<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION



                             WASHINGTON, D.C. 20549



================================================================================


                                    FORM 10-Q


               QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934



    For the Quarter Ended                            Commission File Number
        JUNE 30, 2000                                        0-23431




                           MILLER EXPLORATION COMPANY
             (Exact Name of Registrant as Specified in Its Charter)



            DELAWARE                                     38-3379776
 (State or Other Jurisdiction of                      (I.R.S. Employer
 Incorporation or Organization)                      Identification No.)



     3104 LOGAN VALLEY ROAD
     TRAVERSE CITY, MICHIGAN                             49685-0348
(Address of Principal Executive Offices)                 (Zip Code)



       Registrant's Telephone Number, Including Area Code: (231) 941-0004



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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.



                                                       Outstanding at
               Class                                   August 14, 2000
               -----                                   ---------------

    Common stock, $.01 par value                      13,241,891 shares



================================================================================
<PAGE>

                           MILLER EXPLORATION COMPANY

                                TABLE OF CONTENTS

                                                                       Page No.
                                                                       --------

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements.............................................3

         Consolidated Statements of Operations--
         Three Months and Six Months Ended June 30, 2000 and 1999 ........3

         Consolidated Balance Sheets--
         June 30, 2000 and December 31, 1999..............................4

         Consolidated Statement of Equity--
         Six Months Ended June 30, 2000...................................5

         Consolidated Statements of Cash Flows--
         Six Months Ended June 30, 2000 and 1999..........................6

         Notes to Consolidated Financial Statements.......................7

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations.......................................15

Item 3.  Quantitative and Qualitative Disclosures About Market Risk......21

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings...............................................23

Item 2.  Changes in Securities...........................................23

Item 3.  Defaults Upon Senior Securities.................................23

Item 4.  Submissions of Matters to a Vote of Securityholders.............23

Item 5.  Other Information...............................................24

Item 6.  Exhibits and Reports on Form 8-K................................25


                                       2
<PAGE>

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                           MILLER EXPLORATION COMPANY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                           For the Three Months           For the Six Months
                                                              Ended June 30,                 Ended June 30,
                                                         ------------------------        -----------------------
                                                           2000            1999            2000            1999
                                                         --------        --------        --------        --------
<S>                                                      <C>             <C>             <C>             <C>
REVENUES:
     Natural gas ...................................     $  4,924        $  3,912        $  9,341        $  8,031
     Crude oil and condensate ......................        1,422             898           2,515           1,614
     Other operating revenues ......................          123             150             336             294
                                                         --------        --------        --------        --------
     Total operating revenues ......................        6,469           4,960          12,192           9,939
                                                         --------        --------        --------        --------

OPERATING EXPENSES:
     Lease operating expenses and production taxes..          557             448           1,015           1,051
     Depreciation, depletion and amortization ......        4,415           3,530           8,786           6,922
     General and administrative ....................          633             923           1,342           1,800
                                                         --------        --------        --------        --------
         Total operating expenses ..................        5,605           4,901          11,143           9,773
                                                         --------        --------        --------        --------

OPERATING INCOME ...................................          864              59           1,049             166
                                                         --------        --------        --------        --------

INTEREST EXPENSE ...................................         (818)         (1,013)         (1,667)         (1,607)
                                                         --------        --------        --------        --------

INCOME (LOSS) BEFORE INCOME TAXES ..................           46            (954)           (618)         (1,441)
                                                         --------        --------        --------        --------

INCOME TAX PROVISION (CREDIT) ......................           16            (378)           (210)           (576)
                                                         --------        --------        --------        --------

NET INCOME (LOSS) ..................................     $     30        $   (576)       $   (408)       $   (865)
                                                         ========        ========        ========        ========

EARNINGS (LOSS) PER SHARE (Note 3)
     Basic .........................................     $   0.00        $  (0.05)       $  (0.03)       $  (0.07)
                                                         ========        ========        ========        ========
     Diluted .......................................     $   0.00        $  (0.05)       $  (0.03)       $  (0.07)
                                                         ========        ========        ========        ========
</TABLE>

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


                                       3
<PAGE>

                           MILLER EXPLORATION COMPANY
                           CONSOLIDATED BALANCE SHEETS
                      (In thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                           AS OF JUNE 30,     AS OF DECEMBER 31,
                                                                                2000                1999
                                                                           ---------------    ------------------
                                                                             (UNAUDITED)
                                      ASSETS
<S>                                                                           <C>                 <C>
CURRENT ASSETS:
      Cash and cash equivalents ......................................        $     388           $   3,712
      Restricted cash (Note 2) .......................................               35               1,079
      Accounts receivable ............................................            5,398               4,580
      Inventories, prepaids and advances to operators ................              834                 640
                                                                              ---------           ---------
          Total current assets .......................................            6,655              10,011
                                                                              ---------           ---------

OIL AND GAS PROPERTIES--at cost (full cost method):
      Proved oil and gas properties ..................................          122,829             115,040
      Unproved oil and gas properties ................................           16,872              22,678
Less-Accumulated depreciation, depletion and amortization ............          (87,418)            (78,881)
                                                                              ---------           ---------
          Net oil and gas properties .................................           52,283              58,837
                                                                              ---------           ---------

OTHER ASSETS .........................................................              805                 838
                                                                              ---------           ---------
          Total assets ...............................................        $  59,743           $  69,686
                                                                              =========           =========

                              LIABILITIES AND EQUITY

CURRENT LIABILITIES:
      Current portion of long-term debt ..............................        $  10,478           $   3,500
      Accounts payable ...............................................            1,869               3,472
      Accrued expenses and other current liabilities .................            4,445               7,239
                                                                              ---------           ---------
          Total current liabilities ..................................           16,792              14,211
                                                                              ---------           ---------

LONG-TERM DEBT .......................................................           13,169              25,610

DEFERRED INCOME TAXES ................................................            5,606               5,816

DEFERRED REVENUE .....................................................               37                  54

COMMITMENTS AND CONTINGENCIES (NOTE 6)

EQUITY:
      Common stock warrants ..........................................            1,268                 845
      Preferred stock, $0.01 par value; 2,000,000 shares authorized;
          none outstanding ...........................................               --                  --
      Common stock, $0.01 par value; 40,000,000 shares
          authorized; 12,716,537 shares and 12,681,244 shares
          outstanding at June 30, 2000 and December 31, 1999,
          respectively ...............................................              127                 127
      Additional paid in capital .....................................           66,771              66,690
      Deferred compensation ..........................................               --                 (48)
      Retained deficit ...............................................          (44,027)            (43,619)
                                                                              ---------           ---------
          Total equity ...............................................           24,139              23,995
                                                                              ---------           ---------
          Total liabilities and equity ...............................        $  59,743           $  69,686
                                                                              =========           =========
</TABLE>

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


                                       4
<PAGE>

                           MILLER EXPLORATION COMPANY
                        CONSOLIDATED STATEMENT OF EQUITY
                                 (In thousands)
                                   (Unaudited)
<TABLE>
<CAPTION>
                                        COMMON                                 ADDITIONAL
                                         STOCK      PREFERRED      COMMON        PAID IN       DEFERRED         RETAINED
                                       WARRANTS       STOCK         STOCK        CAPITAL     COMPENSATION        DEFICIT
                                       --------       -----         -----        -------     ------------        -------

<S>                                   <C>           <C>           <C>            <C>           <C>             <C>
BALANCE-December 31, 1999             $    845      $     --      $    127       $ 66,690      $    (48)       $(43,619)

     Issuance of restricted stock
         and benefit plan shares            --            --            --             81            48              --
     Common stock
         warrants issued                   423            --            --             --            --              --
     Net loss                               --            --            --             --            --            (408)
                                      --------      --------      --------       --------      --------        --------

BALANCE-June 30, 2000                 $  1,268      $     --      $    127       $ 66,771      $     --        $(44,027)
                                      ========      ========      ========       ========      ========        ========
</TABLE>

