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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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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, 2003         |  | 0-23431               



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MILLER EXPLORATION COMPANY

(Exact Name of Registrant as Specified in Its Charter)



|Delaware                                                       |  | 38-3379776                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer 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



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



Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 126-2 of the Act).  Yes ̈No  x



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



|Class                        |  | Outstanding at August 11, 2003
|---------------------------- |  | ------------------------------
|Common stock, $.01 par value |  | 2,069,774 shares              



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##### Table of Contents

MILLER EXPLORATION COMPANY



TABLE OF CONTENTS



|                              |  |                                                                                                |  | Page No.
|----------------------------- |  | ---------------------------------------------------------------------------------------------- |  | --------
|                              | 
|PART I. FINANCIAL INFORMATION |  |                                                                                               
|                              |  |                                                                                               
|Item 1.                       |  | Financial Statements                                                                           |  | 3       
|                              |  |                                                                                               
|                              |  | Consolidated Statements of OperationsThree Months and Six Months Ended June 30, 2003 and 2002 |  | 3       
|                              |  |                                                                                               
|                              |  | Consolidated Balance SheetsJune 30, 2003 and December 31, 2002                                |  | 4       
|                              |  |                                                                                               
|                              |  | Consolidated Statement of EquitySix Months Ended June 30, 2003                                |  | 5       
|                              |  |                                                                                               
|                              |  | Consolidated Statements of Cash FlowsSix Months Ended June 30, 2003 and 2002                  |  | 6       
|                              |  |                                                                                               
|                              |  | Notes to Consolidated Financial Statements                                                     |  | 7       
|                              |  |                                                                                               
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 17      
|                              |  |                                                                                               
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                     |  | 26      
|                              |  |                                                                                               
|Item 4.                       |  | Controls and Procedures                                                                        |  | 27      
|                             
|PART II. OTHER INFORMATION   
|                              |  |                                                                                               
|Item 1.                       |  | Legal Proceedings                                                                              |  | 28      
|                              |  |                                                                                               
|Item 2.                       |  | Changes in Securities and Use of Proceeds                                                      |  | 29      
|                              |  |                                                                                               
|Item 3.                       |  | Defaults Upon Senior Securities                                                                |  | 29      
|                              |  |                                                                                               
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                            |  | 29      
|                              |  |                                                                                               
|Item 5.                       |  | Other Information                                                                              |  | 29      
|                              |  |                                                                                               
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                               |  | 29      



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##### Table of Contents

PART I. FINANCIAL INFORMATION



Item 1. Financial Statements



MILLER EXPLORATION COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)



|                                                                                             |  | For the Three Months Ended June 30, |       |   | For the Six Months Ended June 30, |  
|-------------------------------------------------------------------------------------------- |  | ----------------------------------- | ----- | - | --------------------------------- | -
|                                                                                             |  | 2003                                |       |   | 2002                              |  
|REVENUES:                                                                                    |  |                                     |       |   |                                   |  
|Natural gas                                                                                  |  | $                                   | 2,153 |   |                                   | $
|Crude oil and condensate                                                                     |  |                                     | 597   |   |                                   |  
|Other operating revenues                                                                     |  |                                     | 5     |   |                                   |  
|                                                                                             |  |                                     |       |   |                                   |  
|Total operating revenues                                                                     |  |                                     | 2,755 |   |                                   |  
|                                                                                             |  |                                     |       |   |                                   |  
|OPERATING EXPENSES:                                                                          |  |                                     |       |   |                                   |  
|Lease operating expenses and production taxes                                                |  |                                     | 494   |   |                                   |  
|Depreciation, depletion and amortization                                                     |  |                                     | 1,512 |   |                                   |  
|General and administrative                                                                   |  |                                     | 736   |   |                                   |  
|Cost ceiling writedown                                                                       |  |                                     |      |   |                                   |  
|                                                                                             |  |                                     |       |   |                                   |  
|Total operating expenses                                                                     |  |                                     | 2,742 |   |                                   |  
|                                                                                             |  |                                     |       |   |                                   |  
|OPERATING INCOME (LOSS)                                                                      |  |                                     | 13    |   |                                   |  
|                                                                                             |  |                                     |       |   |                                   |  
|INTEREST EXPENSE                                                                             |  |                                     | (9    | ) |                                   |  
|                                                                                             |  |                                     |       |   |                                   |  
|INCOME (LOSS) BEFORE INCOME TAXES                                                            |  |                                     | 4     |   |                                   |  
|                                                                                             |  |                                     |       |   |                                   |  
|INCOME TAX PROVISION (CREDIT) (Note 2)                                                       |  |                                     |      |   |                                   |  
|                                                                                             |  |                                     |       |   |                                   |  
|NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE                 |  |                                     | 4     |   |                                   |  
|CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE                                          |  |                                     |      |   |                                   |  
|                                                                                             |  |                                     |       |   |                                   |  
|NET INCOME (LOSS)                                                                            |  | $                                   | 4     |   |                                   | $
|                                                                                             |  |                                     |       |   |                                   |  
|BASIC INCOME (LOSS) PER SHARE  Before Cumulative Effect of Change in Accounting Principle   |  | $                                   |      |   |                                   | $
|                                                                                             |  |                                     |       |  
|BASIC INCOME (LOSS) PER SHARE  Cumulative Effect of Change in Accounting Principle          |  |                                     |      |   |                                   |  
|                                                                                             |  |                                     |       |  
|BASIC INCOME (LOSS) PER SHARE                                                                |  | $                                   |      |   |                                   | $
|                                                                                             |  |                                     |       |  
|DILUTED INCOME (LOSS) PER SHARE  Before Cumulative Effect of Change in Accounting Principle |  |                                     |      |   |                                   | $
|                                                                                             |  |                                     |       |  
|DILUTED INCOME (LOSS) PER SHARE  Cumulative Effect of Change in Accounting Principle        |  | $                                   |      |   |                                   |  
|                                                                                             |  |                                     |       |  
|DILUTED INCOME (LOSS) PER SHARE                                                              |  |                                     |      |   |                                   | $
|                                                                                             |  |                                     |       |  
|WEIGHTED AVERAGE SHARES OUTSTANDING:                                                         |  |                                     |       |   |                                   |  
|Basic                                                                                        |  |                                     | 2,062 |   |                                   |  
|Diluted                                                                                      |  |                                     | 2,139 |   |                                   |  



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



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MILLER EXPLORATION COMPANY

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)



|                                                                                                                                                                    |  | As of June 30, 2003 |          |   | As of December 31, 2002 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------- | -------- | - | ----------------------- | -
|                                                                                                                                                                    |  | (Unaudited)         |          |   |                         |  
|ASSETS                                                                                                                                                              |  |                     |          |   |                         |  
|CURRENT ASSETS:                                                                                                                                                     |  |                     |          |   |                         |  
|Cash and cash equivalents                                                                                                                                           |  | $                   | 4,750    |   |                         | $
|Accounts receivable                                                                                                                                                 |  |                     | 1,325    |   |                         |  
|Inventories, prepaids and advances to other operators                                                                                                               |  |                     | 580      |   |                         |  
|                                                                                                                                                                    |  |                     |          |   |                         |  
|Total current assets                                                                                                                                                |  |                     | 6,655    |   |                         |  
|                                                                                                                                                                    |  |                     |          |   |                         |  
|OIL AND GAS PROPERTIESat cost (full cost method):                                                                                                                  |  |                     |          |   |                         |  
|Proved oil and gas properties                                                                                                                                       |  |                     | 156,009  |   |                         |  
|Unproved oil and gas properties                                                                                                                                     |  |                     | 365      |   |                         |  
|Less-Accumulated depreciation, depletion and amortization                                                                                                           |  |                     | (142,372 | ) |                         |  
|                                                                                                                                                                    |  |                     |          |   |                         |  
|Net oil and gas properties                                                                                                                                          |  |                     | 14,002   |   |                         |  
|                                                                                                                                                                    |  |                     |          |   |                         |  
|OTHER ASSETS                                                                                                                                                        |  |                     | 33       |   |                         |  
|                                                                                                                                                                    |  |                     |          |   |                         |  
|Total assets                                                                                                                                                        |  | $                   | 20,690   |   |                         | $
|                                                                                                                                                                    |  |                     |          |   |                         |  
|LIABILITIES AND EQUITY                                                                                                                                              |  |                     |          |   |                         |  
|                                                                                                                                                                    |  |                    
|CURRENT LIABILITIES:                                                                                                                                                |  |                     |          |   |                         |  
|Current maturities of long-term debt                                                                                                                                |  |                     |         |   |                         | $
|Accounts payable                                                                                                                                                    |  |                     | 460      |   |                         |  
|Accrued expenses and other current liabilities                                                                                                                      |  |                     | 2,528    |   |                         |  
|                                                                                                                                                                    |  |                     |          |   |                         |  
|Total current liabilities                                                                                                                                           |  |                     | 2,988    |   |                         |  
|                                                                                                                                                                    |  |                     |          |   |                         |  
|LONG-TERM DEBT                                                                                                                                                      |  |                     |         |   |                         |  
|                                                                                                                                                                    |  |                    
|COMMITMENTS AND CONTINGENCIES (Note 6)                                                                                                                              |  |                     |          |   |                         |  
|                                                                                                                                                                    |  |                    
|EQUITY:                                                                                                                                                             |  |                     |          |   |                         |  
|Common stock warrants, 960,050 outstanding at June 30, 2003 and December 31, 2002                                                                                   |  |                     | 851      |   |                         |  
|Preferred stock, $0.01 par value; 2,000,000 shares authorized; none outstanding                                                                                     |  |                     |         |   |                         |  
|Common stock, $0.01 par value; 40,000,000 shares authorized; 2,069,774 shares and 1,992,186 shares outstanding at June
30, 2003 and December 31, 2002, respectively |  |                     | 21       |   |                         |  
|Accumulated other comprehensive loss                                                                                                                                |  |                     | (37      | ) |                         |  
|Additional paid in capital                                                                                                                                          |  |                     | 77,771   |   |                         |  
|Accumulated deficit                                                                                                                                                 |  |                     | (60,904  | ) |                         |  
|                                                                                                                                                                    |  |                     |          |   |                         |  
|Total equity                                                                                                                                                        |  |                     | 17,702   |   |                         |  
|                                                                                                                                                                    |  |                     |          |   |                         |  
|Total liabilities and equity                                                                                                                                        |  | $                   | 20,690   |   |                         | $
|                                                                                                                                                                    |  |                     |          |   |                         |  



