<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, 2001                       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 13, 2001
               -----                      ---------------

    Common stock, $.01 par value         19,478,853 shares

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

<PAGE>

                          MILLER EXPLORATION COMPANY

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                        Page No.
                                                                        --------
<S>                                                                     <C>
PART I. FINANCIAL INFORMATION

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

        Consolidated Statements of Operations--
        Three Months and Six Months Ended June 30, 2001 and 2000......   3

        Consolidated Balance Sheets--
        June 30, 2001 and December 31, 2000...........................   4

        Consolidated Statement of Equity--
        Six Months Ended June 30, 2001................................   5

        Consolidated Statements of Cash Flows--
        Six Months Ended June 30, 2001 and 2000.......................   6

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

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


PART II. OTHER INFORMATION

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

Item 2. Changes in Securities.........................................   24

Item 3. Defaults Upon Senior Securities...............................   24

Item 4. Submission of Matters to a Vote of Security Holders...........   24

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

Item 6. Exhibits and Reports on Form 8-K..............................   24
</TABLE>

                                       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,
                                                    --------------------    ------------------
                                                      2001        2000        2001      2000
                                                    --------    --------    --------  --------
<S>                                                 <C>         <C>         <C>       <C>
REVENUES:
  Natural gas....................................    $ 3,800      $4,924     $ 9,377   $ 9,341
  Crude oil and condensate.......................        910       1,422       1,825     2,515
  Other operating revenues.......................         72         123         169       336
                                                     -------      ------     -------   -------
     Total operating revenues....................      4,782       6,469      11,371    12,192
                                                     -------      ------     -------   -------
OPERATING EXPENSES:
  Lease operating expenses and production taxes..        824         557       1,763     1,015
  Depreciation, depletion and amortization.......      3,525       4,415       7,712     8,786
  General and administrative.....................        514         633       1,076     1,342
  Cost ceiling writedown.........................      7,500          --       7,500        --
                                                     -------      ------     -------   -------
     Total operating expenses....................     12,363       5,605      18,051    11,143
                                                     -------      ------     -------   -------

OPERATING INCOME (LOSS)..........................     (7,581)        864      (6,680)    1,049
                                                     -------      ------     -------   -------

INTEREST EXPENSE.................................       (331)       (818)       (588)   (1,667)
                                                     -------      ------     -------   -------

INCOME (LOSS) BEFORE INCOME TAXES................     (7,912)         46      (7,268)     (618)
                                                     -------      ------     -------   -------

INCOME TAX PROVISION (CREDIT)....................       (169)         16          79      (210)
                                                     -------      ------     -------   -------

NET INCOME (LOSS)................................    $(7,743)     $   30     $(7,347)  $  (408)
                                                     =======      ======     =======   =======

EARNINGS (LOSS) PER SHARE (Note 3)
  Basic..........................................     $(0.40)      $0.00      $(0.38)   $(0.03)
                                                     =======      ======     =======   =======
  Diluted........................................     $(0.40)      $0.00      $(0.38)   $(0.03)
                                                     =======      ======     =======   =======
</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,
                                                                         2001               2000
                                                                   ---------------   ------------------
                                                                     (Unaudited)
                                    ASSETS
                                    ------
<S>                                                                <C>                      <C>
CURRENT ASSETS:
  Cash and cash equivalents.......................................       $     264        $  2,292
  Restricted cash (Note 2)........................................              --              69
  Accounts receivable.............................................           2,623           4,474
  Inventories, prepaids and other current assets..................           1,536             316
                                                                         ---------        --------
   Total current assets...........................................           4,423           7,151
                                                                         ---------        --------

OIL AND GAS PROPERTIES--at cost (full cost method):
  Proved oil and gas properties...................................         137,574         131,872
  Unproved oil and gas properties.................................          16,526          16,109
  Less-Accumulated depreciation, depletion and amortization.......        (111,039)        (95,948)
                                                                         ---------        --------
   Net oil and gas properties.....................................          43,061          52,033
                                                                         ---------        --------

OTHER ASSETS......................................................             583             694
                                                                         ---------        --------
   Total assets...................................................       $  48,067        $ 59,878
                                                                         =========        ========

   LIABILITIES AND EQUITY
   -----------------------

CURRENT LIABILITIES:
  Current portion of long-term debt...............................       $     563        $  1,034
  Accounts payable................................................           3,435           3,572
  Accrued expenses and other current liabilities..................           5,148           3,928
                                                                         ---------        --------
   Total current liabilities......................................           9,146           8,534
                                                                         ---------        --------

LONG-TERM DEBT....................................................           5,696          11,196

DEFERRED INCOME TAXES.............................................           6,281           6,202

DEFERRED REVENUE..................................................               3              20

COMMITMENTS AND CONTINGENCIES (NOTE 7)

EQUITY:
  Other comprehensive income (loss)...............................             346              --
  Common stock warrants, 15,694,248 outstanding at
   June 30, 2001 and December 31, 2000............................           1,555           1,759
  Preferred stock, $0.01 par value; 2,000,000 shares authorized;
   none outstanding...............................................              --              --
  Common stock, $0.01 par value; 40,000,000 shares
   authorized; 19,478,853 shares and 19,302,254 shares
   outstanding at June 30, 2001 and December 31, 2000,
   respectively...................................................             195             193
  Additional paid in capital......................................          76,788          76,570
  Retained deficit................................................         (51,943)        (44,596)
                                                                         ---------        --------
   Total equity...................................................          26,941          33,926
                                                                         ---------        --------
   Total liabilities and equity...................................       $  48,067        $ 59,878
                                                                         =========        ========
</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>

