UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q




x
            Quarterly
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934: For the quarterly period ended March 31,
  2010





or




o
            Transition
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934: For the transition period from __________ to
    __________





Commission
file number: 000-32490





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
      No.)




12012
Wickchester Lane, # 475


Houston,
Texas 77079





(Address
of principal executive offices, including zip code)





713-353-9400


(registrant's
principal executive office telephone number)




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 of 1934 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. Yes  x   
No o




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files.) Yes   ̈    No   ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):




Large
      accelerated filer   ̈
            
            Accelerated
      filer   ̈
            
            Non-accelerated
      filer   ̈
            
            Smaller
      reporting company  þ





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


YES o   NOx




As of May
17, 2010, 104,181,723 shares of common stock, $0.001 par value, were
outstanding.











Table of
Contents




Part
      I. Financial InformationItem
      1. Financial StatementsConsolidated
      Balance Sheets (unaudited) at March  31, 2010 and June 30,
      2009
            
            1Consolidated
      Statements of Operations (unaudited) for the Three and Nine Months Ended
      March 31, 2010 and 2009, and for the period from inception of the
      Exploration Stage (July 1, 2009) to March 31, 2010
            
            2Consolidated
      Statements of Shareholders’ Equity (unaudited) for the Nine Months Ended
      March 31, 2010
            
            3Consolidated
      Statements of Cash Flows (unaudited) for the Nine Months Ended March 31,
      2010 and 2009, and for the period from inception of the Exploration Stage
      (July 1, 2009) to March 31, 2010
            
            5Notes
      to Consolidated Financial Statements (unaudited)
            
            6Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
            
            22Item
      3. Quantitative and Qualitative Disclosures about Market
    Risks
            
            25Item
      4T. Controls and Procedures
            
            25Part
      II. Other InformationItem
      1. Legal Proceedings
            
            25Item
      1A. Risk Factors
            
            26Item
      4. Submission of Matters to a Vote of Security Holders
            
            35Item
      6. Exhibits
            
            36Signatures
            
            38









HYPERDYNAMICS
CORPORATION


(an
Exploration Stage Company)


CONSOLIDATED
BALANCE SHEETS


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


(Unaudited)





March 31,
              2010
            
            
            June 30,
              2009ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            3,135
            
            
            $
            1,360Accounts
      Receivable – Joint Interest
            
            
            90
            
            
            
            -Prepaid
      expenses and other current assets
            
            
            51
            
            
            
            52Assets
      held for sale – Discontinued Operations
            
            
            -
            
            
            
            145Total
      current assets
            
            
            3,276
            
            
            
            1,557Property
      and equipment, net of accumulated depreciation of $402 and
      $339
            
            
            576
            
            
            
            209Oil
      and gas properties, using full cost method:Unevaluated
      properties excluded from amortization
            
            
            16,643
            
            
            
            7,663Deposits
            
            
            64
            
            
            
            11Total
      assets
            
            $
            20,559
            
            
            $
            9,440LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable and accrued expenses
            
            $
            6,587
            
            
            $
            803Accounts
      payable - seismic data
            
            
            650
            
            
            
            650Variable
      share issuance obligation
            
            
            -
            
            
            
            553Dividends
      payable
            
            
            372
            
            
            
            372Dividends
      payable to related party
            
            
            442
            
            
            
            434Short-term
      notes payable and current portion of long-term debt, net of discount of $-
      and $134
            
            
            17
            
            
            
            639Total
      current liabilities
            
            
            8,068
            
            
            
            3,451Warrant
      derivative liability
            
            
            1,699
            
            
            
            -Long-term
      debt, net of discount of $- and $341
            
            
            -
            
            
            
            1,661Liabilities
      related to assets held for sale - discontinued
      operations-noncurrent
            
            
            -
            
            
            
            18Deferred
      rent
            
            
            17
            
            
            
            56Total
      liabilities
            
            
            9,784
            
            
            
            5,186Commitments
      and contingencies (Note 10)
            
            
            -
            
            
            
            -Shareholders'
      equity:Convertible
      preferred stock, par value $0.001; stated value $1,000; 20,000,000
      authorizedSeries
      A – 3,000 shares issued and 1,945 shares outstanding
            
            
            -
            
            
            
            -Series
      B - 2,725 shares issued and 0 and 2,406 shares outstanding
            
            
            -
            
            
            
            -Common
      stock, $0.001 par value, 250,000,000 shares authorized; 95,824,131 and
      64,162,813 shares issued and outstanding
            
            
            96
            
            
            
            64Additional
      paid-in capital
            
            
            86,606
            
            
            
            71,805Accumulated
      deficit
            
            
            (67,615
            )
            
            
            (67,615
            )Deficit
      accumulated after reentering exploration stage
            
            
            (8,312
            )
            
            
            -Total
      shareholders' equity
            
            
            10,775
            
            
            
            4,254Total
      liabilities and shareholders' equity
            
            $
            20,559
            
            
            $
            9,440





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




1




HYPERDYNAMICS
CORPORATION


(an
Exploration Stage Company)


CONSOLIDATED
STATEMENTS OF OPERATIONS


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


(Unaudited)




Three
      months
                                endedMarch
      31,
                              
                              
                              Nine
      months
                                ended
      March 31,
                              
                              
                              Inception
      of exploration stage (July 1, 2009) through March 31,2010
                              
                              
                              2009
                              
                              
                              2010
                              
                              
                              2009
                              
                              
                              2010Costs
      and expenses:Depreciation
                              
                              $
                              34
                              
                              
                              $
                              33
                              
                              
                              $
                              93
                              
                              
                              $
                              100
                              
                              
                              $
                              93Selling,
      general and administrative
                              
                              
                              2,434
                              
                              
                              
                              1,023
                              
                              
                              
                              7,860
                              
                              
                              
                              5,251
                              
                              
                              
                              7,860Total
      costs and expenses
                              
                              
                              2,468
                              
                              
                              
                              1,056
                              
                              
                              
                              7,953
                              
                              
                              
                              5,351
                              
                              
                              
                              7,953Loss
      from operations
                              
                              
                              (2,468
                              )
                              
                              
                              (1,056
                              )
                              
                              
                              (7,953
                              )
                              
                              
                              (5,351
                              )
                              
                              
                              (7,953
                              )Other
      income (expense)Gain
      (loss) on derivative liability
                              
                              
                              364
                              
                              
                              
                              -
                              
                              
                              
                              (114
                              )
                              
                              
                              -
                              
                              
                              
                              (114
                              )Interest
      expense, net
                              
                              
                              (1
                              )
                              
                              
                              (160
                              )
                              
                              
                              (712
                              )
                              
                              
                              (2,379
                              )
                              
                              
                              (712
                              )Loss
      on settlement of debt
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (298
                              )
                              
                              
                              (579
                              )
                              
                              
                              (298
                              )Total
      other income (expense)
                              
                              
                              363
                              
                              
                              
                              (160
                              )
                              
                              
                              (1,124
                              )
                              
                              
                              (2,958
                              )
                              
                              
                              (1,124
                              )Loss
      from continuing operations
                              
                              
                              (2,105
                              )
                              
                              
                              (1,216
                              )
                              
                              
                              (9,077
                              )
                              
                              
                              (8,309
                              )
                              
                              
                              (9,077
                              )Income
      (loss) from discontinued operations, net of tax
                              
                              
                              -
                              
                              
                              
                              (37
                              )
                              
                              
                              765
                              
                              
                              
                              (1,889
                              )
                              
                              
                              765Net
      loss
                              
                              
                              (2,105
                              )
                              
                              
                              (1,253
                              )
                              
                              
                              (8,312
                              )
                              
                              
                              (10,198
                              )
                              
                              
                              (8,312
                              )Preferred
      stock dividend to related party
                              
                              
                              -
                              
                              
                              
                              (24
                              )
                              
                              
                              (8
                              )
                              
                              
                              (73
                              )
                              
                              
                              (8
                              )Net
      loss attributable to common shareholders
                              
                              $
                              (2,105
                              )
                              
                              $
                              (1,277
                              )
                              
                              $
                              (8,320
                              )
                              
                              $
                              (10,271
                              )
                              
                              $
                              (8,320
                              )Basic
      and diluted income (loss) per shareFrom
      continuing operations
                              
                              $
                              (0.02
                              )
                              
                              $
                              (0.02
                              )
                              
                              $
                              (0.11
                              )
                              
                              $
                              (0.14
                              )From
      discontinued operations
                              
                              
                              (0.00
                              )
                              
                              
                              -
                              
                              
                              
                              0.01
                              
                              
                              
                              (0.03
                              )Net
      loss per share attributable to common shareholders
                              
                              $
                              (0.02
                              )
                              
                              $
                              (0.02
                              )
                              
                              $
                              (0.10
                              )
                              
                              $
                              (0.17
                              )Weighted
      average shares outstanding – Basic anddiluted
                              
                              
                              92,399,529
                              
                              
                              
                              62,785,827
                              
                              
                              
                              80,423,130
                              
                              
                              
                              61,187,304




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




2




HYPERDYNAMICS
CORPORATION


(an
Exploration Stage Company)


CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY


(In
Thousands, Except Number of Shares)


(Unaudited)





Series
      A Preferred
                    
                    
                    Series
      B Preferred
                    
                    
                    Common
      Stock
                    
                    
                    Additional
      Paid-in
                    
                    
                    Accumulated
                    
                    
                    Deficit
      Accumulated during ExplorationShares
                    
                    
                    Amount
                    
                    
                    Shares
                    
                    
                    Amount
                    
                    
                    Shares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Deficit
                    
                    
                    Stage
                    
                    
                    TotalBalance,
      June 30, 2009, as previously reported
                    
                    
                    1,945
                    
                    
                    $
                    -
                    
                    
                    
                    2,406
                    
                    
                    $
                    -
                    
                    
                    
                    64,162,813
                    
                    
                    $
                    64
                    
                    
                    $
                    71,805
                    
                    
                    $
                    (67,615
                    )
                    
                    $
                    -
                    
                    
                    $
                    4,254Cumulative
      effect of reclassification of warrants as a derivative under ASC
      815
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,585
                    )
                    
                    
                    --
                    
                    
                    
                    -
                    
                    
                    
                    (1,585
                    )Balance
      at July 1, 2009, as adjusted
                    
                    
                    1,945
                    
                    
                    
                    -
                    
                    
                    
                    2,406
                    
                    
                    
                    -
                    
                    
                    
                    64,162,813
                    
                    
                    
                    64
                    
                    
                    
                    70,220
                    
                    
                    
                    (67,615
                    )
                    
                    
                    -
                    
                    
                    
                    2,669Common
      stock issued for:Services
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    442,049
                    
                    
                    
                    -
                    
                    
                    
                    322
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    322Conversion
      of Series B Preferred Stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (2,406
                    )
                    
                    
                    -
                    
                    
                    
                    15,822,222
                    
                    
                    
                    16
                    
                    
                    
                    (16
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Conversion
      of debentures
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,949,411
                    
                    
                    
                    2
                    
                    
                    
                    1,294
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,296Cash
      in registered direct offering
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    8,801,171
                    
                    
                    
                    9
                    
                    
                    
                    7,521
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    7,530Exercise
      of warrants
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,646,465
                    
                    
                    
                    5
                    
                    
                    
                    4,409
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,414Amortization
      of fair value of stock options
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,534
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,534Discount
      related to modification of convertible debt
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,172
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,172Warrant
      repricing charged to interest expense
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    158
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    158Warrant
      repricingDeemed
      dividend
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    322
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    322Deemed
      dividend
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (322
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (322
                    )Preferred
      stock dividends to related party
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (8
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (8
                    )Net
      loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (8,312
                    )
                    
                    
                    (8,312
                    )Balance,
      March 31, 2010
                    
                    
                    1,945
                    
                    
                    $
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    95,824,131
                    
                    
                    $
                    96
                    
                    
                    $
                    86,606
                    
                    
                    $
                    (67,615
                    )
                    
                    $
                    (8,312
                    )
                    
                    $
                    10,775





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





3




HYPERDYNAMICS
CORPORATION


(an
Exploration Stage Company)


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In Thousands)


(Unaudited)




Nine
      Months Ended
                    March
      31,
                  
                  
                  Inception
      of Exploration Stage
                    (July
      1, 2009) through
                    March
      31,2010
                  
                  
                  2009
                  
                  
                  2010CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                  
                  $
                  (8,312
                  )
                  
                  $
                  (10,198
                  )
                  
                  $
                  (8,312
                  )(Income)
      loss from discontinued operations
                  
                  
                  (765
                  )
                  
                  
                  1,889
                  
                  
                  
                  (765
                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation,
      depletion and amortization
                  
                  
                  93
                  
                  
                  
                  100
                  
                  
                  
                  93Common
      stock issued for services
                  
                  
                  143
                  
                  
                  
                  1,060
                  
                  
                  
                  143Employee
      stock options
                  
                  
                  1,534
                  
                  
                  
                  243
                  
                  
                  
                  1,534Variable
      share issuance obligation
                  
                  
                  (374
                  )
                  
                  
                  585
                  
                  
                  
                  (374
                  )Warrant
      repricing charged to interest expense
                  
                  
                  158
                  
                  
                  
                  -
                  
                  
                  
                  158Loss
      on debt extinguishment
                  
                  
                  298
                  
                  
                  
                  579
                  
                  
                  
                  298Loss
      on derivative liability
                  
                  
                  114
                  
                  
                  
                  -
                  
                  
                  
                  114Interest
      accreted to debt principal
                  
                  
                  342
                  
                  
                  
                  1,546
                  
                  
                  
                  342Amortization
      of discount and financing costs on debt
                  
                  
                  144
                  
                  
                  
                  626
                  
                  
                  
                  144Loss
      on disposal of property and equipment
                  
                  
                  33
                  
                  
                  
                  -
                  
                  
                  
                  33Changes
      in operating assets and liabilities:Accounts
      Receivable
                  
                  
                  (90
                  )
                  
                  
                  -
                  
                  
                  
                  (90
                  )Prepaid
      expenses and other current assets
                  
                  
                  116
                  
                  
                  
                  109
                  
                  
                  
                  116Other
      assets
                  
                  
                  (54
                  )
                  
                  
                  -
                  
                  
                  
                  (54
                  )Accounts
      payable and accrued expenses
                  
                  
                  1,054
                  
                  
                  
                  (846
                  )
                  
                  
                  1,054Deferred
      rent
                  
                  
                  (39
                  )
                  
                  
                  (13
                  )
                  
                  
                  (39
                  )Cash
      used in operating activities – continuing operations
                  
                  
                  (5,605
                  )
                  
                  
                  (4,320
                  )
                  
                  
                  (5,605
                  )Cash
      provided by (used in) operating activities – discontinued
      operations
                  
                  
                  (76
                  )
                  
                  
                  1,129
                  
                  
                  
                  (76
                  )Net
      cash used in operating activities
                  
                  
                  (5,681
                  )
                  
                  
                  (3,191
                  )
                  
                  
                  (5,681
                  )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of property and equipment
                  
                  
                  (502
                  )
                  
                  
                  (210
                  )
                  
                  
                  (502
                  )Investment
      in oil and gas properties
                  
                  
                  (10,448
                  )
                  
                  
                  (5
                  )
                  
                  
                  (10,448
                  )Proceeds
      from sale of oil and gas properties
                  
                  
                  6,294
                  
                  
                  
                  -
                  
                  
                  
                  6,294Cash
      used in investing activities – continuing operations
                  
                  
                  (4,656
                  )
                  
                  
                  (215
                  )
                  
                  
                  (4,656
                  )Cash
      provided by investing activities – discontinued operations
                  
                  
                  881
                  
                  
                  
                  19
                  
                  
                  
                  881Net
      cash used in investing activities
                  
                  
                  (3,775
                  )
                  
                  
                  (196
                  )
                  
                  
                  (3,775
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from issuance of stock, net of offering costs of $470
                  
                  
                  7,530
                  
                  
                  
                  -
                  
                  
                  
                  7,530Proceeds
      from exercise of warrants
                  
                  
                  4,414
                  
                  
                  
