UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549








FORM
10-Q


x
            Quarterly
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934: For the quarterly period ended: September 30,
  2008





or


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





Commission
file number: 000-32490





HYPERDYNAMICS
CORPORATION


(Exact
name of registrant as specified in its charter)





Delaware
              87-0400335(State
      or other jurisdiction of incorporation or organization)
              (IRS
      Employer Identification No.)








One Sugar
Creek Center Blvd., # 125


Sugar
Land, Texas 77748





(Address
of principal executive offices, including zip code)





713-353-9400


(registrant's
principal executive office telephone number)








Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes  x    No o







Indicate
by check mark whether the registrant 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
              o


Accelerated
      Filer
              x


Non-Accelerated
      Filer
              o


Smaller
      Reporting Company
            o





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





APPLICABLE
ONLY TO CORPORATE ISSUERS


As of
November 7, 2008, 60,280,968 shares of common stock, $0.001 par value, were
outstanding.













Tableof Contents








Part
      I. Financial InformationItem
      1
                  Financial StatementsConsolidated Balance Sheets at September 30, 2008 and June 30,
      2008
                  2Consolidated Statements of Operations for the Three Months
      Ended September 30, 2008 and 2007
                  3Consolidated
      Statements of Cash Flows for the Three Months Ended September 30, 2008 and
      2007
                  4Notes to Consolidated Financial
    Statements
                  6Item
      2
                  Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
                  13Item
      3
                  Quantitative and Qualitative Disclosures about Market
      Risks
                  17Item
      4
                  Controls and Procedures
                  17Part
      II. Other InformationItem
      1
                  Legal Proceedings
                  18Item
      1A
                  Risk Factors
                  18Item
      6
                  Exhibits
                  18Signatures
                  18





1
 Table of Contents





HYPERDYNAMICSCORPORATION


CONSOLIDATED
BALANCE SHEETS


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


(Unaudited)





September
    30,
                    
                    
                    June 30,2008
                    
                    
                    2008ASSETSCurrent
    assets:Cash and cash
      equivalents
                    
                    $
                    1,879
                    
                    
                    $
                    1,480Trade accounts
      receivable
                    
                    
                    295
                    
                    
                    
                    396Prepaid expenses and other current
      assets
                    
                    
                    299
                    
                    
                    
                    151Assets held for
      sale
                    
                    
                    31
                    
                    
                    
                    31Total current
      assets
                    
                    
                    2,504
                    
                    
                    
                    2,058Property and equipment, net of
      accumulated depreciation of $276 and $240
                    
                    
                    379
                    
                    
                    
                    409Oil and gas
      properties:Evaluated properties, using full
      cost accounting, net of accumulated depreciation and depletionof $1,028 and
      $758
                    
                    
                    2,816
                    
                    
                    
                    3,157Unevaluated properties excluded
      from amortization
                    
                    
                    7,420
                    
                    
                    
                    7,314Other
assets
                    
                    
                    256
                    
                    
                    
                    12Total
assets
                    
                    $
                    13,375
                    
                    
                    $
                    12,950LIABILITIESANDSHAREHOLDERS'
      EQUITYCurrent
      liabilities:Accounts payable and accrued
      expenses
                    
                    $
                    1,434
                    
                    
                    $
                    2,393Accounts payable - seismic
      data
                    
                    
                    650
                    
                    
                    
                    650Asset retirement obligation,
      current
                    
                    
                    30
                    
                    
                    
                    99Dividends
      payable
                    
                    
                    372
                    
                    
                    
                    372Dividends payable to related
      party
                    
                    
                    368
                    
                    
                    
                    343Short term notes payable and
      current portion of long term debt, net of discount of $139 and
      $196
                    
                    
                    90
                    
                    
                    
                    401Total current
      liabilities
                    
                    
                    2,944
                    
                    
                    
                    4,258Long term debt, net of discount of
      $2,226 and $206
                    
                    
                    2,655
                    
                    
                    
                    1,315Asset retirement obligation, non
      current
                    
                    
                    634
                    
                    
                    
                    631Deferred
    rent
                    
                    
                    68
                    
                    
                    
                    73Total
      liabilities
                    
                    
                    6,301
                    
                    
                    
                    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
      2,446shares
      outstanding
                    
                    
                    -
                    
                    
                    
                    -Common stock, $0.001 par value,
      250,000,000 shares authorized; 59,776,091 and 59,339,481 shares issued and
      outstanding
                    
                    
                    60
                    
                    
                    
                    59Additional paid-in
      capital
                    
                    
                    68,615
                    
                    
                    
                    65,443Accumulated
      deficit
                    
                    
                    (61,601
                    )
                    
                    
                    (58,829
                    )Total shareholders'
      equity
                    
                    
                    7,074
                    
                    
                    
                    6,673Total liabilities and
      shareholders' equity
                    
                    $
                    13,375
                    
                    
                    $
                    12,950





2
 Table of Contents





HYPERDYNAMICSCORPORATION


CONSOLIDATED
STATEMENTS OF OPERATIONS


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


(Unaudited)




