SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

For the quarterly period ended March 31, 2010

For the transition period from              to             

Commission file number 001-32497

DUNE ENERGY, INC.

(Exact name of small business as specified in its charter)

Two Shell Plaza, 777 Walker Street, Suite 2300, Houston, Texas 77002

(Address of principal executive offices)

(713) 229-6300

(Issuer’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 40,484,243 shares of Common Stock, $.001 per share, as of April 28, 2010.

PART 1

FINANCIAL INFORMATION

Dune Energy, Inc.

Consolidated Balance Sheets

(Unaudited)

See notes to consolidated financial statements.

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Dune Energy, Inc.

Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

See notes to consolidated financial statements.

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Dune Energy, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

See notes to consolidated financial statements.

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DUNE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—ACCOUNTING POLICIES AND BASIS OF PRESENTATION

Dune Energy, Inc., a Delaware corporation (“Dune” or the “Company”), is an independent energy company that was formed in 1998. Since May 2004, Dune has been engaged in the exploration, development, exploitation and production of oil and natural gas. Dune sells its oil and gas production primarily to domestic pipelines and refineries. Its operations are presently focused in the states of Texas and Louisiana.

Dune prepared these financial statements according to the instructions for Form 10-Q. Therefore, the financial statements do not include all disclosures required by generally accepted accounting principles. However, Dune has recorded all transactions and adjustments necessary to fairly present the financial statements included in this Form 10-Q. The adjustments made are normal and recurring. The following notes describe only the material changes in accounting policies, account details or financial statement notes during the first three months of 2010. Therefore, please read these financial statements and notes to the financial statements together with the audited financial statements and notes thereto in our 2009 Form 10-K. The income statement for the three months ended March 31, 2010 cannot necessarily be used to project results for the full year.

Reclassifications and Adjustments

Certain prior year amounts in the consolidated financial statements have been reclassified to conform to current year presentations. All historical share and per share data in the consolidated financial statements and notes thereto have been restated to give retroactive recognition of the 1-for-5 reverse stock split. See Note 4 for additional information regarding the reverse stock split.

Loss per share

Basic earnings per share amounts are calculated based on the weighted average number of shares of common stock outstanding during each period. Diluted earnings per share is based on the weighted average numbers of shares of common stock outstanding for the periods, including dilutive effects of stock options, warrants granted and convertible preferred stock. Dilutive options and warrants that are issued during a period or that will expire or are canceled during a period are reflected in the computations for the time they were outstanding during the periods being reported. Since Dune incurred losses for all other periods, the impact of the common stock equivalents would be antidilutive and therefore are not included in the calculation.

NOTE 2—DEBT FINANCING

Wells Fargo Foothill Credit Agreement (Short-term debt)

On May 15, 2007, Dune entered into a credit agreement among it, each of Dune’s subsidiaries named therein as borrowers, each of Dune’s subsidiaries named therein as guarantors, certain lenders and Wells Fargo Foothill, Inc. (“Wells Fargo”), as arranger and administrative agent (the “WF Agreement”). Subject to the satisfaction of a Borrowing Base formula (based on the proved producing and non-producing reserves of Dune and its operating subsidiaries), numerous conditions precedent and covenants, the WF Agreement provides for a revolving credit commitment of up to $20 million, which could be extended up to $40 million upon request by Dune so long as no Default or Event of Default exists or would exist at time of such request (the “Revolver Commitment”), with a sub-limit of $20 million for issuance of letters of credit. Effective February 29, 2008, Dune requested and received the extension up to $40 million under the Revolver Commitment. The borrowing base was reset to $34,949,080 as of February 4, 2009 and reset back to $40 million in August 2009. Unless earlier payment was required under the WF Agreement, advances under the Revolver Commitment were to be paid on or before May 15, 2010. Under the WF Agreement, interest on advances accrued at either Wells Fargo’s

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Base Rate or the LIBOR rate, at Dune’s option, plus an applicable margin ranging from 0.25% to 2.0% based upon the ratio of outstanding advances and letters of credit usage under the WF Agreement to the Borrowing Base or Revolver Commitment, whichever was less. With respect to letters of credit issued under the WF agreement, fees accrued at a rate equal to the applicable margin for any LIBOR rate advances multiplied by the daily balance of the undrawn amount of all outstanding letters of credit. As of March 31, 2010, standby letters of credit were issued amounting to $8.5 million. During 2009 there were new borrowings of $24.0 million which are outstanding under the Revolver Commitment as of March 31, 2010.

