# United States Securities and
Exchange Commission Washington, D. C. 20549

# Form 10-Q

|(Mark one) |                                                                                                                                          
|---------- | -----------------------------------------------------------------------------------------------------------------------------------------
|[ X ]      | Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2004           
|[     ]    | Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934For the Transition Period from .......... to ..........

Commission File Number .......... 1-12508

MAGNUM HUNTER
RESOURCES, INC. Exact name of registrant as specified in its charter

|Nevada                                                       |  | 87-0462881                     
|------------------------------------------------------------ |  | -------------------------------
|State or other jurisdiction of incorporation or organization |  | IRS employer identification No.

600 East Las Colinas
Blvd., Suite 1100, Irving, Texas 75039Address of principal
executive offices

(972)
401-0752

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes [ X ]    No [     ]

State the number of shares outstanding of each of the issuer's classes of common equity, as of July 23, 2004:  86,755,682.

---

# PART 1 
FINANCIAL INFORMATION

# Item 1. Financial Statements

# MAGNUM HUNTER
RESOURCES, INC. AND SUBSIDIARIES UNAUDITED CONDENSED
CONSOLIDATED BALANCE SHEETS (in thousands of dollars)

|                                                                             | June 30, | December 31,
|---------------------------------------------------------------------------- | -------- | ------------
|
|ASSETS                                                                       |          |             
|Current Assets                                                               |          |             
|                                                                             |          |             
|Cash and cash equivalents                                                    |          |             
|Accounts receivable - trade, net of allowance of $4,348 and $4,331           |          |             
|respectively                                                                 |          |             
|Deferred income taxes, current                                               |          |             
|Deposits                                                                     |          |             
|Land held for sale                                                           |          |             
|Prepaid drilling costs                                                       |          |             
|Other current assets                                                         |          |             
|                                                                             |          |             
|Total Current Assets                                                         |          |             
|Property, Plant, and Equipment                                               |          |             
|Oil and gas properties, full cost method                                     |          |             
|Unproved                                                                     |          |             
|Proved                                                                       |          |             
|Gas processing plants and pipelines                                          |          |             
|Other property                                                               |          |             
|                                                                             |          |             
|Total Property, Plant and Equipment                                          |          |             
|Accumulated depreciation, depletion, amortization and impairment             |          |             
|                                                                             |          |             
|Net Property, Plant and Equipment                                            |          |             
|                                                                             |          |             
|Other Assets                                                                 |          |             
|Deferred financing costs and other                                           |          |             
|Acquisition escrow                                                           |          |             
|Goodwill                                                                     |          |             
|                                                                             |          |             
|Total Assets                                                                 |          |             
|                                                                             |          |             
|LIABILITIES AND STOCKHOLDERS' EQUITY                                         |          |             
|Current Liabilities                                                          |          |             
|                                                                             |          |             
|Trade payables and other current liabilities                                 |          |             
|Accrued interest                                                             |          |             
|Other accrued liabilities                                                    |          |             
|Revenues payable                                                             |          |             
|Suspended revenue payable                                                    |          |             
|Derivative liabilities, current                                              |          |             
|Current maturities of long-term debt                                         |          |             
|                                                                             |          |             
|Total Current Liabilities                                                    |          |             
|Long-Term Liabilities                                                        |          |             
|Long-term debt, less current maturities                                      |          |             
|Asset retirement obligations                                                 |          |             
|Derivative liabilities, non-current                                          |          |             
|Deferred income taxes payable                                                |          |             
|Other non-current liabilities                                                |          |             
|Stockholders' Equity                                                         |          |             
|Preferred stock - $.001 par value; 10,000,000 shares authorized, 216,000     |          |             
|designated as Series A; 80,000 issued and outstanding, liquidation amount $0 |          |             
|Common Stock - $.002 par value; 200,000,000 shares authorized,               |          |             
|88,402,746 and 71,977,759 shares issued, respectively                        |          |             
|Additional paid-in capital                                                   |          |             
|Accumulated other comprehensive loss                                         |          |             
|Retained earnings                                                            |          |             
|Common stock in deferred compensation plan, at cost (34,416 shares)          |          |             
|Unearned common stock in KSOP, at cost (1,012,203 shares)                    |          |             
|                                                                             |          |             
|                                                                             |          |             
|Treasury stock, at cost (3,942,294 shares)                                   |          |             
|                                                                             |          |             
|Total Stockholders' Equity                                                   |          |             
|                                                                             |          |             
|Total Liabilities and Stockholders' Equity                                   |          |             
|                                                                             |          |             

The
accompanying notes are an integral part of these condensed consolidated financial
statements.

---

# MAGNUM HUNTER
RESOURCES, INC. AND SUBSIDIARIES UNAUDITED CONDENSED
CONSOLIDATED STATEMENTS OF INCOME (in thousands, except
for shares and per share amounts)

|                                                                    | Three Months Ended
June 30, | Six Months Ended
June 30,
|------------------------------------------------------------------- | --------------------------- | -------------------------
|
|Operating Revenues:                                                 |                             |                          
|Oil and gas sales                                                   |                             |                          
|Gas gathering, marketing and processing                             |                             |                          
|Oil field services                                                  |                             |                          
|                                                                    |                             |                          
|Total Operating Revenues                                            |                             |                          
|                                                                    |                             |                          
|Operating Costs and Expenses:                                       |                             |                          
|Oil and gas production lifting costs                                |                             |                          
|Production taxes and other costs                                    |                             |                          
|Gas gathering, marketing and processing                             |                             |                          
|Oil field services                                                  |                             |                          
|Depreciation, depletion, amortization and accretion                 |                             |                          
|Loss (Gain) on sale of assets                                       |                             |                          
|General and administrative                                          |                             |                          
|                                                                    |                             |                          
|Total Operating Costs and Expenses                                  |                             |                          
|                                                                    |                             |                          
|Operating Profit                                                    |                             |                          
|Equity in losses of affiliate                                       |                             |                          
|Other income                                                        |                             |                          
|Costs associated with early retirement of debt                      |                             |                          
|Non-cash hedging adjustments                                        |                             |                          
|Interest expense                                                    |                             |                          
|                                                                    |                             |                          
|Income Before Income Tax                                            |                             |                          
|Provision for income tax expense                                    |                             |                          
|Current                                                             |                             |                          
|Deferred                                                            |                             |                          
|                                                                    |                             |                          
|Total Provision for Income Tax Expense                              |                             |                          
|                                                                    |                             |                          
|Income Before Cumulative Effect of a Change in Accounting Principle |                             |                          
|Cumulative effect of a change in accounting principle,              |                             |                          
|net of income tax expense of $244                                   |                             |                          
|                                                                    |                             |                          
|Net Income                                                          |                             |                          
|                                                                    |                             |                          
|Income per Common Share - Basic                                     |                             |                          
|Income before cumulative effect of a change in accounting principle |                             |                          
|Cumulative effect of a change in accounting principle .             |                             |                          
|                                                                    |                             |                          
|Income per Common Share - Basic                                     |                             |                          
|                                                                    |                             |                          
|Income per Common Share - Diluted                                   |                             |                          
|Income before cumulative effect of a change in accounting principle |                             |                          
|Cumulative effect of a change in accounting principle               |                             |                          
|                                                                    |                             |                          
|Income per Common Share - Diluted                                   |                             |                          
|                                                                    |                             |                          
|Common Shares Used in Per Share Calculation                         |                             |                          
|Basic                                                               |                             |                          
|                                                                    |                             |                          
|Diluted                                                             |                             |                          
|                                                                    |                             |                          

The
accompanying notes are an integral part of these condensed consolidated financial
statements.

---

# MAGNUM HUNTER
RESOURCES, INC. AND SUBSIDIARIES UNAUDITED CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME FOR THE SIX MONTHS
ENDED JUNE 30, 2004 (in thousands)

|                                                         | Preferred
Stock | Common
Stock | Treasury
Stock | Additional
Paid in
Capital | Retained
Earnings | Deferred
Compensation | Unearned
Shares in
KSOP | Accumulated
Other
Comprehensive
Income (Loss) | Total
Stockholders'
Equity | Total
Comprehensive
Income (Loss)
|-------------------------------------------------------- | --------------- | ------------ | -------------- | -------------------------- | ----------------- | --------------------- | ----------------------- | --------------------------------------------- | -------------------------- | ---------------------------------
|Balance at December 31, 2003                             |                 |              | $              | 1                          |                   | $                     | 144                     |                                               | $                          | (25,040                          
|Issuance of 1,425 shares of common stock pursuant to     |                 |             
|employee stock option plan                               |                 |              |                |                            |                   |                       | 3                       |                                               |                            |                                  
|Deferred tax benefit on exercise of employee stock       |                 |             
|options                                                  |                 |              |                |                            |                   |                       |                         |                                               |                            |                                  
|Stock compensation                                       |                 |              |                |                            |                   |                       |                         |                                               |                            |                                  
|Issuance of 15,000 shares of common stock pursuant to    |                 |             
|public offering                                          |                 |              |                |                            |                   |                       | 30                      |                                               |                            |                                  
|Net Income                                               |                 |              |                |                            |                   |                       |                         |                                               |                            |                                  
|Reclassification adjustment related to derivative        |                 |             
|contracts, net of income tax expense of $6,580           |                 |              |                |                            |                   |                       |                         |                                               |                            |                                  
|Change in fair value of outstanding hedge positions, net |                 |             
|of income tax benefit of $9,848                          |                 |              |                |                            |                   |                       |                         |                                               |                            |                                  
|Amortization of purchased hedge positions, net of income |                 |             
|tax benefit of $150                                      |                 |              |                |                            |                   |                       |                         |                                               |                            |                                  
|                                                         |                 |              |                |                            |                   |                       |                         |                                               |                            |                                  
|Balance at June 30, 2004                                 |                 |              | $              | 1                          |                   | $                     | 177                     |                                               | $                          | (25,040                          
|                                                         |                 |              |                |                            |                   |                       |                         |                                               |                            |                                  

The
accompanying notes are an integral part of these condensed consolidated financial
statements.

---

# MAGNUM HUNTER
RESOURCES, INC. AND SUBSIDIARIES UNAUDITED CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)

|                                                                              | For the Six Months Ended
June 30,
|----------------------------------------------------------------------------- | ---------------------------------
|
|CASH FLOW FROM OPERATING ACTIVITIES:                                          |                                  
|Net Income                                                                    |                                  
|Adjustments to reconcile net income to cash provided by operating activities: |                                  
|Cumulative effect of a change in accounting principle                         |                                  
|Depreciation, depletion, amortization and accretion                           |                                  
|Amortization of deferred financing costs                                      |                                  
|Costs associated with early retirement of debt                                |                                  
|Deferred income taxes                                                         |                                  
|Equity in losses of unconsolidated affiliate                                  |                                  
|Gain on sale of assets                                                        |                                  
|Minority interest in consolidated subsidiary                                  |                                  
|Non-cash hedging adjustments                                                  |                                  
|Stock compensation                                                            |                                  
|Changes in certain assets and liabilities:                                    |                                  
|Accounts receivable                                                           |                                  
|Deposits and other current assets                                             |                                  
|Accounts payable and accrued liabilities                                      |                                  
|(Payment) refund of income taxes                                              |                                  
|                                                                              |                                  
|Net Cash Provided by Operating Activities                                     |                                  
|                                                                              |                                  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                         |                                  
|Proceeds from sale of assets, net of purchase price adjustments               |                                  
|Additions to property and equipment                                           |                                  
|Deposit of funds into escrow for pending acquisition of properties            |                                  
|(Increase) decrease in other assets                                           |                                  
|Payment received on note receivable                                           |                                  
|Distribution from unconsolidated affiliate                                    |                                  
|Investment in unconsolidated affiliate                                        |                                  
|                                                                              |                                  
|Net Cash Used in Investing Activities                                         |                                  
|                                                                              |                                  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                         |                                  
|Proceeds from issuance of debt                                                |                                  
|Redemption of notes payable                                                   |                                  
|Fees paid related to financing activities                                     |                                  
|Payments of principal on debt and production payment                          |                                  
|Increase in notes receivable from affiliate                                   |                                  
|Loan made to KSOP                                                             |                                  
|Proceeds from issuance of common stock                                        |                                  
|Proceeds from public offering of common stock                                 |                                  
|Purchase of common stock for deferred compensation plan                       |                                  
|Purchase of treasury stock                                                    |                                  
|Increase in restricted cash for payment of notes payable                      |                                  
|                                                                              |                                  
|Net Cash Provided by (Used in) Financing Activities                           |                                  
|                                                                              |                                  
|NET (DECREASE) INCREASE  IN CASH AND CASH EQUIVALENTS                         |                                  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                              |                                  
|                                                                              |                                  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                    |                                  
|                                                                              |                                  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                             |                                  
|Cash paid for interest                                                        |                                  
|                                                                              |                                  
|                                                                              |                                  
|Cash paid (refunded) for income taxes                                         |                                  
|                                                                              |                                  
|                                                                              |                                  
|Non-cash accruals for employee incentives                                     |                                  
|                                                                              |                                  

The
accompanying notes are an integral part of these condensed consolidated financial
statements.