Three Months Ended September
      30,2008
                          
                          
                          2007Revenues:Oil and gas
      production
                          
                          $
                          1,119
                          
                          
                          $
                          314Costs and
      expenses:Lease operating
      costs
                          
                          
                          434
                          
                          
                          
                          854Accretion
      expense
                          
                          
                          20
                          
                          
                          
                          5Depreciation, depletion and
      amortization
                          
                          
                          306
                          
                          
                          
                          135Selling, general and
      administrative
                          
                          
                          2,297
                          
                          
                          
                          2,633Total costs and
      expenses
                          
                          
                          3,057
                          
                          
                          
                          3,627Loss from
      operations
                          
                          
                          (1,938
                          )
                          
                          
                          (3,313
                          )Other income
      (expense):Interest(expense) income, net
                          
                          
                          (199
                          )
                          
                          
                          36Gain(loss)on debtextinguishment
                          
                          
                          (635
                          )
                          
                          
                          10Total other(expense) income
                          
                          
                          (834
                          )
                          
                          
                          46Net loss
                          
                          
                          (2,772
                          )
                          
                          
                          (3,267
                          )Preferred stock dividend to
      related party
                          
                          
                          (25
                          )
                          
                          
                          (25
                          )Net loss attributable to common
      shareholders
                          
                          $
                          (2,797
                          )
                          
                          $
                          (3,292
                          )Basic and diluted loss per common
      share
                          
                          $
                          (0.05
                          )
                          
                          $
                          (0.06
                          )Weighted average shares
      outstanding (basic and diluted)
                          
                          
                          59,696,645
                          
                          
                          
                          55,330,976





3
 Table of Contents





HYPERDYNAMICSCORPORATION


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
Thousands)


(Unaudited)




Three
      Months Ended
                      September
      30,2008
                    
                    
                    2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                    
                    $
                    (2,772
                    )
                    
                    $
                    (3,267
                    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation,
      depletion and amortization
                    
                    
                    306
                    
                    
                    
                    135Accretion
      of asset retirement obligation
                    
                    
                    20
                    
                    
                    
                    5Common
      stock  issued for services
                    
                    
                    513
                    
                    
                    
                    139Employee
      stock options
                    
                    
                    141
                    
                    
                    
                    682(Gain)
      loss on debt extinguishment
                    
                    
                    635
                    
                    
                    
                    (10
                    )Bad
      debt expense
                    
                    
                    -
                    
                    
                    
                    4Amortization
      of discount and financing costs on debt
                    
                    
                    81
                    
                    
                    
                    -Changes
      in operating assets and liabilities:Accounts
      receivable
                    
                    
                    100
                    
                    
                    
                    10Other
      current assets
                    
                    
                    31
                    
                    
                    
                    (19
                    )Accounts
      payable and accrued expenses
                    
                    
                    (893
                    )
                    
                    
                    548Deferred
      rent
                    
                    
                    (5
                    )
                    
                    
                    (4
                    )Net
      cash used in operating activities
                    
                    
                    (1,843
                    )
                    
                    
                    (1,777
                    )CASH
      FLOWS FROM INVESTING ACTIVITIESInvestment
      in oil and gas properties
                    
                    
                    (116
                    )
                    
                    
                    (1,549
                    )Purchase
      of property and equipment
                    
                    
                    (5
                    )
                    
                    
                    (105
                    )Net
      cash used in investing activities
                    
                    
                    (121
                    )
                    
                    
                    (1,654
                    )CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from sale of common stock, net
                    
                    
                    -
                    
                    
                    
                    135Collection
      of stock subscription receivable
                    
                    
                    -
                    
                    
                    
                    5,250Prepayment
      penalty on debt extinguishment
                    
                    
                    (271
                    )
                    
                    
                    -Proceeds
      from convertible debentures
                    
                    
                    5,000
                    
                    
                    
                    -Placement
      fees on convertible debentures
                    
                    
                    (300
                    )
                    
                    
                    -Financing
      costs deducted from convertible debentures
                    
                    
                    (30
                    )
                    
                    
                    -Proceeds
      from installment debt
                    
                    
                    -
                    
                    
                    
                    47Payments
      on notes payable
                    
                    
                    (2,000
                    )
                    
                    
                    -Payments
      on installment debt
                    
                    
                    (36
                    )
                    
                    
                    (296
                    )Net
      cash provided by financing activities
                    
                    
                    2,363
                    
                    
                    
                    5,136Net
      increase in cash
                    
                    
                    399
                    
                    
                    
                    1,705Cash
      at beginning of period
                    
                    
                    1,480
                    
                    
                    
                    618Cash
      at end of period
                    
                    $
                    1,879
                    
                    
                    $
                    2,323





4
 Table of Contents





HYPERDYNAMICS
CORPORATION


CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)


(In
Thousands)


(Unaudited)