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


                                       5
<PAGE>

                           MILLER EXPLORATION COMPANY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                             FOR THE SIX MONTHS ENDED
                                                                                      JUNE 30,
                                                                               2000             1999
                                                                            ---------         --------
<S>                                                                         <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss ......................................................        $  (408)          $  (865)
     Adjustments to reconcile net loss to net cash from
        operating activities--
           Depreciation, depletion and amortization ................          8,786             6,922
           Deferred income taxes ...................................           (210)             (491)
           Deferred revenue ........................................            (17)              (18)
           Warrants and stock compensation .........................            552               774
           Changes in assets and liabilities--
               Restricted cash .....................................          1,044                --
               Accounts receivable .................................           (818)              675
               Other assets ........................................           (410)              517
               Accounts payable ....................................         (1,603)           (1,834)
               Accrued expenses and other current liabilities ......         (2,794)              492
                                                                            -------           -------
                  Net cash flows provided by operating activities...          4,122             6,172
                                                                            -------           -------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Exploration and development expenditures ......................         (2,930)           (8,375)
     Proceeds from sale of oil and gas properties and purchases of
        equipment, net .............................................            947             8,201
                                                                            -------           -------
Net cash flows used in investing activities ........................         (1,983)             (174)
                                                                            -------           -------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Payments of principal .........................................         (5,602)           (7,576)
     Borrowing on long-term debt ...................................            139             2,490
                                                                            -------           -------
        Net cash flows used in financing activities ................         (5,463)           (5,086)
                                                                            -------           -------
NET CHANGE IN CASH AND CASH EQUIVALENTS ............................         (3,324)              912
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD ...............          3,712                22
                                                                            -------           -------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD .....................        $   388           $   934
                                                                            =======           =======
SUPPLEMENTAL CASH FLOW INFORMATION:
     Cash paid during the period for--
        Interest ...................................................        $ 1,280           $ 1,543
                                                                            =======           =======
</TABLE>

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



                                       6
<PAGE>

                           MILLER EXPLORATION COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

(1)      ORGANIZATION AND NATURE OF OPERATIONS

         The consolidated financial statements of Miller Exploration Company
(the "Company") and subsidiary included herein have been prepared by management
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). Accordingly, they reflect all adjustments which
are, in the opinion of management, necessary for a fair presentation of the
financial results for the interim periods. Certain information and notes
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. However, management believes that the disclosures are
adequate to make the information presented not misleading. These consolidated
financial statements should be read in conjunction with the financial statements
and the notes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.

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

         Principles of Consolidation

         The consolidated financial statements of the Company include the
accounts of the Company and its subsidiary after elimination of all intercompany
accounts and transactions.

         Nature of Operations

         The Company is a domestic, independent energy company engaged in the
exploration, development and production of crude oil and natural gas. The
Company has established exploration efforts concentrated primarily in the
Mississippi Salt Basin of central Mississippi.

         Oil and Gas Properties

         SEC Regulation S-X, Rule 4-10 requires companies reporting on a full
cost basis to apply a ceiling test wherein the capitalized costs within the full
cost pool may not exceed the net present value of the Company's proven oil and
gas reserves plus the lower of the cost or market value of unproved properties
and deferred income taxes. Any such excess costs should be charged against
earnings.

         Reclassifications

         Certain reclassifications have been made to prior period statements to
conform with the June 30, 2000 presentation.


                                       7
<PAGE>

                          MILLER EXPLORATION COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)



(2)      RESTRICTED CASH

         In 1999, the Company entered into escrow agreements at the request of
certain joint venture partners regarding the drilling of certain wells operated
by the Company. Terms of the escrow agreements require the parties to the
agreements to deposit their proportionate share of the estimated costs of
drilling each subject well into a separate escrow account. The escrow account is
controlled by an independent third party agent and is restricted to the sole
purpose of processing payments to vendors covered by the escrow agreements.

(3)      EARNINGS PER SHARE

         The computation of earnings (loss) per share for the three-month and
six-month periods ended June 30, 2000 and 1999 are as follows (in thousands,
except per share data):

<TABLE>
<CAPTION>
                                                         THREE MONTHS                    SIX MONTHS
                                                         ENDED JUNE 30                  ENDED JUNE 30
                                                     2000             1999           2000           1999
                                                  ----------      ----------     ----------      ----------
<S>                                               <C>             <C>            <C>             <C>
     Net earnings (loss) attributable to
         basic and diluted EPS .............      $       30      $     (576)    $     (408)     $     (865)

     Average common shares outstanding
         applicable to basic EPS ...........          12,704          12,619         12,702          12,586

     Earnings (loss) per share:
         Basic .............................      $     0.00      $    (0.05)    $    (0.03)     $    (0.07)
         Diluted ...........................      $     0.00      $    (0.05)    $    (0.03)     $    (0.07)
</TABLE>

         Options and restricted stock were not included in the computation of
diluted earnings per share for the three-month period ended June 30, 1999 and
the six-month periods ended June 30, 2000 and 1999 because their effect was
antidilutive.

(4)      LONG-TERM DEBT

         Bank Debt

         Concurrently with the Company's Initial Public Offering, the Company
entered into a credit facility (the "Credit Facility") with Bank of
Montreal, Houston Agency ("Bank of Montreal"). The Credit Facility, as amended,
required principal reductions and included certain negative covenants that
imposed limitations on the Company and its subsidiary with respect to, among
other things, distributions with respect to capital stock, limitations on
financial ratios, the creation or incurrence of liens, restrictions on proceeds
from sales of oil and gas properties, the incurrence of additional indebtedness,
making loans and investments and mergers and consolidations. The obligations
under the Credit Facility were secured by a lien on all real and personal
property of the Company. Commencing April 1999, the interest rate under this
facility was increased to Bank of Montreal's prime rate plus 3.5%.

         Principal payments of $20.6 million were made from April 1999 through
June 2000, leaving an outstanding balance at June 30, 2000 of $16.4 million
under the Credit Facility.

                                       8
<PAGE>

                           MILLER EXPLORATION COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

(4)      LONG-TERM DEBT (CONTINUED)

         On July 11, 2000, a principal payment of $4.9 million was made to pay
down the Credit Facility to $11.5 million. The pay down was made from the
Guardian transaction proceeds (as more fully described in Note 9).

         On July 19, 2000, the Company entered into a new senior credit facility
with Bank One, Texas, N.A. (" Bank One") which replaced the existing credit
facility with Bank of Montreal. The new credit facility has a 30-month term and
a current borrowing base of $11.5 million. The interest rate under the new
credit facility is either the Bank One prime rate plus 2% or LIBOR plus 4% at
the Company's option. The new credit facility requires the Company to make
monthly payments of $500,000 until the next borrowing base re-determination
which is scheduled for January 1, 2001.

         The new credit facility with Bank One includes certain covenants that
impose restrictions on the Company with respect to, among other things,
incurrence of additional indebtedness, limitations on financial ratios, making
investments and mergers and consolidation. The obligations under the new credit
facility are secured by a lien on all of the Company's real and personal
property.

         Other

         On April 14, 1999, the Company issued a $4.7 million note payable to
one of its suppliers, Veritas DGC Land, Inc. (the "Veritas Note"), for the
outstanding balance due to Veritas for past services provided in 1998 and 1999.
The principal obligation under the Veritas Note was originally due on April 15,
2001. On July 19, 2000, the note was amended as more fully described below.