---

# MAGNUM HUNTER
RESOURCES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the Six Months
Ended June 30, 2004

# NOTE 1 
MANAGEMENTS REPRESENTATION

In this quarterly report on Form
10-Q, the words Magnum Hunter, company, we,
our, and us refer to Magnum Hunter Resources, Inc. and its
consolidated subsidiaries unless otherwise stated or the context otherwise requires. The
condensed consolidated balance sheet of Magnum Hunter Resources, Inc. and subsidiaries as
of June 30, 2004, the condensed consolidated statements of income for the three and six
months ended June 30, 2004 and 2003, the condensed consolidated statement of
stockholders equity and comprehensive income for the six months ended June 30, 2004,
and the condensed consolidated statements of cash flows for the six months ended June 30,
2004 and 2003, are unaudited. The December 31, 2003 condensed consolidated balance sheet
information is derived from audited financial statements. In the opinion of management,
all necessary adjustments (which include only normal recurring adjustments) have been made
to present fairly the financial position at June 30, 2004, and the results of operations
for the three- and six-month periods, changes in stockholders equity for the six
months ended June 30, 2004, and comprehensive income and cash flows for the six-month
periods ended June 30, 2004 and 2003.

Certain information and footnote
disclosures normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have been
condensed or omitted. It is suggested that these condensed financial statements be read in
conjunction with the financial statements and notes thereto included in our December 31,
2003 annual report and in our Form 10-K. The results of operations for the three- and
six-month periods ended June 30, 2004 are not necessarily indicative of the operating
results that will occur for the full year.

The accompanying condensed
consolidated financial statements include the accounts of the company and our
subsidiaries. All significant intercompany transactions and balances have been eliminated
in consolidation. Certain items have been reclassified to conform with the current
presentation.

Magnum Hunter is a holding company
with no significant assets or operations other than our investments in our subsidiaries.
The wholly-owned subsidiaries of the company, except for Canvasback Energy, Inc., Redhead
Energy Inc. and Metrix Networks, Inc., an 80% owned subsidiary of the company,
collectively referred to as Canvasback, are direct guarantors of each of our 9.6% Senior
Notes, our Senior Bank Credit Facility (Facility) and our Floating Rate
Convertible Senior Notes (Convertible Notes), and have fully and
unconditionally guaranteed these obligations on a joint and several basis. The guarantors
comprise all of our direct and indirect subsidiaries (other than Canvasback), and we have
presented separate condensed consolidating financial statements and other disclosures
concerning the guarantors and Canvasback (See Note 10). Except for Canvasback, there is no
restriction on the ability of consolidated or unconsolidated subsidiaries to transfer
funds to the company in the form of loans or advances.

# NOTE 2  NEW
ACCOUNTING STANDARDS

The Financial Accounting Standards
Board (FASB) is currently evaluating an issue involving the classification of
mineral rights. In June 2001, FASB issued Statement of Financial Accounting Standards
(SFAS) No. 141, Business Combinations, which requires the purchase
method of accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. In July 2001, the FASB also issued SFAS No.
142, Goodwill and Other Intangible Assets, which discontinues the practice of
amortizing goodwill and indefinite lived intangible assets and initiates an annual review
of impairment. Intangible assets with a determinable useful life will continue to be
amortized over that period. The amortization provisions apply to goodwill and intangible
assets acquired after June 30, 2001. SFAS No. 141 and 142 clarify that more assets should
be distinguished and classified between tangible and intangible. We did not change or
reclassify contractual mineral rights included in proved and unproved oil and gas
properties on our balance sheet upon adoption of SFAS No. 142. We believe the treatment of
such mineral rights as tangible assets under the full cost method of accounting for oil
and gas properties

---

# MAGNUM HUNTER
RESOURCES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) 
For the Six Months Ended June 30, 2004

is appropriate. An issue has been
raised regarding whether these mineral rights should be classified as tangible or
intangible assets.

FASB has recently issued proposed
FASB Staff Position (FSP) No. 142-b, Application of FASB Statement 142,
Goodwill and Other Intangible Assets, to Oil- and Gas-Producing Entities,
which supports our current accounting treatment of mineral rights. This FSP is expected to
be finalized and issued later this year.

FASB issued FSP FAS 129-1,
Disclosure Requirements Under FASB Statement No. 129, Disclosure of Information
About Capital Structure, in April 2004. This FSP provides additional guidance on
the disclosure requirements of contingently convertible securities. We have made the
required disclosures related to the terms of our Convertible Notes in our Annual Report on
Form 10-K and have provided explanations in Note 6 of this Form 10-Q about the dilutive
effects of these notes on our EPS.

FASBs Emerging Issues Task
Force (EITF) has recently issued a Draft EITF Abstract for EITF Issue No.
04-8, The Effect of Contingently Convertible Debt on Diluted Earnings per
Share, which addresses the issue of when the dilutive effects of contingently
convertible debt instruments should be included in diluted earnings per share. This
guidance would require companies to include the dilutive effect of convertible debt
securities in diluted earnings per share regardless of whether or not the contingent
conversion features have been triggered. Adoption of this guidance would not have an
impact on any of our reported earnings per share because our stock price has not exceeded
the conversion price of our Convertible Notes. The comment period for this draft ends in
September 2004, and, if approved by FASB, would be effective for reporting periods ending
after December 15, 2004.

# NOTE 3 
STOCK-BASED COMPENSATION

Beginning June 1, 2003, and effective
January 1, 2003, we began expensing the fair market value of stock options newly granted,
modified or settled pursuant to SFAS No. 123, Accounting for Stock-Based
Compensation, and as allowed under the prospective method of SFAS No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure, an
amendment to SFAS No. 123. The fair value of each option granted after December 31,
2002 is estimated on the grant date, using the Black-Scholes option-pricing model. For the
three and six months ended June 30, 2004, we recorded pre-tax stock compensation expense
of $18 thousand and $59 thousand, respectively, which is reflected in our general and
administrative expenses. We recorded $433 thousand of pre-tax stock compensation expense
for the three and six months ended June 30, 2003. For options granted prior to January 1,
2003, we continue to use the intrinsic method under APB No. 25, Accounting for Stock
Issued to Employees and Related Interpretations, whereby no compensation expense is
recognized for stock options granted with an exercise price equal to the market value of
our stock on the grant date.

If we had recorded stock option
expense under the fair value provisions of SFAS No. 123 for all prior and current grants,
our net income and EPS would have been as shown in the below pro forma tables (in
thousands):

# MAGNUM HUNTER
RESOURCES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) 
For the Six Months Ended June 30, 2004

|                                             | Three Months Ended
June 30, | Six Months Ended
June 30,
|-------------------------------------------- | --------------------------- | -------------------------
|
|Net income, as reported                      |                             |                          
|                                             |                             |                          
|Total stock-based employee compensation      |                             |                          
|expense included in reported net             |                             |                          
|income, net of income taxes of $7, $164, $22 |                             |                          
|and $164                                     |                             |                          
|                                             |                             |                          
|Deduct:  Total stock-based employee          |                             |                          
|compensation determined under fair           |                             |                          
|value-based method for all awards, net of    |                             |                          
|income taxes of $412, $605, $850 and $1,014  |                             |                          
|                                             |                             |                          
|Pro forma net income                         |                             |                          
|                                             |                             |                          
|Earnings per share:                          |                             |                          
|Basic - as reported                          |                             |                          
|                                             |                             |                          
|Basic - pro forma                            |                             |                          
|                                             |                             |                          
|Diluted - as reported                        |                             |                          
|                                             |                             |                          
|Diluted - pro forma                          |                             |                          
|                                             |                             |                          
|                                             |                             |                          

Exposure Draft No. 1102-100,
Share-Based Payment, an amendment of FASB Statements No. 123 and 95, which was
issued by the FASB on March 31, 2004, may impact our future accounting for stock-based
compensation. If we are required to adopt this amendment in its current form, we would be
required to discontinue the prospective method of expensing stock options which we
currently follow. Under this proposed literature, we would be required to expense all
unvested grants issued prior to January 1, 2003, which would result in higher compensation
costs.

# NOTE 4  GOODWILL

In June 2001, SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets, were issued to be effective for fiscal years beginning after December 15,
2001. Under these statements, goodwill is no longer amortized, but is subject to annual
impairment tests. We completed our annual test as of December 31, 2003 and found no
impairment. There were no changes to the carrying value of goodwill during the six months
ended June 30, 2004.

Our goodwill results from our merger
with Prize Energy Corp. (Prize), which was completed on March 15, 2002, and
the purchase price allocation was finalized as of June 30, 2003. The goodwill has been
fully allocated to our Exploration and Production segment.

# NOTE 5  ASSET
RETIREMENT OBLIGATIONS

Our asset retirement obligations
include plugging, abandonment, decommission and remediation costs, which are included in
developed oil and gas properties, production and distribution facilities and natural gas
processing plants.

The following is a reconciliation of
the asset retirement obligation liability at June 30, 2004 (in thousands):

|Balance at January 1, 2004          |  |  | $ | 32,489 |  
|----------------------------------- |  |  | - | ------ | -
|Liabilities incurred                |  |  |   | 2,033  |  
|Liabilities settled                 |  |  |   | (356   | )
|Liabilities sold                    |  |  |   | (45    | )
|Accretion expense                   |  |  |   | 1,425  |  
|Change in retirement cost estimates |  |  |   | 222    |  
|                                    |  | 
|Balance at June 30, 2004            |  |  | $ | 35,768 |  
|                                    |  | 

---

# MAGNUM HUNTER
RESOURCES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) 
For the Six Months Ended June 30, 2004

# NOTE 6  EARNINGS
PER SHARE INFORMATION

The following is a reconciliation of
the basic and diluted earnings per share computations (in thousands, except for per share
amounts):

|                                     | Three Months Ended
|------------------------------------ | ------------------
|
|
|Basic EPS                            |                   
|Income available to common           |                   
|stockholders                         |                   
|                                     |                   
|Effect of Dilutive Securities        |                   
|Warrants                             |                   
|Options                              |                   
|                                     |                   
|Diluted EPS                          |                   
|Income available to common           |                   
|stockholders and assumed conversions |                   
|                                     |                   

|                                     | Six Months Ended
|------------------------------------ | ----------------
|
|
|Basic EPS                            |                 
|Income available to common           |                 
|stockholders                         |                 
|                                     |                 
|Effect of Dilutive Securities        |                 
|Warrants                             |                 
|Options                              |                 
|                                     |                 
|Diluted EPS                          |                 
|Income available to common           |                 
|stockholders and assumed conversions |                 
|                                     |                 

At June 30, 2004, warrants
representing 7,228,457 shares of common stock and options representing 5,297,077 shares of
common stock were outstanding. At June 30, 2003, warrants representing 7,873,206 shares of
common stock and options representing 6,918,333 shares of common stock were outstanding.
For the three- and six-month periods ended June 30, 2004, 7,228,457 shares of common stock
representing warrants, and 25,000 shares and 35,000 shares of common stock representing
options, respectively, were excluded from the diluted earnings per share calculations
because the exercise price exceeded the average market price of our common stock for these
periods. For the three- and six-month periods ended June 30, 2003, 7,873,206 shares of
common stock representing warrants and 3,108,300 shares and 3,119,200 shares of common
stock representing options, respectively, were excluded from the diluted earnings per
share calculations because the exercise price exceeded the average market price of our
common stock for these periods. There was no dilutive effect from our Convertible Notes at
June 30, 2004, because their conversion price exceeded the average market price of our
common stock.

# NOTE 7  DEBT

Notes payable and long-term debt at
June 30, 2004 and December 31, 2003 consisted of the following (in thousands):

---

# MAGNUM HUNTER
RESOURCES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) 
For the Six Months Ended June 30, 2004

|                                                         | June 30,
2004 | December 31,
2003
|-------------------------------------------------------- | ------------- | -----------------
|Long-Term Debt:                                          |               |                  
|Bank debt under revolving credit agreements, due         |               |                  
|May 2, 2007, 2.4% at June 30, 2004                       |               |                  
|Capital lease obligations                                |               |                  
|9.6% Senior unsecured notes, due March 15, 2012          |               |                  
|Floating rate convertible senior notes, due December 15, |               |                  
|2023, 1.52% at June 30, 2004                             |               |                  
|Production payment liability, non-recourse               |               |                  
|                                                         |               |                  
|                                                         |               |                  
|Less:  Current portion of capital lease obligations      |               |                  
|                                                         |               |                  
|Total Long-Term Debt                                     |               |                  
|                                                         |               |                  

We have a Facility  which  provides for total  borrowings of $500 million,  on which our borrowing base was limited
to $275  million at June 30, 2004.  The level of the  borrowing  base is dependent on the  valuation by the lenders
of the assets pledged, which are primarily oil and gas reserves.

On April 30,  2004,  we amended our  Facility  to receive a more  favorable  rate  structure  and to  increase  the
borrowing  base by $20 million,  up to $275 million.  We also extended the  expiration  date of the Facility by one
year, resulting in a new maturity date of May 2, 2007.

On July 15, 2004,  we amended our  Facility to increase the  borrowing  base to $380  million,  an increase of $105
million,  and to allow us to use proceeds from our secondary  common stock offering to redeem and retire up to $105
million in principal of our 9.6% Senior  Notes  outstanding.  The  amendment  also  increased  the  borrowing  base
another $100 million  upon  consummation  of the New Mexico  property  acquisition  (see Note 12). The $105 million
increase in the borrowing base may be adjusted downward based on the total principal amount of debt redeemed.

On a semi-annual  basis,  our borrowing base under our Facility is redetermined by the financial  institutions  who
have  committed to the company  based on their review of our proved oil and gas reserves and other  assets.  If the
outstanding  senior bank debt exceeds the  redetermined  borrowing  base,  the company must repay the excess.  As a
result of the  redetermination  completed on April 30, 2004, our borrowing  base was increased by $20 million.  The
next  redetermination  date will have an  effective  date of June 30,  2004 and will have a  completion  date of no
later than November 10, 2004.

