<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
       SEPTEMBER 30, 1999                                  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                                   November 10, 1999
           -----                                   -----------------
  Common stock, $.01 par value                     12,681,244 shares
<PAGE>

                           MILLER EXPLORATION COMPANY

                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                                                            Page No.
                                                                                                            --------

PART I.  FINANCIAL INFORMATION

<S>      <C>                                                                                                   <C>
Item 1.  Financial Statements...................................................................................3

         Consolidated Statements of Operations--
         Three Months and Nine Months Ended September 30, 1999 and 1998 ........................................3

         Consolidated Balance Sheets--
         September 30, 1999 and December 31, 1998...............................................................4

         Consolidated Statement of Equity--
         Nine Months Ended September 30, 1999...................................................................5

         Consolidated Statements of Cash Flows--
         Nine Months Ended September 30, 1999 and 1998..........................................................6

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

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.................14


PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings.....................................................................................22

Item 6.  Exhibits and Reports on Form 8-K......................................................................23

</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 NINE MONTHS
                                                               ENDED SEPTEMBER 30,                   ENDED SEPTEMBER 30,
                                                           ----------------------------         ----------------------------
                                                              1999              1998               1999               1998
                                                           ----------------------------         ----------------------------
REVENUES:
<S>                                                        <C>                <C>                <C>                <C>
    Natural gas .................................          $  4,403           $  4,833           $ 12,434           $ 13,395
    Crude oil and condensate ....................             1,041                775              2,655              1,854
    Other operating revenues ....................               101                250                395                572
                                                           --------           --------           --------           --------
        Total operating revenues ................             5,545              5,858             15,484             15,821
                                                           --------           --------           --------           --------

OPERATING EXPENSES:
    Lease operating expenses and production taxes               288                907              1,338              2,314
    Depreciation, depletion and amortization ....             4,460              3,596             11,383              9,214
    General and administrative ..................               626                763              2,426              2,596
                                                           --------           --------           --------           --------
        Total operating expenses ................             5,374              5,266             15,147             14,124
                                                           --------           --------           --------           --------

OPERATING INCOME ................................               171                592                337              1,697
                                                           --------           --------           --------           --------

INTEREST EXPENSE ................................              (998)              (522)            (2,605)            (1,084)
                                                           --------           --------           --------           --------

INCOME (LOSS) BEFORE INCOME TAXES ...............              (827)                70             (2,268)               613
                                                           --------           --------           --------           --------

INCOME TAX PROVISION (CREDIT) (Note 2) ..........              (281)               (30)              (857)             5,492
                                                           --------           --------           --------           --------

NET INCOME (LOSS) ...............................          $   (546)          $    100           $ (1,411)          $ (4,879)
                                                           ========           ========           ========           ========

EARNINGS (LOSS) PER SHARE (Note 3)
    Basic .......................................          $  (0.04)          $   0.01           $  (0.11)          $  (0.46)
                                                           ========           ========           ========           ========
    Diluted .....................................          $  (0.04)          $   0.01           $  (0.11)          $  (0.46)
                                                           ========           ========           ========           ========
</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 SEPTEMBER 30,   AS OF DECEMBER 31,
                                                                               1999                  1998
                                                                        ------------------    -----------------
                                                                           (UNAUDITED)
                                      ASSETS
<S>                                                                          <C>                 <C>
CURRENT ASSETS:
      Cash and cash equivalents ....................................          $     931           $      22
      Accounts receivable ..........................................              4,274               3,959
      Inventories, prepaids and advances to other operators ........                316                 978
                                                                              ---------           ---------
          Total current assets .....................................              5,521               4,959
                                                                              ---------           ---------

OIL AND GAS PROPERTIES--at cost (full cost method):
      Proved oil and gas properties ................................            112,290             103,272
      Unproved oil and gas properties ..............................             26,943              39,995
      Less-Accumulated depreciation, depletion and amortization ....            (74,395)            (63,253)
                                                                              ---------           ---------
          Net oil and gas properties ...............................             64,838              80,014
                                                                              ---------           ---------

OTHER ASSETS .......................................................                755                 995
                                                                              ---------           ---------
          Total assets .............................................          $  71,114           $  85,968
                                                                              =========           =========

                              LIABILITIES AND EQUITY

CURRENT LIABILITIES:
      Current portion of long-term debt ............................          $   8,000           $  10,500
      Accounts payable .............................................              2,513               6,819
      Accrued expenses and other current liabilities ...............              5,581               3,565
                                                                              ---------           ---------
          Total current liabilities ................................             16,094              20,884
                                                                              ---------           ---------

LONG-TERM DEBT .....................................................             24,678              31,837

DEFERRED INCOME TAXES ..............................................              6,111               6,883

DEFERRED REVENUE ...................................................                 62               1,615

COMMITMENTS AND CONTINGENCIES (NOTE 6)

EQUITY:
      Common stock warrants ........................................                423                  --
      Preferred stock, $0.01 par value; 2,000,000 shares authorized;
          none outstanding .........................................                 --                  --
      Common stock, $0.01 par value; 40,000,000 shares
          authorized; 12,681,244 shares and 12,492,597 shares
          outstanding at September 30, 1999 and December 31, 1998,
          respectively .............................................                127                 126
      Additional paid in capital ...................................             66,834              67,136
      Deferred compensation ........................................               (167)               (876)
      Retained deficit .............................................            (43,048)            (41,637)
                                                                              ---------           ---------
Total equity .......................................................             24,169              24,749
                                                                              ---------           ---------
          Total liabilities and equity .............................          $  71,114           $  85,968
                                                                              =========           =========
</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, 1998                           $     --     $    --     $    126     $ 67,136      $   (876)     $(41,637)

