UNITED STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
DC 20549
 
 
 FORM
10-Q
 T
              Quarterly
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934: For the quarterly period ended December 31,
  2008
 
 or
 £
              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.)
 
 
 One Sugar
Creek Center Blvd., # 125
 Sugar
Land, Texas 77478
 
 (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   T    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
the definitions 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
              T
 Non-Accelerated
      Filer
              £
 Smaller
      Reporting Company
              £
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)   YES £   NO
T
 
 APPLICABLE
ONLY TO CORPORATE ISSUERS
 As of February 17,
2009,65,102,346*
shares of common stock, $0.001 par value, were outstanding.* (includes
2,500,000 shares of our common stock issued to a vendor as a deposit, but which
are not considered outstanding for accounting purposes)
  
 
  Table of Contents
 
 
 Part
      I. Financial InformationItem
      1.
                    Financial StatementsConsolidated Balance Sheets (unaudited) at December 31, 2008
      and June 30, 2008
                    2Consolidated Statements of Operations (unaudited) for the Three
      and  Six Months Ended December 31, 2008 and
    2007
                    3Consolidated Statements of Cash Flows (unaudited) for the Six
      Months Ended December 31, 2008 and 2007
                    4Notes to Consolidated Financial Statements
      (unaudited)
                    6Item
      2.
                    Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
                    15Item
      3.
                    Quantitative and Qualitative Disclosures about Market
      Risks
                    19Item
      4.
                    Controls and Procedures
                    20Part
      II. Other InformationItem
      1.
                    Legal Proceedings
                    21Item
      1A.
                    Risk Factors
                    21Item
      2.
                    Unregistered Sales of Equity Securities and Use of
      Proceeds
                    21Item
      6.
                    Exhibits
                    22Signatures
                    23
  Table of Contents
  HYPERDYNAMICS CORPORATION
 CONSOLIDATED
BALANCE SHEETS (Unaudited)
 (In
Thousands, Except Number of Shares and Per Share Amounts)
 (Unaudited)
 
 (Unaudited)December31,
                      
                      
                      June 30,2008
                      
                      
                      2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                      
                      $
                      776
                      
                      
                      $
                      1,480Trade
      accounts receivable
                      
                      
                      122
                      
                      
                      
                      396Prepaid
      expenses and other current assets
                      
                      
                      98
                      
                      
                      
                      151Assets
      held for sale
                      
                      
                      -
                      
                      
                      
                      31Total
      current assets
                      
                      
                      996
                      
                      
                      
                      2,058Property
      and equipment, net of accumulated depreciation of $311 and
      $240
                      
                      
                      343
                      
                      
                      
                      409Oil
      and gas properties:Evaluated
      properties, using full cost accounting, net of accumulated depreciation,
      depletion, amortization and impairment of $3,551 and $758
                      
                      
                      349
                      
                      
                      
                      3,157Unevaluated
      properties excluded from amortization
                      
                      
                      7,635
                      
                      
                      
                      7,314Other
      assets
                      
                      
                      11
                      
                      
                      
                      12Total
      assets
                      
                      $
                      9,334
                      
                      
                      $
                      12,950LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable and accrued expenses
                      
                      $
                      972
                      
                      
                      $
                      2,393Accounts
      payable - seismic data
                      
                      
                      650
                      
                      
                      
                      650Asset
      retirement obligation, current
                      
                      
                      30
                      
                      
                      
                      99Variable
      share issuance obligation
                      
                      
                      543
                      
                      
                      
                      -Dividends
      payable
                      
                      
                      372
                      
                      
                      
                      372Dividends
      payable to related party
                      
                      
                      392
                      
                      
                      
                      343Short-term
      notes payable and current portion of long term debt, net of discount
      of  $71 and $196
                      
                      
                      278
                      
                      
                      
                      401Total
      current liabilities
                      
                      
                      3,237
                      
                      
                      
                      4,258Long-term
      debt, net of discount of $570 and $206
                      
                      
                      1,802
                      
                      
                      
                      1,315Asset
      retirement obligation, non current
                      
                      
                      654
                      
                      
                      
                      631Deferred
      rent
                      
                      
                      64
                      
                      
                      
                      73Total
      liabilities
                      
                      
                      5,757
                      
                      
                      
                      6,277Commitments
      and contingenciesShareholders'
      equity:Convertible
      preferred stock, par value $0.001; stated value $1,000; 20,000,000
      authorizedSeries
      A – 3,000 shares issued and 1,945 shares issued and
      outstanding
                      
                      
                      -
                      
                      
                      
                      -Series
      B - 2,725 shares issued and 2,446 shares outstanding
                      
                      
                      -
                      
                      
                      
                      -Common
      stock, $0.001 par value, 250,000,000 shares authorized; 62,529,679 and
      59,339,481 shares issued and outstanding
                      
                      
                      63
                      
                      
                      
                      59Additional
      paid-in capital
                      
                      
                      71,288
                      
                      
                      
                      65,443Accumulated
      deficit
                      
                      
                      (67,774
                      )
                      
                      
                      (58,829
                      )Total
      shareholders' equity
                      
                      
                      3,577
                      
                      
                      
                      6,673Total
      liabilities and shareholders' equity
                      
                      $
                      9,334
                      
                      
                      $
                      12,950
 
 See
accompanying notes to consolidated financial statements
  2
 Table of Contents
  HYPERDYNAMICS CORPORATION
 CONSOLIDATED
STATEMENTS OF OPERATIONS (Unaudited)
 (In
Thousands, Except Number of Shares and Per Share Amounts)
 (Unaudited)
 
 Three Months Ended
      December 31,
                  
                  
                  Six Months Ended
      December 31,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Revenues:Oil
      and gas sales
                  
                  $
                  612
                  
                  
                  $
                  500
                  
                  
                  $
                  1,731
                  
                  
                  $
                  814Oilfield
      service revenues
                  
                  
                  -
                  
                  
                  
                  31
                  
                  
                  
                  -
                  
                  
                  
                  31Total
      revenues
                  
                  
                  612
                  
                  
                  
                  531
                  
                  
                  
                  1,731
                  
                  
                  
                  845Costs
      and expenses:Lease
      operating costs
                  
                  
                  386
                  
                  
                  
                  649
                  
                  
                  
                  820
                  
                  
                  
                  1,503Accretion
      expense
                  
                  
                  20
                  
                  
                  
                  5
                  
                  
                  
                  40
                  
                  
                  
                  10Depreciation,
      depletion and amortization
                  
                  
                  256
                  
                  
                  
                  113
                  
                  
                  
                  562
                  
                  
                  
                  248Impairment
      of evaluated oil and gas properties
                  
                  
                  2,303
                  
                  
                  
                  -
                  
                  
                  
                  2,303
                  
                  
                  
                  -Selling,
      general and administrative
                  
                  
                  1,998
                  
                  
                  
                  1,870
                  
                  
                  
                  4,295
                  
                  
                  
                  4,503Total
      costs and expenses
                  
                  
                  4,963
                  
                  
                  
                  2,637
                  
                  
                  
                  8,020
                  
                  
                  
                  6,264Loss
      from operations
                  
                  
                  (4,351
                  )
                  
                  
                  (2,106
                  )
                  
                  
                  (6,289
                  )
                  
                  
                  (5,419
                  )Other
      income (expense):Interest
      (expense) income, net
                  
                  
                  (2,022
                  )
                  
                  
                  10
                  
                  
                  
                  (2,221
                  )
                  
                  
                  46Gain
      (loss) on debt extinguishment
                  
                  
                  200
                  
                  
                  
                  -
                  
                  
                  
                  (435
                  )
                  
                  
                  10Total
      other income (expense)
                  
                  
                  (1,822
                  )
                  
                  
                  10
                  
                  
                  
                  (2,656
                  )
                  
                  
                  56Net
      loss
                  
                  
                  (6,173
                  )
                  
                  
                  (2,096
                  )
                  
                  
                  (8,945
                  )
                  
                  
                  (5,363
                  )Preferred
      stock dividend to related party
                  
                  
                  (24
                  )
                  
                  
                  (25
                  )
                  
                  
                  (49
                  )
                  
                  
                  (
      50
                  )Net
      loss attributable to common shareholders
                  
                  $
                  (6,197
                  )
                  
                  $
                  (2,121
                  )
                  
                  $
                  (8,994
                  )
                  
                  $
                  (5,413
                  )Basic
      and diluted loss per common share
                  
                  $
                  (0.10
                  )
                  
                  $
                  (0.04
                  )
                  
                  $
                  (0.15
                  )
                  
                  $
                  (0.10
                  )Weighted
      average shares outstanding  (basic and diluted)
                  
                  
                  61,114,189
                  
                  
                  
                  55,698,010
                  
                  
                  
                  60,405,417
                  
                  
                  
                  55,501,993
 
 See
accompanying notes to consolidated financial statements
  3
 Table of Contents
  HYPERDYNAMICS CORPORATION
 CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)
 (In
Thousands)
 (Unaudited)
 
 Six Months Ended
                    December 31,2008
                  
                  
                  2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                  
                  $
                  (8,945
                  )
                  
                  $
                  (5,363
                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation,
      depletion and amortization
                  
                  
                  562
                  
                  
                  
                  248Impairment
      of evaluated oil & gas properties
                  
                  
                  2,303
                  
                  
                  
                  -Accretion
      of asset retirement obligation
                  
                  
                  40
                  
                  
                  
                  10Common
      stock issued for services
                  
                  
                  896
                  
                  
                  
                  129Employee
      stock options
                  
                  
                  211
                  
                  
                  
                  920Variable
      share issuance obligation
                  
                  
                  543
                  
                  
                  
                  -(Gain)
      loss on debt extinguishment
                  
                  
                  435
                  
                  
                  
                  (10
                  )Bad
      debt expense
                  
                  
                  -
                  
                  
                  
                  4Interest
      accreted to debt principal
                  
                  
                  1,464
                  
                  
                  
                  -Gain
      on disposal of assets
                  
                  
                  (65
                  )
                  
                  
                  -Amortization
      of discount and financing costs on debt
                  
                  
                  550
                  
                  
                  