         On April 14, 1999, the Company also entered into an agreement (the
"Warrant Agreement") to issue warrants to Veritas that entitle Veritas to
purchase shares of common stock in lieu of receiving cash payments for the
accrued interest obligations under the Veritas Note. The Warrant Agreement
required the Company to issue warrants to Veritas in conjunction with the
signing of the Warrant Agreement, as well as on the six and, at the Company's
option, 12 and 18 month anniversaries of the Warrant Agreement. The warrants
issued equal 9% of the then current outstanding principal balance of the Veritas
Note. The number of shares issued upon exercise of the warrants issued on April
14, 1999, and on the six-month anniversary was determined based upon a five-day
weighted average closing price of the Company's common stock at April 14, 1999.
The exercise price of each warrant is $0.01 per share. On April 14, 1999,
warrants exercisable for 322,752 shares of common stock were issued to Veritas
in connection with execution of the Veritas Note. On October 14, 1999 and April
14, 2000, warrants exercisable for another 322,752 and 454,994 shares,
respectively, of common stock were issued to Veritas. The Warrant Agreement was
also amended on July 19, 2000.

         Under the terms of the amended note and warrant, the maturity of the
Veritas Note was extended from April 15, 2001 to July 21, 2003 and the
expiration date for all warrants issued was extended until June 21, 2004. The
annual interest rate has been reduced from 18% to 9 3/4%, provided the entire
note balance is paid in full by December 31, 2001. If all principal and interest
under the Veritas Note is not paid by December 31, 2001, then the note bears
interest at 13 3/4% until paid in full. Interest accrues at the reduced rate
from and after October 15, 2000 and is payable commencing April 15, 2001 and
continuing on each October 15 and April 15 until principal is paid in full.
Interest will be paid in warrants under the

                                       9
<PAGE>

                           MILLER EXPLORATION COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


(4)      LONG-TERM DEBT (CONTINUED)

terms of the Warrant Agreement until such time as the Company is in borrowing
base compliance with its senior lender, Bank One, at which time interest will
only be paid in cash.

         Under the amended Veritas Note, a principal payment of $500,000 was
made on July 19, 2000, the effective date of the amendment, and another $500,000
payment is required from proceeds of the Eagle Transaction (see Note 9) within
five days of stockholder approval if approved on or before October 31, 2000. If
the Eagle Transaction (as more fully described in Note 9) is not approved, the
second payment must be made on or before December 31, 2000. Nonpayment of this
second principal amount results in a penalty payment of $750,000 payable in
warrants at the then current market price of the stock. The balance due Veritas
was $4.7 million at June 30, 2000 with $3.7 million classified as long-term and
$1.0 million as current in the accompanying financial statements.

         Any additional proceeds derived from exercise of warrants issued or
from other debt or equity transactions must be used to pay interest and
principal on the amended Veritas Note until paid in full.

         In connection with the closing of the Amerada Hess Corporation ("AHC")
property acquisition on February 9, 1998, the Company issued a non-interest
bearing note payable to AHC (the "AHC Note"). At June 30, 2000, the remaining
AHC Note of $2.5 million is payable on the annual anniversary dates of the
closing as follows: $1.0 million in 2000 and $1.5 million in 2001. The Company
had obtained a six-month extension of the $1.0 million payment from February
2000 to August 2000. This payment was made on August 3, 2000. Also, the $1.5
million payment due February 2001 has been divided into three quarterly
installments of $500,000 each, payable commencing February 2001. Terms of the
extension agreement require monthly interest payments at an annual interest rate
of 12% for the periods February through August 2000 and February through July
2001.

         The Company's long-term debt consisted of the following as of June 30,
2000 (in thousands):

<TABLE>
     <S>                                        <C>
     Bank of Montreal Credit Facility           $ 16,373
     Veritas Note                                  4,696
     AHC Note                                      2,500
     Other                                            78
                                                --------
          Total                                   23,647

     Less current portion of long-term debt      (10,478)
                                                --------
                                                $ 13,169
</TABLE>


(5)      RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS

         The Company uses a variety of derivative instruments ("derivatives") to
manage exposure to fluctuations in commodity prices and interest rates. To
qualify for hedge accounting, derivatives must meet the following criteria: (i)
the item to be hedged exposes the Company to price or interest rate risk; and
(ii) the derivative reduces that exposure and is designated as a hedge.


                                       10
<PAGE>

                           MILLER EXPLORATION COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


         Commodity Price Hedges

         The Company periodically enters into certain derivatives (primarily
NYMEX futures contracts) for a portion of its oil and natural gas production to
achieve a more predictable cash flow, as well as to reduce the exposure to price
fluctuations. The Company's hedging arrangements apply only to a portion of its
production, provide only partial price protection against volatility in oil and
natural gas prices and limit potential gains from future increases in prices.
Such hedging arrangements may expose the Company to risk of financial loss in
certain circumstances, including instances where production is less than
expected, the Company's customers fail to purchase contracted quantities of oil
or natural gas or a sudden unexpected event materially impacts oil or natural
gas prices. For financial reporting purposes, gains and losses related to
hedging are recognized as income when the hedged transaction occurs. The Company
expects that the amount of hedge contracts that it has in place will vary from
time to time. For the six months ended June 30, 2000 and 1999, the Company
realized approximately $(0.4) million and $0.4 million, respectively, of hedging
gains (losses) which are included in oil and natural gas revenues in the
consolidated statements of operations. For the six months ended June 30, 2000
and 1999, the Company had hedged 40% and 37%, respectively, of its oil and
natural gas production, and as of June 30, 2000 the Company had 2.4 Bcfe of open
oil and natural gas contracts for the months of July 2000 through March 2001.

(6)      COMMITMENTS AND CONTINGENCIES

         Stock-Based Compensation

         During 1997, the Company adopted the Stock Option and Restricted Stock
Plan of 1997 (the "1997 Plan"). The Board of Directors contemplates that the
1997 Plan primarily will be used to grant stock options. However, the 1997 Plan
permits grants of restricted stock and tax benefit rights if determined to be
desirable to advance the purposes of the 1997 Plan. These stock options,
restricted stock and tax benefit rights are collectively referred to as
"Incentive Awards." Persons eligible to receive Incentive Awards under the 1997
Plan are directors, corporate officers and other full-time employees of the
Company and its subsidiaries. A maximum of 1.2 million shares of common stock
(subject to certain antidilution adjustments) are available for Incentive Awards
under the 1997 Plan. During 1999, incentive stock options of 25,000 were issued
to outside directors and new employees under the 1997 Plan. In February 2000 and
1999, 43,500 and 54,750 shares of restricted stock vested, respectively, and the
Company recognized compensation expense of approximately $60,000 and $178,000,
accordingly.

         On January 1, 2000, the Company granted 191,500 stock options to
certain employees with an exercise price of $0.01 per share. The right to
exercise the options vests and they become exercisable when the normal trading
average of the common stock on the market remains above the designated target
prices for a period of five consecutive trading days as follows:


      Five-Day Daily Average Target               Percentage Vested
      -----------------------------               -----------------
             $2.00                                     40%
             $2.75                                     30%
             $3.50                                     30%


                                       11
<PAGE>

                           MILLER EXPLORATION COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


         Other

         The Company has been named as a defendant in a lawsuit filed June 1,
1999 by Energy Drilling Company ("Energy Drilling"), in the Parish of Catahoula,
Louisiana arising from a blowout of the Victor P. Vegas #1 well that was drilled
and operated by the Company. Energy Drilling, the drilling rig contractor on the
well, is claiming damages related to their destroyed drilling rig and related
costs amounting to approximately $1.2 million, plus interest, attorneys' fees
and costs.

         The Company has been named in a lawsuit brought by Victor P. Vegas, the
landowner of the surface location of the blowout well referenced above. The suit
was filed July 20, 1999 in the Parish of Orleans, Louisiana, claiming
unspecified damages related to environmental and other matters.

         The Company has been named in a lawsuit brought by Charles Strickland,
employee of BJ Services, Inc., on September 30, 1999. The suit is claiming
damages of $1.0 million for personal injuries allegedly suffered at a well site
operated by the Company.