     Issuance of restricted stock
         and benefit plan shares                          --          --           --         (390)          709           --
     Issuance of non-employee
         Directors' shares                                --          --            1           88            --           --
     Common stock warrants issued                        423          --           --           --            --           --
     Net loss                                             --          --           --           --            --        (1,411)
                                                    --------     -------     --------     --------      --------      --------

BALANCE-September 30, 1999                          $    423     $    --     $    127     $ 66,834      $   (167)     $(43,048)
                                                    ========     =======     ========     ========      ========      ========
</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 NINE MONTHS ENDED
                                                                                          SEPTEMBER 30,
                                                                                  -----------------------------
                                                                                     1999               1998
                                                                                  -----------       ----------
<S>                                                                               <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss                                                                     $ (1,411)          $ (4,879)
     Adjustments to reconcile net loss to net cash from
        operating activities--
           Depreciation, depletion and amortization                                 11,383              9,214
           Deferred income taxes                                                      (772)               268
           Deferred revenue                                                         (1,553)               (41)
           Changes in assets and liabilities--
               Accounts receivable                                                    (316)            (1,772)
               Other assets                                                            664              1,874
               Accounts payable                                                     (4,306)             3,329
               Accrued expenses and other current liabilities                        2,016              3,716
                                                                                  --------           --------
                  Net cash flows provided by operating activities                    5,705             11,709
                                                                                  --------           --------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Exploration and development expenditures                                       (8,669)           (32,161)
     Acquisition of properties                                                        --              (51,011)
     Proceeds from sale of oil and gas properties                                   12,701                515
                                                                                  --------           --------
               Net cash flows provided by (used in) investing activities             4,032            (82,657)
                                                                                  --------           --------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Payments of principal                                                         (12,149)            (8,178)
     Borrowing on long-term debt                                                     2,490             33,500
     Contributions, return of capital and stock proceeds, net                          831             45,601
                                                                                  --------           --------
               Net cash flows provided by (used in) financing activities            (8,828)            70,923
                                                                                  --------           --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                   909                (25)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE
     PERIOD                                                                             22                146
                                                                                  --------           --------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD                                    $    931           $    121
                                                                                  ========           ========
SUPPLEMENTAL CASH FLOW INFORMATION:
     Cash paid during the period for--
        Interest                                                                  $  2,331           $    761
                                                                                  ========           ========
</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, 1998.

         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.

         The Combination Transaction

         The Company was formed as a Delaware corporation in November 1997 to
serve as the surviving company upon the completion of a series of combination
transactions (the "Combination Transaction"). The first part of the Combination
Transaction included the following activities: the Company acquired all of the
outstanding capital stock of Miller Oil Corporation ("MOC"), the Company's
predecessor, and certain oil and gas interests (collectively, the "Combined
Assets") owned by Miller & Miller, Inc., Double Diamond Enterprises, Inc.,
Frontier Investments, Inc., Oak Shores Investments, Inc., Eagle Investments,
Inc. (d/b/a Victory, Inc.) and Eagle International, Inc. (the "affiliated
entities," all Michigan corporations owned by Miller family members who were
beneficial owners of MOC) in exchange for an aggregate consideration of
approximately 5.3 million shares of Common Stock of the Company. The operations
of all of these entities had been managed through the same management team, and
had been owned by the same members of the Miller family. The Company completed
the Combination Transaction concurrently with consummation of the Company's
initial public offering (the "Offering").

         Initial Public Offering

         On February 9, 1998, the Company completed the Offering of its Common
Stock and concurrently completed the Combination Transaction. On that date, the
Company sold 5.5 million shares of its Common Stock for an aggregate purchase
price of $44.0 million. On March 9, 1998, the Company sold an additional 62,500
shares of its Common Stock for an aggregate purchase price of $0.5 million,
pursuant to the exercise of the underwriters' over-allotment option.

                                       7
<PAGE>

                           MILLER EXPLORATION COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


(1)      ORGANIZATION AND NATURE OF OPERATIONS (CONTINUED)

         Other Transactions Completed Concurrently With the Offering

         In addition to the above described activities of the Company, the
second part of the Combination Transaction (consummated concurrently with the
Offering) was the exchange by the Company of an aggregate of approximately 1.6
million shares of Common Stock for interests in certain other oil and gas
properties that were owned by non-affiliated parties. Because these interests
were acquired from individuals who were not under the common ownership and
management of the Company, these exchanges were accounted for under the purchase
method of accounting. Under that method, the properties were recorded at their
estimated fair value at the date on which the exchange was consummated (February
9, 1998).

         In November 1997, the Company entered into a Purchase and Sale
Agreement whereby the Company acquired interests in certain crude oil and
natural gas producing properties and undeveloped properties from Amerada Hess
Corporation ("AHC") for approximately $48.8 million, net of post-closing
adjustments. This purchase was consummated concurrently with the Offering. This
acquisition was accounted for under the purchase method of accounting and was
financed with the use of proceeds from the Offering and with new bank
borrowings.

         In February 1998, MOC terminated its S corporation status which
required the Company to reclassify combined equity and retained earnings as
additional paid-in capital.

         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 two
regions: the Mississippi Salt Basin of central Mississippi and the Blackfeet
Indian Reservation of the southern Alberta Basin in Montana.

