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 2008 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 acreage position will allow us to grow organically through low risk drilling in the near term. This position continues to present attractive opportunities to expand our reserve base through field extensions and high risk/high reward exploratory drilling opportunities. In addition, we will constantly review, rationalize and "high-grade" our properties in order to optimize our existing asset base.

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 reserve base coupled with significant exploitation and exploration potential.

Liquidity and Capital Resources

During the first nine months of 2009 compared to the first nine months of 2008, net cash flow provided by continuing operations decreased by $18.7 million to ($1.6) million. This decline was primarily attributable to lower average oil and gas prices for the nine months ended September 30, 2009 of $53.66/bbl and $4.25/mcf compared to $113.99/bbl and $10.45/mcf for the nine months ended September 30, 2008.

Our current assets were $31.1 million on September 30, 2009. Cash on hand comprised approximately $19.9 million of this amount. This compared to $15.5 million at the end of the calendar year 2008 and $33.4 million at the end of the third calendar quarter of 2008. Accounts payable has been reduced from $21.7 million at year end 2008 to $9.3 million at September 30, 2009 and $4.4 million at September 30, 2008.

The financial statements continue to reflect our ongoing drilling and facilities upgrade program which involved almost $61.8 million of capital investment in 2008 and another $9.0 million during the first nine months of 2009. Expenditures in the discontinued Barnett Shale operations accounted for $9.0 million in 2008. We now expect to spend approximately $9.3 million during the final three months of 2009 on continuing development and exploitation of our asset base. However, this anticipated capital may be reduced or increased depending on available cash flow. Because we operate the majority of our properties, we can control the timing of expenditures.

During the third quarter of 2009, our revolving credit facility availability was increased to $40 million from $34.95 million. This will provide ample liquidity to meet our expected working capital needs for the remainder of 2009. As of September 30, 2009, borrowings under this credit facility totaled $17.0 million for working capital purposes. Our credit agreement requires that Dune hedge between 50% and 80% of production from proved

Semi-annual interest of $15.75 million on our 10 1/2% Senior Secured Notes due 2012 was paid on June 1, 2009 and is due semi-annually thereafter. The principal on the Senior Secured Notes is not due until 2012.

Shares of our Preferred Stock are not redeemable until the later of December 1, 2012 or the repayment in full of all senior secured debt or upon a change in control. Dividends are payable quarterly 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 position to meet our financial obligations and ongoing capital programs in the current commodity price environment.

As mentioned above, capital spending for the remainder of the fiscal year will be targeted at approximately $9.3 million. The exact amount will depend upon individual well performance results, cash flow and, where applicable, partner negotiations on the timing of drilling operations. In addition, we expect to offer participations in our drilling program to industry partners over this time frame, thus potentially reducing our capital requirements.

Results of Operations

Year-over-year production decreased from 8,629 Mmcfe for the first nine months of 2008 to 6,850 Mmcfe for the same nine month period of 2009. This decrease was caused by normal reservoir declines and a very limited capital reinvestment program.

The following table reflects the decrease in oil and gas sales revenue from continuing operations due to the changes in prices and volumes:

                                             Three Months Ended                       Nine Months Ended
                                               September 30,                            September 30,
                                         2009                   2008              2009                   2008
                                       (In thousands, except prices)            (In thousands, except prices)
Gas production volume (Mcf)                   1,116                1,399               3,584                4,615
Gas sales revenue                   $         3,900         $     14,390     $        15,216         $     48,240
Price per Mcf                       $          3.49         $      10.29     $          4.25         $      10.45
Decrease in gas sales revenue
due to:
Change in production volume         $        (2,901 )                        $       (10,803 )
Change in prices                             (7,589 )                                (22,221 )

Total decrease in gas sales
revenue                             $       (10,490 )                        $       (33,024 )

Oil production volume (Bbls)                    170                  177                 544                  669
Oil sales revenue                   $        11,321         $     21,915     $        29,190         $     76,259
Price per barrel                    $         66.59         $     123.81     $         53.66         $     113.99
Decrease in oil sales revenue
due to:
Change in production volume         $          (867 )                        $       (14,249 )
Change in prices                             (9,727 )                                (32,820 )

Total decrease in oil sales
revenue                             $       (10,594 )                        $       (47,069 )

Total production Mcfe                         2,135                2,461               6,850                8,629
Price per Mcfe                      $          7.13         $      14.75     $          6.48         $      14.43

Although the loss from continued operations before income taxes increased during the three month period ($25.9 million) and the nine month period ($36.9 million), significant reductions in spending were necessary to offset approximately 64% reduction in revenues. This is reflected in the significant reductions in lease operating expense, DD&A and G&A expense.

Revenues

Revenue from continuing operations for the current quarter ended September 30, 2009 decreased $21.1 million from the comparable 2008 quarter to $15.2 million. This was largely the result of reduced commodity prices which reflected a drop of $7.62/mcfe or 52%.

Revenue from continuing operations for the current nine months ended September 30, 2009 decreased $80.1 million from the nine months ended September 30, 2008 to $44.4 million. This was largely the result of reduced commodity prices which reflected a drop of $7.95/mcfe or 55%.