                  -Changes
      in operating assets and liabilities:Accounts
      receivable
                  
                  
                  274
                  
                  
                  
                  (115
                  )Other
      current assets
                  
                  
                  86
                  
                  
                  
                  31Accounts
      payable and accrued expenses
                  
                  
                  (1,232
                  )
                  
                  
                  120Deferred
      rent
                  
                  
                  (9
                  )
                  
                  
                  (8
                  )Net
      cash used in operating activities
                  
                  
                  (2,887
                  )
                  
                  
                  (4,034
                  )CASH
      FLOWS FROM INVESTING ACTIVITIESInvestment
      in oil and gas properties
                  
                  
                  (230
                  )
                  
                  
                  (1,755
                  )Purchase
      of property and equipment
                  
                  
                  (5
                  )
                  
                  
                  (108
                  )Proceeds
      from the sale of assets
                  
                  
                  96
                  
                  
                  
                  -Change
      in deposits
                  
                  
                  -
                  
                  
                  
                  (6
                  )Net
      cash used in investing activities
                  
                  
                  (139
                  )
                  
                  
                  (1,869
                  )CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from sale of common stock, net
                  
                  
                  -
                  
                  
                  
                  679Collection
      of stock subscription receivable
                  
                  
                  -
                  
                  
                  
                  5,250Proceeds
      from convertible debentures
                  
                  
                  5,000
                  
                  
                  
                  -Placement
      fees on convertible debentures
                  
                  
                  (300
                  )
                  
                  
                  -Financing
      costs deducted from convertible debentures
                  
                  
                  (30
                  )
                  
                  
                  -Prepayment
      penalty on notes payable
                  
                  
                  (271
                  )
                  
                  
                  -Proceeds
      from installment debt
                  
                  
                  -
                  
                  
                  
                  47Payments
      on notes payable
                  
                  
                  (2,000
                  )
                  
                  
                  -Payments
      on installment debt
                  
                  
                  (77
                  )
                  
                  
                  (349
                  )Net
      cash provided by financing activities
                  
                  
                  2,322
                  
                  
                  
                  5,627Net
      decrease  in cash
                  
                  
                  (704
                  )
                  
                  
                  (276
                  )Cash
      at beginning of period
                  
                  
                  1,480
                  
                  
                  
                  618Cash
      at end of period
                  
                  $
                  776
                  
                  
                  $
                  342
 
 See
accompanying notes to consolidated financial statements
  4
 Table of Contents
  HYPERDYNAMICS
CORPORATION
 CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited) (Continued)
 (In
Thousands)
 (Unaudited)
 
 Six months ended
                    December 31,2008
                  
                  
                  2007SUPPLEMENTAL
      DISCLOSURESInterest
      paid in cash
                  
                  $
                  471
                  
                  
                  $
                  5Income
      taxes paid in cash
                  
                  
                  -
                  
                  
                  
                  -NON-CASH
      INVESTING AND FINANCING TRANSACTIONSDeemed
      dividend attributable to repriced warrants issued with purchase of common
      stock
                  
                  $
                  29
                  
                  
                  $
                  153Accrued
      and unpaid preferred stock dividend to related party
                  
                  
                  49
                  
                  
                  
                  50Accounts
      payable for oil and gas properties
                  
                  
                  129
                  
                  
                  
                  59Conveyance
      of  asset retirement obligation
                  
                  
                  86
                  
                  
                  
                  -Note
      payable for assets
                  
                  
                  32
                  
                  
                  
                  30Stock
      payable for placement fee associated with sale of convertible
      debentures
                  
                  
                  103
                  
                  
                  
                  -Discount
      associated with beneficial conversion feature andwarrants
      issued with convertible debentures
                  
                  
                  2,372
                  
                  
                  
                  -Common
      stock issued for accounts payable
                  
                  
                  173
                  
                  
                  
                  234Common
      stock issued for investment  in oil and gas
      properties
                  
                  
                  34
                  
                  
                  
                  285Fair
      value of warrant repricing associated with debt
    modification
                  
                  
                  106Conversion
      of debt into common stock
                  
                  
                  3,817
                  
                  
                  
                  -Accelerated
      discount associated with debt conversion
                  
                  
                  1,814
                  
                  
                  
                  -
 
 See
accompanying notes to consolidated financial statements
  5
 Table of Contents
  HYPERDYNAMICS CORPORATION
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
 1.  Basis
of Presentation
 
 The
unaudited consolidated financial statements of Hyperdynamics Corporation
("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  for the
year ended June 30, 2008. 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, 2008, as reported in the Form 10-K, have been
omitted.
 
 Certain
amounts in the 2008 financial statements have been reclassified to conform with
the 2009 financial statement presentation.
 
 New
Accounting Pronouncements
 
 We are
evaluating the effect that the adoption of recently issued accounting
pronouncements will have on our results of operations, financial position, or
cash flow.
 
 2.
Going Concern
 
 The
accompanying financial statements have been prepared assuming Hyperdynamics will
continue as a going concern.  Hyperdynamics has incurred losses since
inception, resulting in cumulative losses of $67,774,000 through December 31,
2008. The Company has historically been able to raise capital as planned to
progress the exploration of its most significant oil and gas asset offshore West
Africa, and to slowly develop its producing assets in Louisiana. The world
economic crisis has injected more uncertainty into the picture and the related
depressed price for oil has seriously weakened the Company’s production revenues
and limited its options for continuing to raise new capital. These combined
conditions raise substantial doubt about Hyperdynamics’ ability to continue as a
going concern. Hyperdynamics’ future is dependent upon its ability to obtain
proceeds from the sale or monetization of some of its oil and gas exploration
assets, to obtain continued equity or debt financing, and ultimately upon
developing future profitable operations from the development of its oil and gas
properties.  Management plans remain focused on obtaining well
capitalized joint venture partners to help the company monetize a portion of
offshore exploration asset.  Management is also working diligently on
the possibility to sell some or all of its producing assets in Louisiana, and
finally on evaluating  how it can raise additional capital to further
its business operations.  The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
 
 3.
Oil and Gas Properties
 
 Evaluated
properties
 
 Additions
to the full cost center during the six months ended December 31, 2008 included
exploratory drilling costs of $60,000, lease acquisition costs of $6,000 and
development costs of $6,000. As of December 31, 2008, we had capitalized
$2,652,000 in oil and gas properties, which is net of depletion of $1,248,000
and is subject to the full cost ceiling test for impairment.  At
December 31, 2008, based on the ceiling test, an impairment of $ 2,303,000 was
indicated, and the net value of the properties after impairment and depletion
was $349,000.
 
 During
July 2008, Hyperdynamics assigned 15% of its working interest in its Magee-smith
leases to Rabb Resources (“Rabb”), who became the operator of the
wells.  In return for the working interest assignment, Hyperdynamics
received a $1,600,000 credit from Rabb toward the $4,000,000 Promised Funds
commitment related to certain oil and gas properties acquired from Rabb in July
2007.  Hyperdynamics has fully satisfied the Promised Fund
commitment.  No gain or loss was recognized for this transaction in
accordance with full cost rules.
 
 During
July 2008, Hyperdynamics assigned 100% of its working interest in the Kelly and
Norris leases  to a third party buyer.  There were no proved
reserves assigned to these properties.  The buyer assumed the asset
retirement obligation associated with these properties, $86,000, in connection
with the transaction.  No gain or loss was recognized for this
transaction in accordance with full cost rules.
 
 The sales
proceeds will be collected from a 10% overriding royalty interest retained by
Hyperdynamics in the Kelly and Norris leases.  If the buyer does not
produce revenues from these properties, they are not required to pay the
purchase price.  Accordingly, we did not recognize a receivable from
the sale of the working interest.  We will recognize revenues, if any,
when they occur.
  6
 Table of Contents
  Unevaluated
properties
 
 We
incurred $321,000 of geological and geophysical costs for our Guinea concession
during the six months ended December 31, 2008.  The costs were
incurred as follows: payroll and consulting costs directly associated with
geophysical and geological evaluation of our Guinea concession of $132,000;
costs associated with our 2008 seismic shoot of $54,000; costs associated with
geological study of $78,000; professional expenses of $43,000 and geophysical
and geological software for $14,000.
 
 4.
Asset Retirement Obligations
 
 The
following is a reconciliation of our asset retirement obligation
liability:
 
 Asset
      retirement obligation, June 30, 2008
                    
                    $
                    730,000Liabilities
      sold
                    
                    
                    (86,000
                    )Accretion
      of discount
                    
                    
                    40,000Asset
      retirement obligation, December 31, 2008
                    
                    $
                    684,000
 
 
 5.  Short-term
notes payable and long-term debt
 
 Short-term
notes payable and long-term debt consist of:
 
 
 December 31, 2008
                      
                      
                      June 30, 2008Installment
      notes payable
                      
                      $
                      73,000
                      
                      
                      $
                      118,000YA
      GlobalGross
                      
                      
                      -
                      
                      
                      
                      2,000,000Unamortized
      discount
                      
                      
                      -
                      
                      
                      
                      (402,000
                      )Net
                      
                      
                      -
                      
                      
                      
                      1,598,000Convertible
      debenturesGross
                      
                      
                      2,648,000Unamortized
      discount
                      
                      
                      (641,000
                      )
                      
                      
                      -Net
                      
                      
                      2,007,000
                      
                      
                      
                      -Total
      short term notes payable and long term debt
                      
                      
                      2,080,000
                      
                      
                      
                      1,716,000Less:
      current portion
                      
                      
                      (278,000
                      )
                      
                      
                      (401,000
                      )Carrying
      value of notes as of December 31, 2008
                      
                      $
                      1,802,000
                      
                      
                      $
                      1,315,000
 
 Installment
notes payable
 
 In
addition to installment notes payable as of June 30, 2008, during the six months
ended December 31, 2008, Hyperdynamics financed three insurance policies for an
aggregate amount of $32,000. Hyperdynamics is obligated to pay installments of
principal and interest of approximately $14,000 per month.
 
 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.
 
