UNITED
  STATES 
  SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

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FORM
  10-KSB

|þ                                                        |  | Annual Report Pursuant
      to Section 13 or 15(d) of the Securities Exchange Act of 1934for
      the fiscal year ended December 31, 2005
|-------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|                                                         |  |                                                                                                                                            
|o                                                        |  | Transition Report
      under Section 13 of 15(d) of the Securities Exchange Act of 1934                                                   
|                                                         |  |                                                                                                                                            
|For the transition period from ___________ to __________

Commission
  file number 0-27897

DUNE
  ENERGY, INC.(Name of small
  business issuer in its charter)

|Delaware                                                                    |  |  | 95-4737507                                
|--------------------------------------------------------------------------- |  |  | ------------------------------------------
|(State or Other Jurisdiction
      of 
      Incorporation or Organization) |  |  | (I.R.S. Employee
      Identification No.)
|                                                                            |  |  |                                           
|3050 Post Oak Blvd.,
      Suite 695 Houston, Texas                         |  |  | 77056                                     
|(Address of principal
      executive offices)                              |  |  | (Zip Code)                                

Issuer's
telephone number, including area code: (713)  888-0895

Securities
  registered under Section 12(b) of the Exchange Act:

|Title
        of each class |  |  | Name
        of each exchange on which registered
|--------------------------- |  |  | -------------------------------------------------
|N/A                         |  |  | N/A                                              

Securities
registered under Section 12(g) of the Exchange  Act:  Common Stock,$.001 par value per
share (Title of class)

Check
whether the issuer is not required to file  reports pursuant to Section 13 or 15(d) of
the Exchange  Act.  o

Check
  whether the issuer: (1) filed all reports required to be filed by Section 13
  or 15(d) of the Exchange Act during the past 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 þ
  No o

Check
  if there is no disclosure of delinquent filers in response to Item 405 of Regulation
  S-B contained in this form, and no disclosure will be contained, to the best
  of registrants knowledge, in definitive proxy or information statements
  incorporated by reference in Part III of this Form 10-KSB or any amendment to
  this form 10-KSB.o

Indicate
  by check mark whether the registrant is a shell company (as defined in Rule
  12b-2 of the Exchange Act).YES
  o No
  þ

The
issuer's revenues for its fiscal year ended  December 31, 2005 were  $3,724,278.

As
of March 15, 2006, the aggregate market value of  the issuers common equity held by
non-affiliates was  $57,444,341, based on the closing price of $2.81 for its  common
stock on the American Stock Exchange on March 15,  2006.  59,244,859 shares of the issuers
common stock were  outstanding as of March 15, 2006.

Documents
Incorporated by Reference

N/A

Transitional
  Small Business Disclosure Formats (check one): YES
  o No
  þ

1



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Cautionary
Notice Regarding Forward Looking Statements

Dune
Energy, Inc. (referred to herein as Dune,  we or the Company)
desires to take advantage of the safe  harbor provisions of the Private
Securities Litigation  Reform Act of 1995.  This report contains a number of
forward-looking statements that reflect managements current  views and expectations
with respect to our business,  strategies, future results and events and financial
performance.  All statements made in this Annual Report  other than statements of
historical fact, including  statements that address operating performance, events or
developments that management expects or anticipates will or  may occur in the future,
including statements related to  revenues, cash flow, profitability, adequacy of funds
from  operations, statements expressing general optimism about  future operating results
and non-historical information, are  forward looking statements.  In particular, the
words  believe, expect, intend,  anticipate, estimate, may, will, variations
of such words, and similar  expressions identify forward-looking statements, but are not
the exclusive means of identifying such statements and their  absence does not mean that
the statement is not  forward-looking.  These forward-looking statements are  subject to
certain risks and uncertainties, including those  discussed below.  Our actual results,
performance or  achievements could differ materially from historical results  as well as
those expressed in, anticipated or implied by  these forward-looking statements.  We do
not undertake any  obligation to revise these forward-looking statements to  reflect any
future events or circumstances.

Readers
should not place undue reliance on these  forward-looking statements, which are based on
managements  current expectations and projections about future events,  are not
guarantees of future performance, are subject to  risks, uncertainties and assumptions
(including those  described below) and apply only as of the date of this  report.  Our
actual results, performance or achievements  could differ materially from the results
expressed in, or  implied by, these forward-looking statements.  Factors that  could
cause or contribute to such differences include, but  are not limited to, those discussed
below in Risk Factors as well as those discussed elsewhere in this report,
and the  risks discussed in our press releases and other  communications to shareholders
issued by us from time to  time which attempt to advise interested parties of the risks
and factors that may affect our business.  We undertake no  obligation to publicly update
or revise any forward-looking  statements, whether as a result of new information, future
events or otherwise.

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PART I

Item 1.
Description of Business.

The Company

We
are an independent energy company engaged in the  exploration, development, and
acquisition of natural gas and  crude oil properties. Presently, we have an interest in
the  following areas in Texas and Louisiana:

|>> |  | Barnett
Shale - working  interests  (ranging  between  92%  and  100%)  in  certain  oil  and
gas  leases  covering  approximately  1,270  gross acres in Denton  and Wise  Counties,
Texas,  as well as an  undivided  interest in eight  producing  wells  thereon,  plus a
working  interest in one additional  well  undergoing  completion,  all  located  on  the
fairway  of  the  prolific  Barnett  Shale play in the North Texas Fort  Worth Basin (the
"Barnett Shale Properties");
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|>> |  | Bayou
Couba  -  A  working  interest  in  certain  exclusive  exploration  and  development
rights  covering  approximately  11,000  gross  contiguous  acres  in St.  Charles
Parish,  Louisiana,  together  with  an  undivided  working  interest  in  three
producing wells (the "Bayou Couba Property");
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|>> |  | Welder
Ranch - leases  covering  approximately  7,950  contiguous  acres  on the  Welder  Ranch
located  in  Victoria  County,  Texas,  together with an undivided  working  interest  in
three  producing  wells  and an  additional  well  undergoing  completion (the
"Welder  Ranch Property");
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|>> |  | Pearsall
Field - a working  interest  in two  leases  covering  2,400  acres and the option to
participate  in additional  leases  covering  approximately  9,000  acres  in  the
Pearsall  Field,  located  in  Frio  County,  Texas,  together  with an undivided
working  interest  in  two  producing  wells  (the  "Pearsall  Property"); and
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|>> |  | Los
Mogotes  Field - a small but  profitable  working  interest  in  one  18,000  acre  lease
containing  multiple wells in the Los Mogotes  Field,  located in  Zapata  County,  Texas
(the "Los  Mogotes  Property,"  and together  with the Welder Ranch  Property
and the  Pearsall Property, the "South Texas Properties").
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
Company was incorporated in the State of  Delaware on November 20, 1998, under the name
of IP Factory,  Inc.  In May 2001, Hitthebeach.com, Inc., a private company,  was merged
into the Company. On May 7, 2003, Merchant  Builders, Inc., a private company, merged
into the Company  and the Company changed its name to Dune Energy, Inc.

In
May of 2004, Itera Holdings BV (Itera), a  company organized under the laws
of the Netherlands and one  of the largest producers of natural gas in Russia and the
Baltics, acquired 78% of the Company's shares of common  stock (Common Stock)
for an aggregate purchase price of $12  million.  Itera and our management have a common
vision to  build the Company into a substantial U.S. independent  exploration and
development company by combining Itera's  capital resources with the experience of our
management  team.  The Company's headquarters are located at 3050 Post  Oak Blvd., Suite
695, Houston, Texas 77056.  Its telephone  number is (713) 888-0895.

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Business
Strategy

Grow
Through the Drill Bit.We believe that our  personnel have knowledge in identifying,
drilling and  stimulating tight formations and believe that we can  continue to
internally generate drilling prospects.

Focused
Exploration and Development.We intend to  focus exploration and development in proven
prolific Gulf  Coast trends, as well as low risk extensional drilling in  the Barnett
Shale.  With respect to operating in  concentrated areas, we hope to more efficiently
control  overhead and operating expenses, thereby allowing ourselves  to manage a greater
amount of acreage with fewer employees  and minimizing the marginal costs of increased
drilling and  production.  This targeting of operations allows us to more  efficiently
capitalize on geological, geophysical,  exploration, development, completion and
subsequent  production in those areas.

Diversify
Risk Geologically.We intend to allocate  a majority of our capital to low risk
development and  exploitation projects, and the remainder to moderate-higher  risk
exploration plays.  We set limits on the amount of  capital invested in any one
exploration project.  With our  Bayou Couba, Barnett Shale and Welder Ranch Properties,
we  believe we have a complementary mix of exploration and  development opportunities.

Generate
  Prospects and Maintain Multiyear Drilling Portfolio. We intend to proactively
  search for acquisitions and/or joint ventures in our core areas of concentration.
  We have identified 22 potential drilling locations on our recently acquired
  Barnett Shale Properties, approximately seven developmental locations and 14
  exploration leads on our Bayou Couba Property, and a number of prospects and/or
  leads on the Welder Ranch Property.

Control
of Operations.  We prefer to control the  operation of all of our significant properties
to  efficiently allocate capital.  We prefer to generate and  retain operating control
over our own prospects, as we  believe this allows more effective control of operating
costs, the timing and plans for future development, the  level of drilling and the
marketing of production on the  property. In certain instances, we may choose to hire an
operator with technical proficiency in certain areas, if we  believe it to be in the
Companys best interests.

Use
of Advanced Technology.We utilize 3-D seismic  and interpretation techniques to reduce
drilling risks.  We  have used these techniques on all of our exploratory  prospects,
including those on the Welder Ranch Property and  Bayou Couba properties.  We also employ
the latest fracing  technique for all of our wells requiring such treatment.

Barnett
Shale Properties

On
November 4, 2005, we entered into an Amended and  Restated Asset Purchase and Sale
Agreement (the Voyager  Agreement) with Voyager Partners, Ltd. (Voyager)
to  acquire 95% of the producing and non-producing oil and  natural gas properties and
related property and equipment  owned by Voyager located in the North Texas Fort Worth
Basin, with Voyager retaining a 5% ownership interest in the  properties (the Voyager
Acquisition).  The vast majority  of these properties are located in Denton County,
with the  remainder in Wise County, both on the fairway of the  prolific Barnett Shale in
the North Texas Fort Worth Basin.  We expect the Voyager Acquisition to provide
significant  production and high impact, low risk extensional drilling  opportunities.

The
Voyager  Agreement  divides  the  Barnett  Shale  Properties into three  tranches,  each
of which has a separate  closing  date.  A  closing  with  respect  to  the  Tranche  1
assets  occurred on December  16,  2005.  The Tranche 1 assets  that we purchased include
working  interests  (ranging between  92% and 95%) in  approximately  950 gross  acres in
Denton and  Wise  Counties,  Texas,  as  well  as  four  producing  wells  thereon.  The
purchase  price for the  Tranche  1 assets  was  $24.6 million.

As
part  of  the  Voyager  Acquisition,  Voyager  assigned  to us an  asset  purchase
agreement  with  a  third  party  relating to certain  additional  oil and gas properties
in the Barnett  Shale.  On November 17, 2005,  pursuant to the  asset  purchase
agreement  assigned  by  Voyager  and  an  additional  purchase  agreement  between us
and certain  third  parties,  we acquired working  interests  (ranging between 92%

3



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and  100%)  in
certain  oil  and  gas  leases  covering  approximately  320 gross  acres in Denton
County,  Texas,  as  well  as  an  undivided  interest  in  four  producing  wells
thereon,  and  all  of  the  sellers'  personal  property,  equipment  and  contract
rights  with  respect  thereto  (the  Springside  Properties).  The  purchase
price  for  the  Springside Properties was $5.5 million.

As
a  result  of  the  acquisition  of  the  Voyager  Tranche  1  assets  and  the
Springside  Properties,  we have  working  interests  (ranging  between  92% and  100%)
in 1,270  gross  acres in the Barnett  Shale,  as well as  interests  in  eight
producing  wells  and one  well  undergoing  completion  thereon.  We have identified 22
future  drilling  locations on  this acreage.

In
accordance  with the Voyager  Agreement,  we have  advanced  $1.8  million  to  Voyager
in  return  for  working  interests  in  four  wells  that  were  not  included  in  the
Tranche 1  assets.  Upon  acquiring  the  property  underlying  these  wells  from
Voyager at the  closing  of the  Tranche 2  assets,  our working  interest  in these
wells will  increase  from approximately 39-41% to approximately 95%.

We
and  Voyager  have  agreed  to  permit  rolling  closings  of  Tranche  2 assets  between
January  5, 2006 and  April  15,  2006.  The  allocated  values  of  the  Tranche  2
assets  equates  to  approximately  $20.0  million.  Within  seventy-five  (75) days
after Voyager  notifies us that it has  satisfied  certain  conditions  with  respect to
the Tranche 3  assets,  we  will be  obligated  to  close  on the  Tranche  3  assets.
The  allocated  values of the Tranche 3 assets equate  to  approximately  $23.0 million.
The Tranche 2 and Tranche 3  closings are subject to  satisfaction  of various
conditions,  including  our ability to obtain  financing,  and there can be  no
assurances  that  any of the  contemplated  closings  will  occur.

Based
on current well spacing  rules,  our management  expects  that there are  approximately
50 drilling  locations  on the  Tranche 2 and  Tranche 3 assets,  assuming  as many as
one-third of these locations may be drilled horizontally.

As
part  of  the  Voyager  Acquisition,  we  are  negotiating  to become a 16% to 39%
limited  partner in up to  three (3)  limited  partnerships,  the  purpose of which is to
design,  construct,  lay,  own,  operate and maintain  natural  gas gathering  pipelines
in the same general  geographic  area  as the Barnett Shale Assets.  The Voyager
Agreement  gives us  the  option,  within 90 days  after  the later of the  closing  date
for the  Tranche  1 assets  or the date as of which  each  such  limited  partnership  is
formed,  to  acquire  80%  of  Voyager's  interests  in each such limited  partnership
for a  price  equal to 100% of the  initial  contribution  to capital  which  Voyager  is
required  to  make  into  such  limited  partnership.  One pipeline is  currently in
place.  The second  pipeline  system  should be completed by early third  quarter,  and
the third pipeline should be completed  concurrently  with  the  drilling  development
of the area to be  served  by such  pipeline.  We expect the three  pipelines  will have
aggregate  capacity  exceeding  50  MMcf  per  day,  with  estimated  throughput  of  40
MMcf  per  day  within  two  years  from  commencement  of  operations.  We believe our
interest in the  pipelines  will  decrease our overall  costs of  operations by
providing  significant  benefits  to  us,  including:  (1) the  ability to transport
our own gas,  thereby  enhancing  overall  economic  efficiency  through  higher  prices
received;  (2) guaranteed  access to a pipeline,  reducing our dependency  on other
companies to transport our gas; and (3) the  ability  to  transport  third  party
gas,  enabling  us  to  generate  additional income.

Presently,
Voyager is not selling, and we are not  buying, the remaining 5% of Voyager's interests
in the  assets involved in the Voyager Acquisition (the "Retained  Interests").
However, for a period of ninety (90) days  following the full and final satisfaction by
certain Voyager  affiliates of their obligations under a settlement agreement  with the
Dan Hughes Group, Voyager has the right and option  to sell to us, and we have the right
and option to buy from  Voyager, the designated Retained Interests for a price
determined pursuant to the Voyager Agreement.  Similarly,  for a period of ninety (90)
days after the first anniversary  date of execution of leases comprising the Tranche 3
assets,  Voyager will have the right and option to cause us to  purchase from Voyager the
Tranche 3 Retained Interests  pursuant to the Voyager Agreement.  Any purchase of
Retained  Interests will relate back to January 1st of the year in  which such option to
purchase (or option to cause the  purchase) is exercised.

4



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Dune
Operating Company ("DOC"), our wholly owned  subsidiary, is the operator of
record of the Barnett Shale  Properties.  We entered into a Transitional Matters
Agreement as of the date of the closing for the Tranche 1  assets whereby Dark Horse
Operating Company ("Dark Horse")  will operate the Barnett Shale Properties for
us on a  contract basis after the Tranche 1 asset closing.  Under the  Transitional
Matters Agreement, Dark Horse will provide DOC  with certain operating and administrative
services with  respect to the Barnett Shale Properties for up to 12 months  after the
Tranche 1 asset closing, subject to our right to  extend the term on a month-to-month
basis.

Prior
to the closing date for each Tranche of  assets, Voyager is obligated to use reasonable
commercial  efforts to obtain, at its cost, the rights to certain  additional oil and gas
leases ("Additional Leases") and to  transfer them to us, at such closing or
within 120 days  after the date of such closing, as though they were Barnett  Shale
properties covered by the Voyager Agreement.  The  Additional Leases are to cover
additional well locations for  the development of proved undeveloped Barnett Shale
reserves. For each Additional Lease which Voyager is unable  to obtain within 120 days
after the closing date, we will be  entitled under the Voyager Agreement to reduce the
base  consideration payable to Voyager by the allocated value for  each proposed well
location.

At
the closing of the Tranche 1 assets, Voyager and  certain of its principals and
affiliates, as the assignors  (the "Voyager Assignors"), entered into with us
(as the  Assignee), an Area of Mutual Interest Agreement (the "AMI
Agreement").  The area of mutual interest or "AMI" defined  in the AMI
Agreement includes, as a general matter, the area  within approximately two (2) miles of
the exterior  boundaries of the existing leases included in the Barnett  Shale Property.
The AMI Agreement provides that if, during  the period of 24 calendar months beginning on
the closing  date for the Tranche 1 assets (the "Effective Date"), any of  the
Voyager Assignors acquires an oil or gas lease or an  interest therein covering any of
the lands located in the  AMI (the "Acquired Interest"), then Voyager Assignors
must  first offer us the option to acquire 95% of the Acquired  Interest.

During
the first nine (9) months following the  Effective Date, we may, but are not obligated,
to purchase  any Acquired Interests brought to us by Voyager Assignors.  Thereafter,
provided that the Voyager Assignors tender  sufficient Qualified Acquired Interests
(defined below), we  will be obligated to purchase $2.75 million of such  Qualified
Acquired Interests in the last three (3) months of  the first twelve (12) months
following the Effective Date  and an additional $2.75 million of such Qualified Acquired
Interests in the second 12 months following the Effective  Date.  In order for our
obligation to purchase an Acquired  Interest to arise, the Acquired Interest must (i)
cover at  least 40 acres in the case of a vertical location and 120  acres in the case of
a horizontal location, (ii) overlay  Barnett Shale formation gas reserves that qualify as
"proved" or "proved undeveloped," (iii) not be subject to a  drilling
obligation within 180 days after the date of its  execution and (iv) have clear title (a
"Qualified Acquired  Interest").  The price to be paid for a Qualified Acquired
Interest is based on several factors, including the number  of wells and well types, the
reserve category (proved or  probable), and the price of natural gas at the time of
acquisition.

The
Barnett Shale is one of the largest and most  active natural gas fields in the United
States, covering 15  Texas counties.  In the first three quarters of 2005, the  Barnett
Shale was producing in excess of 1,200 Mmcf per day  of natural gas.  The Barnett Shale
properties reside in the  core area of the Barnett Shale where wells have demonstrated
superior economics, and are located in areas that are not  subject to fracture related
water encroachment.  Within  these Barnett Shale properties, the identified probable well
locations are a result of reserve definitions, and are  fundamentally no different from
any of the existing proved  undeveloped locations.