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



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MILLER EXPLORATION COMPANY

CONSOLIDATED STATEMENT OF EQUITY

(In thousands)

(Unaudited)



|                                           |  | Common Stock Warrants |     | Preferred Stock |   | Common Stock |  | Accumulated Other Comprehensive Income (Loss) |    |  | Additional Paid In Capital |     | Accumulated Deficit | 
|------------------------------------------ |  | --------------------- | --- | --------------- | - | ------------ |  | --------------------------------------------- | -- |  | -------------------------- | --- | ------------------- | 
|                                           |  |                       |     |                 |  
|                                           |  |                       |     |                 |  
|                                           |  |                       |     |                 |  
|BALANCE-December 31, 2002                  |  | $                     | 851 |                 | $ |             |  | $                                             | 20 |  | $                          | (49 | )                   | 
|Issuance of benefit plan shares            |  |                       |    |                 |   |             |  |                                               |   |  |                            |    |                     | 
|Issuance of non-employee directors shares |  |                       |    |                 |   |             |  |                                               | 1  |  |                            |    |                     | 
|Change in unrealized gain                  |  |                       |    |                 |   |             |  |                                               |   |  |                            | 12  |                     | 
|Net income                                 |  |                       |    |                 |   |             |  |                                               |   |  |                            |    |                     | 
|                                           |  |                       |     |                 |   |              |  |                                               |    |  |                            |     |                     | 
|BALANCE-June 30, 2003                      |  | $                     | 851 |                 | $ |             |  | $                                             | 21 |  | $                          | (37 | )                   | 
|                                           |  |                       |     |                 |   |              |  |                                               |    |  |                            |     |                     | 



Disclosure of Comprehensive
Income:



|                                  |  | For the six months ended June 30, |    
|--------------------------------- |  | --------------------------------- | ---
|                                  |  | 2003                              |    
|Net income (loss)                 |  | $                                 | 441
|Other comprehensive income (loss) |  |                                   | 12 
|                                  |  |                                   |    
|Total comprehensive income (loss) |  | $                                 | 453
|                                  |  |                                   |    



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



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MILLER EXPLORATION COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                 |  | For the Six Months Ended June 30, |       
|-------------------------------------------------------------------------------- |  | --------------------------------- | ------
|                                                                                 |  | 2003                              |       
|CASH FLOWS FROM OPERATING ACTIVITIES:                                            |  |                                   |       
|Net income (loss)                                                                |  | $                                 | 441   
|Adjustments to reconcile net income (loss) to net cash fromoperating activities |  |                                   |       
|Cost ceiling writedown                                                           |  |                                   |      
|Depreciation, depletion and amortization                                         |  |                                   | 3,148 
|Cumulative effect of change in accounting principle                              |  |                                   | 450   
|Deferred income taxes                                                            |  |                                   |      
|Warrants and stock compensation                                                  |  |                                   | 140   
|Loss on sale of non-oil and gas assets                                           |  |                                   | 198   
|Changes in assets and liabilities                                               |  |                                   |       
|Accounts receivable                                                              |  |                                   | 116   
|Other assets                                                                     |  |                                   | (257  
|Accounts payable                                                                 |  |                                   | (179  
|Accrued expenses and other current liabilities                                   |  |                                   | (278  
|                                                                                 |  |                                   |       
|Net cash flows provided by operating activities                                  |  |                                   | 3,779 
|                                                                                 |  |                                   |       
|CASH FLOWS FROM INVESTING ACTIVITIES:                                            |  |                                   |       
|Exploration and development expenditures                                         |  |                                   | (415  
|Proceeds from sale of oil and gas properties                                     |  |                                   | 2,140 
|                                                                                 |  |                                   |       
|Net cash flows provided by (used in) investing activities                        |  |                                   | 1,725 
|                                                                                 |  |                                   |       
|CASH FLOWS FROM FINANCING ACTIVITIES:                                            |  |                                   |       
|Payments of principal                                                            |  |                                   | (2,503
|Borrowing on notes payable and long-term debt                                    |  |                                   | 1,703 
|                                                                                 |  |                                   |       
|Net cash flows provided by (used in) financing activities                        |  |                                   | (800  
|                                                                                 |  |                                   |       
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                          |  |                                   | 4,704 
|                                                                                 |  |                                   |       
|CASH AND CASH EQUIVALENTS AT BEGINNING OF THEPERIOD                              |  |                                   | 46    
|                                                                                 |  |                                   |       
|CASH AND CASH EQUIVALENTS AT END OF THE PERIOD                                   |  | $                                 | 4,750 
|                                                                                 |  |                                   |       
|SUPPLEMENTAL CASH FLOW INFORMATION:                                              |  |                                   |       
|Cash paid during the period for interest                                         |  | $                                 | 25    
|                                                                                 |  |                                   |       



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



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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 its 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, 2002. The statements of operations for the three and six month periods ended June 30, 2003, cannot necessarily be used to
project results for the full year.



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.



Change in Accounting Principle



On January 1, 2003, the Company adopted the provisions of Statement of Financial Accounting Standards No. 143,
Accounting for Asset Retirement Obligations (SFAS 143). SFAS 143 requires entities to record the fair value of retirement obligations associated with tangible long-lived assets in the period in which the obligation is
incurred. The respective asset retirement cost is capitalized as part of the carrying amount of the long-lived asset. The asset retirement cost is allocated to expense using a systematic and rational method over the assets useful lives. At
January 1, 2003, the Company recorded a $517,000 retirement obligation related to processing plants, pipelines, and oil and gas well plugging and abandonment liabilities. The cumulative effect of the change in accounting resulted in a $450,000
charge as reflected in the Companys Consolidated Statements of Operations for the six months ended June 30, 2003.



The following pro forma information is provided to give effect to the adoption of SFAS 143 as if it had been adopted on January 1, 2002.



|                                                                |  | Period ended June 30, 2002               |       
|--------------------------------------------------------------- |  | ---------------------------------------- | ------
|                                                                |  | (in thousands, except per share amounts) |       
|                                                                |  | Three Months                             |       
|Net loss                                                        |  | $                                        | (2,156
|Pro forma adjustment to reflect retroactive adoption ofSFAS 143 |  |                                          | (12   
|Pro forma net loss                                              |  | $                                        | (2,168
|                                                                |  |                                          |       
|Earnings (loss) per share:                                      |  |                                          |       
|Basic  as reported                                             |  | $                                        | (0.11 
|Basic  pro forma                                               |  | $                                        | (0.11 
|Diluted  as reported                                           |  | $                                        | (0.11 
|Diluted  pro forma                                             |  | $                                        | (0.11 



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MILLER EXPLORATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Principles of Consolidation



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



Nature of Operations



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



Oil and Gas Properties



SEC Regulation S-X, Rule 4-10 requires companies reporting on a full cost
basis to apply a ceiling test wherein the capitalized costs, net of deferred income taxes, 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. Any such excess costs should be charged against earnings.



Stock-Based Employee Compensation



The Company accounts for all stock options issued under the provisions and related interpretation of Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock-Based Compensation. The Company
intends to continue to apply APB No. 25 for purposes of determining net income.



Reclassifications



Certain reclassifications have been made to prior period statements to conform with the June 30, 2003 presentation.



Reverse Stock Split



On October 11, 2002, the Company affected a one-for-ten reverse stock split that has been retroactively reflected in the Companys Consolidated
Financial Statements.



Change in Business Plan and
Merger Proposal



Beginning in mid 2002, the Company
changed its business plan from a focus on exploration and development activities to pursuing opportunities involving strategic joint ventures, the sale of the Company, or the sale of its assets. For a variety of reasons, the Board of Directors
determined that this shift in direction was in the best interest of the shareholders of the Company. This exhaustive effort has culminated in the execution of a merger agreement with Edge Petroleum Corporation (Edge) that was approved by
the Companys Board of Directors on May 28, 2003 pursuant to which a wholly owned subsidiary of Edge will merge with and into Miller and Miller will become a subsidiary of Edge (the Merger). Due to the change in business plan and
pending Merger, exploration and development activities have been curtailed; the Companys exploration office in Jackson, Mississippi has been closed and employees located there terminated; and there have been increases in certain corporate
overhead costs such as severance costs and office closure expenses and reductions achieved in certain other areas such as rent and office equipment and supplies. The Company has also incurred legal and other third party costs to date totaling
approximately $200,000 that have been capitalized pending the outcome of the Merger.



