are currently
outstanding and were issued pursuant to such agreements at a weighted average
price of $0.27 per share.
 
 The
purpose of the Plan is to further our interest, and the interest of our
subsidiaries and our stockholders by providing incentives in the form of stock
or stock options to key employees, consultants and Directors who contribute
materially to our success and profitability. We believe that our future success
will depend in part on our continued ability to attract and retain highly
qualified personnel as employees, independent consultants and attorneys.
The issuance of stock and grants of options and warrants will recognize and
reward outstanding individual performances and contributions and will give such
persons a proprietary interest in us, thus enhancing their personal interest in
our continued success and progress. We pay wages, salaries, and consulting rates
that we believe are competitive. We use the Plan and individual compensation
arrangements to augment our compensation packages.
 
 
 Security ownership of certain
beneficial owners and management
 
 The
following table sets forth certain information at September 28, 2007, with
respect to the beneficial ownership of shares of Common Stock by (1) each person
known to us that owns beneficially more than 5% of the outstanding shares of
Common Stock, (2) each of our Directors, (3) each of our Executive Officers, and
(4) all of our Executive Officers, Directors as a group.
  Name and Address of Beneficial
      Owner
              
              Number of Shares
      of
                Common
Stock
                Beneficially
      Owned
              
              
              
              
              
              Percent of
      ClassKent
      WattsOne
      Sugar Creek Center Boulevard, Suite 125Sugar
      Land, TX 77478
              
              
              12,592,218
              
              
              
              (1
              )
              
              
              15
              %Harry
      BriersOne
      Sugar Creek Center Boulevard, Suite 125Sugar
      Land, TX 77478
              
              
              1,998,336
              
              
              
              (2
              )
              
              
              2
              %Harold
      PolingFairlane Plaza
      North290
      Town Center Drive, Suite 322Dearborn,
      Michigan 48126
              
              
              623,648
              
              
              
              (3
              )
              
              
              1
              %Albert
      F. Young2417
      Fox Chase BlvdTroy,
      Michigan 48098-5626
              
              
              236,722
              
              
              
              (4
              )
              
              
              -
              %Steven
      Plumb5300
      N. Braeswood, #370Houston,
      TX 77096-3317
              
              
              139,211
              
              
              
              (5
              )
              
              
              -
              %L.
      Gene StohlerOne
      Sugar Creek Center Boulevard, Suite 125Sugar
      Land, TX 77478
              
              
              188,627
              
              
              
              (6
              )
              
              
              -
              %Michael
      WattsOne
      Sugar Creek Center Boulevard, Suite 125Sugar
      Land, Texas 77478
              
              
              6,630,458
              
              
              
              (7
              )(9)
              
              
              8
              %All
      Directors and Executive Officers as a group (6
      persons)
              
              
              15,782,836
              
              
              
              (8
              )
              
              
              19
              %
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 (1)
              This
      amount includes: 2,733,707 shares of common stock; currently exercisable
      options or warrants to purchase 1,940,000 shares of common stock; and
      7,918,511 shares deemed beneficially owned through TW Trust. TW Trust owns
      the shares indirectly thought its ownership of TWJ Navigation, Inc. TWJ
      Navigation, Inc. owns 1,069 shares of Series B Preferred Stock which are
      convertible into 7,918,511 shares of common stock, warrants to purchase
      1,740,000 shares of common stock, and 4,074 shares of common stock. The
      beneficiaries of TW Trust are Kent Watts's children. Kent Watts is the
      trustee of TW Trust.
 
 
 (2)
              This
      amount includes: 1,898,336 shares of common stock and currently
      exercisable options to purchase 100,000 shares of common
      stock.
 
 
 (3)
              This
      amount includes: 383,648 shares of common stock and currently exercisable
      options or warrants to purchase 240,000 shares of common
      stock.
 
 
 (4)
              This
      amount includes: 76,722 shares of common stock and currently exercisable
      options or warrants to purchase 160,000 shares of common
      stock.
 
 
 (5)
              Includes
      59,211 shares of common stock and currently exercisable options to
      purchase 80,000 shares of common
stock.
 
 
 (6)
              This
      amount includes: 43,627 shares of common stock and currently exercisable
      options to purchase 145,000 shares of common
  stock.
 
 
 (7)
              This
      amount includes: 6,296 shares of common stock, currently exercisable
      warrants to purchase 580,000 shares of common stock and 2,933,330 shares
      beneficially owned through KW Trust. KW Trust owns the shares indirectly
      though its ownership of KW Navigation, Inc. KW Navigation, Inc. owns 396
      shares of Series B Preferred Stock, which are convertible into 2,993,330
      shares of common stock, 6,269 shares of common stock, and warrants to
      purchase 580,000 shares of common stock. The beneficiary of KW Trust is
      Kelly Wheeler. Michael Watts is the trustee of KW
  Trust.
 