Bayou Couba
Property

On
October 19, 2005, we entered into a definitive  Exploration and Development Agreement
(the "ANEC Agreement")  with American Natural Energy Corporation
("ANEC").  Pursuant  to the ANEC Agreement, which has an effective date of
August  26, 2005, we acquired certain exclusive exploration and  development rights in
ANEC's Joint Development Agreement  with ExxonMobil Corp. (the "Development
Agreement"),  covering approximately 11,000 contiguous acres in St.  Charles Parish,
Louisiana (the "Bayou Couba Field").  ExxonMobil Production Company delivered
its consent to our  participation on September 12, 2005.

5



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Of
the 11,000 acres covered by the Development  Agreement, approximately 1,300 acres pertain
to a lease  referred to as the Delta Securities Lease.  The ANEC  Agreement provides us
with the right to participate in 50%  of ANEC's development rights in the Delta
Securities Lease  in exchange for our payment of $1 million.  Upon the  successful
drilling of one of the first two exploratory  wells drilled by us and ANEC, we will be
required to pay  ANEC an additional $500,000.  In addition, we will have the  right to
participate in all of ANEC's exploration rights in  the remaining 9,700 contiguous acres
covered by the  Development Agreement.  Each party will pay its respective  share of
drilling, completion and operations costs.  Pending  ANECs satisfaction of certain
conditions as set forth  below, the term of the Development Agreement will be  extended
from November 2007 to November 2009.

The
Bayou Couba Field was discovered by Gulf Oil in  1942.  The field is situated on a crest
of a highly faulted  salt dome which is productive from 30 sands.  The nature of  the
faultline system creates traps that in the past were  overlooked or created a potential
for bypassed oil and gas  production.  In addition, preliminary analysis of  reprocessed,
state of the art 3-D seismic indicates numerous  hydrocarbon traps at depths ranging
between 4,000 and 20,000  feet.  There are several leads that indicate significant
potential reserves in the subsalt area.  Initial drilling  has focused and will continue
to focus on numerous (i)  development prospects with updip PUD potential, (ii)
extensional prospects with trapped bypassed hydrocarbons and  (iii) near field
exploratory prospects with analog  production.

Since
signing  the  ANEC  Agreement,  we  have  successfully  completed  three  out of  three
wells  at Bayou  Couba:

| | >> |  | The
DSCI  92ST  well,  drilled  to  a  depth  of  approximately  6,040 feet,  was completed
in  November  of  2005  and  is  currently  producing  approximately  85  boe  per  day.
We have a 15.625%  working  interest  in the  DSCI 92ST.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | >> |  | The
DSCI  51ST  well,  drilled  to a depth  of 5,600  feet,  was  completed in October of
2005 and  is  currently  producing  at  a  rate  of  approximately  45 boe  per  day.  We
have a  20.625%  working  interest  in  the  DSCI  51ST.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | >> |  | The
DSCI 15ST well,  completed  in  December  of 2005  at a depth of  approximately  7,600
feet, is  currently  producing  approximately  80  boe  per  day.  We  have a 50%
working  interest  in the DSCI 15ST.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Based
upon current 3-D seismic data acquired in  conjunction with the ANEC Agreement, we have
identified at  least seven development and 14 exploration drilling  prospects at Bayou
Couba. On March 8, 2006, ANEC entered  into a Seismic Survey Participation Agreement (the
Participation Agreement) with Seismic Exchange, Inc.  (SEI), to
acquire a license with respect to the geophysical  data covering 60 square miles of the
3-D Seismic Survey to  be conducted pursuant to the Participation Agreement (the  Licensed
Data).  The area to be surveyed by this shoot  covers the 11,000 acres we have
exploration and development  rights in under our ANEC Agreement, as well as additional
acres surrounding it.  The cost of ANEC acquiring a license  to the 3-D survey is $2
million, of which we have agreed to  pay $1 million.  The Participation Agreement
provides that  ANEC has the one-time right to designate a Partner to  receive
a Partner License from SEI.  Pursuant to an  Agreement with ANEC, ANEC has agreed that we
shall have the  right to cause ANEC to designate us as a Partner, if we
shall so elect.  If we elect to do so, we have agreed with  ANEC to each pay SEI $500,000
for the Partner License.  Upon  delivery of the Licensed Data to ANEC, provided that ANEC
makes timely payments to SEI therefor, Exxon Mobil has  agreed to extend the term of the
Development Agreement by  two years to November 2009.

Subject
to rig availability, we anticipate that  over the next 12 months, we will drill several
exploration  and development wells with the remainder to be held in  inventory.
Additionally, we believe that there is  significant untested sub-salt gas potential and,
pending  results of the 3-D survey consucted by SEI, we would  anticipate drilling an
exploratory well beneath the salt  dome during the first half of 2007.

6



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South Texas
Properties

The Welder
Ranch Property

The
Welder Ranch Property consists of 7,950  contiguous acres of land leased from the Welder
family in  Victoria County, Texas.  The Welder Leases are held by  Vaquero Partners, LLC,
our wholly-owned subsidiary (Vaquero  Partners), and are operated by Dune
Operating Company,  which is also our wholly-owned subsidiary.  Per the terms of  the
Welder Leases, Vaquero Partners receives 70% of net  revenue generated on the Welder
Ranch Property.  Effective  as of August 22, 2005, we became the sole owner of Vaquero
Partners when Vaquero Partners redeemed the 15% membership  interest previously held by
Vaquero Oil and Gas, Inc.

To
date, our primary focus on the Welder Ranch  Property has been on the Wilcox Formation.
The Wilcox  Formation is one of the most prolific formations along the  Texas Gulf Coast.
Our primary targets regarding exploration  activity in the area are the geopressured
lower and middle  sands of the Wilcox formation.  The Wilcox is productive at  depths
ranging from 8,300 feet to below 17,000 feet.  The  upper Wilcox sands have four
producing intervals that are  normally pressured.  The middle and lower sands, beginning
at approximately 9,500 feet, are geopressured.  These  geopressured zones are the primary
targets on the Welder  Ranch Property.  A successful upper Wilcox well will cost  between
$800,000 and $1 million to drill and complete at the  9,000 foot depth, whereas a deeper
geopressured well (such  as Vaquero #1 well) may cost between $4 million and $5  million
through completion.  We completed the Vaquero #1  and the Vaquero #2 wells, which both
targeted the  geopressured Wilcox Formation.

Our
Vaquero #2 well was completed in the 12,300  foot horizon and put on production on August
1, 2005.  Presently, the well is producing at the rate of 480 Mcfe per  day.  We hold a
63.5% net working interest in the Vaquero #2  well.

The
locations for our Vaquero # 1 and # 2 wells  were drilled utilizing advanced 3D seismic
interpretation,  in conjunction with extensive geological and engineering  analysis of
leases acquired by us during 2003 and 2004.  The  Vaquero # 1 was drilled to a total
depth of 13,920 feet and  encountered gas shows at depths between 9,300 feet and  13,500
feet.  Due to a mechanical casing failure, we could  not complete the well in the 13,000
foot interval.  The well  was therefore completed in the 9,300 foot sand and is
presently producing approximately 130 Mcfe per day.  We are  reviewing various
alternatives in the Vaquero # 1 including,  but not limited to, drilling a sidetrack to
the original  target depth, where potential gas reserves were evident on  electric logs.
We hold a 67.4% net working interest in the  Vaquero #1 well.  The 9,300 foot payzone
encountered in the  Vaquero #1 was also tested to be productive in the Vaquero  #2, and
will be categorized as Proved Behind Pipe.

Our
Rob  Welder  #1  well,  completed  in  the  Cook  Mountain  formation  in August  2004,
continues to produce at  the  rate  of 310  Mcfe  per  day.  We  hold  a  100%  working
interest in this well.

During
the first  quarter  of 2006,  we  completed  a  shallow  Frio  well  and  intend  to
place  it on  production  shortly.  Our  geological  and  geophysical  team  has  also
identified  a  number  of  other  large,  high-quality,  high-reserve  potential
prospects  and  leads  on the  Welder  Ranch Property.

The
Pearsall Property

Our
Pearsall Property presently consists of two  leases covering 2,400 acres in the Pearsall
Field, located  in the Austin Chalk trend in Frio County, Texas.  San  Antonio based
Alamo Operating Company is currently the  contract operator; however, we expect to take
over as  operator as soon as practicable.  As of March 15, 2006, the  two wells in which
we hold a working interest were producing  oil at a combined rate of approximately 100
boe per day.  We  have a 27% working interest in the first well, and a 40%  working
interest in the second and each subsequent well.  We  have the right to participate (on
similar terms) in the  drilling of future reentry wells on the Pearsall Property on
additional leases covering up to approximately 9,000 acres.  Net revenue interest on the
leases averages 76.5%.  We are  currently evaluating the drilling of additional wells on
the  Pearsall Property.

7



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The Los Mogotes
Property

In
May of 2004, we completed the purchase of a  small non-operated working interest (0.7%
W.I.) in the  Haynes Lease (covering approximately 18,000 acres) located  within Los
Mogotes Field in Zapata County for $874,500.  The  Los Mogotes Field is an onshore U.S.
development project in  the South Texas Wilcox trend, with production averaging
approximately 90 Mmcfe of gas per day.  Our current working  interest in the Los Mogotes
project currently provides  approximately $100,000 per month in cash flow.

Regulation

Our
business is or may be affected by numerous laws  and regulations, including those
relating to energy,  environment, and conservation.  Failure to comply with these  laws
and regulations may result in the assessment of  administrative, civil and/or criminal
penalties, the  imposition of injunctive relief or both.  Changes in any of  these laws
and regulations could have a material adverse  effect on our business. In view of the
many uncertainties  with respect to current and future laws and regulations,  including
their applicability to us, we cannot predict the  overall effect of such laws and
regulations on its future  operations.

We
believe  that  current  operations  comply in all  material  respects with applicable
laws and  regulations,  and  that  they  have  no more  restrictive  effect  than on
other  similar companies in the energy industry.

Our
operations  are  subject  to  regulation  at the  state level and, in some cases,
county,  municipal  and local  governmental  levels.  Such regulation  includes (1)
requiring  permits for the  drilling of wells,  (2)  maintaining  bonding  requirements
to drill or operate  wells,  and (3)  regulating  the  location  of wells,  the  method
of  drilling  and casing  wells,  surface use and  restoration of properties  upon which
wells are drilled,  and (4) plugging and  abandoning  of wells  and the  disposal  of
fluids used and  produced in  connection  with operations.

Our
operations  are  also  subject  to  various  conservation  laws and  regulations
relating to well spacing,  and safety issues for gathering systems.

Environmental
Matters

We
are  subject  to  extensive  federal,  state,  and  local  environmental  laws and
regulations  that,  among other  things,  regulate  the  discharge  or disposal  of
substances  into the  environment  and  otherwise  are intended to protect  the
environment.  Numerous  governmental  agencies issue rules  and  regulations  to
implement  and enforce  such laws,  which  are  often  difficult  and  costly  to  comply
with and which  carry  substantial  administrative,  civil,  and/or  criminal  penalties
and, in some cases,  injunctive  relief for failure  to  comply.  Some  laws  and
regulations  relating  to  the  protection of the environment  may, in certain
circumstances,  impose  "strict  liability" for  environmental  contamination.
Other laws and  regulations  may  require  the rate of oil and  natural gas  production
to be below the  economically  optimal  rate  or  may  even  restrict  or  prohibit
exploration  or  production  activities  in  environmentally  sensitive  areas.  In
addition,  state laws often  require some form of remedial  action  such as  closure  of
inactive  pits and  plugging  of  abandoned  wells  to  prevent  pollution  from  former
or  suspended operations.

We
believe  that  we are in  substantial  compliance  with  current  applicable  laws  and
regulations  and  that  continued  compliance  with  existing  requirements  will  not
have a material  adverse impact.  However,  from time to time,  legislation  or other
initiatives  are proposed to place more  onerous  conditions.  Adoption  of  such
proposals  could  adversely  impact our operating costs,  capital  expenditures,
earnings, and/or competitive position.

Employees

As
of March 15, 2006 we have 11 employees, of which  9 are full time employees and 2 are
part time employees.

8



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Risk Factors

RISKS
RELATED TO THE BUSINESS

WE HAVE HAD
OPERATING LOSSES AND LIMITED REVENUES TO DATE.

We
have been operating at a loss each year since  its inception.  Net losses applicable to
common stockholders  for the years ended December 31, 2004 and December 31, 2005  were
$1,114,961 and $1,584,643, respectively.  Revenues for  the years ended December 31, 2004
and 2005 were $1,022,297  and $3,724,278, respectively.  We may not be able to  generate
significant revenues in the future.  In addition,  we expect to incur substantial
operating expenses in  connection with our gas and oil exploration and development
activities.  As a result, we may continue to experience  negative cash flow for at least
the foreseeable future and  cannot predict when, or even if, we might become profitable.

WE HAVE
SUBSTANTIAL CAPITAL REQUIREMENTS THAT, IF NOT MET,  MAY HINDER OPERATIONS.

We
have experienced and expect to continue to  experience substantial capital needs as a
result of its  active exploration, development, and acquisition programs.  We expect that
additional external financing will be  required in the future to fund our growth.  We may
not be  able to obtain additional financing, and financing under  existing or new credit
facilities may not be available in  the future.  Without additional capital resources, we
may be  forced to limit or defer our planned natural gas and oil  exploration and
development program and this will adversely  affect the recoverability and ultimate value
of our natural  gas and oil properties, in turn negatively affecting our  business,
financial condition, and results of operations.

NATURAL GAS
AND OIL PRICES ARE HIGHLY VOLATILE, AND LOWER  PRICES WILL NEGATIVELY AFFECT OUR
FINANCIAL RESULTS.

Our
revenue, profitability, cash flow, oil and gas  reserves value, future growth, and
ability to borrow funds  or obtain additional capital, as well as the carrying value  of
our properties, are substantially dependent on prevailing  prices of natural gas and oil.
Historically, the markets  for natural gas and oil have been volatile, and those  markets
are likely to continue to be volatile in the  future.  It is impossible to predict future
natural gas and  oil price movements with certainty.  Prices for natural gas  and oil are
subject to wide fluctuations in response to  relatively minor changes in the supply of
and demand for  natural gas and oil, market uncertainty, and a variety of  additional
factors beyond our control.  These factors  include:

| | o |  | the
level of consumer product demand;
| | - |  | -------------------------------------

| | o |  | overall
economic conditions;
| | - |  | ----------------------------

| | o |  | weather
conditions;
| | - |  | -------------------

| | o |  | domestic
and foreign governmental relations;
| | - |  | --------------------------------------------

| | o |  | the
price and availability of alternative fuels;
| | - |  | ------------------------------------------------

| | o |  | political
conditions;
| | - |  | ---------------------

| | o |  | the
level and price of  foreign  imports  of oil and  liquefied natural gas; and
| | - |  | --------------------------------------------------------------------------------

| | o |  | the
ability of the  members of the  Organization  of  Petroleum  Exporting Countries to agree
upon and  maintain oil price controls.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------

Declines
in natural gas and oil prices may  materially adversely affect our financial condition,
liquidity, and ability to finance planned capital  expenditures and results of
operations.  We do not currently  engage in any hedging program to mitigate our exposure
to  fluctuation in oil and gas prices

DRILLING FOR
NATURAL GAS AND OIL IS A SPECULATIVE ACTIVITY  AND INVOLVES NUMEROUS RISKS AND
SUBSTANTIAL AND UNCERTAIN  COSTS THAT COULD ADVERSELY AFFECT US.

9



---

Our
success will be largely dependent upon the  success of our drilling program.  Drilling
for natural gas  and oil involves numerous risks, including the risk that no
commercially productive natural gas or oil reservoirs will  be discovered.  The cost of
drilling, completing, and  operating wells is substantial and uncertain, and drilling
operations may be curtailed, delayed, or canceled as a  result of a variety of factors
beyond our control, including:

| | o |  | unexpected
or adverse drilling conditions;
| | - |  | ------------------------------------------

| | o |  | elevated
pressure  or  irregularities  in  geologic  formations;
| | - |  | ----------------------------------------------------------------

| | o |  | equipment
failures or accidents;
| | - |  | --------------------------------

| | o |  | adverse
weather conditions;
| | - |  | ---------------------------

| | o |  | compliance
with governmental requirements; and
| | - |  | ----------------------------------------------

| | o |  | shortages
or delays in the  availability  of drilling  rigs, crews, and equipment.
| | - |  | ----------------------------------------------------------------------------------

Even
if drilled, our completed wells may not  produce reserves of natural gas or oil that are
economically  viable or that meet our earlier estimates of economically  recoverable
reserves.  Our overall drilling success rate or  our drilling success rate for activity
within a particular  project area may decline.  Unsuccessful drilling activities  could
result in a significant decline in our production and  revenues and materially harm our
operations and financial  condition by reducing our available cash and resources.
Because of the risks and uncertainties of our business, our  future performance in
exploration and drilling may not be  comparable to our historical performance.

WE DEPEND ON
SUCCESSFUL EXPLORATION, DEVELOPMENT, AND  ACQUISITIONS TO MAINTAIN RESERVES AND REVENUE
IN THE FUTURE.

In
general, the volume of production from natural  gas and oil properties declines as
reserves are depleted,  with the rate of decline depending on reservoir  characteristics.
Except to the extent that we conduct  successful exploration and development activities
or acquire  properties containing proved reserves, or both, our proved  reserves will
decline as reserves are produced.  Our future  natural gas and oil production is,
therefore, highly  dependent on our level of success in finding or acquiring  additional
reserves.  We do not have an established history  of locating and developing properties
that have gas and oil  reserves.  As of the date hereof, none of our leased  properties
has generated significant operating revenues.  Additionally, the business of exploring
for, developing, or  acquiring reserves is capital intensive.  Recovery of our  reserves,
particularly undeveloped reserves, will require  significant additional capital
expenditures and successful  drilling operations.  To the extent cash flow from
operations is reduced and external sources of capital become  limited or unavailable, our
ability to make the necessary  capital investment to maintain or expand our asset base of
natural gas and oil reserves would be impaired.  In  addition, we are dependent on
finding partners for our  exploratory activity.  To the extent that others in the
industry do not have the financial resources or choose not  to participate in our
exploration activities, we will be  adversely affected.

10



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RESERVE
ESTIMATES DEPEND ON MANY ASSUMPTIONS THAT MAY TURN  OUT TO BE INACCURATE

Any
material inaccuracies in these reserve  estimates or underlying assumptions could
materially affect  the quantities and present values of our reserves.  The  process of
estimating natural gas and oil reserves is  complex.  It requires interpretations of
available technical  data and various assumptions, including assumptions relating  to
economic factors.  Any significant inaccuracies in these  interpretations or assumptions
could materially affect the  estimated quantities and present value of reserves shown in
this report.  In order to prepare these estimates, we must  project production rates and
timing of development  expenditures.  We must also analyze available geological,
geophysical, production and engineering data, and the  extent, quality and reliability of
this data can vary.  The  process also requires economic assumptions relating to  matters
such as oil and natural gas prices, drilling and  operating expenses, capital
expenditures, taxes and  availability of funds.  Therefore, estimates of oil and  natural
gas reserves are inherently imprecise.

Actual
future production, oil and natural gas  prices, revenues, taxes, development
expenditures, operating  expenses and quantities of recoverable oil and natural gas
reserves most likely will vary from our estimates.  A  significant variance could
materially affect the estimated  quantities and pre-tax present value of reserves shown
in  this report.  In addition, we may adjust estimates of proved  reserves to reflect
production history, results of  exploration and development, prevailing oil and natural
gas  prices and other factors, many of which are beyond our  control.

OUR FUTURE
ACQUISITIONS MAY YIELD REVENUES OR PRODUCTION  THAT VARIES SIGNIFICANTLY FROM OUR
PROJECTIONS.