 The notes
carried an annual interest rate equal to 20% and mature on July 6, 2010. The
notes provided for monthly principal installments of $50,000 beginning on
September 1, 2008 and monthly interest installments. The notes were redeemable
at our option at an earlier date provided we paid an “early redemption premium”
of 15% of the principal amount being redeemed.
 
 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.
  7
 Table of Contents
  Sale
of 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, with $300,000 payable in
cash and $103,000 payable with 66,000 shares of Hyperdynamics common stock, and
the lender received $30,000 for legal costs.  This resulted 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.
 
 Hyperdynamics
has evaluated the warrants for derivative accounting consideration under SFAS
133 and EITF 00-19. We have concluded that the warrants meet the criteria for
classification in stockholders' equity under SFAS 133 and EITF 00-19. Therefore,
derivative accounting is not applicable for the warrants.
 
 Hyperdynamics
analyzed the convertible debentures for derivative accounting consideration
under SFAS 133 and EITF 00-19. Hyperdynamics determined the conversion feature
met the criteria for classification in stockholders' equity under SFAS 133 and
EITF 00-19. Therefore, derivative accounting is not applicable for the
convertible instruments.
 
 The fair
value of the investment was allocated among the debentures and warrants as
follows:
 
 Relative
      fair value of $2.75 warrant
                    
                    $
                    947,000Relative
      fair value of $3.00 warrant
                    
                    
                    939,000Relative
      fair value of note payable
                    
                    
                    3,114,000
 
 The fair
value of the warrant was calculated using the Black-Scholes method, assuming
volatility of 113%, expected term of 7 years, and a risk adjusted interest rate
of 3.45%.
 
 We
analyzed the convertible debentures for the existence of a beneficial conversion
feature under EITF 98-5 and 00-27.  The intrinsic value of the
beneficial conversion feature was $486,000.
 
 The
relative fair value of the warrants, the intrinsic value of the beneficial
conversion feature, and $30,000 of financing costs were recorded as a discount
to the notes. Deferred financing costs consisting of cash and stock payments to
the placement agent for the transaction totaled $403,000.  These
discounts and deferred financing costs, totaling $2,805,000, were amortized and
were to be charged to interest expense over the life of the notes using the
effective interest rate method. The effective interest rate on the notes,
including the discount, was 62% per annum.
 
 The
debentures carried an annual interest rate equal to 10% with a maturity date of
September 12, 2012. The notes were to be repaid in monthly installments of
$139,000 beginning September 12, 2009.  Interest installments were
also to  be paid quarterly on the outstanding balance. Interest
installments commenced on October 1, 2008. At Hyperdynamics’ option, the notes
could be  redeemed within 120 days of the closing date, September 12,
2008, and payment of an “early redemption premium” of 10% of the principal
amount being redeemed.   After 120 days, the investor was to be
paid  a “make-whole” payment with each conversion or redemption of 40%
of the principal less interest previously
paid.    Hyperdynamics had the option to pay, if certain
conditions were met, the principal installments, interest payments, and
make-whole payments using Hyperdynamics common stock using a formula based on
current market prices of the stock.
 
 The
investors in the convertible debentures previously received 2,424,243 warrants
to purchase common stock with an exercise price of $3.27 per share as part of a
registered direct offering of our common stock completed in May
2008.  The provisions of the warrants include a reduction in the
exercise price in the event stock or convertible securities were issued with a
lower exercise price. By agreement with the investors, the exercise price of the
warrants was reduced from $3.27 to $3.00. The modification resulted in a deemed
dividend to the warrant holders of $29,000.
 
 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 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 “Accreted
Payments”). Any Accreted Payments will increase the Monthly Redemption Amount
(as such term is defined in the Debenture), accrue only ordinary interest of 10%
per annum and, upon conversion or redemption, will not be subject to any further
make-whole interest payable due pursuant to the Debenture.
  8
 Table of Contents
  The
investors also agreed, until the earlier of January 12, 2009 or such time that
the trading price of our common stock exceeds $2 per share, not to convert more
than $3,300,000 principal amount of the Debentures in the
aggregate.
 
 Hyperdynamics
analyzed the transaction based on EITF 96-19 and concluded that the amendment
resulted in a substantial modification of terms of the
debt.  Accordingly, Hyperdynamics recognized the amendment as an
extinguishment of debt 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. Gain on extinguishment of $56,000 from the transaction was computed
as follows:
 
 Carrying value of the debentures
immediately prior to modification:
 
 Face
      value of debentures issued on September 12, 2008
                    
                    $
                    5,000,000Less:
                    Discount
      related to warrants
                    
                    
                    (1,886,000
                    )Discount
      related to conversion feature
                    
                    
                    (486,000
                    )Discount
      related to financing costs
                    
                    
                    (30,000
                    )Subtotal
                    
                    
                    2,598,000Less:
                    Conversions
                    
                    
                    (563,000
                    )Add:
                    Amortization
      of discount
                    
                    
                    422,000Carrying
      value of debentures at November 20, 2008
                    
                    $
                    2,457,000
 
 Gain
on debt extinguishment:
 Fair
      value of debenture principal on the date of modification
                    
                    $
                    1,963,000Repriced
      May 2008 warrants
                    
                    
                    31,000Repriced
      September 2008 warrants
                    
                    
                    75,000Fair
      value of assets given
                    
                    
                    2,069,000Less:
                    Carrying
      value of debt prior to modification
                    
                    
                    (2,457,000
                    )Unamortized
      deferred financing charge
                    
                    
                    332,000Gain
      on debt extinguishment
                    
                    $
                    (56,000
                    )
 
 
 As a
consequence of the extinguishment, the post modification debt is recorded at its
fair value and the resulting discount is amortized as interest expense over the
term of the debentures.  At November 20, 2008, the discount of the
post modification debt was $2,474,000, which represents the difference between
the stated principal of $4,438,000 and the fair value of the post modification
debt and the fair value of warrants that were repriced in conjunction with the
debt modification.  The post modification debt has an effective
interest rate of 29% per annum.  The fair value of the post
modification debt was determined based upon the value of the conversion feature
in the debentures using the Company’s stock price on November 20, 2008 of $0.73
per share.
 
 The fair
value of the warrant repricings associated with the modification were computed
as follows:
 
 The price
of the warrants, originally issued in May 2008, was reduced from $3.00 to
$2.00.  The modification resulted in a fair value of $31,000, which
was calculated using the Black-Scholes method. The following table details the
significant assumptions used to compute the fair market value of the
modification to these warrants:
 
 Before
                        
                        
                        AfterRisk-free
      interest rate
                        
                        
                        2.43
                        %
                        
                        
                        2.43
                        %Dividend
      yield
                        
                        
                        0
                        %
                        
                        
                        0
                        %Volatility
      factor
                        
                        
                        111.62
                        %
                        
                        
                        111.62
                        %Remaining
      term (years)
                        
                        
                        6.47
                        
                        
                        
                        6.47
  9
 Table of Contents
  The price
of the warrants, originally issued in September 2008, was reduced from $2.75 and
$3.00 to $2.25 and $2.50, respectively. The modification resulted in a fair
value of $75,000, which was calculated using the Black-Scholes method. The
following table details the significant assumptions used to compute the fair
market value of the warrant modification:
 
 Before
                        
                        
                        AfterRisk-free
      interest rate
                        
                        
                        2.43
                        %
                        
                        
                        2.43
                        %Dividend
      yield
                        
                        
                        0
                        %
                        
                        
                        0
                        %Volatility
      factor
                        
                        
                        112.32
                        %
                        
                        
                        112.32
                        %Remaining
      term (years)
                        
                        
                        6.78
                        
                        
                        
                        6.78
 
 
 The total
fair value of the warrant modifications discussed above of $106,000 is included
in the discount on the post modification debt, with the offsetting credit
recorded as additional paid in capital.
 
 In
conjunction with the extinguishment, the
investor  converted  $3,254,000 of debenture principal into
Hyperdynamics’ common stock,  resulting in issuance of 1,972,222
shares of common stock.  Voluntary conversion make whole interest
which was due and payable as of  November 20, 2008
of  $1,416,000, was accreted to the debenture principal. This includes
the amount outstanding prior to the extinguishment of $133,000 and the amount
that became due upon the conversion in the amendment agreement, which totaled
$1,283,000. Additionally, interest due on the debentures at December 31, 2008 of
$48,000 was  accreted to principal.
 
 The
accelerated discount relating to the converted debentures of $1,814,000 was
immediately recognized as a reduction of additional paid in capital. The
amortization of discount through December 31, 2008 was $19,000.
 
 The
following table details the change in the carrying value of the debentures from
November 20, 2008 through December 31, 2008:
 
 Principal
                    
                    
                    Discount
                    
                    
                    NetAt
      November 20, 2008
                    
                    $
                    4,438,000
                    
                    
                    $
                    (2,474,000
                    )
                    
                    $
                    1,964,000Interest
      accreted to principal
                    
                    
                    1,464,000
                    
                    
                    
                    -
                    
                    
                    
                    1,464,000Debenture
      conversion
                    
                    
                    (3,254,000
                    )
                    
                    
                    1,814,000
                    
                    
                    
                    (1,440,000
                    )Amortization
      of discount
                    
                    
                    -
                    
                    
                    
                    19,000
                    
                    
                    
                    19,000At
      December 31, 2008
                    
                    $
                    2,648,000
                    
                    
                    $
                    (641,000
                    )
                    
                    $
                    2,007,000
 
 The
changes to the principal on this debt changed the monthly redemption
amount.  As of December 31, 2008, the monthly redemption amount, the
first payment of which is due on September 12, 2009, is $74,000.
 
 Future
minimum debt payments
 
 Future
minimum debt payments on installment debts and debentures for the twelve months
ending December 31:
 
 2009
                    
                    $
                    349,0002010
                    
                    
                    962,0002011
                    
                    
                    889,0002012
                    
                    
                    521,000Total
      minimum payments required
                    
                    $
                    2,721,000
 
 6.
Shareholders’ Equity
 
 Stock
issuances
 
 Fiscal
year 2009
 
 During
the six months ended December 31, 2008, Hyperdynamics issued  792,137
shares of common stock from its stock and stock option plan for services valued
at $930,000. Services were valued using the market close price on the date of
grant.
 
