The following discussion will assist in the understanding of our financial position and results of operations. The information below should be read in conjunction with the consolidated financial statements, the related notes to consolidated financial statements and our 2007 Form 10-K. Our discussion contains both historical and forward-looking information. We assess the risks and uncertainties about our business, long-term strategy and financial condition before we make any forward-looking statements but we cannot guarantee that our assessment is accurate or that our goals and projections can or will be met. Statements concerning results of future exploration, exploitation, development and acquisition expenditures as well as revenue, expense and reserve levels are forward-looking statements. We make assumptions about commodity prices, drilling results, production costs, administrative expenses and interest costs that we believe are reasonable based on currently available information.

Our primary focus will continue to be the development and exploration efforts in our Gulf Coast properties. We believe that our extensive acreage position will allow us to grow organically through low risk drilling in the near term, as this property set continues to present attractive opportunities to expand our reserve base through field extensions, delineating deeper formations within existing fields and high risk/high reward exploratory drilling for 2008 and beyond. In addition, we will constantly review, rationalize and "high-grade" our properties in order to optimize our existing asset base. Consistent with this goal, during the third quarter of 2008, we closed $38.1 million of our previously announced sale of our Barnett Shale assets, located in Denton and Wise Counties, Texas. The difference between the $38.1 million and the $41.5 million original sale price reflects post-closing adjustments as well as one final set of properties anticipated to close by December 15, 2008. Certain customary final settlement adjustments are expected to occur during the fourth quarter.

We expect to maintain and utilize our technical and operations teams' knowledge of salt-dome structures and multiple stacked producing zones common in the Gulf Coast to enhance our growth prospects and reserve potential. We will employ technical advancements, including 3-D seismic data, pre-stack depth migration and directional drilling to identify and exploit new opportunities in our asset base. We also plan to employ the latest drilling, completion and fracturing technology in all of our wells to enhance recoverability and accelerate cash flows associated with these wells.

We continually review opportunities to acquire producing properties, leasehold acreage and drilling prospects that are in core operating areas. We are seeking to acquire operational control of properties that we believe have a solid proved reserves base coupled with significant exploitation and exploration potential. We intend to continue to evaluate acquisition opportunities and make acquisitions that we believe will further enhance our operations and reserves in a cost effective manner.

Hurricanes

As previously announced, during the third quarter we experienced two production disruptions by hurricanes Gustav and Ike resulting in production shut-ins on certain fields of approximately 27 days. As a result of Gustav, approximately 25 Mmcfe/day net was shut in. Many of our onshore Louisiana fields were flooded and incurred minor structural damage. Total net shut in production for Hurricane Ike was approximately 30 Mmcfe/day. Post Ike damage was very similar to Gustav. Such damage is not anticipated to exceed Dune's deductibles for insurance claims. Most fields impacted are back on production and ramping up to pre-Gustav/Ike levels. The Leeville field in Lafourche Parish, Louisiana and South Florence field in Vermillion Parish, Louisiana did not resume full production until October 1, 2008. Live Oak field in Vermillion Parish, Louisiana did not resume production until November 1, 2008. Deferred production is 3.5 Mmcfe/day net from Leeville and South Florence and 1 Mmcfe/day net from Live Oak. In total, Dune estimates that production deferrals associated with the two hurricanes will be approximately 0.5 Bcfe.

During the first nine months of 2008 compared to the first nine months of 2007, net cash flow provided by operating activities decreased by $8.1 million to $24.3 million. This decline was primarily attributable to our efforts to substantially reduce our accounts payable which had accumulated in 2007 as a result of our aggressive capital program.

Our current assets stood at $54.6 million on September 30, 2008. Primarily owing to the closing of the Barnett Shale sale during the quarter, cash on hand comprised approximately $33.4 million of this amount. This compared to $16.8 million at the end of the calendar year 2007 and $52.9 million at the end of the third calendar quarter of 2007. The Barnett Shale disposition, as mentioned earlier, also facilitated the reduction in our accounts payable from $56.6 million at year end 2007 to $4.4 million at September 30, 2008.