Three
      months ended
                  September
      30,2008
                
                
                2007SUPPLEMENTAL
      DISCLOSURESInterest
      paid in cash
                
                $
                89
                
                
                $
                2NON-CASH
      TRANSACTIONSDeemed
      dividend attributable to repriced warrants issued with purchase of common
      stock
                
                $
                29
                
                
                $
                -Accrued
      and unpaid preferred stock dividend to related party
                
                
                25
                
                
                
                25Account
      payable for oil and gas properties
                
                
                6
                
                
                
                59Conveyance
      of  asset retirement obligation
                
                
                86
                
                
                
                -Note
      payable for assets
                
                
                27
                
                
                
                30Stock
      payable for placement fee associated with sale of convertible
      debentures
                
                
                103
                
                
                
                -Discount
      associated with beneficial conversion feature and warrants issued with
      convertible debentures
                
                
                2,372
                
                
                
                -Common
      stock issued for accounts payable
                
                
                173
                
                
                
                -Common
      stock issued for purchase of working interest in oil and gas
      properties
                
                
                -
                
                
                
                285





5
 Table of Contents





HYPERDYNAMICSCORPORATION


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.





New
Accounting Pronouncements





We do not
expect the adoption of recently issued accounting pronouncements to have a
significant impact on our results of operations, financial position, or cash
flow.





2.
Oil and Gas Properties





Evaluated
properties





Additions
to the full cost center during the three months ended September 30, 2008
included exploratory drilling costs of $10,000 and  development costs
of $6,000. As of September 30, 2008, we have capitalized $2,816,000 in oil and
gas properties, net of depletion of $1,028,000, which is subject to the full
cost ceiling test for impairment.  At September 30, 2008, there was no
impairment indicated.





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.  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.





Unevaluated
properties





We
incurred $106,000 of geological and geophysical costs for our Guinea concession
during the three months ended September 30, 2008.  The costs were
incurred as follows: payroll and consulting costs directly associated with
geophysical and geological evaluation of our Guinea concession of $48,000; costs
associated with our 2008 seismic shoot of $54,000; and geophysical and
geological software for $4,000.





3.
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
                  
                  
                  20,000Asset
      retirement obligation, September 30, 2008
                  
                  $
                  664,000





6
 Table of Contents





4.  Short
term notes payable and long term debt





Short
term notes payable and long term debt consist of:




September
      30, 2008
                      
                      
                      June
      30, 2008Installment
      notes payable
                      
                      $
                      110,000
                      
                      
                      $
                      118,000YA
      GlobalGross
                      
                      
                      -
                      
                      
                      
                      2,000,000Unamortized
      discount
                      
                      
                      -
                      
                      
                      
                      (402,000
                      )Net
                      
                      
                      -
                      
                      
                      
                      1,598,000Convertible
      debenturesGross
                      
                      
                      5,000,000Unamortized
      discount
                      
                      
                      (2,365,000
                      )
                      
                      
                      -Net
                      
                      
                      2,635,000
                      
                      
                      
                      -Total
      short term notes payable and long term debt
                      
                      
                      2,745,000
                      
                      
                      
                      1,716,000Less:
      current portion
                      
                      
                      (90,000
                      )
                      
                      
                      (401,000
                      )Carrying
      value of notes as of September 30, 2008
                      
                      $
                      2,655,000
                      
                      
                      $
                      1,315,000


Installment
notes payable





In
addition to installment notes payable as of June 30, 2008, during the three
months ended September 30, 2008, Hyperdynamics financed two insurance policies
for an aggregate amount of $27,000. 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 carriedan annual interest rate equal to 20%
and maturedon July 6, 2010. The notesprovided formonthlyprincipalinstallments of $50,000beginning on September 1, 2008 and
monthlyinterestinstallments.Thenoteswere redeemable at our
optionat an earlier dateprovided we
paidan “early redemption
premium” of 15% of the principal amount being redeemed.





Hyperdynamics repaid the
noteson September 12,
2008.  At the time of payoff, Hyperdynamics paid $1,950,000principal remaining on the debt
anda 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.





Saleof ConvertibleDebentures





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 netcashproceeds 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 theconvertibledebenturesfor 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.





7
 Table of Contents





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 convertibledebenturesfor 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
discountsand deferred
financing costs, totaling
$2,805,000, will be amortized and charged to interest expense over the life of
the notes using the effective interest rate method. The effective interest rate
on the notes, including the discount, is 61%per annum.





The debentures carry an annual interest
rate equal to 10% and mature on September 12, 2012. The notes will be repaid in
monthly installments of $139,000 beginning September 12, 2009.Interest installments will also be paid
quarterly on the outstanding balance. Interest installments commence on October
1, 2008. At our option, we can redeem the notes within 120 days of the closing
date, September 12, 2008, and pay an “early redemption premium” of 10% of the
principal amount being redeemed.After 120 days, we will pay the investor
a “make-whole” payment with each conversion or redemption,of 40% of the principal, less interest
previously paid.We have the option to pay, if we meet
certain conditions, our principal installments, interest payments, and
make-whole payments using Hyperdynamics common stock using a formula based on
current market prices of the stock.