         Oil and Gas Properties

         Securities and Exchange Commission Regulation ("SEC") 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, net of deferred income
taxes, may not exceed the net present value of the Company's proven oil and gas
reserves plus the lower of cost or market of unproved properties. Any such
excess costs should be charged against earnings.

         Reclassifications

         Certain reclassifications have been made to prior period statements to
conform with the September 30, 1999 presentation.

                                       8
<PAGE>

                           MILLER EXPLORATION COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)



(2)      INCOME TAXES

         Before consummation of the Offering, the Company and the combined
entities either elected to be treated as S corporations under the Internal
Revenue Code of 1986, as amended, or were otherwise not taxed as entities for
federal income tax purposes. The taxable income or loss has therefore been
allocated to the equity owners of the Company and the affiliated entities.

         Due to the use of different methods for tax and financial reporting
purposes in accounting for various transactions, the Company has temporary
differences between its tax basis and financial reporting basis. Had the Company
been a taxpaying entity before consummation of the Offering, a deferred tax
liability of approximately $5.4 million would have been recorded for this
difference, with a corresponding reduction in retained earnings. Therefore,
included in the deferred income tax provision for the nine months ended
September 30, 1998, is a one-time non-cash accounting charge of $5.4 million to
record net deferred tax liabilities upon consummation of the Offering and the
termination of MOC's S corporation status.


(3)      EARNINGS PER SHARE

         The computation of earnings (loss) per share for the three-month and
nine-month periods ended September 30, 1999 and 1998 are as follows (in
thousands, except per share data):

<TABLE>
<CAPTION>
                                                                          THREE MONTHS                         NINE MONTHS
                                                                       ENDED SEPTEMBER 30,                 ENDED SEPTEMBER 30,
                                                                     1999               1998              1999                1998
                                                                   ---------          --------          ---------          ---------
<S>                                                                <C>                <C>               <C>                <C>
Net income (loss) attributable to
    basic and diluted EPS ...............................          $   (546)          $    100          $ (1,411)          $ (4,879)

Average common shares outstanding
    applicable to basic EPS .............................            12,679             12,493            12,617             10,702
Add:  stock options, treasury shares and restricted stock              --                  109              --                 --
                                                                   --------           --------          --------           --------
Average common shares outstanding
    applicable to diluted EPS ...........................            12,679             12,602            12,617             10,702

Earnings (loss) per share:
    Basic ...............................................          $  (0.04)          $   0.01          $  (0.11)          $  (0.46)
    Diluted .............................................          $  (0.04)          $   0.01          $  (0.11)          $  (0.46)
</TABLE>


         Options and restricted stock were not included in the computation of
diluted earnings per share for the three months ended September 30, 1999 and for
the nine months ended September 30, 1999 and 1998 because their effect was
antidilutive.

                                       9
<PAGE>

                           MILLER EXPLORATION COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

(4)      LONG-TERM DEBT

         The Company has entered into a credit facility (the "Credit Facility")
with Bank of Montreal, Houston Agency ("BMO"). The Credit Facility includes
certain negative covenants that impose limitations on the Company and its
subsidiary with respect to, among other things, distributions with respect to
its capital stock, limitations on financial ratios, the creation or incurrence
of liens, the incurrence of additional indebtedness, making loans and
investments and mergers and consolidations. The obligations of the Company under
the Credit Facility are secured by a lien on all real and personal property of
the Company. At September 30, 1999, $25.5 million was outstanding under the
Credit Facility.

         On April 14, 1999, the Company and BMO entered into the Second
Amendment to the Credit Facility. The Second Amendment stipulates, among other
things, that the Company would submit a revised reserve report to BMO by
October 1, 1999 for a re-determination of the borrowing base and pay a $300,000
re-determination fee.

         On October 29, 1999, the re-determination fee was paid, and the Company
and BMO entered into the Third Amendment to the Credit Facility which includes:
(i) terms requiring the Company to make principal payments to BMO of $0.75
million the last day of each month during the period beginning with October 1999
through February 2000, except for the January 31, 2000 payment which will be
$4.0 million; (ii) terms requiring that all outstanding borrowings bear interest
at BMO's prime rate plus 3.5%; (iii) revision or waiver of certain negative
covenant provisions through September 30, 2000; (iv) a requirement to submit a
revised reserve report to BMO by April 1, 2000 for a re-determination of the
borrowing base; (v) a requirement that all proceeds from the sales of proved or
unproved oil and gas properties, prior to the re-determination date, must be
used to reduce the principal amount outstanding under the Credit Facility; and
(vi) a requirement for an amendment fee payable to BMO in an amount equal to 2%
of the outstanding balance of the Credit Facility at the April re-determination
date. At the April re-determination date, the Company will likely be required to
make additional payments of principal to the extent its outstanding borrowings
exceed the borrowing base. Final maturity of the Credit Facility is January 1,
2001. All other principal and interest obligations are expected to be fulfilled
through available cash flows, additional property sales or other financing
sources, including the possible issuance of additional equity securities as well
as identifying alternative sources for debt financing.

         On April 14, 1999, the Company issued a $4.7 million note payable to
one its suppliers, Veritas DGC Land, Inc. (the "Veritas Note Payable"), for the
outstanding balance due to Veritas for past services provided in 1998 and 1999.
The balance due Veritas was $4.7 million at September 30, 1999, and has been
classified as long-term debt in the accompanying financial statements. The
principal obligation under the Veritas Note Payable is due on April 15, 2001.
Management plans to fulfill the principal obligation under the Veritas Note
Payable from available cash flows, property sales and other financing sources.