In
acquiring producing properties, we assess the  recoverable reserves, future natural gas
and oil prices,  operating costs, potential liabilities and other factors  relating to
the properties.  Our assessments are necessarily  inexact and their accuracy is
inherently uncertain.  Our  review of a subject property in connection with its
acquisition assessment will not reveal all existing or  potential problems or permit us
to become sufficiently  familiar with the property to assess fully its deficiencies  and
capabilities.  We may not inspect every well, and we may  not be able to observe
structural and environmental problems  even when we do inspect a well.  If problems are
identified,  the seller may be unwilling or unable to provide effective  contractual
protection against all or part of those  problems.  Any acquisition of property interests
may not be  economically successful, and unsuccessful acquisitions may  have a material
adverse effect on our financial condition  and future results of operations.  We cannot
assure you that:

| | o |  | we
will be able  to  identify  desirable  gas and oil  prospects  and  acquire  leasehold
or  other  ownership  interests  in  such  prospects  at  a  desirable price;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | any
completed,  currently  planned,  or  future  acquisitions  of ownership  interests in gas
and  oil  prospects  will  include  prospects  that  contain proven gas or oil reserves;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | we
will have the ability to develop  prospects  which  contain  proven gas or oil reserves
to the point  of production;
| | - |  | -----------------------------------------------------------------------------------------------------------------------

| | o |  | we
will  have the  financial  ability  to  consummate  additional  acquisitions of ownership
interests  in gas  and  oil  prospects  or to  develop  the  prospects  which  we
acquire  to the  point  of  production; or
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o |  | that
we will be able to  consummate  such  additional  acquisitions on terms favorable to us.
| | - |  | ---------------------------------------------------------------------------------------------

11



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WE MAY
EXPERIENCE DIFFICULTY IN ACHIEVING AND MANAGING  FUTURE GROWTH.

Future
growth may place strains on our resources  and cause us to rely more on project partners
and  independent contractors, possibly negatively affecting our  financial condition and
results of operations.  Our ability  to grow will depend on a number of factors,
including:

| | o |  | our
ability  to  obtain  leases  or  options  on  properties for which we have 3-D seismic
data;
| | - |  | ------------------------------------------------------------------------------------------------

| | o |  | our
ability to acquire additional 3-D seismic data;
| | - |  | ---------------------------------------------------

| | o |  | our
ability to identify  and acquire new  exploratory  prospects;
| | - |  | -----------------------------------------------------------------

| | o |  | our
ability to develop existing prospects;
| | - |  | ------------------------------------------

| | o |  | our
ability  to  continue  to  retain  and  attract  skilled personnel;
| | - |  | -----------------------------------------------------------------------

| | o |  | our
ability  to  maintain  or  enter  into  new  relationships  with  project  partners  and
independent contractors;
| | - |  | ---------------------------------------------------------------------------------------------------------------------

| | o |  | the
results of our drilling program;
| | - |  | ------------------------------------

| | o |  | hydrocarbon
prices; and
| | - |  | -----------------------

| | o |  | our
access to capital.
| | - |  | ----------------------

We
may not be successful in upgrading our  technical, operations, and administrative
resources or in  increasing our ability to internally provide certain of the  services
currently provided by outside sources, and we may  not be able to maintain or enter into
new relationships with  project partners and independent contractors.  Our inability  to
achieve or manage growth may adversely affect our  financial condition and results of
operations.

OUR BUSINESS
MAY SUFFER IF WE LOSE KEY PERSONNEL.

We
depend to a large extent on the services of  certain key management personnel, including
our executive  officers and other key employees, the loss of any of whom  could have a
material adverse effect on our operations.  We  have entered into employment agreements
with each of Alan  Gaines, our Chairman and CEO, Amiel David, our President and  COO, and
Hugh Idstein, our CFO.  See "Executive Compensation   Employment
Agreements."  We do not maintain key-man life  insurance with respect to any of our
employees.  Our success  will be dependent on our ability to continue to employ and
retain skilled technical personnel.

WE FACE
STRONG COMPETITION FROM OTHER NATURAL GAS AND OIL  COMPANIES.

We
encounter competition from other natural gas and  oil companies in all areas of our
operations, including the  acquisition of exploratory prospects and proven properties.
Our competitors include major integrated natural gas and oil  companies and numerous
independent natural gas and oil  companies, individuals, and drilling and income
programs.  Many of our competitors are large, well-established  companies that have been
engaged in the natural gas and oil  business much longer than we have and possess
substantially  larger operating staffs and greater capital resources than  we do.  These
companies may be able to pay more for  exploratory projects and productive natural gas
and oil  properties and may be able to define, evaluate, bid for, and  purchase a greater
number of properties and prospects than  our financial or human resources permit.  In
addition, these  companies may be able to expend greater resources on the  existing and
changing technologies that we believe are and  will be increasingly important to
attaining success in the  industry.  We may not be able to conduct its operations,
evaluate, and select suitable properties and consummate  transactions successfully in
this highly competitive  environment.

12



---

THE
UNAVAILABILITY OR HIGH COST OF DRILLING RIGS, EQUIPMENT,  SUPPLIES OR PERSONNEL COULD
AFFECT ADVERSELY OUR ABILITY TO  EXECUTE ON A TIMELY BASIS OUR EXPLORATION AND
DEVELOPMENT  PLANS WITHIN BUDGET, WHICH COULD HAVE A MATERIAL ADVERSE  EFFECT ON OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Shortages
or the high cost of drilling rigs,  equipment, supplies or personnel could delay or
affect  adversely our exploration and development operations, which  could have a
material adverse effect on our financial  condition and results of operations.  Demand
for drilling  rigs, equipment, supplies and personnel currently is very  high in the
areas in which we operate, particularly in the  Barnett Shale.  An increase in drilling
activity in the  areas in which we operate could further increase the cost  and decrease
the availability of necessary drilling rigs,  equipment, supplies and personnel.

WE MAY NOT
BE ABLE TO KEEP PACE WITH TECHNOLOGICAL  DEVELOPMENTS IN OUR INDUSTRY.

The
natural gas and oil industry is characterized  by rapid and significant technological
advancements and  introductions of new products and services using new  technologies.  As
others use or develop new technologies, we  may be placed at a competitive disadvantage,
and competitive  pressures may force us to implement those new technologies  at
substantial costs.  In addition, other natural gas and  oil companies may have greater
financial, technical, and  personnel resources that allow them to enjoy technological
advantages and may in the future allow them to implement new  technologies before we can.
We may not be able to respond  to these competitive pressures and implement new
technologies on a timely basis or at an acceptable cost.  If  one or more of the
technologies we use now or in the future  were to become obsolete or if we are unable to
use the most  advanced commercially available technology, our business,  financial
condition, and results of operations could be  materially adversely affected.

WE ARE
SUBJECT TO VARIOUS GOVERNMENTAL REGULATIONS AND  ENVIRONMENTAL RISKS.

Natural
gas and oil operations are subject to  various federal, state, and local government
regulations  that may change from time to time.  Matters subject to  regulation include
discharge permits for drilling  operations, plug and abandonment bonds, reports
concerning  operations, the spacing of wells, unitization and pooling of  properties, and
taxation.  From time to time, regulatory  agencies have imposed price controls and
limitations on  production by restricting the rate of flow of natural gas  and oil wells
below actual production capacity in order to  conserve supplies of natural gas and oil.
Other federal,  state, and local laws and regulations relating primarily to  the
protection of human health and the environment apply to  the development, production,
handling, storage,  transportation, and disposal of natural gas and oil,  by-products
thereof, and other substances and materials  produced or used in connection with natural
gas and oil  operations.  In addition, we may be liable for environmental  damages caused
by previous owners of property we purchase or  lease.  Some environmental laws provide
for joint and  several strict liability for remediation of releases of  hazardous
substances, rendering a person liable for  environmental damage without regard to
negligence or fault  on the part of such person.  In addition, we may be subject  to
claims alleging personal injury or property damage as a  result of alleged exposure to
hazardous substances such as  oil and gas related products.  As a result, we may incur
substantial liabilities to third parities or governmental  entities and may be required
to incur substantial  remediation costs.  We also are subject to changing and  extensive
tax laws, the effects of which cannot be  predicted.  Compliance with existing, new, or
modified laws  and regulations could have a material adverse effect on our  business,
financial condition, and results of operations.

OUR ABILITY
TO PRODUCE SUFFICIENT QUANTITIES OF OIL AND GAS  FROM OUR PROPERTIES MAY BE ADVERSELY
AFFECTED BY A NUMBER OF  FACTORS OUTSIDE OF OUR CONTROL.

13



---

Our
business of exploring for and producing oil and  gas involves a substantial risk of
investment loss.  Drilling oil and gas wells involves the risk that the wells  may be
unproductive or that, although productive, do not  produce oil and/or gas in economic
quantities.  Other  hazards, such as unusual or unexpected geological  formations,
pressures, mechanical failures, explosions,  fires, blowouts, release of toxic gases,
loss of circulation  of drilling fluids, pipeline ruptures or spills, or other
conditions may substantially delay or prevent completion of  any well.  This could result
in a total loss of our  investment in a particular property.  Adverse weather  conditions
can also hinder drilling operations.  A  productive well may become uneconomic if water
or other  deleterious substances are encountered, which impair or  prevent the production
of oil and/or gas from the well.  In  addition, production from any well may be
unmarketable if it  is impregnated with water or other deleterious substances.  As with
any petroleum property, there can be no assurance  that oil and gas will be produced from
the properties in  which we have interests.  In addition, the marketability of  oil and
gas which may be acquired or discovered is affected  by numerous factors beyond our
control.  These factors  include the proximity and capacity of oil and gas pipelines  and
processing equipment, market fluctuations of prices,  taxes, royalties, land tenure,
allowable production and  environmental protection.  We cannot predict how, when, or  if
any or all of these factors will adversely affect our  business.  If we are unable to
produce oil and/or natural  gas from our properties in commercial quantities, our
operations will be severely affected.

WE MAY NOT
HAVE ENOUGH INSURANCE TO COVER ALL OF THE RISKS  WE FACE.

In
accordance with customary industry practices, we  maintain insurance coverage against
some, but not all,  potential losses in order to protect against the risks we  faces.  We
do not carry business interruption insurance.  We  may elect not to carry insurance if
our management believes  that the cost of available insurance is excessive relative  to
the risks presented.  In addition, we cannot insure fully  against pollution and
environmental risks.  The occurrence  of an event not fully covered by insurance could
have a  material adverse effect on our financial condition and  results of operations.

OPERATORS OF
PROSPECTS IN WHICH WE PARTICIPATE MAY NOT  MAINTAIN OR MAY FAIL TO OBTAIN ADEQUATE
INSURANCE.

Oil
and gas operations are subject to particular  hazards incident to the drilling and
production of oil and  gas, such as blowouts, cratering, explosions, uncontrollable
flows of oil, gas or well fluids, fires and pollution and  other environmental risks.
These hazards can cause personal  injury and loss of life, severe damage to and
destruction of  property and equipment, pollution or environmental damage  and suspension
of operation.  We do not operate all of the  properties in which we have an interest.  In
the projects in  which we own a non-operating interest directly or own an  equity
interest in a limited partnership which in turn owns  a non-operating interest, the
operator for the prospect  maintains insurance of various types to cover our operations
with policy limits and retention liability customary in the  industry.  We believe the
coverage and types of insurance  are adequate.  The occurrence of a significant adverse
event  that is not fully covered by insurance could result in the  loss of our total
investment in a particular prospect which  could have a material adverse effect on our
financial  condition and results of operations.

14



---

THE
MARKETABILITY OF OUR NATURAL GAS PRODUCTION DEPENDS ON  FACILITIES THAT WE TYPICALLY DO
NOT OWN OR CONTROL, WHICH  COULD RESULT IN A CURTAILMENT OF PRODUCTION AND REVENUES.

The
marketability of our production depends in part  upon the availability, proximity, and
capacity of natural  gas gathering systems, pipelines, and processing  facilities.  We
generally deliver natural gas through gas  gathering systems and gas pipelines that we do
not own under  interruptible or short-term transportation agreements.  Under the
interruptible transportation agreements, the  transportation of our gas may be
interrupted due to capacity  constraints on the applicable system, for maintenance or
repair of the system, or for other reasons as dictated by  the particular agreements.
Our ability to produce and  market natural gas on a commercial basis could be harmed by
any significant change in the cost or availability of such  markets, systems, or
pipelines.

WE CANNOT
CONTROL THE ACTIVITIES ON PROPERTIES WE DO NOT  OPERATE AND ARE UNABLE TO ENSURE THEIR

PROPER OPERATION AND  PROFITABILITY.

We
do not operate all of the properties in which we  have an interest.  As a result, we have
limited ability to  exercise influence over, and control the risks associated  with,
operations of these properties.  The failure of an  operator of our wells to adequately
perform operations, an  operator's breach of the applicable agreements, or an  operator's
failure to act in ways that are in our best  interests could reduce our production and
revenues.  The  success and timing of our drilling and development  activities on
properties operated by others depends upon a  number of factors outside of our control,
including the  operator's:

| | o |  | timing
and amount of capital expenditures;
| | - |  | ------------------------------------------

| | o |  | expertise
and financial resources;
| | - |  | ----------------------------------

| | o |  | inclusion
of other  participants  in drilling  wells;  and
| | - |  | ----------------------------------------------------------

| | o |  | use
of technology.
| | - |  | ------------------

WE MAY HEDGE
THE PRICE RISKS ASSOCIATED WITH OUR  PRODUCTION.  OUR HEDGE TRANSACTIONS MAY RESULT IN
OUR MAKING  CASH PAYMENTS OR PREVENT US FROM BENEFITING TO THE FULLEST  EXTENT POSSIBLE
FROM INCREASES IN PRICES FOR NATURAL GAS AND  OIL.

Because
natural gas and oil prices are unstable, as  we grow, we may enter into
price-risk-management  transactions such as swaps, collars, futures, and options to
reduce our exposure to price declines associated with a  portion of our natural gas and
oil production and thereby to  achieve a more predictable cash flow.  The use of these
arrangements will limit our ability to benefit from  increases in the prices of natural
gas and oil.  Our hedging  arrangements may apply to only a portion of our production,
thereby providing only partial protection against declines  in natural gas and oil
prices.  These arrangements could  expose us to the risk of financial loss in certain
circumstances, including instances in which production is  less than expected, our
customers fail to purchase  contracted quantities of natural gas and oil, or a sudden,
unexpected event materially impacts natural gas or oil  prices.

15



---

RISKS
RELATED TO THE COMMON STOCK

YOU MAY
EXPERIENCE DILUTION OF YOUR OWNERSHIP INTERESTS DUE  TO THE FUTURE ISSUANCE OF ADDITIONAL
SHARES OF OUR COMMON  STOCK.

We
may in the future issue our previously  authorized and unissued securities which will
result in the  dilution of the ownership interests of our present  stockholders.  We are
currently authorized to issue  100,000,000 shares of Common Stock and 1,000,000 shares of
preferred stock with such designations, preferences and  rights as determined by our
board of directors.  As of the  date hereof, we have outstanding 59,244,859 shares of
Common  Stock and have outstanding options and warrants to purchase  an additional
3,502,657 shares of Common Stock.  Some of  these securities contain anti-dilution
provisions that will  result in the issuance of additional shares in the event we  sell
additional shares of Common Stock at prices less than  the applicable conversion price.
Issuance of these shares  of Common Stock may substantially dilute the ownership
interests of our existing stockholders.  The potential  issuance of such additional
shares of Common Stock may  create downward pressure on the trading price of our Common
Stock that in turn will require us to issue additional shares  to raise funds through
sales of our securities.  We may also  issue additional shares of our capital stock in
connection  with the hiring of personnel, future acquisitions, future  private placements
of our securities for capital raising  purposes, or for other business purposes.  This
will further  dilute the interests of our existing holders.

WE DO NOT
INTEND TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE.

We
have never declared or paid a dividend on our  Common Stock.  We intend to retain
earnings, if any, for use  in our operations and the expansion of our business and
therefore do not anticipate paying any dividends in the  foreseeable future.

A
SIGNIFICANT MARKET FOR OUR COMMON STOCK MAY NOT DEVELOP.

Our
Common Stock began trading on the American  Stock Exchange on May 9, 2005.  The average
daily volume  for the Common Stock over the past three months is  approximately 70,000
shares.  We are not certain that an  active trading market in our Common Stock will
develop, or  if such a market develops, that it will be sustained.

THE TRADING
PRICE OF OUR COMMON STOCK MAY BE VOLATILE.

The
trading price of our shares has from time to  time fluctuated widely and in the future
may be subject to  similar fluctuations.  The trading price may be affected by  a number
of factors, including the risk factors set forth  herein, as well as our operating
results, financial  condition, announcements or drilling activities, general  conditions
in the oil and gas exploration and development  industry, and other events or factors.
In addition, we have  agreed to file a registration statement to permit the public
resale of the shares sold in our private placement completed  as of February 1, 2006 and
certain other of our outstanding  securities.  The influx of such a substantial number of
shares into the public market could have significant  negative effect on the trading
price of our Common Stock.  In recent years, broad stock market indices, in general, and
smaller capitalization companies, in particular, have  experienced substantial price
fluctuations.  In a volatile  market, we may experience wide fluctuations in the market
price of our Common Stock.  These fluctuations may have an  extremely negative effect on
the market price of our Common  Stock.

16



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Item 2.
Description of Property.

Our
headquarters are located at 3050 Post Oak  Blvd., Suite 695, Houston, Texas.  We
presently lease 4,197  square feet at such location at an annual rent of $79,740.  Our
office lease expires June 1, 2009.

The
information appearing in Item 1 of this Annual  Report is incorporated by reference
herein.

Item 3.
Legal Proceedings.

None.

Item 4.
Submission of Matters to a Vote of Security  Holders.

In
December 2005, our shareholder holding  35,464,397 shares (approximately 70.6%) of the
50,244,859  shares of our Common Stock outstanding at such time  consented in writing,
without a meeting, to our issuance of  up to 9,900,000 shares of Common Stock in
connection with  our private placement which was completed on February 1,  2006.  On or
about January 6, 2006, we mailed to our  shareholders an information statement on
Schedule 14C with  respect to such matter.

PART II

Item 5.
Market for Common Equity, Related Stockholder  Matters and Small Business Issuer
Purchases of  Equity Securities.

On
May 9, 2005, our Common Stock began trading on  the American Stock Exchange under the
symbol "DNE".  Prior  to May 9, 2005, our Common Stock was traded on the OTC
Bulletin Board under the symbol "DENG."  Our Common Stock  became eligible for
quotation on the OTC Bulletin Board on  May 11, 2004.  The following table sets forth,
for periods  prior to May 9, 2005, the high and low bid prices per share  of the Common
Stock for each of the calendar quarters  identified below as reported by the OTC Bulletin
Board.  These quotations represent inter-dealer prices, without  retail mark-up, markdown
or commission, and may not  represent actual transactions.  The following table also
sets forth, for the period from May 9, 2005 to December 31,  2005, the high and low sale
prices of the Common Stock on  the American Stock Exchange.

|2005:                                                           |  |  |   | High |  |   | Low  | 
|--------------------------------------------------------------- |  |  | - | ---- |  | - | ---- | 
|                                                                |  |  |   |      |  |   |      | 
|Quarter ended December 31, 2005                                 |  |  | $ | 3.00 |  | $ | 1.81 | 
|Quarter
      ended September 30, 2005                          |  |  | $ | 2.80 |  | $ | 2.81 | 
|Quarter ended June 30, 2005 (May 9, 2005 through June 30, 2005) |  |  | $ | 2.92 |  | $ | 1.85 | 
|Quarter
      ended June 30, 2005 (through May 8, 2005)         |  |  | $ | 3.05 |  | $ | 2.00 | 
|Quarter ended March 31, 2005                                    |  |  | $ | 3.00 |  | $ | 0.73 | 

|2004:                                            |  |  |   | High |  |   | Low  | 
|------------------------------------------------ |  |  | - | ---- |  | - | ---- | 
|                                                 |  |  |   |      |  |   |      | 
|Quarter ended December 31, 2004                  |  |  | $ | 1.10 |  | $ | 0.55 | 
|Quarter
      ended September 30, 2004           |  |  |   | 3.45 |  |   | 0.90 | 
|Quarter ended June 30, 2004 (began May 11, 2004) |  |  |   | 3.75 |  |   | 1.84 | 

17



---

The
last sales price of our Common Stock as  reported on the American Stock Exchange on
December 30, 2005  was $2.84 per share.