                  -
                  
                  
                  
                  4,414Proceeds
      from convertible debt, net of financing costs
                  
                  
                  -
                  
                  
                  
                  5,000
                  
                  
                  
                  -Placement
      fees on convertible debentures
                  
                  
                  -
                  
                  
                  
                  (300
                  )
                  
                  
                  -Financing
      costs deducted from convertible debentures
                  
                  
                  -
                  
                  
                  
                  (30
                  )
                  
                  
                  -Prepayment
      penalty on notes payable
                  
                  
                  -
                  
                  
                  
                  (271
                  )
                  
                  
                  -Payments
      on notes payable and installment debt
                  
                  
                  (713
                  )
                  
                  
                  (2,112
                  )
                  
                  
                  (713
                  )Cash
      provided by financing activities – continuing operations
                  
                  
                  11,231
                  
                  
                  
                  2,287
                  
                  
                  
                  11,231Cash
      used in financing activities – discontinued operations
                  
                  
                  -
                  
                  
                  
                  (10
                  )
                  
                  
                  -Net
      cash provided by financing  activities
                  
                  
                  11,231
                  
                  
                  
                  2,277
                  
                  
                  
                  11,231INCREASE
      IN CASH AND CASH EQUIVALENTS
                  
                  
                  1,775
                  
                  
                  
                  (1,110
                  )
                  
                  
                  1,775CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                  
                  
                  1,360
                  
                  
                  
                  1,480
                  
                  
                  
                  1,360CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                  
                  $
                  3,135
                  
                  
                  $
                  370
                  
                  
                  $
                  3,135




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




4




SUPPLEMENTAL
      DISCLOSURES:Interest
      paid in cash
            
            $
            69
            
            
            $
            473
            
            
            $
            69Income
      taxes paid in cash
            
            
            -
            
            
            
            -
            
            
            
            -NON-CASH
      TRANSACTIONS:Common
      stock issued for accounts payable
            
            $
            -
            
            
            $
            173
            
            
            $
            -Common
      stock issued to settle variable share obligation
            
            
            179
            
            
            
            -
            
            
            
            179Common
      stock issued for investment in oil and gas properties
            
            
            -
            
            
            
            40
            
            
            
            -Stock
      issued for deferred financing costs
            
            
            -
            
            
            
            103
            
            
            
            -Common
      stock issued for prepaid services
            
            
            -
            
            
            
            62
            
            
            
            -Common
      stock issued for payment of preferred stock dividends
            
            
            -
            
            
            
            7
            
            
            
            -Deemed
      dividend attributable to repriced warrants originally issued with purchase
      of common stock
            
            
            322
            
            
            
            29
            
            
            
            322Debt
      discount on convertible debt
            
            
            -
            
            
            
            2,372
            
            
            
            -Conveyance
      of asset retirement obligation
            
            
            18
            
            
            
            86
            
            
            
            18Accounts
      payable for oil and gas property
            
            
            4,826
            
            
            
            92
            
            
            
            4,826Accounts
      payable for prepaid expenses
            
            
            -
            
            
            
            3
            
            
            
            -Note
      payable for fixed assets
            
            
            -
            
            
            
            32
            
            
            
            -Fair
      value of warrant repricing associated with debt
    modification
            
            
            -
            
            
            
            106
            
            
            
            -Accrued
      and unpaid preferred stock dividend to related parties
            
            
            8
            
            
            
            73
            
            
            
            8Accelerated
      discount associated with debt conversion
            
            
            -
            
            
            
            1,824
            
            
            
            -Conversion
      of debt into common stock
            
            
            -
            
            
            
            3,863
            
            
            
            -Conversion
      of Series B Preferred Stock into Common Stock
            
            
            16
            
            
            
            -
            
            
            
            16Fair
      value of warrant modifications
            
            
            480
            
            
            
            -
            
            
            
            480Relative
      fair value of warrants issued in connection with equity
      offering
            
            
            1,642
            
            
            
            -
            
            
            
            1,642Note
      payable issued for prepaid insurance
            
            
            115
            
            
            
            -
            
            
            
            115




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





5


HYPERDYNAMICS
CORPORATION


(an
Exploration Stage Company)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)




1.
NATURE OF BUSINESS AND BASIS OF PRESENTATION





Hyperdynamics
Corporation (“Hyperdynamics,” the “Company,” “we,” and “our”) is a Delaware
corporation formed in March 1996. Hyperdynamics has two wholly-owned
subsidiaries, SCS Corporation (“SCS”) and HYD Resources Corporation (“HYD”).
Through SCS and its  wholly-owned subsidiary, SCS Corporation Guinea
SARL, which is a limited liability company formed under the laws of the Republic
of Guinea (“Guinea”) located in Conakry, Guinea, Hyperdynamics focuses on oil
and gas exploration offshore the coast of West Africa. SCS began operations in
oil and gas exploration, seismic data acquisition, processing, and
interpretation in late fiscal 2002. In April 2004, Hyperdynamics acquired HYD,
and in January 2005, HYD acquired Trendsetter Production Company (Trendsetter),
an oil and gas operator in Louisiana that had been under common ownership with
HYD. Trendsetter operated all of the Company’s domestic oil and gas assets until
the completion of their sale in August, 2009.





With sale
of all of our proved reserves, Hyperdynamics reentered the Exploration stage
effective July 1, 2009.  We are seeking, among other things, to bring
in one or more additional PSC participants to operate and help fund our search
for oil and gas deposits on our Guinea concession.





The
unaudited consolidated financial statements of Hyperdynamics have been prepared
in accordance with accounting principles generally accepted in the United States
and the rules of the Securities and Exchange Commission ("SEC"), and should be
read in conjunction with the audited financial statements and notes thereto
contained in Hyperdynamics' Annual Report filed with the SEC on Form 10-K, as
amended, for the year ended June 30, 2009. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of financial position and the results of operations for the interim
periods presented have been reflected herein.  The results of
operations for interim periods are not necessarily indicative of the results to
be expected for the full year. Notes to the financial statements which would
substantially duplicate the disclosures contained in the audited financial
statements for the most recent fiscal year ended June 30, 2009, as reported in
the Form 10-K, as amended, have been omitted.





Estimates





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.





Earnings
Per Share





Basic
loss per share is computed using the weighted average number of shares of common
stock outstanding during each period. Diluted loss per share includes the
dilutive effects of common stock equivalents on an “as if converted” basis. For
the three and nine months ended March 31, 2010 and 2009, all potential dilutive
securities had an anti-dilutive effect and were not included in the calculation
of diluted net loss per common share.





Contingencies




Legal




We are
subject to legal proceedings, claims and liabilities which arise in the ordinary
course of business. We accrue for losses associated with legal claims when such
losses are probable and can be reasonably estimated. These accruals are adjusted
as additional information becomes available or circumstances change. Legal fees
are charged to expense as they are incurred.




Environmental





We accrue
for losses associated with environmental remediation obligations when such
losses are probable and can be reasonably estimated. These accruals are adjusted
as additional information becomes available or circumstances change. Costs of
future expenditures for environmental remediation obligations are not discounted
to their present value. Recoveries of environmental remediation costs from other
parties are recorded at their undiscounted value as assets when their receipt is
deemed probable.




6




Financial
instruments





The
accounting standards regarding fair value of financial instruments and related
fair value measurements define fair value, establish a three-level valuation
hierarchy for disclosures of fair value measurement, and enhance disclosure
requirements for fair value measures.





The three
levels are defined as follows:




·
              Level
      1 - inputs to the valuation methodology are quoted prices (unadjusted) for
      identical assets or liabilities in active
  markets.


·
                Level
      2 - inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the asset or liability, either directly or indirectly, for
      substantially the full term of the financial
  instrument.
 
 ·
                Level
      3 - inputs to the valuation methodology are unobservable and significant
      to the fair value
measurement.





Financial
assets and liabilities are classified in their entirety based on the lowest
level of input that is significant to the fair value measurement.  The
Company has determined that certain warrants outstanding as of the date of these
financial statements qualify as derivative financial instruments under the
provisions of FASB ASC Topic No. 815-40, Derivatives and Hedging – Contracts
in an Entity’s Own Stock.” See Note 7 for discussion of the impact the
adoption of this standard had on the Company’s financial statements and results
of operations.  These warrant agreements include provisions designed
to protect holders from a decline in the stock price (‘down-round’ provision) by
reducing the exercise price in the event we issue equity shares at a price lower
than the exercise price of the warrants.  As a result of this
down-round provision, the exercise price of these warrants could be modified
based upon a variable that is not an input to the fair value of a
‘fixed-for-fixed’ option as defined under FASB ASC Topic No. 815-40 and
consequently, these warrants must be treated as a liability and recorded at fair
value at each reporting date.





The fair
value of these warrants was determined using a Lattice Model with any change in
fair value during the period recorded in earnings as “Other income (expense) –
Gain (loss) on derivative liability. As a result, the derivative
warrant liability is carried on the balance sheet at its fair
value.





Significant
Level 3 inputs used to calculate the fair value of the warrants include the
stock price on the valuation date, expected volatility, risk-free interest rate
and management’s assumptions regarding the likelihood of a repricing of these
warrants pursuant to the down-round provision.





The
following table sets forth by level within the fair value hierarchy our
financial assets and liabilities that were accounted for at fair value on a
recurring basis as of March 31, 2010.





(in
      thousands)
            
            Carrying
              Value
      at
              March
      31, 2010
            
            
            Fair Value Measurement at March 31,
      2010Level
      1
            
            
            Level
      2
            
            
            Level
      3Derivative
      warrants liability
            
            $
            1,699
            
            
            $
            -
            
            
            $
            -
            
            
            $
            1,699





The
following table sets forth the changes in the fair value measurement of our
Level 3 derivative warrant liability:





Beginning
      balance – July 1, 2009 (after adoption of ASC 815)
              
              $
              1,585Loss
      included in earnings
              
              
              55At
      September 30, 2009
              
              
              1,640Loss
      included in earnings
              
              
              423At
      December 31, 2009
              
              
              2,063Gain
      included in earnings
              
              
              (364
              )At
      March 31, 2010
              
              $
              1,699




The
Company did not identify any other assets and liabilities that are required to
be presented on the consolidated balance sheet at fair value in accordance with
FASB ASC Topic No. 815.




7




Recently
issued or adopted accounting pronouncements




In
June 2009, the FASB
issued SFAS No. 168, “The FASB
Accounting Standards Codification TM and the Hierarchy of Generally Accepted
Accounting Principles – a replacement of FASB Statement No. 162 ” (“SFAS
168”). The FASB Accounting
Standards Codification TM , (“Codification”) became the source of
authoritative GAAP recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. On
the effective date of SFAS 168, the Codification superceded all then-existing
non-SEC accounting and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification will become
non-authoritative. SFAS 168 is effective for financial statements issued for
interim and annual periods ending after September 15, 2009. The Company has
adopted the requirements of SFAS 168.





Effective
July 1, 2009, the Company adopted a FASB accounting standard, ASC 815 (EITF
07-05) which defines determining whether an instrument (or embedded feature) is
indexed to an entity’s own stock.  See Note 7 for discussion of
the impact the adoption of this standard had on the Company’s financial
statements and results of operations.





Other
recently issued or adopted accounting pronouncements are not expected to have a
material impact on the Company’s financial position or results from
operations.





2.
SALES OF OIL AND GAS PROPERTIES, ASSETS HELD FOR SALE AND DISCONTINUED
OPERATIONS





On April
1, 2009, management executed a contract to sell the working interest in all of
its domestic oil and gas properties in a transaction that was treated for
accounting purposes as three sales.  The liabilities associated with
the working interest in the oil and gas properties, asset retirement
obligations, were transferred with the assets. The sale was completed during
August 2009.  The Company received scheduled payments of $1,030,000
and $820,000 during May 2009.  The final payment of $820,000 was
received in August 2009.





These
assets, which were associated with HYD, our former domestic business segment,
are a disposal group and constitute a component of the entity with
distinguishable cash flows.  Accordingly, these assets and cash flows
and results of operations associated with these assets are classified as
discontinued operations in the accompanying Consolidated Statements of
Operations, Consolidated Balance Sheets, and Consolidated Statements of Cash
Flows for all periods presented.





Assets
held for sale as of June 30, 2009 consisted of land and a building in Trout,
Louisiana and working interest in our remaining domestic oil and gas
properties.  The remaining properties were sold in August
2009.  The following assets and liabilities have been segregated and
classified as assets held for sale and liabilities associated with assets held
for sale, as appropriate, in the Consolidated Balance Sheets as of March 31,
2010 and June 30, 2009.  The amounts presented below do not include
cash, or payables, which will be retained by Hyperdynamics.





(in
      thousands)
            
            March
      31, 2010
            
            
            June 30,
              2009Assets
      held for saleLand
      and building, net of accumulated depreciation of $0 and
    $7,000
            
            $
            -
            
            
            $
            43Oil
      and Gas Properties, net of accumulated impairment of $0 and
      $576,000
            
            
            -
            
            
            
            102Assets
      held for sale and discontinued operations
            
            $
            -
            
            
            $
            145Liabilities
      related to assets held for sale and discontinued operations-
      noncurrentAsset
      retirement obligations
            
            $
            -
            
            
            $
            18





The
following summarized financial information for the nine months ended March 31,
2010 and 2009 relates to the assets held for sale and have been reported as
discontinued operations in all periods presented. Because of Hyperdynamics’ net
loss, there is no provision for income taxes.





8




(in
      thousands)
            
            March
      31,
              2010
            
            
            March
      31,
              2009Revenues
            
            $
            -
            
            
            $
            2,074Cost
      and Expenses:Lease
      operating costs
            
            
            -
            
            
            
            (1,131)Depreciation,
      depletion and amortization
            
            
            -
            
            
            
            (528)Accretion
            
            
            -
            
            
            
            (60)Impairment
      and other expenses
            
            
            
            
            
            
            (2,303)Gain
      on settlement of debt
            
            
            -
            
            
            
            144Other
      expenses
            
            
            -
            
            
            
            (85)Gain
      on sale of discontinued operations
            
            
            765
            
            
            
            -Income
      (loss) from discontinued operations
            
            $
            765
            
            
            $
            (1,889
            )




3.
INVESTMENT IN OIL AND GAS PROPERTIES





Investment
in Oil and Gas properties consists of our Guinea concession in offshore West
Africa.





The
following table provides detail of costs (in thousands) to date for Guinea as of
March 31, 2010 and June 30, 2009:





March 31,
              2010
            
            
            June
      30,
              2009Lease
      Acquisition Costs
            
            $
            476
            
            
            $
            291Geological
      and Geophysical Cost
            
            
            16,167
            
            
            
            7,37216,643
            
            
            
            7,663Less:
      AccumulatedDepletion
      and Depreciation
            
            
            -
            
            
            
            -$
            16,643
            
            
            $
            7,663





Excluded Costs





Hyperdynamics
excludes capitalized costs of unevaluated oil and gas properties from
amortization. Currently, geological and geophysical information pertaining to
the Guinea concession is being collected and evaluated and no reserves have been
attributed to this concession. The costs associated with such unproved
properties of $16,643,000 and $7,663,000 as of March 31, 2010 and June 30, 2009,
respectively, are excluded from amounts subject to amortization. The majority of
the evaluation activities are expected to be completed within the next two
years. As of March 31, 2010, based on our impairment review and our intent to
continue evaluation activities, there was no impairment indicated for our
excluded costs.





We
incurred $10,448,000 and $342,000 of geological and geophysical costs for our
Guinea concession during the nine months ended March 31, 2010 and 2009,
respectively.





Guinea
Concession





On
September 22, 2006, we signed a Production Sharing Contract (the “2006 PSC”)
with the Republic of Guinea (“Guinea”). On September 11, 2009, we entered into a
Memorandum of Understanding (the “2009 MOU”) with Guinea in which we agreed
with the government to resolve and to clarify certain issues related to the 2006
PSC. On March 25, 2010, we entered into an amendment to the 2006 PSC with the
government of the Republic of Guinea.