                                       10
<PAGE>

                           MILLER EXPLORATION COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

(4)  LONG-TERM DEBT (CONTINUED)

         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 the Company's Common Stock in lieu of receiving cash payments
for the accrued interest obligations under the Veritas Note Payable. The Warrant
Agreement requires 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 to be issued must equal 9% of the then current outstanding principal
balance of the Veritas Note Payable. The number of shares to be issued upon
exercise of the warrants issued on April 14 and on the six-month anniversary is
determined based upon a five-day weighted average closing price of the Company's
Common Stock at April 14. 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 Payable and
prepaid interest expense was recorded for $422,644. The prepaid interest expense
will be recognized in the consolidated statements of operations over the first
six-month period of the Warrant Agreement. As of September 30, 1999, the prepaid
interest expense balance was $34,455. On October 14, 1999, the six-month
anniversary of the Warrant Agreement, warrants exercisable for another 322,752
shares of Common Stock were issued to Veritas.

         The Company has the option, in lieu of issuing warrants, to make a cash
payment to Veritas at the 12 and 18 month anniversaries equivalent to 9% of the
then current principal balance of the Veritas Note Payable. Under the terms of
the Warrant Agreement, all warrants issued will expire on April 15, 2002. In
addition, the Company also entered into an agreement with Veritas that (i)
requires the Company to file a registration statement with the SEC to register
shares of Common Stock that are issuable upon exercise of the above warrants and
(ii) grants certain piggy-back registration rights in connection with the
warrants.

         In connection with the closing of the AHC acquisition on February 9,
1998, the Company has a non-interest bearing note payable to AHC (the "AHC Note
Payable") of $2.5 million (at September 30, 1999) which is payable on the annual
anniversary dates of the closing as follows: $1.0 million in 2000 and $1.5
million in 2001.


(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.

                                       11
<PAGE>

                           MILLER EXPLORATION COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


(5)      RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS (CONTINUED)

         Commodity Price Hedges

         The Company periodically enters into certain derivatives (e.g., NYMEX
futures contracts) for a portion of its oil and natural gas production to
achieve a more predictable cash flow and to reduce the exposure to commodity
price fluctuations. The Company's policy is to hedge no more than 50% (through
the use of derivatives) of its future production. 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 three months
ended September 30, 1999 and 1998, the Company realized approximately $(328,000)
and $329,000, respectively, of hedging gains (losses). For the nine months ended
September 30, 1999 and 1998, the Company realized approximately $(7,000) and
$407,000, respectively of hedging gains (losses). As of September 30, 1999 the
Company had 1.5 Bcfe of open oil and natural gas contracts through March 2000
ranging in price from $2.63 to $3.02 per Mcfe.

         Interest Rate Hedge

         The Company entered into an interest rate swap agreement, effective
November 2, 1998, to exchange the variable rate interest payment obligation
under the Credit Facility without exchanging the underlying principal amount.
This agreement converted the variable rate debt to fixed rate debt to reduce the
impact of interest rate fluctuations. The notional amount was used to measure
interest to be paid or received and did not represent the exposure to credit
loss. The difference between the amounts paid and received under the swap is
accrued and recorded as an adjustment to interest expense over the life of the
hedge agreement, which was to expire February 9, 2001. In March 1999, the
Company terminated its interest rate swap agreement and received $0.3 million,
which will be recognized in earnings ratably as the related outstanding loan
balance is amortized.


(6)      COMMITMENTS AND CONTINGENCIES

         Stock Options and Restricted Stock

         Upon consummation of the Offering, 109,500 shares of restricted stock
were granted to certain employees. The restricted stock vests in cumulative
increments of one-half of the total number of shares of Common Stock subject
thereto, beginning on the first anniversary of the date of grant. Because the
restricted stock shares are subject to the risk of forfeiture during the vesting
period, compensation expense will be recognized ratably over the two-year
vesting period as the risk of forfeiture passes. In February 1999, compensation
expense of $0.2 million was recorded by the Company as certain restricted shares
became vested. At September 30, 1999, the compensation expense on the restricted
stock shares to be vested in February 2000, is being deferred and is based on
the market value of the shares at September 30, 1999.

                                       12
<PAGE>

                           MILLER EXPLORATION COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


(6)      COMMITMENTS AND CONTINGENCIES (CONTINUED)

         Other

         The Company is not currently named as a defendant in any lawsuits
and/or administrative proceedings arising other than in the ordinary course of
business except as disclosed below.

         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 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 Strictland,
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 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 either action. The
Company currently believes any costs resulting from the lawsuits mentioned above
would be covered by the Company's insurance.

(7)      RELATED PARTY TRANSACTIONS

         During the first half of 1999, an affiliated entity purchased a working
interest in certain proved and unproved oil and gas properties from the Company
for $4.9 million. The Company believes that the purchase price is representative
of the fair market value of these interests and that the terms are consistent
with those available to unrelated parties. During the quarter ended September
30, 1999, one of these related party sales was rescinded. The $1.0 million in
proceeds have been reclassified as a drilling advance to apply towards the
drilling of wells that this affiliated entity is participating in.