         The Company has been named in a lawsuit brought by Eric Parkinson,
husband and personal representative of the Estate of Kelly Anne Parkinson
(deceased). The amended complaint was filed December 13, 1999, in the County of
Hillsdale, Michigan, claiming an unspecified amount plus interest and attorney
fees for suffering the loss of the deceased. Kelly Anne Parkinson was killed in
an automobile accident on February 2, 1999, while traveling on a county road
located next to land wherein the Company is lessee of underground mineral
rights. The plaintiff alleges that the accident was the result of mud dragged on
the road from the leased property and alleges that the Company was negligent in
its duty to conduct its operations at the site with reasonable care.

         The Company received notice on February 1, 2000 that AHC became a
defendant in a lawsuit as operator of certain Texas properties wherein Miller
Oil Corporation was a joint venture partner. The claimant alledges that he
contacted leukemia during his 17 year employment at Schlumberger while working
on various wells in Texas. Approximately 25 oil and gas companies have been
named as defendants in this suit. AHC has tendered defense and indemnity of this
lawsuit to Schlumberger and has agreed to pursue defense on behalf of all
working interest owners including the Company in this case. The case is in the
early stages of discovery.

         The Company believes it has meritorious defenses to the claims
discussed above and intends to vigorously defend these lawsuits. The Company
does not believe that the final outcome of these matters will have a material
adverse effect on the Company's operating results, financial condition or
liquidity. Due to the uncertainties inherent in litigation, however, no
assurances can be given regarding the final outcome of each action. The Company
currently believes any costs resulting from the lawsuits mentioned above would
be covered by the Company's insurance.

                                       12
<PAGE>

                           MILLER EXPLORATION COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


         On May 1, 2000, the Company filed a lawsuit in the United States
District Court for the District of Montana against K2 America Corporation and K2
Energy Corporation (hereinafter collectively referred to as "K2"). The Company's
lawsuit includes certain claims of relief and allegations by the Company against
K2, including breach of contract arising from failure by K2 to agree to escrow,
repudiation, and rescission; specific performance; declaratory relief; partition
of K2 lands that are subject to the K2/Blackfeet IMDA; negligence; and tortuous
interference with contract. The lawsuit is on file with the United States
District Court for the District of Montana, Great Falls Division and is not
subject to protective order.

         On May 1, 2000, the Company gave notice to the Blackfeet Tribal
Business Council demanding arbitration of all disputes as provided for under the
Indian Mineral Development Act ("IMDA") agreement between the Company and the
Blackfeet (the "Miller/Blackfeet IMDA") dated February 19, 1999, and pursuant to
the IMDA agreement between K2 and the Blackfeet ("K2/Blackfeet IMDA") dated May
30, 1997.

         The disputes for which the Company demands arbitration include but are
not limited to the unreasonable withholding of a consent to a drilling extension
as provided in the Miller/Blackfeet IMDA, as well as a determination by the
Blackfeet dated March 16, 2000, that certain wells which the Company proposed to
drill "would not satisfy the mandatory drilling obligations" under the
K2/Blackfeet IMDA. The Company contends the K2/Blackfeet IMDA, gives it as
lessee, and not the Blackfeet, the exclusive right to select drill sites and
well depths.

 (7)     RELATED PARTY TRANSACTIONS

         During 1999, an affiliated entity purchased a working interest in
certain unproved oil and gas properties from the Company for $3.9 million. The
Company believes that the purchase price was representative of the fair market
value of these interests and that the terms were consistent with those available
to unrelated parties.

 (8)     NON-CASH ACTIVITIES

         In February 2000 and 1999, 43,500 and 54,750 shares of restricted
stock, respectively, vested. In connection therewith, the Company recognized
compensation expenses of approximately $60,000 and $178,000 for the six months
ended June 30, 2000 and 1999, respectively. In February and June 2000, 37,210
and 12,329 shares of Company common stock, respectively, were issued to the
Company's 401(k) savings plan as an employer matching contribution. Beginning
from April 14, 1999, interest expense is being provided for under the Veritas
Note with warrants rather than through the payment of cash. These non-cash
activities have been excluded from the consolidated statements of cash flows.

(9)      SUBSEQUENT EVENTS

         On July 11, 2000, the Company entered into a Securities Purchase
Agreement (the "Securities Purchase Agreement") with Guardian Energy Management
Corporation ("Guardian"). Pursuant to the Securities Purchase Agreement, the
Company issued to Guardian a convertible promissory note in the amount of $5.0
million, and three warrants exercisable, for 1,562,500, 2,500,000 and 9,000,000
shares of the Company's common stock respectively. Conversion of the note and
exercise of the warrants are subject to stockholder approval.



                                       13
<PAGE>

                           MILLER EXPLORATION COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


         On July 12, 2000, the Company signed a letter agreement (the "Eagle
Transaction") to sell, in exchange for $2.0 million in undeveloped oil and gas
properties and $0.5 million in cash, a total of 1,851,851 shares of common stock
to Eagle Investments, Inc., ("Eagle") an affiliated entity controlled by C. E.
Miller, the Chairman of the Company. In addition, Eagle will be issued warrants
exercisable for a total of 2,031,250 shares of common stock. Consummation of the
transaction with Eagle is subject, among other things, to stockholder approval.

         Also on July 11, 2000, the Company entered into a Subscription
Agreement with ECCO Investments, LLC ("ECCO"), pursuant to which ECCO purchased
370,370 shares of the Company's common stock for an aggregate purchase price of
$0.5 million or $1.35 per share.





                                       14
<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

OVERVIEW


         The Company is an independent oil and gas exploration, development and
production company that has developed a base of producing properties and
inventory of prospects primarily in Mississippi.

         The Company uses the full cost method of accounting for its oil and
natural gas properties. Under this method, all acquisition, exploration and
development costs, including any general and administrative costs that are
directly attributable to the Company's acquisition, exploration and development
activities, are capitalized in a "full cost pool" as incurred. Additionally,
proceeds from the sale of oil and gas properties are applied to reduce the costs
in the full cost pool. The Company records depletion of its full cost pool using
the unit-of-production method.

         Securities and Exchange Commission ("SEC") Regulation S-X, Rule 4-10
requires companies reporting on a full cost basis to apply a ceiling test
wherein the capitalized costs within the full cost pool may not exceed the net
present value of the Company's proven oil and gas reserves plus the lower of the
cost or market value of unproved properties and deferred income taxes. Any such
excess costs should be charged against earnings.


                                       15
<PAGE>

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS
                                   (CONTINUED)

RESULTS OF OPERATIONS

         The following table summarizes production volumes, average sales prices
and average costs for the Company's oil and natural gas operations for the
periods presented (in thousands, except per unit amounts):

<TABLE>
<CAPTION>
                                                       FOR THE THREE MONTHS      FOR THE SIX MONTHS
                                                          ENDED JUNE 30,           ENDED JUNE 30,
                                                       --------------------     ---------------------
                                                         2000        1999         2000         1999
                                                       --------    --------     --------     --------
<S>                                                    <C>         <C>          <C>          <C>
Production volumes:
     Crude oil and condensate (MBbls) ..............        57          63          104          134
     Natural gas (MMcf) ............................     1,506       1,876        3,148        3,931
     Natural gas equivalent (MMcfe) ................     1,848       2,254        3,773        4,771

Revenues:
     Crude oil and condensate ......................   $ 1,422     $   898      $ 2,515      $ 1,614
     Natural gas ...................................     4,924       3,912        9,341        8,031

Operating expenses:
     Lease operating expenses and production taxes..   $   557     $   448      $ 1,015      $ 1,051
     Depletion, depreciation and amortization ......     4,415       3,530        8,786        6,922
     General and administrative ....................       633         923        1,342        1,800

Interest expense ...................................   $   818     $ 1,013      $ 1,667      $ 1,607

Net income (loss) ..................................   $    30     $  (954)     $  (408)     $(1,441)

Average sales prices:
     Crude oil and condensate ($ per Bbl) ..........   $ 24.95     $ 14.25      $ 24.18      $ 11.53
     Natural gas ($ per Mcf) .......................      3.27        2.09         2.97         2.04
     Natural gas equivalent ($ per Mcfe) ...........      3.43        2.13         3.14         2.02