 During
the six months ended December 31, 2008, Hyperdynamics issued 109,839 shares of
common stock valued at $173,000 from its  stock and stock option plan
for services which had been rendered  and accrued during the year
ending June 30, 2008. The stock was valued using the market closing price on the
date of grant.
  10
 Table of Contents
  During
the six months ended December 31, 2008, Hyperdynamics issued 66,000 shares of
common stock associated with placement costs for a convertible debenture of
$103,000.
 
 During
the three months ended December 31, 2008, Hyperdynamics issued 250,000 shares of
common stock associated with the conversion of  $563,000 principal of
debentures at $2.25 per share.
 
 During
the three months ended December 31, 2008, Hyperdynamics issued 1,972,222 shares
of common stock associated with the conversion of  $3,254,000
principal of debentures at $1.65 per share.
 
 Fiscal
year 2008
 
 During
the six months ended December 31, 2007, Hyperdynamics issued 106,323 shares of
common stock from its stock and stock option plan for services valued at
$269,000.  Services were valued using the market close price on date
of grant.
 
 During
the six months ended December 31, 2007, Hyperdynamics issued 30,000 shares of
common stock valued at $95,000 from its stock and stock option plan for services
which had been rendered and accrued during the year ending June 30,
2007.  The stock was valued using the market closing price on the date
of grant.
 
 During
the six months ended December 31, 2007, Hypderdynamics issued  738,251
shares of common stock upon the cashless exercise by two officers of our Company
of warrants, with a strike price of $0.23, to purchase 800,000 shares of common
stock.  Hyperdynamics also issued 119,389 shares of common stock upon
the cashless exercise by an investor of warrants, with a strike price of $0.50,
to purchase 142,000 shares of common stock.
 
 During
the six months ended December 31, 2007, Hyperdynamics issued 544,000 shares of
common stock for gross cash proceeds of $544,000 pursuant to the exercise of
warrants with a strike price of $1.00 per share.
 
 During
the six months ended December 31, 2007, Hyperdynamics issued 48,160 shares of
common stock for gross cash proceeds of $135,000 pursuant to the exercise by the
Company of a put option on our Dutchess equity line of credit.
 
 During
the six months ended December 31, 2007, Hyperdynamics issued 100,000 shares of
common stock with a value of $285,000 in connection with the acquisition of the
RABB oil and gas properties in Louisiana.  The shares were valued at
the closing price on date of grant.
 
 Discount
on convertible debentures
 
 In
September 2008, in conjunction with the sale of convertible debentures, we
issued 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.
The discount on the debt associated with the relative fair values of the
warrants of $1,886,000 and the beneficial conversion feature of $486,000 were
recorded as an addition to paid in capital.  These warrants were
subsequently repriced in November  2008 (See Note 5).
 
 Employee
stock options
 
 During
the six months ended December 31, 2008, we recognized aggregate compensation
expense associated with vesting of employee stock options of $211,000.
The fair value of the options grants was determined using the Black-Scholes
method. (See Note 8)
 
 Other
items relating to equity
 
 In July
2008, Hyperdynamics entered into a contract for 3-D seismic work offshore
Guinea. The contract is open as to scope of work and provides the price for
various activities associated with the work. We will finalize the scope of
work when we determine the offshore area to be covered by the seismic shoot. We
estimate the cost of the 3-D seismic work to be approximately $15,000,000 but
the cost could increase to as high as an estimated $45,000,000 based on options
we have to expand the scope of work. The contract provides for
Hyperdynamics to issue 2,500,000 shares of common stock to the vendor as a
deposit. The value ascribed to the stock by the parties in the contract is $6.00
per share. The 2,500,000 shares were issued during August 2008 and delivered to
the vendor during October 2008. The contract provides that the stock may be sold
to pay invoices after the seismic work begins. Any proceeds from the sale
of this stock may be applied by the direction of us to any legitimate
outstanding invoices. Should we elect to pay cash for the seismic work any
remaining unsold stock will be returned to us. We may replace the stock
deposit with a cash deposit at the rate of $6 per share at any time and have the
stock returned prior to it being sold.  As of December 31, 2008, work
had not commenced on this project.  Because there is no performance
commitment as of the date of this report, there is no accounting recognition of
the stock issued during the six months ended December 31, 2008, in accordance
with EITF 00-18 governing share-based payment to non-employees.  As a
result, these shares are not shown as issued in the accompanying financial
statements.
  11
 Table of Contents
  In July
2008, we entered an agreement with an international law firm to support our 2006
PSC. The agreement estimates the value of their work to be provided from
July 2008 through March 2009 at $630,000. During July 2008, we issued
350,000 shares of common stock valued at the market price on the stock grant
date of $543,000 as a payment on the new engagement and for approximately
$132,000 of fees that had been incurred in the past. We charged $411,000 of
compensation costs associated with this stock grant to expense in the quarter
ended September 30, 2008.  The contract provides for a “true-up” six
months after the date the shares were issued.  Under the provision,
the firm will receive additional shares if the market value of the stock has
declined in value, such that the total market value of the stock received
at the true up date will be $700,000. The true up provision constitutes an
obligation to issue a variable number of shares based upon a fixed monetary
value; accordingly, the provisions of SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity, apply to
the stock grant.  If the true up were to occur on December 31, 2008,
Hyperdynamics would issue an additional 1,205,000 shares under the terms of the
agreement based upon the total scope of work in the agreement. We recorded
additional expense of $543,000 during the three month period ended December 31,
2008, which is included in selling, general and administrative expense and is
reflected on the balance sheet as Variable share issuance
obligation.  The value of the obligation was
calculated  based on the market price of our common stock on December
31, 2008. The agreement does not specify a cap on the number of shares that may
be issued.
 
 The
contract provides for bonuses of an additional 350,000 shares of common stock
upon the achievement of certain performance criteria.
 
 7.
Warrant repricings
 
 In
addition to the warrant repricings discussed above in Note 5, in September 2008,
the Company modified the terms of certain warrants to purchase common stock
issued during May 2008 as a result of warrants issued to the same investor in
conjunction with sale of convertible debentures.    The
price of the warrants was reduced from $3.27 to $3.00.  The
modification resulted in a deemed dividend of $29,000, which was calculated
using the Black-Scholes method. The following table details the significant
assumptions used to compute the fair market value of the modification to these
warrants:
 
 Before
                        
                        
                        AfterRisk-free
      interest rate
                        
                        
                        3.45
                        %
                        
                        
                        3.45
                        %Dividend
      yield
                        
                        
                        0
                        %
                        
                        
                        0
                        %Volatility
      factor
                        
                        
                        111.88
                        %
                        
                        
                        111.88
                        %Remaining
      term (years)
                        
                        
                        6.7
                        
                        
                        
                        6.7
 
 
 8.
Stock Options and Warrants
 
 Options
granted to employees
 
 During
the six months ended December 31, 2008, Hyperdynamics granted 385,000 options to
employees.   The options had exercise prices ranging from $0.45
to $2.00, exercise term of two to  three years with immediate vesting
and a fair value on the date of grant totaling $168,000.  The weighted
average fair value of the employee stock options granted during the
six  months ended December 31, 2008 was $1.56.
 
 During
the six months ended December 31, 2008, Hyperdynamics recognized $43,000
compensation cost from an option award that had been granted in a prior
year.  Accordingly, the aggregate compensation cost recognized for
options vested during the six months ended December 31, 2008 was
$211,000.  At December 31, 2008, there was $62,000 of unrecognized
compensation costs related to non-vested share-based compensation arrangements
granted under our stock and stock option plan.
 
 The
following table details the significant assumptions used in the Black-Scholes
model to compute the fair market values of employee stock options granted during
the six months ended December 31, 2008:
 
 Risk-free
      interest rate
                    
                    
                    0.76
      – 2.63
                    %Dividend
      yield
                    
                    
                    0
                    %Volatility
      factor
                    
                    
                    86.91
      – 118.02
                    %Expected
      life (years)
                    
                    
                    1 -
      1.5
  12
 Table of Contents
  Expected
volatility is based solely on historical volatility of our common stock over the
period commensurate with the expected term of the stock options.  We
rely solely on historical volatility as we do not have traded
options.  The expected term calculation for stock options is based on
the simplified method as described in the Securities and Exchange Commission
Staff Accounting Bulletin number 107.  We use this method because we
do not have sufficient historical information on exercise patterns to develop a
model for expected term.  The risk-free interest rate is based on the
U. S. Treasury yield in effect at the time of grant for an instrument with a
maturity that is commensurate with the expected term of the stock
options.  The dividend yield rate of zero is based on the fact that we
have never paid cash dividends on our common stock and we do not intend to pay
cash dividends on our common stock.
 
