Document:

ex10_2.htm

    
      

    

    
      	
              Exhibit
      10.2

            	
              Note.

            

    

    

    

     

    NEITHER
THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS CONVERTIBLE HAVE
BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES
COMMISSION OF ANY STATE.  THESE SECURITIES HAVE BEEN SOLD IN RELIANCE
UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE “SECURITIES
ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS.

     

    HYPERDYNAMICS
CORPORATION

     

    Secured
Note

     

    
      	
              Issuance
      Date:  February 6, 2008

            	
              Original
      Principal
      Amount:                                                      $910,526

            
	
              No.
      HDY 201

            	 
      

    

    

    FOR VALUE RECEIVED,
HYPERDYNAMICS CORPORATION, a Delaware corporation (the “Company”), hereby
promises to pay to the order of YA GLOBAL INVESTMENTS, L.P. or registered
assigns (the “Holder”) the amount
set out above as the Original Principal Amount (as reduced pursuant to the terms
hereof pursuant to redemption, conversion or otherwise, the “Principal”) when due,
whether upon the Maturity Date (as defined below), on any Installment Date with
respect to the Installment Amount due on such Installment Date (each, as defined
herein), acceleration, redemption or otherwise (in each case in accordance with
the terms hereof) and to pay interest (“Interest”) on any
outstanding Principal at the applicable Interest Rate from the date set out
above as the Issuance Date (the “Issuance Date”) until
the same becomes due and payable, whether upon any Installment Date or the
Maturity Date or acceleration, conversion, redemption or otherwise (in each case
in accordance with the terms hereof).  This Secured Note (including
all Secured Notes issued in exchange, transfer or replacement hereof, this
“Note”) is one
of an issue of Secured Notes issued pursuant to the Securities Purchase
Agreement (collectively, the “Notes” and such other
Senior Notes, the “Other
Notes”).  Certain capitalized terms used herein are defined in
Section 17.

     

    GENERAL
TERMS

     

    Payment of
Principal.  On September 1, 2008 and each Installment Date
thereafter, the Company shall pay to the Holder Twenty-Two Thousand Seven
Hundred Sixty-Three Dollars ($22,763) (the “Installment Amount”)
in accordance with Section 3.  On the Maturity Date, the Company shall
pay to the Holder an amount in cash representing all outstanding Principal,
accrued and unpaid Interest.  The “Maturity Date” shall
be July 6, 2010, as may be extended at the option of the Holder (i) in the event
that, and for so long as, an Event of Default (as defined below) shall have
occurred and be continuing on the Maturity Date (as may be extended pursuant to
this Section 1) or any event shall have occurred and be continuing on the
Maturity Date (as may be extended pursuant to this Section 1) that with the
passage of time and the failure to cure would result in an Event of
Default.  Other than as specifically permitted by this Note, the
Company may not prepay or redeem any portion of the outstanding Principal
without the prior written consent of the Holder.

     

    
      
         

      

      
        1

        
          

        

      

      
         

      

    

    Interest.  Interest
shall accrue on the outstanding principal balance hereof at an annual rate equal
to twenty percent (20%) (“Interest
Rate”).  Interest shall be calculated on the basis of a 365-day
year and the actual number of days elapsed, to the extent permitted by
applicable law.  Interest that will accrue for the ninety (90) day
period beginning on the date hereof will be paid to the Company on the date
hereof, thereafter Interest hereunder shall be paid on each Installment Date and
on the Maturity Date (or sooner as provided herein) to the Holder or its
assignee in whose name this Note is registered on the records of the Company
regarding registration and transfers of Notes, in accordance with Section
3.

     

    Security.  The
Note is secured by a security interest in all of the assets of the Company and
of Trendsetter Production Company as evidenced by the security agreement of even
date herewith between the Holder, the Company and Trendsetter Production Company
(the “Security
Agreement”).

     

    Primary
Market.  As promptly as possible, but in no event later than 5
p.m. New York City time on February 12, 2008, the Company shall file an
application for the listing with the American Stock Exchange of one million and
six hundred thousand (1,600,000) shares of Common Stock to be issuable upon
conversion of this Note (such shares, the “Listed Conversion
Shares”) and upon notification that such Listed Conversion Shares have
been listed will use its best efforts to secure and maintain such listing; provided, however, that any
Listed Conversion Shares that have not been issued may be issued to the Holder
upon exercise of the Warrants (as defined in the Securities Purchase Agreement)
notwithstanding any designation in the listing application or this Section 1(d)
as Conversion Shares.  If upon conversion of the Notes there are an
insufficient number of unissued Listed Shares (as defined in the Securities
Purchase Agreement) for the Company to satisfy such exercise, the Company shall
as promptly as possible secure the listing of an additional number of shares of
Common Stock necessary to satisfy such conversion.

     

    EVENTS OF
DEFAULT.

     

    An “Event of Default”,
wherever used herein, means any one of the following events (whatever the reason
and whether it shall be voluntary or involuntary or effected by operation of law
or pursuant to any judgment, decree or order of any court, or any order, rule or
regulation of any administrative or governmental body):

     

    
      
         

      

      
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    the
Company’s failure to pay to the Holder any amount of Principal, Interest, or
other amounts when and as due under this Note (including, without limitation,
the Company’s failure to pay any redemption payments or amounts hereunder) or
any other Transaction Document; provided, however, that only
with respect to an Event of Default caused by a failure set forth in this
Section 2(a)(i), the Company will have three (3) Business Days following notice
from Buyers of such non payment to cure such Event of Default;

     

    The
Company or any subsidiary of the Company shall commence, or there shall be
commenced against the Company or any subsidiary of the Company under any
applicable bankruptcy or insolvency laws as now or hereafter in effect or any
successor thereto, or the Company or any subsidiary of the Company commences any
other proceeding under any reorganization, arrangement, adjustment of debt,
relief of debtors, dissolution, insolvency or liquidation or similar law of any
jurisdiction whether now or hereafter in effect relating to the Company or any
subsidiary of the Company or there is commenced against the Company or any
subsidiary of the Company any such bankruptcy, insolvency or other proceeding
which remains undismissed for a period of 61 days; or the Company or any
subsidiary of the Company is adjudicated insolvent or bankrupt; or any order of
relief or other order approving any such case or proceeding is entered; or the
Company or any subsidiary of the Company suffers any appointment of any
custodian, private or court appointed receiver or the like for it or any
substantial part of its property which continues undischarged or unstayed for a
period of sixty one (61) days; or the Company or any subsidiary of the Company
makes a general assignment for the benefit of creditors; or the Company or any
subsidiary of the Company shall fail to pay, or shall state that it is unable to
pay, or shall be unable to pay, its debts generally as they become due; or the
Company or any subsidiary of the Company shall call a meeting of its creditors
with a view to arranging a composition, adjustment or restructuring of its debts
(provided, however, that one on one negotiations of debt repayments will not in
and of themselves be deemed an Event of Default); or the Company or any
subsidiary of the Company shall by any act or failure to act expressly indicate
its consent to, approval of or acquiescence in any of the foregoing; or any
corporate or other action is taken by the Company or any subsidiary of the
Company for the purpose of effecting any of the foregoing;

     

    The
Company or any subsidiary of the Company shall default in any of its
obligations, other than any obligation to a trade creditor, under any other note
or any mortgage, credit agreement or other facility, indenture agreement,
factoring agreement or other instrument under which there may be issued, or by
which there may be secured or evidenced any indebtedness for borrowed money or
money due under any long term leasing or factoring arrangement of the Company or
any subsidiary of the Company in an amount exceeding $250,000, whether such
indebtedness now exists or shall hereafter be created and such default shall
result in such indebtedness becoming or being declared due and payable prior to
the date on which it would otherwise become due and payable;

     

    If the Common Stock is quoted or listed for
trading on any of the following and it ceases to be so quoted or listed for
trading and shall not again be quoted or listed for trading on any Primary
Market within five (5) Trading Days of such delisting: (a) the American Stock
Exchange, (b) New York Stock Exchange, (c) the Nasdaq Global Market, (d) the
Nasdaq Capital Market, or (e) the Nasdaq OTC Bulletin Board (“OTCBB”) (each, a
“Primary Market”);

     

    
      
         

      

      
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    The
Company or any subsidiary of the Company shall be a party to any Change of
Control Transaction (as defined in Section 17) unless in connection with such
Change of Control Transaction this Note is retired;

     

    The
Company’s (A) failure to cure a Conversion Failure (as defined herein) by
delivery of the required number of shares of Common Stock within five (5)
Business Days after the applicable Conversion Failure or (B) notice, written or
oral, to any holder of the Notes including by way of public announcement, at any
time, of its intention not to comply with a request for conversion of any Notes
into shares of Common Stock is tendered in accordance with the provision of the
Notes, other than pursuant to Section 4(c).

     

    The
Company shall fail for any reason to deliver the payment in cash pursuant to a
Buy In (as defined herein) within three (3) Business Days after such payment is
due;

     

    The
Company shall fail to observe or perform any other covenant, agreement or
warranty contained in, or otherwise commit any breach or default of any
provision of this Note (except as may be covered by Section 2(a)(i) through
2(a)(viii) hereof) or any Transaction Document (as defined in Section 17) which
is not cured within the time prescribed, or if no time period is prescribed,
then within twenty (20) days after the Company is provided with written notice
thereof from the Holder; provided, however, that the
Company’s failure to comply with the covenants set forth in Section 4(k) of the
Securities Purchase Agreement shall not be deemed an Event of Default for so
long as the Deposit Agreements (as such term is defined in the Security
Agreement, dated February 6, 2008, by and between the Company, the Holder and
certain subsidiaries of the Company) remain in full force and
effect.

     

    any Event
of Default (as defined in the Other Notes) occurs with respect to any Other
Notes.

     

    During
the time that any portion of this Note is outstanding, if any Event of Default
has occurred, (i) the full unpaid Principal amount of this Note, together with
interest and other amounts owing in respect thereof, to the date of acceleration
shall become immediately due and payable in cash, and (ii) the Holder shall have
the right (but not the obligation) to convert this Note into Common Stock at the
Conversion Price.  The Holder need not provide and the Company hereby
waives any presentment, demand, protest or other notice of any kind, (other than
required notice of conversion) and the Holder may immediately and without
expiration of any grace period enforce any and all of its rights and remedies
hereunder and all other remedies available to it under applicable law. Such
declaration may be rescinded and annulled by Holder at any time prior to payment
hereunder. No such rescission or annulment shall affect any subsequent Event of
Default or impair any right consequent thereon.

     

    During
the time that any portion of this Note is outstanding, if any Event of Default
has occurred, the Company shall by 4:59 p.m., New York Time, on the Business Day
following learning of the Event of Default, file with the U.S. Securities and
Exchange Commission (the “SEC”) a Current
Report on Form 8-K (the “Default Form 8-K”)
disclosing that (i) an Event of Default has occurred and (ii) in accordance with
their terms, the Notes are convertible, at the option of the Holder, into shares
of Common Stock.

     

    
      
         

      

      
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    COMPANY
PAYMENTS.

     

    On each
applicable Installment Date, the Company shall pay to the Holder of this Note by
wire transfer of immediately available funds, an amount equal to the accrued and
unpaid interest due on the Note and the Installment Amount, if any, due on such
date.

     

    The
Company at its option shall have the right to redeem (“Optional Redemption”)
a portion or all amounts outstanding under this Note in addition to any
Installment Amount prior to the Maturity Date.  The Company shall pay
an amount equal to the principal amount being redeemed plus a redemption premium
(“Redemption
Premium”) equal to fifteen percent (15%) of the Principal amount being
redeemed, and accrued Interest, (collectively referred to as the “Company Additional
Redemption
Amount”).  In order to make a redemption pursuant to this
Section, the Company shall first provide written notice to the Holder of its
intention to make a redemption (the “Redemption Notice”)
setting forth the amount of Principal it desires to redeem.  After
receipt of the Redemption Notice, if an Event of Default has occurred, the
Holder shall have fifteen (15) Business Days to elect to convert all or any
portion of this Debenture, subject to the limitations set forth in Section
4(b).  On the fourth (4th) Business Day after the Redemption Notice,
the Company shall deliver to the Holder the Company Additional Redemption Amount
with respect to the Principal amount redeemed after giving effect to any
conversions effected during the three (3) Business Day period.

     

    CONVERSION OF
DEBENTURE. At any time following an Event of Default, this Note
shall be convertible at the option of the Holder, into shares of the Company’s
Common Stock, on the terms and conditions set forth in this Section
4.

     

    Conversion
Right.  Subject to the provisions of Section 4(c), at any time
following an Event of Default, the Holder shall be entitled to convert any
portion of the outstanding and unpaid Conversion Amount (as defined below) into
fully paid and nonassessable shares of Common Stock in accordance with Section
4(b), at the Conversion Rate (as defined below).  The number of shares
of Common Stock issuable upon conversion of any Conversion Amount pursuant to
this Section 4(a) shall be determined by dividing (x) such Conversion Amount by
(y) the Conversion Price (the “Conversion
Rate”).  The Company shall not issue any fraction of a share of
Common Stock upon any conversion.  If the issuance would result in the
issuance of a fraction of a share of Common Stock, the Company shall round such
fraction of a share of Common Stock up to the nearest whole
share.  The Company shall pay any and all transfer, stamp and similar
taxes that may be payable with respect to the issuance and delivery of Common
Stock upon conversion of any Conversion Amount.

     

    “Conversion Amount”
means the full unpaid Principal amount of this Note together with accrued
Interest and other amounts owing to the Conversion Date (as defined
below).

     

    “Conversion Price”
means, as of any Conversion Date or other date of determination, the lesser of
(i) Two Dollars ($2.00) or (ii) seventy percent (70%) of the lowest Closing Bid
Price of the Common Stock during the fifteen (15) consecutive Trading Days prior
to the Conversion Date as quoted by Bloomberg, in each case subject to
adjustment as provided herein.

     

    
      
         

      

      
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    Mechanics of
Conversion.

     

    Optional
Conversion.  Following an Event of Default, to convert the
Conversion Amount into shares of Common Stock on any date (a “Conversion Date”),
the Holder shall (A) transmit by facsimile (or otherwise deliver), for receipt
on or prior to 11:59 p.m., New York Time, on such date, a copy of an executed
notice of conversion in the form attached hereto as Exhibit I (the “Conversion Notice”)
to the Company and (B) if required by Section 4(b)(iii), surrender this Note to
a nationally recognized overnight delivery service for delivery to the Company
(or an indemnification undertaking reasonably satisfactory to the Company with
respect to this Note in the case of its loss, theft or
destruction).  On or before 4:59 p.m., New York Time, on the Business
Day following the date of receipt of a the first Conversion Notice the Company
shall file or cause to be filed the Default Form 8-K if such filing has not
already been made.  On or before the third Business Day following the
date of receipt of a Conversion Notice (the “Share Delivery
Date”), the Company shall (X) if legends are not required to be placed on
certificates of Common Stock pursuant to the Securities Purchase Agreement and
provided that the Transfer Agent is participating in the Depository Trust
Company’s (“DTC”) Fast Automated
Securities Transfer Program, credit such aggregate number of shares of Common
Stock to which the Holder shall be entitled to the Holder’s or its designee’s
balance account with DTC through its Deposit Withdrawal Agent Commission system
or (Y) if the Transfer Agent is not participating in the DTC Fast Automated
Securities Transfer Program, issue and deliver to the address as specified in
the Conversion Notice, a certificate, registered in the name of the Holder or
its designee, for the number of shares of Common Stock to which the Holder shall
be entitled which certificates shall not bear any restrictive legends unless
required pursuant to Section 2(g) of the Securities Purchase
Agreement.  If this Note is physically surrendered for conversion and
the outstanding Principal of this Note is greater than the Principal portion of
the Conversion Amount being converted, then the Company shall as soon as
practicable and in no event later than three (3) Business Days after receipt of
this Note and at its own expense, issue and deliver to the holder a new Note
representing the outstanding Principal not converted.  The Person or
Persons entitled to receive the shares of Common Stock issuable upon a
conversion of this Note shall be treated for all purposes as the record holder
or holders of such shares of Common Stock upon the transmission of a Conversion
Notice.  In the event of a partial conversion of this Note pursuant
hereto, the principal amount converted shall be deducted from the Installment
Amounts due on subsequent Installment Dates.