As
of March 15, 2006,  there were  approximately  292  holders of record of our Common Stock.

We
have not paid any cash dividends to date, and  have no intention of paying any cash
dividends on the Common  Stock in the foreseeable future.  The declaration and payment
of dividends is subject to the discretion of our Board of  Directors and to certain
limitations imposed under Delaware  corporation law.  The timing, amount and form of
dividends,  if any, will depend on, among other things, our results of  operations,
financial condition, cash requirements and other  factors deemed relevant by our Board of
Directors.  The  agreements and instruments that we entered into in 2005 in  connection
with our debt financings contain significant  restrictions on our ability to pay
dividends on our Common  Stock.

As
of  March  15,  2006,  approximately  3,502,657  shares of our Common  Stock  were
subject  to  issuance  upon  exercise or conversion of  outstanding  options or warrants
to  purchase shares of Common Stock.

The
following table provides information as of  December 31, 2005 about our equity
compensation plans and  arrangements as of December 31, 2005.

Equity
Compensation Plan Information - December 31,  2005

|Plan Category                                                       |  | (a) 
  Number of securities to 
  be issued upon exercise 
  of outstanding options, 
  warrants and rights |  | (b) 
  Weighted-average 
  exercise price of 
  outstanding options, 
  warrants and rights |  | (c) 
  Number of securities 
  remaining available for 
  future issuance under 
  equity compensation 
  plans (excluding 
  securities reflected in 
  column (a))
|------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                    |  |                                                                                                             |  |                                                                                             |  |                                                                                                                                                                     
|Equity compensation plans 
        approved by security holders (1) |  | 1,224,324                                                                                                   |  | $ 2.44                                                                                      |  |                                                                                                                                                                    
|                                                                    |  |                                                                                                             |  |                                                                                             |  |                                                                                                                                                                     
|Equity compensation plans not
  approved by security holders        |  | 2,278,333                                                                                                   |  | $1.93                                                                                       |  |                                                                                                                                                                    
|                                                                    |  |                                                                                                             |  |                                                                                             |  |                                                                                                                                                                     
|Total                                                               |  | 3,502,657                                                                                                   |  | $2.10                                                                                       |  |                                                                                                                                                                    
|                                                                    |  |                                                                                                             |  |                                                                                             |  |                                                                                                                                                                     

| | (1) |  | Consists
of warrants issued to our placement agent  to purchase (a) 324,324 shares of our Common
Stock  at $1.85 per share, and (b) 900,000 shares of our  Common Stock at $2.65 per share.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) |  | Consists
of stock options grants to our employees,  officers and directors.
| | --- |  | ---------------------------------------------------------------------------

18



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Item 6. Management's Discussion and Analysis or Plan of Operations.

Introduction

We
  are engaged in the exploration, development,  exploitation and production of oil and
  natural gas.  We sell  our oil and gas primarily to domestic pipelines and  refineries.
  We entered into a number of property  acquisitions and joint ventures during 2004 and
  2005 as  described in Note 2 to our financial statements filed with  this report.  We did
  not make any dispositions of property  during 2004 and 2005. These acquisitions and joint
  ventures  significantly affected our results of operations during 2004  and 2005 and had
  the effect of significantly increasing both  our revenues and expenses.  Our financial
  statements  consolidate our accounts with those of our wholly-owned  subsidiary, Vaquero
  Partners LLC, and all inter-company  balances and transactions between Dune Energy, Inc.
  and  Vaquero Partners LLC have been eliminated in such  consolidation.

Results of
Operations

Year
ended  December 31, 2005  compared to year ended  December 31, 2004

Revenues.
Our  revenues  were  $3,724,278  in  2005,  compared  to  revenues  of  $1,022,297  in
2004.  This  364%  increase  in  revenues  from  2004 to 2005 was the  result  of
receiving  $1,768,406  from  production  for  existing  wells,  $1,599,632  from seven
wells drilled in 2005 and $356,240 from  wells  acquired  during  2005.  During  the
first  quarter  of  2006 we drilled four wells,  two of which were  successful and
should be on production  early in the second  quarter of 2006;  one of which requires
additional  work and one of which was a  marginal  well that  management  decided to plug
for  economic  reasons.

Operating
Expenses:The  increase in our  operating  expenses  can  generally  be  attributed  to
a  significant  increase in well drilling  activity and costs  associated with
evaluating  and  closing  several  projects  including  the  Voyager  acquisition  and
our joint  venture  at Bayou  Couba.  Excluding  our  participation  in the drilling at
Los Mogotes,  Dune  participated  in the  drilling  of  seven  wells in 2005  versus the
three we  participated  in 2004.  This  increase in  activity  resulted  in  additional
operating  expenses.  We  expect  operating  expenses  to  increase  as  a  result  of
increased  drilling  activity  and  continued  acquisition  activity.

General
and  Administrative  Expenses.  Our  general  and  administrative  expenses  increased
from  $1,935,539  in  2004 to  $2,550,549  in 2005,  an  increase  of  approximately
25%.  Increased  drilling and  acquisition  activity  resulted  in  increased  general
and  administrative  costs  related to  salary expense  (hiring  additional  employees)
and accounting  expense.  We expect  general  and  administrative  expense  to  increase
at a lower rate than 2005.

Production
Taxes.Production  taxes  refer to state  assessed  severance  tax on the  production of
oil and gas and  also  the  marketing  and  transportation  costs  of  these  products.
Production  net to Dune  increased from 47,000 Mcfe  in 2004 to 438,000  Mcfe in 2005 a
930%  increase.  Production  taxes  increased  as a  result  of  increased  production
and  increases in transportation and marketing costs.

Depletion,
Depreciation  and  Amortization.Depletion,  depreciation  and amortization  (DD&A)
expenses  are on the full cost  method of  accounting.  In 2004 our DD&A  was very
small at  $63,801  due to a much  smaller  cost basis  and  lower  production  levels.
Dunes  full  cost  pool  increased  from $6.9 million in 2004 to almost  $21.0
million  in  2005.  Depletion  and  depreciation  of  oil  and  gas  properties  is  on
a  units  of  production  basis  and  was  $918,438 for 2005.  Depreciation  of office
equipment is on a  straight  line  basis and was $5,033  for 2005.  In  addition,  loan
costs and fees are  amortized  over the term of the debt  instruments  to  which  they
relate.  In  2005,  amortization  expenses  was  $143,558.  We  expect  our  DD&A
expense  to  increase as production increases.

Lease
Operating  Expense.Lease  operating  expense  refers  to  costs  incurred  in the
direct  operation  of the  wells.  Dunes  operating  expense  grew from  $37,478 in
2004  to  $378,163  in 2005 in direct  relation  to our  increase in  well  activity.
Lease  operating  expense  is  expected  to  continue  to  increase  as  more  drilling
and  production  activity occurs.

Operating
Loss.Our  aggregate  operating  loss  decreased  from  $1,079,717 in 2004 to $612,772
in 2005 as the  $2,701,981  increase  in  revenue  was  greater  than  the  $2,235,036
increase in operating expenses.

19



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Other
Income (Expense):

Other
Income.Other  income of $78,194 in  2004  was  related  to the  adjustments  to
accounts  payable  balances.  There  were  no  resulting  adjustments in 2005.

Interest
Income.Our  interest  income  increased  slightly,  from $45,395 in 2004 to $48,893  in
2005  due to  higher  cash  balances  and  higher  interest rates.

Minority
Interest.  Minority  interest  refers to activity due a minority  interest  owner in  the
Vaquero  Partners  LLC.  Their net income  (loss)  is  reflected as minority  interest on
our  financial  statements.  Minority  interest  expense  was $38,193  and  $52,611  in
2004  and  2005  respectively.  With  respect to  Vaquero  Partners  LLC,  there will be
no  minority  interest  expense in the future as Dune has  acquired the minority owners
interest.

Interest
Expense.  Interest  expense  increased  from  $120,640  in  2004  to  $775,427  in  2005.
This  was the  result  of  increasing  debt to  $39,097,514  by the  end of  2005.
Interest  expense  will  continue to grow in 2006 as debt  balances  are  anticipated  to
remain at  current  or higher  levels  depending on drilling and acquisition activity.

Accretion
Expense.We  incurred  accretion  expense  of $2,173  in 2005 as a result of  recording
our asset retirement obligation entry in 2005.

Loss
on Embedded  Derivative  Liability.  We  recorded  a  loss  on  our  mark  to  market  of
our  embedded  derivatives  as of December 31, 2005.  This  is on  our  participating
collars  on  oil  and  gas  swaps.  As of December 31,  2005,  our mark to market  value
reflected a liability of $190,553.

Net
Loss.Our net loss  increased  $469,682  from  $1,114,961  in 2004 to  $1,584,643  in
2005.  A  large  component  of  the  net  loss  in  2005  was  interest  expense of
$775,427  and loss on  embedded  derivative liability of $190,553.

Net
Loss Per  Share.  Even  though  our net  loss  increased  from 2004 to 2005,  our net
loss per  share  decreased  from  $(0.04) in 2004 to $(0.03) in  2005  because  the
weighted  average  shares  outstanding in 2005 increased.

20



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Impact of
Inflation

Inflation  has
not had a  material  effect on our  results  of  operations.

Financial
Liquidity and Capital Resources

We
believe  that our cash  requirements  in the next  twelve  months will be met by our
revenues  from  operations,  our cash  reserves  and  draws  available  under  our
current  banking facilities.

Private
Equity Placements

On
September 30, 2005, we closed a private equity  offering pursuant to which we received
$6,000,000 in gross  proceeds.  A total of 3,243,243 shares of Common Stock were  sold at
a price of $1.85 per share.  Sanders Morris Harris  Inc. (SMH) acted as
Placement Agent in the offering and  received (i) a cash fee equal to 5% of the gross
proceeds  and (ii) a warrant exercisable for up to 324,324 shares of  our Common Stock at
an exercise price of $1.85 per share.

In
February 2006, we closed a private equity  offering pursuant to which we sold a total of
9,000,000  shares of our Common Stock at a price of $2.65 per share.  Gross proceeds
raised in this offering were $23,850,000.  SMH served as our lead placement agent and
C.K. Cooper & Company served as co-placement agent. From the gross  proceeds, we paid
our investment bankers a placement agent  fee of $1,192,500 (5% of the gross proceeds)
and we paid SMH  a financial advisory fee of $477,000 (2% of the gross  proceeds). We
also issued to SMH, a warrant exercisable for  up to 900,000 shares our Common Stock, at
an exercise price  of $2.65 per share. The price per share in this offering was
determined by taking the thirty (30) day volume weighted  average market price of our
Common Stock as of January 17,  2006, and discounting it by approximately 10% to account
for  investors receiving unregistered stock.

Debt
Financings

To
finance our recent and pending property  acquisitions, we entered into a Credit Agreement
dated as of  November 17, 2005 (the "Credit Agreement"), with Standard  Bank
Plc, as Administrative Agent and Lender ("Standard")  and Standard Americas
Inc., as Collateral Agent.  In  accordance with the requirement of Standard, we also
entered  into a Swap Agreement ("Swap Agreement") with Standard  providing the
notional volumes which are 65% to 70% of the  reasonably anticipated projected production
from Proved  Developed Producing Reserves (as defined in the Credit  Agreement) for each
month through the second anniversary of  November 17, 2005 for each crude oil and natural
gas  streams, calculated separately; pursuant to the requirements  of the Credit
Agreement, separate swap hedges need to be put  in place by us at a number of specific
times when the Proved  Developed Producing Reserves are calculated and recalculated.

In
addition,  we entered  into a Term Loan  Agreement  dated as of  November  17,  2005 (the
"Term  Loan  Agreement")  with our majority  stockholder,  Itera  Holdings  BV.
Amounts  borrowed  from  Itera  under  the  Term  Loan  Agreement  are  subordinated  to
all  obligations  under the Credit  Agreement  and the Swap  Agreement  and are
evidenced  by a  convertible  subordinated  promissory note (the  "Convertible
Subordinated  Note").

Under
the Term Loan  Agreement,  Itera agreed to make  available  to us,  up to $25  million
of  subordinated  debt.  Effective  November  17,  2005,  prior  promissory  notes
evidencing  our  $8.5  million  outstanding  subordinated  indebtedness  to  Itera  were
refinanced  by  a  Convertible  Subordinated  Note.  In  addition,  in  connection  with
the  closing of the  acquisition  of the Voyager  Tranche 1 assets,  we borrowed  an
additional  $12  million  under the Term Loan  Agreement,  also  evidenced  by the
Convertible  Subordinated  Note.  Loans  made by  Itera  under  the Term  Loan  Agreement
accrue  interest  at  a  rate  between  11.5%  and  12.5%  per  annum.  One  half  of
accrued  interest  is  payable  in  convertible  notes  having  the same terms and
conditions  as

21



---

the Convertible
Subordinated  Note and under the terms of the  Credit  Agreement  must be so paid so long
as any  obligations  under  the  Credit  Agreement  and the Swap  Agreement  remain
unsatisfied.  Pursuant to the Convertible  Subordinated  Note,  Itera  may  elect  to
convert  all  or  a  portion  of  the  outstanding  principal  amount  plus  accrued  and
unpaid  interest (the  "Conversion  Amount") due under the Convertible
Subordinated  Note, in increments of at least  $100,000,  into  such  number  of  shares
of our  Common  Stock  equal  to the  quotient of (x) the  Conversion  Amount divided by
(y) $4.625.  We  received  the  opinion  of an  investment  banking  firm,  stating  that
the  terms  of  the  Term  Loan  Agreement  and  Convertible  Subordinated  Note  are
fair,  from a  financial  point of view, to our stockholders.

Prior
to  November  17,  2005,  we  had  incurred  indebtedness  from  Itera  totaling
$8,500,000.  Such  indebtedness,  described  below,  were  refinanced  by  our  issuance
of a  Convertible  Subordinated  Note  to  Itera  on  November  17, 2005.  During the
quarter  ended  September  30,  2005,  Itera  loaned us the sum of $2.0  million
pursuant  to  the terms of a  promissory  note  dated  August 12,  2005.  In  addition,
Itera  advanced $1.5 million to us in June 2005 and  $5 million in March  2005.  Subject
to  mandatory  prepayment  upon the occurrence of certain  events,  the promissory  notes
evidencing  all three  loans  had a three  year  maturity  and  bore interest at the
Prime Rate plus 4% per annum.

Subject
to  the  satisfaction  of a  Borrowing  Base  formula,  numerous  conditions  precedent
and  covenants,  the  Credit  Agreement  provides  for  facilities  of  up  to  $50
million.  In  connection  with  the  acquisitions  of  the  Springside  Properties  and
the Voyager  Tranche 1 assets,  we  borrowed  $8.5 million  under the  revolving  credit
facility  and made the First Term Draw under the term loan  facility  in  the  amount  of
$10  million.  Unless  earlier  payment  is  required under the Credit  Agreement,
Revolving Loans must be  paid on or  before  November  17,  2007 and  Term  Loans on or
before  May 17,  2007.  The  Second  Term  Draw,  which may be  requested  on or  before
May  31,  2006  and may be up to $19  million,  is conditioned,  among other things,  the
additional  convertible  subordinated  loan by Itera  of the $4.5  million  balance  of
its $25  million  commitment  under  the Term Loan  Agreement  and  acquisition  of
additional  Oil  and  Gas  Properties.

As
security  for all of our  obligations  under  the  Credit  Agreement and the Swap
Agreement,  we granted Standard  a  security  interest  in  and a  first  lien  on,  all
of our  assets  including,  without  limitation,  the  Barnett  Shale  properties  that
we acquired  or will  acquire  from  Voyager.  Our two  wholly-owned  subsidiaries,
Vaquero Partners LLC and  Dune  Operating  Company,  have  each  guaranteed  our
obligations.  Under  the  Credit  Agreement,  interest  on  Revolving  Loans  accrues  at
the  LIBOR  Rate  plus  the  Applicable  Margin while  interest on Term Loans  accrues at
a  rate between 12% and 13% per annum.

Critical
Accounting Policies

Our
significant  accounting  policies are more fully  described  in  Note  1 to  the  audited
financial  statements  included  with  this  report.  The  preparation  of  financial
statements  in  conformity  with  accounting  principles  generally  accepted in the
United  States of America  requires  management to make estimates and  assumptions  that
affect the  reported  amounts  of  assets,  liabilities,  revenues  and  expenses,  and
the related  disclosures  of contingent  assets  and  liabilities.  Actual  results
could  differ  from  those  estimates under different assumptions or conditions.

We
use the full cost  accounting  method  to  account  for  the  costs  incurred  in  the
acquisition,  exploration,  development and production of oil and gas reserves.

Quantitative
and Qualitative Disclosure about Market Risk

Our
primary  exposure  to market  risk  consists  of  changes  in  interest  rates on
borrowings  under our  Credit  Agreement  with  Standard.  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  rate  debt.  Except
with  respect to the interest rates under the Credit  Agreement,  we  do not have debts
or hold  instruments  that are  sensitive to  changes in interest  rates,  foreign
currency  exchange rates  or commodity prices.

22



---

Item 7.
Financial Statements.

Index to
Financial Statements

|                                                                                                            |  | Page
|----------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                            |  |     
|Report of Independent Registered Public Accounting Firm                                                     |  | F-1 
|                                                                                                            |  |     
|Consolidated Balance Sheet at December 31, 2005                                                             |  | F-2 
|                                                                                                            |  |     
|Consolidated
      Statements of Operations for the years ended December 31, 2005 and 2004                  |  | F-3 
|                                                                                                            |  |     
|Consolidated Statements of Changes in Stockholders Equity
  for the years ended December 31, 2005 and 2004 |  | F-4 
|                                                                                                            |  |     
|Consolidated Statements of Cash Flows for the years ended December 31, 2005 and 2004                        |  | F-5 
|                                                                                                            |  |     
|Notes
      to Consolidated Financial Statements                                                            |  | F-6 

23



---

REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of
Directors  Dune Energy, Inc.  Houston, Texas

We have audited
the accompanying consolidated balance sheet of Dune Energy Inc.  as of December 31, 2005,
and the related statements of operations, stockholders'  equity, and cash flows for the
two years then ended. These financial statements  are the responsibility of Dune's
management. Our responsibility is to express an  opinion on these financial statements
based on our audits.

We conducted
our audits in accordance with standards of the Public Company  Accounting Oversight Board
(United States). Those standards require that we plan  and perform the audits to obtain
reasonable assurance about whether the  financial statements are free of material
misstatement. An audit includes  examining, on a test basis, evidence supporting the
amounts and disclosures in  the financial statements. An audit also includes assessing
the accounting  principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our  audits
provide a reasonable basis for our opinion.

