<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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

                                    FORM 10-Q

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

                 For the Quarter Ended          Commission File Number
                  September 30, 2001                    0-23431


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

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

                3104 Logan Valley Road
                Traverse City, Michigan                     49685-0348
       (Address of Principal Executive Offices)             (Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                                    Yes  X          No ___
                                        ---

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

                                                   Outstanding at
                  Class                           November 12, 2001
                  -----                           -----------------

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

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

<PAGE>

                           MILLER EXPLORATION COMPANY

                                TABLE OF CONTENTS

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

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

         Consolidated Statements of Operations--
         Three Months and Nine Months Ended September 30, 2001 and 2000 ...............................   3

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

         Consolidated Statement of Equity--
         Nine Months Ended September 30, 2001..........................................................   5

         Consolidated Statements of Cash Flows--
         Nine Months Ended September 30, 2001 and 2000.................................................   6

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

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.........  16

Item 3.  Quantitative and Qualitative Disclosures About Market Risk....................................  23

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings.............................................................................  24

Item 2.  Changes in Securities.........................................................................  25

Item 3.  Defaults Upon Senior Securities...............................................................  25

Item 4.  Submission of Matters to a Vote of Security Holders...........................................  25

Item 5.  Other Information.............................................................................  25

Item 6.  Exhibits and Reports on Form 8-K..............................................................  25
</TABLE>

                                       2

<PAGE>

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

                           MILLER EXPLORATION COMPANY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                        For the Three Months    For the Nine Months
                                                        Ended September 30,     Ended September 30,
                                                        --------------------    --------------------
                                                          2001        2000        2001        2000
                                                        --------    --------    --------    --------
<S>                                                     <C>         <C>         <C>         <C>
REVENUES:
     Natural gas .....................................  $  2,695    $  5,466    $ 12,072    $ 14,807
     Crude oil and condensate ........................       795       1,463       2,621       3,978
     Other operating revenues ........................        65         108         234         273
                                                        --------    --------    --------    --------
         Total operating revenues ....................     3,555       7,037      14,927      19,058
                                                        --------    --------    --------    --------
OPERATING EXPENSES:
     Lease operating expenses and production taxes ...       655         970       2,418       1,985
     Depreciation, depletion and amortization ........     2,793       4,235      10,505      13,021
     General and administrative ......................       383         427       1,459       1,598
     Cost ceiling writedown ..........................     1,000          --       8,500          --
                                                        --------    --------    --------    --------
         Total operating expenses ....................     4,831       5,632      22,882      16,604
                                                        --------    --------    --------    --------

OPERATING INCOME (LOSS) ..............................    (1,276)      1,405      (7,955)      2,454
                                                        --------    --------    --------    --------

INTEREST EXPENSE .....................................      (241)       (782)       (829)     (2,449)
                                                        --------    --------    --------    --------

INCOME (LOSS) BEFORE INCOME TAXES ....................    (1,517)        623      (8,784)          5
                                                        --------    --------    --------    --------

INCOME TAX PROVISION (CREDIT) ........................      (176)        212         (97)          2
                                                        --------    --------    --------    --------

INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ..............    (1,341)        411      (8,687)          3

EXTRAORDINARY ITEM -
LOSS FROM EARLY EXTINGUISHMENT OF DEBT,
LESS APPLICABLE INCOME TAXES .........................        --        (166)         --        (166)
                                                        --------    --------    --------    --------

NET INCOME (LOSS) ....................................  $ (1,341)   $    245    $ (8,687)   $   (163)
                                                        ========    ========    ========    ========

EARNINGS (LOSS) PER SHARE (Note 3)
     Basic ...........................................  $  (0.07)   $   0.02    $  (0.45)   $  (0.01)
                                                        ========    ========    ========    ========
     Diluted .........................................  $  (0.07)   $   0.02    $  (0.45)   $  (0.01)
                                                        ========    ========    ========    ========
</TABLE>

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

                                        3

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                As of September 30,    As of December 31,
                                                                                        2001                     2000
                                                                                -------------------    ------------------
                                                                                     (Unaudited)
<S>                                                                             <C>                     <C>
                                      ASSETS
                                      ------
CURRENT ASSETS:
      Cash and cash equivalents ..............................................            $     262            $   2,292
      Restricted cash (Note 2) ...............................................                   --                   69
      Accounts receivable ....................................................                3,363                4,474
      Inventories, prepaids and other current assets .........................                1,007                  316
                                                                                          ---------            ---------
          Total current assets ...............................................                4,632                7,151
                                                                                          ---------            ---------