The investors in the convertible
debenturespreviouslyreceived 2,424,243 warrants
to purchase common stock with an exercise price of $3.27 pershareas part of a registered direct offering
of our common stockcompleted 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 wasreduced from $3.27 to $3.00.The modification resulted
in a deemed dividendto the
warrant holdersof
$29,000.





The activity on thedebenturesduring thethree monthsendedSeptember30, 2008is as follows:





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
                  
                  
                  2,598,000Add:Amortization of
      discount
                  
                  
                  37,000Balance of debentures at September
      30, 2008
                  
                  $
                  2,635,000





As of
September 30, 2008, the unamortized balance of deferred financing costs was
$397,000, of which $152,000 was included in Prepaid expenses and Other current
assets and $245,000 was included in Other assets.





Future minimum debt
payments





Year ending September
30:





2009
                    
                    $
                    230,0002010
                    
                    
                    1,672,0002011
                    
                    
                    1,673,0002012
                    
                    
                    1,535,000Total minimum payments
      required
                    
                    $
                    5,110,000





5.
Shareholders’ Equity





Stock issuances





During thethree monthsended September 30, 2008, Hyperdynamics
issued326,771shares of common stockfrom its Stock and Stock Option planfor servicesvaluedat$513,000. Services were valued using the
market close price on the date of grant.





8
 Table of Contents





During the three months ended September
30, 2008, Hyperdynamics issued 109,839shares of common stock
valuedat$173,000from its  Stock and Stock
Option planfor
serviceswhichhad beenrenderedand accruedduring the year ending June 30, 2008.The stock was valued using
the market closing price on the date of grant.





Discount
on convertible debentures





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.





Employee
stock options





During
the quarter ended September 30, 2008, we granted options to purchase 190,000
shares of common stock to Hyperdynamics employees and
directors.   The compensation expense associated with employee
stock options which vested during the quarter ended September 30, 2008 was
$141,000. The fair value of the options grants was determined using the
Black-Scholes method.(See Note 7).





Warrant repricings





Warrants, originally issued to purchase
common stock , were modified by reducing the exercise price from $3.27 per share
to $3.00 per share.This resulted in a deemed dividend of
$29,000(See Note
6).





Other
items relating to equity





In July 2008, Hyperdynamics entered into
a contract for 3-D seismic work offshoreGuinea. 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.  Because there is no
performance commitment as of the date of this report, there is no accounting
recognition of the stock, 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.





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 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 September 30, 2008, Hyperdynamics would issue an additional
210,000 shares under the terms of the agreement based upon the total scope of
work in the agreement.  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.





6.
Deemed Dividend





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:





9
 Table of Contents




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





7.
Stock Options and Warrants





Options
granted to employees





During
the three  months ended September 30, 2008, Hyperdynamics granted
190,000 options to employees.   The options had exercise prices
ranging from $1.25 to $2.00, exercise term of two to  three years with
immediate vesting and a fair value on the date of grant totaling
$110,000.  The weighted average fair value of the employee stock
options granted during the quarter ended September 30, 2008 was
$0.58.





During
the three months ended September 30, 2008, Hyperdynamics recognized $31,000
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 three months ended September 30, 2008 was
$141,000.  At September 30, 2008, there was $74,000 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:





Risk-free
      interest rate
                  
                  
                  2.00
      – 2.63
                  %Dividend
      yield
                  
                  
                  0
                  %Volatility
      factor
                  
                  
                  86.91
      - 88.48
                  %Expected
      life (years)
                  
                  
                  1 -
      1.5





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 110.  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 as of
September 30, 2008:




Options
                  
                  
                  Weighted
      average exercise priceOutstanding
      at year end June 30, 2008
                  
                  
                  2,238,696
                  
                  
                  
                  3.45Granted
                  
                  
                  190,000
                  
                  
                  
                  1.69Exercised
                  
                  
                  -
                  
                  
                  
                  -Forfeited
                  
                  
                  -
                  
                  
                  
                  -Expired
                  
                  
                  (417,857
                  )
                  
                  
                  1.18Outstanding
      at September 30, 2008
                  
                  
                  2,010,839
                  
                  
                  $
                  3.76





10
 Table of Contents








Options
      outstanding and exercisable as of September 30, 2008:Exercise
      Price
                          
                          
                          Outstanding
      Number of Shares
                          
                          Remaining  Life
                          
                          Exercisable Number
      of Shares$
                          1.00
      - 1.49
                          
                          
                          
                          52,500
                          
                          1 -
      2 years
                          
                          
                          52,500$
                          1.00
      - 1.49
                          
                          
                          
                          130,000
                          
                          2 -
      3 years
                          
                          
                          130,000$
                          1.50
      - 1.99
                          
                          
                          