Operating expenses

Lease operating expense and production taxes

Lease operating expense and production taxes from continuing operations for the current quarter ended September 30, 2009 decreased $3.0 million from the comparable 2008 quarter to $7.6 million. This decrease from $4.28/mcfe during the third quarter of 2008 to $3.54/mcfe for the same three month period of 2009 reflects Dune's efforts to reduce operating costs and the lower production costs associated with reduced revenues.

Lease operating expense and production taxes from continuing operations for the nine months ended September 30, 2009 decreased $11.3 million from the comparable 2008 period to $22.6 million. This decrease was composed of a reduction in operating costs of $2.6 million, production costs of $5.5 million, and workover expense of $4.2 million, slightly offset by increased transportation costs of $1.0 million. This translated into a reduction from $3.92/mcfe for the first nine months of 2008 to $3.30/mcfe for the same period of 2009.

Accretion of asset retirement obligation

Accretion expense for asset retirement obligations increased by $0.2 million for the quarter ended September 30, 2009 compared to the comparable period in 2008. Similarly, accretion expense for the nine month period ended September 30, 2009 reflected a $0.8 million increase from the comparable period of 2008. This increase is the result of reevaluating abandonment costs at the year end.

Depletion, depreciation and amortization (DD&A)

For the quarter ended September 30, 2009, the Company recorded DD&A expense of $5.5 million ($2.58/mcfe) compared to $12.2 million ($4.95/mcfe) for the quarter ended September 30, 2008 representing a

These reductions reflect the impact of the 2008 impairment on the Company's oil and gas properties of $125.7 million which directly impact the depletable base for DD&A purposes. This reduction in the depletable base along with a reduction in production during the periods resulted in a 48%-55% reduction in DD&A expense.

General and administrative expense (G&A expense)

G&A expense for the current quarter ended 2009 decreased $1.8 million from the comparable 2008 quarter to $3.1 million. This decrease resulted principally from a reduction in personnel expense of $1.0 million and share-based compensation of $0.7 million.

For the nine months ended September 30, 2008 and 2009, G&A expense decreased $3.3 million to $11.7 million. This decrease consists of a decrease in personnel expense of $2.3 million and share-based compensation of $0.6 million.

On a unit of production basis, G&A fell from $1.97/mcfe for the third quarter of 2008 to $1.43/mcfe for the same period of 2009 and from $1.74/mcfe for the nine months of 2008 to $1.71/mcfe for the same period of 2009.

Exploration costs

For the three and nine months ended September 30, 2009, there were no exploration costs compared to $0.01 million for the three and $0.1 million for the nine months ended September 30, 2008.

Other income (expense)

Interest income

Interest income for the quarter ended September 30, 2009 was $0.2 million less than the comparable 2008 quarter. Additionally, interest income decreased $0.4 million for the current nine months ended September 30, 2009 compared to the 2008 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, 2009 amounted to $8.8 million compared to $8.9 million in the comparable quarter ended 2008.

Interest expense for the nine months ended September 30, 2009 amounted to $26.2 million compared to $26.4 million in the comparable period of 2008.

Gain (loss) on derivative liabilities

For the current quarter ended September 30, 2009, the Company incurred a loss on derivatives of $1.1 million composed of an unrealized loss of $2.6 million due to the change in the mark-to-market valuation and a realized gain of $1.5 million for cash settlements. This loss compared to a $23.7 million gain for the 2008 comparable quarter.

Income tax benefit (expense)

As a result of the acquisition of all the outstanding stock of Goldking in 2007, the Company had significant deferred tax liabilities in excess of its deferred tax assets. Management determined that a valuation allowance was not necessary and the realization of its deferred tax assets were more likely than not. Consequently, Dune recorded an income tax expense of $9.0 million in the quarter ended September 30, 2008 and an income tax benefit of $1.7 million in the nine months ended September 30, 2008.

At December 31, 2008, the Company had fully utilized its deferred tax liability associated with the Goldking acquisition and has established a valuation allowance against its net deferred tax assets. The Company is no longer in a position to record an income tax benefit against future losses. Consequently, no income tax benefit was recorded in the first three quarters of 2009.

Discontinued 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, 2008, the Company reported a loss from discontinued operations of ($0.3 million) and ($24.7 million), respectively.

Net income (loss) available to common shareholders

For the third quarter ended September 30, 2009, net income available to common shareholders decreased ($28.4 million) from the comparable quarter of 2008. This decrease reflects the impact of a ($21.1 million) reduction in revenues, a ($2.9 million) increase in Preferred Stock dividends, and a ($24.8 million) reduction in the gain on derivative liabilities. This was partially offset by a $11.3 million reduction in operating expenses and a $9.0 million reduction in income tax expense.

For the nine months ended September 30, 2009, net income available to common shareholders increased $46.1 million from the comparable period of 2008. This increase reflects the impact of a ($80.1 million) reduction in revenues and a ($1.7 million) reduction in income tax benefit. This was offset by a $33.4 million reduction in operating expenses, a $11.8 million decrease in the loss on derivative liabilities, a $24.7 million reduction in the loss on discontinued operations and a $58.2 million reduction in Preferred Stock dividends.