The Companys Board of Directors approved a severance plan totaling $370,000 of which $60,000 was paid to employees in the Jackson, Mississippi office upon closing. If the Merger is approved, the balance of the
severance obligation will be paid to employees within five days of closing. Additionally, Edge has agreed to retain certain employees for up to 90 days beyond the Merger closing date. These employees will be paid a retention bonus if they agree to
remain employed as long as needed up to the 90 days. The total maximum retention payments that could be owed is approximately $248,000. Also, if the Merger is approved, the Company will pay approximately $127,000 to its investment bankers (C.K.
Cooper & Company) as a success fee and anticipates incurring additional legal and other Merger related costs.



(2) Income Taxes



In 1998, upon consummation of the Companys initial public offering, the Company recorded a one-time non-cash accounting charge of $5.4 million to
record net deferred tax liabilities, due to the use of different methods for tax and financial reporting purposes in accounting for various transactions and the resultant temporary differences between tax basis and financial reporting basis.



Based on estimates of future anticipated taxable income and
also taking into consideration the Companys current net operating loss and depletion deduction carryforwards of approximately $50.2 million, it has been determined that there should be no accrual of future tax liability. Accordingly, the
Company recorded a $5.5 million income tax credit in June 2002 to reverse the entire deferred income tax liability balance. The Company does not anticipate the need to record deferred income taxes in the foreseeable future.



(3) Notes Payable and Long-Term Debt



Notes Payable



During the past few years the Company has financed various insurance policy
premiums. The amounts financed each year are less than $200,000, and the notes are fully paid off by each calendar year end. Terms of these notes require monthly payments of principal and interest, and the notes bear interest at rates competitive
with the Companys credit facility. In May 2003, the Company paid the remaining balance of these notes in full.



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MILLER EXPLORATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Bank Debt



On July 19, 2000, the Company entered into a senior credit facility with Bank One, Texas, N.A. (Bank One), which
replaced the previous credit facility with Bank of Montreal, Houston Agency. The Bank One credit facility had 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. The
Companys financing needs have changed as a result of the change in its business plan and pending Merger. Therefore, the Company terminated the credit facility with Bank One on June 30, 2003.



Other



On April 14, 1999, the Company issued a $4.7 million note payable (the Veritas Note) 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 April 14, 1999, the Company also entered into an agreement (the
Warrant Agreement) to issue warrants to Veritas that entitle Veritas to purchase shares of common stock in lieu of receiving cash payments for the accrued interest obligations under the Veritas Note. The Warrant Agreement required the
Company to issue warrants to Veritas in conjunction with the signing of the Warrant Agreement, as well as on the six and, at the Companys option, 12 and 18 month anniversaries of the Warrant Agreement. The warrants issued equal 9% of the then
current outstanding principal balance of the Veritas Note. The number of shares issued upon exercise of the warrants 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 $0.10 per share. On April 14, 1999, warrants exercisable for 32,276 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 32,276 and 45,500 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.



On July 18, 2000, the Company entered into the First
Amendment to Promissory Note, Warrant and Registration Rights Agreement (First Amendment Agreement). Under the terms of the First Amendment Agreement, the maturity of the Veritas Note was extended to July 21, 2003 from April 15, 2001 and
the expiration date for all warrants issued was extended until June 21, 2004. The annual interest rate was reduced to 93⁄4% from 18%, provided the entire Note balance was paid in full by December 31, 2001. The Veritas Note was not paid in full by
December 31, 2001, and the interest rate was increased to 133⁄4% annually. Interest is payable on each October 15 and April 15 until the note is paid in full. The Company has paid additional interest of approximately $225,000 at the incremental
4% rate for the period of October 15, 2000 through April 14, 2002. Interest was required to be paid in warrants under the terms of the First Amendment 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 would only be paid in cash. Since October 15, 2000, all interest payments have been made in cash.



On June 28, 2002, the Company entered into the Second Amendment to Promissory Note, Warrant and Registration Rights Agreement (Second Amendment
Agreement). Concurrently with the execution of the Second Amendment Agreement, the Company made a $600,000 principal payment. Under terms of the Second Amendment Agreement, the Veritas Note was amended as follows: (1) the maturity of the
Veritas Note was changed to December 31, 2002 from July 21, 2003; (2) the interest rate was changed to 93⁄4%; (3) the past due annual interest rate was changed to 12% from 133⁄4%; and (4) six principal payments of $150,000, totaling



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MILLER EXPLORATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



$900,000 were required, and were payable on or before the last day of each month commencing on July 31, 2002. In the event that all six principal payments
mentioned above were made timely, an interest payment would not be due on October 15, 2002, and Veritas agreed to extinguish the remaining principal balance of $2.2 million and any accrued interest outstanding under the Veritas Note. As a
result, the Company would recognize a gain of approximately $2.4 million. In the event that these six principal payments were not timely made, the entire principal balance outstanding under the Veritas Note would be accelerated and become due and
payable upon demand and shall accrue interest at the past due rate from the date of the Second Amendment Agreement until the Veritas Note is paid in full. At December 31, 2002, the Company had made all required payments under the Second Amendment
Agreement. Therefore, the remaining principal balance and related accrued interest payable obligations have been extinguished, and the Company recognized a $2.4 million gain for the year-ended December 31, 2002.



As an inducement for Veritas to enter into the Second Amendment Agreement:
(1) the Company granted Veritas an overriding royalty interest on the Companys entire leasehold that is not held by production and leases acquired through July 31, 2003 (excluding leases within the boundaries of the Blackfeet Indian
Reservation); (2) the Company transferred its proprietary rights in approximately 140 square miles of 3-D seismic data with respect to certain areas within the Mississippi Salt Basin to Veritas in exchange for a 25-year license allowing the Company
the use of same data. The Company has also agreed to an optional transfer fee on its currently licensed data, which in the aggregate totals approximately $1.6 million in the event of a change in control of the Company; and (3) certain Company
Directors who own or control shares of Common Stock of the Company and are considered major stockholders agreed to provide certain tag-along rights in the event one of these major stockholders negotiates a sale of Company Common Stock with a private
party. The Second Amendment Agreement also extended the expiration date of the warrants to July 31, 2004 from June 21, 2004.



(4) 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 156,250, 250,000 and 900,000 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 185,186 shares
of common stock. In addition, Eagle was issued warrants exercisable for a total of 203,125 shares of Common Stock that expired on December 7, 2002 This transaction with Eagle was approved by the Companys stockholders at meeting on December 7,
2000.



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##### Table of Contents

MILLER EXPLORATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Common Stock Warrants



As of June 30, 2003, the Company has the following Common Stock warrants outstanding:



|Warrants       |  | Exercise Price |       |  |  | Expiration Date
|-------------- |  | -------------- | ----- |  |  | ---------------
|60,050 shares  |  | $              | 0.10  |  |  |                
|900,000 shares |  | $              | 30.00 |  |  |                



(5) Risk Management Activities and
Derivative Transactions



The Company uses a variety of
financial derivative instruments (derivatives) to manage exposure to fluctuations in commodity prices. To qualify for hedge accounting, derivatives must meet the following criteria: (i) the item to be hedged exposes the Company to price
risk; and (ii) the derivative reduces that exposure and is designated as a hedge. 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 declines in oil and natural gas prices and limit potential gains from future
increases in prices. Such hedging arrangements may expose the Company to risk of financial loss in certain circumstances, including instances where production is less than expected, the Companys customers fail to purchase contracted quantities
of oil or natural gas or a sudden unexpected event materially impacts oil or natural gas prices. For financial reporting purposes, gains and losses related to hedging are recognized as oil and gas revenues during the period the hedge transaction
occurs. The Company expects that the amount of hedge contracts that it has in place will vary from time to time. For the six months ended June 30, 2003 and 2002, the Company realized approximately $(0.4) million and $(0.1) million, respectively, of
hedging (losses) which are included in oil and natural gas revenues in the Consolidated Statements of Operations. The fair value of remaining derivative contracts at June 30, 2003, is approximately $(0.04) million. This amount is reflected in other
current liabilities in the Consolidated Balance Sheet with a corresponding amount in comprehensive loss in the equity section of the Consolidated Balance Sheet. For the six months ended June 30, 2003 and 2002, the Company had hedged 24% and 58%,
respectively, of its oil and natural gas production, and as of June 30, 2003, the Company had 46 Mmcfe of open natural gas contracts for the months of July 2003 through September 2003. If all these open contracts had been settled as of June 30,
2003, the Company would have paid approximately $0.04 million.



(6)
Commitments and Contingencies



Stock-Based Compensation



During 1997, the Company adopted the Stock Option and
Restricted Stock Plan of 1997 (the 1997 Plan). The 1997 Plan has been primarily 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 240,000 shares of Common Stock (subject to certain antidilution adjustments) are available for Incentive Awards under the 1997 Plan.



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##### Table of Contents

MILLER EXPLORATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



On January 1, 2000, the Company granted 19,150 stock options to certain employees with an exercise
price of $0..10 per share. The right to exercise the options vests and the options become exercisable only when (i) the Company moves its headquarters from Traverse City, Michigan, or (ii) 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
|----------------------------- |  | -----------------
|$20.00                        |  | 40%              
|$27.50                        |  | additional 30%   
|$35.00                        |  | final 30%        



When it is probable
that the five-day stock price target will be attained or the headquarters will be moved (the measurement date), the Company is required to recognize compensation expense for the difference between the quoted market price of the Common
Stock at this measurement date less the $0.10 per share grant price times the number of options that will vest. If the Merger is approved, it is estimated that 18,400 of the above options will vest upon closing of the Merger with Edge and moving the
headquarters out of Traverse City, Michigan. Compensation expense would be recorded at that time to recognize the intrinsic value of these options using the then current stock trading price.