     

    Company’s Failure to Timely
Convert.  If within three (3) Trading Days after the Company’s
receipt of the facsimile copy of a Conversion Notice the Company shall fail to
issue and deliver a certificate to the Holder or credit the Holder’s balance
account with DTC for the number of shares of Common Stock to which the Holder is
entitled upon such holder’s conversion of any Conversion Amount (a “Conversion Failure”),
and if on or after such Trading Day the Holder purchases (in an open market
transaction or otherwise) Common Stock to deliver in satisfaction of a sale by
the Holder of Common Stock issuable upon such conversion that the Holder
anticipated receiving from the Company (a “Buy-In”), then the
Company shall, within three (3) Business Days after the Holder’s request and in
the Holder’s discretion, either (i) pay cash to the Holder in an amount equal to
the Holder’s total purchase price (including brokerage commissions and other out
of pocket expenses, if any) for the shares of Common Stock so purchased (the
“Buy-In Price”), at which point the
Company’s obligation to deliver such certificate (and to issue such Common
Stock) shall terminate, or (ii) promptly honor its obligation to deliver to the
Holder a certificate or certificates representing such Common Stock and pay cash
to the Holder in an amount equal to the excess (if any) of the Buy-In Price over
the product of (A) such number of shares of Common Stock, times (B) the Closing
Bid Price on the Conversion Date.

     

    
      
         

      

      
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    Book-Entry.
Notwithstanding anything to the contrary set forth herein, upon conversion of
any portion of this Note in accordance with the terms hereof, the Holder shall
not be required to physically surrender this Note to the Company unless (A) the
full Conversion Amount represented by this Note is being converted or (B) the
Holder has provided the Company with prior written notice (which notice may be
included in a Conversion Notice) requesting reissuance of this Note upon
physical surrender of this Note.  The Holder and the Company shall
maintain records showing the Principal and Interest converted and the dates of
such conversions or shall use such other method, reasonably satisfactory to the
Holder and the Company, so as not to require physical surrender of this Note
upon conversion.

     

    Limitations on
Conversions.

     

    Beneficial
Ownership.  The Company shall not effect any conversions of
this Note and the Holder shall not have the right to convert any portion of this
Note or receive shares of Common Stock as payment of interest hereunder to the
extent that after giving effect to such conversion or receipt of such interest
payment, the Holder, together with any affiliate thereof, would beneficially own
(as determined in accordance with Section 13(d) of the Exchange Act and the
rules promulgated thereunder) in excess of 4.99% of the number of shares of
Common Stock outstanding immediately after giving effect to such conversion or
receipt of shares as payment of interest.    Since the
Holder will not be obligated to report to the Company the number of shares of
Common Stock it may hold at the time of a conversion hereunder, unless the
conversion at issue would result in the issuance of shares of Common Stock in
excess of 4.99% of the then outstanding shares of Common Stock without regard to
any other shares which may be beneficially owned by the Holder or an affiliate
thereof, the Holder shall have the authority and obligation to determine whether
the restriction contained in this Section will limit any particular conversion
hereunder and to the extent that the Holder determines that the limitation
contained in this Section applies, the determination of which portion of the
principal amount of this Note is convertible shall be the responsibility and
obligation of the Holder.  If the Holder has delivered a Conversion
Notice for a principal amount of this Note that, without regard to any other
shares that the Holder or its affiliates may beneficially own, would result in
the issuance in excess of the permitted amount hereunder, the Company shall
notify the Holder of this fact and shall honor the conversion for the maximum
principal amount permitted to be converted on such Conversion Date in accordance
with Section 4(a) and, any principal amount tendered for conversion in excess of
the permitted amount hereunder shall remain outstanding under this Note. The
provisions of this Section may be waived by a Holder (but only as to itself and
not to any other Holder) upon not less than 65 days prior notice to the Company.
Other Holders shall be unaffected by any such waiver.

     

    Principal Market
Regulation.  The Company shall not be obligated to issue any
shares of Common Stock upon conversion of the Notes or exercise of the Warrants
if the issuance of such shares of Common Stock would cause the Company to breach
its obligations under the rules or regulations of the American Stock Exchange
(the “Exchange
Cap”), except that such limitation shall not apply in the event that the
Company (A) obtains the approval of its stockholders as required by the
applicable rules of the American Stock Exchange for issuances of Common Stock in
excess of such amount or (B) obtains a written opinion from outside counsel to
the Company that such approval is not required, which opinion shall be
reasonably satisfactory to the Buyer.  Until such approval or written
opinion is obtained, the Company shall not issue to the Holder in the aggregate,
Commitment Shares or, upon conversion or exercise or otherwise, as applicable,
of Notes or Warrants, Common Stock in an amount greater than the Exchange
Cap

     

    
      
         

      

      
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    Other
Provisions.

     

    All
calculations under this Section 4 shall be rounded to the nearest $0.0001 or
whole share.

     

    The
Company covenants that it will at all times reserve and keep available out of
its authorized and unissued shares of Common Stock, free from preemptive rights
or any other actual contingent purchase rights of persons other than the Holder,
not less than such number of shares of the Common Stock as shall (subject to any
additional requirements of the Company as to reservation of such shares set
forth in this Note or in the Transaction Documents) be issuable (taking into
account the adjustments and restrictions set forth herein) upon the conversion
of the Conversion Amount.

     

    Nothing
herein shall limit a Holder’s right to pursue actual damages for the Company’s
failure to deliver certificates representing shares of Common Stock upon
conversion within the period specified herein and such Holder shall have the
right to pursue all remedies available to it at law or in equity including,
without limitation, a decree of specific performance and/or injunctive relief,
in each case without the need to post a bond or provide other security. The
exercise of any such rights shall not prohibit the Holder from seeking to
enforce damages pursuant to any other Section hereof or under applicable
law.

     

    Adjustments to Conversion
Price

     

    Adjustment of Conversion
Price upon Issuance of Common Stock.  If the Company, at any
time while this Note is outstanding, issues or sells, or in accordance with this
Section 5(a) is deemed to have issued or sold, any shares of Common Stock,
excluding shares of Common Stock deemed to have been issued or sold by the
Company in connection with any Excluded Securities, for a consideration per
share (the “New
Issuance Price”) less than a price equal to the Conversion Price in
effect immediately prior to such issue or sale (such price the “Applicable Price”)
(the foregoing a “Dilutive Issuance”),
then immediately after such Dilutive Issuance the Conversion Price then in
effect shall be reduced to an amount equal to the New Issuance
Price.  For purposes of determining the adjusted Conversion Price
under this Section 5(a), the following shall be applicable:

     

    Issuance of
Options.  If the Company in any manner grants or sells any
Options and the lowest price per share for which one share of Common Stock is
issuable upon the exercise of any such Option or upon conversion or exchange or
exercise of any Convertible Securities issuable upon exercise of such Option is
less than the Applicable Price, then such share of Common Stock shall be deemed
to be outstanding and to have been issued and sold by the Company at the time of
the granting or sale of such Option for such price per share.  For
purposes of this Section, the “lowest price per share for which one share of
Common Stock is issuable upon the exercise of any such Option or upon conversion
or exchange or exercise of any Convertible Securities issuable upon exercise of
such Option” shall be equal to the sum of the lowest amounts of consideration
(if any) received or receivable by the Company with respect to any one share of
Common Stock upon granting or sale of the Option, upon exercise of the Option
and upon conversion or exchange or exercise of any Convertible Security issuable
upon exercise of such Option.  No further adjustment of the Conversion
Price shall be made upon the actual issuance of such share of Common Stock or of
such Convertible Securities upon the exercise of such Options or upon the actual
issuance of such Common Stock upon conversion or exchange or exercise of such
Convertible Securities.

     

    
      
         

      

      
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    Issuance of Convertible
Securities.  If the Company in any manner issues or sells any
Convertible Securities and the lowest price per share for which one share of
Common Stock is issuable upon such conversion or exchange or exercise thereof is
less than the Applicable Price, then such share of Common Stock shall be deemed
to be outstanding and to have been issued and sold by the Company at the time of
the issuance or sale of such Convertible Securities for such price per
share.  For the purposes of this Section, the “lowest price per share
for which one share of Common Stock is issuable upon such conversion or exchange
or exercise” shall be equal to the sum of the lowest amounts of consideration
(if any) received or receivable by the Company with respect to any one share of
Common Stock upon the issuance or sale of the Convertible Security and upon the
conversion or exchange or exercise of such Convertible Security.  No
further adjustment of the Conversion Price shall be made upon the actual
issuance of such share of Common Stock upon conversion or exchange or exercise
of such Convertible Securities, and if any such issue or sale of such
Convertible Securities is made upon exercise of any Options for which adjustment
of the Conversion Price had been or are to be made pursuant to other provisions
of this Section, no further adjustment of the Conversion Price shall be made by
reason of such issue or sale.

     

    Change in Option Price or
Rate of Conversion.  If the purchase price provided for in any
Options, the additional consideration, if any, payable upon the issue,
conversion, exchange or exercise of any Convertible Securities, or the rate at
which any Convertible Securities are convertible into or exchangeable or
exercisable for Common Stock changes at any time, the Conversion Price in effect
at the time of such change shall be adjusted to the Conversion Price which would
have been in effect at such time had such Options or Convertible Securities
provided for such changed purchase price, additional consideration or changed
conversion rate, as the case may be, at the time initially granted, issued or
sold.  For purposes of this Section, if the terms of any Option or
Convertible Security that was outstanding as of the Issuance Date are changed in
the manner described in the immediately preceding sentence, then such Option or
Convertible Security and the Common Stock deemed issuable upon exercise,
conversion or exchange thereof shall be deemed to have been issued as of the
date of such change.  No adjustment shall be made if such adjustment
would result in an increase of the Conversion Price then in effect.

     

    Calculation of Consideration
Received.  In case any Option is issued in connection with the
issue or sale of other securities of the Company, together comprising one
integrated transaction in which no specific consideration is allocated to such
Options by the parties thereto, the Options will be deemed to have been issued
for the difference of (x) the aggregate fair market value of such Options and
other securities issued or sold in such integrated transaction, less (y) the
fair market value of the securities other than such Option, issued or sold in
such transaction and the other securities issued or sold in such integrated
transaction will be deemed to have been issued or sold for the balance of the
consideration received by the Company.  If any Common Stock, Options
or Convertible Securities are issued or sold or deemed to have been issued or
sold for cash, the consideration received therefor will be deemed to be the
gross amount raised by the Company; provided, however, that such gross amount is
not greater than 110% of the net amount received by the Company
therefor.  If any Common Stock, Options or Convertible Securities are
issued or sold for a consideration other than cash, the amount of the
consideration other than cash received by the Company will be the fair value of
such consideration, except where such consideration consists of securities, in
which case the amount of consideration received by the Company will be the
Closing Bid Price of such securities on the date of receipt.  If any
Common Stock, Options or Convertible Securities are issued to the owners of the
non-surviving entity in connection with any merger in which the Company is the
surviving entity, the amount of consideration therefor will be deemed to be the
fair value of such portion of the net assets and business of the non-surviving
entity as is attributable to such Common Stock, Options or Convertible
Securities, as the case may be.  The fair value of any consideration
other than cash or securities will be determined jointly by the Company and the
Holder.  If such parties are unable to reach agreement within ten (10)
days after the occurrence of an event requiring valuation (the “Valuation Event”),
the fair value of such consideration will be determined within five (5) Business
Days after the tenth (10th) day
following the Valuation Event by an independent, reputable appraiser jointly
selected by the Company and the Holder.  The determination of such
appraiser shall be deemed binding upon all parties absent manifest error and the
fees and expenses of such appraiser shall be borne by the Company.

     

    
      
         

      

      
        9

        
          

        

      

      
         

      

    

     

    Record
Date.  If the Company takes a record of the holders of Common
Stock for the purpose of entitling them (A) to receive a dividend or other
distribution payable in Common Stock, Options or in Convertible Securities or
(B) to subscribe for or purchase Common Stock, Options or Convertible
Securities, then such record date will be deemed to be the date of the issue or
sale of the Common Stock deemed to have been issued or sold upon the declaration
of such dividend or the making of such other distribution or the date of the
granting of such right of subscription or purchase, as the case may
be.

     

    Adjustment of Conversion
Price upon Subdivision or Combination of Common Stock.  If the
Company, at any time while this Note is outstanding, shall (a) pay a stock
dividend or otherwise make a distribution or distributions on shares of its
Common Stock or any other equity or equity equivalent securities payable in
shares of Common Stock, (b) subdivide outstanding shares of Common Stock into a
larger number of shares, (c) combine (including by way of reverse stock split)
outstanding shares of Common Stock into a smaller number of shares, or (d) issue
by reclassification of shares of the Common Stock any shares of capital stock of
the Company, then the Conversion Price shall be multiplied by a fraction of
which the numerator shall be the number of shares of Common Stock (excluding
treasury shares, if any) outstanding before such event and of which the
denominator shall be the number of shares of Common Stock outstanding after such
event. Any adjustment made pursuant to this Section shall become effective
immediately after the record date for the determination of stockholders entitled
to receive such dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision, combination or
re-classification.

     

    
      
         

      

      
        10

        
          

        

      

      
         

      

    

     

    Purchase
Rights.  If at any time the Company grants, issues or sells any
Options, Convertible Securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock (the “Purchase Rights”),
then the Holder will be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which the Holder could have
acquired if the Holder had held the number of shares of Common Stock acquirable
upon complete conversion of this Note (without taking into account any
limitations or restrictions on the convertibility of this Note) immediately
before the date on which a record is taken for the grant, issuance or sale of
such Purchase Rights, or, if no such record is taken, the date as of which the
record holders of Common Stock are to be determined for the grant, issue or sale
of such Purchase Rights.

     

    Other
Events.  If any event occurs of the type contemplated by the
provisions of this Section 4 but not expressly provided for by such provisions
(including, without limitation, the granting of stock appreciation rights,
phantom stock rights or other rights with equity features), then the Company’s
Board of Directors will make an appropriate adjustment in the Conversion Price
so as to protect the rights of the Holder under this Note; provided that no such
adjustment will increase the Conversion Price as otherwise determined pursuant
to this Section 5.

     

    Other Corporate
Events.  In addition to and not in substitution for any other
rights hereunder, prior to the consummation of any Fundamental Transaction
pursuant to which holders of shares of Common Stock are entitled to receive
securities or other assets with respect to or in exchange for shares of Common
Stock (a “Corporate
Event”), the Company shall make appropriate provision to insure that the
Holder will thereafter have the right to receive upon a conversion of this Note,
at the Holder’s option, (i) in addition to the shares of Common Stock receivable
upon such conversion, such securities or other assets to which the Holder would
have been entitled with respect to such shares of Common Stock had such shares
of Common Stock been held by the Holder upon the consummation of such Corporate
Event (without taking into account any limitations or restrictions on the
convertibility of this Note) or (ii) in lieu of the shares of Common Stock
otherwise receivable upon such conversion, such securities or other assets
received by the holders of shares of Common Stock in connection with the
consummation of such Corporate Event in such amounts as the Holder would have
been entitled to receive had this Note initially been issued with conversion
rights for the form of such consideration (as opposed to shares of Common Stock)
at a conversion rate for such consideration commensurate with the Conversion
Rate.  Provision made pursuant to the preceding sentence shall be in a
form and substance satisfactory to the Required Holders.  The
provisions of this Section shall apply similarly and equally to successive
Corporate Events and shall be applied without regard to any limitations on the
conversion or redemption of this Note.

     

    Whenever
the Conversion Price is adjusted pursuant to Section 5 hereof, the Company shall
promptly mail to the Holder a notice setting forth the Conversion Price after
such adjustment and setting forth a brief statement of the facts requiring such
adjustment.

     

    
      
         

      

      
        11

        
          

        

      

      
         

      

    

     

    In case
of any (1) merger or consolidation of the Company or any subsidiary of the
Company with or into another Person, or (2) sale by the Company or any
subsidiary of the Company of more than one-half of the assets of the Company in
one or a series of related transactions, a Holder shall have the right to (A)
exercise any rights under Section 2(b), (B) convert the aggregate amount of this
Note then outstanding into the shares of stock and other securities, cash and
property receivable upon or deemed to be held by holders of Common Stock
following such merger, consolidation or sale, and such Holder shall be entitled
upon such event or series of related events to receive such amount of
securities, cash and property as the shares of Common Stock into which such
aggregate principal amount of this Note could have been converted immediately
prior to such merger, consolidation or sales would have been entitled, or (C) in
the case of a merger or consolidation, require the surviving entity to issue to
the Holder a Note with a principal amount equal to the aggregate principal
amount of this Note then held by such Holder, plus all accrued and unpaid
interest and other amounts owing thereon, which such newly issued Note shall
have terms identical (including with respect to conversion) to the terms of this
Note, and shall be entitled to all of the rights and privileges of the Holder of
this Note set forth herein and the agreements pursuant to which this Notes were
issued. In the case of clause (C), the conversion price applicable for the newly
issued shares of convertible preferred stock or Notes shall be based upon the
amount of securities, cash and property that each share of Common Stock would
receive in such transaction and the Conversion Price in effect immediately prior
to the effectiveness or closing date for such transaction. The terms of any such
merger, sale or consolidation shall include such terms so as to continue to give
the Holder the right to receive the securities, cash and property set forth in
this Section upon any conversion or redemption following such event. This
provision shall similarly apply to successive such events.