As security for Dune’s obligations under the WF Agreement, Dune and certain of its operating subsidiaries granted Wells Fargo a security interest in and a first lien on all of Dune’s existing and after-acquired assets including, without limitation, the oil and gas properties and rights that Dune acquired in the Goldking acquisition. In addition, two of the Company’s subsidiaries have each guaranteed the Company’s obligations.

On August 4, 2008, Dune amended the WF Agreement, pursuant to which the definitions of “Change of Control” and “Permitted Holders” were modified to provide that a Change of Control occurs when any group or person, other than Permitted Holders, becomes the beneficial owner, directly or indirectly, of 25% or more of Dune’s common stock. This amendment also added James A. Watt and Alan Gaines to the list of Permitted Holders, which already included Itera Holdings B.V. and Natural Gas Partners VII, LP.

On July 8, 2009, Dune signed a second amendment to its credit agreement with Wells Fargo modifying the “Change of Control” definition and thus curing an Event of Default that had previously been waived until July 17, 2009 by the lender. The Event of Default was triggered on May 6, 2009 when the Permitted Holders no longer held 51% or more of our outstanding common stock. The Permitted Holders were defined as Itera Holdings B.V., Natural Gas Partners VII, LP, Alan Gaines and James Watt. In the second quarter, 21,116 preferred shares were converted into 6.2 million common shares resulting in 27.9 million common shares outstanding at the end of the quarter. The Permitted Holders held approximately 40.3% of the outstanding common stock of the Company at the end of the quarter. The modified definition states in part that a Change in Control occurs if any person or group other than the Permitted Holders becomes a beneficial owner of 15% or more of the outstanding common stock of the Company, that a majority of the members of the Board of Directors do not constitute Continuing Directors or that Frank Smith, the Company’s CFO, or James Watt, the Company’s CEO, cease employment with the Company and a successor acceptable to the lenders is not appointed within 30 days of termination of employment.

On March 23, 2010, the maturity date on the WF Agreement with Wells Fargo was extended until March 31, 2011 through a third amendment to the agreement. In addition, the $10 million minimum liquidity requirement was removed. New minimum monthly cumulative EBITDA and minimum monthly production covenants have been added. The Company is also required to maintain a minimum $80 million of proved developed producing reserves. An annual ceiling was also placed on capital expenditures. The borrowing rate options have been increased to LIBOR plus 5% or Base Rate plus 5% and letter of credit fees are now 3.5%. A minimum floor of 1% has also been placed under the LIBOR rate. The non-use fee under the agreement has been increased to 0.75%. The borrowing base calculation is based solely on 65% of proved developed producing reserves and the hydrocarbon pricing assumptions used are to be the lower of a formula based on the NYMEX strip or the WFF price deck then in effect. Finally, there was a $500,000 closing fee and an early termination fee.

Senior Secured Notes (Long-term debt)

On May 15, 2007, Dune sold to Jefferies & Company, Inc. $300 million aggregate principal amount of 10 ¹/2% Senior Secured Notes due 2012 (“Senior Secured Notes”) at a purchase price of $285 million. Net proceeds from the sale of the Senior Secured Notes together with the net proceeds from the sale of Dune’s Senior

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Redeemable Convertible Preferred Stock were used primarily to acquire all of the issued and outstanding capital stock of Goldking, to discharge outstanding indebtedness and for general working capital.

The Senior Secured Notes, bearing interest at the rate of 10 ¹/2 % per annum, were issued under that certain indenture, dated May 15, 2007, among Dune, the guarantors named therein, and The Bank of New York Trust Company NA, as trustee (the “Indenture”). The Indenture contains customary representations and warranties by the Company as well as typical restrictive covenants whereby Dune has agreed, among other things, to limitations to incurrence of additional indebtedness, declaration of dividends, issuance of capital stock, sale of assets and corporate reorganizations.

The Senior Secured Notes are subject to redemption by Dune (i) prior to June 1, 2010, in connection with equity offerings at a repurchase price equal to 110.5% of the aggregate principal amount plus accrued interest for up to 35% of the outstanding principal amount of the Senior Secured Notes, (ii) during the twelve-month period beginning June 1, 2010, at a repurchase price equal to 105.25% of the aggregate principal amount plus accrued interest, and (iii) after June 1, 2011, at a repurchase price equal to 100% of the aggregate principal amount plus accrued interest. Holders of the Senior Secured Notes may put such notes to the Company for repurchase, at a repurchase price of 101% of the principal amount plus accrued interest, upon a change in control as defined in the Indenture.