PSC
Amendment





On March
25, 2010, we entered into an amendment (the “PSC Amendment”) to the 2006
PSC.   The PSC Amendment was entered into in accordance with the
2009 MOU between us and the Republic of Guinea, which required a review of the
terms of the 2006 PSC to bring it into line with the Guinea Petroleum Code and
international standards.  The PSC Amendment provides that the parties
to the 2009 MOU have fully complied with the terms of the 2009 MOU.




9





The
PSC Amendment clarifies that we retained a contract area of
approximately 25,000 square kilometers, which is approximately equivalent to 30%
of the original Contract Area under the 2006 PSC, following its December 31,
2009 relinquishment of approximately 70% of the original contract
area.  The PSC Amendment requires that we relinquish an additional 25%
of the retained contract area (6,250 square kilometers) by September 30,
2013.  Under the terms of the PSC Amendment, the first exploration
period, as defined in the original 2006 PSC and as amended by the 2009 MOU, will
end and we will enter into the second exploration period in September
2010.  The second exploration period ends September 2013, subject to
further extension for one (1) additional year to allow the completion of any
well in process and for two (2) additional years to allow the completion of the
appraisal of any discovery of potential oil and gas reserves, or through
September 2016. Under the PSC Amendment, we are required to drill
two exploration wells, one of which is to be commenced by the end of December
2011, to a minimum depth of 2,500 meters and the second of which is to be
commenced by the end of September 2016, to a minimum depth of
2,500 meters.  The PSC Amendment requires a
minimum gross expenditure of $15 million on each of the exploration wells
($30 million in the aggregate) and the acquisition of a minimum of 2,000
square kilometers of 3D seismic by September 2013 with a minimum expenditure of
$12 million.




Under the
PSC Amendment, Guinea will be carried for its share of up to 15%, with the cost
of that carry to be recovered out of 62.5% of Guinea's share of cost and profit
oil.   The PSC Amendment clarifies that only those eligible
expenditures, which were made following the date the 2006 PSC was signed, i.e.
September 22, 2006, are eligible for cost recovery.  An annual
training budget of $200,000 is required to be established by us for the benefit
of the Guinean oil industry personnel, and we will also pay an annual surface
tax of $2.00 per square kilometer on its retained acreage, retroactively
adjusted to September 22, 2006.  The PSC Amendment also removes our
right of first refusal covering the relinquished acreage as described in the
2009 MOU. The PSC Amendment provides that should the Guinean government
note material differences between provisions of the PSC Amendment and
international standards or the Petroleum Code, the parties will renegotiate the
relevant articles.





2009 MOU





The 2009
MOU required us to surrender 64% of the Contract Area (approximately 51,200
square kilometers) no later than December 31, 2009.  The
relinquishment was submitted by us and received by the Guinean government on
December 30, 2009.   Pursuant to the 2009 MOU we maintained the right
to participate in any new concessions granted within this surrendered Contract
Area on a right of first refusal basis, on equal terms and conditions with
bidding parties.  As required by the 2009 MOU, we submitted the
two-year work plan to the Guinean government on December 30, 2009.





In
addition to our other obligations under the 2006 PSC, we agreed in the 2009 MOU
to commence drilling of at least one exploratory well within the non-surrendered
portion of the  Contract Area no later than December 31,
2011.  The 2009 MOU required negotiation between the parties
concerning certain provisions in the 2006 PSC to make such terms more consistent
with usually applicable international standards and practices by March 11, 2010,
subject to force majeure and then-pending arbitration, without any
modification of our existing rights to the non-surrendered portion of the
Contract Area of approximately 28,800 square kilometers. The 2009 MOU also
required that if negotiations were not concluded by March 10, 2010, the 2009 MOU
would be cancelled.





Dana Petroleum
Agreement





On
December 4, 2009, we entered into a Sale and Purchase Agreement (“SPA”) with
Dana Petroleum (E&P) Limited (“Dana”) for Dana to acquire a 23%
participation interest in the 2006 PSC.  On January 28, 2010, the
Company effected the closing of the Sale and Purchase Agreement with Dana and
assigned a minority interest in the oil and gas concession offshore Guinea to
Dana.  In connection with the closing of the assignment of a
participation interest in the 2006 PSC to Dana, we entered into an Assignment of
Participating Interest (the “Assignment”) with Dana, a Deed of Assignment and
Joint Operating Agreement.  Pursuant to the Assignment, we assigned to
Dana an undivided 23% of our participating interest in the contractual
interests, rights, obligations and duties under the 2006 PSC.  As
required by the 2006 PSC, the Deed of Assignment was delivered as the necessary
notice of the Assignment to be given to the Ministry of Mines, Energy and
Hydraulics of Guinea.





As part
of the obligation to bear the proportionate share of costs, the SPA required
Dana to make a cash payment to us immediately after closing the assignment of
the 23% participating interest to Dana in the amount of $ 1.7 million for Dana’s
pro-rata portion of accrued expenditures associated with our marine 2D seismic
data acquisition program within the 2006 PSC contract area.  The $1.7
million payment was received by us on February 4, 2010 and was recorded as a
reduction in the carrying value of our Guinea concession.





The
Operating Agreement appoints us as the operator for purposes of conducting oil
and gas exploration and production activities within the retained Contract
Area.  We share operating costs of joint operations with Dana in
proportion to the parties’ respective 77% and 23% participating interests. An
operating committee and voting procedures are established whereby managerial and
technical representatives of the Company and Dana make decisions regarding joint
operations, exploration and appraisal of commercial discoveries, and the
disposition of commercial production.  The Operating Agreement places
restrictions upon the transfer of the parties’ respective participating
interests in the form of a right of first purchase that is triggered by a
proposed transfer or certain changes in control of the Company or
Dana.





10




Upon
conclusion and finality of the 2006 PSC review, the SPA requires Dana to pay the
Company consideration of $19.6 million and assume its proportionate share of
costs for all operations pursuant to the Operating Agreement.The $19.6
million payment is to be comprised of $5 million in cash, and $14.6 million in
cash or shares of Dana at Dana’s option.




Repsol Letter of
Intent





On
January 29, 2010, we entered into an Amendment to the Agreement for Exclusive
Dealing and Letter of Intent (“Amended LOI”) with Repsol Exploracion, S.A.,
(“Repsol”).  This Amended LOI extends the term of the Agreement for
Exclusive Dealing and Letter of Intent (“Original LOI”) that was entered into
between the parties on November 26, 2009, from January 31, 2010 until March 11,
2010, which date has not been further extended.  The Original LOI
contemplated the prospective acquisition by Repsol of an undivided 37% working
interest in our concession off the coast of Guinea.





Under the
provisions of the Original LOI, Repsol committed to make certain seismic
acquisition payments to us.  Under the Amended LOI, Repsol paid $2.7
million to us, representing Repsol’s pro-rata share of work preformed to date
under the Marine 2D Seismic Data Acquisition Services Agreement with Bergen
Oilfield Services.  The $2.7 million payment was received by
Hyperdynamics on February 11, 2010. In addition, following our delivery of an
invoice to Repsol for subsequent work performed under the BOS Agreement, Repsol
paid its pro-rata share of such invoice, which was approximately
$1,000,000.  These payments totaling $3,700,000 were recorded as a
reduction in the carrying value of our Guinea concession.





Domestic
Oil and Gas Properties





In August
2009, the Company completed the sale of its domestic oil and gas properties. The
Company no longer has any proved oil and gas reserves.





4.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES




Accounts payable and accrued
expenses as ofMarch 31, 2010andJune 30, 2009include the
following:


March 31,
      2010
            
            
            June 30,
      2009(in
      Thousands)Accounts
      payable - Trade
            
            $
            3,587
            
            
            $
            688Accrued
      - Other
            
            
            3,000
            
            
            
            -Accrued
      payroll
            
            
            -
            
            
            
            11Taxes
      payable
            
            
            -
            
            
            
            88Deferred
      rent
            
            
            -
            
            
            
            16$
            6,587
            
            
            $
            803




5. 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 Guinea seismic data and to accept a deferred
payment arrangement. The additional $100,000 was charged to interest expense in
2003. OSS maintains a lien on the ownership and sale of 1,000 kilometers of the
seismic data acquired in 2002, as security for the $650,000.





Any user
license sales proceeds generated from user licenses of this data shall first go
to pay off the $650,000 liability at a rate of 90% of gross user license sales
proceeds to OSS and 10% to SCS, until the $650,000 is paid in full. Any funding
arrangement SCS enters into with respect to the 2006 PSC, whereby all rights and
obligations under the 2006 PSC are transferred, shall cause the $650,000 to
become immediately due upon signing and funding of such agreement. The payable
is accrued at March 31, 2010. The agreement does not provide for interest
payments.  Accordingly, we have not accrued interest on this
payable.




11





6.
SHORT-TERM NOTES PAYABLE AND LONG-TERM DEBT





Short-term
notes payable and long-term debt consists of the following:





March 31,
      2010
            
            
            June 30,
      2009(in
      thousands)Installment
      notes payable
            
            $
            17
            
            
            $
            23YA
      Global Notes
            
            
            -
            
            
            
            -Convertible
      debenturesGross
            
            
            -
            
            
            
            2,752Unamortized
      discount
            
            
            -
            
            
            
            (475)Net
            
            $
            -
            
            
            $
            2,277Total
      short term notes payable and long-term debt
            
            
            17
            
            
            
            2,300Less:  current
      portion
            
            
            (17
            )
            
            
            (639)Long
      term notes payable, net of discount
            
            $
            -
            
            
            $
            1,661





In
addition to installment notes payable as of June 30, 2009, during the nine
months ended March 31, 2010, Hyperdynamics financed an insurance policy for an
aggregate amount of $115,000. Hyperdynamics was obligated to pay installments of
principal and interest of approximately $13,000 per month. As of March 31, 2010,
this has been paid in full.





YA
Global





On
February 6, 2008, Hyperdynamics entered into a financing agreement (the
“Financing Agreement”) with YA Global Investments, LP (“YA Global”). Under the
Financing Agreement, we issued  $2,000,000 of notes, whose carrying
value (net of discount of $402,000) as of June 30, 2008 was
$1,598,000.  Hyperdynamics repaid the notes on September 12,
2008.  At the time of payoff, Hyperdynamics paid $1,950,000 principal
remaining on the debt and  a prepayment penalty of
$271,000.  Hyperdynamics recognized accelerated discount amortization
of $364,000 related to the payoff of these notes.  Accordingly,
Hyperdynamics recognized a loss on extinguishment of debt of
$635,000.





Convertible
Debentures





On
September 12, 2008, Hyperdynamics sold $5,000,000 convertible debentures,
convertible at $2.25 per share, to an investor in a registered direct
offering.  Placement costs totaled $403,000, resulting in net cash
proceeds of $4,670,000.   The investor also received warrants to
purchase 1,111,111 shares of common stock at $3.00 per share and warrants to
purchase 1,111,111 shares of common stock at $2.75 per share.





During
October 2008, the above investor converted $563,000 of debenture principal to
common stock, resulting in the issuance of 250,000 shares of common stock and
payment of cash of $89,000 for a portion of the associated make whole
interest.  The remaining make whole interest of $133,000 associated
with these conversions was added to the debenture principal in November 2008 as
discussed below.





On
November 20, 2008, Hyperdynamics entered into an amendment agreement with the
same debenture investor.  The agreement reduced the conversion price
of the convertible debentures to $1.65 per share, reduced the exercise price of
the 2,424,243 warrants issued during May 2008 to $2 per share, and reduced the
exercise price of the 1,111,111 Series A and Series B warrants each issued
during  September 2008 to $2.25 per share and $2.50 per share,
respectively. The amendment also provided a new interest payment option, payment
in kind, by which interest, including any ‘make whole’ interest due, could be
added to the outstanding principal amount of the Debenture.





The
amendment resulted in a substantial modification of terms of the
debt.  Accordingly, Hyperdynamics recognized the amendment as an
extinguishment of debt (the “2008 Extinguishment”) which
provides  that the fair value of the assets given to the investor to
refund the existing debt will be compared with the carrying value of the
existing debt and a gain or loss on extinguishment be
recognized.  Hyperdynamics recognized a gain associated with the 2008
Extinguishment of $56,000 during the three months ended December 31,
2008.  As a consequence of the 2008 Extinguishment, the post
modification debt was recorded at its fair value and the resulting discount is
amortized as interest expense over the term of the convertible
debentures.  The post modification debt had an effective interest rate
of 29% per annum.





On
November 12, 2009, we entered into a Securities Purchase Agreement with the
convertible debenture holder (See Note 9 for additional
information).  Pursuant to the Securities Purchase Agreement and the
terms of the convertible debenture, the conversion price of the convertible
debenture was reduced from $1.65 per share to $0.95 per share, subject to no
further adjustment other than for stock splits and stock dividends. Pursuant to
FASB ASC Topic No. 470-20, “Debt with Conversion and Other
Options,” we determined the reduction in the conversion price resulted in
the recognition of a contingent beneficial conversion feature.  The
intrinsic value of the contingent beneficial conversion feature was $1,172,000,
which was treated as additional discount on the outstanding convertible
debenture balance of $1,590,000 on November 12, 2009.




12





During
the nine months ended March 31, 2010, based upon the conversion prices of $1.65
and $0.95 per share, the convertible debenture investor converted a total
principal amount, including interest accreted to principal, of $1,296,000 (net
of a discount of $1,116,000) into 1,949,411 shares of our common
stock.  Following the offering with Enable Growth Partners, L.P., as
discussed in Note 8 below, we paid approximately $525,000 to retire the
remaining outstanding convertible debenture amount.  We recognized a
loss of approximately $298,000 for the nine months ended March 31, 2010, which
represents the difference between the remaining convertible debenture amount
outstanding, net of the discount associated with the contingent beneficial
conversion feature discussed above, and the payoff amount.  The
beneficial conversion feature did not have any intrinsic value at the time the
convertible debenture was paid off.





7.
WARRANT DERIVATIVE LIABILITY





Effective
July 1, 2009, we adopted FASB ASC Topic No. 815 (formerly EITF 07-05) which
defines determining whether an instrument (or embedded feature) is indexed to an
entity’s own stock.  This literature specifies that a contract that
would otherwise meet the definition of a derivative but is both (a) indexed to
our own stock and (b) classified in stockholders’ equity in the statement of
financial position would not be considered a derivative financial instrument and
provides a new two-step model to be applied in determining whether a financial
instrument or an embedded feature is indexed to an issuer’s own stock and thus
able to qualify for the scope exception.





As a
result of this adoption, warrants previously treated as equity pursuant to the
derivative treatment exemption are no longer afforded equity treatment because
the warrants have a down-round ratchet provision on the exercise price. As a
result, the warrants are not considered indexed to our own stock, and as such,
all future changes in the fair value of these warrants will be recognized
currently in earnings in our consolidated statement of income under the caption
“Other income (expense) – Gain (loss) on derivative ” until such time as
the warrants are exercised or expire.





The
exercise price of certain warrants issued to YA Global Investments, LP (“YA
Global”) is subject to “reset” provisions in the event we subsequently issue
common stock, stock warrants, stock options or convertible debt with a stock
price, exercise price or conversion price lower than $2.00. If these provisions
are triggered, YA Global will receive warrants to purchase additional shares of
common stock and a reduction in the exercise price of all their
warrants.





As such,
effective July 1, 2009, we reclassified from additional paid-in capital, as a
cumulative effect adjustment, $1,585,000 to Warrant Derivative Liabilities to
recognize the fair value of the YA Global Warrants as if these warrants had been
treated as a derivative liability since their issuance in February
2008.





In
November 2009, the YA Global warrants, then totaling 666,666 were reset to an
exercise price of $0.95 and into a total number of shares of
1,157,894.  In December 2009, these warrants, then totaling 1,157,894
were reset to an exercise price of $0.90 and into a total number of shares of
1,222,222. We recognized a $114,000 loss from the change in fair value for
the nine months ended March 31, 2010.  The fair value of the YA Global
Warrants was $1,699,000 on March 31, 2010.