On October 31, 2000, the Company granted 25,000 stock options to employees
with an exercise price of $16.25 per share (the closing market price on the date of grant). The right to exercise the options vests at a rate of one-fifth per year beginning on the first anniversary of the grant date.



On April 6, 2001, the Company granted 19,000 stock options to the Chief
Executive Officer of the Company. Of these options, 10,000 were issued under the same terms as those issued to certain employees on January 1, 2000, and the remaining 9,000 stock options were issued under the same terms as those issued to certain
employees on October 31, 2000.



On November 12, 2001, the
Company granted 33,700 stock options to employees with an exercise price of $12.50 per share. The right to exercise the options vests at a rate of one-fifth per year beginning on the first anniversary of the grant date.



The Company accounts for all stock options issued under the provisions and
related interpretation of Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock-Based Compensation. The Company intends to continue to apply APB No. 25 for purposes of determining net income.



SFAS 123, Accounting for Stock-Based Compensation, as amended by
SFAS 148, Accounting for Stock-Based Compensation  Transition and Disclosure, outlines a fair value based method of accounting for stock options or similar equity instruments. The Company uses the Black-Scholes option 
pricing model to estimate fair value.



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##### Table of Contents

MILLER EXPLORATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



The status of stock options granted under the Stock Option and Restricted Stock Plan of 1997 is as
follows:



|                                 |  | Options         
|-------------------------------- |  | ----------------
|                                 |  | Number Of Shares
|Outstanding at January 1, 2002   |  | 166,525         
|                                 |  |                 
|Granted                          |  | 1,200           
|Exercised                        |  | 0               
|Forfeited                        |  | (3,175          
|                                 |  |                 
|Outstanding at June 30, 2002     |  | 164,550         
|                                 |  |                 
|Granted                          |  | 0               
|Exercised                        |  | 0               
|Forfeited                        |  | (31,800         
|                                 |  |                 
|Outstanding at December 31, 2002 |  | 132,750         
|                                 |  |                 
|Granted                          |  | 0               
|Exercised                        |  | 0               
|Forfeited                        |  | 0               
|                                 |  |                 
|Outstanding at June 30, 2003     |  | 132,750         
|                                 |  |                 



In December 2002, the
FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosurean amendment of FASB Statement No. 123 to provide alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. Additionally, the statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of
accounting for stock-based compensation and the effect of the method used on reported results. Had compensation expense for stock-based compensation been determined based on the fair value at the date of grant, our net income and earnings per share
would have been reduce and the stock-based compensation cost would have been increased to the pro forma amounts indicated below:



|                                                                                                                                   |  | For the                   |     
|---------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ----
|                                                                                                                                   |  | Six Months Ended June 30, |     
|                                                                                                                                   |  | 2003                      |     
|Net income (loss) as reported                                                                                                      |  | $                         | 441 
|Add:                                                                                                                               |  |                           |     
|Stock based employee compensation expense (benefit) included in reported net income, net of related income tax                     |  | $                         |    
|Deduct:                                                                                                                            |  |                           |     
|Total stock based employee compensation expense determined under fair value based method for all awards, net of related income
tax |  | $                         | (81 
|                                                                                                                                   |  |                           |     
|Pro Forma net income (loss)                                                                                                        |  | $                         | 360 
|                                                                                                                                   |  |                           |     
|Earnings (Loss) Per Share:                                                                                                         |  |                           |     
|BasicAs reported                                                                                                                  |  | $                         | 0.22
|BasicPro Forma                                                                                                                    |  | $                         | 0.18
|DilutedAs reported                                                                                                                |  | $                         | 0.21
|DilutedPro Forma                                                                                                                  |  | $                         | 0.17



The effects of
applying SFAS No. 123 in this pro forma disclosure should not be interpreted as being indicative of future effects.



The fair value of each option grant is estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions used for
estimating fair value:



|                        |  | Six Months Ended June 30, |  
|----------------------- |  | ------------------------- | -
|Assumption              |  | 2003                      |  
|Dividend Yield          |  | 0                         | %
|Risk-free interest rate |  | 3.875                     | %
|Expected Life           |  | 10 years                  |  
|Expected volatility     |  | 37.9                      | %



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##### Table of Contents

MILLER EXPLORATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



The following table summarizes certain information for the options outstanding at June 30, 2003:



|                      |  | Options Outstanding |  | Options Exercisable              
|--------------------- |  | ------------------- |  | ---------------------------------
|Range of Grant
Prices |  | Shares              |  | WeightedAverage Remaining    Life
|$0.10 to $16.25       |  | 74,425              |  | 7.5 years                        
|$21.88 to $77.50      |  | 2,800               |  | 5.3 years                        
|$80.00 to $101.25     |  | 55,525              |  | 4.6 years                        
|                      |  |                     |  |                                  
|Total                 |  | 132,750             |  |                                  
|                      |  |                     |  |                                  



Litigation



On May 1, 2000, the Company filed a lawsuit in the
Federal District Court for the District of Montana against K2 America Corporation and K2 Energy Corporation (collectively referred to in this section as K2). The Companys lawsuit includes certain claims of relief and allegations by
the Company against K2, including breach of contract arising from failure by K2 to agree to escrow, repudiation, and rescission; specific performance; declaratory relief; partition of K2 lands that are subject to the K2 Agreement; negligence; and
tortuous interference with contract. The lawsuit is on file with the Federal District Court for the District of Montana, Great Falls Division and is not subject to a protective order. In an order dated September 4, 2001, the Federal District Court
dismissed without prejudice the lawsuit against K2 and deferred the case to the Blackfeet Tribal Court for determination of whether it has jurisdiction over the claims made by the Company. The Company filed a complaint in the Blackfeet Tribal Court
in Montana against K2 substantially similar to the action previously filed in Federal District Court, while arguing to the Blackfeet Tribal Court that proper jurisdiction is with the Federal District Court. K2 subsequently filed a counterclaim
against the Company to the effect that alleged actions by the Company damaged K2 by denying K2 the ability to participate in the Miller/Blackfeet IMDA and damaged K2s goodwill with Tribal officials so as to impede other development initiatives
on the Reservation. The Company answered K2s counterclaim by asserting that any damages K2 may have incurred were caused in whole or in part by its own negligence, conduct, bad faith or fault. The Blackfeet Tribal Business Council unanimously
voted on May 1, 2002, to over-turn a previous Tribal Business Council decision which action reaffirms the Companys 50% interest in the K2 Energy Exploration Agreement (K2/Blackfeet IMDA) covering 150,000 net Tribal mineral acres. On May 27,
2003, K2 and the Company entered into an agreement resolving all matters between themselves on the basis of: (a) dismissal with prejudice of the above mentioned pending Tribal Court lawsuit; (b) termination of the K2/Miller Exploration and
Development Agreement dated June 17, 1998; and (c) mutually releasing all claims for all alleged acts or omissions of the other party prior to the date of this agreement.



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 Bureau of Indian Affairs (BIA) responded to the Companys request for arbitration by stating that it
was the BIAs position that the Miller/Blackfeet IMDA was terminated. The Company also filed an appeal brief with the United States Department of Interior Appeals Division. On January 25, 2002, the Interior Department Appeals Division vacated
the BIAs purported termination of the Miller/Blackfeet IMDA to allow arbitration to proceed.



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##### Table of Contents

MILLER EXPLORATION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



In order to avoid further delay and to avoid the uncertainty and costs of further pursuing the
dispute (including arbitration and litigation), and to place the parties on a footing that enables them to pursue a productivebusiness relationship, the Company and the Blackfeet Tribal Business Council entered into an Amended Exploration Agreement
on June 3, 2002, covering 100,000 net Tribal mineral acres.



The Company was 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, was claiming damages related to the destruction of their drilling rig and related costs amounting to approximately $1.2 million, plus interest, attorneys fees and costs.
In January 2001, the Federal District Court judge ruled against the Company on two of the three claims filed in this case with damages left undetermined. This ruling was appealed to the U.S. Fifth Circuit Court of Appeals with the lower court ruling
being upheld. This ruling is significant for oil and gas operators in the industry using the Independent Association of Drilling Contractors (IADC) standard drilling contracts. The Circuit Court of Appeals interpreted the IADC
contract to assign responsibility for loss of the drilling contractors equipment to the operator under a catastrophic event not the fault of the operator and without determining whether there was an unsound location. In September 2002, the
judgment amount totaling approximately $780,000 was paid by the Companys insurance carrier.



In August 2002, the District Court of Appeals ruled in favor of the Company on disputed interest and day-rate charges. Energy Drilling filed an appeal of
the Court of Appeals decision. In February 2003, the District Court ruled in favor of Energy Drilling on disputed attorney fees totaling approximately $117,000. The Company filed an appeal of this ruling. In April 2003, the Fifth Circuit Court
of Appeals reversed the District Court of Appeals findings regarding the interest charges owed by the Company. In June 2003, a final settlement was reached and the Company paid $73,000 of the total settlement of approximately $223,000 with the
remaining balance being paid by the insurance carrier.



The
Company was named in a lawsuit brought by Victor P. Vegas, the landowner of the surface location of the blowout well referenced above. The suit was filed July 20, 1999 in the Parish of Orleans, Louisiana, claiming unspecified damages related to
environmental and other matters. Under a Department of Environmental Quality (DEQ) approved plan, site remediation has been completed and periodic testing is being performed. On December 11, 2001, the plaintiff submitted a remediation
plan for more extensive clean-up and a settlement demand. In February 2002, the Company filed a remediation plan with the Louisiana DEQ for approval. In July 2002, the Civil District Court ruled that the DEQ would not have primary jurisdiction and
that a jury trial would be held.