                                           Other
                                       Comprehensive    Common                         Additional
                                          Income        Stock     Preferred   Common    Paid In    Retained
                                          (Loss)       Warrants     Stock     Stock     Capital    Deficit
                                      -----------     --------   ----------   ------  ----------  ---------
<S>                                  <C>            <C>         <C>         <C>      <C>          <C>

BALANCE-December 31, 2000             $        --     $  1,759   $       --   $  193  $   76,570  $ (44,596)

 Issuance of benefit plan shares                            --           --        1          80         --
 Issuance of non-employee
  directors' shares                            --           --           --        1         138         --
 Change in value of warrants issued
  to Veritas DGC Land, Inc.                    --         (204)          --       --          --         --
 Adoption of new accounting
  standard (Note 1)                        (5,685)          --           --       --          --         --
 Change in unrealized gains
  (losses)                                  6,031           --           --       --          --         --
 Net loss                                      --           --           --       --          --     (7,347)
                                      -----------     --------   ----------   ------  ----------  ---------

BALANCE-June 30, 2001                 $       346     $  1,555   $       --   $  195  $   76,788  $ (51,943)
                                      ===========     ========   ==========   ======  ==========  =========

<CAPTION>

Disclosure of Comprehensive Income:
----------------------------------
                                                               For the Six Months Ended June 30,
                                                                    2001               2000
                                                                 ----------          -----------
<S>                                                             <C>                 <C>

 Net loss                                                        $   (7,347)         $      (408)
 Other comprehensive income                                             346                   --
                                                                 ----------          -----------

  Total comprehensive income (loss)                              $   (7,001)         $      (408)
                                                                 ==========          ===========
</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,
                                                                  ------------------------
                                                                    2001            2000
                                                                  --------        --------
<S>                                                               <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss......................................................  $ (7,347)       $   (408)
  Adjustments to reconcile net loss to net cash from
    operating activities--
      Cost ceiling writedown....................................     7,500              --
      Depletion, depreciation and amortization..................     7,712           8,786
      Deferred income taxes.....................................        79            (210)
      Warrants and stock compensation...........................        16             552
      Deferred revenue..........................................       (17)            (17)
      Changes in assets and liabilities--
        Restricted cash.........................................        69           1,044
        Accounts receivable.....................................     1,851            (818)
        Other assets............................................      (879)           (410)
        Accounts payable........................................      (137)         (1,603)
        Accrued expenses and other current liabilities..........     1,221          (2,794)
                                                                  --------        --------
           Net cash flows provided by operating activities......    10,068           4,122
                                                                  --------        --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Exploration and development expenditures......................    (6,120)         (2,930)
  Proceeds from sale of oil and gas properties and purchases of
    equipment, net..............................................        (5)            947
                                                                  --------        --------
           Net cash flows used in investing activities..........    (6,125)         (1,983)
                                                                  --------        --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Payments of principal.........................................   (11,635)         (5,602)
  Borrowing on long-term debt...................................     5,664             139
                                                                  --------        --------
           Net cash flows used in financing activities..........    (5,971)         (5,463)
                                                                  --------        --------
NET CHANGE IN CASH AND CASH EQUIVALENTS.........................    (2,028)         (3,324)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD............     2,292           3,712
                                                                  --------        --------
CASH AND CASH EQUIVALENTS AT END OF THE  PERIOD.................  $    264        $    388
                                                                  ========        ========
SUPPLEMENTAL CASH FLOW INFORMATION:
  Cash paid during the period for interest......................  $    603        $  1,280
                                                                  ========        ========
</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 presented.  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, 2000.

       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.

       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.
Using unescalated period-end prices at June 30, 2001, of $3.28 per Mcf of
natural gas and $25.55 per barrel of oil, the Company has recognized a $7.5
million non-cash cost ceiling writedown, (for further discussion, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations"). The Company did not have any such charges against earnings during
the six-months ended June 30, 2000.

       New Accounting Standard

       In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
amended by Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133" and
Statement No. 138, "Accounting for Certain Derivatives and Certain Hedging
Activities" (hereinafter collectively referred to as SFAS No. 133). SFAS No. 133
requires 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

                                       7
<PAGE>

                          MILLER EXPLORATION COMPANY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)



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 was adopted by the Company as of January 1, 2001 and the
Company completed the process of identifying all derivative instruments,
determining fair market values of derivatives designating and documenting hedge
relationships, and evaluating the effectiveness of those hedge relationships.