In our opinion,
the financial statements referred to above present fairly, in  all material respects, the
financial position of Dune Energy Inc., as of  December 31, 2005, and the results of its
operations and its cash flows for the  periods described in conformity with accounting
principles generally accepted in  the United States of America.

/s/ MALONE & BAILEY, PC

MALONE
  & BAILEY, PC
  www.malone-bailey.com
  Houston, Texas

March 24, 2006

F-1



---

Dune Energy,
Inc. 
 Consolidated Balance Sheet  December 31, 2005

|ASSETS                                                               |  |  |   |           
|-------------------------------------------------------------------- |  |  | - | ----------
|Current
      assets:                                                |  |  |   |           
|Cash                                                                 |  |  | $ | 3,754,120 
|Accounts
      receivable                                            |  |  |   | 1,595,967 
|                                                                     |  |  |   |           
|Total
      current assets                                           |  |  |   | 5,350,087 
|                                                                     |  |  |   |           
|Property
      and equipment                                         |  |  |   | 39,127    
|Less
      accumulated depreciation                                  |  |  |   | (5,033    
|                                                                     |  |  |   |           
|Net
      property and equipment                                     |  |  |   | 34,094    
|                                                                     |  |  |   |           
|Oil and
      gas properties, using full cost accounting:            |  | 
|Properties
      being amortized                                     |  |  |   | 20,984,208
|Properties
      not subject to amortization                         |  |  |   | 28,962,342
|Deposits
      on oil and gas properties                             |  |  |   | 1,820,101 
|Less
      accumulated depreciation, depletion and amortization      |  |  |   | (982,240  
|                                                                     |  |  |   |           
|Net oil
      and gas properties                                     |  |  |   | 50,784,411
|                                                                     |  |  |   |           
|Deferred
      financing costs, net of accumulated amortization      |  |  |   |           
|of
      $143,558                                                    |  |  |   | 2,363,187 
|                                                                     |  |  |   |           
|TOTAL
      ASSETS                                                   |  |  | $ | 58,531,779
|                                                                     |  |  |   |           
|LIABILITIES
      AND STOCKHOLDERS' EQUITY                           |  | 
|Current
      liabilities - accounts payable and accrued liabilities |  |  | $ | 4,280,024 
|Long-term
      debt                                                 |  |  |   | 39,097,514
|Other
      long-term liabilities                                    |  |  |   | 269,235   
|                                                                     |  |  |   |           
|Total
      liablities                                               |  |  |   | 43,646,773
|                                                                     |  |  |   |           
|STOCKHOLDERS'
      EQUITY                                           |  | 
|Common
      stock, $.001 par value, 100,000,000 shares              |  | 
|authorized,
      50,244,859 shares issued and outstanding           |  |  |   | 50,244    
|Additional
      paid-in capital                                     |  |  |   | 20,093,671
|Accumulated
      deficit                                            |  |  |   | (5,258,909
|                                                                     |  |  |   |           
|Total
      stockholders' equity                                     |  |  |   | 14,885,006
|                                                                     |  |  |   |           
|TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY                     |  |  | $ | 58,531,779
|                                                                     |  |  |   |           

See summary of
significant accounting policies and notes to financial statements.

F-2



---

Dune Energy,
Inc.  
Consolidated Statements of Operations  Years ended December 31, 2005 and 2004

|                                               |  |  | 2005 |            | 2004 |  
|---------------------------------------------- |  |  | ---- | ---------- | ---- | -
|                                               |  |  |      |            |      |  
|Revenues                                       |  |  | $    | 3,724,278  |      | $
|                                               |  |  |      |            |      |  
|Operating
      expenses:                      |  | 
|General
      and administrative expense       |  |  |      | 2,550,549  |      |  
|Production
      taxes                         |  |  |      | 341,309    |      |  
|Depletion,
      depreciation and amortization |  |  |      | 1,067,029  |      |  
|Lease
      operating expense                  |  |  |      | 378,163    |      |  
|                                               |  |  |      |            |      |  
|Operating
      loss                           |  |  |      | (612,772   | )    |  
|                                               |  |  |      |            |      |  
|Other
      income (expense):                  |  | 
|Other
      income                             |  |  |      |           |      |  
|Interest
      income                          |  |  |      | 48,893     |      |  
|Minority
      interest                        |  |  |      | (52,611    | )    |  
|Interest
      expense                         |  |  |      | (775,427   | )    |  
|Accretion
      expense                        |  |  |      | (2,173     | )    |  
|Loss
      on embedded derivative liability    |  |  |      | (190,553   | )    |  
|                                               |  |  |      |            |      |  
|Net loss                                       |  |  | $    | (1,584,643 | )    | $
|                                               |  |  |      |            |      |  
|Net loss
      per share:                      |  | 
|Basic
      and diluted                        |  |  | $    | (0.03      | )    | $
|Weighted
      average shares outstanding:     |  | 
|Basic
      and diluted                        |  |  |      | 47,557,242 |      |  

See summary of
significant accounting policies and notes to financial statements.

F-3



---

Dune Energy,
Inc.  Consolidated Statements of Changes in Stockholders Equity  Years ended December
31, 2005 and 2004

|                                                     |  |  | Preferred
        Stock - Series A |          | Common
        Stock |   |        |   |        |            |                                  |  
|---------------------------------------------------- |  |  | ---------------------------------- | -------- | -------------------- | - | ------ | - | ------ | ---------- | -------------------------------- | -
|                                                     |  |  |                                    |          |                      |   |        |   |        |            |                                  |  
|                                                     |  |  | Shares                             |          | Amount               |   | Shares |   | Amount |            | Paid-In
        
        Capital |  
|                                                     |  |  |                                    |          |                      |   |        |   |        |            |                                  |  
|Balance
      at                                     |  |  |                                    |          |                      |   |        |   |        |            |                                  |  
|December
      31, 2003                              |  |  |                                    |         |                      | $ |       |   |        | 7,119,127  |                                  | $
|Stock
      issued for:                              |  | 
|Services                                             |  |  |                                    |         |                      |   |       |   |        | 522,917    |                                  |  
|Cash                                                 |  |  |                                    | 222,222  |                      |   | 222    |   |        | 35,464,432 |                                  |  
|Commissions                                          |  |  |                                    |         |                      |   |       |   |        | 476,323    |                                  |  
|Conversion
      of preferred to common              |  |  |                                    | (111,111 | )                    |   | (111   | ) |        | 222,222    |                                  |  
|Debt                                                 |  |  |                                    |         |                      |   |       |   |        | 1,792,150  |                                  |  
|Net loss                                             |  |  |                                    |         |                      |   |       |   |        |           |                                  |  
|                                                     |  |  |                                    |          |                      |   |        |   |        |            |                                  |  
|Balance
      at                                     |  | 
|December
      31, 2004                              |  |  |                                    | 111,111  |                      |   | 111    |   |        | 45,597,171 |                                  |  
|Stock
      issued for:                              |  | 
|Debt                                                 |  |  |                                    |         |                      |   |       |   |        | 1,182,223  |                                  |  
|Conversion
      of preferred to common              |  |  |                                    | (111,111 | )                    |   | (111   | ) |        | 222,222    |                                  |  
|Cash
      paid to consultant for stock subscription |  |  |                                    |         |                      |   |       |   |        |           |                                  |  
|Cash
      received for stock subscription           |  |  |                                    |         |                      |   |       |   |        | 3,243,243  |                                  |  
|Net loss                                             |  |  |                                    |         |                      |   |       |   |        |           |                                  |  
|                                                     |  |  |                                    |          |                      |   |        |   |        |            |                                  |  
|Balance
      at December 31, 2005                   |  |  |                                    |         |                      | $ |       |   |        | 50,244,859 |                                  | $
|                                                     |  |  |                                    |          |                      |   |        |   |        |            |                                  |  

See summary of
significant accounting policies and notes to financial statements.

F-4



---

Dune Energy,
Inc.  Consolidated Statements of Cash Flows  Years ended December 31, 2005 and 2004

|                                                                         |  |  |   | 2005        |   |   | 2004       |  
|------------------------------------------------------------------------ |  |  | - | ----------- | - | - | ---------- | -
|                                                                         |  |  |   |             |   |   |            |  
|CASH
      FLOWS FROM OPERATING ACTIVITIES                               |  |  |   |             |   |   |            |  
|Net
      loss                                                           |  |  | $ | (1,584,643  | ) | $ | (1,114,961 | )
|Adjustments
      to reconcile net loss to net cash used in              |  | 
|operating
      activities:                                              |  | 
|Depletion,
      depreciation and amortization                           |  |  |   | 1,067,029   |   |   | 63,801     |  
|Minority
      interest                                                  |  |  |   | (17,201     | ) |   | 17,201     |  
|Stock
      for services and interest                                    |  |  |   |            |   |   | 219,958    |  
|Changes
      in:                                                        |  | 
|Accounts
      receivable                                                |  |  |   | (1,059,638  | ) |   | (444,392   | )
|Other
      current assets                                               |  |  |   |            |   |   | 42,690     |  
|Accounts
      payable and accrued liabilites                            |  |  |   | 4,002,084   |   |   | (9,196     | )
|Other
      long-term liabilities                                        |  |  |   | 269,235     |   |   |           |  
|                                                                         |  |  |   |             |   |  
|NET
      CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                |  |  |   | 2,676,866   |   |   | (1,224,899 | )
|                                                                         |  |  |   |             |   |  
|CASH
      FLOWS FROM INVESTING ACTIVITIES                               |  | 
|Investment
      in proved and unproved properties                       |  |  |   | (43,003,119 | ) |   | (5,800,842 | )
|Deposits
      on oil and gas properties                                 |  |  |   | (1,820,101  | ) |   |           |  
|Purchase
      of office equipment                                       |  |  |   | (39,127     | ) |   |           |  
|                                                                         |  |  |   |             |   |  
|NET CASH
      USED IN INVESTING ACTIVITIES                              |  |  |   | (44,862,347 | ) |   | (5,800,842 | )
|                                                                         |  |  |   |             |   |  
|CASH
      FLOWS FROM FINANCING ACTIVITIES                               |  | 
|Proceeds
      from long-term debt                                       |  |  |   | 39,097,514  |   |   |           |  
|Proceeds
      from sale of common stock                                 |  |  |   | 5,601,833   |   |   | 10,800,000 |  
|Payment
      of loan origination fees                                   |  |  |   | (2,506,745  | ) |   |           |  
|Proceeds
      from sale of preferrred stock                             |  |  |   |            |   |   | 200,000    |  
|Proceeds
      from sale of convertible debentures                       |  |  |   |            |   |   | 45,000     |  
|Payments
      on notes payable                                          |  |  |   |            |   |   | (500,000   | )
|                                                                         |  |  |   |             |   |  
|NET CASH
      PROVIDED BY FINANCING ACTIVITIES                          |  |  |   | 42,192,602  |   |   | 10,545,000 |  
|                                                                         |  |  |   |             |   |  
|NET CHANGE
      IN CASH BALANCE                                         |  |  |   | 7,121       |   |   | 3,519,259  |  
|Cash
      balance at beginning of period                                |  |  |   | 3,746,999   |   |   | 227,740    |  
|                                                                         |  |  |   |             |   |  
|Cash
      balance at end of period                                      |  |  | $ | 3,754,120   |   | $ | 3,746,999  |  
|                                                                         |  |  |   |             |   |  
|SUPPLEMENTAL
      DISCLOSURES                                           |  | 
|Interest
      paid                                                      |  |  | $ | 553,236     |   | $ | 99,351     |  
|Income
      taxes paid                                                  |  |  |   |            |   |   |           |  
|NON-CASH
      DISCLOSURES                                               |  | 
|Stock
      issued for conversion of debt                                |  |  | $ | 450,000     |   | $ | 724,000    |  
|Conversion
      of preferred stock to common stock                      |  |  |   | 222         |   |   | 100,000    |  
|Increase
      in oil and gas property for note payable                  |  |  |   |            |   |   | 140,000    |  
|Reduction
      in oil and gas property for adjustment in purchase price |  |  |   |            |   |   | 91,937     |  
|Stock
      issued for debt to related party                             |  |  |   |            |   |   | 42,500     |  

See summary of
significant accounting policies and notes to financial statements.

F-5



---

DUNE
ENERGY, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of
operations and organization

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 products primarily to domestic  pipelines and refineries.
Its operations are presently focused in the States of  Texas and Louisiana. Dune, through
its 100% owned subsidiary, Vaquero Partners  LLC ("Vaquero"), acquired
interests in certain oil and natural gas leases  located in Victoria County, Texas. Dune
also directly holds interests in other  properties discussed in this 10-KSB.

Consolidation

The
accompanying consolidated financial statement includes all accounts of Dune  and Vaquero.
All significant inter-company balances and transactions have been  eliminated in
consolidation.

Oil and gas
properties

Dune follows
the full cost accounting method to account for the costs incurred  in the acquisition,
exploration, development and production of oil and gas  reserves. Under this method, all
costs, including internal costs directly  related to acquisition, exploration and
development activities are capitalizable  as oil and gas property costs.

Amortization of
unproved property costs begins when the properties become proved  or their values become
impaired. Dune assesses the realizability of unproved  properties on at least an annual
basis or when there has been an indication that  an impairment in value may have
occurred. Impairment of unproved properties is  assessed based on management's intention
with regard to future exploration and  development of individually significant properties
and the ability of Dune to  obtain funds to finance such exploration and development. If
the results of an  assessment indicate that the properties are impaired, the amount of
the  impairment is added to the capitalized costs to be amortized.

The fair value
of an asset retirement obligation is recognized in the period in  which it is incurred if
a reasonable estimate of fair value can be made. The  present value of the estimated
asset retirement costs is capitalized as part of  the carrying amount of the long-lived
asset. For Dune, asset retirement  obligations relate to the abandonment of oil and gas
producing facilities. The  amounts recognized are based upon numerous estimates and
assumptions, including  future retirement costs, future recoverable quantities of oil and
gas, future  inflation rates and the credit-adjusted risk-free interest rate.

Under full cost
accounting rules for each cost center, capitalized costs of  proved properties, less
accumulated amortization and related deferred income  taxes, shall not exceed an amount
(the "cost ceiling") equal to the sum of (a)  the present value of future net
cash flows from estimated production of proved  oil and gas reserves, based on current
economic and operating condition,  discounted at 10 percent, plus (b) the cost of
properties not being amortized,  plus (c) the lower of cost or estimated fair value of
any unproved properties  included in the costs being amortized, less (d) any income tax
effects related  to differences between the book and tax basis of the properties
involved. If  capitalized costs exceed this limit, the excess is charged as an impairment
expense. Costs of oil and gas properties will be amortized using the units of  production
method.

F-6



---

Revenue
recognition

Dune records
oil and gas revenues following the entitlement method of accounting  for production, in
which any excess amount received above Dune's share is  treated as a liability. If less
than Dune's share is received, the  underproduction is recorded as an asset. Dune did not
have an imbalance position  in terms of volumes or values at December 31, 2005.

Cash and
cash equivalents

Cash and cash
equivalents include cash in banks and certificates of deposit  which mature in within
three months of the date of purchase.

Use of
estimates

The preparation
of these financial statements in conformity with accounting  principles generally
accepted in the United States of America requires  management to make estimates and
assumptions that affect the reported amounts of  assets and liabilities and disclosure of
contingent assets and liabilities at  the date of the financial statements and the
reported amount of revenues and  expenses during the reporting period. Actual results
could differ from those  estimates.

Property and
equipment

Property and
equipment is valued at cost. Additions are capitalized and  maintenance and repairs are
charged to expense as incurred. Gains and losses on  dispositions of equipment are
reflected in other revenues.

Deferred
financing costs

In connection
with debt financings, Dune has paid $2,506,745 in fees. These fees  were recorded as
deferred financing costs and are being amortized over the life  of the loans using the
straight-line method.

Long-lived
assets

Long-lived
assets to be held and used or disposed of other than by sale are  reviewed for impairment
whenever events or changes in circumstances indicate  that the carrying amount may not be
recoverable. When required, impairment  losses on assets to be held and used or disposed
of other than by sale are  recognized based on the fair value of the asset. Long-lived
assets to be  disposed of by sale are reported at the lower of the asset's carrying
amount or  fair value less cost to sell.

Derivatives

Derivative
financial instruments, utilized to manage or reduce commodity price  risk related to
Dune's production and interest rate risk related to Dune's  long-term debt, are accounted
for under the provisions of SFAS No. 133,  "Accounting for Derivative Instruments
and for Hedging Activities", and related  interpretations and amendments. Under this
statement, derivatives are carried on  the balance sheet at fair value. If the derivative
is designated as a fair value  hedge, the changes in the fair value of the derivative and
of the hedged item  attributable to the hedged risk are recognized in earnings. If the
derivative is  designated as a cash flow hedge, the effective portions of changes in the
fair  value of the derivative are recorded in other comprehensive income and are
recognized in the statement of operations when the hedged item affects earnings.  If the
derivative is not designated as a hedge, changes in the fair value are  recognized in
other expense. Ineffective portions of changes in the fair value  of cash flow hedges are
also recognized in other expense.

F-7



---

Stock-based
compensation

Dune records as
compensation expense as the excess of the fair value of such shares over the exercise price as calculated  pursuant to Statement
of Financial Accounting Standard No. 123, Accounting for  Stock-Based Compensation
("SFAS No. 123"), recognized over the related service  period. Dune accounts
for stock-based compensation issued to non-employees in  accordance with the provisions
of SFAS No. 123 and EITF No. 96-18, "Accounting  for Equity Investments That Are
Issued to Non-Employees for Acquiring, or in  Conjunction with Selling Goods or
Services". For expensing purposes, the value  of common stock issued to
non-employees and consultants is determined based on  the fair value of the services
received or the fair value of the equity  instruments issued, whichever value is more
reliably measurable.

Had
compensation expense for 2005 and 2004 been determined under the fair value  provisions
of SFAS No. 123, as amended by SFAS No. 148, Dune's net loss to  common shareholders and
net loss per share would have been:

|                                                                          |  |  | 2005 |            | 2004 |  
|------------------------------------------------------------------------- |  |  | ---- | ---------- | ---- | -
|                                                                          |  |  |      |            |      |  
|Net loss,
      as reported                                               |  |  | $    | (1,584,643 | )    | $
|Add:
      Stock-based employee compensation expense included in reported |  | 
|net
      income determined under APB No. 25                              |  |  |      |           |      |  
|Deduct:
      Total stock-based employee compensation expense determined  |  | 
|under
      fair-value based method for all awards                        |  |  |      | 2,234,056  |      |  
|                                                                          |  |  |      |           
|Pro forma
      net loss                                                  |  |  | $    | (3,818,699 | )    | $
|                                                                          |  |  |      |           
|Loss
      per share, basic and diluted:                                  |  | 
|As reported                                                               |  |  | $    | (0.03      | )    | $
|Pro forma                                                                 |  |  | $    | (0.08      | )    | $

These pro forma
amounts may not be representative of future disclosures since  the estimated fair value
of stock options is amortized to expense over the  vesting period and additional options
may be issued in future years. The  estimated fair value of each option granted was
calculated using the  Black-Scholes option pricing model. The following summarizes the
weighted  average of the assumptions used in the model.

|                                    |  |  |  | 2005   |   |  | 2004 |  
|----------------------------------- |  |  |  | ------ | - |  | ---- | -
|                                    |  |  |  |        |   |  |      |  
|Risk
      free rate                |  |  |  | 2.0    | % |  |     | %
|Expected
      years until exercise |  |  |  | 5.0    |   |  |     |  
|Expected
      stock volatility     |  |  |  | 135.72 | % |  |     | %
|Dividend
      yield                |  |  |  | N/A    |   |  | N/A  |  

Income taxes

Dune recognizes
deferred tax assets and liabilities based on differences between  the financial reporting
and tax bases of assets and liabilities using the  enacted tax rates and laws that are
expected to be in effect when the  differences are expected to be recovered. Dune
provides a valuation allowance  for deferred tax assets for which it does not consider
realization of such  assets to be more likely than not.