OIL AND GAS PROPERTIES--at cost (full cost method):
      Proved oil and gas properties ..........................................              138,979              131,872
      Unproved oil and gas properties ........................................               16,970               16,109
      Less-Accumulated depreciation, depletion and amortization ..............             (114,767)             (95,948)
                                                                                          ---------            ---------
          Net oil and gas properties .........................................               41,182               52,033
                                                                                          ---------            ---------

OTHER ASSETS .................................................................                  557                  694
                                                                                          ---------            ---------
          Total assets .......................................................            $  46,371            $  59,878
                                                                                          =========            =========

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

CURRENT LIABILITIES:
      Current portion of long-term debt ......................................            $      16            $   1,034
      Accounts payable .......................................................                2,171                3,572
      Accrued expenses and other current liabilities .........................                4,202                3,928
                                                                                          ---------            ---------
          Total current liabilities ..........................................                6,389                8,534
                                                                                          ---------            ---------

LONG-TERM DEBT ...............................................................                8,196               11,196

DEFERRED INCOME TAXES ........................................................                6,106                6,202

DEFERRED REVENUE .............................................................                   --                   20

COMMITMENTS AND CONTINGENCIES (NOTE 7)

EQUITY:
      Other comprehensive income .............................................                  425                   --
      Common stock warrants, 15,694,248 outstanding at
          September 30, 2001 and December 31, 2000 ...........................                1,555                1,759
      Preferred stock, $0.01 par value; 2,000,000 shares authorized;
          none outstanding ...................................................                   --                   --
      Common stock, $0.01 par value; 40,000,000 shares
          authorized; 19,478,853 shares and 19,302,254 shares
          outstanding at September 30, 2001 and December 31, 2000,
          respectively .......................................................                  195                  193
      Additional paid in capital .............................................               76,788               76,570
      Retained deficit .......................................................              (53,283)             (44,596)
                                                                                          ---------            ---------
          Total equity .......................................................               25,680               33,926
                                                                                          ---------            ---------
          Total liabilities and equity .......................................            $  46,371            $  59,878
                                                                                          =========            =========
</TABLE>


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

                                        4

<PAGE>

                           MILLER EXPLORATION COMPANY
                        CONSOLIDATED STATEMENT OF EQUITY
                                 (In thousands)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                               Other
                                             Comprehensive     Common                               Additional
                                               Income           Stock      Preferred     Common      Paid In      Retained
                                               (Loss)          Warrants      Stock        Stock      Capital       Deficit
                                               ------          --------      -----        -----      -------       -------
<S>                                            <C>           <C>           <C>          <C>          <C>          <C>
BALANCE-December 31, 2000                      $     --      $  1,759      $     --     $    193     $ 76,570     $(44,596)

   Issuance of benefit plan shares                                 --            --            1           80           --
   Issuance of non-employee
       directors' shares                             --            --            --            1          138           --
   Change in value of warrants issued
       to Veritas DGC Land, Inc.                     --          (204)           --           --           --           --
   Adoption of new accounting
       standard (Note 1)                         (5,685)           --            --           --           --           --
   Change in unrealized gains
       (losses)                                   6,110            --            --           --           --           --
   Net loss                                          --            --            --           --           --       (8,687)
                                               --------      --------      --------     --------     --------     --------

BALANCE-September 30, 2001                     $    425      $  1,555      $     --     $    195     $ 76,788     $(53,283)
                                               ========      ========      ========     ========     ========     ========
</TABLE>

Disclosure of Comprehensive Income:
----------------------------------

<TABLE>
<CAPTION>
                                                             For the Nine Months Ended September 30,
                                                                   2001                 2000
                                                                 --------              -------
<S>                                                              <C>                   <C>
     Net loss                                                    $ (8,687)             $  (163)
     Other comprehensive income                                       425                   --
                                                                 --------              -------

         Total comprehensive income (loss)                       $ (8,262)             $  (163)
                                                                 ========              =======
</TABLE>

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

                                        5

<PAGE>

                           MILLER EXPLORATION COMPANY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                          For the Nine Months Ended
                                                                                                September  30,
                                                                                         -----------------------------
                                                                                           2001                 2000
                                                                                         --------             --------
<S>                                                                                      <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss .................................................................          $ (8,687)            $   (163)
     Adjustments to reconcile net loss to net cash from
        operating activities--
            Cost ceiling writedown ............................................             8,500                   --
            Depletion, depreciation and amortization ..........................            10,505               13,021
            Deferred income taxes .............................................               (96)                 (84)
            Warrants and stock compensation ...................................                16                  769
            Extraordinary item ................................................                --                  166
            Deferred revenue ..................................................               (20)                 (25)
            Changes in assets and liabilities--
               Restricted cash ................................................                69                 (785)
               Accounts receivable ............................................             1,111                  (99)
               Other assets ...................................................              (306)              (1,144)
               Accounts payable ...............................................            (1,401)              (1,853)
               Accrued expenses and other current liabilities .................               274               (1,131)
                                                                                         --------             --------
                  Net cash flows provided by operating activities .............             9,965                8,672
                                                                                         --------             --------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Exploration and development expenditures .................................            (8,029)              (4,349)
     Proceeds from sale of oil and gas properties and purchases of
        equipment, net ........................................................                52                  947
                                                                                         --------             --------
                  Net cash flows used in investing activities .................            (7,977)              (3,402)
                                                                                         --------             --------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Payments of principal ....................................................           (16,682)             (25,023)
     Borrowing on long-term debt ..............................................            12,664               16,639
     Issuance of common stock .................................................                --                  500
                                                                                         --------             --------
                  Net cash flows used in financing activities .................            (4,018)              (7,884)
                                                                                         --------             --------