Average Costs ($ per Mcfe):
     Lease operating expenses and production taxes..   $  0.30     $  0.20      $  0.27      $  0.22
     Depletion, depreciation and amortization ......      2.39        1.57         2.33         1.45
     General and administrative ....................      0.34        0.41         0.36         0.38
</TABLE>


  Three Months Ended June 30, 2000 compared to Three Months Ended June 30, 1999

         Oil and natural gas revenues for the three months ended June 30, 2000
increased 32% to $6.3 million from $4.8 million for the same period in 1999. The
revenues for the three months ended June 30, 2000 and 1999 include $(0.4)
million and $(0.1) million of hedging losses, respectively (see "Risk Management
Activities and Derivative Transactions" below). Total gas production for the
three months ended June 30, 2000 declined 20% to 1,506 Mmcf from 1,876 Mmcf for
the same period in 1999. The decrease in gas production output is primarily
attributable to a declining production curve for Mississippi Salt Basin
properties. The effect of the sale of Antrim Shale gas producing properties in
Michigan (June 1, 1999 effective date) were largely offset by production gains
from non-Antrim Shale properties in Michigan. Average natural gas prices
increased 56% to $3.27 per Mcf for the three months ended June 30, 2000 from
$2.09 per Mcf in the same period in 1999. Total oil production volumes during
the three months ended June 30, 2000 decreased 10% to 57 Mbbls from 63 Mbbls for
the same period in 1999. The drop in oil production is attributable to a
declining production curve for Mississippi Salt Basin properties. Average oil
prices increased 75% to $24.95 per barrel during the three months ended June 30,
2000 from $14.25 per barrel in the same period in 1999. The significant
increases in natural gas and oil prices


                                       16
<PAGE>

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS
                                  (CONTINUED)


represents an example of the volatility in commodity prices the industry has
experienced over the past couple years.

         Lease operating expenses and production taxes for the three months
ended June 30, 2000 increased 24% to $0.6 million from $0.4 million for the same
period in 1999. Lease operating expenses increased by approximately $0.04
million due primarily to the cost of installing compression equipment and the
related compressor rental on certain Mississippi salt basin wells during the
quarter ended June 30, 2000. The addition of compressors will help maintain
current production rates during the presently high commodity price environment.
Production taxes increased by approximately $0.07 million due primarily to the
phase out of the 7% State of Mississippi production tax exemption. The exemption
phases out, as average natural gas and oil prices exceed the ceiling limitation
as stipulated in the applicable statute.

         Depreciation, depletion and amortization ("DD&A") expense for the three
months ended June 30, 2000 increased 25% to $4.4 million from $3.5 million for
the same period in 1999. The increased DD&A expense was the combined result of
an increase in the amount of capitalized costs subject to DD&A and an increase
in the depletion rate. The higher depletion rate was primarily the result of
decreased proved oil and gas reserves primarily attributable to the sale of
producing oil and gas properties in 1999.

         General and administrative expense for the three months ended June 30,
2000 decreased 31% to $0.6 million from $0.9 million for the same period in
1999. This decrease is primarily the result of the cost reduction plan
implemented in May 1999 and continued monitoring which had the combined effect
of: 1) a reduction in the number of employees from 36 at June 30, 1999 to 23 at
June 30, 2000 and the resultant effect on salaries, wages and benefits; 2) a
significant decrease in legal and professional fees and; 3) reduced travel
related expenditures.

         Interest expense for the three months ended June 30, 2000 decreased 19%
to $0.8 million from $1.0 million in the same period in 1999, as a result debt
levels that decreased from an average outstanding balance of approximately $34
million for the quarter ended June 30, 1999 to approximately $17 million for the
quarter ended June 30, 2000.

         Net income (loss) for the three months ended June 30, 2000 was $0.03
million compared to net loss of $(1.0) million for the same period in 1999, as a
result of the factors described above.


         Six Months Ended June 30, 2000 compared to Six Months Ended
         June 30, 1999

         Oil and natural gas revenues for the six months ended June 30, 2000
increased 23% to $11.9 million from $9.6 million for the comparable period in
the prior year. The revenues for the six months ended June 30, 2000 and 1999
include approximately $(0.4) million and $0.4 million of hedging (losses) gains,
respectively (see "Risk Management Activities and Derivative Transactions"
below). In 1999, the Company sold substantially all of its producing properties
in Texas, Louisiana and the Antrim Shale properties in Michigan. These property
sales and a declining production curve for Mississippi salt basin properties
represent the primary reasons why production volumes for the six months ended
June 30, 2000 decreased 21% to 3,773 Mmcfe from 4,771 Mmcfe for the comparable
period of the prior year. Average realized oil prices increased 110% to $24.18
per barrel from the significantly depressed price of $11.53 per barrel
experienced during the comparable period of 1999. Realized natural gas prices
for the six months ended June 30, 2000 increased 46% to $2.97 per Mcf from $2.04
per Mcf for the comparable period of the prior year.


                                       17
<PAGE>

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS
                                  (CONTINUED)


         Lease operating expenses and production taxes for the six months ended
June 30, 2000 decreased 3% to $1.0 million from $1.1 million for the comparable
period in the prior year. Lease operating expenses decreased by approximately
$0.1 million. This decrease was comprised of an approximate $0.4 million
reduction in expenses attributable to the properties in Texas, Louisiana and
Michigan that were sold in 1999. This reduction was partially offset by
approximately $0.2 million of additional lease operating expenses associated
with the compression equipment installed at certain Mississippi salt basin well
sites in the later part of May 2000 and June 2000 plus operating expenses
related to new production in Michigan. Production taxes increased by
approximately $0.1 million due primarily to the phase out of the 7% State of
Mississippi production tax exemption and taxes on new production in Michigan.
The exemption will remain phased out until commodity prices fall back below the
ceiling limitations as stipulated in the applicable statute.

         Depreciation, depletion and amortization expense for the six months
ended June 30, 2000 increased 27% to $8.8 million from $6.9 million for the
comparable period in the prior year. The higher depletion expense was the
combined result of an increase in capitalized costs subject to depletion and an
increased depletion rate. The higher depletion rate was primarily the result of
decreased proved oil and gas reserves attributable to the sale of producing oil
and gas properties in 1999.

         General and administrative expenses for the six months ended June 30,
2000 decreased 25% to $1.3 million from $1.8 million for the comparable period
in the prior year. This decrease is the result of the cost reduction plan
implemented in May 1999 and the continued monitoring which had the combined
effect of: 1) a reduction in the number of employees from 36 at June 30, 1999 to
23 at June 30, 2000 and the resultant effect on salaries, wages and benefits; 2)
a significant decrease in legal and professional fees and; 3) reduced travel
related expenditures.

         Interest expense for the six months ended June 30, 2000 increased 4% to
$1.7 million from $1.6 million for the comparable period in the prior year, as a
result of the prime plus 3.5% interest rate that became effective with the
Second Amendment to the Credit Facility dated April 14, 1999 and interest
expense associated with the Veritas Note Payable agreement dated April 14, 1999.

         Net loss for the six months ended June 30, 2000 decreased to ($0.4)
million from ($1.4) million for the comparable period in the prior year, as a
result of the factors described above.

LIQUIDITY AND CAPITAL RESOURCES

         Historically, the Company's primary sources of capital have been funds
generated by operations and borrowings under our bank credit facility.

         Concurrently with the Company's Initial Public Offering, the Company
entered into a credit facility (the "Credit Facility") with Bank of Montreal,
Houston Agency ("Bank of Montreal"). The Credit Facility, as amended, required
principal reductions and included certain negative covenants that imposed
limitations on the Company and its subsidiary with respect to, among other
things, distributions with respect to capital stock, limitations on financial
ratios, the creation or incurrence of liens, restrictions on proceeds from sales
of oil and gas properties, the incurrence of additional indebtedness, making
loans and investments and mergers and consolidations. The obligations under the
Credit Facility were secured by a lien on all real and personal property of the
Company. Commencing April 1999, the interest rate under this facility was
increased to Bank of Montreal's prime rate plus 3.5%.