On July 16, 2004,  we announced  our election to redeem $105 million in principal  amount of our  outstanding  9.6%
Senior  Notes at a  redemption  price of 109.6% of the  principal  amount,  or $115 million plus accrued and unpaid
interest of  approximately  $4.5  million  through the  redemption  date.  We are funding  this  redemption  with a
portion of the proceeds  received from our public offering of common stock as well as the increased  borrowing base
under our Facility.  The redemption will take place on August 27, 2004.

# NOTE 8 - HEDGING

We were  obligated  to eight crude oil  derivatives  and fourteen  natural gas  derivatives  on June 30, 2004.  All
outstanding  derivatives  qualify  for cash flow  hedge  accounting  treatment  as  defined  within  SFAS No.  133,
"Accounting for Derivative  Instruments and Hedging  Activities," which requires  derivative assets and liabilities
to be recorded at their fair value on the balance  sheet with an offset for the  effective  portion of the hedge to
other comprehensive income.  Hedge ineffectiveness on cash-flow hedges is recorded in earnings.

At June 30, 2004, the fair value of the company's derivatives were as follows (in thousands):

---

# MAGNUM HUNTER
RESOURCES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) 
For the Six Months Ended June 30, 2004

|Derivative Assets            |  |  |   |        | 
|---------------------------- |  |  | - | ------ | 
|                             |  | 
|Natural gas collars          |  |  | $ | 623    | 
|Natural gas swaps            |  |  |   | 848    | 
|                             |  | 
|Total derivative assets      |  |  | $ | 1,471  | 
|                             |  | 
|Derivative Liabilities       |  | 
|                             |  | 
|Natural gas collars          |  |  | $ | 25,670 | 
|Natural gas swaps            |  |  |   | 510    | 
|Crude oil collars            |  |  |   | 6,404  | 
|Crude oil swaps              |  |  |   | 463    | 
|                             |  | 
|Total derivative liabilities |  |  | $ | 33,047 | 
|                             |  | 
|Net Derivative Liability     |  |  | $ | 31,576 | 
|                             |  | 

Of the $1.5 million of derivative
assets, $578 thousand is included in other current assets and $893 thousand is included in
other assets on our condensed consolidated balance sheet at June 30, 2004.

For the three- and six-month periods
ended June 30, 2004, the consolidated statement of income includes non-cash hedging
adjustment gains of $370 thousand and $464 thousand, respectively. These gains are
comprised of hedge ineffectiveness gains of $172 thousand and $68 thousand, respectively,
related to the crude oil and natural gas derivatives as well as non-cash gains of $198
thousand and $396 thousand, respectively, related to the amortization of hedge contracts
acquired in the Prize merger. The remaining amortization amount relating to hedge
contracts acquired in the Prize merger that will be reclassified into the consolidated
statement of income in 2004 is a $396 thousand gain. It is estimated at this time that $16
million, net of income tax, of other comprehensive loss will be reclassified into the
consolidated statement of income during the next 12 months.

On July 12, 2004, we terminated a
natural gas collar for 10,000 Mmbtu per day for the period August through December 2004.
In closing this contract we realized a $1.3 million loss, which will be recognized in
earnings with the underlying forecasted commodity sales transactions for the months August
through December 2004. After this contract was terminated, our remaining natural gas
production hedged for July through December 2004 decreased to approximately 86.7 Mmcf/day
with a weighted average floor price of $4.02 and a weighted average ceiling price of
$6.00.

# NOTE 9  SEGMENT
DATA

We have three reportable segments.
The Exploration and Production segment is engaged in exploratory and developmental
drilling and acquisition, production, and sale of crude oil, condensate, and natural gas.
The Gas Gathering, Marketing, and Processing segment is engaged in the gathering and
compression of natural gas from the wellhead, the purchase and resale of natural gas that
it gathers, and the processing of natural gas liquids. The Oil Field Services segment is
engaged in the managing and operation of producing oil and gas properties for interest
owners.

Our reportable segments are strategic
business units that offer different products and services. They are managed separately
because each business requires different technology and marketing strategies. The
Exploration and Production segment has six geographic areas that are aggregated. The Gas
Gathering, Marketing, and Processing segment includes the activities of the three
gathering systems and four natural gas liquids processing plants located in two geographic
areas that are aggregated. The Oil Field Services segment has six geographic areas that
are aggregated. The reason for aggregating the segments, in each case, is due to the
similarity in nature of the products, the production processes, the type of customers, the
method of distribution, and the regulatory environments.

The accounting policies of the
segments are the same as those for the company as a whole. We evaluate performance based
on profit or loss from operations before income taxes. The accounting for intersegment
sales and transfers is done as if the sales or transfers were to third parties  that
is, at current market prices.

---

# MAGNUM HUNTER
RESOURCES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) 
For the Six Months Ended June 30, 2004

Segment data for the periods ended
June 30, 2004 and 2003 follows (in thousands):

|Three Months Ended June 30, 2004:     | Exploration &
Production | Gas Gathering,
Marketing &
Processing | Oil Field
Services | All Other | Elimination | Consolidated
|------------------------------------- | ------------------------ | ------------------------------------- | ------------------ | --------- | ----------- | ------------
|Revenue from external customers       |                          |                                       | $                  | 97,913    |             | $           
|Intersegment revenues                 |                          |                                       |                    | 484       |             |             
|Depreciation, depletion, amortization |                          |                                      
|and accretion                         |                          |                                       |                    | 26,739    |             |             
|Segment profit (loss)                 |                          |                                       |                    | 46,461    |             |             
|Interest expense                      |                          |                                       |                    |           |             |             
|Other income                          |                          |                                       |                    |           |             |             
|                                      |                          |                                       |                    |           |             |             
|Income before income taxes            |                          |                                       |                    |           |             |             
|Provision for income tax expense      |                          |                                       |                    |           |             |             
|                                      |                          |                                       |                    |           |             |             
|Net income                            |                          |                                       |                    |           |             |             
|                                      |                          |                                       |                    |           |             |             

|Three Months Ended June 30, 2003:          | Exploration &
Production | Gas Gathering,
Marketing &
Processing | Oil Field
Services | All Other | Elimination | Consolidated
|------------------------------------------ | ------------------------ | ------------------------------------- | ------------------ | --------- | ----------- | ------------
|Revenue from external customers            |                          |                                       | $                  | 68,470    |             | $           
|Intersegment revenues                      |                          |                                       |                    | 443       |             |             
|Depreciation, depletion, amortization      |                          |                                      
|and accretion                              |                          |                                       |                    | 24,101    |             |             
|Segment profit (loss)                      |                          |                                       |                    | 22,941    |             |             
|Equity in losses of affiliates             |                          |                                       |                    |           |             |             
|Interest expense                           |                          |                                       |                    |           |             |             
|Costs relating to early retirement of debt |                          |                                       |                    |           |             |             
|Other income                               |                          |                                       |                    |           |             |             
|                                           |                          |                                       |                    |           |             |             
|Income before income taxes                 |                          |                                       |                    |           |             |             
|Provision for income tax expense           |                          |                                       |                    |           |             |             
|                                           |                          |                                       |                    |           |             |             
|Net income                                 |                          |                                       |                    |           |             |             
|                                           |                          |                                       |                    |           |             |             

|Six Months Ended June 30, 2004:        | Exploration &
Production | Gas Gathering,
Marketing &
Processing | Oil Field
Services | All Other | Elimination | Consolidated
|-------------------------------------- | ------------------------ | ------------------------------------- | ------------------ | --------- | ----------- | ------------
|Revenue from External customers        |                          |                                       | $                  | 186,730   |             | $           
|Intersegment revenues                  |                          |                                       |                    | 894       |             |             
|Depreciation, depletion, amortization, |                          |                                      
|and accretion                          |                          |                                       |                    | 51,303    |             |             
|Segment profit (loss)                  |                          |                                       |                    | 89,321    |             |             
|Interest expense                       |                          |                                       |                    |           |             |             
|Other income                           |                          |                                       |                    |           |             |             
|                                       |                          |                                       |                    |           |             |             
|Income before income taxes             |                          |                                       |                    |           |             |             
|Provision for income tax expense       |                          |                                       |                    |           |             |             
|                                       |                          |                                       |                    |           |             |             
|Net income                             |                          |                                       |                    |           |             |             
|                                       |                          |                                       |                    |           |             |             
|                                       |                          |                                       |                    |           |             |             

---

# MAGNUM HUNTER
RESOURCES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) 
For the Six Months Ended June 30, 2004

|Six Months Ended June 30, 2003:        | Exploration &
Production | Gas Gathering,
Marketing &
Processing | Oil Field
Services | All Other | Elimination | Consolidated
|-------------------------------------- | ------------------------ | ------------------------------------- | ------------------ | --------- | ----------- | ------------
|Revenue from external customers        |                          |                                       | $                  | 138,060   |             | $           
|Intersegment revenues                  |                          |                                       |                    | 843       |             |             
|Depreciation, depletion, amortization, |                          |                                      
|and accretion                          |                          |                                       |                    | 44,698    |             |             
|Segment profit (loss)                  |                          |                                       |                    | 49,809    |             |             
|Equity in losses of affiliates         |                          |                                       |                    |           |             |             
|Interest expense                       |                          |                                       |                    |           |             |             
|Costs associated with early retirement |                          |                                      
|of  debt                               |                          |                                       |                    |           |             |             
|Other income                           |                          |                                       |                    |           |             |             
|                                       |                          |                                       |                    |           |             |             
|Income before income taxes             |                          |                                       |                    |           |             |             
|Provision for income tax expense       |                          |                                       |                    |           |             |             
|Cumulative effect of a change in       |                          |                                      
|accounting principle                   |                          |                                       |                    |           |             |             
|                                       |                          |                                       |                    |           |             |             
|Net income                             |                          |                                       |                    |           |             |             
|                                       |                          |                                       |                    |           |             |             

# NOTE 10  CONDENSED
CONSOLIDATING GUARANTOR FINANCIAL STATEMENTS

The company and its wholly-owned
subsidiaries, except Canvasback, are direct guarantors of our 9.6% Senior Notes,
Convertible Notes and Facility and have fully and unconditionally guaranteed these
obligations on a joint and several basis. In addition to not being a guarantor of the
companys 9.6% Senior Notes, Convertible Notes and Facility, Canvasback cannot be
included in determining compliance with certain financial covenants under the
companys Facility. We have not included separate financial statements related to the
guarantors because management has determined that they are not material to investors.
Condensed consolidating financial information for Magnum Hunter Resources, Inc. and
subsidiaries as of June 30, 2004 and December 31, 2003, and for the three- and six-month
periods ended June 30, 2004 and 2003, was as follows:

# Magnum Hunter
Resources, Inc. and Subsidiaries Condensed Consolidating Balance Sheets

|As of June 30, 2004                       
|------------------------------------------
|
|ASSETS                                    
|Current assets                            
|Property and equipment                    
|(using full cost accounting)              
|Investment in subsidiaries                
|(equity method)                           
|Investment in Parent                      
|Other assets                              
|                                          
|Total assets                              
|                                          
|LIABILITIES AND STOCKHOLDERS'             
|EQUITY                                    
|Current liabilities                       
|Long-term liabilities                     
|Stockholders' equity                      
|                                          
|Total liabilities and stockholders' equity
|                                          

---

# MAGNUM HUNTER
RESOURCES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) 
For the Six Months Ended June 30, 2004

|As of December 31, 2003                   
|------------------------------------------
|
|ASSETS                                    
|Current assets                            
|Property and equipment                    
|(using full cost accounting)              
|Investment in subsidiaries                
|(equity method)                           
|Investment in Parent                      
|Other assets                              
|                                          
|Total assets                              
|                                          
|LIABILITIES AND STOCKHOLDERS'             
|EQUITY                                    
|Current liabilities                       
|Long-term liabilities                     
|Stockholders' equity                      
|                                          
|Total liabilities and stockholders' equity
|                                          

# Magnum Hunter Resources,
Inc. and Subsidiaries Condensed Consolidating Statements of Income

|For the Three Months Ended June 30, 2004        
|------------------------------------------------
|
|Revenues                                        
|Expenses                                        
|                                                
|Income before equity in net income of subsidiary
|Equity in net income of subsidiary              
|                                                
|Income before income taxes                      
|Income tax (expense) benefit                    
|                                                
|Net income                                      
|                                                

|For the Three Months Ended June 30, 2003          
|--------------------------------------------------
|
|Revenues                                          
|Expenses                                          
|                                                  
|Income before equity in net earnings of subsidiary
|Equity in net earnings of subsidiary              
|                                                  
|Income before income taxes                        
|Income tax expense                                
|                                                  
|Net income                                        
|                                                  

---

# MAGNUM HUNTER
RESOURCES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) 
For the Six Months Ended June 30, 2004

|For the Six Months Ended June 30, 2004            
|--------------------------------------------------
|
|Revenues                                          
|Expenses                                          
|                                                  
|Income before equity in net earnings of subsidiary
|Equity in net earnings of subsidiary              
|                                                  
|Income before income taxes                        
|Income tax (expense) benefit                      
|                                                  
|Net income                                        
|                                                  

|For the Six Months Ended June 30, 2003            
|--------------------------------------------------
|
|Revenues                                          
|Expenses                                          
|                                                  
|Income before equity in net earnings of subsidiary
|Equity in net earnings of subsidiary              
|                                                  
|Income before income taxes                        
|Income tax expense                                
|                                                  
|Net income                                        
|Cumulative effect of a change in accounting       
|principle                                         
|                                                  
|Net income                                        
|                                                  

# Magnum Hunter
Resources, Inc. and Subsidiaries Condensed Consolidating Statements of Cash Flows

|For the Six Months Ended June 30, 2004
|--------------------------------------
|
|Cash flow from operating activities   
|Cash flow from investing activities   
|Cash flow from financing activities   
|                                      
|Net increase (decrease) in cash       
|Cash at beginning of period           
|                                      
|Cash at end of period                 
|                                      

|For the Six Months Ended June 30, 2003
|--------------------------------------
|
|Cash flow from operating activities   
|Cash flow from investing activities   
|Cash flow from financing activities   
|                                      
|Net increase in cash                  
|Cash at beginning of period           
|                                      
|Cash at end of period                 
|                                      

---

# MAGNUM HUNTER
RESOURCES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) 
For the Six Months Ended June 30, 2004

# NOTE 11  COMMON
STOCK OFFERING

On June 30, 2004, we sold 15 million
shares of Magnum Hunter common stock at $10.25 per share under a previously filed
universal shelf registration statement. The proceeds from this issuance were $147.2
million, net of offering costs. We also granted the underwriters an option to purchase an
additional 2.25 million shares to cover over-allotments, which they exercised on July 2,
2004. The net proceeds from this sale were approximately $22.1 million. We will use the
proceeds from these issuances to finance a portion of our pending acquisition of oil and
gas properties in the state of New Mexico (see Note 12) and to redeem a portion of our
9.6% Senior Notes (see Note 7). Prior to the property acquisition and Note redemption, the
net proceeds from these issuances were used to reduce debt under the Facility.