Loss per
share

Basic and
diluted net loss per share calculations are presented in accordance  with Financial
Accounting Standards Statement 128, and are calculated on the  basis of the weighted
average number of common shares outstanding during the  year. They include the dilutive
effect of common stock equivalents in years with  net income. Basic and diluted loss per
share is the same due to the absence of  common stock equivalents.

F-8



---

New
Accounting Standards

In December
2004, the FASB issued SFAS No. 123R, "Accounting for Stock-Based
Compensation". SFAS No. 123R establishes standards for the accounting of
transactions in which an entity exchanges its equity instruments for goods or  services.
This statement focuses primarily on accounting for transactions in  which an entity
obtains employee services in share-based payment transactions.  SFAS No. 123R requires
that the fair value of such equity instruments be  recognized as expense in the
historical financial statements as services are  performed. Prior to SFAS No. 123R, only
certain pro forma disclosures of fair  value were required. SFAS No. 123R shall be
effective for small business issuers  as of the beginning of the first interim or annual
reporting period that begins  after December 15, 2005. The adoption of this new
accounting pronouncement is  not currently expected to have a material impact on the
financial statements of  Dune during the calendar year 2006.

Dune does not
expect the adoption of any other recently issued accounting  pronouncements to have a
significant impact on its results of operations,  financial position or cash flows.

NOTE 2 
PROPERTY ACQUISITIONS

On June 3,
2004, Dune closed its purchase of 34.98% of Penroc Oil Corporation's  approximately 2%
working interest in the Los Mogotes Field located in Zapata  County, Texas. The effective
date of the closing was May 28, 2004. Total  consideration consisted of 25,000 shares of
Dune common stock and cash of  $874,500.

On December 13,
2004, Dune Energy announced that it entered into a Joint Venture  Participation Agreement
covering 2,309 acres plus various agreements covering  approximately 16,695 additional
acres, in the Pearsall Field, located in Frio  County, Texas. The Agreement calls for
Dune, at its option on a well by well  basis, to drill up to 24 locations on the various
leases underlying this  transaction. During 2004, Dune paid $409,050 for its working
interest (27%) cost  of drilling the initial well and $133,782 for leasehold and
geophysical and  geological costs.

On October 19,
2005, Dune acquired certain exclusive exploration and development  rights from American
Natural Energy Corporation ("ANEC"), with an effective date  of August 26,
2005, in ANEC's Joint Development Agreement with ExxonMobil Corp.,  covering
approximately 11,000 contiguous acres in St. Charles Parish, Louisiana.  Dune has the
right to participate in 50% of ANEC's development rights in the  Delta Securities Lease
in exchange for $1 million. Upon the successful drilling  of one of the first two
exploratory wells drilled, Dune will be required to pay  ANEC an additional $500,000.

On November 17,
2005, Dune acquired the interests in certain oil and gas  properties (the
"Springside Properties") from Voyager Partners, Ltd.  ("Voyager").
Dune paid a total of $5,451,362 for the Springside Properties with  an effective date of
July 1, 2005.

On December 16,
2005, Dune acquired the interests in certain producing and  non-producing natural gas
properties and related property and equipment located  in the Barnett Shale play in the
North Texas Fort Worth Basin from Voyager  ("Voyager Tranche 1"). The purchase
price for the properties was $24.6 million  with an effective date of May 1, 2005.

NOTE 3 
CONVERTIBLE DEBENTURES

In March 2004,
Dune issued a convertible debenture with a face value of $45,000.  The debenture was
convertible into Dune common stock at $0.45 per share at the  option of the holder.

During the year
ended December 31, 2004, nineteen holders converted $766,500 of  convertible debentures
into 1,792,150 shares of common stock. During the year  ended December 31, 2005, the remaining
holders converted $445,000 in convertible  debentures into 1,182,223 shares of  common
stock. As of December 31, 2005, there  are no remaining convertible debentures
outstanding.

F-9



---

Dune analyzed
these convertible debentures for derivative accounting consideration under SFAS No. 133
and EITF 00-19. The Company determined that derivative accounting is not applicable for
the convertible debentures.

NOTE 4 
DEBT FINANCINGS

To finance the
Company's recent and pending property acquisitions, Dune entered  into a Credit Agreement
dated as of November 17, 2005 (the "Credit Agreement"),  with Standard Bank
Plc, as Administrative Agent and Lender ("Standard") and  Standard Americas
Inc., as Collateral Agent. In accordance with the requirement  of Standard, Dune also
entered into a Swap Agreement ("Swap Agreement") with  Standard. The Standard
agreements requires the company to enter into swap  arrangements equal to 65% to 70% of
the reasonably anticipated projected  production from Proved Developed Producing Reserves
(as defined in the Credit  Agreement) for each month through the second anniversary of
November 17, 2005  for each crude oil and natural gas streams, calculated separately.
Pursuant to  the requirements of the Credit Agreement, separate swap hedges need to be
put in  place by Dune at a number of specific times when the Proved Developed Producing
Reserves are calculated and recalculated.

In addition,
Dune entered into a Term Loan Agreement dated as of November 17,  2005 (the "Term
Loan Agreement") with its majority stockholder, Itera Holdings  BV. Amounts borrowed
from Itera under the Term Loan Agreement are subordinated  to all obligations under the
Credit Agreement and the Swap Agreement and are  evidenced by a convertible subordinated
promissory note (the "Convertible  Subordinated Note").

Under the Term
Loan Agreement, Itera agreed to make available to Dune, up to $25  million of
subordinated debt. Effective November 17, 2005, prior promissory  notes evidencing $8.5
million outstanding subordinated indebtedness to Itera  were refinanced by a Convertible
Subordinated Note. In addition, in connection  with the closing of the acquisition of the
Voyager Tranche 1 assets, Dune  borrowed an additional $12 million under the Term Loan
Agreement, also evidenced  by the Convertible Subordinated Note. Loans made by Itera
under the Term Loan  Agreement accrue interest at a rate between 11.5% and 12.5% per
annum. One half  of accrued interest is payable in convertible notes having the same
terms and  conditions as the Convertible Subordinated Note and under the terms of the
Credit Agreement must be so paid so long as any obligations under the Credit  Agreement
and the Swap Agreement remain unsatisfied. Pursuant to the Convertible  Subordinated
Note, Itera may elect to convert all or a portion of the  outstanding principal amount
plus accrued and unpaid interest (the "Conversion  Amount") due under the
Convertible Subordinated Note, in increments of at least  $100,000, into such number of
shares of Dune's common stock equal to the  quotient of (x) the conversion amount divided
by (y) $4.625. Dune received the  opinion of an investment banking firm stating that the
terms of the Term Loan  Agreement and Convertible Subordinated Note are fair, from a
financial point of  view, to our stockholders.

Prior to
November 17, 2005, Dune had incurred indebtedness from Itera totaling  $8,500,000. Such
indebtedness, described below, was refinanced by our issuance  of a Convertible
Subordinated Note to Itera on November 17, 2005. During the  quarter ended September 30,
2005, Itera loaned Dune the sum of $2.0 million  pursuant to the terms of a promissory
note dated August 12, 2005. In addition,  Itera advanced $1.5 million to the Company in
June 2005 and $5 million in March  2005. Subject to mandatory prepayment upon the
occurrence of certain events, the  promissory notes evidencing all three loans had a
three year maturity and bore  interest at the prime rate plus 4% per annum.

Subject to the
satisfaction of a Borrowing Base formula, numerous conditions,  precedent and covenants,
the Credit Agreement provides for facilities of up to  $50 million. In connection with
the acquisitions of the Springside Properties  and the Voyager Tranche 1 assets, Dune
borrowed $8.5 million under the revolving  credit facility and made the First Term Draw
under the term loan facility in the  amount of $10 million. Unless earlier payment is
required under the Credit  Agreement, Revolving Loans must be paid on or before November
17, 2007 and Term  Loans on or before May 17, 2008. The Second Term Draw,

F-10



---

which may be
requested on  or before May 31, 2006 and may be up to $19 million,  is conditioned, among
other  things, on the additional convertible subordinated loan by Itera of the $4.5
million balance of its $25 million commitment under the Term Loan Agreement and
acquisition of additional Oil and Gas Properties.

As security for
all of the Company's obligations under the Credit Agreement and  the Swap Agreement, Dune
granted Standard a security interest in and a first  lien on all of our assets including,
without limitation, the Barnett Shale  properties that Dune acquired or will acquire from
Voyager. The Company's two  wholly-owned subsidiaries, Vaquero Partners LLC and Dune
Operating Company, have  each guaranteed the obligations. Under the Credit Agreement,
interest on  Revolving Loans accrues at the LIBOR Rate plus the Applicable Margin while
interest on Term Loans accrues at a rate between 12% and 13% per annum.

NOTE 5 
DERIVATIVE FINANCIAL INSTRUMENTS

Dune enters
into derivative contracts to provide a measure of stability in the  cash flows associated
with Dune's oil and gas production and to manage exposure  to commodity prices. None of
the derivative contracts Dune has entered into have  been designated as cash flow hedges or fair value hedges.
During 2005, Dune recorded losses of  $190,553 related to its derivative instruments.

The derivative
instruments Dune has entered into are described below.

Natural Gas
Derivatives

Dune entered
into participating collars on natural gas hedges (NG-NYMEX) whereby  Dune receives a
floor price of $8.00/MMbtu and pays 45% of any price in excess  of $8.00/MMbtu up to a
maximum payment of $1.80/MMbtu. The following table shows  the monthly volumes hedged.

|Start
        Month |  |  | End 
        Month  |  |  |  | Monthly
        Volume
        MMbtu | 
|------------------- |  |  | ------------------- |  |  |  | ------------------------------------ | 
|                    |  |  |                     |  |  |  |                                      | 
|December
      2005 |  |  | May
      2006      |  |  |  | 30,000                               | 
|June
      2006     |  |  | October
      2006  |  |  |  | 27,500                               | 
|November
      2006 |  |  | December
      2006 |  |  |  | 25,000                               | 
|January
      2007  |  |  | May 2007            |  |  |  | 20,000                               | 
|June
      2007     |  |  | December
      2007 |  |  |  | 17,500                               | 

Crude Oil Derivatives

Dune entered
into participating collars on crude oil hedges (WTI-NYMEX) whereby  Dune receives a floor
price of $45/BBL and pays 25% of any price in excess of  $45/BBL up to a maximum of
$5/BBL. The following table shows the monthly volumes  hedged.

|Start
        Month  |  |  | End 
        Month  |  |  |  | Monthly
        Volume
        BBL | 
|-------------------- |  |  | ------------------- |  |  |  | ---------------------------------- | 
|                     |  |  |                     |  |  |  |                                    | 
|December
      2005  |  |  | January
      2006  |  |  |  | 1,500                              | 
|February
      2006  |  |  | August
      2006   |  |  |  | 1,250                              | 
|September
      2006 |  |  | December
      2006 |  |  |  | 1,000                              | 
|January
      2007   |  |  | October
      2007  |  |  |  | 750                                | 
|November
      2007  |  |  | December
      2007 |  |  |  | 500                                | 

F-11



---

NOTE 6 
ASSET RETIREMENT OBLIGATION

Dune had no
asset retirement obligations prior to 2005. Asset retirement obligations are included in other long term liabilities on Dunes balance sheet. The following table is a  reconciliation of
the asset retirement obligation liability for 2005:

For the year
ended December 31, 2005:

|Asset
      retirement obligation at beginning of year |  |  | $ |       | 
|------------------------------------------------------ |  |  | - | ------ | 
|Liabilities
      incurred                             |  |  |   | 76,509 | 
|Liabilities
      settled                              |  |  |   |       | 
|Accretion
      expense                                |  |  |   | 2,173  | 
|Revisions
      in estimated liabilities               |  |  |   |       | 
|                                                       |  |  |   |       
|Asset
      retirement obligation at end of year       |  |  | $ | 78,682 | 
|                                                       |  |  |   |       

NOTE 7 
PREFERRED STOCK

In April 2004,
Dune issued a total of 222,222 shares of Series A Convertible  Preferred Stock to two
individuals for an aggregate of $200,000. Each share of  preferred stock is convertible
into two shares of common stock at the option of  the holder.

During the year
ended December 31, 2004, 111,111 shares of Series A Convertible  Preferred Stock were
converted into 222,222 shares of common stock.

During the year
ended December 31, 2005, the remaining 111,111 shares of Series  A Convertible Preferred
Stock were converted into 222,222 shares of common  stock.

As of December
31, 2005 there are no remaining Series A Convertible Preferred  shares outstanding.

NOTE 8 
COMMON STOCK

On May 19,
2004, Dune sold 35,464,432 shares to Itera Holdings BV for the  aggregate purchase price
of $12,000,000. Also on May 19, 2004, Dune issued  476,323 shares and paid $1,200,000 in
cash to the Altitude Group LLC for  services in assisting with this transaction.

During the year
ended December 31, 2004, Dune issued an aggregate of 522,917  shares valued at $219,958
to several individuals for services rendered. Also  during the same twelve month period,
holders converted $766,500 of convertible  debentures into 1,792,150 shares of common
stock.

During the year
ended December 31, 2005, the remaining note holders converted  $445,000 in convertible
notes payable into 1,182,223 shares of common stock.

During the year
ended December 31, 2005, the remaining 111,111 shares of Series  A Convertible Preferred
Stock were converted into 222,222 shares of common  stock.

On September
30, 2005, Dune closed a $6 million private equity offering. A total  of 3,243,243 shares
of common stock were sold at a price of $1.85 per share.  Dune paid the investment
banker, Sanders Morris Harris Inc., a placement agent  fee consisting of (i) cash equal
to 5% of the gross proceeds and (ii) a warrant  exercisable for up to 324,324 shares our
common stock, at an exercise price of  $1.85 per share. Dune has agreed to register both
the shares issued to investors  and the shares underlying the warrant for resale upon the
earlier of (i) six  months or (ii) the next registration statement filed by Dune (other
than on

F-12



---

Form  S-8 or
S-4). The private offering was made in reliance upon Section 4(2) of the  Securities Act
of 1933, as amended and Rule 506 of Regulation D.

NOTE 9 
STOCK OPTIONS

During 2004 and
2005, Dune's Board of Directors granted stock options, all of  which are immediately
exercisable. The following table summarizes stock option  activity:

|                                          |  |  | Options |           | Weighted
        
        Average
        Price |  
|----------------------------------------- |  |  | ------- | --------- | ----------------------------------------------- | -
|Outstanding
      as of January 1, 2004   |  |  |         | 350,000   |                                                 | $
|Granted
      during 2004                 |  |  |         | 50,000    |                                                 |  
|Cancelled
      or Expired                |  |  |         |          |                                                 |  
|Exercised                                 |  |  |         |          |                                                 |  
|                                          |  |  |         |           |                                                 |  
|Outstanding
      as of December 31, 2004 |  |  |         | 400,000   |                                                 |  
|Granted
      during 2005                 |  |  |         | 1,795,000 |                                                 |  
|Cancelled
      or Expired                |  |  |         |          |                                                 |  
|Exercised                                 |  |  |         |          |                                                 |  
|                                          |  |  |         |           |                                                 |  
|Outstanding
      as of December 31, 2005 |  |  |         | 2,195,000 |                                                 | $
|                                          |  |  |         |           |                                                 |  

Options
outstanding and exercisable at December 31, 2005 are as follows:

|                                                                                                                             | Outstanding |                                                                                                                                                                   
|---------------------------------------------------------------------------------------------------------------------------- | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                             |             |                                                                                                                                                                   
|Exercise
        Price                                                                                                       |             | Number 
        Of Shares                                                                                                                                         
|                                                                                                                             |             |                                                                                                                                                                   
|0.45
        
        0.54 
        0.85 
        1.25 
        2.30 
        2.35 
        2.44 
        2.54 
        2.56 |             | 100,000 
          250,000 
            50,000 
          250,000 
            15,000 
          300,000 
        1,125,000 
            30,000 
           75,000
|                                                                                                                             |             |                                                                                                                                                                   
|                                                                                                                             |             | 2,195,000                                                                                                                                                         
|                                                                                                                             |             |                                                                                                                                                                   

NOTE 10 
COMMITMENTS AND CONTINGENCIES

Effective as of
the closing of the stock sale to Itera Holdings BV on May 19,  2004, Dune amended its
Operating Agreement with Vaquero Oil & Gas Inc. ("VOG")  with respect to
certain matters relating to Vaquero Partners LLC. VOG fixed its  Membership Interest in
Vaquero at 15% with Dune holding the other 85%. Dune also  amended its drilling agreement
with VOG to provide that VOG will be paid (i)  $25,000 a month for its services through
November 2004, and (ii) $12,500 a month  for its services through May 2005. In August of
2005, Dune became the 100% owner  of Vaquero Partners, LLC as a result of the redemption
by Vaquero Partners, LLC  of VOG's 15% membership interest.

Dune signed new
Employment Agreements with Alan Gaines (CEO) and Amiel David  (President/COO). Each of
the agreements is for an initial term of twenty five  (25) months, commencing May 12,
2005 and expiring on June 30, 2007. The  agreements provide for base salaries as follows:
Mr. Gaines - $400,000 for the  first thirteen (13) months and $460,000 for the next
twelve (12) months; Dr.  David - $300,000 for the first thirteen (13) months and $330,000
for the next  twelve (12) months. Mr. Gaines' agreement provides that for each of the 12
months ended June 30, 2006 and 2007, he will be entitled to receive a  performance bonus
equal to one percent (1%) of Dune's "free cash flow" (defined  as Dune's
earnings before depreciation, depletion, amortization and capital  expenditures) up to $8
million and two percent

F-13



---

(2%) of free
cash flow above $8  million. Dr. David shall be entitled to receive a performance bonus
equal to  three quarters of one percent (.75%) of Dune's "free cash flow" up to
$8 million  and one and one half percent (1.5%) of free cash flow above $8 million. The
agreements provide that in the event Mr. Gaines or Dr. David are terminated  without
"cause" (as defined in the agreements), they are to receive a severance
payment equal to the greater of (i) twelve (12) months base salary and (ii)  their base
salary for the remainder of the term. Each agreement contains  covenants restricting each
of the foregoing officers from participating in any  business which is then engaged in
the drilling, exploration or production of  natural gas or oil, within the area
contemplated by that certain Area of Mutual  Interest Agreement dated November 17, 2003
between Dune and VOG. In connection  with their extensions, Dune granted stock options to
Mr. Gaines and Dr. David to  acquire 625,000 and 500,000 shares of Dune's common stock,
respectively. Of the  625,000 options granted to Mr. Gaines, 250,000 vested immediately,
with an  additional 250,000 and 125,000 vesting on each of the next two anniversary
dates. Of the 500,000 options granted to Dr. David, 250,000 vested immediately  and
250,000 vest on the first anniversary date.

On April 4,
2005, Dune entered into an Employment Agreement with Hugh Idstein to  serve as the
Company's Chief Financial Officer. The agreement was for an initial  term of one year and
provides for a base salary of $135,000 per annum. In  addition, upon completion of the
initial term, Mr. Idstein will receive a  guaranteed bonus of $20,250 and will be
eligible for a discretionary performance  bonus up to an additional $20,250. The
Agreement provides that in the event Mr.  Idstein is terminated without "cause"
(as defined in the Agreement), he will  receive a severance payment equal to six (6)
months base salary. His agreement  also contains covenants restricting him from
participating in any business which  is then engaged in the drilling, exploration or
production of natural gas or  oil, within the area contemplated by that certain Area of
Mutual Interest  Agreement dated November 17, 2003 between Dune and Vaquero Oil & Gas,
Inc.