On January 10, 2003, a
confidential settlement agreement was signed, which released the Company from all liability from all present and future claims, subject to certain express reservations associated with this property. On March 27, 2003, the settlement amount was paid
by the Companys insurance carrier. The settlement agreement requires that the Company complete the clean-up of the property in accordance with a final Louisiana DNR Office of Conservation Compliance Order. The Company believes that all defense
costs and final clean-up costs will be covered by its general liability and well control insurance.



(7) Non-Cash Activities



The Company issued 54,877 and 24,350 shares of the Companys Common Stock to its non-employee directors for the six months ended June 30, 2003 and 2002, respectively, as compensation, as provided for under the Equity Compensation Plan
for Non-Employee Directors. During the six months ended June 30, 2003 and



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##### Table of Contents

2002, the Company issued 22,711 and 7,918 shares, respectively, of the Companys Common Stock to the Companys 401(K) Savings Plan as an employer
matching contribution. For the six months ended June 30, 2003 and 2002, the Company recognized $(0.04) million and $(0.1) million, respectively, of other comprehensive loss under the provisions of SFAS No. 133. The Company adopted FAS 143 (as more
fully described in Note 1) on January 1, 2003. In connection therewith, the Company recorded an asset retirement obligation of $517,000 as a current liability and also increased by the same amount the carrying value of specific oil and gas property
costs in the Consolidated Balance Sheets. These non-cash activities have been excluded from the Consolidated Statements of Cash Flows.



(8) Sale of Oil and Gas Properties



One June 6, 2003, the Company completed the sale of its interests in the proved and unproved Properties in the North Monroeville Field and Vanity Fair
prospect areas located in Covington County, Alabama to Savannah Oil and Gas L.L.C. for a value of $2.5 million effective January 1, 2003. The book value of these properties represents less than 10% of the Companys total assets. Under full cost
accounting, the net sale proceeds are recorded as a reduction to the full cost pool and oil and gas property costs as reported in the Consolidated Balance Sheet at June 30, 2003. Oil and Gas revenues and expenses associated with these properties
were recorded through the closing date in the Companys Consolidated Financial Statements as of June 30, 2003 and for the three and six months then ended.



16



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##### Table of Contents

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



Overview



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



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



Securities and Exchange Commission (SEC) Regulation S-X, Rule 4-10 requires companies reporting on a full cost basis to apply a ceiling test wherein the capitalized costs, net of deferred income taxes,
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. Any such excess costs should be charged against earnings.



Beginning in mid 2002, the Company changed its business plan from a focus
on exploration and development activities to pursuing opportunities involving strategic joint ventures, the sale of the Company, or the sale of its assets. For a variety of reasons, the Board of Directors determined that this shift in direction was
in the best interest of the shareholders of the Company. This exhaustive effort has culminated in the execution of a merger agreement with Edge Petroleum Corporation (Edge) that was approved by the Companys Board of Directors on
May 28, 2003 pursuant to which a wholly owned subsidiary of Edge will merge with and into Miller and Miller will become a subsidiary of Edge (the Merger). The Companys mode of operation in the first six months of 2003, was
substantially different than during the same period of the prior year. Throughout the following Management and Discussion and Analysis of Financial Conditions and Results of Operation section, there will be references to the Merger and
its affect on the Company.



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):



17



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##### Table of Contents

Managements Discussion and Analysis of Financial Condition and Results of Operations

(Continued)



|                                              |  | Three Months Ended June 30, |       |      | Six Months Ended June 30, |       
|--------------------------------------------- |  | --------------------------- | ----- | ---- | ------------------------- | ------
|                                              |  | 2003                        |       | 2002 |                           |       
|Production volumes:                           |  |                             |       |      |                           |       
|Crude oil and condensate (MBbls)              |  |                             | 23    |      |                           | 43    
|Natural gas (MMcf)                            |  |                             | 394   |      |                           | 604   
|Natural gas equivalent (MMcfe)                |  |                             | 532   |      |                           | 862   
|                                              |  |                             |       |     
|Revenues:                                     |  |                             |       |      |                           |       
|Crude oil and condensate                      |  | $                           | 597   |      | $                         | 931   
|Natural gas                                   |  |                             | 2,153 |      |                           | 1,963 
|                                              |  |                             |       |     
|Operating expenses:                           |  |                             |       |      |                           |       
|Lease operating expenses and production taxes |  | $                           | 494   |      | $                         | 488   
|Depletion, depreciation and amortization      |  |                             | 1,512 |      |                           | 2,422 
|General and administrative                    |  |                             | 736   |      |                           | 504   
|Cost ceiling writedown                        |  |                             |      |      |                           | 7,000 
|                                              |  |                             |       |     
|Interest expense                              |  | $                           | 9     |      | $                         | 206   
|                                              |  |                             |       |     
|Net income (loss)                             |  | $                           | 4     |      | $                         | (2,156
|                                              |  |                             |       |     
|Average sales prices:                         |  |                             |       |      |                           |       
|Crude oil and condensate ($ per Bbl)          |  | $                           | 25.96 |      | $                         | 21.65 
|Natural gas ($ per Mcf)                       |  |                             | 5.46  |      |                           | 3.25  
|Natural gas equivalent ($ per Mcfe)           |  |                             | 5.17  |      |                           | 3.36  
|                                              |  |                             |       |     
|Average Costs ($ per Mcfe):                   |  |                             |       |      |                           |       
|Lease operating expenses and production taxes |  | $                           | 0.93  |      | $                         | 0.57  
|Depletion, depreciation and amortization      |  |                             | 2.84  |      |                           | 2.81  
|General and administrative                    |  |                             | 1.38  |      |                           | 0.58  



Quarter Ended June
30, 2003 compared to Quarter Ended June 30, 2002



Oil and
natural gas revenues for the quarter ended June 30, 2003 decreased 5% to $2.8 million from $2.9 million for the comparable period in the prior year. The revenues for the quarter ended June 30, 2003 and 2002 include approximately $(0.1) million and
$(0.2) million of hedging losses, respectively (see Risk Management Activities and Derivative Transactions below). Production volumes for the quarter ended June 30, 2003, decreased 38% to 532 MMcfe from 862 MMcfe for the comparable
period in the prior year. As a result of the change in the business plan and the potential Merger, the Company has incurred minimal capital expenditures and has not pursued exploration and development activities in 2003. Due to this reduced drilling
activity, oil and gas production continued a downward trend since no reserve discoveries have been made in 2003 to offset normal depletion. Revenues and production are also down due to the sale of the Companys Alabama properties (as more fully
discussed in Note 8). Average realized oil prices for the quarter ended June 30, 2003, increased 20% to $25.96 per barrel from $21.65 per barrel experienced during the comparable period of 2002. Realized natural gas prices for the quarter ended June
30, 2003, increased 68% to $5.46 per Mcf from $3.25 per Mcf for the comparable period of the prior year. The significant commodity price increases have substantially affected oil and gas revenues.



18



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##### Table of Contents

Managements Discussion and Analysis of Financial Condition and Results of Operations

(Continued)



Lease operating expenses (LOE) and production taxes for the quarter ended June 30, 2003
remained substantially unchanged at $0.5 million for the quarters ended June 30, 2003 and 2002, respectively. The LOE component for the quarter ended June 30, 2003, decreased slightly from the comparable period in the prior year, due primarily to
rework expenses incurred in 2002. Production taxes for the quarter ended June 30, 2003, increased by an offsetting amount for the comparable period in the prior year due to the exemption from the State of Mississippi production tax that applied to
certain properties in 2002, but not in 2003.



Depreciation,
depletion and amortization (DD&A) expense for the quarter ended June 30, 2003, decreased 38% to $1.5 million from $2.4 million for the comparable period in the prior year, due to decreased production volumes and a reduced property
cost basis after the $7.0 million cost ceiling writedown recognized in June 2002.



General and administrative expenses (G&A) for the quarter ended June 30, 2003, increased 46% to $0.7 million from $0.5 million for the same period of 2002. The significant increase is attributable
primarily to: (1) an out of court settlement in the Energy Drilling Company case, whereby the Company agreed to pay approximately $73,000; (2) a non-cash charge of $99,000 for abandoned office furniture and improvements associated with the closing
of the Companys Jackson, Mississippi, office on June 30, 2003; and (3) increased corporate taxes of approximately $84,000 due to the affect the Companys October 2002 reverse stock split had on the Delaware franchise tax. The above
mentioned increases were partially offset by a $83,000 decrease (net of $60,000 in severance pay associated with closure of the Companys Jackson, Mississippi office) in salaries and wages due to the Companys reduced workforce for the
quarter ended June 30, 2003 compared to the same period of 2002 and salary reductions taken by certain management personnel beginning July, 2002.



The Company had no cost ceiling writedown for the quarter ended June 30, 2003, compared to a $7.0 million writedown for the same period of 2002.



Interest expense for the quarter ended June 30, 2003 decreased
96% to $0.01 million from $0.2 million for the comparable period in the prior year. This decrease is primarily attributable to the extinguishment of the Veritas Note (as more fully discussed in Note 3) and the fact that the Companys credit
facility was paid off in March 2003. Interest expense for the second quarter of 2003 consists of unused credit facility fees and nominal interest paid on insurance premium notes. The insurance notes were paid in full in May 2003.



Net income (loss) for the quarter ended June 30, 2003, was $4,000 compared to
$(2.2) million for the same period in the prior year, as a result of the factors described above.