 
 (8)
              Includes:
      currently exercisable warrants to purchase 2,665,000 shares of common
      stock and 7,918,511 shares deemed beneficially owned through TW
      Trust.
  
 (9)
              Includes currently
      exercisable warrants to purchase 1,500,000 shares of common
      stock and 1,610,832 shares of common stock in addition to securities
      beneficially owned through KW
Trust.
  We are
not aware of any arrangements that could result in a change of
control.
  Item 13 Certain
Relationshipsand Related Transactions, and Director
Independence
 
 Related
party transactions include payments to the CEO's brother, Michael Watts, as
follows: during the year ended June 30, 2007, Michael Watts, the CEO's brother,
received payment of $13,000 cash to pay for offering costs on private
subscription agreements and warrants exercised. Additional offering costs will
also be paid on 3,471,000 warrants purchased by private investors should they be
exercised in the future. If all of these warrants were exercised, Mr. Watts
would receive approximately $867,750 to pay these additional costs.
 
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  Warrants
to purchase 1,200,000 shares of common stock with an exercise price of $0.50 per
share were issued to a company of which Michael Watts is president for public
relations/investor relations services. The warrants vested quarterly from
January 2004 through December 2005. All the warrants had been exercised as of
June 30, 2007.
 
 In March
2007, the audit committee pre-approved a consulting contract with Mike Watts
under which Mr. Watts will provide Investor Relations, Public Relations,
Financial Consulting and general advisory services.  In June 2007, the
compensation committee and audit committee approved a warrant to purchase
1,500,000 shares of common stock at $4.00 per share as the compensation
associated with this agreement.  The warrants expire in June
2014.
 
 In April
2007, Mr. Jeremy Driver’s (son-in-law of Michael E. Watts, brother of the Chief
Executive Officer), employment arrangement was amended to add health insurance
benefits for his dependents and a bonus schedule based on barrels of oil
produced per day.  The audit committee pre-approved the
amendment.
 
 In
September, 2006, Harry James Briers, Executive Vice President, requested and
obtained pre-approval from the Audit Committee to give Christopher M. Watts, a
related party of Mr. Kent Watts, our CEO, a bonus for work performed in Guinea
and a raise in pay as the company's Investor Relations Coordinator. He received
a bonus of $2,000 and a raise from $29,000 annually to $32,480 annually. The
raise of $3,480 represents a 12% increase.
 
 In
October 2006, the Company hired Glen Driver as a manager in our Louisiana
operations. Mr. Driver is the father of Jeremy Driver, a related party of Mr.
Kent Watts, our CEO. The audit committee pre-approved the hiring in accordance
with the Company's conflict of interest policy.
  In 2007,
an original trust for grandchildren of Earnest Watts (father of Kent Watts) was
divided into five trusts for the same beneficiaries pursuant to the terms of the
original trust. The original trust owned DJX LTD., which in turn held shares of
Series B Preferred Stock. DJX LTD. transferred its Series B Preferred Stock to
five new corporations which are owned by the five trusts.
 
 In June
2007, four of the new corporations converted a total of 238 shares of Preferred
Series B stock to 1,762,962 shares of Hyperdynamics common
stock.  They then exchanged 1,740,000 shares of common stock for
warrants to purchase 3,480,000 shares of common stock at $4 per share. The
exchange of stock for warrants facilitated the settlement of Hyperdynamics’
lawsuit with Trendsetter Investors LLC.  In accordance with a price
reset provision in the original warrants, the exercise price of the warrants was
reduced from $4.00 per share to $2.40 per share on June 29, 2007
 
 Director
Independence
 
 Our
common stock is listed on the American Stock Exchange (AMEX).  We use
SEC Rule 10A-3 and the AMEX definition of independent director in determining
whether a director is independent in the capacity of director and in the
capacity as a member of a board committee.  In determining Director
independence, we have not relied on any exemptions from any rule’s definition of
independence.
 
 In
addition to the requirements of SEC Rule 10A-3 under the Securities Exchange Act
of 1934, the AMEX rules provide that "Independent director" means a person other
than an executive officer or employee of the company.
 
 Directors
serving on our audit committee must also comply with additional AMEX
requirements as follows:
 
 (a)           The
Director must not have participated in the preparation of our financial
statements or any current subsidiary at any time during the past three years;
and
 
 (b)           The
Director is able to read and understand fundamental financial statements,
including our balance sheet, income statement, and cash flow
statement.
 
 We have a
total of five directors, three of whom three are independent
directors.  Our independent directors are: Harold A. Poling, Albert F.
Young and L. Gene Stohler.
 
 Our Audit
Committee members are Messrs. Poling, Young and Stohler, all of whom are
independent Directors.   Mr. Poling is the financial expert based
on his work as Chairman and CEO of Ford Motor Co.  During the year
ended June 30, 2007, the Audit Committee met 4 times and took action by
Unanimous Consent 3 times.
 