(8)      NON-CASH ACTIVITIES

         During 1998, the Company recorded a one-time non-cash charge of
approximately $5.4 million for the termination of MOC's S corporation status, as
more fully discussed in Note 2, and acquired certain oil and gas properties
owned by non-affiliated parties for approximately $12.8 million of its Common
Stock, as more fully discussed in Note 1. On April 14, 1999, warrants
exercisable for 322,752 shares of Common Stock were issued to Veritas DGC Land,
Inc. in lieu of receiving cash payments for interest obligations as more fully
discussed in Note 4. These non-cash activities have been excluded from the
consolidated statement of cash flows.

                                       13
<PAGE>

                           MILLER EXPLORATION COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


(9)      SUBSEQUENT EVENTS

         On October 29, 1999, the Company entered into a joint venture
arrangement with Remington Oil and Gas Corporation ("Remington") covering
multiple salt domes in the Mississippi Salt Basin. The terms of the joint
venture arrangement provide for Remington to pay the Company $1.5 million upon
closing and to participate in the drilling of five prospects in the Company's
Mississippi Salt Basin Project. Remington will earn a position in undeveloped
acreage ranging from 14% to 40% working interest in the prospects by paying a
disproportionate share of drilling costs in the five-well program. Additionally,
Remington will have the option to earn 50% of the undeveloped acreage at the
Company's Dry Creek Dome by paying the first $900,000 of a 3-D seismic shoot.
The $1.5 million in cash proceeds received from Remington was forwarded to BMO
to reduce the principal amount outstanding as required by the Third Amendment to
the Credit Facility.



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 located primarily in Mississippi and Montana.

         The Company was organized in connection with the Combination
Transaction. The Combined Assets consist of MOC, interests in oil and natural
gas properties from the affiliated entities and interests in such properties
owned by certain business partners and investors, including AHC, Dan A. Hughes,
Jr. and SASI Minerals Company. No assets other than those in which MOC or the
affiliated entities had an interest were part of the Combined Assets. The
Company and the owners of the Combined Assets entered into separate agreements
that provided for the issuance of approximately 6.9 million shares of the
Company's Common Stock and the payment of $48.8 million (net of post-closing
adjustments) in cash to certain participants in the Combination Transaction in
exchange for the Combined Assets. The issuance of the shares and the cash
payment were completed upon consummation of the Company's Offering.

         The Combination Transaction closed on February 9, 1998, in connection
with the closing of the Offering. The Offering, including the sale of additional
shares from the underwriters' over-allotment, resulted in net proceeds to the
Company of approximately $40.4 million after expenses.

         For further discussion of the Offering and the Combination Transaction,
see Note 1 to the Consolidated Financial Statements.

         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.

         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, net of deferred taxes, may not exceed the net present value of the
Company's proven oil and gas reserves plus the lower of cost or market of
unproved properties. Any such excess costs should be charged against earnings.

                                       14
<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 NINE MONTHS
                                                                    ENDED SEPTEMBER 30,        ENDED SEPTEMBER 30,
                                                                ---------------------------  ------------------------
                                                                   1999           1998          1999         1998
                                                                ---------------------------  ------------------------
<S>                                                              <C>            <C>           <C>          <C>
Production volumes:
        Crude oil and condensate (Mbbls)...................           60             73           200          162
        Natural gas (Mmcf).................................        1,805          2,349         5,736        6,442
        Natural gas equivalent (Mmcfe).....................        2,165          2,787         6,936        7,414

Average sales prices:
        Crude oil and condensate ($ per Bbl)...............      $ 17.35        $ 10.62       $ 13.28      $ 11.44
        Natural gas ($ per Mcf)............................         2.44           2.06          2.17         2.08
        Natural gas equivalent ($ per Mcfe)................         2.51           2.01          2.17         2.06


Average Costs ($ per Mcfe):
        Lease operating expenses and production taxes......      $   .13        $   .33       $   .19      $   .31
        Depletion, depreciation and amortization...........         2.06           1.29          1.64         1.24
        General and administrative.........................          .29            .27           .35          .35
</TABLE>


  Three Months Ended September 30, 1999 compared to Three Months Ended
September 30, 1998

         Oil and natural gas revenues for the three months ended September 30,
1999 decreased 3% to $5.4 million from $5.6 million for the same period in 1998.
The revenues for the three months ended September 30, 1999 and 1998 include
$(328,000) and $329,000 of hedging gains (losses), respectively (see "Risk
Management Activities and Derivative Transactions" below). Despite a 12%
increase in natural gas production volumes for the Mississippi Salt Basin
properties, total gas production for the three months ended September 30, 1999
declined 23% to 1,805 Mmcf from 2,349 Mmcf for the same period in 1998. The
decrease in total natural gas production is primarily attributable to the sale
of certain non-strategic gas producing properties in Texas, Louisiana and
Michigan that occurred in previous quarters of 1999. Average natural gas prices
increased 18% to $2.44 per Mcf (including a $203,000 hedge loss) for the three
months ended September 30, 1999 from $2.06 per Mcf in the same period in 1998.
Although oil production for the Mississippi properties decreased 7%, total oil
production volumes during the three months ended September 30, 1999 decreased
18% to 60 Mbbls from 73 Mbbls for the same period in 1998. The decrease in
non-Mississippi oil production is attributable to the sale of certain
non-strategic oil producing properties in Texas and Louisiana. Average oil
prices increased 63% to $17.35 per barrel (including a $125,000 hedge loss)
during the three months ended September 30, 1999 from $10.62 per barrel in the
same period in 1998.