In September
2005, Dune amended the lease for office space in Houston, Texas to  expand its space to
4,197 square feet. The monthly rent is now $6,645 per month  and expires June 1, 2009.

NOTE 11 
INCOME TAXES

The tax effect
of temporary differences that give rise to significant portions  of the deferred tax
assets and deferred tax liabilities at December 31, 2005 and  2004 are as follows:

|                                |  |  | 2005 |            | 2004 |  
|------------------------------- |  |  | ---- | ---------- | ---- | -
|Federal
      income taxes:     |  |  |      |            |      |  
|Current                         |  |  | $    |           |      | $
|Deferred                        |  |  |      | 1,738,659  |      |  
|Less:
      Valuation allowance |  |  |      | (1,738,659 | )    |  
|                                |  |  |      |            |      |  
|Total                           |  |  | $    |           |      | $
|                                |  |  |      |            |      |  

Dune had net
operating loss carryforwards of approximately $5,113,703 as of  December 31, 2005.
Available carryforwards expire 15 to 20 years from when  incurred.

NOTE 12 
SUBSEQUENT EVENTS

On February 1,
2006, Dune sold a total of 9,000,000 shares of our common stock  at a price of $2.65 per
share in a private equity offering. Gross proceeds  raised in the offering were
$23,850,000. From the gross proceeds, Dune paid the  investment bankers a placement agent
fee of $1,192,500 (5% of the gross  proceeds) and a financial advisory fee of $477,000
(2% of the gross proceeds).  Dune also issued a warrant exercisable for up to 900,000
shares its common stock  at an exercise price of $2.65 per share.

F-14



---

NOTE 13 
SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)

Capitalized
Costs

Capitalized
costs incurred in property acquisition, exploration and development  activities as of
December 31, 2005 are as follows:

|Total
      capitalized costs     |  |  | $ | 51,766,651 |  
|--------------------------------- |  |  | - | ---------- | -
|Less:
      Accumulated depletion |  |  |   | (982,240   | )
|                                  |  |  |   |           
|Net capitalized
      costs       |  |  | $ | 50,784,411 |  
|                                  |  |  |   |           

Costs incurred
for property acquisition, exploration and development activities  for the year ended
December 31, 2005 are as follows:

|Acquisition
      of properties:             |  |  |   |            | 
|-------------------------------------------- |  |  | - | ---------- | 
|Proved                                       |  |  | $ | 5,010,468  | 
|Unproved                                     |  |  |   | 24,520,637 | 
|Exploration
      and development activities |  |  |   | 14,373,676 | 
|                                             |  |  |   |           
|Total
      Costs                            |  |  | $ | 43,904,781 | 
|                                             |  |  |   |           

Oil and Reserve
Data

An independent
petroleum engineer estimated proved developed and undeveloped  reserves for Dune's
properties. Reserve definitions and pricing requirements  prescribed by the Securities
and Exchange Commission were used. The  determination of oil and gas reserve quantities
involves numerous estimates  which are highly complex and interpretive. The estimates are
subject to  continuing re-evaluation and reserve quantities may change as additional
information becomes available. Estimated value of proved reserves was computed  by
applying prices in effect at December 31, 2005. The average price used was  $59.29 per
barrel of oil at $9.49 per mcf of gas.

|                                                |  |  |  | 2005                 |   |  | 2004                |  
|----------------------------------------------- |  |  |  | -------------------- | - |  | ------------------- | -
|                                                |  |  |  |                      |   |  |                     |  
|                                                |  |  |  | Oil 
        (Mbbls) |   |  | Gas 
        (Mmcf) |  
|                                                |  |  |  |                      |   |  |                     |  
|Proved
      developed and undeveloped reserves |  |  |  |                      |   |  |                     |  
|Beginning
      of year                         |  |  |  | 1,309                |   |  | 5,534               |  
|Purchases                                       |  |  |  | 75                   |   |  | 18,307              |  
|Discoveries
      and extensions                |  |  |  |                     |   |  |                    |  
|Improved
      recovery                         |  |  |  |                     |   |  |                    |  
|Revisions
      of previous estimates           |  |  |  | (794                 | ) |  | 2,570               |  
|Production                                      |  |  |  | (12                  | ) |  | (364                | )
|                                                |  |  |  |                      |   |  |                     |  
|End
      of year                               |  |  |  | 578                  |   |  | 26,047              |  
|                                                |  |  |  |                      |   |  |                     |  
|                                                |  |  |  |                      |   |  |                     |  
|Proved
      developed reserves:                |  | 
|Beginning
      of year                         |  |  |  | 3                    |   |  | 965                 |  
|End
      of year                               |  |  |  | 131                  |   |  | 5,432               |  

F-15



---

Standardized
measure of discounted future net cash flows are as follows:

|                                                               |  |  | Year Ended December 31, |        
|-------------------------------------------------------------- |  |  | ----------------------- | -------
|                                                               |  |  | 2005                    |        
|                                                               |  |  |                         |        
|                                                               |  |  | (In
        Thousands)  |        
|                                                               |  |  |                         |        
|Future
      cash inflows                                      |  |  | $                       | 281,497
|Future
      production costs                                  |  |  |                         | 57,336 
|Future
      development costs                                 |  |  |                         | 46,266 
|Future
      income tax expense                                |  |  |                         | 34,285 
|                                                               |  |  |                         |        
|Future
      gross cash flows                                  |  |  |                         | 143,611
|Less:
      10% annual discount of                             |  | 
|estimated
      timing of cash flows                           |  |  |                         | (48,135
|                                                               |  |  |                         |        
|Standardized
      measure of discounted future net cash flows |  | 
|relating
      to proved oil and gas reserves                  |  |  | $                       | 95,476 
|                                                               |  |  |                         |        

The following
reconciles the change in the standardized measure for discounted future net cash flows
as of the years ended:

|                                                             |  |  | 2005                   |         | 2004 |  
|------------------------------------------------------------ |  |  | ---------------------- | ------- | ---- | -
|                                                             |  |  |                        |         |      |  
|                                                             |  |  | (In
        Thousands) |        
|                                                             |  |  |                        |        
|Beginning
      of year                                      |  |  | $                      | 37,190  |      | $
|Sales
      of oil and gas produced, net of production costs |  |  |                        | (3,005  | )    |  
|Net
      changes in prices and production costs             |  |  |                        | 18,836  |      |  
|Improved
      recovery, less related costs                  |  |  |                        |        |      |  
|Net
      changes in estimated future development costs      |  |  |                        | (2,947  | )    |  
|Revisions                                                    |  |  |                        | (10,347 | )    |  
|Purchase
      of reserves                                   |  |  |                        | 48,326  |      |  
|Net
      change in timing                                   |  |  |                        | (2,130  | )    |  
|Accretion
      discount                                     |  |  |                        | 3,719   |      |  
|Future
      income tax expense                              |  |  |                        | 5,834   |      |  
|                                                             |  |  |                        |         |      |  
|End of
      year                                            |  |  | $                      | 95,476  |      | $
|                                                             |  |  |                        |         |      |  

F-16



---

Item 8.
Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure.

None.

Item 8A.
Controls and Procedures.

Within
the 90 days prior to the date of this  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
our disclosure  controls and procedures pursuant to Exchange Act Rule  13a-14. Based upon
the evaluation, our Chief Executive  Officer and Chief Financial Officer concluded that
our  disclosure controls are effective in timely alerting them to  material information
relating to us, required to be included  in our periodic SEC filings. There have been no
significant  changes in our internal controls or in other factors which  could
significantly affect internal controls subsequent to  the date we conducted our
evaluation.

PART III

Item 9.
Directors, Executive Officers, Promoters and  Control Persons; Compliance with Section
16(a)  of the Exchange Act.

The
following  table  sets  forth  information  with  respect to our directors and executive
officers.

|Name                                                                                                                                                                                                          |  | Age                                                                                                |  | Position                                                                                                                                                                      
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                              |  |                                                                                                    |  |                                                                                                                                                                               
|Alan Gaines 
      Amiel David 
      Hugh Idstein 

      Richard M. Cohen 
      Steven Barrenechea 
      Valery G. Otchertsov 
      Raissa S. Frenkel 
      Steven M. Sisselman 
    Marshall Lynn Bass |  | 50 
        66 
        47 
        54 
        46 
        59 
        44 
        46 
        36 |  | Chairman and Chief Executive Officer 
President and Chief Operating Officer 
Chief Financial Officer 
Director and Secretary 
Director 
Director 
Director 
Director 
Director

Alan
Gainesis the Chairman and Chief Executive  Officer of the Company and has served as a
Director of the  Company since May 2001. For the past five years, Mr. Gaines  has served
as President and CEO of Proton Capital LLC, a  privately held merchant and investment
banking firm.  Since  April 2005, Mr. Gaines has served as Vice Chairman of  Baseline Oil
& Gas Corp., a public company.  In 1983, Mr.  Gaines founded Gaines, Berland Inc., a
full service  brokerage firm and investment bank specializing in global  energy markets,
with particular emphasis given to small to  mid-capitalization exploration and
production, pipeline,  midstream, and oilfield services companies. Mr. Gaines  served as
President of Gaines, Berland from 1983 to 1998.  Mr. Gaines holds a BBA in Finance from
Baruch College, and  an MBA ("With Distinction") from the Zarb School, Hofstra
University School of Management.

Amiel
Davidhas served as the President/Chief  Operating Officer of the Company since February
2004 and has  over 35 years of engineering and investment banking  experience within the
energy sector.  From 1993 - 2001, he  was the Senior Vice President and Chief Engineer
for the  First City Bank and later First Union Securities (Wachovia  Bank) where he was
responsible for the technical viability  of in excess of $3.5 billion of energy credits.
From 2001  through 2003, Dr. David was the Managing Director, Senior  Vice President and
Chief Engineer of Duke Capital Partners.  Dr. David holds a PhD in Petroleum Engineering
from Stanford  University and an MBA from The University of Pittsburgh.

Hugh
Idstein has served as the Chief Financial  Officer of the Company since April 4, 2005.
Prior to  joining our Company, Mr. Idstein served as CFO of Houston

24



---

based Black
Stone Minerals Company, L.P., an oil and gas  mineral exploration company.  In addition
Mr. Idstein has  acted as a consultant for several oil and gas companies  regarding
international oil and gas opportunities.  He  earned an MBA and a BS in Energy Management
from Eastern  Illinois University.

Richard
  M. Cohenhas served as a Director of the Company since December 2003. Since 1996, Mr.
  Cohen has been the President of Richard M. Cohen Consultants, a private financial
  services consulting company that assists both public and private companies with
  their corporate governance and corporate finance needs. In 1999, Mr. Cohen was
  the President of National Auto Credit, a publicly traded sub-prime auto finance
  company. From 1992-1995, Mr. Cohen was the President of General Media Inc.,
  a publicly reporting international diversified publishing and communications
  company. Mr. Cohen is a Certified Public Accountant and worked at Arthur Andersen
  & Co. from 1975 to 1977. He received a BS ("With Honors") from
  The University of Pennsylvania (Wharton) and an MBA from Stanford University.

Steven
  Barrenechea has served as a Director of the Company since May 2001. Mr.
  Barrenechea is COO of Coast to Coast Catering Company, an upscale catering service.
  From April 2005 to January 2006, Mr. Barrenechea served as a Director of Baseline
  Oil & Gas Corp., a public company. Mr. Barrenechea is a member of the Board
  of Directors of the Creative Coalition, The Milford (Connecticut) Red Cross,
  and The Child Guidance Center of Fairfield County. Mr. Barrenechea holds a BBA
  from New York University.

Valery
  Otchertsov has served as a Director of our Company since May 2004. Since
  1999, Mr. Otchertsov has held the position of President of Itera Holding Ltd
  and since 2003 Chairman of the Management Board of Itera Oil and Gas Company
  Ltd. (Itera). Itera's operating entities are engaged in the business of production,
  transportation, marketing and sales of natural gas throughout the Former Soviet
  Union. From 1997 -1999, Mr. Otchertsov served as First Vice-President of Itera
  International Group of Companies. From 1991 -1996, Mr. Otchertsov served as
  Minister of Economics and Finance, Deputy Chairman of the Cabinet of Ministers
  of Turkmenistan. He graduated with a Bachelors degree from Izhevsk Mechanical
  Institute.

Raissa
  Frenkelhas served as a Director of our Company since May 2004. Dr. Frenkel
  has been a member of the Board of Directors of the Itera Oil and Gas Company
  Ltd (Itera) since 2002. Itera's operating entities are engaged in the business
  of production, transportation, marketing and sales of natural gas throughout
  the Former Soviet Union. Since 2003, Dr. Frenkel has been Executive Vice-President
  of Itera International Energy Corp. an Itera subsidiary operating in the US
  gas, real estate and commodity business. From 1994-2002 Dr. Frenkel was a Vice-President
  with Itera International Energy Corp. She graduated from the Kazan Finance and
  Economics Institute in 1982 and received her PHD from Kazan State University
  in 1989.

Steven
  Sisselman has served as a Director of our Company since May 2004. From 1995
  to the present, Mr. Sisselman has been a Vice-President of Business Development
  with Itera International Energy Corp., an Itera subsidiary operating in the
  US gas, real estate and commodity business. From 1992-1994, Mr. Sisselman was
  Vice-President of Dalon Inc., a petroleum trading company, responsible for trading
  crude oil and petroleum products from the former Soviet Union. For the 12 years
  prior to 1992, Mr. Sisselman was employed by Charter Oil Company, UBS AG, and
  Astra Oil working in various financial and trading positions both in the US
  and London, England. He graduated from University of Florida in 1980 with a
  BS in Business Administration with a major in Finance

Marshall
  Lynn Bass has served as a Director of our Company and a member of the Company's
  audit committee since September 29, 2004. From 1998 to December 2001, he served
  as an associate, and from 2002 to present, he served as a principal of Weisser,
  Johnson & Co., a Houston based energy investment bank. He is also a principal
  and co-founder of GasRock Capital, LLC, a finance company which makes direct
  investments in energy companies or projects. He graduated from Purdue University
  in 1992 with a BS in economics and from Rice University with a Masters in business
  administration.

25



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The Audit
Committee

Messrs.
Bass and Barrenechea constitute the Audit  Committee of our Board of Directors,
established by the  Board in accordance with Section 3(a)(58)(A) of the Exchange  Act,
for the purpose of overseeing our accounting and  financial reporting processes and the
audits of our  financial statements.

Section
16(a) Beneficial Ownership Reporting Compliance

Section
16(a) of the Securities Exchange Act of  1934 requires our directors, executive officers
and  beneficial owners of more than 10% of our Common Stock to  file with the SEC reports
of their holdings of, and  transactions in, our Common Stock.  Based solely upon our
review of copies of such reports and written representations  from reporting persons that
were provided to us, we believe  that our officers, directors and 10% stockholders
complied  with these reporting requirements with respect to 2005,  except that a Form 4
for Amiel David, reporting a stock  option grant as of February 15, 2005, was
inadvertently  filed late on April 7, 2005.

Code of
Ethics

The
Company has adopted a written code of ethics  that applies to the Companys
principal executive officer,  principal financial officer, principal accounting officer
and any persons performing similar functions. The Company  will provide a copy of its
code of ethics to any person  without charge upon written request addressed to Dune
Energy, Inc., 3050 Post Oak Blvd., Suite 695, Houston, Texas  77056.

26



---

Item 10.
Executive Compensation.

The
following  table  shows for fiscal  years  ended  December  31,  2005,  2004  and  2003,
respectively,  certain  compensation  which  we  awarded  or paid  to,  or  which  was
earned from us by, our executive officers  (collectively,  the  Named Executive
Officers).

|Summary
      Compensation Table            
|--------------------------------------------
|                                            
|                                            
|                                            
|Name
        and 
        Principal Position
|Alan
      Gaines,                          
|Chairman
      and Chief                    
|Executive
      Officer                     
|                                            
|Amiel
      David,                          
|President
      and Chief                   
|Operating
      Officer                     
|                                            
|Hugh
      Idstein,                         
|Chief
      Financial Officer               
|                                            

|(1) |  | Includes
salary for January 2006 paid in 2005.
|--- |  | ----------------------------------------------

|(2) |  | Represents
amounts  paid by the  Company  for health  insurance premiums.
|--- |  | -------------------------------------------------------------------------

|(3) |  | Consist
of  stock  options  to  purchase  shares  of  Common Stock,  the vesting  schedule and
other terms  of  which  are set  forth  in the  footnotes  to the  table  below  under
the  caption  Option  Grants In  Last Fiscal Year (2005).
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

27



---

Option
Grants in Last Fiscal Year

As
set forth in the following table, during 2005 we  granted the following stock options to
the Named Executive  Officers:

Option
Grants In Last Fiscal Year (2005)

|              |  | Year |  | Number of
        Securities
        Underlying
        Options 
        Granted |     |  | % of 
        Total Options
        Granted to 
        Employees in 
        Fiscal Year |   | Exercise
        Price |       | Expiration
        Date |         
|------------- |  | ---- |  | -------------------------------------------------------------------------------- | --- |  | ----------------------------------------------------------------------------------------- | - | ---------------------- | ----- | ----------------------- | --------
|              |  |      |  |                                                                                  |     |  |                                                                                           |   |                        |       |                         |         
|Alan Gaines   |  | 2005 |  | 625,000                                                                          | (1) |  | 34.8                                                                                      | % |                        | $2.44 |                         | 5/12/10 
|Amiel David   |  | 2005 |  | 750,000                                                                          | (2) |  | 41.8                                                                                      | % |                        | $2.02 |                         | 5/12/10 
|Hugh Idstein  |  | 2005 |  | 75,000                                                                           | (3) |  | 4.2                                                                                       | % |                        | $2.56 |                         | 4/4/10  
|Richard Cohen |  | 2005 |  | 50,000                                                                           | (4) |  | 2.8                                                                                       | % |                        | $2.35 |                         | 10/28/10

---

|1. |  | Of
the 625,000 options, options to purchase 250,000  shares of Common Stock vested as of the
date of  grant (May 12, 2005) and options to purchase  250,000 shares and 125,000 shares,
respectively, will vest on each of the first  two anniversaries of May 12, 2005.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. |  | The
exercise price of $2.02 listed in the table  represents the weighted-average exercise
price  of the options held by Dr. David.  On May 12,  2005 options were granted to Dr.
David with a  five-year term, to purchase up to 500,000  shares of Common Stock at $2.44
per share.  Such options vested immediately upon grant as  to 250,000 shares and the
remaining 250,000  shares will vest on May 12, 2006.  Dr. David  also received on
February 15, 2005 options to  purchase 250,000 shares.  Such options are  fully vested,
expire on February 15, 2010 and  have an exercise price off $1.25 per share.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. |  | Mr.
Idstein received options to purchase 75,000  shares at $2.56 per share.  Such options
vested  with respect to 25,000 shares immediately as of  the date of grant (April 4,
2005) and will vest  with respect to 25,000 shares on each of the  first two
anniversaries of April 4, 2005.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. |  | These
options to purchase 50,000 shares will vest  at the time that the issuance of such
options  is approved by our shareholders.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------

28



---

Aggregated
Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values

Option
Value at December 31, 2005

|                    |  |  |  | Number of Securities 
        Underlying Unexercised 
        Options at December 31, 2005 |  |  | Value of 
        Unexercised In-The-Money 
        Options at December 31, 2005 | 
|------------------- |  |  |  | ------------------------------------------------------------------------------------------ |  |  | -------------------------------------------------------------------------------- | 
|                    |  |  |  |                                                                                            |  |  |                                                                                  | 
|                    |  |  |  | Exercisable                                                                                |  |  | Unexercisable                                                                    | 
|                    |  |  |  |                                                                                            |  |  |                                                                                  | 
|Alan
      Gaines   |  |  |  | 250,000                                                                                    |  |  | 375,000                                                                          | 
|Amiel
      David   |  |  |  | 500,000                                                                                    |  |  | 250,000                                                                          | 
|Hugh
      Idstein  |  |  |  | 25,000                                                                                     |  |  | 50,000                                                                           | 
|Richard
      Cohen |  |  |  | 0                                                                                          |  |  | 50,000                                                                           | 

The  last  sale
price  of  the  Common  Stock  was  $2.84  on  December 30, 2005, the last trading day of
2005.