 The
      following table summarizes employee stock options issued and outstanding
      for the six months ended December 31, 2008:
                        
                        Options
                        
                        
                        Weighted average exercise
    priceOutstanding
      at year end June 30, 2008
                        
                        
                        2,238,696
                        
                        
                        
                        3.45Granted
                        
                        
                        385,000
                        
                        
                        
                        1.56Exercised
                        
                        
                        -
                        
                        
                        
                        -Forfeited
                        
                        
                        (32,857
                        )
                        
                        
                        2.09Expired
                        
                        
                        (440,000
                        )
                        
                        
                        1.26Outstanding
      at December 31, 2008
                        
                        
                        2,150,839
                        
                        
                        $
                        3.58
 
 
 Options
outstanding and exercisable as of December 31, 2008:
 
 Exercise Price
                                      
                                      Outstanding Number of
Shares
                                      
                                      Remaining  Life
                                      
                                      Exercisable  Number of
      SharesLess
      than $1
                                      
                                      45,000
                                      
                                      2 -
      3 years
                                      
                                      45,000$1.00
      - 1.49
                                      
                                      97,500
                                      
                                      1 -
      2 years
                                      
                                      97,500$1.00
      - 1.49
                                      
                                      115,000
                                      
                                      2 -
      3 years
                                      
                                      115,000$1.50
      - 1.99
                                      
                                      40,000
                                      
                                      1
      year or less
                                      
                                      40,000$1.50
      - 1.99
                                      
                                      120,000
                                      
                                      1 -
      2 years
                                      
                                      120,000$1.50
      - 1.99
                                      
                                      45,000
                                      
                                      2 -
      3 years
                                      
                                      45,000$2.00
      - 2.49
                                      
                                      258,447
                                      
                                      1
      year or less
                                      
                                      258,447$2.00
      – 2.49
                                      
                                      140,000
                                      
                                      1 -
      2 years
                                      
                                      140,000$2.00
      - 2.49
                                      
                                      310,000
                                      
                                      2 -
      3 years
                                      
                                      310,000$2.50
      - 2.99
                                      
                                      105,000
                                      
                                      1
      year or less
                                      
                                      105,000$2.50
      – 2.99
                                      
                                      169,892
                                      
                                      1 -
      2 years
                                      
                                      169,892$3.00
      – 3.50
                                      
                                      40,000
                                      
                                      1
      year or less
                                      
                                      40,000$3.00
      – 3.50
                                      
                                      65,000
                                      
                                      1 -
      2 years
                                      
                                      65,000$5.00
                                      
                                      300,000
                                      
                                      2 -
      3 years
                                      
                                      -$10.00
                                      
                                      300,000
                                      
                                      2 -
      3 years
                                      
                                      -2,150,839
                                      
                                      
                                      
                                      1,550,839
 
 The
exercisable options had no intrinsic value at December 31, 2008.
 
 The
following table summarizes common stock warrants issued and outstanding for the
six months ended December 31, 2008:
 
 Warrants
                              
                              
                              Weighted average exercise
    priceOutstanding
      at year June 30, 2008
                              
                              
                              11,717,692
                              
                              
                              
                              2.54Granted
                              
                              
                              9,292,930
                              
                              
                              
                              2.56Exercised
                              
                              
                              -
                              
                              
                              
                              -Cancelled
                              
                              
                              (7,070,708
                              )
                              
                              
                              3.05Expired
                              
                              
                              (453,383
                              )
                              
                              
                              1.88Outstanding
      at December 31, 2008
                              
                              
                              13,486,531
                              
                              
                              $
                              2.30
  13
 Table of Contents
  Warrants
outstanding and exercisable as of December 31, 2008:
 
 Exercise Price
                                  
                                  Outstanding Number  of
      Shares
                                  
                                  Remaining Life
                                  
                                  Exercisable  Number of
      Shares$1.65
                                  
                                  666,666
                                  
                                  5
      years
                                  
                                  666,666$1.65
                                  
                                  3,480,000
                                  
                                  6
      years
                                  
                                  3,480,000$2.00
                                  
                                  2,424,243
                                  
                                  6
      years
                                  
                                  2,424,243$2.25
                                  
                                  1,111,111
                                  
                                  7
      years
                                  
                                  1,111,111$2.50
                                  
                                  3,143,400
                                  
                                  1
      year or less
                                  
                                  3,143,400$2.50
                                  
                                  1,111,111
                                  
                                  7
      years
                                  
                                  1,111,111$4.00
                                  
                                  1,500,000
                                  
                                  6
      years
                                  
                                  1,500,000$5.00
                                  
                                  50,000
                                  
                                  3
      years
                                  
                                  -13,486,531
                                  
                                  
                                  
                                  13,436,531
 
 At
December 31, 2008, there was $28,000 of unrecognized compensation expense
associated with the outstanding warrants.  The exercisable warrants
had no intrinsic value at December 31, 2008.
 
 9.
Cost Reimbursement
 
 In July
2007, Hyperdynamics received $130,000 as a reimbursement of legal costs incurred
during fiscal 2006 and 2007 in a lawsuit with Trendsetter Investors
LLC.  The reimbursement was recorded as a reduction of legal costs
relating to three months ended September 30, 2007 and it is included in selling,
general and administrative expense.
 
 10.
Subsequent Events
 
 During
January 2009, we granted 162,500 options to employees and directors in
accordance with their compensation packages. The fair value of options was
$16,000 based upon the Black-Scholes valuation model.
 
 During
January 2009, Hyperdynamics issued 72,667 shares of common stock for services
valued using the market close price on the date of grant at
$42,000.
 
 11.
Segment Information
 
 Reportable
segments
 
 Hyperdynamics
has two reportable segments: SCS Corporation ("SCS") and our domestic Louisiana
operations ("HYDR"). SCS is engaged in oil and gas exploration activities
pertaining to offshore Guinea, West Africa. HYDR is engaged in oil and gas
exploration, development, and production activities in Louisiana, USA.
Hyperdynamics evaluates performance based on profit or loss from operations. The
reportable segments are managed by separate management teams who are evaluated
based on their segment’s performance.
  14
 Table of Contents
  The
following tables summarize certain balance sheet data as of December 31, 2008
and June 30, 2008 and income statement data about Hyperdynamics' reportable
segments and corporate overhead for the three and six months ended December 31,
2008 and 2007:
 
 SCS
                  
                  
                  HYDR
                  
                  
                  Corporate
                  
                  
                  TotalSegment
      assetsAs
      of December 31, 2008
                  
                  $
                  7,845,000
                  
                  
                  $
                  1,239,000
                  
                  
                  $
                  250,000
                  
                  
                  $
                  9,334,000As
      of June 30, 2008
                  
                  
                  7,590,000
                  
                  
                  
                  3,774,000
                  
                  
                  
                  1,586,000
                  
                  
                  
                  12,950,000Six
      months ended December 31, 2008:Revenues
      from external customers
                  
                  
                  -
                  
                  
                  
                  1,731,000
                  
                  
                  
                  -
                  
                  
                  
                  1,731,000Depreciation,
      depletion and amortization
                  
                  
                  49,000
                  
                  
                  
                  495,000
                  
                  
                  
                  18,000
                  
                  
                  
                  562,000Loss
      from operations (2)
                  
                  
                  (2,970,000
                  )
                  
                  
                  (1,995,000
                  )
                  
                  
                  (1,324,000
                  )
                  
                  
                  (6,289,000
                  )Expenditures
      for long-lived assets (1)
                  
                  
                  326,000
                  
                  
                  
                  72,000
                  
                  
                  
                  -
                  
                  
                  
                  398,000Three
      months ended December 31, 2008:Revenues
      from external customers
                  
                  
                  -
                  
                  
                  
                  612,000
                  
                  
                  
                  -
                  
                  
                  
                  612,000Depreciation,
      depletion and amortization
                  
                  
                  25,000
                  
                  
                  
                  222,000
                  
                  
                  
                  9,000
                  
                  
                  
                  256,000Loss
      from operations (2)
                  
                  
                  (1,437,000
                  )
                  
                  
                  (2,276,000
                  )
                  
                  
                  (638,000
                  )
                  
                  
                  (4,351,000
                  )Expenditures
      for long-lived assets (1)
                  
                  
                  215,000
                  
                  
                  
                  56,000
                  
                  
                  
                  -
                  
                  
                  
                  271,000Six
      months ended December 31, 2007:Revenues
      from external customers
                  
                  
                  -
                  
                  
                  
                  845,000
                  
                  
                  
                  -
                  
                  
                  
                  845,000Depreciation,
      depletion and amortization
                  
                  
                  35,000
                  
                  
                  
                  193,000
                  
                  
                  
                  20,000
                  
                  
                  
                  248,000Loss
      from operations
                  
                  
                  (2,198,000
                  )
                  
                  
                  (1,171,000
                  )
                  
                  
                  (2,050,000
                  )
                  
                  
                  (5,419,000
                  )Expenditures
      for long-lived assets (1)
                  
                  
                  295,000
                  
                  
                  
                  1,869,000
                  
                  
                  
                  14,000
                  
                  
                  
                  2,178,000Three
      months ended December 31, 2007:Revenues
      from external customers
                  
                  
                  -
                  
                  
                  
                  531,000
                  
                  
                  
                  -
                  
                  
                  
                  531,000Depreciation,
      depletion and amortization
                  
                  
                  23,000
                  
                  
                  
                  80,000
                  
                  
                  
                  10,000
                  
                  
                  
                  113,000Loss
      from operations
                  
                  
                  (1,046,000
                  )
                  
                  
                  (348,000
                  )
                  
                  
                  (712,000
                  )
                  
                  
                  (2,106,000
                  )Expenditures
      for long-lived assets (1)
                  
                  
                  16,000
                  
                  
                  
                  131,000
                  
                  
                  
                  3,000
                  
                  
                  
                  150,000
 
 (1) Expenditures for
long-lived assets includes non cash items.(2) Includes impairment of oil and
gas properties of $2,303,000.
 
 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.
 
 
 Item 2 Management'sDiscussion and Analysis of Financial
Condition and Results of Operations
 
 Overview
 
 Our
corporate mission is to provide energy for the future by exploring for,
developing new, and re-establishing pre-existing sources of energy
worldwide.  Through our domestic and international business segments,
we produce oil in Louisiana, USA and we explore for oil in Guinea, West
Africa.
 
 Domestic
Operations
 
 Our
operations in Louisiana produce oil and provide revenues and cash
flows.  The business model is that the domestic production will
provide sufficient cash flow to support our corporate overhead, so that capital
raised can be devoted to work on our concession in Guinea.  We have
not yet experienced sufficient cash flow to accomplish the goal of covering
overhead with net cash flows from oil production. Since September 30, 2008,
the price of oil has dropped substantially and hence the income has not
increased relative to the production levels.   We continually
evaluate new leases and opportunities for drilling; however, due to the current
price of oil, plans to conduct new drills are on hold and we are
focusing  instead on our international operations.
  15
 Table of Contents
  International
Operations
 
 On
September 22, 2006, our wholly owned subsidiary, SCS Corporation signed a
Production Sharing Contract (the “2006 PSC”) with the Republic of Guinea. The
2006 PSC gives us exclusive rights to explore, develop, and produce the
petroleum resources in an area of approximately 31,000 square miles off the
coast of Guinea.  Developments of our work on the 2006 PSC over the
six months ended December 31, 2008 include the following:
 
 ·
              During
      the quarter ended September 30, 2008, we interpreted 2008 2-D seismic,
      which had been acquired during the quarter ended June 30, 2008. Our
      geological and geophysical staff continue to evaluate the
      data.  We also negotiated a contract with a contractor to
      acquire up to 4,100 square kilometers of 3-D seismic data.  We
      believe that the 3-D seismic data will provide us with a portfolio of
      drillable prospects. See Item 1A – Risk Factors in our Form 10-K for the
      year ended June 30, 2008.
 