# NOTE 12 
SUBSEQUENT EVENT

On July 30, 2004, we purchased oil
and gas properties located in the state of New Mexico, primarily in Lea and Eddy counties
for $239.1 million, subject to certain purchase price adjustments. The properties include
both producing oil and gas wells and undeveloped leasehold mineral interests. The
effective date of the acquisition was May 1, 2004.

---

# Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operation

# Results of Operations

The following discussion and analysis
should be read in conjunction with our consolidated financial statements and the notes
associated with them contained in our Form 10-K for the year ended December 31, 2003. This
discussion should not be construed to imply that the results discussed herein will
necessarily continue into the future or that any conclusion reached herein will
necessarily be indicative of actual operating results in the future. Such discussion
represents only the best present assessment by our management.

There have been no changes to our
critical accounting policies for the six-month period ended June 30, 2004. Exposure Draft
No. 1102-100, Share-Based Payment, an amendment of FASB, Statements No. 123 and
95, issued by the Financial Accounting Standards Board (FASB) on March
31, 2004, may impact our future accounting for stock-based compensation. If we are
required to adopt this amendment in its current form, we would be required to discontinue
the prospective method of expensing stock options which we currently follow. Under this
proposed literature, we would be required to expense all unvested grants issued prior to
January 1, 2003, which would result in higher compensation costs. In June 2003, effective
January 1, 2003, we began expensing stock-based compensation pursuant to SFAS No. 123,
Accounting for Stock-Based Compensation, as allowed under the prospective
method of SFAS No. 148, Accounting for Stock-Based Compensation  Transition
and Disclosure, an amendment to SFAS No. 123. Under these statements, all stock
options granted, modified or settled after December 31, 2002 are expensed based on their
fair values determined by the Black-Scholes option-pricing model. For a discussion of our
other critical accounting policies, refer to our Form 10-K for the year ended December 31,
2003.

Subsequent to our merger with Prize
Energy Corp. (Prize) in March 2002, we have sold a number of non-strategic oil
and gas reserves for total proceeds of approximately $113.6 million, net of purchase price
adjustments. Almost all of the properties sold were acquired in the Prize merger, and the
proceeds have been used to reduce our overall indebtedness and fund our capital
expenditure program. The impact of these non-strategic divestitures are described below in
our results of operations.

In June 2004, we announced the
execution of a purchase and sale agreement to acquire proved and unproved oil and gas
properties located primarily in Lea and Eddy Counties of New Mexico. The geographical area
in which these properties lie is one of our most active and successful onshore areas of
focus. The purchase included both producing oil and gas wells and undeveloped leasehold
mineral interests. The transaction closed on July 30, 2004 with a purchase price of $239.1
million before certain purchase price adjustments. To finance a portion of this
acquisition, we sold 15 million shares of our common stock in a secondary offering on June
30, 2004, resulting in net proceeds after expected expenses of $147.2 million. An
additional 2.25 million shares of our common stock were subsequently sold in July 2004,
pursuant to an over-allotment option granted to the underwriters, resulting in additional
net proceeds of $22.1 million. In addition, on July 15, 2004, we amended our Senior Bank
Credit Facility (Facility) to increase our borrowing base up to $100 million
upon consummation of the acquisition. As a result of our recent equity offering, the
amendment to the Facility also allowed for an increase of the borrowing base on July 15,
2004 of $105 million for the purpose of redeeming $105 million in principal value of our
9.6% Senior Notes outstanding. On July 16, 2004, we announced our election to redeem $105
million principal value of our 9.6% Senior Notes at 109.6% of principal value, or $115
million plus accrued and unpaid interest of approximately $4.5 million through the
redemption date. The redemption date is set for August 27, 2004.

We are considering the possible
formation of a publicly traded master limited partnership to which we would sell or
contribute our gas gathering systems, most of our gas gathering plants, and certain oil
and gas interests. We anticipate that we would at least initially retain a significant
interest in the new partnership. We plan to use any net proceeds received from the sale of
assets to the partnership to pay down our indebtedness.

Throughout this document, we make
statements that are classified as forward-looking. Please refer to the
Forward-Looking Statements section of this document for an explanation of
these types of assertions.

Our results of operations have been
significantly affected by our past success in acquiring oil and gas properties at or near
the bottom of the commodity price cycles and our ability to maintain or increase oil and
natural gas production through our exploration and exploitation activities. Recent
acquisitions, in a higher commodity price environment, have been made in anticipation of
increasing the recognized reserves associated with the properties. Fluctuations in oil and
gas prices and commodity hedging activities have also significantly affected the results
of our operations.

---

The following table sets forth
certain information with respect to our business segments:

|                                                                 | Three Months Ended
June 30, | Six Months Ended
June 30,
|---------------------------------------------------------------- | --------------------------- | -------------------------
|
|Exploration and Production Operations                            |                             |                          
|                                                                 |                             |                          
|Reported Production:                                             |                             |                          
|Oil (Mbbls)                                                      |                             |                          
|Gas (Mmcf)                                                       |                             |                          
|Oil and Gas (Mmcfe)                                              |                             |                          
|Equivalent Daily Rate (Mmcfe per day)                            |                             |                          
|Average Sale Prices (after hedging)                              |                             |                          
|Oil (per Bbl)                                                    |                             |                          
|Gas (per Mcf)                                                    |                             |                          
|Oil and Gas (per Mcfe)                                           |                             |                          
|Effect of hedging activities (per Mcfe)                          |                             |                          
|Lease Operating Expense (per Mcfe)                               |                             |                          
|Lifting costs                                                    |                             |                          
|Production tax and other costs                                   |                             |                          
|Gross margin (per Mcfe)                                          |                             |                          
|Depreciation, depletion, amortization and accretion (per Mcfe) . |                             |                          
|Segment profit (thousands)                                       |                             |                          
|                                                                 |                             |                          
|Gas Gathering, Marketing and Processing Operations               |                             |                          
|                                                                 |                             |                          
|Throughput Volumes (Mcf per day)                                 |                             |                          
|Gathering                                                        |                             |                          
|Processing                                                       |                             |                          
|Gross margin (thousands)                                         |                             |                          
|Gathering (per Mcf throughput)                                   |                             |                          
|Processing (per Mcf throughput)                                  |                             |                          
|Segment profit (thousands)                                       |                             |                          
|                                                                 |                             |                          
|Oil Field Management Services                                    |                             |                          
|                                                                 |                             |                          
|Segment profit (thousands)                                       |                             |                          

# Period to Period
Comparison

# For the Three Months
Ended June 30, 2004 and 2003

We reported net income of $23.2
million for the three months ended June 30, 2004, as compared to net income of $4.2
million for the same period in 2003, an increase of 457%. Total operating revenues
increased 40% to $110 million in 2004 from $78.4 million in 2003. Operating profit
increased 110% to $45 million in 2004 from $21.4 million in 2003, and net income before
income taxes increased 458% to $37.7 million in 2004 from $6.8 million in 2003. The growth
in operating revenues and operating profit was generated across all of our business
segments, but especially in our exploration and production segment, principally the result
of higher realized oil and gas prices (after hedging effects) in the 2004 period compared
to the 2003 period. We recorded $2.2 million in costs associated with early retirement of
debt in the 2003 period versus none in the 2004 period due to the redemption of $50
million of our 10% Senior Notes during June 2003. The growth in pretax income was
additionally impacted by a 22% reduction in interest expense which declined to $9.7
million in the 2004 period from $12.4 million in the 2003 period, principally due to the
redemption of all of our remaining 10% Senior Notes during the year 2003. We recorded a
460% increase in income tax expense to $14.4 million ($14.1 million of which was deferred)
for the three months in 2004 versus $2.6 million for the same period in 2003, due to the
increase in pre-tax income. Basic and diluted earnings per share were $0.34 and $0.33,
respectively, in the 2004 period versus basic and diluted earnings per share of $0.06 each
in the 2003 period, an increase of 467% and 450%, respectively. The increase in net income
was the primary factor causing the increase in basic and diluted earnings per share in the
2004 period. Common shares used in the basic and diluted earnings per share calculation
increased by 4% and 5%, respectively, in the 2004 period compared to the 2003 period,
principally due to the exercise of employee stock options and warrants and the 59%
increase in the average market price of our common stock in the 2004 period compared to
the 2003 period, resulting in a higher calculated number of diluted shares outstanding in
the 2004 period.

---

Exploration and
Production Operations:

For the three months ended June 30,
2004, we reported oil production of approximately 981 thousand barrels and gas production
of approximately 12.8 billion cubic feet, which represents a decrease of 2% in oil
produced and an increase of 3% in gas produced from the comparable period in 2003. Our
reported equivalent daily rate of production, on a million cubic feet per day basis (Mmcfe
per day), increased 1% to 205.8 Mmcfe per day in the 2004 period from 203.5 Mmcfe per day
in the 2003 period. Our production was impacted by the sale of non-strategic oil and gas
properties which occurred after the Prize acquisition. These non-strategic property sales
continued into 2004. The impact of these property sales on reported production was a
decrease of 3.8 Mmcfe per day in the three-month period in 2004 compared to the similar
period in 2003. Removing the effect of sold properties from both the 2004 and 2003
periods, our daily equivalent production grew 3% in the 2004 period compared to the 2003
period. Production for the three months of 2004 was also impacted by start-up delays,
mechanical problems, and weather down time, primarily in our offshore Gulf of Mexico
region.

Oil revenues increased 17% to $30.8
million in the second quarter of 2004 compared to $26.3 million for the same period in
2003. The oil price received, after hedging effects, was $31.42 per Bbl in the 2004 period
compared to $26.35 per Bbl in the 2003 period, an increase of 19%. The price received for
oil before the effect of hedging was $36.80 per Bbl in the 2004 period versus $28.10 per
Bbl in the 2003 period, an increase of 31%. Gas revenues increased 59% to $66.9 million in
the second quarter of 2004 versus $42.1 million for the same period in 2003. The gas price
received, after hedging effects, was $5.21 per Mcf in the 2004 period compared to $3.37
per Mcf for the same period in 2003, an increase of 55%. The price received for gas before
the effect of hedging was $5.62 per Mcf in the 2004 period versus $4.57 per Mcf in the
2003 period, an increase of 23%. We realized a $10.6 million loss from hedging activities
in the 2004 period versus a loss of $16.8 million in the 2003 period, an improvement of
$6.2 million, due to the expiration of lower-priced commodity hedging contracts. The hedge
loss per equivalent unit produced was $0.56 per Mcfe in the 2004 period versus $0.91 per
Mcfe in the 2003 period, a decline of 38% in the realized loss. The price received per
equivalent unit produced before the effect of hedging was $5.78 per Mcfe in the 2004
period versus $4.61 in the 2003 period, an increase of 25%. Total oil and gas revenues
increased 43% to $97.9 million in 2004 from $68.5 million in 2003. The increase in oil and
gas revenues is attributable to the 25% increase in price per Mcfe before hedge losses,
the $6.2 million decrease in hedge losses, and the 1% increase in Mcfe sold in the 2004
period versus the 2003 period.

From time to time, we enter into
various commodity hedging contracts in order to reduce our exposure to the volatility of
oil and gas prices, which provides a base level of cash flow to fund capital expenditures.
During the 2004 period, hedging decreased the average price we received for oil by $5.38
per Bbl and decreased the average price we received for gas by $0.41 per Mcf. During the
second quarter of 2004, we had approximately 88.3 Mmcf/day of gas hedged through cost-less
collars with a weighted average floor price of $3.85 per Mmbtu and a weighted average
ceiling price of $5.84 per Mmbtu. Approximately 63% of second quarter 2004 natural gas
production was hedged. On the crude side, we had approximately 7,000 Bbls/day hedged
through cost-less collars with a weighted average floor price of $23.57 per Bbl and a
weighted average ceiling price of $30.16 per Bbl. Approximately 65% of second quarter 2004
crude oil production was hedged. For the remainder of 2004, we have approximately 4,000
Bbls/day of crude oil production hedged through cost-less collars with a weighted average
floor price of $23.25 per Bbl and a weighted average ceiling price of $28.36 per Bbl. On
July 12, 2004, we terminated a natural gas collar for 10,000 Mmbtu per day for the period
August through December 2004. In closing this contract, we realized a $1.3 million loss,
which will be recognized in earnings with the underlying forecasted commodity sales
transactions for the months August through December 2004. After this contract was
terminated, our remaining natural gas production hedged for July through December 2004 was
approximately 86.7 Mmcf/day with a weighted average floor price of $4.02 and a weighted
average ceiling price of $6.00.