         Lease operating expenses and production taxes for the three months
ended September 30, 1999 decreased 68% to $0.3 million from $0.9 million for the
same period in 1998. Lease operating expenses and production taxes decreased due
to the combined results of improved efficiencies at Company- operated well sites
in the Mississippi Salt Basin and as a result of the sale of certain
non-strategic producing properties in Texas, Louisiana and Michigan.

                                       15
<PAGE>

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


         Depreciation, depletion and amortization ("DD&A") expense for the three
months ended September 30, 1999 increased 25% to $4.5 million from $3.6 million
for the same period in 1998. This increase was the result of above an increase
in the depletion rate. The higher depletion rate was primarily the result of
decreased proved oil and gas reserves attributable to the sale of certain
non-strategic producing oil and gas properties discussed above.

         General and administrative expense for the three months ended September
30, 1999 decreased 18% to $0.6 million from $0.8 million for the same period in
1998, primarily as a result of a cost reduction plan implemented in May 1999.

         Interest expense for the three months ended September 30, 1999
increased 91% to $1.0 million from $0.5 million in the same period in 1998, as a
result of increased debt levels in 1999 compared to the same period in 1998 and
due to significantly increased interest rates, as more fully discussed Note 4.

         Net loss for the three months ended September 30, 1999 was $(0.5)
million compared to net income of $0.1 million for the same period in 1998, as a
result of the factors described above.

   Nine Months Ended September 30, 1999 compared to Nine Months Ended
September 30, 1998

         Oil and natural gas revenues of $15.1 million for the nine months ended
September 30, 1999 decreased 1% from $15.2 million for the same period in 1998.
The revenues for the nine months ended September 30, 1999 and 1998 include
$(7,000) and $407,000 of hedging gains (losses), respectively (see "Risk
Management Activities, and Derivative Transactions" below). Production volumes
for natural gas during the nine months ended September 30, 1999 decreased 11% to
5,736 Mmcf from 6,442 Mmcf for the same period in 1998. Average natural gas
prices increased 4% to $2.17 per Mcf for the nine months ended September 30,
1999 from $2.08 per Mcf in the same period in 1998. Although natural gas
production in the Mississippi Salt Basin increased approximately 24% for the
nine months ended September 30, 1999 compared to the same period in 1998, total
production for the nine months ended September 30, 1999 decreased primarily due
to the sale of certain non-strategic gas producing properties in Texas,
Louisiana and Michigan during 1999. Production volumes for oil during the nine
months ended September 30, 1999 increased 23% to 200 Mbbls from 162 Mbbls for
the same period in 1998. A 45% increase in Mississippi Salt Basin oil production
was partially offset by the sale in 1999 of certain non-strategic oil producing
properties in Texas and Louisiana. Average oil prices increased 16% to $13.28
per barrel during the nine months ended September 30, 1999 from $11.44 per
barrel in the same period in 1998.

         Lease operating expenses and production taxes for the nine months ended
September 30, 1999 decreased 42% to $1.3 million from $2.3 million for the same
period in 1998. Lease operating expenses and production taxes decreased due to
the combined results of improved efficiencies at Company operated wells sites in
the Mississippi Salt Basin and the sale of certain non-strategic producing
properties in Texas, Louisiana and Michigan. As a result, operating expenses per
equivalent unit decreased to $0.19 per Mcfe for the nine months ended September
30, 1999 from $0.31 per Mcfe in the same period in 1998.

         DD&A expense for the nine months ended September 30, 1999 increased 24%
to $11.4 million from $9.2 million for the same period in 1998. This increase
was the result of an increase in the depletion rate. The higher depletion rate
was primarily the result of decreased proved oil and gas reserves due to the
sale of certain non-strategic producing oil and gas properties mentioned above.

         General and administrative expense for the nine months ended September
30, 1999 decreased 7% to $2.4 million from $2.6 million for the same period of
the prior year. Salary reductions and other cost control measures implemented in
May 1999 helped to offset costs associated with a higher average number of
employees during the nine months ended September 30, 1999, compared to the same
period in 1998.

                                       16
<PAGE>

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


         Interest expense for the nine months ended September 30, 1999 increased
140% to $2.6 million from $1.1 million in the same period in 1998 and as a
result of increased debt levels in 1999 compared to the same period in 1998 and
due to significantly increased interest rates as more fully described in Note 4.

         Net loss for the nine months ended September 30, 1999 decreased to
$(1.4) million from $(4.9) million for the same period in 1998, as a result of
the factors described above, plus the nine months ended September 30, 1998
include a one-time non-cash charge to earnings of $5.4 million in connection
with the termination of MOC's S-corporation status, as more fully discussed in
Note 2.

LIQUIDITY AND CAPITAL RESOURCES

         Historically, the Company's primary sources of capital have been funds
generated by operations, capital contributions and borrowings.

         The Company has entered into the Credit Facility with BMO. The Credit
Facility includes certain negative covenants that impose limitations on the
Company and its subsidiary with respect to, among other things, distributions
with respect to its capital stock, limitations on financial ratios, the creation
or incurrence of liens, the incurrence of additional indebtedness, making loans
and investments and mergers and consolidations. The obligations of the Company
under the Credit Facility are secured by a lien on all real and personal
property of the Company. At September 30, 1999, $25.5 million was outstanding
under the Credit Facility.

         On April 14, 1999, the Company and BMO entered into the Second
Amendment to the Credit Facility. The Second Amendment stipulates, among other
things, that the Company would submit a revised reserve report to BMO by October
1, 1999 for a re-determination of the borrowing base and pay a $300,000
re-determination fee.