The financial statements continue to reflect our active and ongoing drilling and facilities upgrade program which involved almost $59.4 million of capital investment in the fourth quarter of 2007 and another $43.3 million during the first nine months of 2008. Expenditures in the discontinued Barnett Shale operations accounted for $9.1 million of the total. We now expect to spend approximately $19.1 million during the final three months of 2008 on continuing development and exploitation of our hydrocarbon assets. The hurricanes caused only minor damage to certain of our production operations and, as a result, no material cash outlays are expected to be necessary to restore this capacity.

During the first nine months of 2008, as a result of an increase in our borrowing base, the availability under our revolving line of credit was increased to $40 million. As of September 30, 2008, there were no borrowings under our credit facility compared with $28.1 million outstanding at the previous quarter.

Semi-annual interest of $15.75 million on our 10 1/2% Senior Secured Notes due 2012 is due to be paid on December 1, 2008 and semi-annually thereafter. The principal on the Senior Secured Notes is not due until 2012.

Shares of our Senior Redeemable Convertible Preferred Stock are not redeemable until December 1, 2012 or upon a change in control. Dividends are payable quarterly beginning September 1, 2007 with the Company having the option of paying any dividend on the Preferred Stock in shares of common stock, shares of Preferred Stock or cash.

Our primary sources of liquidity are cash provided by operating activities, debt financing, sales of non-core properties and access to capital markets. The strength of our current cash position and availability under our revolver put us in a very favorable position to meet our financial obligations and ongoing capital programs even as commodity prices soften from their mid-year highs.

For 2009, capital spending will be targeted at between $50 million and $80 million. The exact amount will depend upon individual well performance results, cash flow and, where applicable, partner negotiations on the timing of drilling operations. Capital spending at the lower end of the range would be expected to result in 2009 production volumes holding at or slightly above the forecasted 2008 fourth quarter level of 32 - 34 Mmcfe/day or 12 - 13 Bcfe annually. Expenditures at or near the upper side of the capital budget would be anticipated to result in an increase in the 2009 production level to 40 - 44 Mmcfe/day or 15 - 16 Bcfe annually.

Results of Operations

Year-over-year production volumes were up significantly as a result of the Goldking acquisition and increased operating and drilling activities, rising from 3,830 mcfe for the first nine months of 2007 to 8,629 mcfe for the same nine month period of 2008. Nevertheless, this increase was tempered partially by the adverse impact on production of hurricanes Gustav and Ike during the third quarter of 2008. Consequently, volumes were down for this period when compared to the same time frame of 2007.

                                           Three Months Ended                            Nine Months Ended
                                              September 30,                                September 30,
                                       2008                   2007                   2008                  2007
                                      (In thousands, except prices)                (In thousands, except prices)
Gas production volume (Mcf)                 1,399                  1,413                   4,615                2,090
Gas sales revenue                $         14,390        $         9,835       $          48,240     $         15,045
Price per Mcf                    $          10.29        $          6.96       $           10.45     $           7.20

Increase in gas sales
revenue due to:
Change in production volume      $            (97 )                            $          18,180
Change in prices                            4,652                                         15,015

Total increase in gas sales
revenue                          $          4,555                              $          33,195


Oil production volume (Bbls)                  177                    188                     669                  290
Oil sales revenue                $         21,915        $        14,177       $          76,259     $         20,729
Price per barrel                 $         123.81        $         75.41       $          113.99     $          71.48

Increase in oil sales
revenue due to:
Change in production volume      $           (827 )                            $          27,057
Change in prices                            8,565                                         28,473

Total increase in oil sales
revenue                          $          7,738                              $          55,530

Total production Mcfe                       2,461                  2,541                   8,629                3,830
Price per Mcfe                   $          14.75        $          9.45       $           14.43     $           9.34

