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 Annual Report on Form 10-K for the fiscal year ended December 31, 2011. 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 expect to 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 and completion 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 six months of 2012 compared to the first six months of 2011, net cash flow provided by operations increased by $20.7 million to $13.4 million. This increase was primarily attributable to a reduction in interest expense which was a direct result of our capital restructuring in 2011.

Our current assets were $18.1 million on June 30, 2012. Cash on hand comprised approximately $8.9 million of this amount. This compared to $20.4 million in cash at the end of the calendar year 2011 and $21.8 million at the end of the second quarter of 2011. Accounts payable have increased from $6.8 million at year end 2011 to $12.5 million at June 30, 2012. Accounts payable were $4.7 million at June 30, 2011. The reduced cash and increased payables compared to prior periods are principally the result of increased operating and capital spending activities thus far in 2012.

The financial statements continue to reflect a modest but ongoing drilling and facilities upgrade program which amounted to $19.2 million during the first six months of 2012, up from $9.5 million spent during the same period of 2011. The increased spending reflected continued drilling activity at Garden Island Bay. We expect to spend approximately $15.0 million net (including dry-hole costs) during the final six months of 2012 on continuing development, exploitation and exploration associated with high potential opportunities within our asset base. This would represent a $9.8 million increase over our $24.4 million of capital investment and exploration costs in 2011. This capital forecast is anticipated to be reduced or increased depending on available cash flow and structure of deals associated with finding partners for some of the high potential exploratory projects around Garden Island Bay. Because we operate the majority of our properties, we can control the timing of many of our expenditures.

As part of its overall financial restructuring, Dune has entered into a new $200.0 million senior secured revolving credit facility pursuant to a credit agreement, dated as of December 22, 2011, by and among Dune, Bank of Montreal, CIT Capital Securities LLC and the lenders party thereto, or the New Credit Agreement, with an initial borrowing base limit of up to $63.0 million that was reduced to $50.0 million at May 1, 2012. At June 30, 2012, $36 million was borrowed under this facility.

In addition, as part of its restructuring, Dune implemented a 1-for-100 reverse stock split, which was effective on December 22, 2011. After the restructuring and the reverse stock split, there were approximately 38.6 million shares of Dune's common stock outstanding. There were 39.4 million shares of common stock outstanding at June 30, 2012.

Our primary sources of liquidity are cash provided by operating activities, debt financing, sales of non-core properties and access to capital markets. We believe the strength of our current cash position and remaining availability under our borrowing arrangements put us in a favorable position to meet our financial obligations and ongoing capital programs in the current commodity price environment. The exact amount of capital spending for 2012 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. However, we have targeted a capital budget of approximately $32 million to $35 million (including dry-hole costs), primarily focused on our Garden Island Bay and Leeville field projects. The capital program will include several maintenance projects in addition to field exploitation within Garden Island Bay and Leeville.

Results of Operations

Year-over-year production decreased from 3,065 Mmcfe for the first six months of 2011 to 2,757 Mmcfe for the same six month period of 2012. The Weiting #32 well in our Chocolate Bayou field was shut in for 17 days during the period for a workover and the Garden Island Bay field was shut in for 19 days due to lack of gas to support the gas lift system. These two events accounted for 144 Mmcfe of the decline in the first quarter. Production has been restored in both fields. The remaining decrease was caused by normal reservoir declines which were not offset by increased production.

                                         Three Months Ended June 30,                            Six Months Ended June 30,
                                                       %                                                    %
                                   2012              Change            2011              2012             Change            2011
Oil production volume
(Mbbls)                                  105              -8 %              114                205            -19 %              254
Oil sales revenue ($000)       $      11,090             -10 %     $     12,341      $      22,053            -15 %     $     25,907
Price per Bbl                  $      105.62              -2 %     $     108.25      $      107.58              5 %     $     102.00
Increase (decrease) in oil
sales revenue due to:
Change in production volume    $        (974 )                                       $      (4,998 )
Change in prices                        (277 )                                               1,144

Total decrease in oil sales
revenue                        $      (1,251 )                                       $      (3,854 )