Six Months Ended June 30, 2003 compared to Six Months Ended June 30, 2002



Oil and gas revenues for the six months ended June 30, 2003, increased 14% to $6.4 million from $5.5 million for the
comparable period in the prior year. The revenues for the six months ended June 30, 2003 and 2002, include approximately $(0.4) million and $(1.0) million of hedging (losses), respectively (see Risk Management Activities and Derivative
Transactions below). Production volumes for the six months ended June 30, 2003, decreased 38% to 1,114 MMcfe from 1,806 MMcfe for the comparable period in the prior year. The downward trend in production is attributable to the Companys
Mississippi Salt Basin properties which are continuing their natural depletion as a result of the change in business plan and the potential Merger. Minimal drilling activity, for reasons previously mentioned, and the resultant lack of reserve
additions accounts for the declining production. Revenues and production are also down due to the sale of the Companys Alabama properties (as more fully discussed in Note 8). Average realized oil prices for the six months ended June 30, 2003
increased 41% to $28.33 per barrel from $20.02 per barrel for the comparable period in the prior year. Realized prices for natural gas increased 103% to $6.08 per Mcf from $2.99 per Mcf for the



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Managements Discussion and Analysis of Financial Condition and Results of Operations

(Continued)



comparable period in the prior year. The significant commodity price increases have had a material affect on the Companys oil and gas revenues and cash
flow for 2003.



Lease operating expenses (LOE) and
production taxes for the six months ended June 30, 2003, increased 14% to $1.1 million from $0.9 million for the comparable period in the prior year. The LOE component for the six months ended June 30, 2003 and 2002, respectively, remained
substantially unchanged at $0.7 million, despite workover expenses on the Minerals Management #2 and Allar #6 wells, and LOE on the Pine Grove Field properties that were incurred in 2002, but not in first half of 2003 due to the sale of these
properties in 2002. Production taxes for the six months ended June 30, 2003, increased 100% to $0.4 million from $0.2 million for the same period in the prior year, due to increased revenues in 2003 and applicable exemption from the 6% State of
Mississippi production tax that was in place during the first quarter of 2002, compared to the first half of 2003 when the exemption did not apply due to higher average commodity prices during that time.



DD&A expense for the six months ended June 30, 2003, decreased 30% to
$3.1 million from $4.5 million for the comparable period of the prior year, due to decreased production volumes and reduced property cost basis after the $7.0 million cost ceiling writedown recognized in June 2002.



General and administrative expenses (G & A) for the six
months ended June 30, 2003, increased 11% to $1.3 million from $1.2 million for the same period of the prior year. Although G & A expenses increased by approximately $0.1 million, there were several significant changes in the components
thereof. G&A items that increased during the first half of 2003 compared to the same period of 2002 include: (1) other corporate taxes increased due to the effect the Companys October 2002 reverse stock split had on the Delaware franchise
tax; and (2) expenses and losses associated with closure of the Companys Houston, Texas, and Jackson, Mississippi, offices in 2003. These increases were partially offset by: (1) a decrease in wages and benefits of $317,000 for the first half
of 2003 (net of additional severance pay of $60,000) compared to the same period for 2002; (2) a reduction in legal and professional fees in 2003; and (3) a decrease in rent expense due to closure of the Companys Houston, Texas, office in
February 2003.



No cost ceiling writedown was necessary
for the six months ended June 30, 2003, compared to a $7.0 million writedown recognized by the Company at June 30, 2002, as previously discussed.



Interest expense for the six months ended June 30, 2003, decreased 94% to $0.02 million from $0.6 million for the same period of the prior year. This
decrease is attributable to: (1) a decrease in the average outstanding credit facility balance during the period from January 1 through March 31, 2003 at which time the Bank debt was paid off. (2) extinguishment of the Veritas Note (as more fully
discussed in Note 3); and (3) lower interest rates associated with the Bank One credit facility which are prime rate sensitive.



Net income (loss) for the six months ended June 30, 2003, was $0.4 million compared to $(2.6) million for the same period of the prior year, as a result
of the factors described above.



Capital Resources and Liquidity



Operating, Investing, and Financing Activities



The Companys primary ongoing source of liquidity is
cash generated from operations. There was $3.8 million cash provided by operating activities for the six months ended June 30, 2003, compared to



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Managements Discussion and Analysis of Financial Condition and Results of Operations

(Continued)



$0.6 million for the same period of the prior year. The increase in cash provided in 2003 compared to 2002 was the primary result of an increase in operating
income caused by significantly higher commodity prices.



The
Companys primary use of cash has historically been for its exploration and development activities. Net cash provided from investing activities was $1.7 million and used in investing activities was $(1.9) million for the six months ended June
30, 2003 and 2002, respectively. The decrease in cash used in 2003 compared to 2002 was attributable to the planned reduction in 2003 exploration and development expenditures due to the Companys change in strategic focus for 2003, as
previously discussed. Also, the Company received approximately $2.1 million in net cash proceeds from the sale of the Alabama properties on June 6, 2003



The Companys primary sources (and uses) of capital relate to the Companys bank credit facility. Net cash provided by (used in) financing
activities was $(0.8) million and $1.1 million in 2003 and 2002, respectively. The increase in cash used in 2003 compared to 2002 is attributable to net principal payments on the Companys credit facility which was entirely paid off in March
2003 and terminated on June 30, 2003.



Financing
Arrangements



Notes Payable



During the past few years the Company has financed various insurance policy
premiums. The amounts financed each year are less than $200,000, and the notes are fully paid off by each calendar year end. Terms of these notes require monthly payments of principal and interest, and the notes bear interest at rates competitive
with the Companys credit facility. In May 2003, the Company paid the remaining balance of these notes in full.



Bank Debt



On July 19, 2000, the Company entered into a senior credit facility with Bank One, Texas, N.A. (Bank One), which replaced the previous credit
facility with Bank of Montreal, Houston Agency. The Bank One credit facility had 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. The Company terminated the credit
facility with Bank One on June 30, 2003.



Other



On April 14, 1999, the Company issued a $4.7 million note
payable (the Veritas Note) 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 April 14, 1999, the
Company also entered into an agreement (the Warrant Agreement) to issue warrants to Veritas that entitle Veritas to purchase shares of common stock in lieu of receiving cash payments for the accrued interest obligations under the Veritas
Note. The Warrant Agreement required the Company to issue warrants to Veritas in conjunction with the signing of the Warrant Agreement, as well as on the six and, at the Companys option, 12 and 18 month anniversaries of the Warrant Agreement.
The warrants issued equal 9% of the then current outstanding principal balance of the Veritas Note. The number of shares issued upon exercise of the warrants 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 $0.10 per share. On April 14, 1999, warrants exercisable for 32,276 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



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Managements Discussion and Analysis of Financial Condition and Results of Operations

(Continued)



exercisable for another 32,276 and 45,500 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.



On July 18,
2000, the Company entered into the First Amendment to Promissory Note, Warrant and Registration Rights Agreement (First Amendment Agreement). Under the terms of the First Amendment Agreement, the maturity of the Veritas Note was extended
to July 21, 2003 from April 15, 2001 and the expiration date for all warrants issued was extended until June 21, 2004. The annual interest rate was reduced to 93⁄4% from 18%, provided the entire Note balance was paid in full by December 31, 2001.
The Veritas Note was not paid in full by December 31, 2001, and the interest rate was increased to 133⁄4% annually. Interest is payable on each October 15 and April 15 until the note is paid in full. The Company has paid additional interest of
approximately $225,000 at the incremental 4% rate for the period of October 15, 2000 through April 14, 2002. Interest was required to be paid in warrants under the terms of the First Amendment 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 would only be paid in cash. Since October 15, 2000, all interest payments have been made in cash.



On June 28, 2002, the Company entered into the Second Amendment to Promissory
Note, Warrant and Registration Rights Agreement (Second Amendment Agreement). Concurrently with the execution of the Second Amendment Agreement, the Company made a $600,000 principal payment. Under terms of the Second Amendment
Agreement, the Veritas Note was amended as follows: (1) The maturity of the Veritas Note was changed to December 31, 2002 from July 21, 2003; (2) the interest rate was changed to 93⁄4%; (3) the past due annual interest rate was changed to 12%
from 133⁄4%; and (4) six principal payments of $150,000, totaling $900,000 were required, and were payable on or before the last day of each month commencing on July 31, 2002. In the event that all six principal payments mentioned above were made
timely, an interest payment would not be due on October 15, 2002, and Veritas agreed to extinguish the remaining principal balance of $2.2 million and any accrued interest outstanding under the Veritas Note. As a result, the Company would recognize
a gain of approximately $2.4 million. In the event that these six principal payments were not timely made, the entire principal balance outstanding under the Veritas Note would be accelerated and become due and payable upon demand and shall accrue
interest at the past due rate from the date of the Second Amendment Agreement until the Veritas Note is paid in full. At December 31, 2002, the Company had made all required payments under the Second Amendment Agreement. Therefore, the remaining
principal balance and related accrued interest payable obligations have been extinguished, and the Company recognized a $2.4 million gain for the year-ended December 31, 2002.



As an inducement for Veritas to enter into the Second Amendment Agreement: (1) the Company granted Veritas an overriding
royalty interest on the Companys entire leasehold that is not held by production and leases acquired through July 31, 2003 (excluding leases within the boundaries of the Blackfeet Indian Reservation); (2) the Company transferred its
proprietary rights in approximately 140 square miles of 3-D seismic data with respect to certain areas within the Mississippi Salt Basin to Veritas in exchange for a 25-year license allowing the Company the use of same data. The Company has also
agreed to an optional transfer fee on its currently licensed data, which in the aggregate totals approximately $1.6 million in the event of a change in control of the Company; and (3) certain Company Directors who own or control shares of Common
Stock of the Company and are considered major stockholders agreed to provide certain tag-along rights in the event one of these major stockholders negotiates a sale of Company Common Stock with a private party. The Second Amendment Agreement also
extended the expiration date of the warrants to July 31, 2004 from June 21, 2004.