The Senior Secured Notes are secured by a lien on substantially all of Dune’s assets, including without limitation, those oil and gas leasehold interests located in Texas and Louisiana held by Dune’s operating subsidiaries. The Senior Secured Notes are unconditionally guaranteed on a senior secured basis by each of Dune’s existing and future domestic subsidiaries. The collateral securing the Senior Secured Notes is subject to, and made subordinate to, the lien granted to Wells Fargo under the WF Agreement.

The debt discount is being amortized over the life of the notes using the effective interest method. Amortization expense associated with the debt discount amounted to $713,851 and $635,105 and is included in interest expense in the Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009, respectively.

NOTE 3—REDEEMABLE CONVERTIBLE PREFERRED STOCK

During the quarter ended June 30, 2007, Dune sold to Jefferies & Company, Inc. pursuant to the Purchase Agreement dated May 1, 2007, 216,000 shares of its Senior Redeemable Convertible Preferred Stock (“Preferred Stock”) for gross proceeds of $216 million less a discount of $12.3 million yielding net proceeds of $203.7 million. As provided in the Certificate of Designations, the Preferred Stock has a liquidation preference of $1,000 per share and originally paid a dividend at a rate of 10% per annum, payable quarterly, at the option of Dune, in additional shares of Preferred Stock, shares of common stock (subject to the satisfaction of certain conditions) or cash. The Preferred Stock was initially convertible into shares of our common stock, based on an initial conversion price of $15.00 per share of the common stock. However, the Certificate of Designations provided a one-time adjustment to the conversion price in the event that the volume weighted average price of the Company’s common stock for the 30 trading days up to and including April 30, 2008 was less than $12.50 per share. The Certificate of Designations also provided that, if the volume weighted average price of the Company’s common stock plus 10% over this 30 day trading period was less than $8.75, then the dividend payable on the Preferred Stock would increase. Because the volume weighted average price of the Company’s common stock was below these thresholds over this 30 day period, effective May 1, 2008, the conversion price of the Preferred Stock was lowered to $8.75 and the dividend rate increased to 12% per annum.

The conversion price of the Preferred Stock is subject to adjustment pursuant to customary anti-dilution provisions and may also be adjusted upon the occurrence of a fundamental change as defined in the Certificate of Designations. In the event a holder of Dune’s Preferred Stock elects to convert such shares prior to June 1, 2010,

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then such holder shall be entitled to a make whole premium consisting of the present value of all dividends on the Preferred Stock as if paid in cash from the date of conversion through June 10, 2010, computed using a discount rate equal to the reinvestment yield (as defined in the Certificate of Designations). Dune may elect to pay this amount in cash or shares of its common stock. Should the Company elect to make such payment in shares of its common stock, then such share will be valued at a 10% discount to the volume weighted average price of the Company’s common stock for the 10 trading days preceding any such conversion. The equity ownership of holders of Dune’s common stock could be significantly diluted. The Preferred Stock is redeemable at the option of the holder on December 1, 2012 and subject to the terms of any of the Company’s indebtedness or upon a change of control. In the event Dune fails to redeem shares of Preferred Stock “put” to Dune by a holder, then the conversion price shall be lowered and the dividend rate increased. After December 1, 2012, Dune may redeem shares of Preferred Stock. The Company analyzed the adjustment of the conversion right and the make whole premium for derivative accounting under FASB ASC 815—Derivatives and Hedges and determined that it was not applicable to either provision.

The Preferred Stock discount is deemed a Preferred Stock dividend and is being amortized over five years using the effective interest method and is charged to additional paid-in capital as the Company has a deficit balance in retained earnings. Charges to additional paid-in capital for the three months ended March 31, 2010 and 2009 amounted to $529,369 and $472,823, respectively.

During the three months ended March 31, 2010, holders of 2,448 shares of the Preferred Stock converted their shares into 704,979 shares of common stock. This amount includes 425,206 shares that the Company elected to issue to pay make whole premiums. Shares issued to satisfy the make whole premiums were deemed a Preferred Stock dividend for accounting purposes and increased the Preferred Stock dividend by $77,739.

During the three months ended March 31, 2010 and 2009, Dune paid dividends on the Preferred Stock in the amount of $5,762,000 and $7,037,000, respectively. In lieu of cash, the Company elected to issue 5,762 and 7,037 additional shares of Preferred Stock, respectively.