Gas production volume
(Mmcf)                                   750               4 %              722              1,529             -1 %            1,543
Gas sales revenue ($000)       $       2,017             -43 %     $      3,549      $       4,449            -40 %     $      7,403
Price per Mcf                  $        2.69             -45 %     $       4.92      $        2.91            -39 %     $       4.80
Increase (decrease) in gas
sales revenue
due to:
Change in production volume    $         138                                         $         (67 )
Change in prices                      (1,670 )                                              (2,887 )

Total decrease in gas sales
revenue                        $      (1,532 )                                       $      (2,954 )

Total production volume
(Mmcfe)                                1,382              -2 %            1,405              2,757            -10 %            3,065
Total revenue ($000)           $      13,107             -18 %     $     15,890      $      26,502            -20 %     $     33,310
Price per Mcfe                 $        9.48             -16 %     $      11.31      $        9.61            -12 %     $      10.87
Decrease in total revenue
due to:
Change in production volume    $        (260 )                                       $      (3,348 )
Change in prices                      (2,523 )                                              (3,460 )

Total decrease in total
revenue                        $      (2,783 )                                       $      (6,808 )

We recorded a net loss available to common stockholders for the six months ended June 30, 2012 of ($2.7 million) or ($0.07) loss per share compared to net loss available to common stockholders of ($32.2 million) or ($673.74) loss per share for the same period of 2011. The decrease in loss of $29.5 million for the period is primarily a result of a $15.2 million reduction in interest expense, a $4.7 million gain on derivative instruments, a $5.2 million reduction in exploration expense and the elimination of $10.0 million of preferred stock dividends.

Revenues

Revenues from for the quarter ended June 30, 2012 totaled $13.1 million compared to $15.9 million for the quarter ended June 30, 2011 representing a $2.8 million decrease. Production volumes for 2012 were 105 Mbbls of oil and 0.75 Bcf of natural gas or 1.38 Bcfe. This compares to 114 Mbbls of oil and 0.72 Bcf of natural gas or 1.40 Bcfe representing a 2% decline in production volumes. In 2012, the average sales price per barrel of oil was $105.62 and $2.69 per Mcf of natural gas as compared to $108.25 per barrel and $4.92 per Mcf, respectively for 2011. These results indicate that the decrease in revenue is attributable to reduced production volumes of 0.02 Bcfe or 2% and decreases in commodity prices of $1.83 per Mcfe or 16%.

Revenues for the six months ended June 30, 2012 totaled $26.5 million compared to $33.3 million for the six months ended June 30, 2011 representing a $6.8 million decrease. Production volumes for 2012 were 205 Mbbls of oil and 1.53 Bcf of natural gas or 2.76 Bcfe. This compares to 254 Mbbls of oil and 1.54 Bcf of natural gas or 3.07 Bcfe representing a 10% decline in production volumes. In 2012, the average sales price per barrel of

Operating expenses

Lease operating expense

The following table presents the major components of Dune's lease operating expense (in thousands) for the three and six months ended June 30, 2012 and 2011 on a Mcfe basis:

                                          Three months ended June 30,                                 Six months ended June 30,
                                       2012                         2011                          2012                          2011
                               Total        Per Mcfe        Total        Per Mcfe        Total         Per Mcfe        Total         Per Mcfe
Direct operating expense      $ 4,973      $     3.60      $ 5,160      $     3.67      $  9,325      $     3.38      $  9,672      $     3.16
Production taxes                1,116            0.81        1,194            0.85         2,170            0.79         2,584            0.84
Ad valorem taxes                  253            0.18          243            0.17           527            0.19           480            0.16
Transportation                    330            0.24          277            0.20           685            0.25           557            0.18
Workovers                          28            0.02           12            0.01           152            0.06           661            0.22

                              $ 6,700      $     4.85      $ 6,886      $     4.90      $ 12,859      $     4.67      $ 13,954      $     4.56

Lease operating expense for the quarter ended June 30, 2012 totaled $6.7 million versus $6.9 million for the same period of 2011. This translated into a decrease of $.05/Mcfe on a volume basis.

Lease operating expense for the six months ended June 30, 2012 totaled $12.9 million versus $14.0 million for the same period of 2011. This translated into an increase of $0.11/Mcfe on a volume basis. This overall decrease between periods reflects the impact of Dune's continued efforts to reduce field operating expenses representing an 8% reduction.