       Certain financial derivative contracts used to hedge the price risk on
future production qualify under the provisions of SFAS No. 133 as cash flow
hedges. These contracts are required to be recognized at their fair value in the
Consolidated Balance Sheet as an asset or liability. The impact on January 1,
2001, of adopting SFAS No. 133 increased liabilities by approximately $5.7
million with a corresponding decrease in other comprehensive income (loss) in
the Consolidated Statement of Equity since the contracts outstanding on that
date met the specific hedge accounting criteria. Several of the contracts that
were outstanding on January 1, 2001, have been settled in the first two quarters
of 2001 (with any hedge gains or losses being realized at the time of
production). The fair value of remaining financial derivative contracts at June
30, 2001 is approximately $0.4 million. This amount is reflected in other
current assets in the Consolidated Balance Sheet with a corresponding amount in
other comprehensive income (loss).

       Reclassifications

       Certain reclassifications have been made to prior period statements to
conform with the June 30, 2001 presentation.

(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.

                                       8
<PAGE>

                          MILLER EXPLORATION COMPANY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)


(3)    Earnings Per Share

       The computation of earnings (loss) per share for the three-month and six-
month periods ended June 30, 2001 and 2000 are as follows (in thousands, except
per share data):

<TABLE>
<CAPTION>

                                                                   Three Months         Six Months
                                                                  Ended June 30,      Ended June 30,
                                                                  2001      2000      2001      2000
                                                                --------  --------  --------  --------
<S>                                                             <C>       <C>       <C>       <C>
  Net income (loss) attributable to
     basic and diluted EPS...................................   $ (7,743) $     30  $ (7,347) $   (408)

  Average common shares outstanding
     applicable to basic EPS.................................     19,446    12,704    19,405    12,702
  Add:  stock options, treasury shares and restricted stock..         --        --        --        --
                                                                --------   -------  --------  --------
  Average common shares outstanding
     applicable to diluted EPS...............................     19,446    12,704    19,405    12,702

  Earnings (loss) per share:
     Basic...................................................   $  (0.40) $   0.00  $  (0.38) $  (0.03)
     Diluted.................................................   $  (0.40) $   0.00  $  (0.38) $  (0.03)
</TABLE>

     Options and restricted stock were not included in the computation of
diluted earnings per share because their effect was antidilutive.

(4)    Long-Term Debt

       Bank Debt

       On July 19, 2000, the Company entered into a senior credit facility with
Bank One, which replaced its prior credit facility with Bank of Montreal,
Houston Agency. The credit facility has a 30-month term with an interest rate of
either the Bank One prime rate plus 2% or LIBOR plus 4% , at the Company's
option. Under the credit facility the Company was required to make monthly
payments of $500,000 from August 1, 2000, until the borrowing base re-
determination that occurred on January 1, 2001. The new borrowing base
determined by Bank One as of August 1, 2001 is $7.5 million, less the $0.5
million due Amerada Hess Corporation ("AHC") in 2001. The borrowing base will be
reduced by $0.5 million per month until the next re-determination scheduled for
January 1, 2002. The outstanding Bank One credit facility balance is $2.0
million at June 30, 2001.

       The Bank One credit facility 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. As a result of the loss created by the $7.5 million
cost ceiling writedown, the minimum tangible net worth covenant as defined by
the credit facility agreement will be amended to $24.0 million, pursuant to a
waiver obtained from Bank One. The obligations under the credit facility are
secured by a lien on all of the Company's real and personal property.

                                       9
<PAGE>

                          MILLER EXPLORATION COMPANY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)

     Other

     On April 14, 1999, the Company issued a $4.7 million note payable to one of
its suppliers, Veritas DGC Land, Inc. ("Veritas"), 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 Warrants 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 Company ratably recognized the prepaid
interest into expense over the period to which it related.

          Under the terms of the amended note and Warrant Agreement, 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. As of June 30, 2001, the Company
cannot assure that the principal balance will be paid in full by December 31,
2001, therefore the Company has accrued additional interest of approximately
$107,000 at the marginal 4% rate for the period October 15, 2000 to date.
Interest accrues and is payable on each October 15 and April 15 until principal
is paid in full. Interest is required to be paid in warrants under the terms of
the Warrant Agreement until the Company is in compliance with the net borrowing
base formula as defined in the Bank One credit facility, at which time interest
will only be paid in cash. The April 15, 2001, interest payment of approximately
$187,000 was made 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
was made in December 2000. The balance due Veritas at June 30, 2001, is $3.7
million, with the entire balance classified as long-term debt in the
accompanying financial statements.

     Any additional proceeds derived by the Company from the 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.
Effective November 1, 2000, Veritas exercised 500,000 warrants to receive
496,923 shares (net of exercise price) of Company Common Stock.

     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") totalling $2.5 million.

                                       10
<PAGE>

                          MILLER EXPLORATION COMPANY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)

At June 30, 2001, the outstanding AHC note balance was $0.5 million and
presently bears interest at 12%.

     The Company's long-term debt consisted of the following as of June 30, 2001
(in thousands):

     Bank One credit facility                   $ 2,000
     Veritas note                                 3,696
     AHC note                                       500
     Other                                           63
                                                -------
       Total                                      6,259
     Less current portion of long-term debt        (563)
                                                -------
                                                $ 5,696
                                                =======

(5)  Capital Transactions and Common Stock Warrants

     On July 11, 2000, the Company entered into a Securities Purchase Agreement
(the "Securities Purchase Agreement") with Guardian Energy Management Corp.
("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. The issuance of the shares of Common Stock
on the conversion of the note and exercise of the warrants was approved by the
Company's stockholders at a meeting on December 7, 2000.