 ·
              Our
      geological and geophysical staff are conducting planning activity
      associated with acquiring 3-D seismic
data.
 
 ·
              We
      continue to provide technical presentations to potential joint venture
      partners.
 
 
 In
December 2008, the President of Guinea, President Lansana Conte, died and a
group, the National Council for Democracy and Development (“CNDD”) , attained
power in Guinea.  The CNDD has organized a new
government.  Hyperdynamics believes its contract rights will be
honored by the new government and has management personnel in-country in Guinea
to monitor events and to work with the new government.
 
 
 RESULTS
OF OPERATIONS
 
 Based on
the factors discussed below for each segment and for the corporate overhead, the
net loss attributable to common shareholders, which includes a provision for
preferred stock dividends, increased
 ·
              $4,076,000,
      or 193%, from $(2,121,000), or $(0.04) per share during the three months
      ended December 31, 2007 to $(6,197,000), or $(0.10) per share during the
      three months ended December 31,
2008.
 ·
              $3,581,000,
      or 67%, from $(5,413,000), or $(0.10) per share during the six months
      ended December 31, 2007 to $(8,994,000), or $(0.15) per share during the
      six months ended December 31, 2008.
 
 Reportable
segments
 
 Hyperdynamics
has two reportable segments: our international operations in Guinea (“SCS”) and
our domestic Louisiana operations (“HYDR”). SCS is engaged in oil and gas
exploration activities pertaining to offshore Guinea, West
Africa.   HYDR is engaged in oil and gas exploration and
production activities in Louisiana, USA. Hyperdynamics evaluates performance
based on profit or loss from operations. The reportable segments are managed by
separate management teams who are evaluated based on their segment's
performance
 
 Louisiana
Operations ("HYDR")
 
 The
following table summarizes selected financial information about our domestic
operations:
 
 Three months ended
      December 31,
                                                    
                                                    
                                                    Increase
                                                    
                                                    
                                                    %
                                                    
                                                    
                                                    Six months ended
                                                      December 31,
                                                    
                                                    
                                                    Increase
                                                    
                                                    
                                                    %2008
                                                    
                                                    
                                                    2007
                                                    
                                                    
                                                    (decrease)
                                                    
                                                    
                                                    Change
                                                    
                                                    
                                                    2008
                                                    
                                                    
                                                    2007
                                                    
                                                    
                                                    (Decrease)
                                                    
                                                    
                                                    ChangeProduction
      dataGross
      barrels sold
                                                    
                                                    
                                                    17,134
                                                    
                                                    
                                                    
                                                    8,580
                                                    
                                                    
                                                    
                                                    8,554
                                                    
                                                    
                                                    
                                                    100
                                                    %
                                                    
                                                    
                                                    32,278
                                                    
                                                    
                                                    
                                                    14,868
                                                    
                                                    
                                                    
                                                    17,410
                                                    
                                                    
                                                    
                                                    117
                                                    %Net
      barrels sold
                                                    
                                                    
                                                    10,761
                                                    
                                                    
                                                    
                                                    5,524
                                                    
                                                    
                                                    
                                                    5,237
                                                    
                                                    
                                                    
                                                    95
                                                    %
                                                    
                                                    
                                                    20,266
                                                    
                                                    
                                                    
                                                    9,833
                                                    
                                                    
                                                    
                                                    10,433
                                                    
                                                    
                                                    
                                                    106
                                                    %Average
      sales price per barrel
                                                    
                                                    $
                                                    56.87
                                                    
                                                    
                                                    $
                                                    90.51
                                                    
                                                    
                                                    
                                                    (33.64
                                                    )
                                                    
                                                    
                                                    (37
                                                    )%
                                                    
                                                    $
                                                    85.41
                                                    
                                                    
                                                    $
                                                    82.78
                                                    
                                                    
                                                    
                                                    2.63
                                                    
                                                    
                                                    
                                                    3
                                                    %RevenuesRevenues
      from oil and  gas production
                                                    
                                                    $
                                                    612,000
                                                    
                                                    
                                                    $
                                                    500,000
                                                    
                                                    
                                                    $
                                                    112,000
                                                    
                                                    
                                                    
                                                    23
                                                    %
                                                    
                                                    $
                                                    1,731,000
                                                    
                                                    
                                                    $
                                                    814,000
                                                    
                                                    
                                                    $
                                                    917,000
                                                    
                                                    
                                                    
                                                    113
                                                    %Revenues
      from oilfield services
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    31,000
                                                    
                                                    
                                                    
                                                    (31,000
                                                    )
                                                    
                                                    
                                                    (100
                                                    )%
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    31,000
                                                    
                                                    
                                                    
                                                    (31,000
                                                    )
                                                    
                                                    
                                                    (100
                                                    )%Costs
      and ExpensesLease
      operating costs
                                                    
                                                    
                                                    386,000
                                                    
                                                    
                                                    
                                                    649,000
                                                    
                                                    
                                                    
                                                    (263,000
                                                    )
                                                    
                                                    
                                                    (41
                                                    )%
                                                    
                                                    
                                                    820,000
                                                    
                                                    
                                                    
                                                    1,503,000
                                                    
                                                    
                                                    
                                                    (683,000
                                                    )
                                                    
                                                    
                                                    (45
                                                    )%Depreciation,
      depletion, and amortization
                                                    
                                                    
                                                    222,000
                                                    
                                                    
                                                    
                                                    80,000
                                                    
                                                    
                                                    
                                                    142,000
                                                    
                                                    
                                                    
                                                    178
                                                    %
                                                    
                                                    
                                                    495,000
                                                    
                                                    
                                                    
                                                    193,000
                                                    
                                                    
                                                    
                                                    302,000
                                                    
                                                    
                                                    
                                                    157
                                                    %Impairment
                                                    
                                                    
                                                    2,303,000
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    2,303,000
                                                    
                                                    
                                                    
                                                    N/A
                                                    
                                                    
                                                    
                                                    2,303,000
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    2,303,000
                                                    
                                                    
                                                    
                                                    N/AAccretion
                                                    
                                                    
                                                    20,000
                                                    
                                                    
                                                    
                                                    5,000
                                                    
                                                    
                                                    
                                                    15,000
                                                    
                                                    
                                                    
                                                    300
                                                    %
                                                    
                                                    
                                                    40,000
                                                    
                                                    
                                                    
                                                    10,000
                                                    
                                                    
                                                    
                                                    30,000
                                                    
                                                    
                                                    
                                                    300
                                                    %Selling,
      general and administrative expense
                                                    
                                                    
                                                    (43,000
                                                    )
                                                    
                                                    
                                                    145,000
                                                    
                                                    
                                                    
                                                    (188,000
                                                    )
                                                    
                                                    
                                                    (130
                                                    )%
                                                    
                                                    
                                                    68,000
                                                    
                                                    
                                                    
                                                    310,000
                                                    
                                                    
                                                    
                                                    (242,000
                                                    )
                                                    
                                                    
                                                    (78
                                                    )%Income/(loss)
      from operations
                                                    
                                                    
                                                    (2,276,000
                                                    )
                                                    
                                                    
                                                    (348,000
                                                    )
                                                    
                                                    
                                                    (1,928,000
                                                    )
                                                    
                                                    
                                                    (554
                                                    )%
                                                    
                                                    
                                                    (1,995,000
                                                    )
                                                    
                                                    
                                                    (1,171,000
                                                    )
                                                    
                                                    
                                                    (824,000
                                                    )
                                                    
                                                    
                                                    (71
                                                    )%
  16
 Table of Contents
  Loss from
operations changed due to the factors discussed below:
 
 Revenues.
Our revenues from oil and gas production increased due to higher oil production.
During the quarter ended September 30, 2008, the price of oil was higher than
the sales price during the quarter ended September 30, 2007; accordingly, the
revenue increase was attributable to prices as well as
production.  However, the price of oil dropped significantly during
the quarter ended December 31, 2008.  This resulted in relatively
comparable revenue for the six months ended December 31, 2008, even though we
increased production substantially. We have no revenues from gas
production.  The production increase is primarily attributable to
production from the oil wells acquired in July 2007 and our investments
therein.
 
 Lease
operating costs include severance tax and routine operating
costs.  Severance tax varies with revenue and increased due to revenue
increases during the three and six months ended December 31, 2008 as compared
with the three and six months ended December 31, 2007.  Other lease
operating costs decreased because of  cost savings achieved when we
turned over operations of, and 15% working interest in, our Magee Smith lease to
a new operator and because we conducted significant work over expense during the
six months ended December 31, 2007 that was not repeated in the current
period.
 
 Accretion
expense. In accordance with SFAS 143, we discount the fair value of our asset
retirement obligations and record accretion expense due to the passage of time
using the interest method of allocation.   Accordingly, the
accretion expense is a function of the balance of the asset retirement
obligation.  As of July 1, 2008 and 2007, respectively, our asset
retirement obligation was $730,000 and $128,000, respectively.  The
increase in accretion expense is due to the higher asset retirement obligation
balance.
 
 Our
depreciation, depletion and amortization expense increased due to higher
production levels and additions to the full cost center during the
quarter.
 
 Based on
the ceiling test prescribed by full cost accounting rules, we recognized an
impairment of $2,303,000 on our oil and gas properties during the three months
ending December 31, 2008.
 