                          40,000
                          
                          1
      year or less
                          
                          
                          40,000$
                          1.50
      - 1.99
                          
                          
                          
                          45,000
                          
                          1 -
      2 years
                          
                          
                          45,000$
                          1.50
      - 1.99
                          
                          
                          
                          120,000
                          
                          2 - 3
years
                          
                          
                          120,000$
                          2.00
      - 2.49
                          
                          
                          
                          323,447
                          
                          1
      year or less
                          
                          
                          323,447$
                          2.00
      – 2.49
                          
                          
                          
                          25,000
                          
                          1 -
      2 years
                          
                          
                          25,000$
                          2.00
      - 2.49
                          
                          
                          
                          255,000
                          
                          2 -
      3 years
                          
                          
                          255,000$
                          2.50
      - 2.99
                          
                          
                          
                          105,000
                          
                          1
      year or less
                          
                          
                          105,000$
                          2.50
      – 2.99
                          
                          
                          
                          144,892
                          
                          1 -
      2 years
                          
                          
                          144,892$
                          2.50
      – 2.99
                          
                          
                          
                          65,000
                          
                          2 -
      3 years
                          
                          
                          65,000$
                          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
                          
                          
                          -2,010,839
                          
                          
                          
                          
                          1,410,839





The exercisable options
had an intrinsic value of $11,375 at September 30, 2008. The
following table summarizes common stock warrants issued and outstanding as of
September 30, 2008:





Warrants
                    
                    
                    Weighted
      average exercise priceOutstanding
      at year June 30, 2008
                    
                    
                    11,717,692
                    
                    
                    
                    2.54Granted
                    
                    
                    4,646,465
                    
                    
                    
                    2.94Exercised
                    
                    
                    -
                    
                    
                    
                    -Cancelled
                    
                    
                    (2,424,243
                    )
                    
                    
                    3.27Expired
                    
                    
                    -
                    
                    
                    
                    -Outstanding
      at September 30, 2008
                    
                    
                    13,939,914
                    
                    
                    $
                    2.54








Warrants
      outstanding and exercisable as of September 30, 2008:Exercise
      Price
                                
                                
                                Outstanding
      Number of Shares
                                
                                Remaining
      Life
                                
                                Exercisable Number
      of Shares$
                                .25
                                
                                
                                
                                125,000
                                
                                1
      year or less
                                
                                
                                125,000$
                                1.65
                                
                                
                                
                                666,666
                                
                                5
      years
                                
                                
                                666,666$
                                1.65
                                
                                
                                
                                3,480,000
                                
                                6
      years
                                
                                
                                3,480,000$
                                2.50
                                
                                
                                
                                3,471,783
                                
                                1
      year or less
                                
                                
                                3,471,783$
                                2.75
                                
                                
                                
                                1,111,111
                                
                                7
      years
                                
                                
                                1,111,111$
                                3.00
                                
                                
                                
                                3,535,354
                                
                                7
      years
                                
                                
                                3,535,354$
                                4.00
                                
                                
                                
                                1,500,000
                                
                                6
      years
                                
                                
                                1,500,000$
                                5.00
                                
                                
                                
                                50,000
                                
                                3
      years
                                
                                
                                -13,939,914
                                
                                
                                
                                
                                13,889,914





At
September 30, 2008, there was $28,000 of unrecognized compensation expense
associated with the outstanding warrants. The exercisable warrants had an
intrinsic value of $125,000 at September 30,2008.





8.
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.





11
 Table of Contents





9.
Subsequent Events





During  October
2008, we granted 150,000 options to employees and directors in accordance with
their compensation packages. The fair value of options was $49,000 based upon
the Black Scholes Valuation model.





During theOctober2008, Hyperdynamics issuedstock as follows:





·
            188,877 shares of common stock for
      services valuedusing
      the market close price on the date of grantat $186,000.


·
            66,000 shares of common stock for
      stock payable of $103,000.


·
            250,000 shares upon the conversion
      of $563,000 of convertible
debentures.





As of
November 10, 2008, Hyperdynamics had not made a required scheduled interest
payment of $133,000 on its convertible debenture that had become due upon the
conversion of a portion of the debentures.  Hyperdynamics has not
received notice from the debenture holder that it is in default of the debenture
contract and is currently negotiating the timing and manner of the interest
payment with the investor.





10.
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.