         On October 29, 1999, the re-determination fee was paid, and the Company
and BMO entered into the Third Amendment to the Credit Facility which includes:
(i) terms requiring the Company to make principal payments to BMO of $0.75
million the last day of each month during the period beginning with October 1999
through February 2000, except for the January 31, 2000 payment which will be
$4.0 million; (ii) terms requiring that all outstanding borrowings bear interest
at BMO's prime rate plus 3.5%; (iii) revision or waiver of certain negative
covenant provisions through September 30, 2000; (iv) a requirement to submit a
revised reserve report to BMO by April 1, 2000 for a re-determination of the
borrowing base; (v) a requirement that all proceeds from the sales of proved or
unproved oil and gas properties, prior to the re-determination date, must be
used to reduce the principal amount outstanding under the Credit Facility; and
(vi) a requirement for an amendment fee payable to BMO in an amount equal to 2%
of the outstanding balance of the Credit Facility at the April re-determination
date. At the April re-determination date, the Company will likely be required to
make additional payments of principal to the extent its outstanding borrowings
exceed the borrowing base. Final maturity of the Credit Facility is January 1,
2001. All other principal and interest obligations are expected to be fulfilled
through available cash flows, additional property sales or other financing
sources, including the possible issuance of additional equity securities as well
as identifying alternative sources for debt financing.

         On April 14, 1999, the Company issued a $4.7 million note payable to
one its suppliers, Veritas DGC Land, Inc. (the "Veritas Note Payable"), for the
outstanding balance due to Veritas for past services provided in 1998 and 1999.
The balance due Veritas was $4.7 million at September 30, 1999, and has been
classified as long-term debt in the accompanying financial statements. The
principal obligation under the Veritas Note Payable is due on April 15, 2001.
Management plans to fulfill the principal obligation under the Veritas Note
Payable from available cash flows, property sales and other financing sources.

                                       17
<PAGE>

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


         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 the Company's Common Stock in lieu of receiving cash payments
for the accrued interest obligations under the Veritas Note Payable. The Warrant
Agreement requires 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 to be issued must equal 9% of the then current outstanding principal
balance of the Veritas Note Payable. The number of shares to be issued upon
exercise of the warrants issued on April 14 and on the six-month anniversary is
determined based upon a five-day weighted average closing price of the Company's
Common Stock at April 14. 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 Payable and
prepaid interest expense was recorded for $422,644. The prepaid interest expense
will be recognized in the consolidated statements of operations over the first
six-month period of the Warrant Agreement. As of September 30, 1999, the prepaid
interest expense balance was $34,455. On October 14, 1999, the six-month
anniversary of the Warrant Agreement, warrants exercisable for another 322,752
shares of Common Stock were issued to Veritas.

         The Company has the option, in lieu of issuing warrants, to make a cash
payment to Veritas at the 12 and 18 month anniversaries equivalent to 9% of the
then current principal balance of the Veritas Note Payable. Under the terms of
the Warrant Agreement, all warrants issued will expire on April 15, 2002. In
addition, the Company also entered into an agreement with Veritas that (i)
requires the Company to file a registration statement with the SEC to register
shares of Common Stock that are issuable upon exercise of the above warrants and
(ii) grants certain piggy-back registration rights in connection with the
warrants.

         In connection with the closing of the AHC acquisition on February 9,
1998, the Company has a non-interest bearing note payable to AHC (the "AHC Note
Payable") of $2.5 million (at September 30, 1999) which is payable on the annual
anniversary dates of the closing as follows: $1.0 million in 2000 and $1.5
million in 2001.

         At September 30, 1999, the Company had a working capital deficit of
$2.6 million (excluding the current portion of long-term debt). Management plans
to meet these working capital requirements from available cash flows, property
sales and other financing sources.

         The Company has budgeted capital expenditures of approximately $10.6
million for 1999. Capital expenditures are being incurred for drilling and
development activities, the completion of 3-D seismic surveys that were in
process at year end 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 nine months ended September 30, 1999 were approximately
$8.7 million. The Company intends to fund the remainder of its 1999 budgeted
capital expenditures through operating 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, are substantially dependent on prevailing prices of oil and natural
gas. The Company cannot predict future oil and natural gas price movements with
certainty. Declines in prices received for oil and natural gas as experienced
during 1998 and the first quarter of 1999 have had an adverse effect on the
Company's financial condition, liquidity, ability to finance capital
expenditures and results of operations. These lower prices also had an impact on
the amount of reserves that can be produced economically by the Company.

                                       18
<PAGE>

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


         The Company has experienced and expects to continue to experience
substantial working capital requirements primarily due to the Company's active
exploration and development programs and technology enhancement programs and
principal payments as required by the Second and Third Amendments to the Credit
Facility, more fully described in Note 4. While the Company believes that cash
flow from operations and property sales will allow the Company to implement its
present business strategy through 1999, additional debt or equity financing may
be required during the remainder of 1999 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 curtailed exploration.

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 (e.g., NYMEX
futures contracts) for a portion of its oil and natural gas production to
achieve a more predictable cash flow and to reduce the exposure to commodity
price fluctuations. The Company's policy is to hedge no more than 50% (through
the use of derivatives) of its future production. 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 three months
ended September 30, 1999 and 1998, the Company realized approximately $(328,000)
and $329,000, respectively, of hedging gains (losses). For the nine months ended
September 30, 1999 and 1998, the Company realized approximately $(7,000) and
$407,000, respectively of hedging gains (losses). As of September 30, 1999 the
Company had 1.5 Bcfe of open oil and natural gas contracts through March 2000
ranging in price from $2.63 to $3.02 per Mcfe.