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Managements Discussion and Analysis of Financial Condition and Results of Operations

(Continued)



Liquidity



As of June 30, 2003, the Company had working capital of $3.7 million, primarily due to increased cash flow attributable to
higher commodity prices, the effect of minimal exploration and development expenditures and approximately $2.1 million in proceeds from the sale of oil and gas properties located in Alabama (as more fully described in Note 8). The Company paid off
its credit facility in March 2003 and terminated the agreement on June 30, 2003. The Company expects that it will utilize its operational cash flows for 2003 to meet its working capital requirements and fund any necessary capital expenditures.



The Company has curtailed its oil and gas exploration
activities and its capital expenditures in 2003 until the outcome of the pending Merger is determined. Actual capital expenditures for the six months ended June 30, 2003, were approximately $0.4 million.



The Companys revenues, profitability, future growth and ability to
borrow funds or obtain additional capital are highly dependent on prevailing prices of oil and natural gas. The Company cannot predict future oil and natural gas price movements with certainty. Although commodity prices in 2003 have rebounded, a
return to significantly lower oil and gas prices experienced by the Company in the first half of 2002, would likely have an adverse effect on the Companys liquidity, financial condition 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.



Although the Company has experienced substantial working capital requirements in the past, the Company anticipates that with continued high commodity
prices and limited capital expenditures, the Companys working capital surplus will increase until the Companys present business plan changes.



Future Financing Obligations



The Company terminated its credit facility on June 30, 2003. The Company has working capital of $3.7 million and a cash balance of $4.75 million at June
30, 2003. The Company believes that the cash balance and future cash flow from operations will be sufficient to meet exploration, development and corporate overhead expenditures until the outcome of the pending Merger is determined or, in the event
the Merger is not approved, until an alternative business plan is adopted.



Off-Balance Sheet Arrangements



The Company does not have any off-balance sheet financing arrangements, except for the operating lease obligations presented below.



Contractual Obligations and Commercial Commitments



Summarized below are the contractual obligations and other commercial commitments of the Company as of June 30, 2003.



|                                   |  | Payments Due by Period (in thousands)
|---------------------------------- |  | -------------------------------------
|Contractual Obligations            |  | Total                                
|                                   |  |                                      
|Long-Term Debt                     |  | $                                    
|Operating Leases                   |  |                                      
|                                   |  |                                      
|Total Contractual Cash Obligations |  | $                                    
|                                   |  |                                      



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Managements Discussion and Analysis of Financial Condition and Results of Operations

(Continued)



|                          |  | Commitment Expiration by Period (in thousands)
|------------------------- |  | ----------------------------------------------
|                          |  | Total                                         
|Commercial Commitments    |  |                                               
|Bank One Credit Facility* |  | $                                             



|* |  | As of June 30, 2003, the credit facility was terminated.
|- |  | --------------------------------------------------------



Critical Accounting Policies



The results of operations, as presented above, are based on the application of accounting principles generally accepted in the United States. The
application of these principles often requires management to make certain judgments, assumptions, and estimates that may result in different financial presentations. The Company believes that certain accounting principles are critical in
understanding its financial statements.



Full Cost Method of
Accounting



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



Use of Estimates



The
preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 revenue and expense during the reporting periods. Accordingly, actual results could differ from these estimates. Significant estimates include
depreciation, depletion and amortization of proved oil and natural gas properties. Oil and natural gas reserve estimates, which are the basis for unit-of-production depletion and the cost ceiling test, are inherently imprecise and are expected to
change as future information becomes available.



New Accounting Standards



In addition to the identified critical accounting
policies discussed above, future results could be affected by a number of new accounting standards that recently have been issued.



SFAS No. 141, Business Combinations



SFAS No. 141, issued in July 2001, requires that all business combinations initiated after June 30, 2001, be accounted for under the purchase method and
the use of the pooling-of-interests method is no longer permitted. The adoption of SFAS No. 141, effective July 1, 2001, will result in the Company accounting for any future business combinations under the purchase method of accounting, but will not
change the method of accounting used in previous business combinations.



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Managements Discussion and Analysis of Financial Condition and Results of Operations

(Continued)



SFAS No. 142, Goodwill and Other Intangible Assets



SFAS No. 142 was issued by the Financial Accounting Standards Board (FASB)
in June 2001 and became effective for the Company on January 1, 2002. The FASB, the Securities and Exchange Commission (SEC) and others are engaged in deliberations on the issue of whether SFAS 142 requires interests held under oil, gas and mineral
leases or other contractual arrangements to be classified as intangible assets. If such interests were deemed to be intangible assets, mineral interest use rights for both undeveloped and developed leaseholds would be classified separate from oil
and gas properties as intangible assets on the Companys balance sheets only, but these costs would continue to be aggregated with other costs of the Companys oil and gas properties in the notes to the Companys financial statements
in accordance with Statement of Financial Accounting Standards No.69, Disclosures about Oil and Gas Producing Activities(FAS 69). Additional disclosures required by SFAS 142 would be included in the notes to financial statements.
Historically, and to the Companys knowledge, the Company and all other oil and gas companies have continued to include these oil and gas leasehold interests as part of oil and gas properties after SFAS 142 became effective. The Company
believes that few oil and natural gas companies have adopted this interpretation or changed their balance sheet presentation for oil and gas leasehold since the implementation of SFAS 142.



As applied to companies like the Company that have adopted full cost
accounting for oil and gas activities, the Company understands that this interpretation of SFAS 142 would only affect its balance sheet classification of proved oil and gas leaseholds acquired after June 30, 2001, and its unproved oil and gas
leaseholds. The Companys results of operations would not be affected, since these leasehold costs would continue to be amortized in accordance with full cost accounting rules. The Company currently makes the disclosures required by FAS 69.



The Company will continue to classify its oil and gas
leaseholds as tangible oil and gas properties until further guidance is provided. Although most of the Companys oil and gas properties are held under oil and gas leases, it does not expect that this interpretation, if adopted, would have a
material impact on the Companys financial condition or results of operations.



SFAS No. 143, Accounting for Asset Retirement Obligations



SFAS No. 143, issued in August 2001, was adopted by the Company on January 1, 2003. The standard requires entities to record the fair value of a liability
for an asset retirement obligation in the period in which the obligation is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability
is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or
loss upon settlement.



SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets



SFAS No. 144,
issued in October 2001, supersedes SFAS No. 121. The accounting model for long-lived assets to be disposed of by sale applies to all long-lived assets, including discontinued operations, and replaces the provisions of APB Opinion No. 30 for the
disposal of segments of a business. SFAS No. 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. SFAS No. 144
has been adopted effective January 1, 2002; however, the Company has not been impacted from this adoption since it follows the full cost method of accounting which requires long-lived oil and gas property costs to be tested for impairment based on
its full cost ceiling (refer to previously referenced Critical Accounting Policies).



SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure  an amendment of FASB
Statement No., 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Additionally, the statement amends the disclosure requirements of SFAS
No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results.



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##### Table of Contents

Managements Discussion and Analysis of Financial Condition and Results of Operations

(Continued)



Effects of Inflation and Changes in Price



Crude oil and natural gas commodity prices have been volatile and unpredictable during 2003 and 2002. The wide fluctuations
that have occurred during these periods have had a significant impact on the Companys results of operations, cash flow and liquidity. Recent rates of inflation have had a minimal effect on the Company.



Environmental and Other Regulatory Matters



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



Item 3. Quantitative and Qualitative Disclosures About Market Risk



The Company uses a variety of financial derivative instruments (derivatives) to manage exposure to fluctuations in commodity prices. To
qualify for hedge accounting, derivatives must meet the following criteria: (i) the item to be hedged exposes the Company to price risk; and (ii) the derivative reduces that exposure and is designated as a hedge. 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 declines in oil and natural gas prices and limit potential gains from future increases in prices. Such hedging arrangements may expose the Company to risk of financial loss in certain
circumstances, including instances where production is less than expected, the Companys customers fail to purchase contracted quantities of oil or natural gas or a sudden unexpected event materially impacts oil or natural gas prices. For
financial reporting purposes, gains and losses related to hedging are recognized as oil and gas revenues during the period the hedge transaction occurs. The Company expects that the amount of hedge contracts that it has in place will vary from time
to time. For the six months ended June 30, 2003 and 2002, the Company realized approximately $(0.4) million and $(0.1) million, respectively, of hedging (losses) which are included in oil and natural gas revenues in the consolidated statements of
operations. The fair value of remaining derivative contracts at June 30, 2003, is approximately $(0.04) million. This amount is reflected in other current liabilities in the Consolidated Balance Sheet with a corresponding amount in comprehensive
loss in the equity section of the Consolidated Balance Sheet. For the six months ended June 30, 2003 and 2002, the Company had hedged 24% and 58%, respectively, of its oil and natural gas production, and as of June 30, 2003, the Company had 46



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##### Table of Contents

Managements Discussion and Analysis of Financial Condition and Results of Operations

(Continued)



Mmcfe of open natural gas contracts for the months of July 2003 through September 2003. If all these open contracts had been settled as of June 30, 2003, the
Company would have paid approximately $0.04 million.



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 the price risk caused by 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.