These
common stock purchase warrants do not trade in an active securities market, and
as such, we estimate the fair value of these warrants using a Lattice Model
using the following assumptions:




March 31,
      2010
                
                
                July 1,
      2009Annual
      dividend yield
                
                
                0.00
                
                
                
                0.00Expected
      life (years)
                
                
                2.85
                
                
                
                3.61Risk-free
      interest rate
                
                
                0.69
                %
                
                
                1.57
                %Expected
      volatility
                
                
                152
                %
                
                
                442
                %Probability
      of below exercise price issuance
                
                
                10
                %
                
                
                10
                %




Expected
volatility is based on historical volatility of our common stock.  The
expected life is based on the remaining term of the warrants. The risk-free
interest rate is based on U.S. Treasury securities according to the remaining
term of the warrants. The expected dividend yield was based on our current and
expected dividend policy. The Lattice Model includes our assessment of the
likelihood of a future issuance of equity at a price lower than the current
strike of the warrants.




13





8.
SHAREHOLDERS' EQUITY





Series B Preferred
Stock





Prior to
the conversion of our Series B preferred stock on September 29, 2009, the Series
B stockholders were entitled to a 4% cumulative dividend on the stated value,
which was payable only upon conversion of the preferred stock. Dividends may be
paid in stock or cash at Hyperdynamics' option. During the nine months ended
March 31, 2010 and 2009, dividends of $8,000 and $73,000 were accrued. The
resulting balance in accrued dividends was $442,000 as of March
31, 2010.





On
September 29, 2009, we entered into the Series B Agreement with the holders of
all of our Series B preferred stock in which the Series B holders (i) converted
all of  their shares of Series B preferred stock into approximately
15,822,222 shares of common stock, (ii) agreed to the cancellation of warrants
to purchase 1,000,000 shares of common stock, (iii) agreed to donate, pursuant
to a specified schedule, 2,000,000 shares of common stock, issued upon
conversion of the Series B preferred stock, and warrants to purchase 1,000,000
shares of common stock, to the American Friends of Guinea, a charitable
organization that provides support to the people of Guinea, and (iv) agreed to
be subject to a nine month lock-up of the 15,822,222 million shares of common
stock received in connection with the conversion of the Series B preferred
stock, and any shares that may be received upon exercise of their
warrants.  The common stock received upon conversion represented a
reduction of 2,000,000 shares that otherwise would have been issuable under the
original terms of the Series B preferred stock.




Under the
terms of the Series B Agreement, if we complete an equity or debt financing in
the future of $10,000,000 or more, we also agreed to (i)  pay a
previously owed dividend in the aggregate amount of approximately $430,000 to
the Series B holders and (ii) subject to market conditions, release from the
lock-up provision described above, up to 1,000,000 shares of common stock
received in connection with the Series B preferred stock conversion in order to
allow for resale by the Series B holders. On April 23, 2010, following our April
20, 2010 registered direct offering , $430,000 was paid to the Series B
holders.





Common Stock issuances




In
addition to the 15,822,222 common shares issued pursuant to the Series B
Conversion discussed above, during the nine months ended March 31, 2010,
we issued 442,049
shares of common stock from its Stock and Stock Option plan to employees,
directors and consultants for services valued at$322,000.
Services were valued using the market close price on the date of
grant.





On
November 12, 2009, we entered into a Shares Purchase Agreement with Enable
Growth Partners, L.P. (“Enable”), which then held certain securities that were
previously issued by us.  Pursuant to the Shares Purchase Agreement,
we have issued to Enable 1,578,948 shares of our common stock, par value
$.001 per share.  The aggregate net proceeds from the offering, after
deducting offering expenses payable by us, were approximately
$1,485,000.  The offering closed on November 17,
2009.




On
December 3, 2009, we entered into a Securities Purchase Agreement pursuant to
which we agreed to sell an aggregate of 7,222,223 shares of its common stock and
warrants to purchase a total of 3,250,000 shares of its common stock to
institutional investors for gross proceeds of approximately $6.5 million.
 The net proceeds to us from the offering, after deducting placement agent
fees and our offering expenses, were approximately $6,045,000.  The
placement agent also received warrants to purchase 144,444 shares of common
stock as additional compensation.  The purchase price of a share of
common stock and fractional warrant was $0.90 with the warrants priced at $0.98.
 Subject to certain ownership limitations, the warrants are exercisable
181 days following the closing date of the offering and expire four years
following the initial exercise date at an exercise price of $0.98.  See
Note 10 for additional information.  The offering closed on December
7, 2009.  The proceeds from this offering were used to pay for a portion of
the current seismic program as well as to retire its remaining long-term
debt.





Employee
stock options





During
the nine months ended March 31, 2010, we granted options to purchase 6,365,000
shares of common stock to our employees and directors.   The
compensation expense associated with employee stock options during the nine
months ended March 31, 2010 was $1,534,000. The fair value of the options grants
was determined using the Black-Scholes option pricing model.  See Note
9.





9.
STOCK OPTIONS AND WARRANTS





We had
two stock award plans: the Stock and Stock Option Plan, which was adopted in
1997 (“1997 Plan”) and the 2008 Restricted Stock Award Plan (“2008 Plan”). On
February 18, 2010, at our annual meeting of stockholders, the board of directors
and stockholders approved the 2010 Equity Incentive Plan (the “2010
Plan”).  In conjunction with the approval of the 2010 Plan at the
annual meeting, the 1997 Plan and 2008 Plan were retired as of February 18,
2010.




14





The 2010
Plan provides for the grants of shares of common stock or incentive stock
options and/or nonqualified stock options or restricted stock to purchase our
common stock to selected employees, directors, officers, agents, consultants,
attorneys, vendors and advisors of our’s or of any parent or subsidiary thereof.
Shares of common stock, options, or restricted stock can only be granted under
this plan within 10 years from the effective date of February 18, 2010. A
maximum of 5,000,000 shares are issuable under the 2010 Plan.




The 2010
Plan provides a means to attract and retain the services of participants and
also to provide added incentive to such persons by encouraging stock ownership
in the Company. Plan grants are administered by the Compensation Committee, who
have substantial discretion to determine which persons, amounts, time, price,
exercise terms, and restrictions, if any.




Additionally,
from time to time, we issue non-compensatory warrants, such as warrants issued
to investors.





2007
Plan





During
the three and nine months ended March 31, 2010, 300,000 and 6,365,000 options,
respectively were issued under the plan.





2008
Plan





During
the three and nine months ended March 31, 2010, no options were issued under the
plan.





2010
Equity Incentive Plan





During
the three and nine months ended March 31, 2010, no options were issued under the
plan.





Stock
and Stock Option Plan





Options
granted to employees, director and vendors during the nine months ended March
31, 2010:





·
            550,000 stock options granted to
      a vendor for services rendered associated with the search and hiring of
      our new CEO, Ray Leonard.  These options are immediately vested
      and have a $1.28 strike price and a five year life.  These
      options had an estimated value of $491,083, all of which was expensed
      immediately.





·
            250,000 stock options granted
      with immediate vesting to Robert Solberg in connection with his addition
      and appointment to the Board of Directors as Chairman of the Board with a
      strike price of $1.15 and a five year life.  These options had
      an estimated value of
$247,525.





·
            155,000 stock options granted
      with immediate vesting to certain officers and directors of the Company
      with a strike price of $0.52.  A total of 60,000 of the options
      have a two year life and the remaining 95,000 options have a three year
      life.  These options had an estimated value of
      $43,396.




·
            45,000 stock options granted with
      immediate vesting to an officer of the Company with a strike price of
      $0.42 and a three year life.  These options had an estimated
      value of $13,443 all of which was expensed
    immediately.





·
            90,000 stock options granted to
      an employee of the Company in connection with his hiring with a strike
      price of $0.54, vesting ratably over three years and a five year
      life.  These options had an estimated value of
      $25,114.





·
            200,000 stock options for a
      director of the Company with a strike price of $0.40, with vesting
      dependent upon certain performance conditions and a two year
      life.  These options had an estimated value of
      $31,715.




·
            50,000 stock options to a
      director upon his election to the Board of the Company with a strike price
      of $1.54, immediate vesting and a five year life. These options had an
      estimated value of $53,718, all of which was expensed
      immediately.




·
                In connection with the hiring of
      our CEO, we granted our
CEO:
  ·
              Options with immediate vesting to
      purchase 500,000 shares of our common stock at an exercise price of $0.49
      and with a five year life.
  15
  ·
              Options to purchase 300,000
      shares of our common stock at an exercise price of $0.49 that vests on a
      monthly basis over five years.  These options have a five
      year life.
 
 In
addition to the equity award grants discussed above, Mr. Leonard received the
following stock option grants, the vesting of which starts on the date the
performance metric (Trigger Event) is achieved:
 
 ·
              When $10 million cumulative is
      raised, the award is 210,000 stock
  options.
  ·
              When $20 million cumulative is
      raised, the award is an additional 180,000 stock
      options.
  ·
              When $30 million cumulative is
      raised, the award is an additional 210,000 stock
      options.
 
 
 All
awards vest 1/36 per month over a three-year period from the Trigger
Event.  These options have a five year life starting from the Trigger
Event, and the exercise price will be $0.49.
 
 A stock
option incentive grant will also be made to our CEO based on achieving the
following share price thresholds:
 
 $2.00/share
              90,000
      stock options$3.00/share
              210,000
      stock options$5.00/share
              600,000
      stock options$9.00/share
              1,200,000
      stock options
  All
awards vest 1/36 per month over a three-year period from the Trigger
Event.  These options have a five year life starting from the Trigger
Event, and the exercise price will be $0.49.
 
 For
awards related to the $2.00 and $3.00 share price, the stock option is earned if
the closing price of the shares trade at or above the target price for 15
consecutive trading days.  For awards related to the $5.00 and $9.00
share price, the stock option is earned if the closing price of the shares trade
at or above the target price for 5 consecutive trading days.
 
 These
options had a fair value of $651,298 which was calculated using the
Black-Scholes option pricing model adjusted for the performance conditions of
the options. Based on the expected vesting schedule, $283,810 was expensed
during the nine months ended March 31, 2010.
  ·
              In
      October and November 2009, we granted options to purchase 825,000 shares
      of common stock to employees, directors and consultants.  The
      options have an exercise price of between $1.12 and $1.61 and a term of
      five years.  The options vest ratably over three
      years.  These options had an estimated fair value of
      $839,000.
  ·
              In
      December 2009, we granted options to purchase 400,000 shares of common
      stock to William Young, our Executive Vice President of Commercial
      Affairs.  The options have an exercise price of $0.92 per share
      and a term of five years.  Options to purchase 200,000 shares of
      common stock vest ratably over three years.  The remaining
      200,000 vest upon achieving a trading share price for our common stock of
      $3.00 per share.  These options had an estimated fair value of
      $196,000.
  ·
              In January 2010, 200,000 stock
      options granted to an employee of the Company in connection with his
      hiring with an exercise price of $0.87, vesting ratably over three years
      and a five year life.  These options had an estimated value of
      $146,381.
 
  ·
              In
      January 2010, 100,000 stock options granted to an officer of the Company
      with an exercise price of $0.90, vesting upon achieving a trading share
      price for our common stock of $3.00 per share and a five year
      term.  These options had an estimated value of
      $8,205.


The
following table provides information about options granted during the nine
months ended March 31, 2010 and 2009:





2010
            
            
            2009Number
      of options granted
            
            
            6,365,000
            
            
            
            577,500Compensation
      expense recognized as selling, general and administrative
      expense
            
            $
            1,535,000
            
            
            $
            243,000Compensation
      cost capitalized
            
            
            -
            
            
            
            -Weighted
      average fair value of options
            
            $
            0.43
            
            
            $
            0.33




16




The
following table details the significant assumptions used to compute the fair
market values of employee stock options granted during the nine months ended
March 31, 2010 and 2009:





2010
            
            
            2009Risk-free
      interest rate
            
            
            0.37
      – 3.58
            %
            
            
            0.40-2.63
            %Dividend
      yield
            
            
            0
            %
            
            
            0
            %Volatility
      factor
            
            
            115
      – 178
            %
            
            
            87-118
            %Expected
      life (years)
            
            
            1.0
      – 11.7
            
            
            
            1-1.5





At March
31, 2010, there was $1,404,000 of unrecognized compensation costs related to
non-vested share based compensation arrangements granted to employees and
directors under the plan.





Summary
information regarding employee stock options issued and outstanding as of March
31, 2010 is as follows:





Options
            
            
            Weighted
      Average Share Price
            
            
            Weighted
      average remaining contractual term
            
            
            Aggregate
      intrinsic valueOutstanding
      at year ended June 30, 2009
            
            
            2,229,707
            
            
            $
            3.27Granted
            
            
            6,365,000
            
            
            
            0.77Exercised
            
            
            -
            
            
            
            -Forfeited
            
            
            (130,000
            )
            
            
            2.05Expired
            
            
            (577,447
            )
            
            
            1.63Outstanding
      at March 31, 2010
            
            
            7,887,260
            
            
            $
            1.39
            
            
            
            5.14
            
            
            $
            3,352,350





Options
      outstanding and exercisable as of March 31, 2010Exercise
      Price
            
            
            Outstanding
      Number of Shares
            
            Remaining
      Life
            
            Exercisable
      Number of Shares$
            0.01
      – 0.49
            
            
            
            105,000
            
            2
      years
            
            
            105,000$
            0.01
      – 0.49
            
            
            
            160,000
            
            3
      years
            
            
            160,000$
            0.01
      – 0.49
            
            
            
            1,160,000
            
            5
      years
            
            
            700,000$
            0.01
      – 0.49
            
            
            
            2,490,000
            
            Over 5
      years
            
            
            -$
            0.50
      – 1.00
            
            
            
            60,000
            
            2
      years
            
            
            60,000$
            0.50
      – 1.00
            
            
            
            95,000
            
            3
      years
            
            
            95,000$
            0.50
      – 1.00
            
            
            
            790,000
            
            5
      years
            
            
            -$
            1.00
      – 1.49
            
            
            
            82,500
            
            1
      year or less
            
            
            82,500$
            1.00
      – 1.49
            
            
            
            30,000
            
            2
      years
            
            
            30,000$
            1.00
      – 1.49
            
            
            
            920,000
            
            5
      years
            
            
            800,000$
            1.50
      – 1.99
            
            
            
            60,000
            
            1
      year or less
            
            
            60,000$
            1.50
      – 1.99
            
            
            
            30,000
            
            2
      years
            
            
            30,000$
            1.50
      – 1.99
            
            
            
            711,000
            
            5
      years
            
            
            50,000$
            2.00
      - 2.49
            
            
            
            205,000
            
            1
      year or less
            
            
            195,000$
            2.00
      - 2.49
            
            
            
            235,000
            
            2
      years
            
            
            235,000$
            2.50
      - 2.99
            
            
            
            88,760
            
            1
      year or less
            
            
            88,760$
            3.00
      - 3.50
            
            
            
            65,000
            
            1
      year or less
            
            
            65,000$
            5.00
            
            
            
            300,000
            
            3
      years
            
            
            -$
            10.00
            
            
            
            300,000
            
            3
      years
            
            
            -7,887,260
            
            
            
            
            2,756,260




Options
exercisable had an intrinsic value of $869,150 at March 31, 2010.




17




Warrants





During
the nine months ended March 31, 2010 and 2009, Hyperdynamics did not grant any
warrants to consultants.





During
the nine months ended March 31, 2010, the holders of all of our Series B
preferred stock agreed to the cancellation of warrants to purchase 1,000,000
shares of the Company’s common stock.





As a
result of the offerings in November and December 2009, outstanding YA Global
warrants to purchase 666,666 shares of common stock at an exercise price of
$1.65 were amended to increase the number of underlying shares of common stock
to 1,222,222 and decrease the exercise price to $0.90 per
share.  These warrants are included in the warrant derivative
liability. The change in value of the warrants as a result of the amendment is
reflected in the valuation of the derivative as of March 31, 2010.