 Our
selling, general and administrative expense includes administrative expenses,
other operational costs, and gains or losses on sales and disposals of
assets.   Significant drivers in the change in selling, general,
and administrative expenses were:
 
 Administrative expensesincreased due to increase in legal and professional expenses offset with
a decrease in other general administrative expenses. The increase in legal and
professional costs can be attributed to increased cost for our annual reserve
report and a cost reimbursement that we received in August 2007 from our
insurance company for legal expenses associated with a suit that was settled
during the year ended June 30, 2007, which reduced expense in the prior year
period. The major drivers for the decrease in other general and
administrative expenses are reductions in travel expenses, insurance costs, bad
debts and rentals.
 
 Other operational costs and
employee related expenses decreased as a result of restructuring the field
offices and discharging the entire workforce as well as by a refund of workmen’s
compensation paid during the prior year.
 
 Gain on
sale of assets during the six months ended December 31, 2008 was $65,000 as
compared to $0 during the three months ended December 31, 2007. During the six
months ended December 31, 2008, we disposed of all the assets held for sale as
of July 1, 2008, which resulted in a recognition of a gain of
$65,000.
  17
 Table of Contents
  International
Operations ("SCS")
 
 The
following table summarizes selected financial information about our
international operations:
 
 
 Three months ended
      December 31,
                  
                  
                  Increase
                  
                  
                  %
                  
                  
                  Six months ended
      December 31,
                  
                  
                  Increase
                  
                  
                  %2008
                  
                  
                  2007
                  
                  
                  (decrease)
                  
                  
                  Change
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  (decrease)
                  
                  
                  ChangeCosts
      and ExpensesDepreciation,
      depletion, and amortization
                  
                  $
                  25,000
                  
                  
                  $
                  23,000
                  
                  
                  
                  2,000
                  
                  
                  
                  9
                  %
                  
                  $
                  49,000
                  
                  
                  $
                  35,000
                  
                  
                  
                  14,000
                  
                  
                  
                  40
                  %Selling,
      general and administrative expense
                  
                  
                  1,412,000
                  
                  
                  
                  1,023,000
                  
                  
                  
                  389,000
                  
                  
                  
                  38
                  %
                  
                  
                  2,921,000
                  
                  
                  
                  2,163,000
                  
                  
                  
                  758,000
                  
                  
                  
                  35
                  %Loss
      from operations
                  
                  
                  1,437,000
                  
                  
                  
                  1,046,000
                  
                  
                  
                  391,000
                  
                  
                  
                  37
                  %
                  
                  
                  2,970,000
                  
                  
                  
                  2,198,000
                  
                  
                  
                  772,000
                  
                  
                  
                  35
                  %
 
 Loss from
operations changed due to the factors discussed below:
 
 Depreciation
increased due to depreciation on additional assets owned as of July 1, 2008 as
compared with July 1, 2007.
 
 Selling,
general and administrative expenses increased due to increases in professional
and consulting expenses, compensation expense, and travel expense, offset by a
decrease in costs associated with our in-country Guinea operations.
 
 Professional and consulting
expenses was the most significant cost driver and it includes share based
payments and a variable share issuance obligation to a legal firm for consulting
and legal expenses they are performing with respect to our Guinea
concession.
 
 Compensation expense
increased during the three months because of salary and of option grants for our
geological and geophysical staff, who joined our payroll beginning in November
2007.
 
 Travel expenses increased
because of increased travel conducted by members of our geological and
geophysical staff and travel for conferences and training.
 
 In-country costs consist of
the following expenses incurred in Guinea: advertising, lobbying, public
relations, office expense, and a misappropriation of funds as discussed in Item
4 of this quarterly report.  The in-country costs decreased
substantially, due to cost cutting measures.  During the six months
ended December 31, 2007, we had conducted extensive public relations work in
Guinea in order to promote and maintain positive public sentiment towards
Hyperdynamics in Guinea and we reduced our expenditures for this purpose during
the six months ended December 31, 2008.
 
 Corporate
Overhead
 
 The
following table summarizes selected financial information about our corporate
overhead:
 
 
 
 Three months ended
      December 31,
                  
                  
                  Increase
                  
                  
                  %
                  
                  
                  Six months ended
      December 31,
                  
                  
                  Increase
                  
                  
                  %2008
                  
                  
                  2007
                  
                  
                  (decrease)
                  
                  
                  Change
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  (decrease)
                  
                  
                  ChangeCosts
      and ExpensesDepreciation,
      depletion, and amortization
                  
                  $
                  9,000
                  
                  
                  $
                  10,000
                  
                  
                  
                  (1,000
                  )
                  
                  
                  (10
                  )%
                  
                  $
                  18,000
                  
                  
                  $
                  20,000
                  
                  
                  
                  (2,000
                  )
                  
                  
                  (10
                  )%Selling,
      general and administrative expense
                  
                  
                  629,000
                  
                  
                  
                  702,000
                  
                  
                  
                  (73,000
                  )
                  
                  
                  (10
                  )%
                  
                  
                  1,306,000
                  
                  
                  
                  2,030,000
                  
                  
                  
                  (724,000
                  )
                  
                  
                  (36
                  )%Loss
      from operations
                  
                  
                  638,000
                  
                  
                  
                  712,000
                  
                  
                  
                  (74,000
                  )
                  
                  
                  (10
                  )%
                  
                  
                  1,324,000
                  
                  
                  
                  2,050,000
                  
                  
                  
                  (726,000
                  )
                  
                  
                  (35
                  )%
 
 Loss from
operations changed due to the factors discussed below:
 
 Selling,
general and administrative expenses, comprised of employee related expenses,
professional expenses, reporting and other general administrative expenses,
decreased during the second quarter of 2008 when compared to the second quarter
of 2007. The major drivers attributable to the decrease are option grants,
travel expenses, and other general administrative expenses, offset by increases
in professional and employee expenses.
 
 During
the six months ended December 31, 2007, there were option grants for employees
and directors but were not repeated in 2008. Travel conducted for investor
relations and road shows during the three and six months ended December 31, 2007
were considerably reduced during the three and six months ended December 31,
2008. Further, insurance costs decreased during the three and six months ended
December 31, 2008, primarily due to reduction in the cost of health and
commercial insurance. Professional expenses increased during the three and six
months ended December 31, 2008 due to increased reporting requirements and
services for defending existing lawsuits.
  18
 Table of Contents
  Other
factors affecting net loss chargeable to common shareholders
 
 During
the three months ended December 31, 2008, Hyperdynamics had settlement gains of
$200,000 attributable to the refinancing of a debenture, which
resulted in settlement gain of $56,000, and settlement of an accrued debt, which
resulted in a settlement gain of $144,000.  During the three months
ended September 30, 2008, Hyperdynamics paid off a different debenture, which
resulted in a settlement loss of $635,000.  Total settlement loss for
the six months ended December 31, 2008 was $435,000.
 
 During
the three and six months ended December 31, 2008, Hyperdynamics incurred
interest expense, primarily attributable to the early conversion of debentures,
of $2,221,000 and $2,022,000, respectively.   Hyperdynamics did
not have debt of this nature during the three and six months ended December 31,
2007.
 
 Liquidity
and Capital Resources
 
 Our ratio
of current assets to current liabilities (current ratio) was .31 to 1 at
December 31, 2008 and .48 to 1 at June 30, 2008. Current liabilities contain
several items that are payable in stock or are the subject of deferred payment
arrangements whereby the vendor will not get paid except out of future revenues
or cash received from a joint venture partner.  Variable share
issuance obligation of $543,000, dividends payable of $372,000, and dividends
payable to related party of $392,000 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.  Additionally, $65,000 is accrued in accounts
payable to a vendor who, by the terms of his agreement, will not be paid until
we obtain funding from a financial or joint venture partner for Guinea. This
amounts to approximately $2,022,000 of the $3,237,000 reflected in current
liabilities which either will not result in a cash outflow or will not be paid
until we have adequate funds to pay them.
 
 The
accompanying financial statements are prepared assuming that Hyperdynamics will
continue as a going concern.  Hyperdynamics has incurred losses since
inception. We have historically been able to raise capital to progress
our  most unique and speculative oil and gas asset offshore West
Africa. With the combination of the added uncertainty of the world economic
crisis and resulting depressed price of oil, raising the necessary capital has
now become more difficult. The combination of these factors raise substantial
doubt about our ability to continue as a going concern.  The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
 
 In order
to address our liquidity situation, Hyperdynamics management remains focused on
bringing in joint venture partners to help the company monetize a portion of its
most significant yet speculative oil and gas exploration asset offshore West
Africa. We are also evaluating measures to further reduce our costs and working
diligently on the possibility of selling some of our producing
assets.  Finally, we are talking with potential financial partners and
seeking investment from outside investors.  If management is not
successful in monetizing a portion of its exploration assets, selling part or
all of its producing assets, or raising additional funds, Hyperdynamics may not
survive.
 
 Our top
corporate priority at this time is to attract a joint venture or financial
partner so that we can fund an accelerated exploration work program offshore
Guinea.  We now expect these major funds to come primarily from
selling working interest to financial partners or joint venture partners that
invest in our Guinea offshore contract area. We believe that with the
interpretive work performed by our geoscientists on the 2008 seismic
data  we should  be able to obtain a joint venture with one
or more viable oil company operators.  We have mapped our prospects
and prepared an in-depth technical presentation and data room available for
review by potential partners under confidentiality agreements.
 
 
 Item 3. Quantitativeand Qualitative Disclosures About Market
Risk
 
 
 We are
exposed to various risks including energy commodity price risk, specifically,
risk associated with changing prices of oil. We expect oil prices to remain
volatile and unpredictable. If oil prices were to decline significantly,
revenues and cash flow would significantly decline, and our ability to borrow to
finance our operations could be adversely impacted.   We do not
hedge the oil commodity price risk at this time.  We believe this is
appropriate to the size and scope of our operations.
 