NOTE 4—REVERSE STOCK SPLIT

On November 30, 2009, the Company’s stockholders approved a 1-for-5 reverse stock split. The reverse stock split was effective at the opening of trading on December 2, 2009. As a result of the reverse stock split, every five shares of the Company that a stockholder owned were converted into one share of the Company, thus reducing the number of outstanding shares of common stock from approximately 185.5 million shares to 37.1 million shares as of the close of business on December 1, 2009. Following the reverse stock split, the Company continued to have 300 million authorized shares of common stock. Notwithstanding the reverse stock split, each shareholder continued to hold the same percentage of the Company’s outstanding common shares immediately following the reverse stock split as was held immediately prior to the split, except for fractional shares. Fractional shares created as a result of the reverse stock split were rounded up to the nearest whole share.

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NOTE 5—HEDGING ACTIVITIES

In accordance with a requirement of the WF Agreement, Dune and its operating subsidiaries also entered into a Swap Agreement (“Swap Agreement”) with Wells Fargo. The WF Agreement provides that Dune put in place, on a rolling six month basis, separate swap hedges, as adjusted from time to time as specified therein, with respect to notional volumes of not less than 50% and not more than 80% of the estimated aggregate production from (i) Proved Developed Producing Reserves (as defined in the WF Agreement) and (ii) estimated drilling by Dune and its subsidiaries with respect to each of crude oil and natural gas. These hedging arrangements are summarized as follows:

DUNE ENERGY, INC.

Current Hedge Positions as of March 31, 2010

Crude Oil Trade Details

Dune hedges a portion of forecasted crude oil and natural gas production volumes with derivative instruments. Dune uses costless collars in connection with anticipated crude oil and natural gas sales to minimize the impact of commodity price fluctuations. A collar is a combination of a purchased put option and sold call option. Dune accounts for its production hedge derivative instruments as fair value hedges as defined in FASB ASC 815—Derivatives and Hedging.

Accordingly, the gain or losses on derivatives are recognized in earnings. For the three months ended March 31, 2010 and 2009, respectively, Dune recorded a gain on the derivatives of $1,258,874 and $2,803,000, composed of an unrealized gain on changes in mark-to-market valuations of $1,559,240 and $361,442 and a realized gain (loss) on cash settlements of ($300,366) and $2,441,558.

NOTE 6—RESTRICTED STOCK, STOCK OPTIONS AND WARRANTS

The Company utilizes restricted stock, stock options and warrants to compensate employees, officers, directors and consultants. Total stock-based compensation expense including options, warrants and restricted stock was $820,889 and $1,639,001 for the three months ended March 31, 2010 and 2009, respectively.

The 2007 Stock Incentive Plan, which was approved by Dune’s stockholders, reserved a total of 3,200,000 shares of common stock for issuance to employees, officers and non-employee directors. The Plan is administered by Dune’s Compensation Committee. On December 17, 2007, pursuant to its 2007 Stock Incentive Plan, the Company issued a total of 248,591 shares of its common stock to its employees and non-employee directors. These shares vest ratably over a three year period with the initial vesting occurring December 17, 2008. Through March 31, 2010, 61,781 shares were cancelled due to termination of certain employees.

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On August 1, 2008, pursuant to its 2007 Stock Incentive Plan, the Company issued a total of 622,700 shares of its common stock to its employees, officers and non-employee directors. These shares vest ratably over a three year period with the initial vesting occurring August 1, 2009. Through March 31, 2010, 62,091 shares were cancelled due to termination of certain employees.

On December 31, 2009, pursuant to its 2007 Stock Incentive Plan, the Company issued a total of 527,000 shares of its common stock to it employees, officers and non-employee directors. These shares vest ratably over a three year period with the initial vesting occurring December 31, 2010. Additionally, the Company issued a total of 46,780 shares of its common stock to employees as a condition of their employment. These shares vest at various dates over a three year period. Through March 31, 2010, 13,200 shares were cancelled due to termination of certain employees.

NOTE 7—INCOME TAXES

For the year ended December 31, 2008, the Company incurred a significant impairment loss of our oil and gas properties due to the steep decline in global energy prices over that same time period. As a result, Dune is in a position of cumulative reporting losses for the current and preceding reporting periods. The volatility of energy prices and uncertainty of when energy prices may rebound is not readily determinable by management. At this date, this general fact pattern does not allow the Company to project sufficient sources of future taxable income to offset tax loss carryforwards and net deferred tax assets in the U.S. Under these current circumstances, it is management’s opinion that the realization of these tax attributes does not reach the “more likely than not criteria” under FASB ASC 740—Income Taxes. As a result, the Company’s taxes through March 31, 2010 are subject to a full valuation allowance.