Lease operating expense consists of
lifting costs and production taxes and other costs. For the 2004 period, lifting costs
were $15.1 million versus $13.5 million in the 2003 period, an increase of 12%. Production
taxes and other costs increased 21% to $9.6 million in the 2004 period from $7.9 million
in the 2003 period. The increase in lifting costs was primarily attributable to higher
production levels and higher workover, remedial, utility, and service costs in the 2004
period compared to the 2003 period. For the 2004 period, lifting costs, on a unit of
production basis, were $0.81 per Mcfe as compared to $0.73 per Mcfe in the 2003 period, an
increase of 11%. The increase was due to increases in workover and remedial expenses, as
well as higher costs for utilities and services. Production taxes and other costs were
$0.51 per Mcfe produced in the 2004 period compared to $0.43 per Mcfe produced in the 2003
period, an increase of 19%. The increase in production taxes per Mcfe produced was caused
by the increase in crude oil and natural gas prices received before hedging effects during
the 2004 period compared to the 2003 period.

---

Our gross margin realized from
exploration and production operations (oil and gas revenues less lease operating expenses)
for the 2004 period was $73.2 million, or $3.90 per Mcfe, compared to $47 million, or
$2.54 per Mcfe in the 2003 period, an increase of 54% on a per unit of production basis,
as a result of a 41% increase in hedge adjusted revenue per Mcfe produced, offset by a 14%
increase in lease operating expense per Mcfe produced.

Depreciation, depletion, amortization
and accretion of oil and gas properties was $26.7 million in the 2004 period versus $24.1
million in the 2003 period, an increase of 11%. The 2004 period included accretion expense
related to asset retirement obligations of $726 thousand ($0.04 per Mcfe) compared to $600
thousand ($0.03 per Mcfe) in the 2003 period. On a unit of production basis, depreciation
and depletion expense (excluding accretion expense) was $1.39 per Mcfe produced in the
2004 period versus $1.27 per Mcfe produced in the 2003 period. This 9% increase in the
equivalent unit cost per Mcfe produced was due primarily to an increase in development
costs and shorter reserve life properties associated with our activities in the Gulf of
Mexico.

Segment profit for exploration and
production operations was $46.5 million for the three months ended June 30, 2004 versus
$22.9 million for the same period in 2003, an increase of 103%, principally due to higher
realized crude oil and natural gas prices, offset by higher lease operating expenses and
higher depreciation, depletion, amortization and accretion expense.

Gathering, Marketing, and
Processing Operations:

For the three months ended June 30,
2004, our gas gathering system throughput was 15.6 Mmcf/day versus 16.4 Mmcf/day for the
same period in 2003, a decrease of 4%, due to normal production declines. Gas processing
throughput was 26.4 Mmcf/day in 2004 versus 26.8 Mmcf/day in 2003, a decrease of 2%, due
to normal production declines.

Revenues from gas gathering,
marketing, and processing increased 14% to $10.3 million in the 2004 period versus $9.1
million in the 2003 period. Operating costs for the gas gathering, marketing and
processing segment were $7.3 million in the 2004 period and $6.9 million in the 2003
period, an increase of 7%. The revenue increase was the result of higher natural gas and
natural gas liquids prices in the 2004 period compared to the 2003 period.

The gross margin realized from gas
gathering, marketing, and processing for the 2004 period was $3.0 million versus $2.2
million in the 2003 period, an increase of 37%. The gas gathering margin was $0.14 per Mcf
gathered in 2004 versus $0.06 per Mcf in 2003 due to higher gathering fees. The gas
processing margin was $1.11 per Mcf in 2004 compared to $0.84 per Mcf in 2003.

Depreciation expense for gas
gathering, marketing, and processing operations was 2% higher for the 2004 period at $587
thousand versus $577 thousand for the same period in 2003.

Segment profit for gas gathering,
marketing, and processing operations was $2.4 million in the 2004 period versus $1.6
million for the 2003 period, an increase of 49%, principally due to higher commodity
prices.

Oil Field Management
Services Operations:

Revenues from oil field management
services increased 99% to $1.8 million in the second quarter of 2004 versus $913 thousand
in the second quarter of 2003. Approximately $676 thousand of this increase is due to
three months worth of revenues generated by our majority-owned subsidiary, Metrix
Networks, Inc. (Metrix). We purchased an 80% controlling interest in this
entity during December 2003. Prior to this purchase, we included our approximately 32%
share of their profits in the equity in earnings of affiliate section of our income
statement. We also received revenues of approximately $116 thousand from equipment rental
fees charged to outside owners under a new program in which Gruy purchases completion
equipment to be used on multiple projects and charges rental fees to the owners. We also
earned approximately $148 thousand more in management fees under our partnership
agreements in 2004 when compared to 2003. These increases were partially offset by lower
drilling overhead income during the second quarter of 2004.

---

Operating costs increased 52% to $904
thousand in 2004 from $593 thousand in 2003, again primarily due to the Metrix purchase.

The gross margin for this segment in
2004 was $909 thousand versus $320 thousand in 2003, an increase of 184%, due to increased
revenues.

Depreciation expense was $290
thousand in the 2004 period versus $149 thousand in the 2003 period, an increase of 95%,
due to capital additions.

Segment profit was $619 thousand for
the three months in 2004 versus $171 thousand for the same period in 2003.

Other Income and Expenses:

Total depreciation, depletion,
amortization and accretion expense was $27.6 million in the 2004 period versus $25 million
in the 2003 period, an increase of 11%. This is primarily the result of the increased
depletion and accretion rates in our exploration and production segment.

General and administrative expense
for the 2004 period increased 40% to $4.4 million from $3.2 million in the 2003 period.
The principal reasons for this increase were a $254 thousand increase in incentive
compensation expenses, $599 thousand of expenses due to Metrix recorded in the 2004
period, $129 thousand increase in consulting fees, $180 thousand of written-off producer
imbalances in the 2004 period, and the recovery in 2003 of $168 thousand of notes
receivable previously reserved. We recorded no equity in loss of affiliate in the 2004
period versus a loss of $525 thousand in the 2003 period due to the sale of our interest
in NGTS and the acquisition of a majority interest in Metrix. Other income was $2 million
for the 2004 period versus $260 thousand in the 2003 period, an increase of 671%,
primarily the result of proceeds collected from a lawsuit judgment in our favor. The
company recognized a $370 thousand gain in other non-cash hedging adjustments in the 2004
period versus a $167 thousand gain in the 2003 period. In the 2004 period, $198 thousand
of the hedging gain relates to the amortization of commodity hedge assets acquired in the
Prize merger, while a gain of $172 thousand was due to recording hedge ineffectiveness.

We incurred costs associated with the
early retirement of debt of $2.2 million in the three months of 2003 versus none in the
same period of 2004. The 2003 period costs were associated with the redemption of $50
million in principal of our 10% Senior Notes in June 2003.

Interest expense was $9.7 million for
the 2004 period versus $12.4 million for the 2003 period, principally the result of the
redemption in 2003 of our 10% Senior Notes, partially offset by interest on our Floating
Rate Convertible Senior Notes (Convertible Notes) issued in December 2003,
which have a floating interest rate based on three-month LIBOR, initially set at 1.17% and
currently set at 1.52%. Our weighted average interest rate paid under our Facility was
3.2% in the 2004 period versus 3.4% in the 2003 period. Our overall effective interest
rate (excluding costs associated with the early retirement of debt) was 6.5% in the 2004
period versus 8.2% in the 2003 period.

The effective tax rate was 38.3% and
38.2% for the three months ended June 30, 2004 and 2003, respectively. The variance from
the statutory rate of 35% was primarily due to state income taxes.

# For the Six Months Ended
June 30, 2004 and 2003

We reported net income of $42.5
million for the six months ended June 30, 2004, as compared to net income of $12.2 million
for the same period in 2003, an increase of 249%. Total operating revenues increased 33%
to $210.4 million in 2004 from $158.5 million in 2003. Operating profit increased 81% to
$85.6 million in 2004 from $47.4 million in 2003, and net income before income taxes
increased 263% to $68.9 million in 2004 from $19 million in 2003. The growth in operating
revenues and operating profit was generated across all of our business segments, but
especially in our exploration and production segment, principally the result of lower
hedging losses in the 2004 period compared to the 2003 period due to the roll-off of
lower-priced commodity hedging contracts. We recorded $4.1 million in costs associated
with early retirement of debt in the 2003 period versus none in the 2004 period due to the
redemption of $80 million of our 10% Senior Notes during January and June 2003. The growth
in pretax income was additionally impacted by a 23% reduction in interest expense which
declined to $19.3 million in the 2004 period from $25 million in the 2003 period,
principally due to the redemption of all of our remaining 10% Senior Notes during the year
2003. We recorded a 265% increase in income tax expense to $26.5 million ($25.7 million of
which was deferred) for the six months in 2004 versus $7.2 million for the same period in
2003, due to the increase in pre-tax income. Basic and diluted earnings per share were
$0.62 and $0.61, respectively, in the 2004 period versus basic and diluted earnings per
share of $0.18 each in the 2003 period, an increase of 244% and 239%, respectively. The
increase in net income was the primary factor causing the increase in basic and diluted
earnings per share. Common shares used in the basic and diluted earnings per share
calculation increased by 3% and 4%, respectively, in the 2004 period compared to the 2003
period, principally due to the exercise of employee stock options and warrants and the
increase in the average market price of our common stock in the 2004 period compared to
the 2003 period, resulting in a higher calculated number of diluted shares outstanding in
the 2004 period.

---

Exploration and
Production Operations:

For the six months ended June 30,
2004, we reported oil production of approximately 1.9 million barrels and gas production
of approximately 24.7 billion cubic feet, which represents a decrease of 2% in oil
produced and an increase of 4% in gas produced from the comparable period in 2003. Our
reported equivalent daily rate of production, on a million cubic feet per day basis (Mmcfe
per day), increased 1% to 199.1 Mmcfe per day in the 2004 period from 196.6 Mmcfe per day
in the 2003 period. Our production was impacted by the sale of non-strategic oil and gas
properties which occurred after the Prize acquisition. These non-strategic property sales
continued into March 2004. The impact of these property sales on reported production was a
decrease of 5.2 Mmcfe per day in the six month period in 2004 compared to the similar
period in 2003. Removing the effect of sold properties from both the 2004 and 2003
periods, our daily equivalent production grew 4% in the 2004 period compared to the 2003
period. Production for the six months of 2004 was also impacted by start-up delays,
mechanical problems, and weather down time, primarily in our offshore Gulf of Mexico
region.

Oil revenues increased 13% to $59.1
million in the first six months of 2004 compared to $52.5 million for the same period in
2003. The oil price received, after hedging effects, was $30.76 per Bbl in the 2004 period
compared to $26.85 per Bbl in the 2003 period, an increase of 15%. The price received for
oil before the effect of hedging was $35.23 per Bbl in the 2004 period versus $30.22 per
Bbl in the 2003 period, an increase of 17%. Gas revenues increased 49% to $127.2 million
in the first six months of 2004 versus $85.5 million for the same period in 2003. The gas
price received, after hedging effects, was $5.15 per Mcf in the 2004 period compared to
$3.59 per Mcf for the same period in 2003, an increase of 43%. The price received for gas
before the effect of hedging was $5.51 per Mcf in the 2004 period versus $5.27 per Mcf in
the 2003 period, an increase of 5%. We realized a $17.4 million loss from hedging
activities in the 2004 period versus a loss of $46.7 million in the 2003 period, an
improvement of $29.3 million, due to the expiration of lower priced commodity hedging
contracts. The hedge loss per equivalent unit produced was $0.48 per Mcfe in the 2004
period versus $1.31 per Mcfe in the 2003 period, a decline of 63% in the realized loss.
The price received per equivalent unit produced before the effect of hedging was $5.62 per
Mcfe in the 2004 period versus $5.19 in the 2003 period, an increase of 8%, due to the
increase in the pre-hedge price received for crude oil and natural gas. Total oil and gas
revenues increased 35% to $186.7 million in 2004 from $138.1 million in 2003. The increase
in oil and gas revenues is attributable to the $29.4 million decrease in hedge losses, the
8% increase in pre-hedge price per Mcfe, and the 2% increase in Mcfe sold in the 2004
period versus the 2003 period.

From time to time, we enter into
various commodity hedging contracts in order to reduce our exposure to the volatility of
oil and gas prices, which provides a base level of cash flow to fund capital expenditures.
During the 2004 period, hedging decreased the average price we received for oil by $4.47
per Bbl and decreased the average price we received for gas by $0.36 per Mcf. During the
first six months of 2004, we had approximately 86.6 Mmcf/day of gas hedged through
cost-less collars with a weighted average floor price of $3.81 per Mmbtu and a weighted
average ceiling price of $5.81 per Mmbtu. Approximately 64% of our first six months 2004
natural gas production was hedged. On the crude side, we had approximately 7,750 Bbls/day
hedged through cost-less collars with a weighted average floor price of $24.19 per Bbl and
a weighted average ceiling price of $30.63 per Bbl. Approximately 73% of first six months
2004 crude oil production was hedged. For the remainder of 2004, we have approximately
4,000 Bbls/day of crude oil production hedged through cost-less collars with a weighted
average floor price of $23.25 per Bbl and a weighted average ceiling price of $28.36 per
Bbl. On July 12, 2004, we terminated a natural gas collar for 10,000 Mmbtu per day for the
period August through December 2004. In closing this contract we realized a $1.3 million
loss, which will be recognized in earnings with the underlying forecasted commodity sales
transactions for the months August through December 2004. After this contract was
terminated, our remaining natural gas production hedged for July through December 2004 was
approximately 86.7 Mmcf/day with a weighted average floor price of $4.02 and a weighted
average ceiling price of $6.00.