                                       18
<PAGE>

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS
                                  (CONTINUED)

         Principal payments of $20.6 million were made from April 1999 through
June 2000, leaving an outstanding balance at June 30, 2000 of $16.4 million
under the Credit Facility.

         On July 11, 2000, a principal payment of $4.9 million was made to pay
down the Credit Facility to $11.5 million. The pay down was made from the
Guardian transaction proceeds (as more fully described in Note 9).

         On July 19, 2000, the Company entered into a new senior credit facility
with Bank One, Texas, N.A. ("Bank One") which replaced the existing credit
facility with Bank of Montreal. The new credit facility has a 30-month term and
a current borrowing base of $11.5 million. The interest rate under the new
credit facility is either the Bank One prime rate plus 2% or LIBOR plus 4% at
the Company's option. The new credit facility requires the Company to make
monthly payments of $500,000 until the next borrowing base re-determination
which is scheduled for January 1, 2001.

         The new credit facility with Bank One includes certain covenants that
impose restrictions on the Company with respect to, among other things,
incurrence of additional indebtedness, limitations on financial ratios, making
investments and mergers and consolidation. The obligations under the new credit
facility are secured by a lien on all of the Company's real and personal
property.

         On April 14, 1999, the Company issued a $4.7 million note payable to
one of its suppliers, Veritas DGC Land, Inc. (the "Veritas Note"), for the
outstanding balance due to Veritas for past services provided in 1998 and 1999.
The principal obligation under the Veritas Note was originally due on April 15,
2001. On July 19, 2000, the note was amended as more fully described below.

         On April 14, 1999, the Company also entered into an agreement (the
"Warrant Agreement") to issue warrants to Veritas that entitle Veritas to
purchase shares of common stock in lieu of receiving cash payments for the
accrued interest obligations under the Veritas Note. The Warrant Agreement
required the Company to issue warrants to Veritas in conjunction with the
signing of the Warrant Agreement, as well as on the six and, at the Company's
option, 12 and 18 month anniversaries of the Warrant Agreement. The warrants
issued equal 9% of the then current outstanding principal balance of the Veritas
Note. The number of shares issued upon exercise of the warrants issued on April
14, 1999, and on the six-month anniversary was determined based upon a five-day
weighted average closing price of our common stock at April 14, 1999. The
exercise price of each warrant is $0.01 per share. On April 14, 1999, warrants
exercisable for 322,752 shares of common stock were issued to Veritas in
connection with execution of the Veritas Note. On October 14, 1999 and April 14,
2000, warrants exercisable for another 322,752 and 454,994 shares, respectively,
of common stock were issued to Veritas. The Warrant Agreement was also amended
on July 19, 2000.

         Under the terms of the amended note and warrant, the maturity of the
Veritas Note was extended from April 15, 2001 to July 21, 2003 and the
expiration date for all warrants issued was extended until June 21, 2004. The
annual interest rate has been reduced from 18% to 9-3/4%, provided the entire
note balance is paid in full by December 31, 2001. If all principal and interest
under the Veritas Note is not paid by December 31, 2001, then the note bears
interest at 13 3/4% until paid in full. Interest accrues at the reduced rate
from and after October 15, 2000 and is payable commencing April 15, 2001 and
continuing on each October 15 and April 15 until principal is paid in full.
Interest will be paid in warrants under the terms of the Warrant Agreement until
such time as the Company is in borrowing base compliance with its senior lender,
Bank One, at which time interest will only be paid in cash.


                                       19
<PAGE>

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS
                                  (CONTINUED)


         Under the amended Veritas Note, a principal payment of $500,000 was
made on July 19, 2000, the effective date of the amendment, and another $500,000
payment is required from proceeds of the Eagle Transaction (see Note 9) within
five days of stockholder approval if approved on or before October 31, 2000. If
the Eagle Transaction is not approved, the second payment must be made on or
before December 31, 2000. Nonpayment of this second principal amount results in
a penalty payment of $750,000 payable in warrants at the then current market
price of the stock. The balance due Veritas was $4.7 million at June 30, 2000
with $3.7 million classified as long-term and $1.0 million as current in the
accompanying financial Statements.

         Any additional proceeds derived from exercise of warrants issued or
from other debt or equity transactions must be used to pay interest and
principal on the amended Veritas Note until paid in full.

         In connection with the closing of the Amerada Hess Corporation ("AHC")
property acquisition on February 9, 1998, the Company issued a non-interest
bearing note payable to AHC (the "AHC Note"). At June 30, 2000, the remaining
AHC Note of $2.5 million is payable on the annual anniversary dates of the
closing as follows: $1.0 million in 2000 and $1.5 million in 2001. The Company
had obtained a six-month extension of the $1.0 million payment from February
2000 to August 2000. This payment was made on August 3, 2000. Also, the $1.5
million payment due February 2001 has been divided into three quarterly
installments of $500,000 each, payable commencing February 2001. Terms of the
extension agreement require monthly interest payments at an annual interest rate
of 12% for the periods February through August 2000 and February through July
2001.

         The Company has currently budgeted capital expenditures of
approximately $7.4 million for 2000. Capital expenditures will be used to fund
drilling and development activities, the shooting of a new 3-D seismic survey
and leasehold acquisitions and extensions in the Company's project areas. The
actual amounts of capital expenditures may differ significantly from such
estimates. Actual capital expenditures for the six months ended June 30, 2000
were approximately $2.9 million. The Company intends to fund its 2000 budgeted
capital expenditures through operational cash flow.

         The Company's revenues, profitability, future growth and ability to
borrow funds or obtain additional capital, and the carrying value of its
properties, substantially are dependent on prevailing prices of oil and natural
gas. The Company cannot predict future oil and natural gas price movements with
certainty. A return to the significantly lower oil and gas commodity prices
experienced in 1998 and early 1999 would likely have an adverse effect on the
Company's financial condition, liquidity, ability to finance capital
expenditures and results of operations. Lower oil and natural gas prices also
may reduce the amount of reserves that the Company can produce economically.

         The Company has experienced and expect to continue to experience
substantial working capital requirements primarily due to the Company's active
exploration and development program. The Company believes that cash flow from
operations and improved commodity prices should allow the Company to implement
its present business strategy through 2000. A decline in cash flow from
operations caused by an unexpected reduction in production and/or significant
drop in commodity prices could have a material adverse effect on the Company's
operations, including curtailment of its exploration and other activities.

                                       20
<PAGE>

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS
                                  (CONTINUED)


EFFECTS OF INFLATION AND CHANGES IN PRICE

         Crude oil and natural gas commodity prices have been volatile and
unpredictable during 1999 and 2000. The wide fluctuations that have occurred
during these periods have had a significant impact on the Company's results of
operations, cash flow and liquidity. Recent rates of inflation have had a
minimal effect on the Company.

ENVIRONMENTAL AND OTHER REGULATORY MATTERS

         The Company's business is subject to certain federal, state and local
laws and regulations relating to the exploration for, and the development,
production and transportation of, oil and natural gas, as well as environmental
and safety matters. Many of these laws and regulations have become more
stringent in recent years, often imposing greater liability on a larger number
of potentially responsible parties. Although the Company believes it is in
substantial compliance with all applicable laws and regulations, the
requirements imposed by laws and regulations frequently are changed and subject
to interpretation, and the Company is unable to predict the ultimate cost of
compliance with these requirements or their effect on its operations. Any
suspensions, terminations or inability to meet applicable bonding requirements
could materially adversely affect the Company's business, financial condition
and results of operations. Although significant expenditures may be required to
comply with governmental laws and regulations applicable to the Company,
compliance has not had a material adverse effect on the earnings or competitive
position of the Company. Future regulations may add to the cost of, or
significantly limit, drilling activity.

NEW ACCOUNTING STANDARD

         In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting.