     

    REISSUANCE OF THIS
NOTE.

     

    Transfer.  If
this Note is to be transferred, the Holder shall surrender this Note to the
Company, whereupon the Company will, subject to the satisfaction of the transfer
provisions of the Securities Purchase Agreement, forthwith issue and deliver
upon the order of the Holder a new Note (in accordance with Section 6(d)),
registered in the name of the registered transferee or assignee, representing
the outstanding Principal being transferred by the Holder and, if less than the
entire outstanding Principal is being transferred, a new Note (in accordance
with Section 6(d)) to the Holder representing the outstanding Principal not
being transferred.  The Holder and any assignee, by acceptance of this
Note, acknowledge and agree that, by reason of the provisions of Section
4(b)(iii) following conversion or redemption of any portion of this Note, the
outstanding Principal represented by this Note may be less than the Principal
stated on the face of this Note.

     

    Lost, Stolen or Mutilated
Note.  Upon receipt by the Company of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Note, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the Holder to the Company in customary form and,
in the case of mutilation, upon surrender and cancellation of this Note, the
Company shall execute and deliver to the Holder a new Note (in accordance with
Section 6(d)) representing the outstanding Principal.

     

    
      
         

      

      
        12

        
          

        

      

      
         

      

    

     

    Note Exchangeable for
Different Denominations.  This Note is exchangeable, upon the
surrender hereof by the Holder at the principal office of the Company, for a new
Note or Notes (in accordance with Section 6(d)) representing in the aggregate
the outstanding Principal of this Note, and each such new Note will represent
such portion of such outstanding Principal as is designated by the Holder at the
time of such surrender.

     

    Issuance of New
Notes.  Whenever the Company is required to issue a new Note
pursuant to the terms of this Note, such new Note (i) shall be of like tenor
with this Note, (ii) shall represent, as indicated on the face of such new Note,
the Principal remaining outstanding (or in the case of a new Note being issued
pursuant to Section 6(a) or Section 6(c), the Principal designated by the Holder
which, when added to the principal represented by the other new Notes issued in
connection with such issuance, does not exceed the Principal remaining
outstanding under this Note immediately prior to such issuance of new Notes),
(iii) shall have an issuance date, as indicated on the face of such new Note,
which is the same as the Issuance Date of this Note, (iv) shall have the same
rights and conditions as this Note, and (v) shall represent accrued and unpaid
Interest from the Issuance Date.

     

    NOTICES.              Any
notices, consents, waivers or other communications required or permitted to be
given under the terms hereof must be in writing and will be deemed to have been
delivered:  (i) upon receipt, when delivered personally; (ii) upon
receipt, when sent by facsimile (provided confirmation of transmission is
mechanically or electronically generated and kept on file by the sending party);
or (iii) one (1) Trading Day after deposit with a nationally recognized
overnight delivery service, in each case properly addressed to the party to
receive the same.  The addresses and facsimile numbers for such
communications shall be:

     

    

    
      	
              If
      to the Company, to:

            	
              Hyperdynamics
      Corporation

            
	 
      	
              One
      Sugar Creek Center Boulevard, Suite 125

            
	 
      	
              Sugar
      Land, Texas 77478

            
	 
      	
              Attention:                      Kent
      P. Watts

            
	 
      	
              Telephone:                    (713)
      353-9400

            
	 
      	
              Facsimile:                      
      (713) 353-9421

            
	 
      	 
      
	
              With
      a copy to:

            	
              Joel
      Seidner, Esq.

            
	 
      	
              880
      Tully Road #50

            
	 
      	
              Houston,
      TX 77059

            
	 
      	
              Telephone:                     (281)
      493-1311

            
	 
      	
              Facsimile:                       
      (281) 667-3292

            
	 
      	 
      

    

    
      	
              If
      to the Holder:

            	
              YA
      Global Investments, LP

            
	 
      	
              101
      Hudson Street, Suite 3700

            
	 
      	
              Jersey
      City, NJ  07303

            
	 
      	
              Attention:                      
      Mark Angelo

            
	 
      	
              Telephone:                     (201)
      985-8300

            
	 
      	 
      
	
              With
      a copy to:

            	
              David
      Gonzalez, Esq.

            
	 
      	
              101
      Hudson Street – Suite 3700

            
	 
      	
              Jersey
      City, NJ 07302

            
	 
      	
              Telephone:                     (201)
      985-8300

            
	 
      	
              Facsimile:                      
      (201) 985-8266

            

    

     

    or at
such other address and/or facsimile number and/or to the attention of such other
person as the recipient party has specified by written notice given to each
other party three (3) Business Days prior to the effectiveness of such
change.  Written confirmation of receipt (i) given by the recipient of
such notice, consent, waiver or other communication, (ii) mechanically or
electronically generated by the sender’s facsimile machine containing the time,
date, recipient facsimile number and an image of the first page of such
transmission or (iii) provided by a nationally recognized overnight delivery
service, shall be rebuttable evidence of personal service, receipt by facsimile
or receipt from a nationally recognized overnight delivery service in accordance
with clause (i), (ii) or (iii) above, respectively.

     

    
      
         

      

      
        13

        
          

        

      

      
         

      

    

     

    Except as
expressly provided herein, no provision of this Note shall alter or impair the
obligations of the Company, which are absolute and unconditional, to pay the
principal of, interest and other charges (if any) on, this Note at the time,
place, and rate, and in the coin or currency, herein prescribed.  This
Note is a direct obligation of the Company. As long as this Note is outstanding,
the Company shall not and shall cause their subsidiaries not to, without the
consent of the Holder, (i) amend its certificate of incorporation, bylaws or
other charter documents so as to adversely affect any rights of the Holder; (ii)
repay, repurchase or offer to repay, repurchase or otherwise acquire shares of
its Common Stock or other equity securities other than as to the Underlying
Shares to the extent permitted or required under the Transaction Documents; or
(iii) enter into any agreement with respect to any of the
foregoing.

     

    This Note
shall not entitle the Holder to any of the rights of a stockholder of the
Company, including without limitation, the right to vote, to receive dividends
and other distributions, or to receive any notice of, or to attend, meetings of
stockholders or any other proceedings of the Company, unless and to the extent
converted into shares of Common Stock in accordance with the terms
hereof.

     

    No
indebtedness of the Company is senior to this Note in right of payment, whether
with respect to interest, damages or upon liquidation or dissolution or
otherwise.  Without the Holder’s consent, the Company will not and
will not permit any of their subsidiaries to, directly or indirectly, enter
into, create, incur, assume or suffer to exist any indebtedness of any kind, on
or with respect to any of its property or assets now owned or hereafter acquired
or any interest therein or any income or profits there from that is senior in
any respect to the obligations of the Company under this Note.

     

    This Note
shall be governed by and construed in accordance with the laws of the State of
New Jersey, without giving effect to conflicts of laws thereof.  Each
of the parties consents to the jurisdiction of the Superior Courts of the State
of New Jersey sitting in Hudson County, New Jersey and the U.S. District
Court for the District of New Jersey sitting in Newark, New Jersey in connection
with any dispute arising under this Note and hereby waives, to the maximum
extent permitted by law, any objection, including any objection based on forum
non conveniens to the bringing of any such proceeding in such
jurisdictions.

     

    
      
         

      

      
        14

        
          

        

      

      
         

      

    

     

    If the
Company fails to comply with the terms of this Note, then the Company shall
reimburse the Holder promptly for all fees, costs and expenses, including,
without limitation, attorneys’ fees and expenses incurred by the Holder in any
action in connection with this Note, including, without limitation, those
incurred: (i) during any workout, attempted workout, and/or in connection with
the rendering of legal advice as to the Holder’s rights, remedies and
obligations, (ii) collecting any sums which become due to the Holder, (iii)
defending or prosecuting any proceeding or any counterclaim to any proceeding or
appeal; or (iv) the protection, preservation or enforcement of any rights or
remedies of the Holder.

     

    Any
waiver by the Holder of a breach of any provision of this Note shall not operate
as or be construed to be a waiver of any other breach of such provision or of
any breach of any other provision of this Note. The failure of the Holder to
insist upon strict adherence to any term of this Note on one or more occasions
shall not be considered a waiver or deprive that party of the right thereafter
to insist upon strict adherence to that term or any other term of this Note. Any
waiver must be in writing.

     

    If any
provision of this Note is invalid, illegal or unenforceable, the balance of this
Note shall remain in effect, and if any provision is inapplicable to any person
or circumstance, it shall nevertheless remain applicable to all other persons
and circumstances. If it shall be found that any interest or other amount deemed
interest due hereunder shall violate applicable laws governing usury, the
applicable rate of interest due hereunder shall automatically be lowered to
equal the maximum permitted rate of interest. The Company covenants (to the
extent that it may lawfully do so) that it shall not at any time insist upon,
plead, or in any manner whatsoever claim or take the benefit or advantage of,
any stay, extension or usury law or other law which would prohibit or forgive
the Company from paying all or any portion of the principal of or interest on
this Note as contemplated herein, wherever enacted, now or at any time hereafter
in force, or which may affect the covenants or the performance of this
indenture, and the Company (to the extent it may lawfully do so) hereby
expressly waives all benefits or advantage of any such law, and covenants that
it will not, by resort to any such law, hinder, delay or impeded the execution
of any power herein granted to the Holder, but will suffer and permit the
execution of every such as though no such law has been enacted.

     

    Whenever
any payment or other obligation hereunder shall be due on a day other than a
Business Day, such payment shall be made on the next succeeding Business
Day.

     

    THE
PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT ANY OF
THEM MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON OR
ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY TRANSACTION
DOCUMENT OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL
OR WRITTEN) OR ACTIONS OF ANY PARTY.  THIS PROVISION IS A MATERIAL
INDUCEMENT FOR THE PARTIES’ ACCEPTANCE OF THIS AGREEMENT.

     

    
      
         

      

      
        15

        
          

        

      

      
         

      

    

     

    CERTAIN
DEFINITIONS   For purposes of this Note, the following
terms shall have the following meanings:

     

    “Approved Stock Plan”
means a stock option plan that has been approved by the Board of Directors of
the Company prior to the date of the Securities Purchase Agreement, pursuant to
which the Company’s securities may be issued only to any employee, officer,
director, attorney, consultant or vendor for services and/or goods provided to
the Company.

     

    “Bloomberg” means
Bloomberg Financial Markets.

     

    “Business Day” means
any day except Saturday, Sunday and any day which shall be a federal legal
holiday in the United States or a day on which banking institutions are
authorized or required by law or other government action to close.

     

    “Change of Control
Transaction” means the occurrence of (a) an acquisition after the date
hereof by an individual or legal entity or “group” (as described in Rule
13d-5(b)(1) promulgated under the Exchange Act) of effective control (whether
through legal or beneficial ownership of capital stock of the Company, by
contract or otherwise) of in excess of fifty percent (50%) of the voting
securities of the Company (except that the acquisition of voting securities by
the Holder or any other current holder of convertible securities of the Company
shall not constitute a Change of Control Transaction for purposes hereof), (b) a
replacement at one time or over time of more than one-half of the members of the
board of directors of the Company which is not approved by a majority of those
individuals who are members of the board of directors on the date hereof (or by
those individuals who are serving as members of the board of directors on any
date whose nomination to the board of directors was approved by a majority of
the members of the board of directors who are members on the date hereof), (c)
the merger, consolidation or sale of fifty percent (50%) or more of the assets
of the Company or any subsidiary of the Company in one or a series of related
transactions with or into another entity, or (d) the execution by the Company of
an agreement to which the Company is a party or by which it is bound, providing
for any of the events set forth above in (a), (b) or (c).

     

    “Closing Bid Price”
means the price per share in the last reported trade of the Common Stock on a
Primary Market or on the exchange  which the Common Stock is then
listed as quoted by Bloomberg.

     

    “Convertible
Securities” means any stock or securities (other than Options) directly
or indirectly convertible into or exercisable or exchangeable for Common
Stock.

     

    “Commission” means the
Securities and Exchange Commission.

     

    “Common Stock” means
the common stock, par value $.001 per share, of the Company and stock of any
other class into which such shares may hereafter be changed or
reclassified.

     

    
      
         

      

      
        16

        
          

        

      

      
         

      

    

     

     “Exchange Act” means
the Securities Exchange Act of 1934, as amended.

     

    “Excluded Securities”
means, (a) shares issued or deemed to have been issued by the Company pursuant
to an Approved Stock Plan (b) shares of Common Stock issued or deemed to be
issued by the Company upon the conversion, exchange or exercise of any right,
option, obligation or security outstanding on the date prior to date of the
Securities Purchase Agreement, provided that the terms of such right, option,
obligation or security are not amended or otherwise modified on or after the
date of the Securities Purchase Agreement, and provided that the conversion
price, exchange price, exercise price or other purchase price is not reduced,
adjusted or otherwise modified and the number of shares of Common Stock issued
or issuable is not increased (whether by operation of, or in accordance with,
the relevant governing documents or otherwise) on or after the date of the
Securities Purchase Agreement, (c) shares issued in connection with any
acquisition by the Company, whether through an acquisition of stock or a merger
of any business, assets or technologies, leasing arrangement or any other
transaction the primary purpose of which is not to raise equity capital, and
(d) the shares of Common Stock issued or deemed to be issued by the Company
upon conversion of this Note or the exercise of the Warrants.

     

    “Installment Date” May
6, 2008, and continuing on the first Business Day of each successive calendar
month thereafter.

     

     “Options” means any
rights, warrants or options to subscribe for or purchase shares of Common Stock
or Convertible Securities.

     

     “Person” means a
corporation, an association, a partnership, organization, a business, an
individual, a government or political subdivision thereof or a governmental
agency.

     

     “Securities Act” means
the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder.

     

    “Securities Purchase
Agreement” means the Securities Purchase Agreement dated February 6, 2008
by and among the Company and the Buyers listed on Schedule I attached
thereto.

     

    “Trading Day” means a
day on which the shares of Common Stock are quoted on the OTCBB or quoted or
traded on such Primary Market on which the shares of Common Stock are then
quoted or listed; provided, that in the event that the shares of Common Stock
are not listed or quoted, then Trading Day shall mean a Business
Day.

     

    “Transaction
Documents” means the Securities Purchase Agreement or any other agreement
delivered in connection with the Securities Purchase Agreement, including,
without limitation, the Security Agreement.

     

     “Warrants” has the
meaning ascribed to such term in the Securities Purchase Agreement, and shall
include all warrants issued in exchange therefor or replacement
thereof.

     

     

    [Signature
Page Follows]

     

    
      
         

      

      
        17

        
          

        

      

      
         

      

    

     

    IN WITNESS WHEREOF, the
Company has caused this Secured Note to be duly executed by a duly authorized
officer as of the date set forth above.

     

    

    
      	 
      	
              COMPANY:

            
	 
      	
              HYPERDYNAMICS
      CORPORATION

            
	 
      	 
      
	 
      	
              By:
      /s/ Kent Watts

            
	 
      	
              Name:  Kent
      Watts

            
	 
      	
              Title:  President
      and CEO

            

    

    
      
         

      

      
        18

        
          

        

      

      
         

      

    

    EXHIBIT
I

    CONVERSION
NOTICE

     

    (To
be executed by the Holder in order to Convert the Note)

     

    

     

    TO:

     

    

    The
undersigned hereby irrevocably elects to convert $                                         of
the principal amount of Note No. HDY-2-1 into Shares of Common Stock of HYPERDYNAMICS CORPORATION,
according to the conditions stated therein, as of the Conversion Date written
below.