---

Lease operating expense consists of
lifting costs and production taxes and other costs. For the 2004 period, lifting costs
were $28.2 million versus $26.4 million in the 2003 period, an increase of 6%. Production
taxes and other costs increased 5% to $17.9 million in the 2004 period from $17.1 million
in the 2003 period. The increase in lifting costs was primarily attributable to higher
production levels and increases in workover and remedial expenses, as well as higher costs
for utilities and services in the 2004 period compared to the 2003 period. For the 2004
period, lifting costs, on a unit of production basis, were $0.78 per Mcfe as compared to
$0.74 per Mcfe in the 2003 period, an increase of 5% due to higher workover, remedial,
utility and service costs. Production taxes and other costs were $0.49 per Mcfe produced
in the 2004 period compared to $0.48 per Mcfe produced in the 2003 period, an increase of
2%. The increase in production taxes per Mcfe produced was caused by the increase in crude
oil and natural gas prices received before hedging effects during the 2004 period compared
to the 2003 period.

Our gross margin realized from
exploration and production operations (oil and gas revenues less lease operating expenses)
for the 2004 period was $140.6 million, or $3.87 per Mcfe, compared to $94.5 million, or
$2.66 per Mcfe in the 2003 period, an increase of 45% on a per unit of production basis,
as a result of a 32% increase in hedge adjusted revenue per Mcfe produced, partially
offset by a 4% increase in lease operating expense per Mcfe produced.

Depreciation, depletion, amortization
and accretion of oil and gas properties was $51.3 million in the 2004 period versus $44.7
million in the 2003 period, an increase of 15%. The 2004 period included accretion expense
related to asset retirement obligations of $1.4 million ($0.04 per Mcfe) compared to $1.2
million ($0.03 per Mcfe) in the 2003 period. On a unit of production basis, depreciation
and depletion expense (excluding accretion expense) was $1.38 per Mcfe produced in the
2004 period versus $1.22 per Mcfe produced in the 2003 period. This 13% increase in the
equivalent unit cost per Mcfe produced was due primarily to an increase in development
costs and shorter reserve life properties associated with our activities in the Gulf of
Mexico.

Segment profit for exploration and
production operations was $89.3 million for the six months ended June 30, 2004, versus
$49.8 million for the same period in 2003, an increase of 79%, principally due to higher
realized crude oil and natural gas prices, offset by higher lease operating expenses and
higher depreciation, depletion, amortization and accretion expense.

Gathering, Marketing, and
Processing Operations:

For the six months ended June 30,
2004, our gas gathering system throughput was 15.4 Mmcf/day versus 15.9 Mmcf/day for the
same period in 2003, a decrease of 4%, due to normal production declines. Gas processing
throughput was 26.1 Mmcf/day in 2004 versus 24.8 Mmcf/day in 2003, an increase of 5%, due
primarily to the partial shutdown of one processing plant for most of one month during the
first quarter of the 2003 period for scheduled maintenance on a products pipeline.

Revenues from gas gathering,
marketing, and processing increased 8% to $19.8 million in the 2004 period versus $18.4
million in the 2003 period. Operating costs for the gas gathering, marketing and
processing segment increased 4% to $13.9 million in the 2004 period from $13.4 million in
the 2003 period. The revenue increase was the result of higher natural gas liquids prices
and the effect of the processing plant shutdown in 2003, while the operating cost increase
was due to higher costs of gas purchases.

The gross margin realized from gas
gathering, marketing, and processing for the 2004 period was $5.9 million versus $5
million in the 2003 period, an increase of 18%. The gas gathering margin was $0.17 per Mcf
gathered in 2004 versus $0.12 per Mcf in 2003 due to higher gathering fees. The gas
processing margin was $1.12 per Mcf in 2004 compared to $1.03 per Mcf in 2003 due to
higher natural gas liquids prices realized partially offset by higher costs of gas
purchased.

Depreciation expense for gas
gathering, marketing, and processing operations was essentially unchanged at $1.2 million
for the 2004 period compared to the 2003 period.

---

Segment profit for gas gathering,
marketing and processing operations was $4.7 million in the 2004 period versus $3.9
million for the 2003 period, an increase of 23%, principally due to higher commodity
prices.

Oil Field Management
Services Operations:

Revenues from oil field management
services increased 93% to $3.8 million in the first half of 2004 versus $2 million in the
first half of 2003. Approximately $1.6 million of this increase is due to six months
worth of revenues generated by our majority-owned subsidiary, Metrix. We purchased an 80%
controlling interest in this entity during December 2003. Prior to this purchase, we
included our approximately 32% share of their profits in the equity in earnings of
affiliate section of our income statement. We also received revenues of approximately $304
thousand from equipment rental fees charged to outside owners under a new program in which
we purchase completion equipment to be used on multiple projects and charges rental fees
to the owners.

Operating costs increased 62% to $2.3
million in 2004 from $1.5 million in 2003. Of this increase, $678 thousand was
attributable to the Metrix purchase, and $241 thousand was due to increases in
compensation and related expenses.

The gross margin for this segment in
2004 was $1.5 million versus $542 thousand in 2003, an increase of 177%, due to increased
revenues.

Depreciation expense was $573
thousand in the 2004 period versus $295 thousand in the 2003 period, an increase of 94%,
due to capital additions.

Segment profit was $931 thousand for
the six months in 2004 versus $247 thousand for the same period in 2003.

Other Income and Expenses:

Total depreciation, depletion,
amortization and accretion expense was $53.1 million in the 2004 period versus $46.5
million in the 2003 period, an increase of 14%. This is primarily the result of the
increased depletion and accretion rates in our exploration and production segment.

General and administrative expense
for the 2004 period increased 50% to $9.5 million from $6.3 million in the 2003 period.
The principal reasons for this increase were a $1.2 million increase in incentive
compensation expenses and $1.2 million of expenses due to Metrix recorded in the 2004
period. Other drivers of the increase were $353 thousand in higher fees for consulting
paid during the first half of 2004, an increase of $180 thousand due to written-off
producer imbalances and the recovery in 2003 of $168 thousand of notes receivable
previously reserved. We recorded no equity in earnings of affiliate in the 2004 period
versus a loss of $237 thousand in the 2003 period due to the sale of our interest in NGTS
and the acquisition of a majority interest in Metrix. Other income was $2.2 million for
the 2004 period versus $378 thousand in the 2003 period, an increase of 489%, primarily
the result of proceeds collected from a lawsuit judgment issued in our favor. The company
recognized a $464 thousand gain in other non-cash hedging adjustments in the 2004 period
versus a $536 thousand gain in the 2003 period. In the 2004 period, $396 thousand of the
hedging gain relates to the amortization of commodity hedge assets acquired in the Prize
merger, and $68 thousand was due to recording hedge ineffectiveness.

We incurred costs associated with the
early retirement of debt of $4.1 million in the six months of 2003 versus none in the same
period of 2004. The 2003 period costs were associated with the redemption of $80 million
in principal of our 10% Senior Notes in January and June 2003.

Interest expense was $19.3 million
for the 2004 period versus $25 million for the 2003 period, principally the result of the
redemption in 2003 of our 10% Senior Notes, partially offset by interest on our
Convertible Notes issued in December 2003, which have a floating interest rate based on
six-month LIBOR, initially set at 1.17% and currently set at 1.52%. Our weighted average
interest rate paid under our Facility was 3.3% in the 2004 period versus 3.4% in the 2003
period. Our overall effective interest rate (excluding costs associated with early
retirement of debt) was 6.6% in the 2004 period versus 8.4% in the 2003 period.

The effective tax rate was 38.4% and
38.1% for the six months ended June 30, 2004 and 2003, respectively. The variance from the
statutory rate of 35% was primarily due to state income taxes.

---

# Liquidity and Capital
Resources

CASH FLOW AND WORKING CAPITAL. Net
cash provided by operating activities for the six months ended June 30, 2004 increased
$12.5 million to $113.9 million, from $101.4 million for the same period during 2003. The
main driver of this increase was our substantial increase in net income. Please refer to
our period to period comparisons in the above sections for an analysis of this increase by
operating segment.

Our net working capital position at
June 30, 2004 was a deficit of $9.6 million. On that date, we had $242.5 million available
to be drawn under our $275 million Facility. A large factor in our working capital deficit
at June 30, 2004 is our current derivative liability of $27 million, partially offset by
current deferred tax assets of $10 million, which we have recorded on our hedged positions
for the next twelve months due to continued increases in commodities prices over our
hedged ceiling prices. If actual commodities prices realized remain higher than our hedged
ceiling prices on these positions, our resulting higher cash proceeds received on our
production will offset any actual amounts paid out related to these liabilities.

INVESTING ACTIVITIES. Net cash used
in investing activities was $135.6 million in the 2004 six month period. We made capital
expenditures of $124.2 million under our capital budget during 2004. In addition, we made
a deposit of earnest money in connection with the pending acquisition of New Mexico
properties of $12 million. Our capital expenditures are discussed in further detail below.
For 2004, we also received proceeds from the sales of property and equipment of $458
thousand, net of certain purchase price adjustments related to both 2003 and 2004
divestitures. We received a $250 thousand payment on a note receivable.

In the 2003 six month period, net
cash used in investing activities was $88 million. We made cash expenditures of $97.3
million under our capital budget during 2003. Additionally during 2003, we made an
investment of $600 thousand in an affiliate, received proceeds from sale of assets of $9
million, and received distributions from an affiliate of $900 thousand.

FINANCING ACTIVITIES. Net cash
provided by financing activities was $17 million for the six-month period ending June 30,
2004. We borrowed a total of $70.5 million, and we repaid borrowings of $206.5 million. We
paid $380 thousand in fees related to amendments to our Facility, received net proceeds
from the issuance of common stock pursuant to our employee stock option plans of $6.2
million, and received net proceeds from a secondary offering of our common stock of $147.2
million.

Net cash used by financing activities
was $7.2 million for the six-month period in 2003. We borrowed a total of $248.6 million
during the period and repaid borrowings of $167.6 million. We paid $76.9 million, net of
Canvasback redemptions, to redeem $80 million in principal of our 10% Senior Notes. We
also loaned our KSOP $2.7 million to purchase shares of our common stock and paid $7.4
million to purchase an additional 1.3 million shares of treasury stock. We also spent $295
thousand to purchase stock for our deferred compensation plan.

CAPITAL RESOURCES. The following
discussion of Magnum Hunters capital resources refers to the company and our
affiliates. Internally generated cash flow and the borrowing capacity under our Facility
are our major sources of liquidity. From time to time, we may also sell non-strategic
properties in order to increase liquidity. In addition, we may use other sources of
capital, including the issuance of additional debt securities or equity securities, as
sources to fund acquisitions or other specific needs. In the past, we have accessed both
the public and private capital markets to provide liquidity for specific activities and
general corporate purposes. We currently have approximately $23 million available under
our current shelf registration with the Securities and Exchange Commission.

At June 30, 2004, we had $242.5
million available under our Facility which had a borrowing base of $275 million.

On April 30, 2004 we amended our
Facility to receive a more favorable rate structure and to increase the borrowing base to
$275 million, an increase of $20 million. The level of the borrowing base is dependent on
the valuation by the lenders of the assets pledged, which are primarily oil and gas
reserves. We also extended the expiration date of the Facility by one year, resulting in a
new maturity date of May 2, 2007.

---

On July 15, 2004, we amended our
Facility: (i) to increase the borrowing base to $380 million, an increase of $105 million,
and to allow us to use proceeds from our secondary common stock offering to redeem and
retire up to $105 million in principal value of our 9.6% Senior Notes outstanding, and
(ii) to increase the borrowing base by another $100 million upon consummation of the New
Mexico property acquisition. The $105 million increase to the borrowing base may be
adjusted downward based on the total principal amount of debt redeemed.

On a semi-annual basis, our borrowing
base under our Facility is redetermined by the financial institutions who have committed
to the company based on their review of our proved oil and gas reserves and other assets.
If the outstanding senior bank debt exceeds the redetermined borrowing base, the company
must repay the excess. As a result of the redetermination completed on April 30, 2004, our
borrowing base was increased by $20 million. The next redetermination date will have an
effective date of June 30, 2004 and will have a completion date of no later than November
10, 2004.

We sold 15 million shares of our
common stock in a secondary offering on June 30, 2004, resulting in net proceeds after
expected expenses of $147.2 million. An additional 2.25 million shares of our common stock
were sold in July 2004, pursuant to an over-allotment option granted to the underwriters,
resulting in additional net proceeds of $22.1 million. We used these proceeds to
temporarily reduce our borrowings under our Facility. We ultimately used those proceeds to
finance a portion of our acquisition of properties in New Mexico and to fund our upcoming
Note redemption.

Our internally generated cash flow,
results of operations, and financing for our operations are substantially dependent on oil
and gas prices. To the extent that oil and gas prices decline, our earnings and cash flows
may be adversely affected. This adverse effect may be mitigated by our commodity hedging
activities. We believe that our cash flow from operations, existing working capital, and
availability under our Facility will be sufficient to meet interest payments and to fund
the capital expenditure budget for the year 2004.