 Our
functional currency is the US dollar. We have some foreign currency exchange
rate risk resulting from our in-country office in Guinea. US dollars are
accepted in Guinea and many of our purchases and purchase obligations, such as
our office lease in Guinea, are denominated in US dollars. However, our costs
for labor, supplies, and fuel could increase if the Guinea Franc appreciates
against the US dollar. We do not hedge the exposure to currency rate
changes.
  19
 Table of Contents
  Item 4. Controlsand 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 procedures pursuant
to Rule 13a-15 under the Securities Exchange Act of 1934 as of the end of the
period covered by this quarterly report. In the course of this evaluation, our
management considered the material weaknesses in our internal control over
financial reporting discussed below. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that, as a result of
this material weakness, our disclosure controls and procedures as of December
31, 2008 were not effective in ensuring that the information required to be
disclosed by us in reports filed under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the SEC. To address the material weakness, we have
taken additional 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.
 
 In
connection with the preparation of our Annual Report on Form 10-K for the year
ended June 30, 2008 ("Annual Report"), management assessed the effectiveness of
our disclosure controls and procedures and internal control over financial
reporting as of June 30, 2008 as more fully described in Item 9A of our Annual
Report. Based on that assessment, management identified material weaknesses in
our internal controls.  Because of these material weaknesses,
management concluded that we did not maintain effective internal control over
financial reporting as of June 30, 2008.
 
 At the
end of the second quarter of 2009, our management discovered a misappropriation
of approximately $130,000 of funds from our Guinea operation.  Funds
were misappropriated during the first quarter of 2008 and during the second
quarter of 2009. Because of the method used to misappropriate the funds, the
losses were expensed during the periods in which they actually
occurred.  As a result of this, management has tightened and
instituted additional controls over cash and purchasing functions in
Guinea.  Management has curtailed the employee’s accessibility to cash
and is considering appropriate disciplinary action, including and not limited to
termination and restitution, from the employee involved.
 
 To
address the issues associated with our material weaknesses and the
misappropriation discussed above, we have made changes in our internal controls
over financial reporting in fiscal 2009 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 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:
 
 Addressing
deficiencies in the control environment as follows:
 
 ·
              Our
      country controller for Guinea, hired in September 2008, has provided
      direct financial oversight and implemented policies and procedures
      relating to purchasing and budgeting functions for our operations in
      Guinea;
 ·
              Effective
      December 31, 2008, we reduced our expenditures and have implemented an
      imprest style system of funding for our Guinea operations that reduces our
      exposure to loss and fraud;
 ·
              Because  the
      reduced expenditures in Guinea substantially reduces the work assigned to
      the country controller, and because the country controller has extensive
      internal audit and Sarbanes-Oxley compliance experience, we have assigned
      him the task of performing internal audit functions, documenting policies
      and procedures, and assisting with the remediation of internal control
      design gaps; and
 ·
              Implementing
      policies and procedures designed to improve the overall control
      environment, such as obtaining timely acknowledgement of our Code of
      Ethics, annual re-certification of policies, and implementing restrictions
      on users access to posting in the accounting
  system;
 
 Addressing
deficiencies in staffing and segregation of duties as follows:
 
 ·
              Augmenting
      our staff by using qualified contractors who have experience in public
      company reporting to assist in the preparation of financial statements and
      with the evaluation of and accounting for non-routine and non-systematic
      transactions; and
 ·
              Providing
      training to existing employees so that they can perform additional duties,
      thus improving our ability to have independent review and approval of
      financial accounting entries.
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  These
organizational and process changes have improved our internal controls
environment and increased the likelihood of our identifying non-routine and
non-systematic transactions. We will continue our efforts to improve our control
environment and to focus on:
 
 ·
              Refining
      our period-end financial reporting
process;
 ·
              Improving
      our policies, processes, and systems to help insure that our financial
      reporting, operational, and business requirements are met in a timely
      manner; and
 ·
              Strengthening
      the internal audit and risk assessment
process.
 
 Except as
described above and in our Annual Report, there have been no changes in our
internal control over financial reporting that occurred during the most recent
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
 
 
 Part
II Other Information
 
 Item 1. LegalProceedings
 
 For
information regarding our legal proceedings see the legal proceedings disclosed
in Item 3 of our most recent on Form 10-K.
 
 Item 1A. Risk Factors
 
 For
information regarding our risk factors see the risk factors disclosed in Item 1A
of our most recent on Form 10-K. There have been no material changes from the
risk factors previously disclosed in our most recent Annual Report on Form
10-K.
 
 Item
2.Unregistered Sales of Equity Securities and Use of
Proceeds
 
 InSeptember 2008, we issued
options to purchase 60,000 shares of common stock to three employees as
compensation. These options have an exercise price of $1.25 per share and expire
in three years. These transactions were made in reliance upon exemptions from
registration under Section 4(2) of the Securities Act. Each certificate issued
for unregistered securities contained a legend stating that the securities have
not been registered under the Securities Act and setting forth the restrictions
on the transferability and the sale of the securities. No underwriter
participated in, nor did we pay any commissions or fees to any underwriter, in
these transactions. These transactions did not involve a public offering. The
investors had knowledge and experience in financial and business matters that
allowed them to evaluate the merits and risk of receipt of these securities. The
investors were knowledgeable about our operations and financial
condition.
 
 In
October 2008, we issued options to purchase 45,000 shares of common stock to
four directors as compensation. These options have an exercise price of $1.13
per share and expire in two years. These transactions were made in reliance upon
exemptions from registration under Section 4(2) of the Securities Act. Each
certificate issued for unregistered securities contained a legend stating that
the securities have not been registered under the Securities Act and setting
forth the restrictions on the transferability and the sale of the securities. No
underwriter participated in, nor did we pay any commissions or fees to any
underwriter, in these transactions. These transactions did not involve a public
offering. The investors had knowledge and experience in financial and business
matters that allowed them to evaluate the merits and risk of receipt of these
securities. The investors were knowledgeable about our operations and financial
condition.
 
 In
October 2008, we issued options to purchase 105,000 shares of common stock to
four employees as compensation. These options have an exercise price of $2.00
per share and expire in three years. These transactions were made in reliance
upon exemptions from registration under Section 4(2) of the Securities Act. Each
certificate issued for unregistered securities contained a legend stating that
the securities have not been registered under the Securities Act and setting
forth the restrictions on the transferability and the sale of the securities. No
underwriter participated in, nor did we pay any commissions or fees to any
underwriter, in these transactions. These transactions did not involve a public
offering. The investors had knowledge and experience in financial and business
matters that allowed them to evaluate the merits and risk of receipt of these
securities. The investors were knowledgeable about our operations and financial
condition.
 
 In
December 2008, we issued options to purchase 45,000 shares of common stock to
two employees as compensation. These options have an exercise price of $0.45 per
share and expire in three years. These transactions were made in reliance upon
exemptions from registration under Section 4(2) of the Securities Act. Each
certificate issued for unregistered securities contained a legend stating that
the securities have not been registered under the Securities Act and setting
forth the restrictions on the transferability and the sale of the securities. No
underwriter participated in, nor did we pay any commissions or fees to any
underwriter, in these transactions. These transactions did not involve a public
offering. The investors had knowledge and experience in financial and business
matters that allowed them to evaluate the merits and risk of receipt of these
securities. The investors were knowledgeable about our operations and financial
condition.
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  In
January 2009, we issued options to purchase 37,500 shares of common stock to
three directors as compensation. These options have an exercise price of $0.45
per share and expire in two years. These transactions were made in reliance upon
exemptions from registration under Section 4(2) of the Securities Act. Each
certificate issued for unregistered securities contained a legend stating that
the securities have not been registered under the Securities Act and setting
forth the restrictions on the transferability and the sale of the securities. No
underwriter participated in, nor did we pay any commissions or fees to any
underwriter, in these transactions. These transactions did not involve a public
offering. The investors had knowledge and experience in financial and business
matters that allowed them to evaluate the merits and risk of receipt of these
securities. The investors were knowledgeable about our operations and financial
condition.
 
 In
January 2009, we issued options to purchase 105,000 shares of common stock to
four employees as compensation. These options have an exercise price of $2.00
per share and expire in three years. These transactions were made in reliance
upon exemptions from registration under Section 4(2) of the Securities Act. Each
certificate issued for unregistered securities contained a legend stating that
the securities have not been registered under the Securities Act and setting
forth the restrictions on the transferability and the sale of the securities. No
underwriter participated in, nor did we pay any commissions or fees to any
underwriter, in these transactions. These transactions did not involve a public
offering. The investors had knowledge and experience in financial and business
matters that allowed them to evaluate the merits and risk of receipt of these
securities. The investors were knowledgeable about our operations and financial
condition
 
 In
January 2009, we issued options to purchase 20,000 shares of common stock to an
employee as compensation. These options have an exercise price of $0.45 per
share and expire in three years. These transactions were made in reliance upon
exemptions from registration under Section 4(2) of the Securities Act. Each
certificate issued for unregistered securities contained a legend stating that
the securities have not been registered under the Securities Act and setting
forth the restrictions on the transferability and the sale of the securities. No
underwriter participated in, nor did we pay any commissions or fees to any
underwriter, in these transactions. These transactions did not involve a public
offering. The investors had knowledge and experience in financial and business
matters that allowed them to evaluate the merits and risk of receipt of these
securities. The investors were knowledgeable about our operations and financial
condition
 
 Item6. Exhibits
 
 Exhibit 31.1 - Certification of Chief Executive Officer of
Hyperdynamics Corporation required by Rule 13a-14(1) or Rule 15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
 
 Exhibit 31.2 - Certification of Chief Financial Officer of
Hyperdynamics Corporation required by Rule 13a-14(1) or Rule 15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
 
 Exhibit 32.1 - Certification of Chief Executive Officer of
Hyperdynamics Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 and Section 1350 of 18 U.S.C. 63.
 
 Exhibit 32.2 - Certification of Chief Financial Officer of
Hyperdynamics Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 and Section 1350 of 18 U.S.C. 63.
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  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)By: /s/ Kent WattsKent
      Watts, Chairman of the Board,Chief
      Executive
Officer
 
 Dated:
February 17, 2009
 
 
 By: /s/ Sarah Berel-HarropSarah
      Berel-HarropChief
      Financial OfficerPrincipal
      Accounting
Officer
 
 Dated:
February 17, 2009
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