As a
result of the equity transaction in November 2009, the exercise price of
2,424,243 warrants held by Enable and previously granted as part of an equity
purchase, was reduced from $2.00 per share to $0.95 subject to no further
adjustment other than for stock splits and stock dividends.  The
modification resulted in a deemed dividend of $322,000 which was calculated as
the difference in the fair value of the warrants immediately before and after
the modification using the Black-Scholes option pricing model. The following
table details the significant assumptions used to compute the fair market value
of the warrant modification:





Before
              Modification
            
            
            After
      ModificationRisk-free
      interest rate
            
            
            2.63
            %
            
            
            2.63
            %Dividend
      yield
            
            
            0
            %
            
            
            0
            %Volatility
      factor
            
            
            127
            %
            
            
            127
            %Remaining
      term (years)
            
            
            5.49
            
            
            
            5.49





As a
result of the equity transaction in November 2009, the exercise price of
warrants held by Enable and previously granted as part of the convertible
debenture transaction discussed in Note 7, was reduced from $2.50 to $0.95 per
share for 1,111,111 warrants, and from $2.25 to $0.95 per share for 1,111,111
warrants, subject to no further adjustment other than for stock splits and stock
dividends.  This modification resulted in an increased fair value of
$158,000, which has been treated as additional interest expense and which was
calculated as the difference in the fair value of the warrants immediately
before and after the modification using the Black-Scholes option pricing model.
The following table details the significant assumptions used to compute the fair
market value of the warrant modification:





Before
              Modification
            
            
            After
              ModificationRisk-free
      interest rate
            
            
            2.63
            %
            
            
            2.63
            %Dividend
      yield
            
            
            0
            %
            
            
            0
            %Volatility
      factor
            
            
            125
            %
            
            
            125
            %Remaining
      term (years)
            
            
            5.80
            
            
            
            5.80





As a
result of the equity transaction in December 2009, the Company issued warrants
to purchase a total of 3,250,000 shares of its common stock to institutional
investors.  The placement agent in the transaction received 144,444
warrants. The warrants have an exercise price of $0.98 per share a term of four
years from the date they become exercisable and are exercisable 181 days
following the close of the transaction.  The exercise price of the
warrants may be adjusted in the case of stock splits, stock dividends or
combinations of shares, or in the event the Company issues rights, options or
warrants to all holders of the Company’s common stock with an exercise or
purchase price less than the volume weighted average price of the Company’s
shares on the record date.  The warrants issued to the investors and
the placement agent had a relative fair value of $1,572,000 and $70,000,
respectively.  The relative fair value of the 7,222,223 shares issued
in the transaction was $4,403,000 based upon the market price on the transaction
date, The fair value of the warrants was determined using the Black-Scholes
option pricing model. The following table details the significant assumptions
used to compute the fair market value of the warrant modification:





Risk-free
      interest rate
            
            
            2.14
            %Dividend
      yield
            
            
            0
            %Volatility
      factor
            
            
            118
            %Expected
      term (years)
            
            
            4.5




18




During
the three and nine months ended March 31, 2010, Enable exercised all 4,646,465
warrants it held for total proceeds to the Company of
$4,414,142.  Summary information regarding common stock warrants
issued and outstanding as of March 31, 2010 is as follows:





Warrants
            
            
            Weighted
      Average Share PriceOutstanding
      at year ended June 30, 2009
            
            
            10,343,131
            
            
            $
            2.24Granted
            
            
            3,950,000
            
            
            
            0.84Exercised
            
            
            (4,646,465
            )
            
            
            0.95Cancelled
            
            
            (1,000,000
            )
            
            
            4.00Expired
            
            
            -
            
            
            
            -Outstanding
      at year ended March 31, 2010
            
            
            8,646,666
            
            
            $
            1.44


Warrants
outstanding and exercisable as of March 31, 2010


Exercise
      Price
            
            
            Outstanding
      Number of Shares
            
            Remaining
      Life
            
            Exercisable
      Number of Shares$
            0.90
            
            
            
            1,222,222
            
            4
      years
            
            
            1,222,222$
            0.98
            
            
            
            3,394,444
            
            4
      years
            
            
            -$
            1.65
            
            
            
            3,480,000
            
            4
      years
            
            
            3,480,000$
            4.00
            
            
            
            500,000
            
            4
      years
            
            
            500,000$
            5.00
            
            
            
            50,000
            
            2
      years
            
            
            -8,646,666
            
            
            
            
            4,682,222




The
outstanding and exercisable warrants had no intrinsic value at March 31,
2010.





10. COMMITMENTS AND
CONTINGENCIES




The
following are updated since our Annual Report on Form 10-K was
filed.





US
Oil Lawsuit





In August
2007, USOil Corporation (“USOil”) re-filed a previously dismissed lawsuit
claiming it was the actions or omissions of SCS that caused the 2002 PSA to be
cancelled by the Guinea Government. In addition to denying all claims, SCS filed
a counterclaim seeking damages for frivolous litigation and tortuous
interference of a contract.   On October 28, 2009, the court issued a
ruling dismissing USOil’s lawsuit. The order became final November 27,
2009.





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, until contingency is
satisfied.





Bergen
Oilfield Services





On
September 29, 2009, we entered into a Marine 2D Seismic Data Acquisition
Services Agreement (the “Bergen Agreement”) with Bergen Oilfield Services
AS of Norway (“Bergen”).  Pursuant to the Bergen Agreement, Bergen was
obligated to conduct a 9,000 kilometer 2D marine seismic survey on portions
of our oil and gas concession off the coast of Guinea.  Bergen completed
the seismic survey on February 8, 2010.  The cost of the survey was
approximately $11 million. In February 2010, the Company received $1.7 million
and $3.7 million, respectively, from Dana and Repsol representing their
proportionate share of the total cost of the survey.  Additionally, Bergen
holds in escrow 2.5 million shares of our restricted common stock as a security
deposit and now that the survey has been fully paid for, the Company is in the
process of retrieving those shares.  The Deposit Shares are not considered
to be issued for accounting purposes.




19




Environmental
Contingencies





Because
we are engaged in extracting natural resources, our business is subject to
various Federal, state and local provisions regarding the environment.
Compliance with environmental laws may, in certain circumstances, necessitate
significant capital outlays, affect our earnings potential, and cause material
changes in our current and proposed business activities. At the present time,
however, the environmental laws do not materially hinder nor adversely affect
our business. Capital expenditures relating to environmental control facilities
have not been prohibitive to our operations since our inception.





Office
Lease





On
January 4, 2010, the Company and Parkway Properties LP terminated the lease
agreement dated as of December 19, 2005, as amended, for the use and occupancy
in the building known as the Comercia Bank Building located at One Sugar Creek
Center Blvd., #125, Sugar Land, Ft. Bend County, Texas, 77478.





In
connection with the termination of the original lease agreement, on January 4,
2010, the Company entered into a new lease agreement with Parkway for the use
and occupancy of Suite 475 in the Woodbranch Building located at 12012
Wickchester, Houston, Harris County, Texas 77079, at which address the Company’s
principal executive office will be located.  The term of the new lease
agreement is for 60 months beginning on March 1, 2010, the date the Company took
possession of the property. Pursuant to the new lease agreement, the Company is
obligated to make the following base rental payments: (i) $0.00 per month during
months 1 – 9; (ii) $17,472 per month during months 10 – 12; (iii) $17,957 per
month during months 13 – 24; (iv) $19,413 per month during months 25 – 36; (v)
$21,354 per month during months 37 – 48; and (vi) $24,266 per month during
months 49 – 60.





In
addition to the base rent, the Company is responsible for the pro-rata share
(10.664%) of excess operating expenses in connection with the property. The
Company also paid a security deposit of $50,000 at the time of execution of the
new lease agreement of which $35,000 is expected to be refunded at the end of
February 2012, subject to certain conditions.





11.
SUBSEQUENT EVENTS





Guinean
Presidential Decree and Arrête





On May
10, 2010, the Company received from the government of the Republic of Guinea a
Presidential Decree approving both the 2006 PSC, covering its offshore Guinea
concession, and the PSC Amendment. The Company also received a document,
referred to as an arrête, from the Ministry of Mines and Geology confirming the
Government's approval of the assignment of a 23% participating interest in the
2006 PSC to Dana.





Registered
Direct Offering





On April
20, 2010, the Company entered into a securities purchase agreement pursuant to
which the Company agreed to sell an aggregate of 8,076,925 shares of its
common stock and warrants to purchase a total of 2,826,923 shares of its
common stock to institutional investors for gross proceeds of approximately
$10.5 million.  The purchase price of a share of common stock and warrant
was $1.30.  Subject to certain ownership limitations, the warrants are
exercisable 181 days following the closing date of the
offering. Warrants to purchase 807,692 shares of common stock
expire one year following the initial exercise date.  Warrants to
purchase 2,019,231 shares of common stock expire five years following the
initial exercise date. The warrants will have an exercise price of
$1.58.  The exercise price of the warrants is subject to adjustment in the
case of stock splits, stock dividends, combinations of shares and similar
recapitalization transactions.  The warrants issued to the investors
and the placement agent had a relative fair value of $679,000
and $2,697,000, respectively.  The relative fair value of the
8,076,925 shares issued in the transaction was $8,303,000 based upon the market
price on the transaction date. The fair value of the warrants was determined
using the Black-Scholes option pricing model. The following table details the
significant assumptions used to compute the fair market value of the warrant
modification:




Risk-free
      interest rate
            
            
            0.41
            %
            
            
            2.94
            %Dividend
      yield
            
            
            0
            %
            
            
            0
            %Volatility
      factor
            
            
            118
            %
            
            
            118
            %Expected
      term (years)
            
            
            1.5
            
            
            
            5.5




20




NYSE
Amex Listing Deficiency Resolution




On April
15, 2010, the Company resolved the continued listing deficiency with respect to
Section 1003(a)(iv) of the NYSE Amex LLC's Company Guide. As a result, the
Company no longer has any outstanding listing deficiencies with the
Exchange.




Warrants
Exercised
  Significant
warrant exercises since March 31, 2010 include:
  ·
              On
      April 5, 2010, 265,000 warrants with a strike price of $0.90 were
      exercised on a cashless basis for a net issuance of 100,517 shares of the
      Company’s common stock
 ·
              On
      April 15, 2010, 255,000 warrants with a strike price of $0.90 were
      exercised on a cashless basis for a net issuance of 100,973 shares of the
      Company’s common stock.
 
 Equity
transactions
 
 Significant
stock options and warrants granted, forfeited or expired since March 31, 2010
include:
 
 ·
              415,000
      stock options under the 2010 Plan for certain employees of the Company
      with strike prices ranging from $1.10 to $1.49, a five year life on
      340,000 shares and a 0.23 year life on 75,000 shares.  The
      340,000 options vest ratably over three years while the 75,000 shares had
      immediate vesting. These options had an estimate value of
      $334,000.
 
 ·
              697,500
      stock options for certain employees were cancelled or
    expired.
 
 Series
B Dividend Payment
 
 Under the
terms of the Series B Agreement, upon the completion of an equity or debt
financing in the future of $10,000,000 or more, we agreed to  pay a
previously owed dividend in the aggregate amount of approximately $430,000 to
the Series B holders. On April 23, 2010, $430,000 was paid to the Series B
holders.
  21


Item
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations




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 quarterly report on Form 10-Q 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 and gas
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.




Overview





We devote
a substantial portion of our efforts to obtaining additional PSC participants to
help fund our exploration and development of sub-surface hydrocarbons in
commercial quantities offshore Guinea.   We intend to continue
acquiring, exploring and developing oil and gas properties on a global
basis.  At this time we have no source of operating revenue and there
is no assurance when we will, if ever.  We have limited cash and
require substantial additional funds to fulfill our business
plans.  In October 2009, we signed a letter of intent with Dana
Petroleum (E&P) Limited (“Dana”) under which the two companies would
negotiate the assignment of a 23% participating interest in our concession
offshore Guinea.  In January 2010, we finalized the sale of this
participating interest by signing an assignment and an operating agreement
between us and Dana. Upon obtaining the Republic of Guinea Presidential decree
for the PSC Amendment and an arrête in May 2010 that officially allowed Dana to
participate in the 2006 PSC, Dana is obligated to pay us an additional purchase
price of $19.6 million and assume its proportionate share of costs for all
operations. The $19.6 million payment is to be comprised of $5 million in cash,
and $14.6 million in cash or shares of Dana at Dana’s option.  Dana
paid their 23% share of the completed Bergen Oil field Services Seismic
program.





On
November 30, 2009, we signed a letter of intent (“LOI”) with Spanish-based
Repsol YPF, S.A. under which we would negotiate the assignment to Repsol of a
37% interest in our oil and gas concession offshore Guinea.  The LOI
gave Repsol exclusive negotiating rights to take a 37% share in our concession
for $31.5 million. Repsol also would be the operator of the Guinea project,
subject to government and third-party approvals and consents as required. Under
the terms of the LOI, the two companies would work to sign definitive documents
no later than January 31, 2010. On January 29, 2010, we extended the terms of
the LOI until March 11, 2010 and has subsequently not been extended further. As
consideration for extending the LOI, Repsol paid us $2.7 million for their pro
rata share of work performed to date on our ongoing 2-D seismic program. Repsol
also agreed to pay its pro rata share of the remaining work on the seismic
program, which was approximately $1.0 million, upon its completion. These monies
would be repaid to Repsol at its option if the 2006 PSC clarification has not
been ratified by Guinea by September 10, 2010.  The LOI with Repsol
satisfies the clause in our existing LOI with Dana Petroleum PLC of the U.K.
that envisioned Dana's option right to take up to an additional 27% of the
concession if we did not secure the participation of a major oil company by
November 30, 2009.





Our
corporate mission is to provide energy for the future by exploring for,
developing new, and re-establishing pre-existing sources of energy
worldwide.  Through our international business segment, we are
currently exploring for oil and gas offshore Guinea, West Africa.





Our
operating plan within the next 12 months includes the following:




·
            Obtaining
      funds and completing technical work and planning with our prospective
      participants in our concession to drill offshore Guinea in late
      2011.·
            Acquiring,
      processing and interpreting a 3D survey leading to allow identification of
      a proposed drilling location for late 2011.·
            Adding
      one or more additional PSC participants to operate and help fund our
      search for oil and gas deposits on our Guinea
  concession.




22




Going
Concern





As
indicated in our auditor’s report dated September 29, 2009 and contained in our
Annual Report on Form 10-K, as amended, for the fiscal year ended June 30, 2009,
the Company has suffered recurring losses from operations, that, as of the date
of our auditor’s report, raised substantial doubt about our ability to continue
as a going concern.  As reflected in the notes to our Consolidated
Financial Statements contained in our Quarterly Report on Form 10-Q as of and
for the three and six month period ended December 31, 2009, due to our liquidity
position and estimated future capital needs, doubts about our ability to
continue as a going concern remained through December 31, 2009. We have incurred
substantial losses since inception.  Our ability to continue as a
going concern is dependent upon our ability to generate sufficient cash flow to
meet our obligations on a timely basis.  We have been successful in
raising additional equity financing, and management has determined, based upon
our estimated future expenditures and expected cash inflows over the next 15
months, that the uncertainty regarding our ability to continue as a going
concern has been mitigated as of March 31, 2010. However, we cannot assure you
that we will not determine, based upon future events and our expectation for
continuing losses from operations for the foreseeable future, that uncertainty
about our ability to continue as a going concern will not recur.




You
should carefully consider the risks in evaluating our company.  The
risks and uncertainties described in our Annual Report on Form 10-K as amended,
as updated and superseded by the risk factors in Part II, Item 1A of this
Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, are not the
only ones we face and include, among others, we require substantial additional
funding in the near term which may not be available to us on acceptable terms or
at all and if we cannot obtain additional, our ability to raise sufficient
capital and/or enter into a strategic relationship with a industry partner to
execute our business plan, ability to respond to changes in the oil exploration
and production environment, competition, and the availability of personnel in
the future to support our activities may be curtailed and we may ultimately
cease to exist; the PSC Amendment is subject to renegotiation under certain
circumstances and there is no assurance that these negotiations will result in a
mutually acceptable agreement.   We operate in Guinea, a country where
corrupt behavior exists that could impair our ability to do business in the
future or result in significant fines or penalties.   There are
significant risks associated with operating in Guinea.