CAPITAL EXPENDITURES. During the
six-month period in 2004, our total capital expenditures were $124.2 million. Exploration
activities accounted for $30.2 million, development activities accounted for $75.7
million, unproved property acquisitions accounted for $13.9 million, proved property
acquisitions accounted for $3.8 million, and additions to other assets accounted for $644
thousand of the capital expenditures. We participated in the drilling of 87 wells during
the 2004 period, of which 83 were deemed commercial, for a 95% overall success rate. Of
the 87 wells drilled, 20 were exploratory wells, of which 17 were successful, and 67 were
development wells, 66 of which were successful. As of June 30, 2004, we had total unproved
oil and gas property costs of $101.7 million.

In June 2004, we announced the
execution of a purchase and sale agreement to acquire proved and unproved oil and gas
properties located primarily in Lea and Eddy Counties of New Mexico. The geographical area
in which these properties lie is one of our most active and successful onshore areas of
focus. The purchase included both producing oil and gas wells and undeveloped leasehold
mineral interests. The transaction closed on July 30, 2004 with a purchase price of $239.1
million, subject to certain purchase price adjustments. We financed this acquisition with
a portion of the proceeds from our secondary offering of 15 million shares as well as
borrowings under our amended Facility.

Our Board of Directors previously
approved a capital budget of up to $185 million for calendar year 2004. In connection with
the New Mexico property acquisition and the equity offering, we have raised our 2004
capital budget to $200 million. We are not contractually obligated to proceed with any of
our material budgeted capital expenditures. The amount and allocation of future capital
expenditures will depend on a number of factors that are not entirely within our control
or ability to forecast, including drilling results, oilfield service costs, partner
capital plans, and changes in oil and gas prices. As a result, actual capital expenditures
may vary significantly from current expectations. We anticipate that this budget will be
funded by our cash flow from operations as well as utilization of our Facility. In the
normal course of business, we review opportunities for the possible acquisition of oil and
gas reserves and activities related thereto. When potential acquisition opportunities are
deemed consistent with our growth strategy, bids or offers in amounts and with terms
acceptable to us may be submitted. It is uncertain whether any such bids or offers which
may be submitted by us from time to time will be acceptable to the sellers. In the event
of a future significant acquisition, utilizing cash, we may require additional financing
in connection therewith.

---

RECENT TRENDS. The following is a
discussion of recent trends we consider important and our assessment of the impact of
these trends on our business plan.

Commodity prices.Since
mid-year 2002, crude oil and natural gas commodity prices have significantly increased. We
believe that natural gas prices (NYMEX index) will average between $4.00 and $6.00 per Mcf
over the next several years. We have based our 2004 capital and operating budgets on
prices of approximately $5.40 per Mcf. Crude oil prices have recently increased
significantly, but in our view are much more variable due to worldwide political and
economic factors. For 2004 budgeting purposes, we have assumed crude prices will average
approximately $32.00 per Bbl (NYMEX index). Our production mix is largely natural gas, and
therefore our gross margins are largely driven by natural gas prices.

Interest rates. We have
experienced an unusually low interest rate environment for the past several years. We
expect interest rates to increase moderately over the next several years. By the end of
August 2004, we expect that approximately 30% of our debt will be fixed at 9.6% through
2012, with the remaining 70% to be variable rate debt.

Depreciation, depletion,
amortization and accretion (DD&A). Our exploration and production segment DD&A
rate has increased an annual average of 13% per year since 1999. This increase is
attributable to our increased capital expenditures in the offshore Gulf of Mexico region,
where our finding and development costs per unit are higher than our average finding and
development costs per unit have been historically onshore. Our preliminary estimates
indicate that as a result of our recent New Mexico property acquisition, our DD&A rate
will rise initially by 9%. We expect to continue to spend a significant percentage of our
total capital expenditures budget on offshore Gulf of Mexico projects due to strong
economic parameters. Assuming similar results in our drilling activities and reserve
recognition to what we have been achieving, we would expect our DD&A rate to continue
to increase.

Managements assessment of
the impact of these trends on our business plan. We have concentrated our capital
budget in areas where we expect to realize the highest financial benefits, including rate
of return. As such, we have dedicated significant portions of our capital expenditure
budget to the offshore Gulf of Mexico region and onshore in the Southeast New Mexico area
over the past several years.

We have significant exploration,
development and exploitation opportunities both onshore and offshore. Management continues
to monitor commodity prices, finding and development costs and interest rates, among other
factors, to determine both the total dollars to be spent and the allocation of these
dollars among alternative projects within the capital budget. Even if DD&A rates and
interest rates continue to increase, and commodity price increases in turn offset these
expenses, then we would expect to continue our current business plan. We believe we have
significant flexibility in the management of our cash flows.

FORWARD-LOOKING STATEMENTS. This Form
10-Q and the information incorporated by reference contain statements that constitute
forward-looking statements within the meaning Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act. The words expect,
project, estimate, believe, anticipate,
intend, budget, plan, forecast,
predict, and other similar expressions are intended to identify
forward-looking statements. These statements appear in a number of places and include
statements regarding our plans, beliefs, or current expectations, including the plans,
beliefs, and expectations of our officers and directors.

When considering any forward-looking
statement, one should keep in mind the risk factors that could cause our actual results to
differ materially from those contained in any forward-looking statement. Important factors
that could cause actual results to differ materially from those in the forward-looking
statements herein include the timing and extent of changes in commodity prices for oil and
gas, operating risks and other risk factors as described in our Annual Report on Form 10-K
as filed with the Securities and Exchange Commission. Furthermore, the assumptions that
support our forward-looking statements are based upon information that is currently
available and is subject to change. We specifically disclaim all responsibility to
publicly update any information contained in a forward-looking statement or any
forward-looking statement in its entirety and therefore disclaim any resulting liability
for potentially related damages.

All forward-looking statements
attributable to Magnum Hunter Resources, Inc. are expressly qualified in their entirety by
this cautionary statement.

---

# Inflation and Changes in
Prices

Our results of operations and cash
flow have been, and will continue to be, affected by the volatility in oil and gas prices.
Should we experience a significant increase in oil and gas prices that is sustained over a
prolonged period, we would expect that there would also be a corresponding increase in oil
and gas finding costs, lease acquisition costs, and operating expenses.

We market oil and gas for our own
account, which exposes us to the attendant commodities risk. A significant portion of our
gas production is currently sold to end-users either (i) on the spot market on a
month-to-month basis at prevailing spot market prices or (ii) under long-term contracts
based on current spot market prices. We normally sell our oil under month-to-month
contracts to a variety of purchasers.

# Hedging

We were obligated to eight crude oil
derivatives and fourteen natural gas derivatives on June 30, 2004. All outstanding
derivatives qualify for cash flow hedge accounting treatment as defined within SFAS No.
133, which requires derivative assets and liabilities to be recorded at their fair value
on the balance sheet with an offset for the effective part of the hedge to other
comprehensive income. Hedge ineffectiveness on cash-flow hedges is recorded in earnings.

At June 30, 2004, the fair value of
the companys derivatives were as follows (in thousands):

|Derivative Assets            |  |  |   |        | 
|---------------------------- |  |  | - | ------ | 
|                             |  | 
|Natural gas collars          |  |  | $ | 623    | 
|Natural gas swaps            |  |  |   | 848    | 
|                             |  | 
|Total derivative assets      |  |  | $ | 1,471  | 
|                             |  | 
|Derivative Liabilities       |  | 
|                             |  | 
|Natural gas collars          |  |  | $ | 25,670 | 
|Natural gas swaps            |  |  |   | 510    | 
|Crude oil collars            |  |  |   | 6,404  | 
|Crude oil swaps              |  |  |   | 463    | 
|                             |  | 
|Total derivative liabilities |  |  | $ | 33,047 | 
|                             |  | 
|Net Derivative Liability     |  |  | $ | 31,576 | 
|                             |  | 

Of the $1.5 million derivative asset,
$578 thousand is included in other current assets and $893 thousand is included in other
assets on our condensed consolidated balance sheet at June 30, 2004.

For the three- and six-month periods
ended June 30, 2004, the statement of operations includes non-cash hedging adjustment
gains of $370 thousand and $464 thousand, respectively. These gains are made up of hedging
ineffectiveness gains of $172 thousand and $68 thousand, respectively, related to the
crude oil and natural gas derivatives as well as non-cash gains of $198 thousand and $396
thousand, respectively, related to the amortization of hedge contracts acquired in the
Prize merger. The remaining amortization amount relating to hedge contracts acquired in
the Prize merger that will be reclassified into the operations statement in 2004 is a $396
thousand gain. It is estimated at this time that $16.0 million, net of income tax, of
other comprehensive loss will be reclassified into the income statement during the next 12
months.

# New Accounting Standards

The FASB is currently evaluating an
issue involving the classification of mineral rights. In June 2001, FASB issued Statement
of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, which requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method.
In July 2001, the FASB also issued SFAS No. 142, Goodwill and Other Intangible
Assets, which discontinues the practice of amortizing goodwill and indefinite lived
intangible assets and initiates an annual review of impairment. Intangible assets with a
determinable useful life will continue to be amortized over that period. The amortization
provisions apply to goodwill and intangible assets acquired after June 30, 2001. SFAS No.
141 and 142 clarify that more assets should be distinguished and classified between
tangible and intangible. We did not change or reclassify contractual mineral rights
included in proved and unproved oil and gas properties on our balance sheet upon adoption
of SFAS No. 142. We believe the treatment of such mineral rights as tangible assets under
the full cost method of accounting for oil and gas properties is appropriate. An issue has
been raised regarding whether these mineral rights should be classified as tangible or
intangible assets.

---

FASB has recently issued proposed
FASB Staff Position (FSP) No. 142-b, Application of FASB Statement 142,
Goodwill and Other Intangible Assets, to Oil- and Gas-Producing Entities,
which supports our current accounting treatment of mineral rights. This FSP is expected to
be finalized and issued later this year.

FASB issued FSP FAS 129-1,
Disclosure Requirements Under FASB Statement No. 129, Disclosure of Information
About Capital Structure, in April 2004. This FSP provides additional guidance on
the disclosure requirements of contingently convertible securities. We have made the
required disclosures related to the terms of our Convertible Notes in our Annual Report on
Form 10-K and have provided explanations in Note 6 of this Form 10-Q about the dilutive
effects of these notes on our EPS.

FASBs Emerging Issues Task
Force (EITF) has recently issued a Draft EITF Abstract for EITF Issue No.
04-8, The Effect of Contingently Convertible Debt on Diluted Earnings per
Share, which addresses the issue of when the dilutive effects of contingently
convertible debt instruments should be included in diluted earnings per share. This
guidance would require companies to include the dilutive effect of convertible debt
securities in diluted earnings per share regardless of whether or not the contingent
conversion features have been triggered. Adoption of this guidance would not have an
impact on any of our reported earnings per share because our stock price has not exceeded
the conversion price of our Convertible Notes. The comment period for this draft ends in
September 2004, and, if approved by FASB, would be effective for reporting periods ending
after December 15, 2004.

# Item 3. Qualitative and
Quantitative Disclosure About Market Risk

Our operations are exposed to market
risks primarily as a result of changes in commodity prices and interest rates. We do not
use derivative financial instruments for speculative or trading purposes.

Commodity Price Hedging Contracts.We produce, purchase, and sell crude oil, natural gas, condensate, and natural gas
liquids. As a result, our financial results can be significantly impacted as these
commodity prices fluctuate widely in response to changing market forces and conditions. We
have previously engaged in oil and gas hedging activities and intend to continue to
consider various hedging arrangements to realize commodity prices that we consider
favorable. The company engages in hedging contracts for a portion of its oil and gas
production through various contracts (Hedging Agreements). The primary
objective of these activities is to protect against significant decreases in price during
the term of the hedge.

The Hedging Agreements provide for
separate contracts tied to the New York Mercantile Exchange (NYMEX) light
sweet crude oil and Henry Hub natural gas, and the Inside FERC natural gas index price
posting (Index). In addition to fixed price swaps, we have combined option
contracts that have agreed upon price floors and ceilings (Cost-less collars).
To the extent the Index price exceeds the contract ceiling, we pay the spread between the
ceiling and the Index price applied to the related contract volumes. To the extent the
contract floor exceeds the Index, we receive the spread between the contract floor and the
Index price applied to the related contract volumes.

To the extent we receive the spread
between the contract price and the Index price applied to related contract volumes, we
have a credit risk in the event of nonperformance of the counterparty to the agreement. We
do not anticipate any material impact to our results of operations as a result of
nonperformance by such parties.

The following is a summary of the
companys open commodity hedge contracts as of June 30, 2004:

---

|Commodity   | Type   | Volume/Day   | Duration        | Weighted Average
Price
|----------- | ------ | ------------ | --------------- | ----------------------
|
|Natural Gas | Collar | 95,000 MMBTU | Jul 04 - Dec 04 | $4.00 - $5.96         
|Natural Gas | Collar | 50,000 MMBTU | Jan 05 - Dec 05 | $4.05 - $6.32         
|Natural Gas | Swap   | 20,000 MMBTU | Jan 05 - Dec 05 | $          6.25       
|Natural Gas | Collar | 20,000 MMBTU | Jan 06 - Dec 06 | $5.25 - $6.30         
|Crude Oil   | Collar | 4,000 BBL    | Jul 04 - Dec 04 | $23.25 - $28.36       
|Crude Oil   | Swap   | 1,000 BBL    | Jan 05 - Dec 05 | $         34.90       
|Crude Oil   | Collar | 1,000 BBL    | Jan 06 - Dec 06 | $30.00 - $35.85       

On July 12, 2004, we terminated a
natural gas collar for 10,000 Mmbtu per day for the period August through December 2004.
In closing this contract we realized a $1.3 million loss, which will be recognized in
earnings with the underlying forecasted commodity sales transactions for the months August
through December 2004. After this contract was terminated, our remaining natural gas
production hedged for July through December 2004 decreased to approximately 86.7 Mmcf/day
with a weighted average floor price of $4.02 and a weighted average ceiling price of
$6.00.