         SFAS No. 133 is effective for fiscal years beginning after June 15,
2000. The Company has not yet quantified the impacts of adopting SFAS No. 133 on
its financial statements and has not determined the timing of or method of its
adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility in
earnings and other comprehensive income.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS

         The Company uses a variety of derivative instruments ("derivatives") to
manage exposure to fluctuations in commodity prices and interest rates. To
qualify for hedge accounting, derivatives must meet the following criteria: (i)
the item to be hedged exposes the Company to price or interest rate risk; and
(ii) the derivative reduces that exposure and is designated as a hedge.

         Commodity Price Hedges

         The Company periodically enters into certain derivatives (primarily
NYMEX futures contracts) for a portion of its oil and natural gas production to
achieve a more predictable cash flow, as well as to reduce the exposure to price
fluctuations. The Company's hedging arrangements apply only to a portion of its
production, provide only partial price protection against volatility in oil and
natural gas prices and limit potential gains from future increases in prices.
Such hedging arrangements may expose the Company to risk of financial loss in
certain circumstances, including instances where production is less than
expected, the Company's customers fail to purchase contracted quantities of oil
or natural gas or a sudden unexpected event materially impacts oil or natural
gas prices. For financial reporting purposes, gains and losses related to
hedging are recognized as income when the hedged transaction occurs. The Company
expects that the amount of hedge contracts that it has in place will vary from
time to time. For the six months ended June 30, 2000 and 1999, the Company
realized approximately


                                       21
<PAGE>

           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                                   (CONTINUED)

$(0.4) million and $0.4 million, respectively, of hedging gains (losses) which
are included in oil and natural gas revenues in the consolidated statements of
operations. For the six months ended June 30, 2000 and 1999, the Company had
hedged 40% and 37%, respectively, of its oil and natural gas production, and as
of June 30, 2000 the Company had 2.4 Bcfe of open oil and natural gas contracts
for the months of July 2000 to March 2001.

         Market Risk Information

         The market risk inherent in the Company's derivatives is the potential
loss arising from adverse changes in commodity prices and interest rates. The
prices of natural gas are subject to fluctuations resulting from changes in
supply and demand. To reduce price risk caused by the market fluctuations, the
Company's policy is to hedge (through the use of derivatives) future production.
Because commodities covered by these derivatives are substantially the same
commodities that the Company sells in the physical market, no special
correlation studies other than monitoring the degree of convergence between the
derivative and cash markets are deemed necessary. The changes in market value of
these derivatives have a high correlation to the price changes of natural gas.


                                       22
<PAGE>

PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         The Company received notice on February 1, 2000, that AHC became a
defendant in a lawsuit as operator of certain Texas properties wherein the
Company was a joint venture partner. The claimant alleges that he contracted
leukemia during his 17 year employment at Schlumberger while working on various
wells is Texas. Approximately 25 oil and gas companies have been named as
defendants in this suit. AHC has tendered defense and indemnity of this lawsuit
to Schlumberger and has agreed to pursue defense on behalf of all working
interest owners including the Company's in this case. The case is in the early
stages of discovery.

ITEM 2.  CHANGES IN SECURITES

         None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         None.

ITEM 4.  SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS

         At the May 26, 2000 Annual Meeting of Common Stockholders, the
following nominees were elected to the Company's Board of Directors for a term
of three years:

                Name                 Votes For       Votes Withheld
                ----                 ---------       --------------
         Richard J. Burgess         12,230,646          473,562
         Dan A. Hughes Jr.          12,230,646          473,562
         Kelly E. Miller            12,230,646          473,562

         Also, at the May 26, 2000 Annual Meeting of the Common Stockholders,
the following proposals were approved:

         -      To amend the Company's 1999 Stock Option and Restricted Stock
                Plan to increase the number of authorized shares of common stock
                issuable under the plan from 1,200,000 to 1,900,000.

            For           Against           Abstain           Votes Withheld
         ---------        -------           -------           --------------
         7,759,119        568,049           172,736             4,204,304

         -      To amend the Company's Equity Compensation Plan for Non-Employee
                Directors to increase the number of authorized shares of common
                stock issuable under the plan from 120,000 to 320,000 and to
                provide that director fees be paid in stock only.

            For           Against           Abstain           Votes Withheld
         ---------        -------           -------           --------------
         7,914,626        431,842           154,336              4,203,404


                                       23
<PAGE>

         -      To ratify the selection of Arthur Andersen LLP as the Company's
                independent accountants for the year ending December 31, 2000.

             For            Against         Abstain           Votes Withheld
         ----------        --------         -------           --------------
         12,164,923         25,865          105,043             408,377

ITEM 5. OTHER INFORMATION

         On July 19, 2000, the Company entered into a new credit facility with
Bank One, Texas, N.A., which replaced the credit facility the Company previously
had with Bank of Montreal, Houston Agency. For a more complete discussion of the
Bank One Credit Facility, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" and Note
4 to the consolidated financial statements.



                                       24
<PAGE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     (a)    Exhibits. The following documents are filed as exhibits to this
            report on Form 10-Q:


  EXHIBIT NO.                         DESCRIPTION
  -----------                         -----------

     2.1      Exchange and Combination Agreement dated November 12, 1997.
              Previously filed as an exhibit to the Company's Registration
              Statement on Form S-1 (333-40383), and here incorporated by
              reference.

     2.2(a)   Letter Agreement amending Exchange and Combination Agreement.
              Previously filed as an exhibit to the Company's Registration
              Statement on Form S-1 (333-40383), and here incorporated by
              reference.

     2.2(b)   Letter Agreement amending Exchange and Combination Agreement.
              Previously filed as an exhibit to the Company's Registration
              Statement on Form S-1 (333-40383), and here incorporated by
              reference.

     2.2(c)   Letter Agreement amending Exchange and Combination Agreement.
              Previously filed as an exhibit to the Company's Registration
              Statement on Form S-1 (333-40383), and here incorporated by
              reference.

     2.3(a)   Agreement for Purchase and Sale dated November 25, 1997 between
              Amerada Hess Corporation and Miller Oil Corporation. Previously
              filed as an exhibit to the Company's Registration Statement on
              Form S-1 (333-40383), and here incorporated by reference.

     2.3(b)   First Amendment to Agreement for Purchase and Sale dated January
              7, 1998. Previously filed as an exhibit to the Company's
              Registration Statement on Form S-1 (333-40383), and here
              incorporated by reference.

     3.1(a)   Certificate of Incorporation of the Registrant. Previously filed
              as an exhibit to the Company's Registration Statement on Form S-1
              (333-40383), and here incorporated by reference.


     3.1(b)   Certificate of Amendment to Certificate of Incorporation.
              Previously filed as an exhibit to the Company's Annual Report on
              Form 10-K for the year ended December 31, 1999, as amended by
              filing on July 24, 2000, and here incorporated by reference.

     3.2      Bylaws of the Registrant. Previously filed as an exhibit to the
              Company's Quarterly Report on Form 10-Q for the quarter ended June
              30, 1998, and here incorporated by reference.

     4.1      Warrant between Miller Exploration Company and Veritas DGC Land,
              Inc., dated April 14, 1999. Previously filed as an exhibit to the
              Company's Annual Report on Form 10-K for the year ended December
              31, 1998, and here incorporated by reference.

     4.2      Warrant between Miller Exploration Company and Guardian Energy
              Management Corporation dated July 11, 2000, exercisable for
              1,562,500 shares of the Company's Common Stock. Previously filed
              as an exhibit to the Company's Current Report on Form 8-K filed
              July 25, 2000, and here incorporated by reference.

                                       25
<PAGE>

     4.3      Warrant between Miller Exploration Company and Guardian Energy
              Management Corporation dated July 11, 2000, exercisable for
              2,500,000 shares of the Company's Common Stock. Previously filed
              as an exhibit to the Company's Current Report on Form 8-K filed
              July 25, 2000, and here incorporated by reference.