     On July 11, 2000, the Company also signed a letter agreement to acquire an
interest in certain undeveloped oil and gas properties and $0.5 million in cash
from Eagle Investments, Inc. ("Eagle") an affiliated entity controlled by C.E.
Miller, the Chairman of the Company, in exchange for a total of 1,851,851 shares
of common stock. In addition, Eagle was issued warrants exercisable for a total
of 2,031,250 shares of Common Stock. This transaction with Eagle also was
approved by the Company's stockholders at the December 7, 2000 meeting.

     Common Stock Warrants

     As of June 30, 2001, the Company has the following Common Stock warrants
outstanding:

     Warrants                          Exercise Price  Expiration Date
     --------                          --------------  ---------------

       2,343,750 shares.............       $1.35       December 7, 2001
       3,750,000 shares.............        2.50       December 7, 2002
       600,498 shares...............        0.01       July 21, 2004
       9,000,000 shares.............        3.00       December 7, 2004

                                       11
<PAGE>

                          MILLER EXPLORATION COMPANY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)


(6)  Risk Management Activities and Derivative Transactions

     The Company uses a variety of derivative instruments ("derivatives") to
manage exposure to fluctuations in commodity prices (see Note 1). The Company
periodically enters into certain derivatives 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. 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, 2001 and 2000, the Company realized approximately
$(2.7) million and $(0.4) million, respectively, of hedging (losses) which are
included in oil and natural gas revenues in the consolidated statements of
operations. For the six months ended June 30, 2001 and 2000, the Company had
hedged 58% and 40%, respectively, of its oil and natural gas production, and as
of June 30, 2001, the Company had 0.6 Bcf of open natural gas contracts for the
months of July 2001 through December 2001.

(7)  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 full-time employees of the Company
and its subsidiary. A maximum of 2.4 million shares of Common Stock (subject to
certain antidilution adjustments) are available for Incentive Awards under the
1997 Plan. In February 2000, 43,500 restricted shares of stock issued pursuant
to the 1997 Plan vested and the Company recognized compensation expense of
approximately $60,000.

     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 only when the average trading price 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%

                                       12
<PAGE>

                          MILLER EXPLORATION COMPANY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)


     When it is probable that the five-day stock price target will be attained
(the "measurement date"), the Company will recognize compensation expense for
the difference between the quoted market price of the stock at this measurement
date less the $0.01 per share grant price times the number of options that will
vest. Management does not currently believe it is probable that any of these
targets will be attained during 2001; therefore, no compensation expense has
been recorded for these options.

     On October 31, 2000, the Company granted 250,000 stock options to employees
with an exercise price of $1.625 per share (the closing market price on the date
of grant). The right to exercise the options shall vest at a rate of one-fifth
per year beginning on the first anniversary of the grant date.

     On April 6, 2001, the Company granted 190,000 stock options to the Chief
Executive Officer of the Company. Of these options, 100,000 were issued under
the same terms as those issued to certain employees on January 1, 2000, and the
remaining 90,000 stock options were issued under the same terms as those issued
on October 31, 2000.

     Other

     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 for 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 IMDA Agreement between K2 and the
Blackfeet ("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. Discovery is currently underway.

     On May 1, 2000, the Company gave notice to the Blackfeet Tribal Business
Council demanding arbitration of all disputes as provided for under the
Miller/Blackfeet IMDA dated February 19, 1999, and pursuant to the 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.

     The Company is 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. In January 2001, the District Court judge ruled against the Company
on two of three claims filed in this case with damages left undetermined. This
ruling is being appealed to the U.S. Fifth Circuit Court of Appeals. In the
event the Company does not prevail in the appeal, legal counsel has advised that
any resulting damages owed would be covered by insurance.

                                       13
<PAGE>

                          MILLER EXPLORATION COMPANY
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)

     The Company is a defendant 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. Under a DNR
approved plan, site remediation has been completed and periodic testing is being
performed.

     The Company was a defendant in a lawsuit brought by Charles Strickland,
employee of BJ Services, Inc., on September 30, 1999. The suit claimed damages
of $1.0 million for personal injuries allegedly suffered at a well site operated
by the Company. The judge ruled in favor of the Company at the trial that was
held March 8, 2001 and the date for filing an appeal has now passed.

     The Company is a party to a lawsuit brought by Bill and Joyce Vasilion
against AHC (the Company's joint venture partner at the site of the alleged
incident). The claim alleges that AHC (the operator) was negligent in failing to
inspect a crane at a well site that was the subject of an accident which
occurred in September 1994. Discovery is currently underway.

     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.

     Additionally, in the normal course of business, the Company may be a party
to certain other lawsuits and administrative proceedings. Management cannot
predict the ultimate outcome of any pending or threatened litigation or of
actual or possible claims; however, management believes resulting liabilities,
if any, will not have a material adverse impact upon the Company's financial
position or results of operations.

(8)  Non-Cash Activities

     In February 2000, 43,500 restricted shares of Common Stock were issued
pursuant to the 1997 Plan vested. In connection therewith, the Company
recognized compensation expense of approximately $60,000 for the six months
ended June 30, 2000. In June and February 2001, and June and February 2000,
35,612, 34,595, 12,329, and 37,210 shares, respectively, of the Company's Common
Stock were issued to the Company's 401(K) Savings Plan as an employer matching
contribution. In February 2001, 106,292 shares of the Company's Common Stock
were issued as payment of director fees, pursuant to the Equity Compensation
Plan for Non-Employee Directors.