Employment
Agreements

Both
Alan Gaines, our Chairman and CEO, and Amiel  David, our President and COO, entered into
Employment  Agreements with us in May 2005 that extended the term of  their employment
from May 31, 2005 to June 30, 2007.  Per  their respective agreements, Mr. Gaines
receives a base  salary of $400,000 in year one and a base salary of $460,000  in year
two of his contract.  Dr. David receives a base  salary of $300,000 in year one and
$330,000 in year two.  Mr. Gaines' agreement provides that, for the twelve months  ended
June 30, 2006 and 2007, he will be entitled to receive  a performance bonus equal to one
percent (1%) of our "free  cash flow" (defined as our earnings before
depreciation,  depletion, amortization and capital expenditures) up to $8  million and
two percent (2%) of free cash flow above $8  million.  Dr. David shall be entitled to
receive a  performance bonus equal to three quarters of one percent  (.75%) of our
"free cash flow" up to $8 million and one and  one half percent (1.5%) of free
cash flow above $8 million.  The agreements provide that in the event Mr. Gaines or Dr.
David are terminated without "cause" (as defined in the  agreements), they are
to receive a severance payment equal  to the greater of (i) twelve (12) months base
salary and  (ii) their base salary for the remainder of the term.  Each  agreement
contains covenants restricting each of the  foregoing officers from participating in any
business which  is then engaged in the drilling, exploration or production  of natural
gas or oil, within the area contemplated by that  certain Area of Mutual Interest
Agreement, dated November  17, 2003, between us and Voyager. In connection with their
Agreements, we granted stock options to Mr. Gaines and Dr.  David to acquire 625,000 and
500,000 shares of our Common  Stock, respectively.

On
April 4, 2005, we entered into an Employment  Agreement (the "Idstein
Agreement") with Hugh Idstein, to  serve as our Chief Financial Officer.  The
Idstein Agreement  is for an initial term of one year and provides for a base  salary of
$135,000 per annum.  In addition, upon completion  of the initial term, Mr. Idstein will
receive a guaranteed  bonus of $20,250 and will be eligible for a discretionary
performance bonus up to an additional $20,250.  Upon signing  the Idstein Agreement, we
granted a five year stock option  to Mr. Idstein, to purchase up to 75,000 shares of our
Common Stock, at an exercise price of $2.56 per share.  The  option is immediately
exercisable with respect to 25,000  shares.  The option is exercisable for an additional
25,000  shares on each of the first and second anniversary dates of  his

29



---

employment with
us, provided that Mr. Idstein is employed by  us on such dates.  The Idstein Agreement
provides that, in  the event Mr. Idstein is terminated without "cause" (as
defined in the Idstein Agreement), he will receive a  severance payment equal to six (6)
months' base salary.  The  Idstein Agreement also contains covenants restricting Mr.
Idstein from participating in any business which is then  engaged in the drilling,
exploration or production of  natural gas or oil, within the area contemplated by that
certain Area of Mutual Interest Agreement, dated November  17, 2003, between us and
Voyager.

Director
Compensation

Each
of our outside Directors receives $5,000 per  quarter for serving on the Board and $1,000
per quarter for  serving on a committee. Except as set forth above, Directors  are not
compensated in cash for their services but are  reimbursed for out of pocket expenses
incurred in  furtherance of our business. In 2005, we granted stock  options to acquire
up to 50,000 shares of Common Stock to  each of our outside directors and to Mr. Cohen.
Such stock  options were granted on October 28, 2005 and, provided that  we obtain
shareholder approval for the issuance of such  options at our next annual meeting, may be
exercised at any  time prior to October 28, 2010 at an exercise price of $2.35  per share.

30



---

Item 11.
Security Ownership of Certain Beneficial Owners  and Management and Related Stockholder
Matters.

The
following  table sets forth  certain  information  regarding the  beneficial  ownership
of our Common Stock as of  March  15,  2006 by (i) each  person  who,  to our  knowledge,
beneficially  owns  more  than  5% of our  outstanding  Common  Stock;  (ii)  each  of
our  current  directors  and  executive  officers  (titles  are set  forth in
parentheses  next to the  names of  individuals  listed  below);  and  (iii)  all of our
current and executive officers and directors as a group:

|Name
      of 
      Beneficial Owner                 |  | Amount(1)  |                    |  | Percent
        
        of Class
|----------------------------------------------------- |  | ---------- | ------------------ |  | ---------------------------------
|                                                      |  |            |                    |  |                                  
|                                                      |  |            |                    |  |                                  
|Itera
      Holdings BV                               |  | 35,464,397 |                    |  | 59.9                             
|Alan
      Gaines (Chairman and CEO)                  |  | 3,190,501  | (2)                |  | 5.3                              
|Amiel
      David (President and COO)                 |  | 906,250    | (3)(4)             |  | 1.5                              
|Hugh
      Idstein (Chief Financial Officer)          |  | 50,000     | (5)                |  | *                                
|Steven
      Barrenechea (Director)                   |  | 187,500    | (6)                |  | *                                
|Richard
      M. Cohen (Secretary and Director)       |  | 328,385    | (7)                |  | *                                
|Valery
      G. Otchertsov (Director)                 |  | 0          | (7)                |  |                                 
|Raissa
      S. Frenkel (Director)                    |  | 0          | (7)                |  |                                 
|Steven
      M. Sisselman (Director)                  |  | 0          | (7)                |  |                                 
|Marshall
      Lynn Bass (Director)                   |  | 25,000     | (6)(7)             |  | *                                
|All
      Officers & Directors as a Group (9 persons) |  | 4,662,636  | (2)(3)(4)(5)(6)(7) |  | 7.7                              

* Indicates
ownership of less than 1%.

________________

(1)  A  person
is  deemed  to  be  the  beneficial  owner  of  securities  that can be  acquired  by
such  person  within  60  days  from  March  15,  2006.  Each  beneficial  owner's
percentage  ownership is  determined  by assuming that options  that  are  held by such
person  (but  not  held by any  other  person),  and which are exercisable  within 60
days from March  15, 2006, have been exercised.

(2)  Includes
500,000  shares  underlying  a  stock  option  granted May 12, 2005.

(3)  Includes
250,000  shares  underlying  a  stock  option  granted on February 15, 2005.

(4)  Includes
500,000  shares  underlying  a  stock  option  granted May 12, 2005.

(5) Includes
50,000 shares  underlying a stock option granted  on April 4, 2005.

(6) Includes
25,000 shares  underlying a stock option granted  on December 15, 2004.

(7) Excludes
50,000 shares  underlying a stock option granted  on October 28,  2005 that will vest
only upon  approval by our  stockholders at the next annual meeting.

31



---

Item 12.
Certain Relationships and Related Transactions.

Vaquero
Partners and Vaquero Oil & Gas, Inc.  (VOG) entered into an agreement dated
as of August 22,  2003, as subsequently amended on November 17, 2003 and May  18, 2004.
Per this agreement, VOG served as the operator on  our Welder Ranch Property until August
22, 2006.  For its  services, we paid VOG $37,000 during 2005.  Effective August  22,
2005, Vaquero Partners redeemed VOGs 15% membership  interest and we became the
100% owner of Vaquero Partners.

On
November 15, 2004, we entered into a one year  agreement with the Wall Street Group, Inc.
(WSG), to  assist us with investor relations. Pursuant to our agreement  with
WSG, WSG received a monthly fee of $10,000 for the  first three months of its engagement
and received a monthly  fee of $7,500 for each month of service thereafter.
Additionally, on November 15, 2004, we granted WSG options  to acquire up to 133,333
shares of our Common Stock at an  exercise price of $0.75 per share. Such options are
fully  vested and expire on November 15, 2009.  Our agreement with  WSG expired on
November 15, 2005.

We
entered  into a Term Loan  Agreement  dated as of  November  17,  2005  with  our
majority  stockholder,  Itera  Holdings  BV.  Amounts  borrowed  from  Itera  under  the
Term  Loan Agreement are  subordinated to all obligations  under our  Credit  Agreement
and Swap  Agreement  with  Standard and are  evidenced by a  Convertible  Subordinated
Note.  See Item 6  Debt Financings.

32



---

Item 13.
Exhibits.

| | Exhibit
      Nos. |  | 
| | ------------------ |  | 
| |                    |  | 

| | 3.1 |  | Amended and
      Restated Certificate of Incorporation (1)
| | --- |  | -----------------------------------------------------------

| | 3.1.1 |  | Certificate
      of Designation for Series A Convertible Preferred Stock (2)
| | ----- |  | -----------------------------------------------------------------------------

| | 3.2 |  | Amended and
      Restated By-Laws (3)
| | --- |  | --------------------------------------

| | 4.1 |  | Form of Convertible
      Subordinated Note, issued November 17, 2005, from the Registrant to
      Itera Holdings BV (12)
| | --- |  | --------------------------------------------------------------------------------------------------------------------------

| | 4.2 |  | Form of Placement
      Agent Warrant
| | --- |  | -------------------------------------

| | 4.3 |  | Form of Investor
      Registration Rights Agreement
| | --- |  | ----------------------------------------------------

| | 10.1 |  | Oil and Gas
      Lease and Option Agreement dated as of August 22, 2003 between the Registrant
      and the Lessors named therein with respect to the Welder property (1)
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.1.1 |  | Amendment to
      the First Welder Lease Agreement dated February 5, 2004 (4)
| | ------ |  | ------------------------------------------------------------------------------

| | 10.1.2 |  | Second Amendment
      to the First Welder Lease Agreement dated April 8, 2004 (5)
| | ------ |  | ----------------------------------------------------------------------------------

| | 10.1.3 |  | Amendment
to First  Welder  Lease  Agreement  dated  February 5,  2004 (5)
| | ------ |  | --------------------------------------------------------------------------

| | 10.2 |  | Agreement dated
      as of October 30, 2003 between the Registrant and Penroc Oil Corporation
      with respect to Los Mogotes (1)
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------

| | 10.2.1 |  | Closing Agreement
      with Penroc (7)
| | ------ |  | ---------------------------------------

| | 10.2.2 |  | Assignment,
      Conveyance and Bill of Sale with respect to Los Mogotes (7)
| | ------ |  | -----------------------------------------------------------------------------

| | 10.3 |  | Agreement dated
      as of September 26, 2003 between the Registrant and Seitel Data, Ltd. with
      respect to 3-D seismic data (1)
| | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------

| | 10.3.1 |  | Amendment to
      Seitel Agreement dated December 28, 2003 (4)
| | ------ |  | ---------------------------------------------------------------

| | 10.4   |  | Agreement dated
      as of August 22, 2003 by and among Vaquero Partners LLC, Vaquero Oil &
      Gas, Inc., and the Registrant (1)                                                                                   
| | ------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.4.1 |  | Amendment dated November
      17, 2003 to Agreement between Vaquero Partners LLC, Vaquero Oil & Gas,
      Inc., and the Registrant (4)                                                                               
| | 10.4.2 |  | Amendment dated May
      18, 2004 to Agreement between Vaquero Partners LLC, Vaquero Oil & Gas,
      Inc., and the Registrant (7)                                                                                    
| | 10.5   |  | Area of Mutual Interest
      Agreement dated November 17, 2003 between the Registrant and Vaquero Oil
      & Gas, Inc. (4)                                                                                           
| | 10.6   |  | Employment Agreement
      dated as of April 4, 2005 between the Registrant and Hugh Idstein (8)                                                                                                                       
| | 10.7   |  | Employment Agreement
      dated as of May 12, 2005 between the Registrant and Alan Gaines (9)                                                                                                                         
| | 10.8   |  | Employment Agreement
      dated as of May 12, 2005 between the Registrant and Amiel David (9)                                                                                                                         
| | 10.9   |  | Amended and Restated
      Asset Purchase and Sale Agreement between Voyager Partners, Ltd. and the
      Registrant, dated November 4, 2005 (10)                                                                      
| | 10.10  |  | Exploration and Development
      Agreement between Registrant and American Natural Energy Corporation, dated
      effective as of August 26, 2005 (11)                                                               
| | 10.11  |  | Credit Agreement,
      dated November 17, 2005, among Registrant, Standard Bank PLC, Standard Americas
      Inc. as Collateral Agent, and Standard Americas Inc. as Sole Lead Arranger
      and Sole Bookrunner (12)
| | 10.12  |  | Term Loan Agreement,
      dated November 17, 2005, between Registrant and Itera Holdings BV (12)                                                                                                                      
| | 21.1*  |  | List of Subsidiaries                                                                                                                                                                                                   
| | 31.1*  |  | Certification of Chief
      Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                               
| | 31.2*  |  | Certification of Chief
      Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                               
| | 32.1*  |  | Certification pursuant
      to 18 U.S.C. 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002, by Chief Executive Officer                                                                    

33



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| | Exhibit
      Nos. |  | 
| | ------------------ |  | 
| |                    |  | 

| | 32.2* |  | Certification
      pursuant to 18 U.S.C. 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002, by Chief Financial Officer
| | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | 99.1* |  | Reserve Report
      Of Independent Engineer
| | ----- |  | --------------------------------------------

* Indicates
filed herewith

(1)  Previously
filed as an exhibit to the Registrants  10-KSB for the year ended December 31,
2002, and  incorporated by reference herein.

(2)  Previously
filed as an exhibit to the Registrants  10-QSB for the quarter ended June 30, 2004,
and incorporated  by reference herein.

(3)  Previously
filed as an exhibit to the Registrants  Report on Form 8-K, filed on May 19, 2004,
and incorporated  by reference herein.

(4)  Previously
filed as an exhibit to the Registrants  10-KSB for the year ended December 31,
2003, and  incorporated by reference herein.

(5)  Previously
filed as an exhibit to the Registrants  Report on Form 8-K, filed on April 20,
2004, and  incorporated by reference herein.

(6)  Previously
filed as an exhibit to the Registrants  Report on Form 8-K, filed on September 8,
2004, and  incorporated by reference herein.

(7)  Previously
filed as an exhibit to the Registrants  Report on Form 8-K, filed on June 3, 2004,
and incorporated  by reference herein.

(8)  Previously
filed as an exhibit to the Registrants  Report on Form 8-K, filed on April 7, 2005,
and incorporated  by reference herein.

(9)  Previously
filed as an exhibit to the Registrants  10-QSB for the quarter ended March 31,
2005, and  incorporated by reference herein.

(10)
Previously filed as an exhibit to the Registrants  Report on Form 8-K, filed on
November 7, 2005, and  incorporated by reference herein.

(11)
Previously filed as an exhibit to the Registrants  Report on Form 8-K, filed on
October 24, 2005, and  incorporated by reference herein.

(12)
Previously filed as an exhibit to the Registrants  Report on Form 8-K, filed on
November 21, 2005, and  incorporated by reference herein.

34



---

Item 14.
Principal Accountant Fees and Services.

During
fiscal year 2005 and fiscal year 2004, the  aggregate fees which we paid to Malone & Bailey,
PC, our  independent auditors, for professional services were as  follows:

|                         |  |   | Fiscal Year Ended         | 
|------------------------ |  | - | ------------------------- | 
|                         |  |   | December
        31, 2005 | 
|Audit
      Fees (1)     |  | $ | 62,000                    | 
|Audit-Related
      Fees |  |   | N/A                       | 
|Tax Fees
      (2)       |  | $ | 9,000                     | 
|All Other
      Fees     |  |   | N/A                       | 

|(1) |  | Fees
for  audit  services  include  fees  associated  with the  annual  audit  and the  review
of our  quarterly reports on Form 10-QSB.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Consist
primarily of professional  services rendered  for tax compliance, tax advice and tax
planning.
|--- |  | ------------------------------------------------------------------------------------------------------

Audit
Committee  Pre-Approval  of Audit and  Permissible  Non-Audit  Services  of  Independent
Registered  Public  Accounting Firm.

As
required  by the  Audit  Committee  charter,  the  Audit Committee  pre-approves  the
engagement of Malone & Bailey,  PC  for  all  audit  and  permissible  non-audit
services.  The  Audit  Committee  annually  reviews  the  audit and  permissible
non-audit  services  performed by  Malone & Bailey,  PC, and reviews and  approves
the fees  charged by Malone & Bailey,  PC The Audit  Committee  has  considered  the
role of Malone & Bailey,  PC in providing  tax and audit  services and other
permissible  non-audit  services to us and has  concluded  that the  provision of  such
services was  compatible  with the  maintenance  of  Malone & Bailey,  PCs
independence in the conduct of its  auditing functions.

35



---

SIGNATURES

In
accordance with Section 13 or 15(d) of the  Exchange Act, the registrant has duly caused
this report to  be signed on its behalf by the undersigned, thereunto duly  authorized.

|                     | DUNE ENERGY,
      INC.
|-------------------- | -----------------------
|                     |                        
|                     |                        
|Date: March 30, 2006 | By:                    
|                     |                        
|                     | Name:                  
|                     | Title:                 

In
accordance with the Exchange Act, this report  has been signed below by the following
persons on behalf of  the registrant and in the capacities and on the dates  indicated.

|Signature                                   | Date                
|------------------------------------------- | --------------------
|                                            |                     
|/s/ Alan Gaines                             | March 30, 2006      
|                                            |                     
|Alan
      Gaines                           |                     
|Chairman
      and Chief Executive Officer  |                     
|                                            |                     
|                                            |                     
|/s/ Hugh Idstein                            | March 30, 2006      
|                                            |                     
|Hugh
      Idstein                          |                     
|Chief
      Financial Officer               |                     
|                                            |                     
|                                            |                     
|/s/ Amiel David                             | March 30, 2006      
|                                            |                     
|Amiel
      David                           |                     
|President
      and Chief Operating Officer |                     
|                                            |                     
|                                            |                     
|/s/ Richard M. Cohen                        | March 30, 2006      
|                                            |                     
|Richard
      M. Cohen                      |                     
|Director
      and Secretary                |                     
|                                            |                     
|                                            |                     
|/s/ Steven Barrenechea                      | March 30, 2006      
|                                            |                     
|Steven
      Barrenechea                    |                     
|Director                                    |                     
|                                            |                     
|                                            |                     
|/s/
      Valery G. Otchertsov              | March
      30, 2006
|                                            |                     
|Valery
      G. Otchertsov                  |                     
|Director                                    |                     
|                                            |                     
|                                            |                     
|/s/
      Raissa S. Frenkel                 | March
      30, 2006
|                                            |                     
|Raissa
      S. Frenkel                     |                     
|Director                                    |                     
|                                            |                     
|                                            |                     
|/s/
      Steven M. Sisselman               | March
      30, 2006
|                                            |                     
|Steven
      M. Sisselman                   |                     
|Director                                    |                     
|                                            |                     
|                                            |                     
|/s/
      Marshall Lynn Bass                | March
      30, 2006
|                                            |                     
|Marshall
      Lynn Bass                    |                     
|Director                                    |                     

36



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