Accretion of asset retirement obligation

Accretion expense for asset retirement obligations increased by $0.04 million for the quarter ended June 30, 2012 compared to the same period in 2011. Similarly, accretion expense for the six month period ended June 30, 2012 reflected a $0.07 million increase from the comparable period of 2011. This small increase is the result of reevaluating abandonment costs at year end.

Depletion, depreciation and amortization (DD&A)

For the quarter ended June 30, 2012, the Company recorded DD&A expense of $5.0 million ($3.62/Mcfe) compared to $5.2 million ($3.70/Mcfe) for the quarter ended June 30, 2011 representing a decrease of $0.2 million ($0.08/Mcfe). Additionally, for the six months ended June 30, 2012, the Company recorded DD&A expense of $9.3 million ($3.37/Mcfe) compared to $11.5 million ($3.75/Mcfe) for the six months ended June 30, 2011 representing a decrease of $2.2 million ($0.38/Mcfe). This decrease reflects the impact of the reduction in production volumes that directly impacts the DD&A calculation.

General and administrative expense (G&A expense)

G&A expense for the current quarter ended 2012 increased $0.3 million (15%) from the comparable 2011 quarter to $2.3 million. Cash G&A expense for 2012 increased $0.1 million (6%) from 2011 to $1.9 million. This increase resulted principally from an increase in professional fees resulting from the Restructuring.

For the six months ended June 30, 2012 and 2011, G&A expense increased $1.2 million (28%) to $5.4 million. Cash G&A expense for the first half of the year increased $0.6 million (16%) to $4.4 million. This increase primarily resulted from additional professional fees resulting from the Restructuring.

A loss on the settlement of asset retirement obligations of $0.5 million was incurred in second quarter of 2012. Additionally, a loss of $0.9 million was incurred in the six months ended June 30, 2012. These amounts result from the acceleration of plugging and abandonment costs that were projected to occur in a future period.

Exploration expense

In the second quarter of 2011, the Company, as a party to a joint venture, drilled an exploratory well. Although the Company continues to evaluate future options associated with the well, it expensed $5.2 million of costs incurred on the well in the three and six months ended June 30, 2011. No exploration expense was incurred in 2012.

Other income (expense)

Interest income

Interest income for the quarter ended June 30, 2012 was $0.01 million less than the comparable 2011 quarter. Interest income for the six months ended June 30, 2012 was $0.02 million less than the comparable 2011 period.

Interest expense

As a direct result of the Restructuring which occurred on December 22, 2011, interest expense for the quarter ended June 30, 2012 decreased to $2.4 million compared to $10.1 million in the comparable quarter ended 2011. Additionally, interest expense for the six months ended June 30, 2012 decreased to $4.8 million compared to $20.0 million in the comparable period of 2011.

Gain (loss) on derivative instruments

In accordance with the requirements of the New Credit Agreement entered into with the Restructuring, the Company entered into hedge agreements in the first quarter of 2012.

For the quarter ended June 30, 2012, the Company incurred a gain on derivatives of $5.0 million composed of an unrealized gain of $4.5 million due to the change in the mark-to-market valuation and a realized gain of $0.5 million for cash settlements.

For the six months ended June 30, 2012, the Company incurred a gain on derivatives of $4.7 million composed of an unrealized gain of $4.0 million due to the change in mark-to-market valuation and a realized gain of $0.7 million for cash settlements.

Net income (loss) available to common stockholders

For the quarter ended June 30, 2012, net income available to common stockholders increased $19.8 million from the comparable quarter of 2011. This increase reflects the impact of a $7.7 million reduction in interest expense, a $5.2 million decrease in exploration expense, a $5.1 million elimination of preferred stock dividends and a $5.0 million gain on derivative liabilities partially offset by a ($2.7 million) reduction in revenues.

For the six months ended June 30, 2012, net loss available to common shareholders decreased $29.5 million from the comparable 2011 period. This decrease reflects the impact of a $15.2 million reduction in interest expense, a $5.2 million decrease in exploration expense, a $10.0 million elimination of preferred stock dividends and a $4.7 million gain on derivative instruments partially offset by a ($6.8 million) reduction in revenues.