     For the six-months ended June 30, 2001, the Company recognized
approximately $0.4 million of other current assets and other comprehensive
income under the provisions of SFAS No. 133. All of these non-cash activities
have been excluded from the Consolidated Statements of Cash Flows.

                                       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 the Mississippi Salt Basin.

     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. Using unescalated period-end
prices of $3.28 per Mcf of natural gas and $25.55 per barrel of oil, the Company
has recognized a $7.5 million non-cash cost ceiling writedown. Based on the
Company's experience as an operator in the Mississippi Salt Basin and past and
present dealings therein, it is management's belief that the fair market value
of its unproved properties is significantly greater than the associated
historical cost which represents a significant component of the full cost
ceiling test computation.

     The primary reason for the writedown is attributable to the fact that the
Company's drilling success rate and estimated reserves discovered per well over
the past few years has been lower than expected. Adding to this is the fact that
during 1999 and much of 2000, the Company had a primary objective of reducing
debt, which correspondingly led to reduced drilling activities. Long-term debt
was reduced from $42.0 million at December 31, 1998 to $6.2 million at June 30,
2001. To accomplish this substantial reduction in debt, the Company sold down
its interest in many undeveloped prospects and dedicated a significant portion
of operational cash flow to debt service. This resulted in fewer wells being
drilled and at a lower average working interest. These factors have made it
difficult for the Company to replace the depleting reserves associated with the
prolific, high working interest, yet typical short reserve life of the Company's
Mississippi Salt Basin wells. The Company is addressing the issue of short
reserve lives by diversifying its exploration efforts into shallow, long-lived
reserve plays in the Blackfeet Indian Reservation and the coal bed methane
project in the Illinois Basin.

     The Company has had recent success with the Thoth #1 and Parker #1 wells
which were placed on line in July 2001. For the purpose of the cost ceiling
test, the Company has discounted the reserve addition for these two wells until
further production data is available.


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):

                                       15
<PAGE>

          Management's Discussion and Analysis of Financial Condition and
                       Results of Operations (Continued)

<TABLE>
<CAPTION>
                                                        Three Months         Six Months
                                                       Ended June 30,      Ended June 30,
                                                     ------------------  ------------------
                                                       2001      2000      2001      2000
                                                     --------    ------  --------    ------
<S>                                                 <C>         <C>      <C>        <C>
Production volumes:
    Crude oil and condensate (MBbls)                       38        57        75       104
    Natural gas (MMcf)                                    872     1,506     1,954     3,148
    Natural gas equivalent (MMcfe)                      1,100     1,848     2,404     3,773

Revenues:
    Crude oil and condensate                         $    910    $1,422  $  1,825    $2,515
    Natural gas                                         3,800     4,924     9,377     9,341

Operating expenses:
    Lease operating expenses and production taxes    $    824    $  557  $  1,763    $1,015
    Depletion, depreciation and amortization            3,525     4,415     7,712     8,786
    General and administrative                            514       633     1,076     1,342
    Cost ceiling writedown                              7,500        --     7,500        --

Interest expense                                     $    331    $  818  $    588    $1,667

Net income (loss)                                    $ (7,743)   $   30  $ (7,347)   $ (408)

Average sales prices:
    Crude oil and condensate ($ per Bbl)             $  23.95    $24.95  $  24.33    $24.18
    Natural gas ($ per Mcf)                              4.36      3.27      4.80      2.99
    Natural gas equivalent ($ per Mcfe)                  4.28      3.43      4.66      3.14

Average Costs ($ per Mcfe):
    Lease operating expenses and production taxes    $   0.75    $ 0.30  $   0.73    $ 0.27
    Depletion, depreciation and amortization             3.20      2.39      3.21      2.33
    General and administrative                           0.47      0.34      0.45      0.36
</TABLE>


     Three Months Ended June 30, 2001 compared to Three Months Ended June 30,
2000

     Oil and natural gas revenues for the three months ended June 30, 2001
decreased 26% to $4.7 million from $6.3 million for the comparable period in the
prior year. The revenues for the three months ended June 30, 2001 and 2000
include approximately $(0.4) million and $(0.4) million of hedging (losses),
respectively (see "Risk Management Activities and Derivative Transactions"
below). Production volumes for the three months ended June 30, 2001 decreased
40% to 1,100 MMcfe from 1,848 MMcfe for the comparable period of the prior year.
This decrease is attributable to the declining production of the Company's
Mississippi Salt Basin properties. The declining production is due to the
combined effect of the following factors: 1) Mississippi Salt Basin wells tend
to be prolific producers, which are produced rapidly over relatively short lives
(5-7 years); 2) the Company's drilling success rate and the production rates of
new discoveries over the past few years has been lower than expected, and 3)
during 1999 and much of 2000, the Company sold down its working interest in
many undeveloped prospects and used a significant portion of its operational
cash flow to pay down bank debt thereby limiting the Company's drilling
activities during this period. The Company has budgeted $10.0 million of capital
spending to be largely funded from 2001 operational cash flow which will
hopefully help in reversing the declining production trend. The Company has