     

    
      	
              Conversion
      Date:

            	 
      
	 	 
	
              Conversion
      Amount to be converted:

            	
              $

            
	 	 
	
              Conversion
      Price:

            	
              $

            
	 	 
	
              Number
      of shares of Common Stock to be issued:

            	 
      
	 	 
	
              Amount
      of Note Unconverted:

            	
              $

            
	 
      	 
      
	 
      	 
      
	
              Please
      issue the shares of Common Stock in the following name and to the
      following address:

            
	 
	
              Issue
      to:

               

               

               

               

            	 
      
	 
      	 
      
	
              Authorized
      Signature:

            	 
      
	 	 
	
              Name:

            	 
      
	 	 
	
              Title:

            	 
      
	 	 
	
              Broker
      DTC Participant Code:

            	 
      
	 	 
	
              Account
      Number:

            	 
      

    

     

     

    19ex10_3.htm

    
      

    

    
      	
              Exhibit
      10.3

            	
              Securities
      Purchase Agreement.

            

    

    

    

     

     

    SECURITIES PURCHASE
AGREEMENT

     

     

     

    THIS SECURITIES PURCHASE AGREEMENT
(this “Agreement”), dated as
of February 6, 2008, by and among Hyperdynamics Corporation, a Delaware
corporation (the “Company”), and the
Buyers listed on Schedule I attached hereto (individually, a “Buyer” or
collectively “Buyers”).

     

     

    WITNESSETH

     

     

    

     

    WHEREAS, the Company and the
Buyer(s) are executing and delivering this Agreement in reliance upon an
exemption from securities registration pursuant to Section 4(2) and/or
Rule 144A as promulgated by the U.S. Securities and Exchange Commission
(the “SEC”)
under the Securities Act of 1933, as amended (the “Securities
Act”);

     

    WHEREAS, the parties desire
that, upon the terms and subject to the conditions contained herein, the Company
shall issue and sell to the Buyer(s), as provided herein, and the Buyer(s) shall
purchase (i) up to Three Million Dollars ($3,000,000) of secured notes in the
form attached hereto as “Exhibit A” (the
“Notes”), which
shall, in certain instances, be convertible into shares of the Company’s common
stock, par value $0.001 per share (the “Common Stock”) (if
converted, the “Conversion Shares”)
of which Nine Hundred Ten Thousand Five Hundred and Twenty Six Dollars
($910,526) shall be funded on the date hereof (the “First Closing”), One
Million Eighty Nine Thousand Four Hundred and Seventy Four Dollars ($1,089,474)
of which shall be funded on the fifth (5th)
Business Day (as defined herein) following the date on which the conditions set
forth in Section 7(b) hereof have been met (the “Second Closing”) and
One Million Dollars ($1,000,000) of which may, in certain circumstances, be
funded on the one hundred and twentieth (120th) day
following the date hereof (the “Third Closing”)
(individually referred to as a “Closing” and
collectively referred to as the “Closings”) and (ii)
warrants substantially in the form attached hereto as “Exhibit B” (the
“Warrants”), to
acquire up to eight hundred and twenty-five thousand (825,000) shares of Common
Stock (as exercised, the “Warrant Shares”), of
which five hundred and fifty thousand (550,000) shall be issued at the First
Closing and two hundred and seventy five thousand (275,000) shall be issued at
the Third Closing;

     

    
      
         

      

      
        1

        
          

        

      

      
         

      

    

     

    WHEREAS, contemporaneously
with the First Closing and, if applicable, the Third Closing, the Company will,
among other things, issue to the Buyer warrants substantially in the form
attached hereto as “Exhibit B” (the
“Warrants”), to
acquire up to that number of additional shares of Common Stock set forth
opposite such Buyer’s name on Schedule I (as exercised, the “Warrant
Shares”)

     

    WHEREAS, contemporaneously
with the execution and delivery of this Agreement, (i) the Buyer, the Company,
HYD Resources Corporation, a Texas corporation and a wholly owned subsidiary of
the Company (“HYD”) and Trendsetter
Production Company, a Mississippi company and a wholly owned subsidiary of HYD
(“Trendsetter”), are
executing and delivering a Security Agreement (the “Security Agreement”)
pursuant to which Trendsetter and HYD agree to provide the Buyer a security
interest in Pledged Property (as this term is defined in the Security Agreement)
and (ii) Trendsetter and HYD are executing and delivering a Guaranty dated the
date hereof (the “Guaranty” and
collectively with the Security Agreement and the Mortgage (as defined herein),
the “Security
Documents”);

     

    WHEREAS, contemporaneously
with the execution and delivery of this Agreement, the parties hereto are
executing and delivering Irrevocable Transfer Agent Instructions (the “Irrevocable Transfer Agent
Instructions”); and

     

    WHEREAS, the Notes, the
Conversion Shares, the Warrants, and the Warrants Shares collectively are
referred to herein as the “Securities”).

     

    NOW, THEREFORE, in
consideration of the mutual covenants and other agreements contained in this
Agreement the Company and the Buyer(s) hereby agree as follows:

     

    PURCHASE AND SALE OF
NOTES.

     

    Purchase of
Notes.  Subject to the satisfaction (or waiver) of the terms
and conditions of this Agreement, each Buyer agrees, severally and not jointly,
to purchase at the First Closing and the Company agrees to sell and issue to
each Buyer, severally and not jointly, at the First Closing, Notes in amounts
corresponding with the Subscription Amount set forth opposite each Buyer’s name
on Schedule I hereto and Warrants to acquire that number of Warrant Shares as
set forth opposite each Buyer’s name in column (5) on Schedule I hereto at an
exercise price of Two Dollars ($2.00) per share.  Subject to the
satisfaction (or waiver) of the terms and conditions of this Agreement, each
Buyer agrees, severally and not jointly, to purchase at the Second Closing and
the Company agrees to sell and issue to each Buyer, severally and not jointly,
at the Second Closing, Notes in amounts corresponding with the Subscription
Amount set forth opposite each Buyer’s name on Schedule I hereto.  The
Company may, in its sole discretion, offer to sell and issue to each Buyer
severally and not jointly, at the Third Closing, Notes in amounts corresponding
with the Subscription Amount set forth opposite each Buyer’s name on Schedule I
hereto and Warrants to acquire that number of Warrant Shares as set forth
opposite each Buyer’s name in column (6) on Schedule I hereto at an exercise
price per share equal to one-hundred and thirty percent (130%) of the Closing
Bid Price of the Common Stock on the day prior to the Third
Closing.  The Company acknowledges that the purchase at the Third
Closing of Notes and Warrants in amounts corresponding with the Subscription
Amount set forth opposite each Buyer’s name on Schedule I is in each Buyer’s
sole discretion subject to the Company’s right to provide Buyer with fifteen
(15) Business Days advance written notice of its election to not offer such Note
and Warrants for sale. As used in this Agreement, “Business Day” means any day
except Saturday, Sunday and any day which shall be a federal legal holiday in
the United States or a day on which banking institutions are authorized or
required by law or other government action to close.  As used in this
Agreement, “Closing
Bid Price” means the closing bid price of Common Stock as quoted on the
American Stock Exchange (as reported by Bloomberg Financial Markets (“Bloomberg”) through
its “Volume at Price” function).

     

    
      
         

      

      
        2

        
          

        

      

      
         

      

    

     

    Closing
Dates.  The First Closing of the purchase and sale of the Notes
and Warrants shall take place on the date hereof  (the “First Closing Date”),
the Second Closing of the purchase of the Notes shall take place at 10:00 a.m.
Eastern Standard Time on the fifth (5th)
business day following the date on which the conditions set forth herein and in
Sections 6 and 7 hereof have been met (or such other date as is mutually agreed
to by the Company and the Buyer(s)) (the “Second Closing Date”)
and if applicable, the Third Closing of the purchase and sale of the Notes shall
take place at 10:00 a.m. Eastern Standard Time on the one hundred and twentieth
(120th) day
following the First Closing (or such later date as is mutually agreed to by the
Company and the Buyer(s)) (the “Third Closing Date”)
(collectively referred to as the “Closing Dates”),
subject to notification of satisfaction of the conditions to the Third Closing
set forth herein and in Sections 6 and 7 below.  The Closings shall
occur on the respective Closing Dates at the offices of Yorkville Advisors, LLC,
101 Hudson Street, Suite 3700, Jersey City, New Jersey 07302 (or such other
place as is mutually agreed to by the Company and the Buyer(s)).

     

    Form of
Payment.  Subject to the satisfaction of the terms and
conditions of this Agreement, on each Closing Date, (i) the Buyers shall deliver
to the Company such aggregate proceeds for the Notes and Warrants to be issued
and sold to such Buyer at such Closing, minus the fees to be paid directly from
the proceeds of such Closing as set forth herein, and (ii) the Company
shall deliver to each Buyer, the Notes and Warrants which such Buyer is
purchasing at such Closing in amounts indicated opposite such Buyer’s name on
Schedule I, duly executed on behalf of the Company.

     

    BUYER’S REPRESENTATIONS AND
WARRANTIES.

     

    Each
Buyer represents and warrants, severally and not jointly, that:

     

    Investment
Purpose.  Each Buyer is acquiring the Securities for its own
account for investment only and not with a view towards, or for resale in
connection with, the public sale or distribution thereof, except pursuant to
sales registered or exempted under the Securities Act; provided, however, that
by making the representations herein, such Buyer reserves the right to dispose
of the Securities at any time in accordance with or pursuant to an effective
registration statement covering such Securities or an available exemption under
the Securities Act.  Such Buyer does not presently have any agreement
or understanding, directly or indirectly, with any Person to distribute any of
the Securities.

     

    Qualified Institutional
Buyer.  Each Buyer is a “Qualified Institutional
Buyer” as that term is defined in Rule 144A of the Securities
Act.  Each Buyer has provided to the Company a “Certificate of QIB” in
substantially the form attached hereto as Exhibit C.

     

    
      
         

      

      
        3

        
          

        

      

      
         

      

    

     

    Reliance on
Exemptions.  Each Buyer understands that the Securities are
being offered and sold to it in reliance on specific exemptions from the
registration requirements of United States federal and state securities laws and
that the Company is relying in part upon the truth and accuracy of, and such
Buyer’s compliance with, the representations, warranties, agreements,
acknowledgments and understandings of such Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of such Buyer
to acquire the Securities.

     

    Information.  Each
Buyer and its advisors (and his or, its counsel), if any, have been furnished
with all materials relating to the business, finances and operations of the
Company and information he deemed material to making an informed investment
decision regarding his purchase of the Securities, which have been requested by
such Buyer.  Each Buyer and its advisors, if any, have been afforded
the opportunity to ask questions of the Company and its
management.  Neither such inquiries nor any other due diligence
investigations conducted by such Buyer or its advisors, if any, or its
representatives shall modify, amend or affect such Buyer’s right to rely on the
Company’s representations and warranties contained in Section 3
below.  Each Buyer understands that its investment in the Securities
involves a high degree of risk.  Each Buyer is in a position regarding
the Company, which, based upon employment, family relationship or economic
bargaining power, enabled and enables such Buyer to obtain information from the
Company in order to evaluate the merits and risks of this
investment.  Each Buyer has sought such accounting, legal and tax
advice, as it has considered necessary to make an informed investment decision
with respect to its acquisition of the Securities.

     

    No Governmental
Review.  Each Buyer understands that no United States federal
or state agency or any other government or governmental agency has passed on or
made any recommendation or endorsement of the Securities, or the fairness or
suitability of the investment in the Securities, nor have such authorities
passed upon or endorsed the merits of the offering of the
Securities.

     

    Transfer or
Resale.  Each Buyer understands that: (i) the Securities have
not been and are not being registered under the Securities Act or any state
securities laws, and may not be offered for sale, sold, assigned or transferred
unless (A) subsequently registered thereunder, (B) such Buyer shall have
delivered to the Company an opinion of counsel, in a generally acceptable form,
to the effect that such Securities to be sold, assigned or transferred may be
sold, assigned or transferred pursuant to an exemption from such registration
requirements, or (C) such Buyer provides the Company with reasonable assurances
(in the form of seller and broker representation letters) that such Securities
can be sold, assigned or transferred pursuant to Rule 144, Rule 144(k), or Rule
144A promulgated under the Securities Act, as amended (or a successor rule
thereto and as amended) (collectively, “Rule 144”), in each
case following the applicable holding period set forth therein; (ii) any sale of
the Securities made in reliance on Rule 144 may be made only in accordance with
the terms of Rule 144 and further, if Rule 144 is not applicable, any resale of
the Securities under circumstances in which the seller (or the person
through whom the sale is made) may be deemed to be an underwriter (as that term
is defined in the Securities Act) may require compliance with some other
exemption under the Securities Act or the rules and regulations of the SEC
thereunder; and (iii) neither the Company nor any other person is under any
obligation to register the Securities under the Securities Act or any state
securities laws or to comply with the terms and conditions of any exemption
thereunder.

     

    
      
         

      

      
        4

        
          

        

      

      
         

      

    

     

    Legends.  Each
Buyer agrees to the imprinting, so long as is required by this Section 2(g), of
a restrictive legend in substantially the following form:

     

    
      	 
      	
              THE
      SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
      THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
      LAWS.  THE SECURITIES HAVE BEEN ACQUIRED SOLELY FOR INVESTMENT
      PURPOSES AND NOT WITH A VIEW TOWARD RESALE AND MAY NOT BE OFFERED FOR
      SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE
      REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF
      1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF
      COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED
      UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS.

            	 
      

    

     

    Certificates
evidencing the Conversion Shares or Warrant Shares shall not contain any legend
(including the legend set forth above), (i) while a registration statement
covering the resale of such security is effective under the Securities Act (such
registration statement, the “Registration
Statement”), (ii) following any sale of such Conversion Shares or Warrant
Shares pursuant to Rule 144, (iii) if such Conversion Shares or Warrant Shares
are permanently eligible for sale without restriction under Rule 144, or (iv) if
such legend is not required under applicable requirements of the Securities Act
(including judicial interpretations and pronouncements issued by the staff of
the SEC).  The Company shall cause its counsel to issue a legal
opinion to the Company’s transfer agent promptly after the effective date (the
“Effective
Date”) of a Registration Statement if required by the Company’s transfer
agent to effect the removal of the legend hereunder.  If all or any
portion of the Notes or Warrants are exercised by a Buyer that is not an
Affiliate of the Company (a “Non-Affiliated
Buyer”) at a time when there is an effective registration statement to
cover the resale of the Conversion Shares or the Warrant Shares, such Conversion
Shares or Warrant Shares shall be issued free of all legends.  The
Company agrees that following the Effective Date or at such time as such legend
is no longer required under this Section 2(g), it will, no later than three (3)
Trading Days following the delivery by a Non-Affiliated Buyer to the Company or
the Company’s transfer agent of a certificate representing Conversion Shares or
Warrant Shares, as the case may be, issued with a restrictive legend (such third
Trading Day, the “Legend Removal
Date”), deliver or cause to be delivered to such Non-Affiliated Buyer a
certificate representing such shares that is free from all restrictive and other
legends.  The Company may not make any notation on its records or give
instructions to any transfer agent of the Company that enlarge the restrictions
on transfer set forth in this Section.  Each Buyer acknowledges that
the Company’s agreement hereunder to remove all legends from Conversion Shares
or Warrant Shares is not an affirmative statement or representation that such
Conversion Shares or Warrant Shares are freely tradable.  Each Buyer,
severally and not jointly with the other Buyers, agrees that the removal of the
restrictive legend from certificates representing Securities as set forth in
this Section 2(g) is predicated upon the Company’s reliance that the buyer will
sell any Securities pursuant to either the registration requirements of the
Securities Act, including any applicable prospectus delivery requirements, or an
exemption therefrom, and that if Securities are sold pursuant to a Registration
Statement, they will be sold in compliance with the plan of distribution set
forth therein.  As used in this Agreement, “Trading Day” means a
day on which the shares of Common Stock are quoted on the American Stock
Exchange or quoted or traded on such Subsequent Market on which the shares of
Common Stock are then quoted or listed; provided, that in the event that the
shares of Common Stock are not listed or quoted, then Trading Day shall mean a
Business Day.  As used in this Agreement “Subsequent Market” shall
mean: (a) the American Stock Exchange, (b) New York Stock Exchange, (c) the
Nasdaq National Market, (d) the Nasdaq Capital Market, or (e) the Nasdaq OTC
Bulletin Board (“OTC”) (each, a “Subsequent
Market”).