NOTE 8—FAIR VALUE MEASUREMENTS

Certain assets and liabilities are reported at fair value on a recurring basis in Dune’s Consolidated Balance Sheet. The following table summarizes the valuation of our investments and financial instruments by FASB ASC 820-10-05 pricing levels as of March 31, 2010:

NOTE 9—COMMITMENTS AND CONTINGENCIES

The Company, as an owner or lessee and operator of oil and gas properties, is subject to various federal, state and local laws and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among other things, impose liability on the lessee under an oil and gas lease for the cost of pollution clean-up resulting from operations and subject the lessee to liability for pollution damages. In some instances, the Company may be directed to suspend or cease operations in the affected area. Dune maintains insurance coverage, which it believes is customary in the industry, although Dune is not fully insured against all environmental risks.

In connection with the acquisition of Goldking, the Company inherited an environmental contingency which after conducting its due diligence and subsequent testing believes is the responsibility of a third party. However, federal and state regulators have determined Dune is the responsible party for clean up of this area. Dune has maintained a passive maintenance of this site since it was first discovered after Hurricane Katrina. Cost to date of approximately $800,000 has been covered by the Company’s insurance minus the standard deductibles. The Company still feels another party has the primary responsibility for this occurrence but is committed to working with the various state and federal authorities on resolution of this issue. At this time no estimate of the final cost of remediation of this site can be determined or if the Company’s insurance will continue to cover the clean up costs or if the Company can be successful in proving the other party should be primarily responsible for the cost of remediation.

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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 2009 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 three months of 2010 compared to the first three months of 2009, net cash flow provided by operating activities increased by $9.0 million to $7.7 million. This increase was primarily attributable to a reduction in accounts payable and accrued liabilities of $7.7 million and a gain on derivative liabilities of $1.2 million.

Our current assets were $35.7 million on March 31, 2010. Cash on hand comprised approximately $20.1 million of this amount. This compared to $15.1 million at the end of the calendar year 2009 and $9.6 million at the end of the first quarter of 2009. Accounts payable has been reduced from $11.8 million at year end 2009 to $7.4 million at March 31, 2010. Accounts payable were $9.6 million at March 31, 2009.

The financial statements continue to reflect a modest but ongoing drilling and facilities upgrade program which amounted to $1.5 million during the first three months of 2010. The reduced spending reflected our efforts to conserve cash while attempting to modify the Company’s capital structure to provide the flexibility for a more robust growth strategy. Assuming that this can be accomplished, we may spend approximately $21.0 million during the final nine months of 2010 on continuing development and exploitation of our asset base. This would represent an $8 million increase over our almost $14.0 million of capital investment in 2009. However, this anticipated capital may be reduced or increased depending on available cash flow and our continuing capital restructuring efforts. 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 provided liquidity to meet our expected working capital needs for 2009 and is expected to do so again in 2010. As of March 31, 2010, borrowings under this credit facility totaled $24.0 million for working capital purposes. Our credit agreement requires that Dune hedge between 50% and 80% of production from proved developed producing oil and gas reserves for a rolling six month period. We currently have 50% of

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this production hedged over the next six months and 50% through December 31, 2010. Over 58% of oil production and approximately 44% of gas production is hedged over this same 6 month time frame. Effectively all of the hedging instruments are collars. For essentially all of 2010, there are three collars. The crude oil collars are $60.00/$88.10 and $70.00/$88.10. The natural gas collar is $4.50/$7.68.

Semi-annual interest of $15.75 million on our 10 ¹/2% Senior Secured Notes due 2012 was paid on December 31, 2009 and is due on June 1 and December 1 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 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 $21.0 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 slightly from 2,368 Mmcfe for the first three months of 2009 to 2,253 Mmcfe for the same three month period of 2010. This decrease was caused by normal reservoir declines and the very limited capital reinvestment program discussed earlier.

The following table reflects the increase in oil and gas sales revenue due to the changes in prices and volumes:

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We recorded a net loss available to common shareholders for the three months ended March 31, 2010 of ($14.3 million) or ($0.36) loss per share compared to net loss available to common shareholders of ($20.9 million) or ($1.03) loss per share for the same quarter of 2009. The increase of $6.6 million for the quarter is a result of improved commodity prices and reduction in G&A expense.