     4.4      Warrant between Miller Exploration Company and Guardian Energy
              Management Corporation dated July 11, 2000, exercisable for
              9,000,000 shares of the Company's Common Stock. Previously filed
              as an exhibit to the Company's Current Report on Form 8-K filed
              July 25, 2000, and here incorporated by reference.

     4.5      Amendment to Promissory Note, Warrant and Rights Agreement between
              Miller Exploration Company and Veritas DGC Land, Inc., dated July
              19, 2000. Previously filed as an exhibit to the Company's Current
              Report on Form 8-K filed July 25, 2000, and here incorporated by
              reference.

    10.1      Fourth Amendment to Credit Agreement among Miller Oil Corporation
              and Bank of Montreal dated March 20, 2000. Previously filed as an
              exhibit to the Company's Annual Report on Form 10-K for the
              year-ended December 31, 1999, and here incorporated by reference.

    10.2      Securities Purchase Agreement between Miller Exploration Company
              and Guardian Energy Management Corporation dated July 11, 2000.
              Previously filed as an exhibit to the Company's Current Report on
              Form 8-K filed on July 25, 2000.

    10.3      Promissory Note between Miller Exploration Company and Guardian
              Energy Management Corporation dated July 11, 2000. Previously
              filed as an exhibit to the Company's Current Report on Form 8-K
              filed on July 25, 2000.

    10.4      Registration Rights Agreement between Miller Exploration Company
              and Guardian Energy Management Corporation dated July 11, 2000.
              Previously filed as an exhibit to the Company's Current Report on
              Form 8-K filed on July 25, 2000.

    10.5      Form of Subscription Agreement between Miller Exploration Company
              and ECCO Investments, LLC dated July 11, 2000. Previously filed as
              an exhibit to the Company's Current Report on Form 8-K filed on
              July 25, 2000.

    10.6      Form of Letter Agreement between Miller Exploration Company and
              Eagle Investments, Inc. dated July 12, 2000. Previously filed as
              an exhibit to the Company's Current Report on Form 8-K filed on
              July 25, 2000.

    10.7      Amended and Restated Credit Agreement between Miller Exploration
              Company and the Subsidiaries of the Company and Bank One, Texas,
              N.A., dated July 18, 2000.

    27.1      Financial Data Schedule.

---------------
     (b) Reports on Form 8-K. No reports on Form 8-K were filed during the
fiscal quarter ended June 30, 2000.

                                       26
<PAGE>

                                   SIGNATURES


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


                              MILLER EXPLORATION COMPANY



Date: August 14, 2000         By: /s/ Deanna L. Cannon
                                  ---------------------------------------------
                                  Deanna L. Cannon
                                  Vice President-Finance and Secretary
                                  (Principal Accounting and Financial Officer)



                                       27
<PAGE>

                                  EXHIBIT INDEX


 EXHIBIT NO.                         DESCRIPTION
 -----------                         -----------

     2.1      Exchange and Combination Agreement dated November 12, 1997.
              Previously filed as an exhibit to the Company's Registration
              Statement on Form S-1 (333-40383), and here incorporated by
              reference.

     2.2(a)   Letter Agreement amending Exchange and Combination Agreement.
              Previously filed as an exhibit to the Company's Registration
              Statement on Form S-1 (333-40383), and here incorporated by
              reference.

     2.2(b)   Letter Agreement amending Exchange and Combination Agreement.
              Previously filed as an exhibit to the Company's Registration
              Statement on Form S-1 (333-40383), and here incorporated by
              reference.

     2.2(c)   Letter Agreement amending Exchange and Combination Agreement.
              Previously filed as an exhibit to the Company's Registration
              Statement on Form S-1 (333-40383), and here incorporated by
              reference.

     2.3(a)   Agreement for Purchase and Sale dated November 25, 1997 between
              Amerada Hess Corporation and Miller Oil Corporation. Previously
              filed as an exhibit to the Company's Registration Statement on
              Form S-1 (333-40383), and here incorporated by reference.

     2.3(b)   First Amendment to Agreement for Purchase and Sale dated January
              7, 1998. Previously filed as an exhibit to the Company's
              Registration Statement on Form S-1 (333-40383), and here
              incorporated by reference.

     3.1(a)   Certificate of Incorporation of the Registrant. Previously filed
              as an exhibit to the Company's Registration Statement on Form S-1
              (333-40383), and here incorporated by reference.

     3.1(b)   Certificate of Amendment to Certificate of Incorporation.
              Previously filed as an exhibit to the Company's Annual Report on
              Form 10-K for the year ended December 31, 1999, as amended by
              filing on July 24, 2000, and here incorporated by reference.

     3.2      Bylaws of the Registrant. Previously filed as an exhibit to the
              Company's Quarterly Report on Form 10-Q for the quarter ended June
              30, 1998, and here incorporated by reference.

     4.1      Warrant between Miller Exploration Company and Veritas DGC Land,
              Inc., dated April 14, 1999. Previously filed as an exhibit to the
              Company's Annual Report on Form 10-K for the year ended December
              31, 1998, and here incorporated by reference.

     4.2      Warrant between Miller Exploration Company and Guardian Energy
              Management Corporation dated April 11, 2000, exercisable for
              1,562,500 shares of the Company's Common Stock. Previously filed
              as an exhibit to the Company's Current Report on Form 8-K filed
              July 25, 2000, and here incorporated by reference.

     4.3      Warrant between Miller Exploration Company and Guardian Energy
              Management Corporation dated July 11, 2000, exercisable for
              2,500,000 shares of the Company's Common Stock. Previously filed
              as an exhibit to the Company's Current Report on Form 8-K filed
              July 25, 2000, and here incorporated by reference.


                                       28
<PAGE>

     4.4      Warrant between Miller Exploration Company and Guardian Energy
              Management Corporation dated July 11, 2000, exercisable for
              9,000,000 shares of the Company's Common Stock. Previously filed
              as an exhibit to the Company's Current Report on Form 8-K filed
              July 25, 2000, and here incorporated by reference.

     4.5      Amendment to Promissory Note, Warrant and Rights Agreement between
              Miller Exploration Company and Veritas DGC Land, Inc., dated July
              19, 2000. Previously filed as an exhibit to the Company's Current
              Report on Form 8-K filed July 25, 2000, and here incorporated by
              reference.

    10.1      Fourth Amendment to Credit Agreement among Miller Oil Corporation
              and Bank of Montreal dated March 20, 2000. Previously filed as an
              exhibit to the Company's Annual Report on Form 10-K for the
              year-ended December 31, 1999, and here incorporated by reference.

    10.2      Securities Purchase Agreement between Miller Exploration Company
              and Guardian Energy Management Corporation dated July 11, 2000.
              Previously filed as an exhibit to the Company's Current Report on
              Form 8-K filed on July 25, 2000.

    10.3      Promissory Note between Miller Exploration Company and Guardian
              Energy Management Corporation dated July 11, 2000. Previously
              filed as an exhibit to the Company's Current Report on Form 8-K
              filed on July 25, 2000.

    10.4      Registration Rights Agreement between Miller Exploration Company
              and Guardian Energy Management Corporation dated July 11, 2000.
              Previously filed as an exhibit to the Company's Current Report on
              Form 8-K filed on July 25, 2000.

    10.5      Form of Subscription Agreement between Miller Exploration Company
              and ECCO Investments, LLC dated July 11, 2000. Previously filed as
              an exhibit to the Company's Current Report on Form 8-K filed on
              July 25, 2000.

    10.6      Form of Letter Agreement between Miller Exploration Company and
              Eagle Investments, Inc. dated July 12, 2000. Previously filed as
              an exhibit to the Company's Current Report on Form 8-K filed on
              July 25, 2000.

    10.7      Amended and Restated Credit Agreement between Miller Exploration
              Company and the Subsidiaries of the Company, and Bank One, Texas,
              N.A., dated July 18, 2000.

    27.1      Financial Data Schedule.

--------------------


                                       29