We recorded net income for the three months ended September 30, 2008 of $14.3 million or $0.16 basic and $0.06 diluted income per share compared to a net loss available to common shareholders of $13.1 million or $0.17 basic and diluted loss per share for the three months ended September 30, 2007. For the first nine months of 2008, we recorded a net loss available to common shareholders of $114.7 million or $1.32 basic and diluted loss per share compared to a $43.9 million net loss available to common shareholders or $0.63 basic and diluted loss per share for the first nine months of 2007. Although we also showed a $2.8 million loss from continuing operations for the first nine months of the fiscal year, the third quarter results produced $14.6 million of net income from continuing operations. Net loss for the nine months ended September 30, 2008 was greater than in the prior year primarily because of the substantial impact of the impairment associated with the sale of the Barnett Shale properties and the effects of the loss on derivative liabilities. However, as result of declining commodities prices in the third quarter, the same gain or loss on derivative liabilities explains much of the improvement to positive net income from continuing operations and available to common shareholders for the three month period over the previous year. The net income (loss) available to common shareholders over the 2008 period was largely affected by the Preferred Stock dividend associated with the beneficial conversion feature which was triggered on May 1, 2008. In summary, the improvement in the net income from continuing operations for the three month and nine month periods ending September, 2008 over the comparable period of 2007 was the result of higher production and commodity prices, tempered somewhat by the hurricanes in the third quarter and gain or loss on derivative liabilities throughout the period.

Revenues

Revenue from continuing operations for the current quarter ended September 30, 2008 increased $12.3 million from the comparable 2007 quarter to $36.3 million. This was largely the result of higher commodity prices as production was down slightly to 2,461 for the quarter from 2,541 for the same period last year. This was due to shut-ins caused by hurricanes Gustav and Ike.

Revenue from continuing operations for the current nine months ended September 30, 2008 increased $88.7 million from the comparable 2007 period to $124.5 million. The Goldking acquisition and higher commodity

Operating expenses

General and administrative expense (G&A expense)

G&A expense for the current quarter ended 2008 decreased $1.0 million from the comparable 2007 quarter to $4.8 million. Stock-based compensation accounted for $1.5 million of the 2008 third quarter total versus $1.0 million for the same period of 2007. This increase was offset by reductions in personnel expense for the third quarter as one-time severance payments to former Goldking employees were made in 2007.

For the nine months ended September 30, 2007 and 2008, G&A expense was down slightly from $15.4 million to $15.0 million. Stock-based compensation accounted for $7.1 million of the total for the first three quarters of 2007 and $3.9 million in 2008. This reduction was offset by the impact of a full nine months of personnel expense in 2008 compared to four and a half months in 2007 resulting from the Goldking acquisition. On a unit of production basis, G&A fell from $2.30/Mcfe for the third quarter of 2007 to $1.97/Mcfe for the same period of 2008 and from $4.02/Mcfe for the nine months of 2007 to $1.74/Mcfe for the same period of 2008.

Lease operating expense and production taxes

Lease operating expense and production taxes from continuing operations for the current quarter ended September 30, 2008 declined slightly from $10.9 million for the comparable 2007 quarter to $10.5 million.

Lease operating expense and production taxes from continuing operations for the nine months ended September 30, 2008 increased $16.7 million from the comparable 2007 period to $33.9 million. The Goldking acquisition made up most of this increase. However, workover expenses and higher production taxes also contributed to the increase. Nevertheless, total operating expenses for the first nine months of the year fell to $3.92/Mcfe compared to $4.47/Mcfe for the same period of 2007.

Exploration costs

For the quarter ended September 30, 2007 and 2008, exploration costs decreased from $0.042 million to $0.015 million, respectively. Additionally, for the nine months ended September 30, 2007 and 2008, exploration costs decreased from $0.383 million to $0.115 million. This reflects the Company's focus on evaluating development opportunities associated with the Goldking acquisition, which occurred May 15, 2007, and on drilling development wells in order to convert proved undeveloped reserves to proved developed reserves.

Accretion of asset retirement obligation

Accretion expense for asset retirement obligations of $0.2 million represented a $0.6 million reduction for the quarter ended September 30, 2008 compared to the comparable period in 2007. Similarly, accretion expense for the nine month period ended September 30, 2008 totaled $0.5 million which reflected a $0.6 million decrease from the comparable period of 2007. The declines reflect the impact of reevaluating abandonment costs at year end 2007 on the properties acquired from Goldking.