Revenues

Revenues for the quarter ended March 31, 2010 totaled $20.3 million compared to $14.3 million for the quarter ended March 31, 2009 representing a $6.0 million increase. Production volumes for 2010 were 180 Mbbls of oil and 1.2 Bcf of natural gas or 2.3 Bcfe. This compares to 198 Mbbls of oil and 1.2 Bcf of natural gas or 2.4 Bcfe representing little change in production volumes. In 2010, the average sales price per barrel of oil was $76.24 and $5.57 per mcf of natural gas as compared to $39.86 per barrel and $5.43 per mcf, respectively for 2009. These results indicate that the increase in revenue is primarily attributable to the increase in commodity prices as the average price received per Mcfe produced was $8.99 in 2010 versus $6.04 in 2009 representing an increase of 49%.

Operating expenses

Lease operating expense and production taxes

The following table presents the major components of Dune’s lease operating expense (in thousands) for the first quarter of 2010 and 2009 on a Mcfe basis:

Lease operating expense for the quarter ended March 31, 2010 totaled $8.5 million versus $7.0 million for the same period of 2009. This translated into an increase of $0.83/Mcfe on a volume basis. This increase reflects additional costs associated with operating older, more mature fields requiring additional repair and maintenance costs as well as higher production and ad valorem taxes. Additionally, overall lease operating expense increases are the result of the drilling of successful wells in Chocolate Bayou and Alvin Townsite fields.

Accretion of asset retirement obligation

Accretion expense for asset retirement obligations increased by $0.06 million for the quarter ended March 31, 2010 compared to the comparable period in 2009. This small increase is the result of reevaluating abandonment costs at the year end.

Depletion, depreciation and amortization (DD&A)

For the quarter ended March 31, 2010, the Company recorded DD&A expense of $8.1 million ($3.60/mcfe) compared to $8.1 million ($3.40/mcfe) for the quarter ended March 31, 2009. DD&A remained relatively constant for the first quarter of 2010 compared to the first quarter of 2009.

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General and administrative expense (G&A expense)

G&A expense for the current quarter ended 2010 decreased $1.6 million from the comparable 2009 quarter to $3.4 million. This decrease resulted principally from a reduction in personnel expense of $1.0 million and share-based compensation of $0.8 million.

On a unit of production basis, G&A fell from $2.13/mcfe for the first quarter of 2009 to $1.53/mcfe for the same period of 2010.

Other income (expense)

Interest income

Interest income for the quarter ended March 31, 2010 was $0.03 million less than the comparable 2009 quarter. 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 March 31, 2010 was $8.9 million compared to $8.7 million in the comparable quarter ended 2009.

Gain (loss) on derivative liabilities

For the current quarter ended March 31, 2010, the Company incurred a gain on derivatives of $1.3 million composed of an unrealized gain of $1.6 million due to the change in the mark-to-market valuation and a realized loss of $0.3 million for cash settlements. This gain compared to a $2.8 million gain for the 2009 comparable quarter which consisted of an unrealized gain of $0.4 million due to the change in the mark-to-market valuation and a realized gain of $2.4 million for cash settlements.

Net income (loss) available to common shareholders

For the first quarter ended March 31, 2010, net loss available to common shareholders decreased $6.6 million from the comparable quarter of 2009. This decrease reflects the impact of a $6.0 million increase in revenues, a $2.4 million decrease in Preferred Stock dividends and a $1.6 million reduction in G&A expense partially offset by a ($1.5 million) increase in operating expenses and a ($1.5 million) reduction in the gain on derivative liabilities.

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Our primary exposure to market risk is the commodity pricing available to our oil and natural gas production. Realized commodity prices received for such production are primarily driven by the prevailing worldwide price for oil and spot prices applicable to natural gas. To mitigate some of this risk, we engage periodically in certain hedging activities, consisting primarily of costless collars, in order to establish some price floor protection (see Note 5 to financial statements). We also have some exposure to market risk consisting of changes in interest rates on borrowings under our credit agreement with our senior lender. An increase in interest rates would adversely affect our operating results and the cash flow available after debt service to fund operations. We manage exposure to interest rate fluctuations by optimizing the use of fixed and variable debt.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of “disclosure controls and procedures” in Rule 13a-15(e). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

At the end of the period covered by this quarterly report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2010, our disclosure controls and procedures are effective.

During the quarter ended March 31, 2010, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II

OTHER INFORMATION

(a) Exhibits

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

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INDEX TO EXHIBITS

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