Results of
Operations.





Based on
the factors discussed below for our international segment, discontinued
operations and for corporate overhead, the net loss attributable to common
shareholders for the nine months ended March 31, 2010 decreased $1,951,000,
or 19%, from a net loss of $10,271,000, or $0.17 per share in the 2009
period to a net loss of $8,320,000, or $0.10 per share in the 2010
period.  The net loss is comprised of the net loss from operations for
our corporate office of $6,586,000, the net loss of SCS of $2,490,000 and income
from discontinued operations of $765,000.  The net loss chargeable to
common shareholders includes a provision for preferred stock dividends of $8,000
in 2010 and $73,000 in 2009.





Reportable
segments




Hyperdynamics
has one reportable segment: our international operations in Guinea through
our subsidiary SCS.  SCS is engaged in oil and gas exploration
activities pertaining to offshore Guinea, West Africa.    During
the year ended June 30, 2009, our domestic operations were discontinued, and as
of August 2009, all the assets associated with HYD, which was our subsidiary
that held certain properties located in Louisiana, have been
sold.





Three
months ended March 31, 2010 Compared to Three Months Ended March,
2009





Revenues.  There
were no revenues for the three months ended March 31, 2010 and
2009.   We have focused on the acquisition and interpretation of
seismic data for our concession in Guinea.





Depreciation.  Depreciation
expense was $34,000 and $33,000 in the three months ended March 31, 2010 and
2009, respectively.





Selling, General and
Administrative Expenses. Our selling, general and administrative
expenses were $2,434,000 and $1,023,000 for the three months ended March 31,
2010 and 2009, respectively. This represents an increase of 138%, or
$1,411,000.  The increase was primarily employee related costs, which
include salaries, bonuses and stock based compensation related to options
granted to employees and others.





Other income
(expense).  Other income (expense) totaled income of $363,000
and expense of ($160,000) for the three months ended March 31, 2010 and 2009,
respectively. During the 2010 period, the Company recognized a non-cash gain on
the derivative liability related to the YA Global warrants of
$364,000.  No such gains was recognized in the 2009 period. Interest
expense was $1,000 for the 2010 period, versus $160,000 for the 2009
period.  The higher interest expense in the 2009 was primarily
attributable to interest expense on debentures, while there is no debt during
the 2010 period.




23





Loss from Continuing
Operations.  Based on the expenses discussed above, our loss
from operations increased by 73%, or $889,000, from $1,216,000 in the three
months ended March 31, 2009 to $2,105,000 for the three months ended March 31,
2010.





Discontinued Operations.There was nodiscontinuedoperationsfor the three months ended March 31, 2010
while there was a loss of $37,000 for three months ended March 31,
2009.





Nine
months ended March 31, 2010 Compared to Nine Months Ended March 31,
2009





Revenues.  There
were no revenues for the nine months ended March 31, 2010 and 2009. We have
focused on the acquisition and interpretation of seismic data for our concession
in Guinea.





Depreciation.  Depreciation
expense was $93,000 and $100,000 in the nine months ended March 31, 2010 and
2009, respectively.





Selling, General and
Administrative Expenses. Our selling, general and administrative
expenses were $7,860,000 and $5,251,000 for the nine months ended March 31, 2010
and 2009, respectively. This represents an increase of 50%, or $2,609,000. The
increase was primarily employee related costs, which include salaries, bonuses
and stock based compensation related to options granted to employees and
others.





Other income
(expense).Other income (expense) totaled ($1,124,000)
and ($2,958,000) for the nine months ended March 31, 2010 and 2009,
respectively.  During the 2010 period, the Company recognized a
non-cash loss on the derivative liability related to the YA Global warrants of
$114,000.  No such loss was recognized in the 2009
period.  Interest expense was ($712,000) for the 2010 period, versus
($2,379,000) for the 2009 period.  The higher interest expense in the
2009 was primarily attributable to the early conversion of convertible
debentures outstanding during the period and the expensing of the associated
debt discount.  During the 2010 period, the Company recognized a loss
on extinguishment of the remaining convertible debenture balance of ($298,000),
primarily attributable to the expensing of the remaining discount associated
with these debentures, versus a loss of ($579,000) in the 2009 period, primarily
attributable to the early extinguishment of the YA Global debenture that
resulted in a loss of ($635,000), partially offset by a gain on settlement of a
debt obligation for less than the accrued amount.





Loss from Continuing
Operations.  Based on the expenses discussed above, our loss
from continuing operations increased by 9%, or $768,000, from $8,309,000 in the
nine months ended March 31, 2009 to $9,077,000 for the nine months ended March
31, 2010.





Discontinued Operations.Discontinued operations generated income of $765,000 for the nine months
ended March 31, 2010 and a loss of $1,889,000 for nine months ended March 31,
2009.





Liquidity
and Capital Resources





Liquidity





Based on
the Company’s current plans and market conditions, management believes that the
Company’s existing cash and current operations will be sufficient to satisfy its
anticipated cash requirements for the next twelve months.  The Company
has adequate capital resources to meet current working capital and capital
expenditure requirements through the third quarter of fiscal year
2011.  The Company intends to meet its short-term working capital
needs from the proceeds received in April 2010 from the registered direct
offering gross proceeds of $10.5 million and by having completed the assignment
of 23% of its interest in the concession under the 2006 PSC to Dana for payments
totaling $19.6 million, which Dana has not yet paid as of the date of this
Quarterly Report on Form 10-Q.  The $19.6 million payment is to be
comprised of $5 million in cash, and $14.6 million in cash or shares of Dana at
Dana’s option.





On March
31, 2010, the Company had $3,135,000 in cash and $9,784,000 in liabilities. The
liabilities include current liabilities of $8,068,000 and noncurrent liabilities
of $1,716,000.  Net cash used in operating activities for continuing
operations for the nine months ended March 31, 2010 was $5,605,000 compared to
$4,320,000 for the nine months ended March 31, 2009. Cash used by investing
activities for continuing operations for the nine months ended March 31, 2010
was $4,656,000 compared to $215,000 used by investing activities in the nine
months ended March 31, 2009.  There was net cash provided by financing
activities for the nine months ended March 31, 2010 of $11,231,000.  Net
cash of $2,287,000 was provided by financing activities during the nine months
ended March 31, 2009.





Current
liabilities as of March 31, 2010 contain several items that are payable in
stock, that are the subject of deferred payment arrangements whereby the vendor
will not get paid except out of future revenues or cash received from a joint
venture partner, or that will be assumed by others.  Dividends payable
of $372,000, and dividends payable to related party of $442,000 are payable in
stock.   Accounts payable – seismic data of $650,000 is payable only
when we sell the data to third parties or if we get cash infusion for the Guinea
concession.





24





Liquidity
Effects of Discontinued Operations





On April
1, 2009, we executed a contract to sell all of our working interests in our U.S.
domestic oil and gas properties for $2,670,000.  The third and final
installment under the agreement was completed in August 2009.  The
cash flows from discontinued operations are separately reported in the audited
Consolidated Statements of Cash Flows for all periods
presented.  While this transaction improved our short term liquidity,
it also eliminated our sole revenue source.  Accordingly, the
liquidity implication of the discontinued operations is that we will require
additional funding from debt or equity sources or from a joint venture or
financial partner in our Guinea concession in order to continue
operations.





Item
3. Quantitative and Qualitative Disclosures About Market Risk








Our
functional currency is the US dollar. We have some foreign currency exchange
rate risk resulting from our in-country office in Guinea. US dollars are
accepted in Guinea and many of our purchases and purchase obligations, such as
our office lease in Guinea, are denominated in US dollars. However, our costs
for labor, supplies, and fuel could increase if the Guinea Franc appreciates
against the US dollar. We do not hedge the exposure to currency rate
changes.





Item
4T. Controls and Procedures





Disclosure
Controls and Procedures





We
carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of our disclosure controls and as of the end of
the period covered by this quarterly report. The term “disclosure controls and
procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange act of 1934, as amended (“Exchange Act”), means controls and other
procedures of a company that are designed to ensure that information required to
be disclosed by the company in the reports it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Commission’s rules and forms.  Disclosure
controls and procedures also include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company’s management, including its
principal executive and principal financial officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.  In the course of this evaluation, our management
considered the material weaknesses in our internal control over financial
reporting discussed in our Annual Report on Form 10-K. as amended, for the
fiscal year ended June 30, 2009. Based on management’s evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures as of March 31, 2010 were not effective in ensuring that
the information required to be disclosed by us in reports filed under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the SEC.





Changes
in Internal Control Over Financial Reporting





To
address the issues associated with our material weaknesses as described in our
Annual Report on form 10-K, as amended, we have made changes in our internal
controls over financial reporting in the quarter ended March 31, 2010 through
the date of this report, and we continue to spend a significant amount of time
and effort to improve our control environment, including our implementation of
enhanced compliance policies and procedures. We have taken steps in an effort to
ensure our consolidated financial statements included in this quarterly report
have been prepared in accordance with accounting principles generally accepted
in the United States. 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.





We have
been implementing and will aggressively continue to implement changes that are
both organizational and process-focused to improve the control environment. The
changes made through the date of this quarterly report include, among
others:





·
              Utilizing
      industry standard GAAP and SEC Checklists for disclosure requirements for
      interim financial information.·
              The
      hiring of a full-time corporate controller whose employment began April 5,
      2010.





Part
II Other Information





Item
1. Legal Proceedings





For
information regarding our legal proceedings see the legal proceedings disclosed
in Item 3 of our most recent Annual Report on Form 10-K. In addition, the
following information updates the previously made disclosure concerning the
lawsuit involving USOil Corporation (“USOil”) as reflected in our Annual Report
on Form 10-K, as amended.




25




USOil
Lawsuit





In August
2007, USOil re-filed a previously dismissed lawsuit claiming it was the actions
or omissions of SCS that caused the 2002 PSA to be cancelled by the Guinea
Government. In addition to denying all claims, SCS filed a counterclaim seeking
damages for frivolous litigation and tortuous interference of a
contract.   On October 28, 2009, the court issued a ruling dismissing
USOil’s lawsuit. The order became final November 27, 2009.





Item 1A. Risk
Factors




Set forth
below are updated risk factors from those set forth in our Quarterly Report on
Form 10-Q for the quarterly period ended December 31, 2009, which superseded the
risk factors disclosed in our Current Report on Form 8-K filed with the SEC on
November 12, 2009, and in our Annual Report on Form 10-K, as amended, for the
year ended June 30, 2009.





Geopolitical
instability where we operate subjects us to political, economic and other
uncertainties.




We
conduct business in Guinea, which is in a region of the world where there have
been recent civil wars, revolutionary wars, coup d’états and internecine
conflicts.  In September 2009, Guinea experienced a marked increase in
violence including civil unrest and protests against the current government,
which assumed power in December 2008.  External or internal political
forces could potentially create a political or military climate that might cause
a change in political leadership, the outbreak of hostilities, or civil
unrest.  Such uncertainties could result in our having to cease our
Guinea operations and result in the loss or delay of our rights under the 2006
PSC, as amended.




Further,
we face political and economic risks and other uncertainties with respect to our
operations, which may include, among other things:




·
            loss
      of revenue, property and equipment as a result of hazards such as
      expropriation, war, acts of terrorism, insurrection and other political
      risks;·
            increases
      in taxes and governmental royalties;·
            unilateral
      renegotiation of contracts by governmental entities;·
            difficulties
      enforcing our rights against a governmental agency because of the doctrine
      of sovereign immunity and foreign sovereignty over international
      operations;·
            changes
      in laws and policies governing operations of foreign-based companies;
      and·
            currency
      restrictions and exchange rate
fluctuations.




Our
operations in Guinea may also be adversely affected by laws and policies of the
United States affecting foreign trade and taxation.  Realization of
any of these factors could materially and adversely affect our business plan,
financial position, results of operations and future cash flows.




We
will require substantial additional funding in the near term which may not be
available to us on acceptable terms or at all; 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. We need additional funding or
alternative sources of capital to meet our working capital needs in the
future.  We have previously raised capital by selling common stock and
warrants, issuing convertible debentures and using a previously available equity
line of credit which expired in February 2009.  Our management does
not believe that existing cash resources will be sufficient to enable us to
execute our business plan over the next twelve months and that we will need to
raise substantial additional capital or obtain funding through a strategic
relationship in the near term in order to do so.  However, future
financing or strategic alliances may not be available in amounts or on terms
acceptable to us, if at all. If we cannot raise funds on acceptable terms, we
will not be able to execute our business plan and may be forced to curtail
operations or may ultimately cease to exist.




26




We
may not be able to meet our substantial capital requirements to conduct our
operations and achieve our business plan and; we anticipate future losses and
negative cash flow.




Our
business is capital intensive.  We must invest a significant amount in
development and exploration activities.  We are currently making and
intend to continue to make substantial capital expenditures to find, develop and
produce natural gas and oil reserves.  We currently have no operating
revenue.  If we do not obtain capital resources, we may not be able to
meet the obligations under the 2006 PSC, as amended – thus surrendering the
Concession.  The Concession is our single most important asset and its
loss would result in a substantial decrease in our ability to eventually become
a profit-generating company.  Even if we acquire sufficient financing
to meet the obligations under the 2006 PSC, as amended, we may not be able to
raise or expend the capital necessary to undertake or complete future drilling
programs or acquisition opportunities unless we raise additional funds through
debt or equity financings, which may not be available on acceptable terms to us
or at all.  We may not be able to obtain debt or equity financing or
enter into and complete one or more strategic relationships with an industry
partner to meet our capital requirements on acceptable terms, if at
all.  Moreover, our future cash flow from operations may not be
sufficient for continued exploration, development or acquisition activities, and
we may not be able to obtain the necessary funds from other
sources.




With the
completion of the sale of our domestic oil and gas properties in August 2009, we
are strictly in the exploration phase and have no proven petroleum
reserves.  We expect to continue to incur significant expenses over
the next several years with our operations, including further 3D seismic studies
and exploratory drilling.  Based on the exploration results to date,
we anticipate that the cost per commercial well, if further results justify
attempts at commercial drilling, would range from US$20 million each (shallow
water gas prospects) to approximately US$100 million each (deepwater oil
prospects).




The
PSC Amendment is subject to renegotiation under certain conditions, which may
have an adverse impact upon our operations and profitability.




The PSC
Amendment provides that should the government of the Republic of Guinea note
material differences between provisions of the PSC Amendment and international
standards or the Guinea Petroleum Code, the parties will renegotiate the
relevant articles.  If the government of the Republic of Guinea
identifies materials differences between the PSC Amendment’s provisions and
international standards or the Guinea Petroleum Code, there is no assurance that
we will be able to negotiate an acceptable modification to the PSC
Amendment.  If the parties are not successful in renegotiating the
relevant articles of the PSC Amendment, the parties may be required to submit
the matter to international arbitration.  There is no assurance that
any arbitration would be successful or otherwise lead to articles that are more
favorable to the Company than the present articles.  Therefore, the
results of such negotiations or arbitration could be unfavorable to us and, as a
result, could have a material adverse effect on our business plan, financial
position, results of operations and future cash flows.




Our
concession or obligations under the 2006 PSC, as amended, could be adversely
affected by Guinea’s political uncertainties.




Guinea
has faced and continues to face political, economic and social uncertainties
which are beyond our control.  Maintaining a good working relationship
with the Guinean government is important because the Concession is granted under
the terms of the 2006 PSC, as amended, with the Guinean government.  A
presidential election in Guinea is scheduled for June 28, 2010.  While
we intend to maintain a positive working relationship with the Guinean
government, we cannot predict whether the election will occur as scheduled, or
the impact that the election will have on our relationship.  A change
in leadership could result in political instability or substantial changes in
government policies which could have a material adverse effect on our business
plan, financial position, results of operations and future cash
flows.