The
following tables summarize certain balance sheet data as of September 30, 2008
and June 30, 2008 and income statement data about Hyperdynamics' reportable
segments and corporate overhead for the three months ended September 30, 2008
and 2007:





SCS
                  
                  
                  HYDR
                  
                  
                  Corporate
                  
                  
                  TotalSegment
      assetsAs
      of September 30, 2008
                  
                  $
                  7,642,000
                  
                  
                  $
                  3,415,000
                  
                  
                  $
                  2,318,000
                  
                  
                  $
                  13,375,000As
      of June 30, 2008
                  
                  
                  7,590,000
                  
                  
                  
                  3,774,000
                  
                  
                  
                  1,586,000
                  
                  
                  
                  12,950,000Three
      months endedSeptember
      30, 2008Revenues
      from external customers
                  
                  
                  -
                  
                  
                  
                  1,119,000
                  
                  
                  
                  -
                  
                  
                  
                  1,119,000Depreciation,
      depletion and amortization
                  
                  
                  24,000
                  
                  
                  
                  273,000
                  
                  
                  
                  9,000
                  
                  
                  
                  306,000Income
      (loss) from operations
                  
                  
                  (1,533,000
                  )
                  
                  
                  281,000
                  
                  
                  
                  (686,000
                  )
                  
                  
                  (1,938,000
                  )Expenditures
      for long-lived assets
                  
                  
                  111,000
                  
                  
                  
                  16,000
                  
                  
                  
                  -
                  
                  
                  
                  127,000September
      30, 2007Revenues
      from external customers
                  
                  
                  -
                  
                  
                  
                  314,000
                  
                  
                  
                  -
                  
                  
                  
                  314,000Depreciation,
      depletion and amortization
                  
                  
                  12,000
                  
                  
                  
                  113,000
                  
                  
                  
                  10,000
                  
                  
                  
                  135,000Loss
      from operations
                  
                  
                  (1,152,000
                  )
                  
                  
                  (823,000
                  )
                  
                  
                  (1,338,000
                  )
                  
                  
                  (3,313,000
                  )Expenditures
      for long-lived assets
                  
                  
                  279,000
                  
                  
                  
                  1,738,000
                  
                  
                  
                  11,000
                  
                  
                  
                  2,028,000








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.





12
 Table of Contents





Item2 Management's Discussion 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.   However, we
did realize income from operations from the domestic segment during the three
months ended September 30, 2008.  The income was due to our production
levels, the price of oil, and savings in lease operating costs as well as
general and administrative costs.  Since September 30, 2008, the price
of oil has dropped substantially.  Accordingly, we expect revenues and
income from operations to decline during the quarter ending December 31,
2008.   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.





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
three months ended September 30, 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.





·
            Our
      executive team travelled to Guinea during July 2008 and provided a
      technical update on our progress to the government of
    Guinea.








RESULTS
OF OPERATIONS





Based on
the factors discussed below for each segment and for the corporate overhead, the
net loss attributable to common shareholders decreased $495,000, or 15%, from
$(3,292,000), or $(0.06) per share during the three months ended September 30,
2007 to $(2,797,000), or $(0.05) per share during the three months ended
September 30, 2008.  The net loss chargeable to common shareholders
includes a provision for preferred stock dividends of $25,000 in each of the
three months ended September 30, 2008 and 2007.





Reportable
segments





Hyperdynamics
has two reportable segments: our international operations in Guinea (“SCS”) and
our domestic Louisiana operations (“HYDR”). SCS is engaged in oil and gas
exploration activities pertaining to offshore Guinea, West
Africa.   HYDR is engaged in oil and gas exploration and
production activities in Louisiana, USA. Hyperdynamics evaluates performance
based on profit or loss from operations. The reportable segments are managed by
separate management teams who are evaluated based on their segment's
performance.





13
 Table of Contents





Louisiana
Operations ("HYDR")





Three
months ended September 30, 2008 compared to three months ended September 30,
2007.





The
following table summarizes selected financial information about our domestic
operations:





Three
      months ended September 30,
                              
                              
                              Increase
                              
                              
                              %2008
                              
                              
                              2007
                              
                              
                              (decrease)
                              
                              
                              ChangeProduction
      dataGross
      barrels sold
                              
                              
                              15,144
                              
                              
                              
                              6,288
                              
                              
                              
                              8,856
                              
                              
                              
                              141
                              %Net
      barrels sold
                              
                              
                              9,505
                              
                              
                              
                              4,308
                              
                              
                              
                              5,197
                              
                              
                              
                              121
                              %Average
      sales price per barrel
                              
                              $
                              117.73
                              
                              
                              $
                              72.88
                              
                              
                              
                              44.85
                              
                              
                              
                              62
                              %Revenues
      from oil and gas production
                              
                              $
                              1,119,000
                              
                              
                              $
                              314,000
                              
                              
                              $
                              805,000
                              
                              
                              
                              256
                              %Costs
      and ExpensesLease
      operating costs
                              
                              
                              434,000
                              
                              
                              
                              854,000
                              
                              
                              
                              (420,000
                              )
                              
                              
                              (49
                              )%Depreciation,
      depletion, and amortization
                              
                              
                              273,000
                              
                              
                              
                              113,000
                              
                              
                              
                              160,000
                              
                              
                              
                              142
                              %Accretion
                              
                              
                              20,000
                              
                              
                              
                              5,000
                              
                              
                              
                              15,000
                              
                              
                              
                              300
                              %Selling,
      general and administrative expense
                              
                              
                              111,000
                              
                              
                              
                              165,000
                              
                              
                              
                              (54,000
                              )
                              
                              
                              (33
                              )%Income/(loss)
      from operations
                              
                              
                              281,000
                              
                              
                              
                              (823,000
                              )
                              
                              
                              (1,104,000
                              )
                              
                              
                              (134
                              )%





Income/(loss)
from operations changed due to the factors discussed below:





Revenues.   Our
revenues from oil and gas production increased due to higher oil production and
higher sales prices for oil. We have no revenues from gas
production.  The production increase is primarily attributable to
production from the oil wells acquired in July 2007 and our investments
there in.