         Interest Rate Hedge

         The Company entered into an interest rate swap agreement, effective
November 2, 1998, to exchange the variable rate interest payment obligation
under the Credit Facility without exchanging the underlying principal amount.
This agreement converted the variable rate debt to fixed rate debt to reduce the
impact of interest rate fluctuations. The notional amount was used to measure
interest to be paid or received and did not represent the exposure to credit
loss. The difference between the amounts paid and received under the swap is
accrued and recorded as an adjustment to interest expense over the life of the
hedge agreement, which was to expire February 9, 2001. During March 1999, the
Company terminated its interest rate swap agreement and received $0.3 million,
which will be recognized in earnings ratably as the related outstanding loan
balance is amortized.

                                       19
<PAGE>

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

         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 oil and 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 no more than 50% (through the use of
derivatives) of its 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 oil and natural gas.

EFFECTS OF INFLATION AND CHANGES IN PRICE

         During 1998 and into the first quarter of 1999, the Company and the oil
and gas industry as a whole, experienced unusually low crude oil prices and
substantially depressed natural gas prices. These lower commodity prices had a
negative 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.

YEAR 2000 READINESS DISCLOSURE

         This Year 2000 Readiness Disclosure is based upon and partially repeats
information provided by the Company's outside consultants and others regarding
the year 2000 readiness of the Company and its customers, suppliers, financial
institutions and other parties. Although the Company believes this information
to be accurate, it has not independently verified such information.

         The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.

                                       20
<PAGE>

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


         The Company has initiated a plan to prepare its computer systems and
applications for possible year 2000 problems. Under the plan, the Company has
identified its computer hardware and software systems and equipment with
embedded computer chips; assessed the effects of the year 2000 issues; and
developed the steps necessary to identify, correct or reprogram and test systems
for year 2000 compliance. The Company has completed necessary year 2000
modifications on its internal computer hardware and software applications. The
Company will use the remaining time in 1999 for validation, testing, and
development of a contingency plan .

         The Company expects to spend a total of not more than $25,000 in
connection with identifying, assessing, remediating and testing year 2000
issues. The Company expects that it will expense all costs associated with
system changes. If the Company invests in new or upgraded technology which has a
definable value lasting beyond 2000 and where year 2000 compliance is merely
ancillary, the Company will capitalize and depreciate such an asset over its
estimated useful life.

         Based on currently available information, management does not
anticipate that the costs to address the year 2000 issues will have a material
adverse impact on the Company's financial condition, results of operations or
liquidity. However, the extent to which the computer operations and other
systems of the Company's important third parties are adversely affected could,
in turn, affect the Company's ability to communicate with third parties and
could have a material adverse effect on the operations of the Company (including
but not limited to failures in service, disruptions in the Company's ability to
bill joint venture partners, pay vendors and suppliers, and the possible
slowdown of certain computer-dependent processes).

         The Company has made inquiries of third party vendors, suppliers and
partners which have a material relationship with the Company as to the status of
their year 2000 readiness. The Company is relying on vendor, supplier and
partner representations that their internal computer systems are or will be year
2000 compliant and that no material adverse impact on their business operations
is anticipated. The Company has not independently verified these representations
and there can be no assurances that these representations will prove to be
accurate. Unreadiness by these third parties would expose the Company to the
potential for loss and impairment of business processes and activities. The
Company is assessing these risks and is creating contingency plans intended to
address perceived risks.

         The costs of the project and the date on which the Company expects to
complete the year 2000 modifications are based on management's best estimates.
There can be no guarantee that these estimates will be achieved, and actual
results could differ from those anticipated. Specific factors that might cause
differences include, but are not limited to, the ability of other companies on
which the Company's systems rely to modify or convert their systems to be year
2000 ready, the ability of all third parties who have business relationships
with the Company to continue their businesses without interruption and similar
uncertainties. As a result, the Company is in the process of evaluating possible
internal and external scenarios that might have an adverse impact on the
Company. The Company also recognizes that a contingency plan must be developed
in the event the Company's systems cannot be made year 2000 compliant on a
timely basis. The Company is working on development of a contingency plan which
will be completed prior to December 31, 1999.

                                       21
<PAGE>

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


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.


PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         The Company is not currently named as a defendant in any lawsuits
and/or administrative proceedings arising other than in the ordinary course of
business except as disclosed below.

         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 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 Strictland,
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 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 either action. The
Company currently believes any costs resulting from the lawsuits mentioned above
would be covered by the Company's insurance.

                                       22
<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         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.

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

          4.2         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.

         10.1         Agreement between Eagle Investments, Inc., and Miller
                      Exploration Company, dated October 18, 1999.

         27.1         Financial Data Schedule.
--------------------

         (b) Reports on Form 8-K. No reports on Form 8-K were filed during the
fiscal quarter ended September 30, 1999.

                                       23
<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:   November 10, 1999            By: /s/ William J. Baumgartner
                                         ---------------------------------
                                         William J. Baumgartner
                                         Executive Vice President
                                         (Principal Accounting and
                                         Financial Officer)

                                       24
<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         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.


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

          4.2         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.

         10.1         Agreement between Eagle Investments, Inc., and Miller
                      Exploration Company, dated October 18, 1999.

         27.1         Financial Data Schedule.
--------------------

                                       25