Item 4. Controls and Procedures



Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, the Companys principal executive officer and principal financial officer have concluded that the Companys disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the Exchange Act)) are effective in timely providing them with material information required to be disclosed by the Company in its
filings under the Exchange Act. There have been no significant changes in the Companys internal controls or in other factors that have materially affected, or are reasonably likely to materially affect, its internal controls during its most
recent fiscal quarter, including any corrective actions with regard to significant deficiencies and material weaknesses.



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##### Table of Contents

PART II. OTHER INFORMATION



Item 1. Legal Proceedings



On May
1, 2000, the Company filed a lawsuit in the Federal District Court for the District of Montana against K2 America Corporation and K2 Energy Corporation (collectively referred to in this section as K2). The Companys lawsuit includes
certain claims of relief and allegations by the Company against K2, including breach of contract arising from failure by K2 to agree to escrow, repudiation, and rescission; specific performance; declaratory relief; partition of K2 lands that are
subject to the K2 Agreement; negligence; and tortuous interference with contract. The lawsuit is on file with the Federal District Court for the District of Montana, Great Falls Division and is not subject to a protective order. In an order dated
September 4, 2001, the Federal District Court dismissed without prejudice the lawsuit against K2 and deferred the case to the Blackfeet Tribal Court for determination of whether it has jurisdiction over the claims made by the Company. The Company
has filed a complaint in the Blackfeet Tribal Court in Montana against K2 substantially similar to the action previously filed in Federal District Court, while arguing to the Blackfeet Tribal Court that proper jurisdiction is with the Federal
District Court. K2 has since filed a counterclaim against the Company to the effect that alleged actions by the Company damaged K2 by denying K2 the ability to participate in the Miller/Blackfeet IMDA and damaged K2s goodwill with Tribal
officials so as to impede other development initiatives on the Reservation. The Company answered K2s counterclaim by asserting that any damages K2 may have incurred were caused in whole or in part by its own negligence, conduct, bad faith or
fault. The Blackfeet Tribal Business Council unanimously voted on May 1, 2002, to over-turn a previous Tribal Business Council decision which action reaffirms the Companys 50% interest in the K2 Energy Exploration Agreement (K2/Blackfeet IMDA)
covering 150,000 net Tribal mineral acres. On May 27, 2003, K2 and the Company negotiated an agreement resolving all matters between themselves on the basis of: (a) dismissal with prejudice of the above mentioned pending Tribal Court lawsuit; (b)
termination of the K2/Miller Exploration and Development Agreement dated June 17, 1998; and (c) a mutual release of claims for all alleged acts or omissions of the other party prior to the date of this agreement.



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 Bureau of Indian Affairs (BIA) responded to the
Companys request for arbitration by stating that it was the BIAs position that the Miller/Blackfeet IMDA was terminated. The Company also filed an appeal brief with the United States Department of Interior Appeals Division. On January
25, 2002, the Interior Department Appeals Division vacated the BIAs purported termination of the Miller/Blackfeet IMDA to allow arbitration to proceed.



In order to avoid further delay and to avoid the uncertainty and costs of further pursuing the dispute (including arbitration and litigation), and to
place the parties on a footing that enables them to pursue a productive business relationship, the Company and the Blackfeet Tribal Business Council entered into an Amended Exploration Agreement on June 3, 2002, covering 100,000 net Tribal mineral
acres.



The Company was 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, was claiming damages related to the destruction of their drilling rig and related costs amounting to approximately $1.2 million, plus interest, attorneys fees and costs. In January 2001, the Federal District Court judge ruled against
the Company on two of the three claims filed in this case with damages left undetermined. This ruling was appealed to the U.S. Fifth Circuit Court of Appeals with the lower court ruling being upheld. This ruling is significant for oil and gas
operators in the industry using the Independent Association of Drilling Contractors (IADC) standard drilling contracts. The Circuit Court of Appeals interpreted the IADC contract to assign responsibility for loss of the drilling
contractors equipment to the operator under a catastrophic event not the fault of the



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##### Table of Contents

operator and without determining whether there was an unsound location. In September 2002, the judgment amount totaling approximately $780,000 was paid by
the Companys insurance carrier.



In August 2002, the
District Court of Appeals ruled in favor of the Company on disputed interest and day-rate charges. Energy Drilling filed an appeal of the Court of Appeals decision. In February 2003, the District Court ruled in favor of Energy Drilling on
disputed attorney fees totaling approximately $117,000. The Company filed an appeal of this ruling. In April 2003, the Fifth Circuit Court of Appeals reversed the District Court of Appeals findings regarding the interest charges owed by the Company.
In June 2003, a final settlement was reached. The Company paid $73,000 of the total settlement of approximately $223,000 with the remaining balance being paid by the insurance carrier.



The Company was named in a lawsuit brought by Victor P. Vegas, the landowner of the surface location of the blowout well
referenced above. The suit was filed July 20, 1999 in the Parish of Orleans, Louisiana, claiming unspecified damages related to environmental and other matters. Under a Department of Environmental Quality (DEQ) approved plan, site
remediation has been completed and periodic testing is being performed. On December 11, 2001, the plaintiff submitted a remediation plan for more extensive clean-up and a settlement demand. In February 2002, the Company filed a remediation plan with
the Louisiana DEQ for approval. In July 2002, the Civil District Court ruled that the DEQ would not have primary jurisdiction and that a jury trial would be held.



On January 10, 2003, a confidential settlement agreement was signed, which released the Company from all liability from all
present and future claims, subject to certain express reservations associated with this property. On March 27, 2003, the settlement amount was paid by the Companys insurance carrier. The settlement agreement requires that the Company complete
the clean-up of the property in accordance with a final Louisiana DNR Office of Conservation Compliance Order. The Company believes that all defense costs and final clean-up costs will be covered by its general liability and well control insurance.



Item 2. Changes in Securities and Use of Proceeds



None



Item 3. Defaults Upon Senior Securities



None



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



None



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:
| | --- |  | ------------------------------------------------------------------------------------



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##### Table of Contents

|Exhibit No. |     |  | Description                                                                                                                                                                                                                                                                                          
|----------- | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |    
|2.1         | (a) |  | Agreement for Purchase and Sale dated November 25, 1997, between Amerada Hess Corporation and Miller Oil Corporation.
(Incorporated by reference to Exhibit 2.3 to the Companys Amendment No. 1 to Registration Statement on Form S-1 filed on December 5, 1997 (File No. 333-40383).)              
|            |    
|2.1         | (b) |  | First Amendment to Agreement for Purchase and Sale dated January 7, 1998. (Incorporated by reference to Exhibit 2.3(b) to the
Companys Amendment No. 3 to Registration Statement on Form S-1 filed on January 9, 1998 (File No. 333-40383).)                                                        
|            |    
|2.2         |     |  | Agreement and Plan of Merger dated May 28, 2003, by and among Edge Petroleum Corporation, Edge Delaware Sub, Inc. and Miller
Exploration Company. (Incorporated by reference to Exhibit 2.1 to the Companys Current Report on Form 8-K dated May 30, 2003.)                                         
|            |    
|2.3         |     |  | Stockholder Agreement executed on May 28, 2003, by Edge Petroleum Corporation and certain directors and stockholders of Miller
Exploration Company as listed on Exhibit A thereto. (Incorporated by reference to Exhibit 2.2 to the Companys Current Report on Form 8-K dated May 30, 2003.)        
|            |    
|2.4         |     |  | Form of Stockholder Agreement executed on May 28, 2003, by Miller Exploration Company and certain directors and stockholders of
Edge Petroleum Corporation as listed on Exhibit A thereto. (Incorporated by reference to Exhibit 2.3 to the Companys Current Report on Form 8-K dated May 30, 2003.)
|            |    
|2.5         |     |  | Purchase and Sale Agreement executed on May 20, 2003, by and between Miller Oil Corporation and Savannah Oil and Gas, L.L.C.
(Incorporated by reference to Exhibit 2.4 to the Companys Current Report on Form 8-K dated May 30, 2003.)                                                              
|            |    
|2.6         |     |  | Mutual Release of All Claims executed on May 27, 2003, by and between Miller Exploration Company and K2 Energy Corporation
together with K2 America Corporation. (Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K dated May 30, 2003.)                         
|            |    
|3.1         |     |  | Certificate of Incorporation of the Registrant. (Incorporated by reference to Exhibit 3.1 to the Companys Registration
Statement on Form S-1 filed on November 17, 1997 (File No. 333-40383).)                                                                                                      
|            |    
|3.2         |     |  | Bylaws of the Registrant. (Incorporated by reference to Exhibit 3.2 to the Companys Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 (File No. 000-23431).)                                                                                                                        
|            |    
|3.3         |     |  | Bylaws of the Registrant. (Incorporated by reference to Exhibit 3.2 to the Companys Quarterly report on Form 10-Q for the
quarter ended June 30, 1998 (File No. 000-23431).)                                                                                                                        
|            |    
|31.1        | *   |  | Certification of Principal Financial Officer Pursuant to exchange Act Rule 13a-15(e).                                                                                                                                                                                                                
|            |    
|31.2        | *   |  | Certification of Principal Financial Officer Pursuant to exchange Act Rule 13a-15(e).                                                                                                                                                                                                                
|            |    
|32.1        | *   |  | Certification of Chief Executive Officer of Miller Exploration Company, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                    
|            |    
|32.2        | *   |  | Certification of Chief Executive Officer of Miller Exploration Company, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                    

---

|* |  | Filed herewith.
|- |  | ---------------



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##### Table of Contents

SIGNATURES



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



|                      |  | MILLER EXPLORATION COMPANY
|--------------------- |  | --------------------------
|                      |  |                           
|Date: August 14, 2003 |  | By:                       
|                      |  |                           
|                      |  |                           



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