We
operate in Guinea, a country where corrupt behavior exists that could impair our
ability to do business in the future or result in significant fines or
penalties.




We
operate in Guinea, a country where governmental corruption has been known to
exist. There is a risk of violating either the U.S. Foreign Corrupt Practices
Act or laws or legislation promulgated pursuant to the 1997 OECD Convention on
Combating Bribery of Foreign Public Officials in International Business
Transactions or other applicable anti-corruption regulations that generally
prohibit the making of improper payments to foreign officials for the purpose of
obtaining or keeping business.  Some of the identified internal
control deficiencies contributing to our material weaknesses in financial
reporting relate to our operations in Guinea.  These material
weaknesses make it more likely that a violation could have
occurred.  Violation of these laws could result in monetary penalties
against us or our subsidiaries and could damage our reputation and, therefore,
our ability to do business.  In addition, the future success of our
Guinea operations may be adversely affected by risks associated with
international activities, including economic and labor conditions, political
instability, risk of war, expropriation, terrorism, renegotiation or
modification of existing contracts, tax laws and changes in exchange
rates.




27




Our
expected future losses raise doubts about our ability to continue as a going
concern unless we can raise sufficient capital.




Without
the receipt by us of additional funds, we will be unable to execute our business
plan and meet our obligations under the 2006 PSC, as amended.  We have
historically been able to raise capital from debt or equity sources to finance
our activities but there is no assurance we will be able to do so in the future
or on acceptable terms, if at all.  Additionally, we intend to raise
additional capital through one or more strategic relationships such as the
assignment of participation interests in the Concession.  However,
there is no guarantee that we will receive funds from such
relationships.  Our growth is dependent on our raising capital through
the sale of equity or debt or our ability to enter into one or more strategic
relationships concerning the Concession.  As indicated in our
auditor’s report concerning and as discussed in Note # 2 to our Consolidated
Financial Statements contained in our Annual Report on Form 10-K, as amended,
for the fiscal year ended June 30, 2009 and the Quarterly Report on Form 10-Q
for the quarter ended December 31, 2009, our Consolidated Financial Statements
were prepared assuming we would continue as a going concern.  There is
no guarantee that we or our auditors will not determine in the future based on
our recurring losses
from operationsthat substantial doubt exists about our ability to
continue as a going concern.




We
do not have reserve reports for the Concession and our expectations as to 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 for the
Concession.  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.  Because we do not have any reserve reports for the
Concession our expectations as to oil and gas reserves are uncertain and may
vary substantially from actual production.




We
have a history of losses and there is no assurance that we will ever achieve or
sustain profitability.




We have
experienced substantial operating losses.  We expect to incur
significant operating losses until we commence sales from the Concession. We
will also need to raise sufficient funds to finance our exploration and
exploitation activities.  We may be unable to achieve or sustain
profitability.




We
have no ability to control the prices that we may receive for oil and
gas.  Oil and gas prices are volatile and a substantial or extended
decline in prices could adversely affect our financial condition, liquidity,
ability to obtain financing and future operating results.




We have
no source of revenue at this time.  Our financial condition is based
solely on our ability to sell equity or debt securities to investors or enter
into a joint venture or similar strategic relationship with an industry partner,
sell interests related to the Concession or borrow funds.  We expect
that entering into these partnering relationships would entail transferring a
portion of our interest in the Concession to such partner.  Such
investors would consider the price of oil in making an investment
decision.  Declines in oil and gas prices may adversely affect our
financial condition, liquidity, ability to obtain financing and operating
results. Low oil and gas prices also may reduce the amount of oil and gas that
we could produce economically. Low oil and gas 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
      level of domestic and foreign supplies of oil;·
            the
      level of consumer product demand;·
            weather
      conditions;·
            political
      conditions in oil producing regions throughout the
  world;·
            the
      ability of the members of the Organization of Petroleum Exporting
      Countries to agree to and maintain oil
  production;




28




·
            price
      and production controls;·
            the
      price of foreign oil imports;·
            actions
      of governments;·
            domestic
      and foreign governmental regulations;·
            the
      price, availability and acceptance of alternative
fuels;·
            overall
      economic conditions; and·
            value
      of the U.S. dollar.




These
factors and the volatile nature of the energy markets make it impossible to
predict oil and gas prices. Our inability to respond appropriately to changes in
these factors could have a material adverse effect on our business plan,
financial position, results of operations and future cash flows.




Investment
in the oil and gas business is risky and there is no assurance we will be
successful in discovering oil and gas.




Oil and
gas exploration and development are inherently speculative
activities.  There is no certain method to determine whether or not a
given lease or concession will produce oil or gas or yield oil or gas in
sufficient quantities and quality to result in commercial
production.  The development of a lease or concession 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 we may find oil or gas in
commercial quantities.  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.




Drilling
activities are subject to numerous risks, including the significant risk that we
do not reach our target reservoir or that no commercially productive reserve is
encountered.  The cost of drilling, completing and operating wells and
of installing production facilities and pipelines is often
uncertain.  Drilling costs could be significantly higher if we
encounter difficulty in drilling offshore.




There
are drilling and operational hazards associated with the oil and gas industry
which could result in substantial losses.




The oil
and gas industry 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; and·
            natural
      disasters.




Offshore
operations are subject to a variety of operating risks peculiar to the marine
environment, such as capsizing and collisions.  Also, offshore
operations are subject to damage or loss from adverse weather
conditions.




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. The
occurrence of any of these events could have a material adverse effect on our
business plan, financial position, results of operations and future cash
flows.




29




We
are subject to governmental regulations of which the cost of compliance may have
an adverse effect on our financial condition, results of operations and future
cash flow.




Oil and
gas operations in Guinea are subject to extensive government regulation and to
interruption or termination by governmental authorities on account of ecological
and other considerations.  It is impossible to predict future
government proposals that might be enacted into law and the effect they might
have on us.  Restrictions on oil and gas activities, such as
production restrictions, price controls, tax increases and pollution and
environmental controls may have material adverse effect on our financial
condition, results of operations and future cash flows.




The
oil and gas industry is subject to hazards related to pollution and
environmental issues which may create substantial liabilities to third
parties.




Hazards
in the drilling and/or the operation of gas and oil properties, such as
accidental leakage or spillage, are sometimes encountered. Such hazards may
cause substantial liabilities to third parties or governmental entities, the
payment of which could adversely affect our liquidity or result in the loss of
our leases. We may be subject to liability for pollution and other damages due
to environmental events.  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
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.




Government
regulations may require permits for drilling operations, drilling bonds and
reports concerning operations. In addition, there may be 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.




The
success of our business depends on our ability to find, develop and acquire oil
and gas reserves.




We expect
to find certain reserves of gas and oil that can be profitably exploited. There
is, however, no guarantee that we will find reserves that will economically
produce. Future drilling activities could subject us to many risks, including
the risk that we will not find commercially productive reservoirs. Drilling for
oil and natural gas can be unprofitable, not only from dry wells, but from
productive wells that do not produce sufficient revenues to return a profit.
Also, title problems, weather conditions, governmental requirements and
shortages or delays in the delivery of equipment and services can delay our
drilling operations or result in their cancellation. The cost of drilling,
completing and operating wells is often uncertain, and new wells may not be
productive. As a result, we may not recover all or any portion of our
investment. Moreover, if natural gas and oil prices decline, the amount of
natural gas and oil we can economically produce may be reduced, which may result
in a material decline in our revenues, if any.




The
unavailability or high cost of drilling rigs, equipment, supplies, personnel and
oilfield services could adversely impact us.




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




Expansion
of our exploration program will require capital from outside
sources.




We do not
currently have the financial resources to conduct our planned 3D seismic testing
or to drill offshore Guinea.  Absent raising additional capital,
completing the assignment of an interest in our Concession or entering into a
joint venture or similar arrangement, we will not be able to conduct our
planned  3D seismic testing or to conduct drilling operations offshore
Guinea.  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 the Concession), or from borrowings
from third parties (which could result in our assets being pledged as collateral
and which would increase our debt service requirements).




30




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




·
            additional
      offerings of equity securities, which would cause dilution of our common
      stock;·
            sales
      or assignments of interests in the Concession and exploration program,
      which would reduce any future revenues from that
  program;·
            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); and·
            sales
      of interests in other projects, which could reduce any future
      revenues.




It is
difficult to quantify the amount of financing we may need to fund our business
plan.  The amount of funding we may need in the future depends on various
factors such as:




·
            our
      financial position;·
            the
      prevailing market price of natural gas and oil; and·
            the
      lead time required to bring any discoveries to
  production.




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 a material adverse effect on our business plan, financial
position, results of operations and future cash flows.




Pending
and future claims and litigation may adversely affect our financial condition
and results of operations.




We are
currently involved in various lawsuits, including a claim involving
contractually prohibited short selling, a claim that Hyperdynamics and its
Officers and Directors breached their fiduciary duties to shareholders and
committed other tortuous acts, a claim that our actions or omissions caused the
loss of the Royalty and Production Sharing Agreement, dated November 8, 2002,
and an environmental cleanup case, among other claims more thoroughly described
in Item 3 of our Annual Report on Form 10-K, as amended, for the fiscal year
ended June 30, 2009.  The outcome of litigation is difficult to assess or
quantify, and we cannot predict how it will impact us, however the litigation
described in Item 3 of our Annual Report on Form 10-K, as amended, for the
fiscal year ended June 30, 2009 could subject us to substantial legal
expenses.  If we do not prevail, we might not have sufficient funds to make
payments on our debt or successfully execute our business strategy or have to
declare bankruptcy or cease operations.




Drilling
new wells could result in new liabilities, which could endanger our interests in
our properties and assets.




There
are risks associated with the drilling of oil and natural gas wells which could
significantly reduce our revenues or cause substantial losses, impairing our
future operating results. We may become subject to liability for pollution,
blow-outs or other hazards. We intend to obtain insurance with respect to these
hazards, but such insurance has limitations on liability that may not be
sufficient to cover the full extent of such liabilities. The payment of such
liabilities could reduce the funds available to us or could, in an extreme case,
result in a total loss of our properties and assets. Moreover, we may not be
able to maintain adequate insurance in the future at rates that are considered
reasonable. Oil and natural gas production operations are also subject to all
the risks typically associated with such operations, including premature decline
of reservoirs and the invasion of water into producing formations.




We
have competition from other companies that have larger financial and other
resources than we do, which puts us at a competitive disadvantage.




A large
number of companies and individuals engage in drilling for gas and oil, and
there is competition for the most desirable prospects. We will encounter intense
competition from other companies and other entities in the sale of our oil and
gas production. We could be competing with numerous oil and gas companies which
may have financial resources significantly greater than ours. 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, as well as foreign
governments.




31




We
are highly dependent on our management team and consultants and any failure to
retain the services of such parties could adversely affect our ability to
effectively manage our operations or successfully execute our business
plan.




The
successful implementation of our business strategy is highly dependent on our
management team and certain key geoscientists, geologists’, engineers and other
professionals engaged by us.  The loss of key members of our management
team or other highly qualified technical professionals could adversely affect
our ability to effectively manage our overall operations or successfully execute
current or future business strategies which may have a material adverse effect
on our business, financial condition and operating results.




We
depend on oil and gas industry vendors and may not be able to obtain adequate
services.




We are
dependent on industry vendors for the success of our oil and gas exploration
projects. We could be harmed if we fail to attract quality industry vendors to
participate in our exploration and production activities.




New
investors or commercial partners may require participation interests which could
decrease future profitability.




The pace
of exploration and the level of operations may be determined by the amount of
funding available. If funding is limited, exploration may be continued under
agreements that provide investors or commercial partners with a participation
interest in a particular property held by us. Under this type of arrangement, an
investor or commercial partner would invest in specific property and receive a
negotiated interest in that specific property. This could reduce the potential
profitability of the remaining interest in the property and reduce our ability
to control and manage the property. We expect that entering into these
partnering relationships would entail transferring a portion of our interest in
the Concession to such partner.




Dollar
versus Euro denomination for oil and gas transactions may impact the value of
future oil and gas transactions.




Our
financial currency is the U.S. dollar.  Most international oil and gas
transactions are currently denominated in U.S. dollars.  There could be a
desire by some oil producing nations to denominate the price of oil transactions
in Euros.  We do not hedge any market risk.  If we later engage in
Euro denominated transactions we could face a foreign currency exchange risk of
the Euro decreasing in value relative to the U.S. dollar.




There
are material weaknesses in our disclosure controls and procedures and our
internal control over financial reporting and existing deficiencies may not be
adequately remediated.




A
material weakness is a control deficiency, or a combination of control
deficiencies, that results in there being more than a remote likelihood that a
material misstatement in our financial statements will not be prevented or
detected.  We have determined that as of June 30, 2009 and March 31, 2010
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 and reported within the time periods
specified in the rules and forms of the SEC.




We have
also determined as of June 30, 2009 that we have material weaknesses in our
internal control over financial reporting and, as a result, our internal control
over financial reporting is not effective.  Some of the weaknesses we
identified in our internal control over financial reporting relate to our
operations in Guinea, including deficiencies in the Company’s control
environment, deficiencies in the staffing of our financial accounting
department, and departure of members of financial management. See Item 4T Controls and Procedures of
our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 and Item
9A(T) Controls and
Procedures in our Annual Report on Form 10-K, as amended, for the fiscal
year ended June 30, 2009 for further disclosure concerning our controls and
procedures.  These deficiencies increase the likelihood of misstatements in
our financial statements or violations of law.




Our
internal control and procedures were developed through a process in which our
management applied its judgment in assessing the costs and benefits of such
internal controls and procedures, which, by their nature, can provide only
reasonable assurance regarding the control objectives. The design of any system
of internal controls and procedures is based in part upon various assumptions
about the likelihood of future events.  The actions taken to date have not
been effective in remediation of the material weaknesses.  We do not know
when, or if ever, the material weaknesses will be corrected.  Any failure
to remediate the deficiencies noted in connection with our audits or to
implement required new or improved controls, or difficulties encountered in
their implementation, could cause us to fail to meet our reporting obligations
or result in material misstatements in our financial statements. Ineffective
internal control over financial reporting could also cause investors to lose
confidence in our reported financial information, which could result in a lower
trading price of our stock.




32




We
have an accumulated deficit and expect to 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 uneconomical; (d) our ability to attract
qualified employees and consultants; and (e) the amount and timing of operating
costs and capital expenditures relating to conducting our business operations
and infrastructure. As a result of our limited operating history and the
emerging nature of our business plan, it is difficult to forecast revenues or
earnings accurately, which may fluctuate significantly from quarter to
quarter.




In
the event we become a penny stock company, FINRA sales practice requirements
limit a stockholders' ability to buy and sell our stock.




In the
event we become subject to the penny stock rules, there are certain rules that
have been adopted by the Financial Industry Regulatory Authority, Inc. (FINRA)
to which our common stock will be subject.  FINRA rules require that in
recommending an investment to a customer, a broker-dealer must have reasonable
grounds for believing that the investment is suitable for that customer. 
Prior to recommending speculative low priced securities to their
non-institutional customers, broker-dealers must make reasonable efforts to
obtain information about the customer’s financial status, tax status, investment
objectives, and other information. Under interpretations of these rules, FINRA
believes that there is a high probability that speculative low priced securities
will not be suitable for at least some customers. FINRA requirements make it
more difficult for broker-dealers to recommend that their customers buy our
common stock, which has the effect of reducing the level of trading activity and
liquidity of our common stock.  Further, many brokers charge higher
transactional fees for penny stock transactions. As a result, fewer
broker-dealers would be willing to make a market in our common stock, reducing a
stockholders' ability to resell shares of our common stock.




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 restrictive legend or the
termination of a lock-up on a significant percentage of our outstanding shares
of common stock, or the exercise of options and warrants.




As of
April 16, 2010, approximately 15,822,222 shares of our common stock were
restricted shares and subject to a contractual prohibition, or “lock-up,”
preventing the sale of such shares that expires on July 1, 2010, and we have
outstanding warrants and options to purchase approximately 16,242,926 shares of
common stock. If these options and warrants are exercised, the underlying shares
may become eligible for immediate resale.  We do not know when or if these
options will be exercised. In the event that a substantial number of these
restricted 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.