                                       16
<PAGE>

          Management's Discussion and Analysis of Financial Condition and
                       Results of Operations (Continued)

taken steps in 2001 to diversify its exploration activities and reserve base by
acquiring approximately 50,000 gross acres (31,500 net to the Company) in the
Illinois Basin to explore for shallow coal bed methane natural gas reserves. The
Company is also pursuing the acquisition of strategic production packages that
would help boost its daily production rates, proved reserves and operational
cash flow. Average realized oil prices decreased 4% to $23.95 per barrel from
$24.95 per barrel experienced during the comparable period of 2000. Realized
natural gas prices for the three months ended June 30, 2001 increased 33% to
$4.36 per Mcf from $3.27 per Mcf for the comparable period of the prior year.

     Lease operating expenses ("LOE") and production taxes for the three months
ended June 30, 2001 increased 48% to $0.8 million from $0.6 million for the
comparable period in the prior year. LOE for the three months ended June 30,
2001 increased 20% to $0.6 million from $0.5 million for the comparable period
in the prior year. This is due to the fact that the current quarter has
compressor rental charges for the full quarter compared to 2000 when the
compressors were being installed, therefore resulting in rental charges only for
a portion of the quarter. Production taxes for the three months ended June 30,
2001 increased 100% to $0.2 million from $0.1 million for the comparable period
in the prior year due to the phase out of the Company's exemption from the 6%
State of Mississippi production tax that occurred in June 2000 when the average
oil and gas commodity prices in Mississippi exceeded the established price
ceilings.

     Depletion, depreciation and amortization ("DD&A") expense for the three
months ended June 30, 2001 decreased 20% to $3.5 million from $4.4 million for
the comparable period in the prior year primarily as a result of lower
production volumes.

     General and administrative expenses for the three months ended June 30,
2001 decreased 19% to $0.5 million from $0.6 million for the comparable period
in the prior year due to continued efforts to control costs.

     A non-cash cost ceiling writedown of $7.5 million was recognized by the
Company in June 2001 as previously discussed.

     Interest expense for the three months ended June 30, 2001 decreased 60% to
$0.3 million from $0.8 million for the comparable period in the prior year. This
decrease is attributable to: 1) a $14.4 million decrease in the outstanding
credit facility balance at June 30, 2001 compared to June 30, 2000; 2) a $2.0
million decrease in the AHC note balance; 3) a $1.0 million decrease in the
Veritas note balance; and 4) a lower interest rate associated with the new Bank
One credit facility.

     Net income (loss) for the three months ended June 30, 2001 decreased to
$(7.7) million from $0.03 million for the comparable period in the prior year,
as a result of the factors described above.

     Six Months Ended June 30, 2001 compared to Six Months Ended June 30, 2000

     Oil and natural gas revenues for the six months ended June 30, 2001
decreased 6% to $11.2 million from $11.9 million for the comparable period in
the prior year. The revenues for the six months ended June 30, 2001 and 2000
include approximately $(2.7) million and $(0.4) million of hedging (losses),
respectively (see "Risk Management Activities and Derivative Transactions"
below). Production volumes for the six months ended June 30, 2001, decreased 36%
to 2,404 MMcfe from 3,773 MMcfe for the comparable period in the prior year.
This decrease is attributable to the declining production associated with the
Company's Mississippi Salt Basin

                                       17
<PAGE>

          Management's Discussion and Analysis of Financial Condition and
                       Results of Operations (Continued)


properties. The declining production is due to the combined effect of the
following factors: 1) Mississippi Salt Basin wells tend to be prolific
producers, but have relatively short lives (5-7 years); 2) the Company's
drilling success rate and the production rate of new discoveries over the past
few years has been lower than expected; and 3) during 1999 and much of 2000, the
Company sold down its working interest in many undeveloped prospects and used a
significant portion of its operational cash flow to pay down bank debt thereby
limiting the Company's drilling activities during this period; 3). Average
realized oil prices increased less than 1% to $24.33 per barrel from $24.18 per
barrel for the six months ended June 30, 2001 compared to the same period in the
prior year. Realized natural gas prices increased 61% to $4.80 per Mcf from
$2.99 per Mcf for the comparable period of the prior year.

     Lease operating expenses ("LOE") and production taxes for the six months
ended June 30, 2001 increased 74% to $1.8 million from $1.0 million for the
comparable period in the prior year. LOE for the six months ended June 30, 2001
increased 25% to $1.0 million from $0.8 million for the comparable period in the
prior year. This increase is primarily attributable to the fact that
substantially all Company operated wells had compressor rental costs for all of
2001 compared to only a part of 2000 when the equipment was originally
installed. Production taxes for the six months ended June 30, 2001 increased
300% to $0.8 million from $0.2 million for the comparable period in the prior
year due to the phase-out of the Company's exemption from the 6% State of
Mississippi production tax that occurred in June 2000 when the average oil and
gas commodity prices in Mississippi exceeded the established price ceiling.

     DD&A expense for the six months ended June 30, 2001 decreased 12% to $7.7
million from $8.8 million for the comparable period in the prior year primarily
as a result of lower production volumes.