Lease
operating costs include severance tax, workover, and routine operating
costs.  Severance tax varies with revenue and totaled $73,000 and
$26,000 for the three months ended September 30, 2008 and 2007, respectively.
The increase, $47,000, or  181%, is attributable to higher sales
revenues.  We had no workover expense during the quarter ended
September 30, 2008. We worked over or reworked seven oil wells and one service
well for a cost of $340,000 during the quarter ended September 30,
2007.  Other lease operating costs decreased $127,000, or 26%, to
$361,000 during the quarter ended September 30, 2008 from $488,000 during the
quarter ended September 30, 2007.  The decrease in these costs is
primarily attributable to cost savings achieved when we turned over operations
of, and 15% working interest in, our Magee Smith lease to a
new operator.





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 during the quarter partially offset by a decrease in the
depletion rate per barrel of oil equivalent produced.





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:





Other operational costs for
the three months ended September 30, 2008 was $17,000 in comparison to $153,000
in 2007.  This represents a decrease of 89%, or $136,000, due to
decreases in expenses related to repairs and maintenance, tools and yard costs,
field labor and decrease in number of field employees.   During
the quarter ended June 30, 2008, we restructured the field office and discharged
all but one administrative employee.





14
 Table of Contents





Administrative expensesincreased by $82,000.  The main driver in this increase was a
change in legal and professional expenses, which increased by
$143,000.  The increase in legal and professional costs can be
attributed to 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 and which reduced expense in the prior year
period, and increased costs for our annual reserve
report.   In addition, we experienced a net decrease in
administrative expenses of $61,000, which was attributable to decreases in
employee compensation expense and insurance expense.





International
Operations ("SCS")





Three
months ended September 30, 2008 compared to three months ended September 30,
2007.





The
following table summarizes selected financial information about our
international operations:





Three
      months ended September 30,
                              
                              
                              Increase
                              
                              
                              %2008
                              
                              
                              2007
                              
                              
                              (decrease)
                              
                              
                              ChangeCosts
      and ExpensesDepreciation,
      depletion, and amortization
                              
                              $
                              24,000
                              
                              
                              $
                              12,000
                              
                              
                              
                              12,000
                              
                              
                              
                              100
                              %Selling,
      general and administrative expense
                              
                              
                              1,509,000
                              
                              
                              
                              1,140,000
                              
                              
                              
                              369,000
                              
                              
                              
                              32
                              %Loss
      from operations
                              
                              
                              1,533,000
                              
                              
                              
                              1,152,000
                              
                              
                              
                              381,000
                              
                              
                              
                              33
                              %





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.





In-country costs, consisting
of advertising, lobbying, public relations, and office expense in Guinea,
decreased substantially, to $183,000 during the three months ended September 30,
2008 from $631,000 during the three months ended September 30,
2007.  This is a decrease of $448,000, or 71%.  During the
three months ended September 30, 2007, we had conducted extensive public
relations work in Guinea in order to promote and maintain positive public
sentiment towards Hyperdynamics in Guinea.





Professional and consulting
expenses includes a share based payment that resulted in expense of
$411,000 to a legal firm for consulting and legal expenses they are performing
with respect to our Guinea concession.  Other legal and consulting
costs increased by $90,000.  Thus, legal, professional, and consulting
costs increased $501,000, to $654,000 during the three months ended September
30, 2008 from $153,000 during the three months ended September 30,
2007.





Compensation expense
increased $233,000, or 160%, to $379,000 during the three months ended September
30, 2008 from $146,000 during the three months ended September 30,
2007.  The increase in compensation expense consists of salary and of
option grants for our geological and geophysical staff, who were not on our
payroll during the quarter ended September 30, 2007.





Travel expenses increased
42%, or $64,000, to $218,000 in 2008 from $154,000 in 2007, because of travel
conducted by members of our geological and geophysical staff
and  because of the cost of a delegation that travelled to Guinea in
July 2008. Other
administrative expenses increased by $19,000.





Corporate
Overhead





Three
months ended September 30, 2008 compared to three months ended September 30,
2007.