     

    
      
         

      

      
        5

        
          

        

      

      
         

      

    

     

    Authorization,
Enforcement.  This Agreement has been duly and validly
authorized, executed and delivered on behalf of such Buyer and is a valid and
binding agreement of such Buyer enforceable in accordance with its terms, except
as such enforceability may be limited by general principles of equity or
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and
other similar laws relating to, or affecting generally, the enforcement of
applicable creditors’ rights and remedies.

     

    Receipt of
Documents.  Each Buyer and his or its counsel has received and
read in their entirety:  (i) this Agreement and each representation,
warranty and covenant set forth herein and the Transaction Documents (as defined
herein); (ii) all due diligence and other information necessary to verify the
accuracy and completeness of such representations, warranties and covenants;
(iii) the Company’s Form 10-K for the fiscal year ended December 31, 2006; (iv)
the Company’s Form 10-Q for the fiscal quarter ended September 30, 2007 and (v)
answers to all questions each Buyer submitted to the Company regarding an
investment in the Company; and each Buyer has relied on the information
contained therein and has not been furnished any other documents, literature,
memorandum or prospectus.

     

    Due Formation of Corporate
and Other Buyers.  If the Buyer(s) is a corporation, trust,
partnership or other entity that is not an individual person, it has been formed
and validly exists and has not been organized for the specific purpose of
purchasing the Securities and is not prohibited from doing so.

     

    No Legal Advice From the
Company.  Each Buyer acknowledges, that it had the opportunity
to review this Agreement and the transactions contemplated by this Agreement
with his or its own legal counsel and investment and tax
advisors.  Each Buyer is relying solely on such counsel and advisors
and not on any statements or representations of the Company or any of its
representatives or agents for legal, tax or investment advice with respect to
this investment, the transactions contemplated by this Agreement or the
securities laws of any jurisdiction.

     

    REPRESENTATIONS AND
WARRANTIES OF THE COMPANY.

     

    Except as
set forth under the corresponding section of the Disclosure Schedules which
Disclosure Schedules shall be deemed a part hereof and to qualify any
representation or warranty otherwise made herein to the extent of such
disclosure, the Company hereby makes the representations and warranties set
forth below to each Buyer:

     

    
      
         

      

      
        6

        
          

        

      

      
         

      

    

     

    Subsidiaries.  All
of the direct and indirect subsidiaries of the Company are set forth on Schedule
3(a).  The Company owns, directly or indirectly, all of the
capital stock or other equity interests of each subsidiary free and clear of any
liens, and all the issued and outstanding shares of capital stock of each
subsidiary are validly issued and are fully paid, non-assessable and free of
preemptive and similar rights to subscribe for or purchase
securities.

     

    Organization and
Qualification.  The Company and its subsidiaries are
corporations duly organized and validly existing in good standing under the laws
of the jurisdiction in which they are incorporated, and have the requisite
corporate power to own their properties and to carry on their business as now
being conducted.  Each of the Company and its subsidiaries is duly
qualified as a foreign corporation to do business and is in good standing in
every jurisdiction in which the nature of the business conducted by it makes
such qualification necessary, except to the extent that the failure to be so
qualified or be in good standing would not have or reasonably be expected to
result in (i) a material adverse effect on the legality, validity or
enforceability of any Transaction Document, (ii) a material adverse effect on
the results of operations, assets, business or condition (financial or
otherwise) of the Company and the subsidiaries, taken as a whole, or (iii) a
material adverse effect on the Company’s ability to perform in any material
respect on a timely basis its obligations under any Transaction Document (any of
(i), (ii) or (iii), a “Material Adverse
Effect”) and no proceeding has been instituted in any such jurisdiction
revoking, limiting or curtailing or seeking to revoke, limit or curtail such
power and authority or qualification.

     

    Authorization, Enforcement,
Compliance with Other Instruments.  (i) The Company has
the requisite corporate power and authority to enter into and perform and to
cause HYD and Trendsetter to enter into and perform its obligation under the
Security Documents, (ii) the Company has the requisite corporate power and
authority to enter into and perform its obligations under this Agreement, the
Notes, the Warrants, the Irrevocable Transfer Agent Instructions, and each of
the other agreements entered into by the parties hereto in connection with the
transactions contemplated by this Agreement (collectively and together with the
Security Documents, the “Transaction
Documents”) and to issue the Securities in accordance with the terms
hereof and thereof, (ii) the Company has caused the execution and delivery of
the Security Documents by Trendsetter to be duly authorized by Trendsetter’s
Board of Directors and no further consent or authorization is required by
Trendsetter, its Board of Directors or its stockholder, (iii) the Company has
caused the execution and delivery of the Security Documents by HYD to be duly
authorized by HYD’s Board of Directors and no further consent or authorization
is required by HYD, its Board of Directors or its stockholder, (iv) the
execution and delivery of the Transaction Documents by the Company and the
consummation by it of the transactions contemplated hereby and thereby,
including, without limitation, the issuance of the Securities, the reservation
for issuance and the issuance of the Conversion Shares, and the reservation for
issuance and the issuance of the Warrant Shares, have been duly authorized by
the Company’s Board of Directors and no further consent or authorization is
required by the Company, its Board of Directors or its stockholders, (v) the
Company has caused the Security Agreement and Guaranties to be duly executed by
and delivered by HYD and Trendsetter and will cause the Mortgage to be duly
executed and delivered by Trendsetter, (v) the Transaction Documents have been
duly executed and delivered by the Company, (vi) the Transaction Documents
constitute the valid and binding obligations of the Company enforceable against
the Company in accordance with their terms, except as such enforceability may be
limited by general principles of equity or applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally, the enforcement of creditors’ rights and
remedies.  The authorized officer of the Company executing the
Transaction Documents knows of no reason why the Company, HYD or Trendsetter
cannot perform any of their respective obligations under the Transaction
Documents.

     

    
      
         

      

      
        7

        
          

        

      

      
         

      

    

     

    Capitalization.  The
authorized capital stock of the Company consists of 250,000,000 shares of Common
Stock and 20,000,000 shares of Preferred Stock, par value $0.001 per share
(“Preferred
Stock”) of which 56,376,013 shares of Common Stock, 1,945 shares of
the Company’s Series A Preferred Stock, par value $0.001 per share and 2,487
shares of the Company’s Series B Preferred Stock, par value $0.001 per share are
issued and outstanding.  All of the outstanding shares of capital
stock of the Company are validly issued, fully paid and nonassessable, have been
issued in compliance with all federal and state securities laws, and none of
such outstanding shares was issued in violation of any preemptive rights or
similar rights to subscribe for or purchase securities.  Except as
disclosed in Schedule 3(d): (i) none of the Company’s capital stock is subject
to preemptive rights or any other similar rights or any liens or encumbrances
suffered or permitted by the Company; (ii) there are no outstanding options,
warrants, scrip, rights to subscribe to, calls or commitments of any character
whatsoever relating to, or securities or rights convertible into, or exercisable
or exchangeable for, any capital stock of the Company or any of its
subsidiaries, or contracts, commitments, understandings or arrangements by which
the Company or any of its subsidiaries is or may become bound to issue
additional capital stock of the Company or any of its subsidiaries or options,
warrants, scrip, rights to subscribe to, calls or commitments of any character
whatsoever relating to, or securities or rights convertible into, or exercisable
or exchangeable for, any capital stock of the Company or any of its
subsidiaries; (iii) there are no outstanding debt securities, notes, credit
agreements, credit facilities or other agreements, documents or instruments
evidencing indebtedness of the Company or any of its subsidiaries or by which
the Company or any of its subsidiaries is or may become bound; (iv) there are no
financing statements securing obligations in any material amounts, either singly
or in the aggregate, filed in connection with the Company or any of its
subsidiaries; (v) there are no outstanding securities or instruments of the
Company or any of its subsidiaries which contain any redemption or similar
provisions, and there are no contracts, commitments, understandings or
arrangements by which the Company or any of its subsidiaries is or may become
bound to redeem a security of the Company or any of its subsidiaries; (vi) there
are no securities or instruments containing anti-dilution or similar provisions
that will be triggered by the issuance of the Securities; (vii) the Company does
not have any stock appreciation rights or “phantom stock” plans or agreements or
any similar plan or agreement; and (viii) the Company and its subsidiaries have
no liabilities or obligations required to be disclosed in the SEC Documents but
not so disclosed in the SEC Documents, other than those incurred in the ordinary
course of the Company’s or its subsidiaries’ respective businesses and which,
individually or in the aggregate, do not or would not have a Material Adverse
Effect.  The Company has furnished to the Buyers true, correct and
complete copies of the Company’s Certificate of Incorporation, as amended and as
in effect on the date hereof (the “Certificate of
Incorporation”), and the Company’s Bylaws, as amended and as in effect on
the date hereof (the “Bylaws”), and the
terms of all securities convertible into, or exercisable or exchangeable for,
shares of Common Stock and the material rights of the holders thereof in respect
thereto.  No further approval or authorization of any stockholder, the
Board of Directors of the Company or others is required for the issuance and
sale of the Securities.  There are no stockholders agreements, voting
agreements or other similar agreements with respect to the Company’s capital
stock to which the Company is a party or, to the knowledge of the Company,
between or among any of the Company’s stockholders.

     

    
      
         

      

      
        8

        
          

        

      

      
         

      

    

     

    Issuance of
Securities.  The issuance of the Notes and the Warrants is duly
authorized and free from all taxes, liens and charges with respect to the issue
thereof.  Upon conversion in accordance with the terms of the Notes or
exercise in accordance with the Warrants, as the case may be, the Conversion
Shares and Warrant Shares, respectively, when issued will be fully paid and
nonassessable, free from all taxes, liens and charges with respect to the issue
thereof and, to the extent possible in accordance with Section 4(f) hereof,
validly issued.  The Company has reserved from its duly authorized
capital stock eleven million (11,000,000) shares of Common Stock as set forth in
this Agreement.

     

    No
Conflicts.   The execution, delivery and performance of
the Transaction Documents by the Company and the consummation by the Company of
the transactions contemplated hereby and thereby (including, without limitation,
the issuance of the Notes and the Warrants, and reservation for issuance and
issuance of the Conversion Shares and the Warrant Shares) will not (i) result in
a violation of any certificate of incorporation, certificate of formation, any
certificate of designations or other constituent documents of the Company or any
of its subsidiaries, any capital stock of the Company or any of its subsidiaries
or bylaws of the Company or any of its subsidiaries or (ii) conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) in any respect under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any agreement,
indenture or instrument to which the Company or any of its subsidiaries is a
party, or (iii) result in a violation of any law, rule, regulation, order,
judgment or decree (including foreign, federal and state securities laws and
regulations and the rules and regulations of the American Stock Exchange)
applicable to the Company or any of its subsidiaries or by which any property or
asset of the Company or any of its subsidiaries is bound or affected; except in
the case of each of clauses (ii) and (iii), such as could not, individually or
in the aggregate, have or reasonably be expected to result in a Material Adverse
Effect.  The business of the Company and its subsidiaries is not being
conducted, and shall not be conducted in violation of any material law,
ordinance, or regulation of any governmental entity.  Except as
specifically contemplated by this Agreement and as required under the Securities
Act and any applicable state securities laws, the Company is not required to
obtain any consent, authorization or order of, or make any filing or
registration with, any court or governmental agency in order for it to execute,
deliver or perform any of its obligations under or contemplated by this
Agreement in accordance with the terms hereof or thereof.  All
consents, authorizations, orders, filings and registrations which the Company is
required to obtain pursuant to the preceding sentence have been obtained or
effected on or prior to the date hereof.  The Company and its
subsidiaries are unaware of any facts or circumstance, which might give rise to
any of the foregoing.

     

    
      
         

      

      
        9

        
          

        

      

      
         

      

    

     

    SEC Documents; Financial
Statements.  The Company has filed all reports, schedules,
forms, statements and other documents required to be filed by it with the SEC
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for
the two years preceding the date hereof (or such shorter period as the Company
was required by law or regulation to file such material) (all of the foregoing
filed prior to the date hereof or amended after the date hereof and all exhibits
included therein and financial statements and schedules thereto and documents
incorporated by reference therein, being hereinafter referred to as the “SEC Documents”) on
timely basis or has received a valid extension of such time of filing and has
filed any such SEC Document prior to the expiration of any such
extension.  The Company has delivered to the Buyers or their
representatives, or made available through the SEC’s website at
http://www.sec.gov., true and complete copies of the SEC
Documents.  As of their respective dates, the SEC Documents complied
in all material respects with the requirements of the Exchange Act and the rules
and regulations of the SEC promulgated thereunder applicable to the SEC
Documents, and none of the SEC Documents, at the time they were filed with the
SEC, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.  As of their respective dates, the financial
statements of the Company included in the SEC Documents complied as to form in
all material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto.  Such financial
statements have been prepared in accordance with generally accepted accounting
principles, consistently applied, during the periods involved (except (i) as may
be otherwise indicated in such financial statements or the notes thereto, or
(ii) in the case of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments).  No other information provided by or on behalf of the
Company to the Buyers which is not included in the SEC Documents, including,
without limitation, information referred to in Section 2(i) of this Agreement,
contains any untrue statement of a material fact or omits to state any material
fact necessary in order to make the statements therein, in the light of the
circumstance under which they are or were made and not misleading.

     

    Oil and Gas
Properties.  The leases attached hereto as Annex A are (i)
complete and accurate and are the only documents pursuant to which Trendsetter
has acquired Oil and Gas Properties and (ii) all of the Oil and Gas Properties
reflected on the Reserve Report of Rabb Contracting Company, LLC, dated May 12,
2007 and prepared by Clifton S. Partridge, P.E. are reflected in the leases
attached hereto as Annex A.  As used herein, “Oil and Gas
Properties” means all of Trendsetter’s rights, title, interest and
estates now owned or hereafter acquired in and to all leases, oil, gas, coal
seam gas, casinghead gas, condensate, distillate, liquid hydrocarbons, gaseous
hydrocarbons or mineral fee or lease interests, farm-ins, overriding royalty and
royalty interests, including any reserved or residual interest of whatever
nature.

     

    Absence of
Litigation.  There is no action, suit, proceeding, inquiry or
investigation before or by any court, public board, government agency,
self-regulatory organization or body pending against or affecting the Company,
the Common Stock or any of the Company’s subsidiaries, wherein an unfavorable
decision, ruling or finding would have a Material Adverse Effect.

     

    
      
         

      

      
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    Acknowledgment Regarding
Buyer’s Purchase of the Notes.  The Company acknowledges and
agrees that (i) each Buyer is acting solely in the capacity of an arm’s length
purchaser with respect to this Agreement and the transactions contemplated
hereby, (ii) each Buyer is not acting as a financial advisor or fiduciary of the
Company (or in any similar capacity) with respect to this Agreement and the
transactions contemplated hereby and any advice given by each Buyer or any of
their respective representatives or agents in connection with this Agreement and
the transactions contemplated hereby is merely incidental to such Buyer’s
purchase of the Securities, and (iii) the purchase at the Third Closing of the
Notes and Warrants in amounts corresponding with the Subscription Amount set
forth opposite each Buyer’s name on Schedule I is in each Buyer’s sole
discretion and in no circumstances will any such Buyer be obligated to purchase
such Notes and Warrants.  The Company further represents to each Buyer
that the Company’s decision to enter into this Agreement has been based solely
on the independent evaluation by the Company and its
representatives.

     

    No General
Solicitation.  Neither the Company, nor any of its affiliates,
nor any person acting on its or their behalf, has engaged in any form of general
solicitation or general advertising (within the meaning of Regulation D under
the Securities Act) in connection with the offer or sale of the
Securities.

     

    No Integrated
Offering.  Neither the Company, nor any of its affiliates, nor
any person acting on its or their behalf has, directly or indirectly, made any
offers or sales of any security or solicited any offers to buy any security,
under circumstances that would require registration of the Securities under the
Securities Act or cause this offering of the Securities to be integrated with
prior offerings by the Company for purposes of the Securities Act.

     

    Employee
Relations.  Neither the Company nor any of its subsidiaries is
involved in any labor dispute or, to the knowledge of the Company or any of its
subsidiaries, is any such dispute threatened.  None of the Company’s
or its subsidiaries’ employees is a member of a union and the Company and its
subsidiaries believe that their relations with their employees are
good.