Depletion, depreciation and amortization (DD&A)

For the current quarter of 2008, the Company recorded DD&A expense from continuing operations of $12.2 million compared to $11.3 million for 2007 representing a modest increase of $0.9 million, even though production was down slightly from the same quarter of 2007. For the current nine months of 2008, the Company

Other income (expense)

Interest income

Interest income was $0.2 million in the current quarter ended September 30, 2008 compared to $0.7 million in comparable 2007 quarter. Additionally, interest income decreased $0.8 million for the current nine months ended 2008 compared to the 2007 comparable period. This was the result of using our cash balances to support working capital and contribute to the capital program.

Interest expense

Interest expense for the quarter ended September 30, 2008 amounted to $8.9 million compared to $6.6 million in the comparable quarter ended 2007. The increase of $2.3 million is attributable in part to outstanding borrowings under the Revolver Commitment of $28.1 million as of June 30, 2008 which was paid off in August, 2008.

Interest expense for the nine months ended September 30, 2008 amounted to $26.4 million compared to $23.2 million in the comparable period of 2007. This increase reflects interest expense on the Company's additional borrowings under our Revolver Commitment outstanding during 2008.

Loss on derivative liabilities

Effective January 1, 2008, the Company discontinued, prospectively, the designation of its derivatives as cash flow hedges. The net derivative loss related to the discontinued cash flow hedges, as of December 31, 2007, will continue to be reported in accumulated other comprehensive loss until such time that they are charged to income or loss as the volumes underlying the cash flow hedges are realized. Beginning January 1, 2008, the loss on derivatives is being recognized currently in earnings. For the current quarter ended September 30, 2008, the Company incurred a gain on derivatives of $23.7 million, composed of an unrealized gain of $28.1 million due to the change in the mark-to-market valuation partially offset by a realized loss of $4.4 million for cash settlements, compared to a $5.7 million realized gain for the 2007 comparable quarter resulting in an increase of $18.0 million. The gain on the derivatives in the third quarter is primarily attributable to a decline in the fair market value of our derivative liability related to open contracts due to falling oil and gas prices as of September 30, 2008.

For the current nine months ended September 30, 2008, the Company incurred a loss on derivatives of $13.0 million, composed of an unrealized loss of $3.3 million due to the change in the mark-to-market valuation and a realized loss of $9.7 million for cash settlements, compared to a $3.8 million realized gain for the 2007 comparable period. This difference is reflective of the decrease in oil and gas prices for the period.

Income tax benefit

In the first nine months of 2007, the Company's taxes were subject to a full valuation allowance yielding $0 tax benefit. As a result of the Goldking acquisition in the second quarter of 2007, the Company has significant deferred tax liabilities in excess of its deferred tax assets. Management has determined that a valuation allowance is no longer necessary as the realization of its deferred tax assets is more likely than not. Consequently, for the first nine months of 2008, the Company has recorded an income tax benefit of $1.7 million for continuing operations.

Associated with the sale of the Barnett Shale Properties, the Company has reflected all activity for these assets as discontinued operations. For the three and nine months ended September 30, 2007, the Company reclassified $0.2 million and $1.3 million, respectively, as income from discontinued operations. No provision for income tax was computed for these amounts.

For the three and nine months ended September 30, 2008, the Company generated income from the operation of the Barnett Shale Properties of $0.5 million and $2.0 million, respectively. This income was offset by a $1.0 million and $41.9 million impairment to write down the related carrying amounts to their fair value less cost to sell for the three and nine months ended September 30, 2008. Additionally, an income tax benefit of $0.2 million and $15.2 was provided from this transaction yielding a $0.3 million and $24.7 million loss on discontinued operations for the three and nine months ended September 30, 2008.

Net Loss

For the current quarter ended September 30, 2008, the net income from continuing operations reached $14.6 million, up from the comparable 2007 quarter net loss from continuing operations of $5.1 million. Additionally, for the nine months ended for 2008, the net loss decreased $34.2 million from the comparable 2007 period to $2.8 million. The net loss from discontinued operations after tax benefit at September 30, 2008 was $24.7 million. Total net loss from continuing and discontinued operations for the nine month period ended September 30, 2008 was $27.5 million.