Based on future market prices at June
30, 2004, the fair value of open commodity hedging contracts was a net liability of $31.6
million. If future market prices were to increase 10% from those in effect at June 30,
2004, the fair value of open contracts would be a net liability of $59.1 million. If
future market prices were to decline 10% from those in effect at June 30, 2004, the fair
value of the open contracts would be a net liability of $12.3 million.

At inception, due to Company policy,
commodity hedge positions may not exceed 75% of natural gas and 90% of crude oil
forecasted current (18 months) commodity production. For non-current (greater than 18
months) commodity production, at inception, commodity hedge positions for natural gas and
crude oil may not exceed 75% of forecasted production for each product. Unhedged portions
of our natural gas and crude oil production will be subject to market price fluctuations.
There are restrictions on our hedging programs under our Facility.

Fixed and Variable Rate Debt.The company uses fixed and variable rate debt to partially finance budgeted
expenditures. These agreements expose the company to market risk related to changes in
interest rates.

The following table presents the
carrying and fair value of the companys debt along with average interest rates as of
June 30, 2004. Fair values are calculated as the net present value of the expected cash
flows of the financial instruments, except for the fixed rate Senior Notes and the
Convertible Notes, which are valued at their last traded value before June 30, 2004.

|Expected Maturity Dates | 2004 | 2005-7 | 2012 | 2023  | Total | Fair Value
|----------------------- | ---- | ------ | ---- | ----- | ----- | ----------
|
|Variable Rate Debt:     |      |        |      |       |       |           
|Facility (a)            |      |        | $    | --    |       | $         
|Convertible Notes (b)   |      |        |      | --    |       |           
|Capital Leases (c)      |      |        |      | 1,011 |       |           
|Fixed Rate Debt:        |      |       
|Senior Notes (d)        |      |        | $    | --    |       | $         

---

| | (a)     The average interest rate on the Facility is 2.4%.             
| | -----------------------------------------------------------------------
| | (b)     The average interest rate on the convertible notes is 1.52%.   
| | (c)     The average interest rate on the two capital leases is 4.4438%.
| | (d)     The interest rate on the senior notes due 2012 is a fixed 9.6%.

---

# Item 4. Controls and
Procedures

Our chief executive officer and chief
financial officer have reviewed and evaluated the effectiveness of the companys
disclosure controls and procedures [as defined in Rules 240.13a-15(e) and 15d-15(e)
promulgated under the Securities Exchange Act of 1934] as of the end of the period covered
by this quarterly report. Based on that review and evaluation, which included inquiries
made to certain other employees of the company, the chief executive officer and chief
financial officer have concluded that our current disclosure controls and procedures, as
designed and implemented, are reasonably adequate to ensure that they are provided with
material information relating to the company required to be disclosed in the reports the
company files or submits under the Securities Exchange Act of 1934. There have not been
any significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation. However, we have
been reviewing all of our significant internal controls and
are in the process of improving some of our procedures and processes related to our
internal controls.

---

# PART II  OTHER
INFORMATION

# Item 6. Exhibits and
Reports on Form 8-K

(a) Exhibits

|Number     | Description of Exhibit                                                                                                    
|---------- | --------------------------------------------------------------------------------------------------------------------------
|3.1 & 4.1  | Articles of Incorporation (Incorporated by reference to Registration Statement on Form S-18, File No.                     
|           | 33-30298-D).                                                                                                              
|3.2 & 4.2  | Articles of Amendment to Articles of Incorporation (Incorporated by reference to Form 10-K for the                        
|           | year ended December 31, 1990).                                                                                            
|3.3 & 4.3  | Articles of Amendment to Articles of Incorporation (Incorporated by reference to Registration                             
|           | Statement on Form SB-2, File No. 33-66190).                                                                               
|3.4 & 4.4  | Articles of Amendment to Articles of Incorporation (Incorporated by reference to Registration                             
|           | Statement on Form S-3, File No. 333-30453).                                                                               
|3.5 & 4.5  | Articles of Amendment to Articles of Incorporation (Incorporated by reference to Form 10-K for the                        
|           | year ended December 31, 2001).                                                                                            
|3.6 & 4.6* | Amended and Restated By-Laws                                                                                              
|3.7 & 4.7  | Certificate of Designation of 1996 Series A Preferred Stock (Incorporated by reference to Form 8-K                        
|           | dated December 26, 1996, filed January 3, 1997).                                                                          
|3.8 & 4.8  | Amendment to Certificate of Designation for 1996 Series A Convertible Preferred Stock (Incorporated by                    
|           | reference to Registration Statement on Form S-3, File No. 333-30453).                                                     
|4.9        | Form of Warrant Agreement by and between Magnum Hunter Resources, Inc. and American Stock Transfer &                      
|           | Trust Company, as warrant agent (Incorporated by reference to Registration Statement on Form S-3, File                    
|           | No. 333-82552).                                                                                                           
|4.10       | Indenture, dated March 15, 2002, between Magnum Hunter Resources, Inc., the subsidiary guarantors                         
|           | named therein and Bankers Trust Company, as Trustee (Incorporated by reference to Form 10-K for the                       
|           | year ended December 31, 2001).                                                                                            
|4.11       | Form of 9.6% Senior Note due 2007 (included in Exhibit 4.10).                                                             
|4.12       | Indenture dated December 15, 2003 between Magnum Hunter Resources, Inc., the subsidiary guarantors                        
|           | named therein and Deutsche Bank Trust Company Americas, as Trustee.                                                       
|4.13       | Form of Floating Rate Convertible Senior Notes due 2023 (included in Exhibit 4.12).                                       
|4.14       | Shareholder Rights Agreement dated as of January 6, 1998 by and between Magnum Hunter Resources, Inc.                     
|           | and Securities Transfer Corporation, as Rights Agent (Incorporated by reference to Form 8-K dated                         
|           | January 7, 1998, filed January 9, 1998).                                                                                  
|10.1       | Fourth Amended and Restated Credit Agreement dated March 15, 2002, as amended, between                                    
|           | Magnum Hunter Resources, Inc. and Bankers Trust Company, et al (Incorporated by reference to Form 10-K                    
|           | for the year ended December 31, 2001).                                                                                    
|10.2       | First Amendment to Fourth Amended and Restated Credit Agreement, dated April 19, 2002 between                             
|           | Magnum Hunter Resources, Inc. and Deutsche Bank Trust Company Americas, et al. (Incorporated by                           
|           | reference to Form 10-K for the year ended December 31, 2003).                                                             
|10.3       | Second Amendment to Fourth Amended and Restated Credit Agreement, dated July 3, 2002 between                              
|           | Magnum Hunter Resources, Inc. and Deutsche Bank Trust Company Americas, et al. (Incorporated by                           
|           | reference to Form 10-K for the year ended December 31, 2003).                                                             
|10.4       | Third Amendment to Fourth Amended and Restated Credit Agreement, dated August 28, 2002 between Magnum                     
|           | Hunter Resources, Inc. and Deutsche Bank Trust Company Americas, et al. (Incorporated by reference to                     
|           | Form 10-K for the year ended December 31, 2003).                                                                          
|10.5       | Fourth Amendment to Fourth Amended and Restated Credit Agreement, dated September 6, 2002 between                         
|           | Magnum Hunter Resources, Inc. and Deutsche Bank Trust Company Americas, et al. (Incorporated by                           
|           | reference to Form 10-K for the year ended December 31, 2003).                                                             
|10.6       | Waiver and Fifth Amendment to Fourth Amended and Restated Credit Agreement, dated November 20, 2002                       
|           | between Magnum Hunter Resources, Inc. and Deutsche Bank Trust Company Americas, et al. (Incorporated                      
|           | by reference to Form 10-K for the year ended December 31, 2003).                                                          
|10.7       | Waiver and Sixth Amendment to Fourth Amended and Restated Credit Agreement, dated May 2, 2003 between                     
|           | Magnum Hunter Resources, Inc. and Deutsche Bank Trust Company Americas, et al. (Incorporated by                           
|           | reference to Form 10-K for the year ended December 31, 2003).                                                             
|10.8       | Seventh Amendment to Fourth Amended and Restated Credit Agreement, dated August 8, 2003 between Magnum                    
|           | Hunter Resources, Inc. and Deutsche Bank Trust Company Americas, et al. (Incorporated by reference to                     
|           | Form 10-K for the year ended December 31, 2003).                                                                          
|10.9       | Waiver and Eighth Amendment to Fourth Amended and Restated Credit Agreement, dated October 31, 2003                       
|           | between Magnum Hunter Resources, Inc. and Deutsche Bank Trust Company Americas, et al. (Incorporated                      
|           | by reference to Form 10-K for the year ended December 31, 2003).                                                          
|10.10      | Ninth Amendment to Fourth Amended and Restated Credit Agreement, dated December 10, 2003                                  
|           | between Magnum Hunter Resources, Inc. and Deutsche Bank Trust Company Americas, et al. (Incorporated                      
|           | by reference to Form 10-K for the year ended December 31, 2003).                                                          
|10.11      | Tenth Amendment to Fourth Amended and Restated Credit Agreement, dated April 30, 2004 between                             
|           | Magnum Hunter Resources, Inc. and Deutsche Bank Trust Company Americas, et al. (Incorporated by                           
|           | reference to Form 10-Q for the period ended March 31, 2004).                                                              
|10.12*     | Eleventh Amendment to Fourth Amended and Restated Credit Agreement, dated July 15, 2004 between Magnum                    
|           | Hunter Resources, Inc. and Deutsche Bank Trust Company Americas, et al.                                                   
|10.13     | Employment Agreement for Gary C. Evans (Incorporated by reference to Form 10-K for the fiscal year-end                    
|           | December 31, 1999, filed March 30, 2000).                                                                                 
|10.14     | Employment Agreement for Richard R. Frazier (Incorporated by reference to Form 10-K for the fiscal                        
|           | year-end December 31, 1999, filed March 30, 2000).                                                                        
|10.15     | Employment Agreement for Chris Tong (Incorporated by reference to Form 10-K for the fiscal year-                          
|           | end December 31, 2002).                                                                                                   
|10.16     | Employment Agreement for R. Douglas Cronk (Incorporated by reference to Form 10-K for the fiscal                          
|           | year-end December 31, 2002).                                                                                              
|10.17     | Employment Agreement for Charles Erwin (Incorporated by reference to Form 10-K for the fiscal                             
|           | year-end December 31, 2002).                                                                                              
|10.18     | Employment Agreement for Morgan F. Johnston (Incorporated by reference to Form 10-K for the year ended December 31, 2003).
|10.19      | Purchase and Sale Agreement, dated February 27, 1997 among Burlington Resources Oil and Gas                               
|           | Company, Glacier Park Company and Magnum Hunter Production, Inc. (Incorporated by reference to                            
|           | Form 8-K, dated April 30, 1997, filed May 12, 1997).                                                                      
|10.20      | Purchase and Sale Agreement dated November 25, 1998, between Magnum Hunter Production, Inc. and Unocal                    
|           | Oil Company of California (Incorporated by reference to Form 10-K for the fiscal year-end December 31,                    
|           | 1998, filed April 14, 1999).                                                                                              
|10.21      | Agreement of Limited Partnership of Mallard Hunter, L.P., dated May 23, 2000 (Incorporated by                             
|           | reference to Form 10-Q/A for the period ended June 30, 2000, filed November 30, 2000).                                    
|21         | Subsidiaries of the Registrant (Incorporated by reference to Form 10-K for the period ended December 31, 2001).           
|          
|31.1*      | Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002, signed by Gary C. Evans                              
|31.2*      | Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002, signed by Chris Tong                                 
|32.1*      | Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002 signed by Gary C. Evans                               
|32.2*      | Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002 signed by Chris Tong                                  

---

* Filed herewith

(a)    
          Reports on Form 8-K

During the three months ended June
30, 2004, we furnished the following Current Reports on Form 8-K:

1.    
          Report on Form 8-K filed May 4, 2004 reporting on Item 12.

2.    
          Report on Form 8-K filed June 22, 2004 reporting on Item 5.

3.    
          Report on Form 8-K filed June 24, 2004 reporting on Item 5.

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# SIGNATURE

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

# MAGNUM HUNTER RESOURCES, INC.

|By    /s/ Gary C. Evans                                                         |  | August 4, 2004
|------------------------------------------------------------------------------- |  | --------------
|Gary C. Evans         Chairman, President and Chief Executive Officer           |  |               
|                                                                                |  |               
|By    /s/ Chris Tong                                                            |  | August 4, 2004
|Chris Tong         Senior Vice President and Chief Financial Officer            |  |               
|                                                                                |  |               
|By    /s/ Morgan F. Johnston                                                    |  | August 4, 2004
|Morgan F. Johnston         Senior Vice President, General Counsel and Secretary |  |               
|                                                                                |  |               
|By    /s/ David S. Krueger                                                      |  | August 4, 2004
|David S. Krueger         Vice President and Chief Accounting Officer            |  |