     General and administrative expenses for the six months ended June 30, 2001
decreased 20% to $1.1 million from $1.3 million for the comparable period of the
prior year. The decrease is primarily attributable to a reduction in
compensation and related employee benefits due to the reduced staff level in
2001 compared to 2000 and continued efforts to control costs.

     A non-cash cost ceiling writedown of $7.5 million was recognized by the
Company in June 2001 as previously discussed.

     Interest expense for the six months ended June 30, 2001 decreased 65% to
$0.6 million from $1.7 million for the comparable period of the prior year. This
decrease is attributable to: 1) a $14.4 million decrease in the outstanding
credit facility balance at June 30, 2001, compared to June 30, 2000; 2) a $2.0
million decrease in the AHC note balance; 3) a $1.0 million decrease in the
Veritas note balance; and 4) a lower interest rate associated with the new Bank
One credit facility.

     Net loss for the six months ended June 30, 2001, increased to $(7.3)
million from $(0.4) million for the comparable period in the prior year, as a
result of the factors described above.

                                       18
<PAGE>

  Management's Discussion and Analysis of Financial Condition and Results of
                                  Operations
                                  (Continued)

Liquidity and Capital Resources

 Liquidity

     The Company's primary source of liquidity is cash generated from
operations. Net cash provided by operating activities was $10.1 million and $4.1
million for the six months ended June 30, 2001 and 2000, respectively. The
increase in cash provided in 2001 compared to 2000 was primarily attributable to
improved operating results because of the significantly increased commodity
prices and reduced interest charges in 2001.

     Net cash used in investing activities was $6.1 million and $2.0 million for
the six months ended June 30, 2001 and 2000, respectively. The increase in cash
used in 2001 compared to 2000 was primarily due to a $3.2 million increase in
exploration and development expenditures.

     Net cash used in financing activities was $6.0 million and $5.5 million for
the six months ended June 30, 2001 and 2000, respectively.  Cash used in
financing activities for both years was primarily used to pay down debt.

 Capital Resources

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

     On July 19, 2000, the Company entered into a senior credit facility with
Bank One, which replaced its previous credit facility with Bank of Montreal,
Houston Agency. The credit facility has a 30-month term with an interest rate of
either Bank One prime plus 2% or LIBOR plus 4%, at the Company's option. The
Company's obligations under the credit facility are secured by a lien on all of
its real and personal property. The new credit facility required the Company to
make monthly principal payments of $500,000 from August 1, 2000 until the
borrowing base re-determination that occurred on January 1, 2001. The new
borrowing base determined by Bank One as of August 1, 2001 is $7.5 million, less
the $0.5 million due AHC in 2001. The borrowing base will be reduced by $0.5
million per month until the next re-determination scheduled for January 1, 2002.
At June 30, 2001, the outstanding debt balance under the Company's credit
facility with Bank One was $2.0 million.

     The Bank One credit facility includes certain negative 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. As a result of the loss created by
the $7.5 million cost ceiling writedown, the minimum tangible net worth covenant
as defined by the credit facility agreement to $24.0 million, pursuant to a
waiver obtained from Bank One. The obligations under the 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, 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 amend
ed 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

                                       19
<PAGE>

  Management's Discussion and Analysis of Financial Condition and Results of
                                  Operations
                                  (Continued)

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 Company ratably
recognized the prepaid interest into expense over the period to which it
related.

     Under the terms of the amended note and warrant agreements, 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. As of June 30, 2001, the Company cannot
assure that the principal balance will be paid in full by December 31, 2001,
therefore the Company has accrued additional interest of approximately $107,000
at the marginal 4% rate for the period October 15, 2000 to date. Interest
accrues and is payable on each October 15 and April 15 until principal is paid
in full. Interest was required to be paid in warrants under the terms of the
Warrant Agreement until the Company was in compliance with the net borrowing
base formula as defined in the Bank One credit facility, at which time interest
will only be paid in cash. The April 15, 2001 interest payment of approximately
$187,000 was made 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
was made in December 2000.  The balance due Veritas was $3.7 million at June 30,
2001 with the entire balance classified as long-term debt in the accompanying
financial statements.

     Any additional proceeds derived by the Company from the 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. Effective
November 1, 2000, Veritas exercised 500,000 warrants to receive 496,923 shares
(net of exercise price) of Company common stock.

     In connection with the closing of the AHC property acquisition on February
9, 1998, the Company issued a non-interest bearing note payable to AHC totaling
$2.5 million. At June 30, 2001, the outstanding AHC Note balance was $0.5
million and presently bears interest at 12%.

     Refer to Note 5 of the Consolidated Financial Statements for further
information regarding capital resources, specifically the Guardian and Eagle
transactions that were completed in 2000.

     At June 30, 2001, the Company had a working capital deficit of $4.2 million
(excluding the current portion of long-term debt). The company uses its excess
cash to pay down bank debt under the credit facility to help minimize interest
expense. Management plans to meet these working capital requirements from
operational cash flow and draws from the revolving credit facility.