     

    Intellectual Property
Rights.  The Company and its subsidiaries own or possess
adequate rights or licenses to use all trademarks, trade names, service marks,
service mark registrations, service names, patents, patent rights, copyrights,
inventions, licenses, approvals, governmental authorizations, trade secrets and
rights necessary to conduct their respective businesses as now
conducted.  The Company and its subsidiaries do not have any knowledge
of any infringement by the Company or its subsidiaries of trademark, trade name
rights, patents, patent rights, copyrights, inventions, licenses, service names,
service marks, service mark registrations, trade secret or other similar rights
of others, and, to the knowledge of the Company there is no claim, action or
proceeding being made or brought against, or to the Company’s knowledge, being
threatened against, the Company or its subsidiaries regarding trademark, trade
name, patents, patent rights, invention, copyright, license, service names,
service marks, service mark registrations, trade secret or other infringement;
and the Company and its subsidiaries are unaware of any facts or circumstances
which might give rise to any of the foregoing.

     

    Environmental
Laws.  The Company and its subsidiaries are (i) in compliance
with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants (“Environmental Laws”),
(ii) have received all permits, licenses or other approvals required of them
under applicable Environmental Laws to conduct their respective businesses and
(iii) are in compliance with all terms and conditions of any such permit,
license or approval.

     

    
      
         

      

      
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    Title.  All
real property and facilities held under lease by the Company and its
subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company and its
subsidiaries.

     

    Insurance.  The
Company and each of its subsidiaries is insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts as
management of the Company believes to be prudent and customary in the businesses
in which the Company and its subsidiaries are engaged.  Neither the
Company nor any such subsidiary has been refused any insurance coverage sought
or applied for and neither the Company nor any such subsidiary has any reason to
believe that it will not be able to renew its existing insurance coverage as and
when such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business at a cost that would not materially
and adversely affect the condition, financial or otherwise, or the earnings,
business or operations of the Company and its subsidiaries, taken as a
whole.

     

    Regulatory
Permits.  The Company and its subsidiaries possess all material
certificates, authorizations and permits issued by the appropriate federal,
state or foreign regulatory authorities necessary to conduct their respective
businesses, and neither the Company nor any such subsidiary has received any
notice of proceedings relating to the revocation or modification of any such
certificate, authorization or permit.

     

    Internal Accounting
Controls.  The Company and each of its subsidiaries maintains a
system of internal accounting controls as set forth in the Company’s public
filings.

     

    No Material Adverse
Breaches, etc.  Neither the Company nor any of its subsidiaries
is subject to any charter, corporate or other legal restriction, or any
judgment, decree, order, rule or regulation which in the judgment of the
Company’s officers has or is expected in the future to have a Material Adverse
Effect on the business, properties, operations, financial condition, results of
operations or prospects of the Company or its subsidiaries.  Neither
the Company nor any of its subsidiaries is in breach of any contract or
agreement which breach, in the judgment of the Company’s officers, has or is
expected to have a Material Adverse Effect on the business, properties,
operations, financial condition, results of operations or prospects of the
Company or its subsidiaries.

     

    Tax
Status.  The Company and each of its subsidiaries has made and
filed all federal and state income and all other tax returns, reports and
declarations required by any jurisdiction to which it is subject and (unless and
only to the extent that the Company and each of its subsidiaries has set aside
on its books provisions reasonably adequate for the payment of all unpaid and
unreported taxes) has paid all taxes and other governmental assessments and
charges that are material in amount, shown or determined to be due on such
returns, reports and declarations, except those being contested in good faith
and has set aside on its books provision reasonably adequate for the payment of
all taxes for periods subsequent to the periods to which such returns, reports
or declarations apply.  There are no unpaid taxes in any material
amount claimed to be due by the taxing authority of any jurisdiction, and the
officers of the Company know of no basis for any such claim.

     

    
      
         

      

      
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    Certain
Transactions.  Except for arm’s length transactions pursuant to
which the Company makes payments in the ordinary course of business upon terms
no less favorable than the Company could obtain from third parties and other
than the grant of stock options disclosed in the SEC Documents, none of the
officers, directors, or employees of the Company is presently a party to any
transaction with the Company (other than for services as employees, officers and
directors), including any contract, agreement or other arrangement providing for
the furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any officer,
director or such employee or, to the knowledge of the Company, any corporation,
partnership, trust or other entity in which any officer, director, or any such
employee has a substantial interest or is an officer, director, trustee or
partner.

     

    Fees and Rights of First
Refusal.  The Company is not obligated to offer the securities
offered hereunder on a right of first refusal basis or otherwise to any third
parties including, but not limited to, current or former shareholders of the
Company, underwriters, brokers, agents or other third parties.

     

    Investment Company.
The Company is not, and is not an affiliate of, and immediately after receipt of
payment for the Securities, will not be or be an affiliate of, an “investment
company” within the meaning of the Investment Company Act of 1940, as
amended.  The Company shall conduct its business in a manner so that
it will not become subject to the Investment Company Act.

     

    Private Placement.
Assuming the accuracy of the Buyers’ representations and warranties set forth in
Section 2, no registration under the Securities Act is required for the offer
and sale of the Securities by the Company to the Buyers as contemplated hereby.
The issuance and sale of the Securities hereunder does not contravene the rules
and regulations of the Primary Market.

     

    Listing and Maintenance
Requirements.  The Company’s Common Stock is registered
pursuant to Section 12(b) or 12(g) of the Exchange Act, and the Company has
taken no action designed to terminate, or which to its knowledge is likely to
have the effect of, terminating the registration of the Common Stock under the
Exchange Act nor has the Company received any notification that the SEC is
contemplating terminating such registration.  The Company has not, in
the twelve (12) months preceding the date hereof, received notice from any
Primary Market on which the Common Stock is or has been listed or quoted to the
effect that the Company is not in compliance with the listing or maintenance
requirements of such Primary Market.  The Company is, and has no
reason to believe that it will not in the foreseeable future continue to be, in
compliance with all such listing and maintenance requirements.

     

    Manipulation of
Price.  The Company has not, and to its knowledge no one acting on
its behalf has, (i) taken, directly or indirectly, any action designed to cause
or to result in the stabilization or manipulation of the price of any security
of the Company to facilitate the sale or resale of any of the Securities, (ii)
sold, bid for, purchased, or, paid any compensation for soliciting purchases of,
any of the Securities, or (iii) paid or agreed to pay to any Person any
compensation for soliciting another to purchase any other securities of the
Company, other than, in the case of clauses (ii) and (iii), compensation paid to
the Company’s placement agent in connection with the placement of the
Securities.

     

    
      
         

      

      
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    Dilutive
Effect.  The Company understands and acknowledges that under
pursuant to their terms, the Notes, under certain circumstances, will be
convertible into shares of Common Stock and the Company agrees to honor any such
conversion of the Notes. The Company understands and acknowledges that the
Warrant Shares issuable upon exercise of the Warrants and, in the event that the
Notes become convertible, the number of Conversion Shares issuable upon
conversion of the Notes will increase in certain circumstances.  The
Company further acknowledges that its obligation to issue Conversion Shares upon
conversion of the Notes in accordance with this Agreement and the Notes and its
obligation to issue the Warrant Shares upon exercise of the Warrants in
accordance with this Agreement and the Warrants, in each case, is absolute and
unconditional regardless of the dilutive effect that such issuance may have on
the ownership interests of other stockholders of the Company; provided, however, that the
Company will not be required to issue any such Conversion Shares or Warrant
Shares until such Conversion Shares or Warrant Shares, as applicable, have been
listed for trading on the American Stock Exchange.

     

    Dutchess Equity
Line. The equity line of credit entered into with Dutchess in August
2005 that expires in February 2009 (the “Dutchess Equity
Line”) is currently available for draw downs or “puts” by the Company and
the Company knows of no reason why such equity line would be unavailable to the
Company.  The Company shall take all steps necessary in its control to
maintain the effectiveness and availability of the equity line and shall not
terminate the equity line without the prior consent of the Buyer.  The
Company may only issue and sell Common Stock through puts under the Dutchess
Equity Line for aggregate gross proceeds of up to $500,000 per sixty (60) day
period, provided
however, if (a) no Event of Default (as defined in the Notes) has
occurred, (b) the Closing Bid Price of the Common Stock is above $4.00 for
five consecutive Trading Days, and (c) the Closing Bid Price remains above $4.00
on the day a put is made, then the Company may exceed the limitation set forth
above and instead make up to two puts under the Dutchess Equity Line per 30 day
period for aggregate gross proceeds of the greater of: (i) $500,000 for of
the two puts, or, (ii) no more than the amount determined under the volume
matrix formula set forth in Section 2(b) of the Dutchess Equity Line for each of
the two puts. 

     

    Registration
Statement.  The Company has filed with the SEC a Registration
Statement on Form S-3 (Registration No. 333-148287) (the “Form S-3 Registration
Statement”).  The Company represents that the Form S-3 Registration
Statement encompasses the potential issuance of Conversion Shares or Warrant
Shares if such Conversion Shares or Warrant Shares are new issue shares from the
Form S-3 Registration Statement shelf offering and not previously issued
restricted stock.

     

    Holding
Period.  The Company acknowledges and agrees that for purposes
of Rule 144, in the event the Notes become convertible in accordance with their
terms, the first day of the holding period of the Conversion Shares underlying
each of the Notes will be the date that the Buyer pays the full purchase price
for such Note.  The Company agrees not to take a position contrary to
this Section 4(ee).    

     

    
      
         

      

      
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    COVENANTS.

     

    Best
Efforts.  Each party shall use its best efforts to timely
satisfy each of the conditions to be satisfied by it as provided in Sections 6
and 7 of this Agreement.

     

    Reporting
Status.  Until the earlier of (i) the date as of which the
Buyer(s) may sell all of the Securities without restriction pursuant to Rule
144(k) promulgated under the Securities Act (or successor thereto), or (ii) the
date on which (A) the Buyers shall have sold all the Securities and (B) none of
the Notes or Warrants are outstanding (the “Registration
Period”), the Company shall file in a timely manner all reports required
to be filed with the SEC pursuant to the Exchange Act and the regulations of the
SEC   thereunder, and the Company shall not terminate its status
as an issuer required to file reports under the Exchange Act even if the
Exchange Act or the rules and regulations thereunder would otherwise permit such
termination.

     

    Registration
Statement.  If (x) the Conversion Shares issuable upon
conversion of the Notes, and (y) the Warrant Shares issuable upon exercise of
the Warrant, (collectively, the “Registrable
Securities”) are issued prior to the date on which the Buyer may sell
such Registrable Securities without restriction pursuant to Rule 144 and on such
date the Form S-3 Registration Statement is effective, the Company shall issue
such Registrable Securities pursuant to the Form S-3 Registration Statement;
provided,
that  the number of shares registered and available for
issuance pursuant to the Form S-3 Registration Statement is greater than or
equal to the number of Registrable Securities to be issued at such
time.

     

    Use of
Proceeds.  The Company will use the proceeds from the sale of
the Notes for general corporate and working capital purposes.

     

    Reservation of
Shares.  On the date hereof, the Company shall reserve for
issuance to the Buyers eleven million (11,000,000) shares for issuance upon
conversions of the Notes and exercise of the Warrants (collectively, the “Share
Reserve”).  The Company represents that it has sufficient
authorized and unissued shares of Common Stock available to create the Share
Reserve after considering all other commitments that may require the issuance of
Common Stock.  The Company shall take all action reasonably necessary
to at all times have authorized, and reserved for the purpose of issuance, such
number of shares of Common Stock as shall be necessary to effect the full
conversion of the Notes and the full exercise of the Warrants.  If at
any time the Share Reserve is insufficient to effect the full conversion of the
Notes or the full exercise of the Warrants, the Company shall increase the Share
Reserve accordingly.  If the Company does not have sufficient
authorized and unissued shares of Common Stock available to increase the Share
Reserve, the Company shall call and hold a special meeting of the shareholders
within thirty (30) days of such occurrence, for the sole purpose of increasing
the number of shares authorized.  The Company’s management shall
recommend to the shareholders to vote in favor of increasing the number of
shares of Common Stock authorized.  Management shall also vote all of
its shares in favor of increasing the number of authorized shares of Common
Stock.

     

    
      
         

      

      
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    Listings or
Quotation.  The Company’s Common Stock shall be listed or
quoted for trading on any of (a) the American Stock Exchange, (b) New York Stock
Exchange, (c) the Nasdaq Global Market, (d) the Nasdaq Capital Market, or (e)
the Nasdaq OTC Bulletin Board (which does not include the Pink Sheets LLC)
(“OTCBB”)
(each, a “Primary
Market”).  As promptly as possible, but in no event later than
5 p.m. New York City time on February 12, 2008, the Company shall file an
application for the listing of two million, two hundred forty-four thousand
eight hundred and ninety-nine (2,244,899) shares of Common Stock (the “Listed Shares”) upon
the American Stock Exchange and upon notification that such shares have been
listed will use its best efforts to secure and maintain such
listing.  The Listed Shares shall be comprised of: the ninety four
thousand eight hundred and ninety-nine (94,899) shares of Common Stock
representing the First Closing Commitment Shares (as defined herein) to be
issued in respect of the First Closing, five hundred fifty thousand (550,000)
Warrant Shares and one million six hundred (1,600,000) Conversion Shares; provided, however, that any
Listed Shares that have not been issued may be issued to the Buyers upon
exercise of the Warrants or conversion of the Notes notwithstanding any
designation in the listing application or this Section 4(f) as Warrant Shares or
Conversion Shares.  If upon exercise of the Warrants or exchange of
the Notes there are an insufficient number of unissued Listed Shares for the
Company to satisfy such exercise or exchange, the Company shall as promptly as
possible secure the listing of an additional number of shares of Common Stock
necessary to satisfy such exercise or conversion.

     

    Fees and
Expenses.

     

    The
Company shall pay all of its costs and expenses incurred by it connection with
the negotiation, investigation, preparation, execution and delivery of the
Transaction Documents.

     

    The
Company shall place into escrow Eighty Thousand Dollars ($80,000) upon the First
Closing, and, an additional Forty Thousand Dollars ($40,000) upon the Third
Closing directly from the proceeds of each Closing (collectively, the “Monitoring Fees,” and
as deposited into escrow, the “Escrow Funds”) which
shall be used to compensate Yorkville Advisors LLC (“Investment Manager”)
for monitoring and managing the purchase and investment made by YA Global
Investments, L.P. (“YA
Global”) described herein, pursuant to the Investment Manager’s existing
advisory obligations to YA Global.  The Company, Investment Manager,
and YA Global shall enter into an Escrow Agreement of even date herewith in the
form attached hereto as Exhibit D (the “Escrow Agreement”)
appointing David Gonzalez, Esq. as escrow agent (the “Escrow Agent”) to
hold the Escrow Funds and to periodically disburse portions of such Escrow Funds
to the Investment Manager from escrow in accordance with the terms of the Escrow
Agreement.  The Investment Manager shall periodically receive portions
of the Escrow Funds in accordance with the Escrow Agreement until either: (1)
the Escrow Funds shall have been fully disbursed pursuant the Escrow Agreement
or (2) the Securities shall have been Fully Retired.  “Fully Retired”
shall mean that the Buyer shall have fully disposed of all the Securities issued
or issuable hereunder, shall no longer have any investment in, or ownership of,
any of the Securities, all amounts owed to YA Global under the Transaction
Documents shall have been paid, and the Transaction Documents shall have been
terminated.  When the Securities are Fully Retired, the remaining
Escrow Funds shall be returned to the Company or otherwise disbursed in
accordance with the Escrow Agreement.

     

    
      
         

      

      
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    The
Company shall pay a structuring and due diligence  fee to the
Investment Manager of Thirty-Five Thousand Dollars ($35,000) which shall be paid
directly from the proceeds of the First Closing.  The structuring and
due diligence fee shall be nonrefundable and payable whether or not any Closing
occurs.

     

    As
promptly as possible, but in no event later than two (2) Business Days following
the Company’s receipt of notification that the Listed Shares have been listed on
the American Stock Exchange, the Company shall issue to the Buyer ninety four
thousand eight hundred and ninety-nine (94,899) shares of Common Stock (the
“First Closing
Commitment Shares”).  As promptly as possible, but in no event
later than two (2) Business Days after the Third Closing, the Company shall file
an application for the listing upon the American Stock Exchange of Sixty
Thousand Dollars ($60,000) of Common Stock, calculated based on the volume
weighted average price of the Common Stock over the five (5) trading days prior
to the Third Closing (the “Third Closing Commitment
Shares” and together with the First Closing Commitment Shares, the “Commitment Shares”)
and upon notification that such shares have been listed will use its best
efforts to secure and maintain such listing.  As promptly as possible,
but in no event later than two (2) Business Day following the Company’s receipt
of notification that the Third Closing Commitment Shares have been listed on the
American Stock Exchange, the Company shall issue the Buyer the Third Closing
Commitment Shares.