The
following table summarizes selected financial information about our corporate
overhead:





Three
      months ended September 30,
                              
                              
                              Increase
                              
                              
                              %2008
                              
                              
                              2007
                              
                              
                              (decrease)
                              
                              
                              ChangeCosts
      and ExpensesDepreciation,
      depletion, and amortization
                              
                              $
                              9,000
                              
                              
                              $
                              10,000
                              
                              
                              $
                              (1,000
                              )
                              
                              
                              (10
                              )%Selling,
      general and administrative expense
                              
                              
                              677,000
                              
                              
                              
                              1,328,000
                              
                              
                              
                              (651,000
                              )
                              
                              
                              (49
                              )%Loss
      from operations
                              
                              
                              686,000
                              
                              
                              
                              1,338,000
                              
                              
                              
                              (652,000
                              )
                              
                              
                              (49
                              )%





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 Table of Contents





Loss from
operations changed due to the factors discussed below:





Selling,
general and administrative expenses decreased primarily due to a decrease in
compensation expense.  Legal and professional, insurance, and travel
costs also decreased.





Compensation expense
decreased $566,000, or 63%, to $330,000 during the three months ended September
30, 2008 from $896,000 during the three months ended September 30,
2007.  The decrease in compensation expense consists primarily in
changes in option grants for employees and directors that occurred in 2007 but
were not repeated in 2008.





Professional and consulting
expenses decreased $31,000.





Travel expenses decreased
54%, or $27,000, because of travel conducted for investor relations and road
shows decreased during the three months ended September 30, 2008. Other administrativeexpense,
including insurance, decreased by $13,000, primarily due to reduction in the
cost of health insurance and commercial insurance.




Liquidity
and Capital Resources





Our ratio
of current assets to current liabilities (current ratio) was .85 to 1 at
September 30, 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.  Dividends payable of $372,000
and dividends payable to related party of $368,000 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 theGuineaconcession.  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 forGuinea. This amounts to approximately
$1,455,000 of the $2,944,000 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.





Management has evaluated our cash flow
projections in light of the reduced sales price for oil and we have assessed
that we have the liquidity necessary to continue to meet current obligations as
they become due throughout the coming 12 months. Current cash flow projections
take into account the effect of capital raised during September 2008, which
resulted in a cash inflow of $2,400,000 after financing costs and the payoff of
debt, cash flow from our domestic operations, and the implementation of cost
saving measures.





This cash flow does not include any
additional development of our production or adjustment to our operating budget.
We have three development wells that we are considering drilling that we
estimate would increase our production and revenues.  We previously
disclosed, in our 10-K filed on September 30, 2008, that our
Board  authorized us to proceed with the drilling on one of the
locations with a cash drilling cost associated of $250,000 and a cost to
complete to the point of production of an additional $470,000.  The
authorization for this project was contingent upon the price of oil remaining
above a target level. At current oil prices, this project is on
hold.





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 offshoreGuinea.  We now expect these major
funds to come primarily from selling working interest to financial partners or
joint venture partners that invest in ourGuineaoffshore 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. Such joint
ventures and the related liquidity would position us to acquire 3-D seismic
data.





In summary, we believe that between our
production, cost cutting measures, and the funding we have in place, we can meet
our overhead.   We are seeking joint venture or financial
partners to assist with the capital intensive exploration work offshoreGuinea.





16
 Table of Contents





Item3.  Quantitative and Qualitative Disclosures About Market
Risk




We are
exposed to various risks including energy commodity price risk, specifically,
risk associated with changing prices of oil. We expect oil prices to remain
volatile and unpredictable. If oil prices were to decline significantly,
revenues and cash flow would significantly decline, and our ability to borrow to
finance our operations could be adversely impacted.   We do not
hedge the oil commodity price risk at this time.  We believe this is
appropriate to the size and scope of our operations.





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





Item4.  Controls and procedures





We
carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of our disclosure controls and 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 September
30, 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 generally accepted accounting principles. Accordingly, management believes
that the financial statements included in this report fairly present in all
material respects our financial condition, results of operations and cash flows
for the periods presented.





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.





To
address the issues associated with the material weaknesses, 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. We have been implementing and will
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:





·
            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;


·
            Our
      new 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; and,


·
            Implementing
      policies and procedures designed to improve the overall control
      environment, such as obtaining timely acknowledgement of our Code of
      Ethics, and implementing restrictions on users access to posting in the
      accounting system;





These organizational and process changes
have improved our internal controls environment and increased the likelihood of
our identifying non-routine and non-systematic transactions. We will continue
our efforts to improve our control environment and to focus
on:





•
            improving our organizational
      structure to help achieve the proper number of, and quality of our,
      accounting and finance
personnel;





•
            refining our period-end financial
      reporting processes to improve the quality of our financial information;
      and





•
            improving our policies, processes
      and systems to help ensure that our financial reporting, operational and
      business requirements are met in a timely
  manner;





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 Table of Contents





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





Item1. Legal Proceedings





For
information regarding our legal proceedings see the legal proceedings disclosed
in Item 3 of our most recent on Form 10-K.




Item1A. 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.




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.





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 OfficerDated:
      November 10, 2008By:
      /s/ Sarah Berel-HarropSarah
      Berel-HarropChief
      Financial OfficerPrincipal
      Accounting OfficerDated:
      November 10, 2008






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