As of the
date of this Quarterly Report on Form 10-Q, our Directors and Executive Officers
and their affiliates collectively and beneficially own or control approximately
5% of our voting power (including stock, warrants and, options).  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 a material 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.




33




Our
stock price is highly volatile and you may lose some or all of your
investment.




Trading
prices of our common stock may fluctuate in response to a number of events and
factors, such as:




·
            general
      economic conditions;·
            availability
      of credit;·
            changes
      in interest rates;·
            conditions
      or trends in the oil and gas business;·
            fluctuations
      in the stock market in general and market prices for oil and gas companies
      in particular;·
            quarterly
      variations in our operating results;·
            new
      products, services, innovations, and strategic developments by our
      competitors or us, or business;·
            combinations
      and investments by our competitors or us;·
            changes
      in environmental regulation;·
            changes
      in our capital structure, including issuance of additional debt or equity
      to the public;·
            additions
      or departures of our key personnel;·
            corporate
      restructurings, including layoffs or closures of
    facilities;·
            stock
      market analyst reports, news and speculation;·
            political
      turmoil in Guinea; and·
            natural
      disasters such as hurricane, flooding, earthquake, acts of
      God.




We
do not intend to pay dividends in the foreseeable future; therefore, you may
never see a return on your investment.




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




Since
we have not paid any dividends on our common stock and do not intend to do so in
the future, a purchaser of our common stock will only realize a gain on their
investment if the market price of our common stock increases.




We have
never paid, and do not intend to pay, any cash dividends on our common stock for
the foreseeable future. The payment of cash dividends in the future, if any,
will be at the discretion of our board of directors and will depend upon such
factors as restrictions contained in our financing facilities, earnings levels,
capital requirements, our overall financial condition, and any other factors
deemed relevant by our board of directors. A purchaser of our common stock, in
all likelihood, will only realize a profit on their investment if the market
price of our common stock increases in value.




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.




34




Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has 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. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.




Item
4. Submission of Matters to a Vote of Security Holders




On
February 18, 2010, the company held its annual shareholder meeting (1) to elect
six directors; (2) to approve the 2010 Equity Incentive Plan, and (3) to ratify
GBH CPAs as the independent auditors.




The
directors who were elected are Ray Leonard, Robert A. Solberg, Herman Cohen,
Roger D. Friedberger, Lord David Owen, and Fred Zeidman.




The
results of the voting by Item are as follows:




Proposal # 1:




With
respect to election of Directors of the Company:




Director
      Name
              
              Number
      of Affirmative Votes
              
              
              Number
      of Votes WithheldRay
      Leonard
              
              
              41,180,362
              
              
              
              486,516Robert
      A. Solberg
              
              
              41,139,407
              
              
              
              527,471Herman
      Cohen
              
              
              41,183,052
              
              
              
              483,826Roger
      D. Friedberger
              
              
              37,236,923
              
              
              
              4,429,955Lord
      David Owen
              
              
              41,163,805
              
              
              
              503,073Fred
      Zeidman
              
              
              41,169,229
              
              
              
              497,649




Proposal
# 2:




With
respect to the proposal to approve the 2010 Equity Incentive Plan.




Number of Affirmative
      Votes
            
            
            Number
      of Negative Votes
            
            
            Abstentions37,901,089
            
            
            
            3,215,545
            
            
            
            550,224




Proposal
# 3:




With
respect to the proposal to ratify GBH CPAs as the independent
auditors.




Number of Affirmative
      Votes
            
            
            Number
      of Negative Votes
            
            
            Abstentions63,848,525
            
            
            
            537,984
            
            
            
            2,313,729




35




Item 6. Exhibits
  Exhibit
                Number
              
              Description3.1.1
              
              Certificate
      of Incorporation (1)3.1.2
              
              Certificate
      of Amendment of Certificate of Incorporation, dated January 21, 1997
      (1)3.1.3
              
              Certificate
      of Amendment of Certificate of Incorporation, dated September 20, 1999
      (1)3.1.4
              
              Certificate
      of Amendment of Certificate of Incorporation, dated December 22, 2003
      (1)3.2
              
              By-laws
      (1)3.3
              
              Amendment
      to Bylaws (2)4.1
              
              Series
      A Certificate of Designation (6)4.2
              
              Series
      B Certificate of Designation (7)4.3
              
              Form
      of Common Stock Certificate (3)4.4
              
              Form
      of Warrant (4)4.5
              
              Warrant
      issued to YA Global Investments, L.P. on February 6, 2008
    (4)4.6
              
              Form
      of Common Stock Purchase Warrant (5)4.7
              
              Form
      of Series A Preferred Stock Certificate (6)4.8
              
              Form
      of Series B Preferred Stock Certificate (7)4.9
              
              Warrant
      issued to Trendsetter Investors, LLC on June 12, 2007
  (8)4.10
              
              Form
      of Common Stock Purchase Warrant, dated December 2, 2009
    (19)4.11
              
              Form
      of Common Stock Purchase Warrant, dated April 20, 2009
  (20)10.1
              
              Hydrocarbon
      Production Sharing Contract (PSA) between SCS Corporation and the Republic
      of Guinea, Dated September 22, 2006 (9)10.2*
              
              Employment
      Agreement between Hyperdynamics and Jason D. Davis, dated June 17, 2009
      (10)10.3*
              
              Employment
      Agreement between Hyperdynamics and Ray Leonard, dated July 22, 2009
      (11)10.4*
              
              Amendment
      No. 1 to Employment Agreement between Hyperdynamics Corporation and Ray
      Leonard, dated December 11, 2009 (18)10.5
              
              Memorandum
      of Understanding between the Government of the Republic of Guinea and SCS
      Corporation, dated September 11, 2009 (English translation)
      (12)10.6
              
              Memorandum
      of Understanding between the Government of the Republic of Guinea and SCS
      Corporation, dated September 11, 2009 (original French version)
      (12)10.7
              
              Sale
      and Purchase Agreement between Hyperdynamics Corporation and Dana
      Petroleum (E&P) Limited, dated December 4, 2009
(13)10.8
              
              Letter
      Agreement between Hyperdynamics Corporation and Dana Petroleum (E&P)
      Limited, dated December 2, 2009 (14)10.9
              
              Lease
      Agreement between Hyperdynamics Corporation and Parkway Properties LP,
      dated December 29, 2009 (16)10.10
              
              Operating
      Agreement between SCS Corporation and Dana Petroleum (E&P) Limited,
      dated January 28, 2010 (17)10.11
              
              Amendment
      No. 1 to the Hydrocarbons Production Sharing Contract between SCS
      Corporation and the Republic of Guinea, dated March 26, 2010 (English
      translation) (18)
  36
  10.12
              
              Amendment
      No. 1 to the Hydrocarbons Production Sharing Contract between SCS
      Corporation and the Republic of Guinea, dated March 26, 2010 (French
      translation) (18)14.1
              
              Code
      of Ethics (1)16.1
              
              Letter
      from Malone & Bailey, P.C. regarding change in certifying accountant
      (13)21.1
              
              Subsidiaries
      (14)31.1**
              
              Certification
      of Chief Executive Officer of Hyperdynamics Corporation required by Rule
      13a-14(1) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231.2**
              
              Certification
      of Chief Financial Officer and Principal Accounting Officer of
      Hyperdynamics Corporation required by Rule 13a-14(1) or Rule 15d-14(a) of
      the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
      the Sarbanes-Oxley Act of 200232.1
              
              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 (21)32.2
              
              Certification
      of Chief Financial Officer and Principal Accounting Officer of
      Hyperdynamics Corporation pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002 and Section 1350 of 18 U.S.C. 63.
  (21)
  
 *
              
              Management
      contracts or compensatory plans or arrangements.**
              
              Filed
      herewith.(1)
              
              Incorporated
      by reference to our Form 10-KSB/A filed May 16, 2005.(2)
              
              Incorporated
      by reference to our Form 8-K filed March 9, 2009.(3)
              
              Incorporated
      by reference to our Form S-1 filed January 12, 2006, as
      amended.(4)
              
              Incorporated
      by reference to our Form 8-K filed February 8, 2008.(5)
              
              Incorporated
      by reference to our Form 8-K filed May 12, 2008.(6)
              
              Incorporated
      by reference to our Form SB-2 filed February 25, 2000.(7)
              
              Incorporated
      by reference to our Form 8-K filed June 15, 2001.(8)
              
              Incorporated
      by reference to our Form 8-K filed June 18, 2007.(9)
              
              Incorporated
      by reference to our Form 8-K filed September 28, 2006.(10)
              
              Incorporated
      by reference to Form 8-K filed July 6, 2009.(11)
              
              Incorporated
      by reference to Form 8-K filed July 23, 2009.(12)
              
              Incorporated
      by reference to Form 8-K filed September 15, 2009.(13)
              
              Incorporated
      by reference to Form 8-K/A, filed December 22, 2008.(14)
              
              Incorporated
      by reference to Form 8-K/A, filed December 7, 2009(15)
              
              Incorporated
      by reference to Form 8-K/A, dated December 11, 2009.(16)
              
              Incorporated
      by reference to Form 8-K/A, dated January 6, 2010.(17)
              
              Incorporated
      by reference to Form 8-K/A, dated January 29, 2010.(18)
              
              Incorporated
      by reference to Form 8-K/A, dated March 31, 2010.(19)
              
              Incorporated
      by reference to Form 8-K/A, dated December 3, 2009.(20)
              
              Incorporated
      by reference to Form 8-K/A, dated April 20, 2010.(21)
              
              Incorporated
      by reference to Form 10-K filed on September 30,
  2009.
  37
  Signatures
 
 Pursuant
to the requirements 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
  Hyperdynamics
      Corporation

                    (Registrant)Dated:
      May 17, 2010
                By:
                /s/ Ray LeonardRay
      LeonardChief
      Executive Officer
  Dated:
      May 17, 2010
                By:
                /s/ Jason DavisJason
      DavisChief
      Financial OfficerPrincipal
      Accounting Officer
  38
  Exhibit
Index
 
 Exhibit
                Number
              
              Description3.1.1
              
              Certificate
      of Incorporation (1)3.1.2
              
              Certificate
      of Amendment of Certificate of Incorporation, dated January 21, 1997
      (1)3.1.3
              
              Certificate
      of Amendment of Certificate of Incorporation, dated September 20, 1999
      (1)3.1.4
              
              Certificate
      of Amendment of Certificate of Incorporation, dated December 22, 2003
      (1)3.2
              
              By-laws
      (1)3.3
              
              Amendment
      to Bylaws (2)4.1
              
              Series
      A Certificate of Designation (6)4.2
              
              Series
      B Certificate of Designation (7)4.3
              
              Form
      of Common Stock Certificate (3)4.4
              
              Form
      of Warrant (4)4.5
              
              Warrant
      issued to YA Global Investments, L.P. on February 6, 2008
    (4)4.6
              
              Form
      of Common Stock Purchase Warrant (5)4.7
              
              Form
      of Series A Preferred Stock Certificate (6)4.8
              
              Form
      of Series B Preferred Stock Certificate (7)4.9
              
              Warrant
      issued to Trendsetter Investors, LLC on June 12, 2007
  (8)4.10
              
              Form
      of Common Stock Purchase Warrant, dated December 2, 2009
    (19)4.11
              
              Form
      of Common Stock Purchase Warrant, dated April 20, 2009
  (20)10.1
              
              Hydrocarbon
      Production Sharing Contract (PSA) between SCS Corporation and the Republic
      of Guinea, Dated September 22, 2006 (9)10.2*
              
              Employment
      Agreement between Hyperdynamics and Jason D. Davis, dated June 17, 2009
      (10)10.3*
              
              Employment
      Agreement between Hyperdynamics and Ray Leonard, dated July 22, 2009
      (11)10.4*
              
              Amendment
      No. 1 to Employment Agreement between Hyperdynamics Corporation and Ray
      Leonard, dated December 11, 2009 (18)10.5
              
              Memorandum
      of Understanding between the Government of the Republic of Guinea and SCS
      Corporation, dated September 11, 2009 (English translation)
      (12)10.6
              
              Memorandum
      of Understanding between the Government of the Republic of Guinea and SCS
      Corporation, dated September 11, 2009 (original French version)
      (12)10.7
              
              Sale
      and Purchase Agreement between Hyperdynamics Corporation and Dana
      Petroleum (E&P) Limited, dated December 4, 2009
(13)10.8
              
              Letter
      Agreement between Hyperdynamics Corporation and Dana Petroleum (E&P)
      Limited, dated December 2, 2009 (14)10.9
              
              Lease
      Agreement between Hyperdynamics Corporation and Parkway Properties LP,
      dated December 29, 2009 (16)10.10
              
              Operating
      Agreement between SCS Corporation and Dana Petroleum (E&P) Limited,
      dated January 28, 2010 (17)
  39
  10.11
              
              Amendment
      No. 1 to the Hydrocarbons Production Sharing Contract between SCS
      Corporation and the Republic of Guinea, dated March 26, 2010 (English
      translation) (18)10.12
              
              Amendment
      No. 1 to the Hydrocarbons Production Sharing Contract between SCS
      Corporation and the Republic of Guinea, dated March 26, 2010 (French
      translation) (18)14.1
              
              Code
      of Ethics (1)16.1
              
              Letter
      from Malone & Bailey, P.C. regarding change in certifying accountant
      (13)21.1
              
              Subsidiaries
      (14)31.1**
              
              Certification
      of Chief Executive Officer of Hyperdynamics Corporation required by Rule
      13a-14(1) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231.2**
              
              Certification
      of Chief Financial Officer and Principal Accounting Officer of
      Hyperdynamics Corporation required by Rule 13a-14(1) or Rule 15d-14(a) of
      the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
      the Sarbanes-Oxley Act of 200232.1
              
              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 (21)32.2
              
              Certification
      of Chief Financial Officer and Principal Accounting Officer of
      Hyperdynamics Corporation pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002 and Section 1350 of 18 U.S.C. 63.
  (21)
  
 *
              
              Management
      contracts or compensatory plans or arrangements.**
              
              Filed
      herewith.(1)
              
              Incorporated
      by reference to our Form 10-KSB/A filed May 16, 2005.(2)
              
              Incorporated
      by reference to our Form 8-K filed March 9, 2009.(3)
              
              Incorporated
      by reference to our Form S-1 filed January 12, 2006, as
      amended.(4)
              
              Incorporated
      by reference to our Form 8-K filed February 8, 2008.(5)
              
              Incorporated
      by reference to our Form 8-K filed May 12, 2008.(6)
              
              Incorporated
      by reference to our Form SB-2 filed February 25, 2000.(7)
              
              Incorporated
      by reference to our Form 8-K filed June 15, 2001.(8)
              
              Incorporated
      by reference to our Form 8-K filed June 18, 2007.(9)
              
              Incorporated
      by reference to our Form 8-K filed September 28, 2006.(10)
              
              Incorporated
      by reference to Form 8-K filed July 6, 2009.(11)
              
              Incorporated
      by reference to Form 8-K filed July 23, 2009.(12)
              
              Incorporated
      by reference to Form 8-K filed September 15, 2009.(13)
              
              Incorporated
      by reference to Form 8-K/A, filed December 22, 2008.(14)
              
              Incorporated
      by reference to Form 8-K/A, filed December 7, 2009(15)
              
              Incorporated
      by reference to Form 8-K/A, dated December 11, 2009.(16)
              
              Incorporated
      by reference to Form 8-K/A, dated January 6, 2010.(17)
              
              Incorporated
      by reference to Form 8-K/A, dated January 29, 2010.(18)
              
              Incorporated
      by reference to Form 8-K/A, dated March 31, 2010.(19)
              
              Incorporated
      by reference to Form 8-K/A, dated December 3, 2009.(20)
              
              Incorporated
      by reference to Form 8-K/A, dated April 20, 2010.(21)
              
              Incorporated
      by reference to Form 10-K filed on September 30,
  2009.




40