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  Our
Compensation Committee members are Messrs. Young and Stohler, all of whom are
independent Directors.  During the year ended June 30, 2007, the
Compensation Committee met 4 times and took action by Unanimous Consent 4
times.
 
 Our
Nomination Committee members are Messrs. Poling, Young and Stohler, all of whom
are independent Directors.  During the year ended June 30, 2007, the
Nomination Committee met 1 times and took action by Unanimous Consent 0
times.
 
 Item 14 Principal
AccountingFees and Services
 
 Audit  Fees
 
 Malone
& Bailey, PC billed us in the aggregate amount of $85,000 and $59,000
professional  services  rendered  for  their  audit  of  our  annual  financial
statements  and  their reviews of the financial statements
included in our Form 10-K for  the  years  ended
June  30,  2007 and 2005.
 
 Audit-Related  Fees
 
 Malone  &  Bailey,  PC  did  not  bill
us for, nor perform professional services rendered  for assurance and
related services that were reasonably related to the
performance  of  audit  or  review of
the Company's financial statements for the
years  ended  June  30,  2007 and
2006.
 
 Financial  Information  Systems  Design  And  Implementation  Fees
 
 For  the
fiscal years ended June 30, 2007 and 2006, Malone & Bailey, PC
did  not  bill  us for, nor perform, any financial
information  systems design or
implementation.  For  the fiscal years ended June 30, 2006
and 2005, we
were  not  billed  for  professional
services from any other accounting firm for
information  systems  design  or  implementation.
 
 Tax  Fees
 
 Malone  &  Bailey,  PC  billed  us
in the aggregate amount of $ 0 and $0 for professional services rendered for tax
related services  for the years ended June 30,  2007 and
2006.
 
 All  Other  Fees
 
 Malone  &  Bailey,  PC  billed
us $6,000  for professional services in connection with an S-1
filing  during the fiscal year ended
June  30,  2007.
 
 Auditor  Independence
 
 Our  Board  of  Directors  considers
that the work done for us in the year ended
June  30,  2007  by  Malone &
Bailey, PC is compatible with maintaining Malone & Bailey,
P.C.'s  independence.
 
 Auditor's  Time  On  Task
 
 All  of  the
work expended by Malone & Bailey, PC on our June 30, 2007 audit was
attributed  to  work  performed  by  Malone  &
Bailey, P.C.'s full-time, permanent employees.
 
 Item 15 Exhibits,
FinancialStatement Schedules
 
  (A)
 Exibit Number
              Description21.1
              List
      of Subsidiaries23.3
              Consent
      of Ryder Scott Company, L.P.- provided herewith.31.1
              Certification  of  Chief  Executive  Officer  of
      Hyperdynamics
      Corporation  required  by  Rule  13a-14(1)  or  Rule
      15d-14(a)
      of the Securities Exchange  Act  of 1934, as adopted
      pursuant to Section 302 of the Sarbanes-OxleyAct  of  2002.31.2
              Certification  of  Chief  Financial  Officer  of
      Hyperdynamics
      Corporation  required  by  Rule  13a-14(1)  or  Rule
      15d-14(a)
      of the Securities Exchange  Act  of 1934, as adopted
      pursuant to Section 302 of the Sarbanes-OxleyAct  of  2002.32.1
              Certification  of  Chief  Executive  Officer  of
      Hyperdynamics
      Corporation  pursuant  to  Section  906  of  the
      Sarbanes-Oxley
      Act of 2002 and
      Section  1350  of  18  U.S.C.  63.32.2
              Certification  of  Chief  Financial  Officer  of
      Hyperdynamics
      Corporation  pursuant  to  Section  906  of  the
      Sarbanes-Oxley
      Act of 2002 and
      Section  1350  of  18  U.S.C.  63.
 
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  FINANCIAL STATEMENT
SCHEDULES
  The
financial statement schedules required by this item are set forth in the notes
to our financial statements set forth on page 57 and F-1.
  SIGNATURES
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly  authorized.
  HYPERDYNAMICS
      CORPORATIONApril 17,
      2008By:
      /s/ Kent WattsKent
      WattsChairman
      of the Board,Director,Chief
      Executive Officer
  Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
  /s/
      Kent Watts
                Kent
      Watts
              
              Chairman
      of the Board, Director, President, and Chief Executive
    Officer
              
              April
      17, 2008/s/
      Harold A. Poling
                Harold
      A. Poling
              
              Director
              
              April
      17, 2008/s/
      Harry J. Briers
                Harry
      J. Briers
              
              Director,
      Chief Operating Officer and Executive Vice-president
              
              April
      17, 2008/s/
      Steven M. Plumb
                Steven
      M. Plumb
              
              Chief
      Financial Officer and Principal Accounting Officer
              
              April
      17, 2008/s/
      L. Gene Stohler
                L.
      Gene Stohler
              
              Director
              
              April
      17, 2008/s/
      Charles H. Andrews
                Charles H. Andrews
              
              Director
              
              April
      17, 2008
   56