     

    Reserved.

     

    Transactions With
Affiliates.  So long as any Notes are outstanding, the Company
shall not, and shall cause each of its subsidiaries not to, enter into, amend,
modify or supplement, or permit any subsidiary to enter into, amend, modify or
supplement any agreement, transaction, commitment, or arrangement with any of
its or any subsidiary’s officers, directors, person who were officers or
directors at any time during the previous two (2) years, stockholders who
beneficially own five percent (5%) or more of the Common Stock, or Affiliates
(as defined below) or with any individual related by blood, marriage, or
adoption to any such individual or with any entity in which any such entity or
individual owns a five percent (5%) or more beneficial interest (each a “Related Party”),
except for (a) customary employment arrangements and benefit programs on
reasonable terms, (b) any investment in an Affiliate of the
Company,  (c) any agreement, transaction, commitment, or arrangement
on an arms-length basis on terms no less favorable than terms which would have
been obtainable from a person other than such Related Party, (d) any agreement,
transaction, commitment, or arrangement which is approved by a majority of the
disinterested directors of the Company; for purposes hereof, any director who is
also an officer of the Company or any subsidiary of the Company shall not be a
disinterested director with respect to any such agreement, transaction,
commitment, or arrangement.  “Affiliate” for
purposes hereof means, with respect to any person or entity, another person or
entity that, directly or indirectly, (i) has a ten percent (10%) or more equity
interest in that person or entity, (ii) has ten percent (10%) or more common
ownership with that person or entity, (iii) controls that person or entity, or
(iv) shares common control with that person or entity.  “Control” or “controls” for
purposes hereof means that a person or entity has the power, direct or indirect,
to conduct or govern the policies of another person or entity.

     

    Transfer
Agent.  The Company covenants and agrees that, in the event
that the Company’s agency relationship with the transfer agent should be
terminated for any reason prior to a date which is two (2) years after the
Closing Date, the Company shall immediately appoint a new transfer agent and
shall require that the new transfer agent execute and agree to be bound by the
terms of the Irrevocable Transfer Agent Instructions (as defined
herein).

     

    
      
         

      

      
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    Oil and Gas
Properties.  Within (i) sixty (60) days following the date
hereof, the Company shall (a) cause to be filed of record, in the applicable
real property records of each jurisdiction in which the Oil and Gas Properties
are located, a fee or leasehold mortgage, deed of trust or deed to secure debt,
which shall be prepared by Buyer and its counsel in form and substance
reasonably satisfactory to the Company and its counsel, in favor of the Buyer,
securing the Notes and covering all of the Oil and Gas Properties (each, a
“Mortgage”);
and (ii) sixty (60) days following the date hereof, the Company shall furnish
title opinions (each a “Title Opinion”),
dated and reflecting the state of title as of a date no earlier than the date of
filing of the applicable Mortgages in form and substance and issued by counsel
reasonably satisfactory to the Buyer and its counsel, confirming to the Buyer’s
reasonable satisfaction that (a) the Company has good and defensible title to
the quantity of interest represented herein in and to all of the Oil and Gas
Properties, and (b) all of such Company's interest in all of the Oil and Gas
Properties is subject to a valid, perfected and enforceable Mortgage lien in
favor of the Buyer; (iii) upon request the Company will provide to the Buyer
copies from its files of all contracts and documents affecting the Oil and Gas
Properties, and at the Buyer’s option, upon reasonable notice and during normal
business hours, the Company shall  make its files and personnel
available in the Company's offices and otherwise cooperate with the Buyer in the
title verification and due diligence program to be conducted by the Buyer, which
shall be at the Company's expense, to confirm the ownership and value of the Oil
and Gas Properties.  The title opinions provided by the Company may be
based on such records and prior title certificates, abstracts, runsheets, title
policy plant records and opinions as are customarily relied upon by providers of
mortgage financing to purchasers of properties similar to the Oil and Gas
Properties.

     

    At such
time as the Mortgages have been filed and the Title Opinions furnished, each in
accordance with Section 4(k) hereof, the Buyer(s) shall terminate or agree to
terminate the Deposit Account Agreements (as defined in the Security
Agreement).

     

    Neither
the Buyer(s) nor any of its affiliates have an open short position in the Common
Stock of the Company, and the Buyer(s) agrees that it shall not, and that it
will cause its affiliates not to, engage in any short sales of or hedging
transactions with respect to the Common Stock as long as any Notes shall remain
outstanding.

     

    Review of Public
Disclosures.  All SEC filings (including, without limitation,
all filings required under the Exchange Act, which include Forms 10-Q and
10-QSB, 10-K and 10K-SB, 8-K, etc.) and other public disclosures made by the
Company, including, without limitation, all press releases, investor relations
materials, and scripts of analysts meetings and calls, shall be reviewed and
approved for release by the Company’s attorneys and, if containing financial
information, the Company’s independent certified public
accountants.

     

    Disclosure of
Transaction.  Within four Business Day following the date of
this Agreement, the Company shall file a Current Report on Form 8-K describing
the terms of the transactions contemplated by the Transaction Documents in the
form required by the Exchange Act and attaching the material Transaction
Documents (including, without limitation, this Agreement, the form of the Note
and the form of Warrant) as exhibits to such filing.

     

    
      
         

      

      
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    TRANSFER AGENT
INSTRUCTIONS.

     

    The
Company shall issue the Irrevocable Transfer Agent Instructions to its transfer
agent, and any subsequent transfer agent, irrevocably appointing David Gonzalez,
Esq. as the Company’s agent for purpose instructing its transfer agent to issue
certificates or credit shares to the applicable balance accounts at The
Depository Trust Company (“DTC”), registered in
the name of each Buyer or its respective nominee(s), for the Conversion Shares
issued, following an Event of Default, upon conversion of the Notes and the
Warrant Shares issued upon exercise of the Warrants as specified from time to
time by each Buyer to the Company upon conversion of the Notes (following an
Event of Default) or exercise of the Warrants.  The Company shall not
change its transfer agent without the express written consent of the Buyers,
which may be withheld by the Buyers in their sole discretion.  The
Company warrants that with respect to the Warrant Shares and, upon an Event of
Default, the Conversion Shares, no instruction other than the Irrevocable
Transfer Agent Instructions referred to in this Section 5, and stop transfer
instructions to give effect to Section 2(g) hereof (in the case of the
Conversion Shares or Warrant Shares prior to registration of such shares under
the Securities Act) will be given by the Company to its transfer agent, and that
the Securities shall otherwise be freely transferable on the books and records
of the Company as and to the extent provided in this Agreement and the other
Transaction Documents.  If a Buyer effects a sale, assignment or
transfer of the Securities in accordance with Section 2(f), the Company shall
promptly instruct its transfer agent to issue one or more certificates or credit
shares to the applicable balance accounts at DTC in such name and in such
denominations as specified by such Buyer to effect such sale, transfer or
assignment and, with respect to any transfer, shall permit the
transfer.  In the event that such sale, assignment or transfer
involves Conversion Shares or Warrant Shares sold, assigned or transferred
pursuant to an effective registration statement or pursuant to Rule 144, the
transfer agent shall issue such Securities to the Buyer, assignee or transferee,
as the case may be, without any restrictive
legend.    Nothing in this Section 5 shall affect in any way
the Buyer’s obligations and agreement to comply with all applicable securities
laws upon resale of Conversion Shares.  The Company acknowledges that
a breach by it of its obligations hereunder will cause irreparable harm to the
Buyer by vitiating the intent and purpose of the transaction contemplated
hereby.  Accordingly, the Company acknowledges that the remedy at law
for a breach of its obligations under this Section 5 will be inadequate and
agrees, in the event of a breach or threatened breach by the Company of the
provisions of this Section 5, that the Buyer(s) shall be entitled, in
addition to all other available remedies, to an injunction restraining any
breach and requiring immediate issuance and transfer, without the necessity of
showing economic loss and without any bond or other security being
required.

     

    CONDITIONS TO THE COMPANY’S
OBLIGATION TO SELL.

     

    The
obligation of the Company hereunder to issue and sell the Notes and Warrants to
the Buyer(s) at the First Closing is subject to the satisfaction, at or before
the First Closing Date, of each of the following conditions, provided that these
conditions are for the Company’s sole benefit and may be waived by the Company
at any time in its sole discretion:

     

    
      
         

      

      
        19

        
          

        

      

      
         

      

    

    Each
Buyer shall have executed the Transaction Documents and delivered them to the
Company.

     

    The
Buyer(s) shall have delivered to the Company the Purchase Price for the Notes in
the amount as set forth next to each Buyer as set forth on Schedule I attached
hereto, minus any fees to be paid directly from the proceeds at the Closings as
set forth herein, by wire transfer of immediately available U.S. funds pursuant
to the wire instructions provided by the Company.

     

    The
representations and warranties of the Buyer(s) shall be true and correct in all
material respects as of the date when made and as of the Closing Dates as though
made at that time (except for representations and warranties that speak as of a
specific date), and the Buyer(s) shall have performed, satisfied and complied in
all material respects with the covenants, agreements and conditions required by
this Agreement to be performed, satisfied or complied with by the Buyer(s) at or
prior to the Closing Dates.

     

    The
obligation of the Company hereunder to issue and sell the Notes to the Buyer(s)
at the Second Closing is subject to the satisfaction, at or before the Second
Closing Date, of each of the following conditions, provided that these
conditions are for the Company’s sole benefit and may be waived by the Company
at any time in its sole discretion:

     

    The
Buyer(s) shall have delivered to the Company the Purchase Price for the Notes in
the amount as set forth next to each Buyer as set forth on Schedule I attached
hereto, minus any fees to be paid directly from the proceeds the Closings as set
forth herein, by wire transfer of immediately available U.S. funds pursuant to
the wire instructions provided by the Company.

     

    The
representations and warranties of the Buyer(s) shall be true and correct in all
material respects as of the date when made and as of the Second Closing Dates as
though made at that time (except for representations and warranties that speak
as of a specific date), and the Buyer(s) shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Buyer(s) at or prior to the Closing Dates.

     

    Provided
the Company has filed the Mortgages and provided the Title Opinions in
accordance with Section 4(k) hereof, the Buyer(s) shall have terminated or
agreed to terminate (a) the Control Account Agreement entered into on the date
hereof among The Frost National Bank, a national banking association (“Bank”),
Trendsetter and Buyer(s) and (b) the Control Account Agreement entered into on
the date hereof among the Bank, HDY and Buyer(s).

     

    The
obligation of the Company hereunder to issue and sell the Notes and Warrants to
the Buyer(s) at the Third Closing is in the Company’s sole discretion and
subject to the satisfaction, at or before the Third Closing Date, of each of the
following conditions, provided that these conditions are for the Company’s sole
benefit and may be waived by the Company at any time in its sole
discretion:

     

    
      
         

      

      
        20

        
          

        

      

      
         

      

    

    Each
Buyer shall have provided the Company with written notice of its intent to
purchase the Notes at the Third Closing.

     

    The
Buyer(s) shall have delivered to the Company the Purchase Price for the Notes in
the amount as set forth next to each Buyer as set forth on Schedule I attached
hereto, minus any fees to be paid directly from the proceeds the Closings as set
forth herein, by wire transfer of immediately available U.S. funds pursuant to
the wire instructions provided by the Company.

     

    The
representations and warranties of the Buyer(s) shall be true and correct in all
material respects as of the date when made and as of the Closing Dates as though
made at that time (except for representations and warranties that speak as of a
specific date), and the Buyer(s) shall have performed, satisfied and complied in
all material respects with the covenants, agreements and conditions required by
this Agreement to be performed, satisfied or complied with by the Buyer(s) at or
prior to the Closing Dates.

     

    CONDITIONS TO THE BUYER’S
OBLIGATION TO PURCHASE.

     

    The
obligation of the Buyer(s) hereunder to purchase the Notes and accept the
Warrants at the First Closing is subject to the satisfaction, at or before the
First Closing Date, of each of the following conditions, provided that these
conditions are for the Buyer’s sole benefit and may be waived by the Buyer at
any time in its sole discretion:

     

    The
Company shall have executed the Transaction Documents, HDY and Trendsetter shall
have executed the Security Agreement and the Guaranties and the Transaction
Documents shall have been delivered to the Buyers.

     

    The
representations and warranties of the Company shall be true and correct in all
material respects (except to the extent that any of such representations and
warranties is already qualified as to materiality in Section 3 above, in which
case, such representations and warranties shall be true and correct without
further qualification) as of the date when made and as of the First Closing Date
as though made at that time (except for representations and warranties that
speak as of a specific date) and the Company shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Company at or prior to the First Closing Date

     

    The
Company shall have executed and delivered to the Buyer(s) the Notes and Warrants
in the respective amounts set forth opposite each Buyer’s name on Schedule I
attached hereto.

     

    The
Buyers shall have received an opinion of counsel from counsel to the Company in
a form satisfactory to the Buyers stating (x) that the Securities, when issued,
will be duly issued, fully paid and nonassessable and free of any all liens and
charges and preemptive or similar rights and (y) that the Conversion Shares have
been duly and validly authorized and reserved for issuance by all proper
corporate action.

     

    
      
        
           

        

        
          21

          
            

          

        

        
           

        

      

    

    

    The
Company shall have provided to the Buyers a true copy of a certificate of good
standing evidencing the formation and good standing of the Company from the
secretary of state (or comparable office) from the jurisdiction in which the
Company is incorporated, as of a date within 10 days of the First Closing
Date.

     

    The
Company shall have delivered to the Buyers a certificate, executed by the
Secretary of the Company and dated as of the First Closing Date, as to (i) the
resolutions consistent with Section 3(c) as adopted by the Company’s Board of
Directors in a form reasonably acceptable to such Buyer, (ii) the Certificate of
Incorporation and (iii) the Bylaws, each as in effect at the First
Closing.

     

    The Buyer
shall have filed a form UCC-1 or such other forms as may be required to perfect
the Buyer’s interest in the Pledged Property as detailed in the Security
Agreement dated the date hereof, including the perfection of the security
interest in the Pledged Property and provided proof of
such filing to the Buyer(s).

     

    The
Company shall have created the Share Reserve.

     

    The
Irrevocable Transfer Agent Instructions, in form and substance satisfactory to
the Buyer, shall have been delivered to and acknowledged in writing by the
Company’s transfer agent.

     

    The
Company shall have certified, in a certificate executed by two officers of the
Company and dated as of the First Closing Date, that all conditions to the First
Closing have been satisfied.

     

    The
obligation of the Buyer(s) hereunder to purchase the Notes at the Second Closing
is subject to the satisfaction, at or before the Second Closing Date, of each of
the following conditions, provided that these conditions are for the Buyer’s
sole benefit and may be waived by the Buyer at any time in its sole
discretion:

     

    The
Common Stock shall be authorized for quotation or trading on the Primary Market,
trading in the Common Stock shall not have been suspended for any reason, and
the Listed Shares shall be approved for listing or trading on the Primary
Market.

     

    The
representations and warranties of the Company shall be true and correct in all
material respects (except to the extent that any of such representations and
warranties is already qualified as to materiality in Section 3 above, in which
case, such representations and warranties shall be true and correct without
further qualification) as of the date when made and as of the Second Closing
Date as though made at that time (except for representations and warranties that
speak as of a specific date) and the Company shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Company at or prior to the Second Closing Date

     

    The
Company shall have executed and delivered to the Buyer(s) the Notes in the
respective amounts set forth opposite each Buyer’s name on Schedule I attached
hereto.

     

    
      
         

      

      
        22

        
          

        

      

      
         

      

    

    The
Buyers shall have received an opinion of counsel from counsel to the Company in
a form satisfactory to the Buyers stating (i) that the Securities, when issued,
will be duly issued, fully paid and nonassessable and free of any all liens and
charges and preemptive or similar rights and (ii) that the Conversion Shares
have been duly and validly authorized and reserved for issuance by all proper
corporate action.

     

    The
Company shall have provided to the Buyers a true copy of a certificate of good
standing evidencing the formation and good standing of the Company from the
secretary of state (or comparable office) from the jurisdiction in which the
Company is incorporated, as of a date within 10 days of the Second Closing
Date.