                                       20
<PAGE>

  Management's Discussion and Analysis of Financial Condition and Results of
                                  Operations
                                  (Continued)

     The Company anticipates 2001 capital expenditures will be approximately
$10.0 million. Capital expenditures will be used to fund drilling and
development activities, the acquisition of additional seismic data and
processing and leasehold acquisitions and extensions in the Company's project
areas. The actual amounts of capital expenditures and number of wells drilled
may differ significantly from such estimates. Actual capital expenditures for
the six months ended June 30, 2001 were approximately $6.1 million. The Company
intends to fund its 2001 budgeted capital expenditures largely 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. The Company and industry as a whole continue to experience
significant commodity price volatility. A return to the significantly depressed
oil and gas prices experienced in 1998 and early 1999, as compared to historical
averages, 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 can be produced economically by the Company.

     The Company has experienced and expects to continue to experience
substantial working capital requirements primarily due to the Company's active
exploration and development program.  While the Company believes that cash flow
from operations and improved commodity prices should allow the Company to
implement its present business strategy through 2001, additional debt or equity
financing may be required during the remainder of 2001 and in the future to fund
the Company's growth, development and exploration program, and to satisfy its
existing obligations. The failure to obtain and exploit such capital resources
could have a material adverse effect on the Company, including curtailment of
its exploration and other activities.

Effects of Inflation and Changes in Price

     Crude oil and natural gas commodity prices have been very volatile and
unpredictable during 2001 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, liquidity, and budgetary planning. 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.

                                       21
<PAGE>

  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. The Company periodically
enters into certain derivatives 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. 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, 2001 and 2000, the Company realized approximately $(2.7)million
and $(0.4)million, respectively, of hedging (losses) which are included in oil
and natural gas revenues in the consolidated statements of operations. For the
six months ended June 30, 2001 and 2000, the Company had hedged 58% and 40%,
respectively, of its oil and natural gas production, and as of June 30, 2001,
the Company had 0.6 Bcf of open natural gas contracts for the months of July
2001 through December 2001.

     Market Risk Information

     The market risk inherent in the Company's derivatives is the potential loss
arising from adverse changes in commodity prices. 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

     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 for 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 IMDA Agreement between K2 and the
Blackfeet ("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. Discovery is currently underway.

     On May 1, 2000, the Company gave notice to the Blackfeet Tribal Business
Council demanding arbitration of all disputes as provided for under the
Miller/Blackfeet IMDA dated February 19, 1999, and pursuant to the 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.

     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. In January 2001, the District Court judge ruled against the Company
on two of the three claims filed in this case with damages left undetermined.
This ruling is being appealed to the U.S. Fifth Circuit Court of Appeals. In the
event the Company does not prevail in the appeal, legal counsel has advised that
any resulting damages owed would be covered by insurance.

     The Company is a defendant 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. Under a DNR
approved plan, site remediation has been completed and periodic testing is being
performed.

     The Company was a defendant in a lawsuit brought by Charles Strickland,
employee of BJ Services, Inc., on September 30, 1999. The suit claimed damages
of $1.0 million for personal injuries allegedly suffered at a well site operated
by the Company. The judge ruled in favor of the Company at the trial that was
held March 8, 2001 and the date for filing an appeal has now passed.

  The Company is a party to a lawsuit brought by Bill and Joyce Vasilion against
AHC (the Company's joint venture partner at the site of the alleged incident).
The claim alleges that AHC (the operator) was negligent in failing to inspect a
crane at a well site that was the subject of an accident which occurred in
September 1994. Discovery is currently underway.

  The Company believes it has meritorious claims or defenses to the items
discussed above and intends to vigorously pursue 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.

                                       23
<PAGE>

     Additionally, in the normal course of business, the Company may be a party
to certain other lawsuits and administrative proceedings.  Management cannot
predict the ultimate outcome of any pending or threatened litigation or of
actual or possible claims; however, management believes resulting liabilities,
if any, will not have a material adverse impact upon the Company's financial
position or results of operations.

Item 2. Changes in Securities

     None

Item 3. Defaults Upon Senior Securities

     None

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

     At the May 25, 2001 Annual Meeting of Common Stockholders, the following
nominee was elected to the Company's Board of Directors for a term of three
years:

                Name             Votes For      Votes Withheld
          ----------------       ----------     --------------
          Martin G. Lagina       16,667,150        204,134

     Also at the May 25, 2001 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 1,900,000 to 2,400,000.

               For         Against    Abstain    Votes Withheld
           ----------      -------    -------    --------------
           16,171,950      688,484    10,850           --

     .  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 320,000 to 600,000 and to provide that
        director fees be paid in stock only.

               For         Against    Abstain    Votes Withheld
           ----------      -------    -------    --------------
           16,316,101      547,483     7,700           --

Item 5. Other Information

     None

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(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.

                                       24
<PAGE>

       2.1(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       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.

       3.2       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.

_________________________

       (b)       Reports on Form 8-K. No reports on Form 8-K were filed during
                 -------------------
the fiscal quarter ended June 30, 2001.

                                       25
<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 13, 2001           By: /s/ Deanna L. Cannon
                                    ---------------------------------------
                                    Deanna L. Cannon
                                    Vice President-Finance and Secretary
                                    (Principal Accounting and Financial Officer)

                                       26
<PAGE>

                                 EXHIBIT INDEX


      Exhibit No.                          Description
      -----------                          -----------


        2.1(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.

        2.1(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        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.

        3.2        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.

____________________

                                       27