     

    The
Company shall have delivered to the Buyers a certificate, executed by the
Secretary of the Company and dated as of the Second Closing Date, as to (i) the
resolutions consistent with Section 3(c) as adopted by the Company’s Board of
Directors in a form reasonably acceptable to such Buyer, (ii) the Certificate of
Incorporation and (iii) the Bylaws, each as in effect at the Second
Closing.

     

    The
Company shall have filed the Mortgages and furnished the Title Opinions in
accordance with Section 4(k) of this Agreement.

     

    The
Company shall have certified, in a certificate executed by two officers of the
Company and dated as of the Second Closing Date, that all conditions to the
Second Closing (other than the condition set forth in Section 7(b)(viii)) have
been satisfied.

     

    The
obligation of the Buyer(s) hereunder to purchase the Notes at the Third Closing
is in each Buyer’s sole discretion and is subject to the satisfaction, at or
before the Third Closing Date, of any conditions imposed by each Buyer
including, without limitation, of each of the following conditions, provided
that these conditions are for the Buyer’s sole benefit and may be waived by the
Buyer at any time in its sole discretion:

     

    Within fifteen (15)
business days of
the Third Closing Date, the Company shall have notified each Buyer in writing of
its desire to issue and sell the Notes to the Buyer(s) on the Third Closing
Date.

     

    The
Common Stock and the Listed Shares shall be authorized for quotation or trading
on the Primary Market and trading in the Common Stock shall not have been
suspended for any reason.

     

    The
representations and warranties of the Company shall be true and correct in all
material respects (except to the extent that any of such representations and
warranties is already qualified as to materiality in Section 3 above, in which
case, such representations and warranties shall be true and correct without
further qualification) as of the date when made and as of the Third Closing Date
as though made at that time (except for representations and warranties that
speak as of a specific date) and the Company shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Company at or prior to the Third Closing Date.

     

    
      
         

      

      
        23

        
          

        

      

      
         

      

    

    The
Company shall have executed and delivered to the Buyers the Notes and the
Warrants in the respective amounts set forth opposite each Buyers name on
Schedule I attached hereto.

     

    The
Company shall have certified, in a certificate executed by two officers of the
Company and dated as of the Third Closing Date, that all conditions to the Third
Closing have been satisfied.

     

    The
Buyers shall have completed further due diligence in its sole
satisfaction.

     

    INDEMNIFICATION.

     

    In
consideration of the Buyer’s execution and delivery of this Agreement and
acquiring the Notes and, if applicable, the Conversion Shares hereunder, and in
addition to all of the Company’s other obligations under this Agreement, the
Company shall defend, protect, indemnify and hold harmless the Buyer(s) and each
other holder of the Notes and, if applicable, the Conversion Shares, and all of
their officers, directors, employees and agents (including, without
limitation, those retained in connection with the transactions contemplated by
this Agreement) (collectively, the “Buyer Indemnitees”)
from and against any and all actions, causes of action, suits, claims, losses,
costs, penalties, fees, liabilities and damages, and expenses in connection
therewith (irrespective of whether any such Buyer Indemnitee is a party to the
action for which indemnification hereunder is sought), and including reasonable
attorneys’ fees and disbursements (the “Indemnified
Liabilities”), incurred by the Buyer Indemnitees or any of them as a
result of, or arising out of, or relating to (a) any misrepresentation or breach
of any representation or warranty made by the Company in this Agreement, the
Notes or the other Transaction Documents or any other certificate, instrument or
document contemplated hereby or thereby, (b) any breach of any covenant,
agreement or obligation of the Company contained in this Agreement, or the other
Transaction Documents or any other certificate, instrument or document
contemplated hereby or thereby, or (c) any cause of action, suit or claim
brought or made against such Buyer Indemnitee and arising out of or resulting
from the execution, delivery, performance or enforcement of this Agreement or
any other instrument, document or agreement executed pursuant hereto by any of
the parties hereto, any transaction financed or to be financed in whole or in
part, directly or indirectly, with the proceeds of the issuance of the Notes or
the status of the Buyer or holder of the Notes  the Conversion
Shares,  as a Buyer of Notes in the Company.  To the extent
that the foregoing undertaking by the Company may be unenforceable for any
reason, the Company shall make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities, which is permissible under
applicable law.

     

    In
consideration of the Company’s execution and delivery of this Agreement, and in
addition to all of the Buyer’s other obligations under this Agreement, the Buyer
shall defend, protect, indemnify and hold harmless the Company and all of its
officers, directors, employees and agents (including, without limitation, those
retained in connection with the transactions contemplated by this Agreement)
(collectively, the “Company Indemnitees”)
from and against any and all Indemnified Liabilities incurred by the Indemnitees
or any of them as a result of, or arising out of, or relating to (a) any
misrepresentation or breach of any representation or warranty made by the
Buyer(s) in this Agreement, instrument or document contemplated hereby or
thereby executed by the Buyer, (b) any breach of any covenant, agreement or
obligation of the Buyer(s) contained in this Agreement,  the
Transaction Documents or any other certificate, instrument or document
contemplated hereby or thereby executed by the Buyer, or (c) any cause of
action, suit or claim brought or made against such Company Indemnitee based on
material misrepresentations or due to a material breach and arising out of or
resulting from the execution, delivery, performance or enforcement of this
Agreement, the Transaction Documents or any other instrument, document or
agreement executed pursuant hereto by any of the parties hereto.  To
the extent that the foregoing undertaking by each Buyer may be unenforceable for
any reason, each Buyer shall make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities, which is permissible under
applicable law.

     

    
      
         

      

      
        24

        
          

        

      

      
         

      

    

    GOVERNING LAW:
MISCELLANEOUS.

     

    Governing
Law.  This Agreement shall be governed by and interpreted in
accordance with the laws of the State of New Jersey without regard to the
principles of conflict of laws.  The parties further agree that any
action between them shall be heard in Hudson County, New Jersey, and expressly
consent to the jurisdiction and venue of the Superior Court of New Jersey,
sitting in Hudson County and the United States District Court for the District
of New Jersey sitting in Newark, New Jersey for the adjudication of any civil
action asserted pursuant to this Paragraph.

     

    Counterparts.  This
Agreement may be executed in two or more identical counterparts, all of which
shall be considered one and the same agreement and shall become effective when
counterparts have been signed by each party and delivered to the other
party.  In the event any signature page is delivered by facsimile
transmission, the party using such means of delivery shall cause four (4)
additional original executed signature pages to be physically delivered to the
other party within five (5) days of the execution and delivery
hereof.

     

    Headings.  The
headings of this Agreement are for convenience of reference and shall not form
part of, or affect the interpretation of, this Agreement.

     

    Severability.  If
any provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement in that jurisdiction or the
validity or enforceability of any provision of this Agreement in any other
jurisdiction.

     

    Entire Agreement,
Amendments.  This Agreement supersedes all other prior oral or
written agreements between the Buyer(s), the Company, their affiliates and
persons acting on their behalf with respect to the matters discussed herein, and
this Agreement and the instruments referenced herein contain the entire
understanding of the parties with respect to the matters covered herein and
therein and, except as specifically set forth herein or therein, neither the
Company nor any Buyer makes any representation, warranty, covenant or
undertaking with respect to such matters.  No provision of this
Agreement may be waived or amended other than by an instrument in writing signed
by the party to be charged with enforcement.

     

    
      
         

      

      
        25

        
          

        

      

      
         

      

    

    Notices.  Any
notices, consents, waivers, or other communications required or permitted to be
given under the terms of this Agreement must be in writing and will be deemed to
have been delivered (i) upon receipt, when delivered personally; (ii) upon
confirmation of receipt, when sent by facsimile; (iii) three (3) days after
being sent by U.S. certified mail, return receipt requested, or (iv) one (1) day
after deposit with a nationally recognized overnight delivery service, in each
case properly addressed to the party to receive the same.  The
addresses and facsimile numbers for such communications shall be:

     

    
      	
              If
      to the Company, to:

            	
              Hyperdynamics
      Corporation

            
	 
      	
              One
      Sugar Creek Center Boulevard, Suite 125

            
	 
      	
              Sugar
      Land, Texas 77478

            
	 
      	
              Attention:                      Kent
      P. Watts

            
	 
      	
              Telephone:                    (713)
      353-9400

            
	 
      	
              Facsimile:                      (713)
      353-9421

            
	 
      	 
      
	
              With
      a copy to:

            	
              Joel
      Seidner, Esq.

            
	 
      	
              880
      Tully Road #50

            
	 
      	
              Houston,
      TX 77079

            
	 
      	
              Telephone:                   
      (281) 493-1311

            
	 
      	
              Facsimile:                      (281)
      667-3292

            

    

     

    If to the
Buyer(s), to its address and facsimile number on Schedule I, with copies to the
Buyer’s counsel as set forth on Schedule I.  Each party shall provide
five (5) days’ prior written notice to the other party of any change in address
or facsimile number.

     

    Successors and
Assigns.  This Agreement shall be binding upon and inure to the
benefit of the parties and their respective successors and
assigns.  Neither the Company nor any Buyer shall assign this
Agreement or any rights or obligations hereunder without the prior written
consent of the other party hereto.

     

    No Third Party
Beneficiaries.  This Agreement is intended for the benefit of
the parties hereto and their respective permitted successors and assigns, and is
not for the benefit of, nor may any provision hereof be enforced by, any other
person.

     

    Survival.  Unless
this Agreement is terminated under Section 9(l), the representations and
warranties of the Company and the Buyer(s) contained in Sections 2 and 3, the
agreements and covenants set forth in Sections 4, 5 and 9, and the
indemnification provisions set forth in Section 8, shall survive the Closing for
a period of two (2) years following the date on which the Notes are converted in
full.  The Buyer(s) shall be responsible only for its own
representations, warranties, agreements and covenants hereunder.

     

    Publicity.  The
Company and the Buyer(s) shall have the right to approve, before issuance any
press release or any other public statement with respect to the transactions
contemplated hereby made by any party; provided, however, that the Company shall
be entitled, without the prior approval of the Buyer(s), to issue any press
release or other public disclosure with respect to such transactions required
under applicable securities or other laws or regulations (the Company shall use
its best efforts to consult the Buyer(s) in connection with any such press
release or other public disclosure prior to its release and Buyer(s) shall be
provided with a copy thereof upon release thereof).

     

    
      
         

      

      
        26

        
          

        

      

      
         

      

    

    Further
Assurances.  Each party shall do and perform, or cause to be
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.

     

    Termination.  In
the event that the First Closing shall not have occurred with respect to the
Buyers on or before five (5) business days from the date hereof due to the
Company’s or the Buyer’s failure to satisfy the conditions set forth in Sections
6 and 7 above (and the non-breaching party’s failure to waive such unsatisfied
condition(s)), the non-breaching party shall have the option to terminate this
Agreement with respect to such breaching party at the close of business on such
date without liability of any party to any other party; provided, however, that
if this Agreement is terminated by the Company pursuant to this Section 9(l),
the Company shall remain obligated to reimburse the Buyer(s) for the fees and
expenses of Yorkville Advisors LLC described in Section 4(g) above (other than
the amounts set forth in Section 4(g)(ii)).

     

    Brokerage.  The
Company represents that no broker, agent, finder or other party has been
retained by it in connection with the transactions contemplated hereby and that
no other fee or commission has been agreed by the Company to be paid for or on
account of the transactions contemplated hereby.

     

    No Strict
Construction.  The language used in this Agreement will be
deemed to be the language chosen by the parties to express their mutual intent,
and no rules of strict construction will be applied against any
party.

     

    Limitations
on Issuance of Common Stock.

     

    Principal Market
Regulation.  The Company shall not be obligated to issue any
shares of Common Stock upon conversion of the Notes or exercise of the Warrants
if the issuance of such shares of Common Stock would cause the Company to breach
its obligations under the rules or regulations of the American Stock Exchange
(the “Exchange
Cap”), except that such limitation shall not apply in the event that the
Company (A) obtains the approval of its stockholders as required by the
applicable rules of the American Stock Exchange for issuances of Common Stock in
excess of such amount or (B) obtains a written opinion from outside counsel to
the Company that such approval is not required, which opinion shall be
reasonably satisfactory to the Buyer.  Until such approval or written
opinion is obtained, the Company shall not issue to the Buyer in the aggregate,
upon conversion or exercise or otherwise, as applicable, of Notes or Warrants,
or Commitment Shares, shares of Common Stock in an amount greater than the
Exchange Cap.

     

    Stockholders
Approval.  The Buyer shall provide written notice (“Exchange Cap Notice”)
to the Company if at any time the total number of shares issuable upon full
conversion of the Notes and full exercise of the Warrants would exceed the
Exchange Cap.  Within sixty (60) days of receipt of an Exchange Cap
Notice, the Company shall use its best efforts to call and hold a special
meeting of the shareholders, for the purpose of approving the transactions
contemplated herein (such affirmative approval being referred to herein as the
“Stockholder
Approval”).  The Company’s Board shall recommend to the
shareholders to vote in favor of approving the transactions contemplated
herein.

     

    

    [REMAINDER
PAGE INTENTIONALLY LEFT BLANK]

    
      
         

      

      
        27

        
          

        

      

      
         

      

    

    IN WITNESS WHEREOF, each Buyer and the Company
have caused their respective signature page to this Securities Purchase
Agreement to be duly executed as of the date first written above.

     

    

    
      	 
      	
              COMPANY:

            
	 
      	
              Hyperdynamics
      Corporation

            
	 
      	 
      
	 
      	
              By:
      /s/  Kent Watts

            
	 
      	
              Name:   Kent
      Watts

            
	 
      	
              Title:     President
      and CEO

            

    

     

    
      
         

      

      
        28

        
          

        

      

      
         

      

    

    IN WITNESS WHEREOF, each Buyer and the Company
have caused their respective signature page to this Securities Purchase
Agreement to be duly executed as of the date first written above.

     

    

    
      	 
      	
              BUYERS:

            
	 
      	
              YA
      GLOBAL INVESTMENTS, L.P.

            
	 
      	 
      	 
      
	 
      	
              By:

            	
              Yorkville
      Advisors, LLC

            
	 
      	
              Its:

            	
              Investment
      Manager

            
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	
              By:

            	
              /s/
      Mark Angelo

            
	 
      	
              Name:

            	
              Mark
      Angelo

            
	 
      	
              Its:

            	
              Portfolio
      Manager

            

    

    
      
         

      

      
        29

        
          

        

      

      
         

      

    

    SCHEDULE
I

     

    SCHEDULE OF
BUYERS

     

    

    

    
      	
              (1)

            	 	
              (2)

            	 	 	
              (3)

            	 	 	
              (4)

            	 	 	
              (5)

            	 	
              (6)

            	 	
              (7)

            	 	
              (8)

            
	
              Buyer

            	 	
              Subscription
      Amount

            	 	 	
              Number
      of

              Warrant
      Shares

            	 	 
      	 	 	 	
              Legal
      Representative’s

              Address
      and Facsimile

              Number

            
	 
      	 	
              First
      Closing

            	 	 	
              Second
      Closing

            	 	 	
              Third
      Closing

            	 	 	
              First
      Closing

            	 	
              Second
      Closing

            	 	
              Third
      Closing

            	 	 
      
	 
      	 	 	 	 	 	 	 	 	 	 	 	 	 
      	 	 	 	 
      
	
              YA
      Global Investments, L.P.

            	 	$	910,526	 	 	$	1,089,474	 	 	$	1,000,000	 	 	 	550,000	 	
              none

            	 	 	275,000	 	
              David
      Gonzalez, Esq.

            
	
              101
      Hudson Street, Suite 3700

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      	 	 	 	 	
              101
      Hudson Street, Suite 3700

            
	
              Jersey
      City, NJ  07302

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      	 	 	 	 	
              Jersey
      City, New Jersey 07302

            
	
              Attention:
      Mark Angelo

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      	 	 	 	 	
              Telephone:
      (201) 985-8300

            
	
              Telephone:
      (201) 985-8300

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      	 	 	 	 	
              Facsimile:
      (201) 985-8266

            
	
              Facsimile:
      (201) 985-8266

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      	 	 	 	 	 
      
	
              Residence:  Cayman
      Islands

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      	 	 	 	 	 
      

      
        
           

        

        
          30

          
            

          

        

        
           

        

      

    

     

    LIST OF
EXHIBITS:

    

    Disclosure
Schedule

    

    Exhibit A
– Form of Notes

    

    Exhibit B
– Form of Warrant

    

    Exhibit C
– Form QIB Certification

     

     

    31

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