NET CHANGE IN CASH AND CASH EQUIVALENTS .......................................            (2,030)              (2,614)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD ..........................             2,292                3,712
                                                                                         --------             --------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD ................................          $    262             $  1,098
                                                                                         ========             ========

SUPPLEMENTAL CASH FLOW INFORMATION:
     Cash paid during the period for interest .................................          $    712             $  1,555
                                                                                         ========             ========
</TABLE>

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

                                        6

<PAGE>

                           MILLER EXPLORATION COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

(1)      Organization and Nature of Operations

         The consolidated financial statements of Miller Exploration Company
(the "Company") and subsidiary included herein have been prepared by management
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). Accordingly, they reflect all adjustments which
are, in the opinion of management, necessary for a fair presentation of the
financial results for the interim periods presented. Certain information and
notes normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations. However, management believes that the disclosures
are adequate to make the information presented not misleading. These
consolidated financial statements should be read in conjunction with the
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2000.

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

         Principles of Consolidation

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

         Nature of Operations

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

         Oil and Gas Properties

         SEC Regulation S-X, Rule 4-10 requires companies reporting on a full
cost basis to apply a ceiling test wherein the capitalized costs within the full
cost pool may not exceed the net present value of the Company's proven oil and
gas reserves plus the lower of the cost or market value of unproved properties
and deferred income taxes. Any such excess costs should be charged against
earnings. Using unescalated period-end prices at September 30, 2001, of $2.24
per Mcf of natural gas and $23.43 per barrel of oil, the Company would have
recognized a $3.9 million non-cash cost ceiling writedown (for further
discussion, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations"). However, based upon improvements in oil and natural gas
prices experienced subsequent to period-end, the non-cash ceiling writedown has
been reduced to $1.0 million based on closing commodity prices on November 8,
2001 of $2.96 per Mcf of natural gas and $21.17 per barrel of oil. The Company
did not have any such charges against earnings during the nine-months ended
September 30, 2000.

                                        7

<PAGE>

                           MILLER EXPLORATION COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

         New Accounting Standard

         In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
amended by Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133" and
Statement No. 138, "Accounting for Certain Derivatives and Certain Hedging
Activities" (hereinafter collectively referred to as SFAS No. 133). SFAS No. 133
requires that every derivative instrument, including certain derivative
instruments embedded in other contracts, be recorded in the balance sheet as
either an asset or liability measured at its fair value. SFAS No. 133 requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting.

         SFAS No. 133 was adopted by the Company as of January 1, 2001 and the
Company completed the process of identifying all derivative instruments,
determining fair market values of derivatives designating and documenting hedge
relationships, and evaluating the effectiveness of those hedge relationships.

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

         Reclassifications

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

(2)      Restricted Cash

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

(3)      Earnings Per Share

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

                                        8

<PAGE>

<TABLE>
<CAPTION>
                                                                   For the Three Months       For the Nine Months
                                                                      Ended Sept. 30,            Ended Sept. 30,
                                                                   ---------------------     ---------------------
                                                                     2001          2000         2001        2000
                                                                   ---------   --------      --------     --------
<S>                                                                <C>         <C>           <C>          <C>
BASIC EARNINGS (LOSS) PER SHARE COMPUTATION
     Income (loss) before extraordinary item....................    $ (1,341)  $    411      $ (8,687)    $      3
     Extraordinary item.........................................          --       (166)           --         (166)
                                                                    --------   --------      --------     --------
     Net income (loss)..........................................    $ (1,341)  $    245      $ (8,687)    $   (163)
                                                                    ========   ========      ========     ========

     Weighted average common shares outstanding.................      19,479     13,101        19,430       12,836
     Earnings (loss) per share - Basic
         Income (loss) before extraordinary item................    $  (0.07)  $   0.03      $  (0.45)    $   0.00
         Extraordinary item.....................................          --      (0.01)           --        (0.01)
                                                                    --------   --------      --------     --------
         Net income (loss)......................................    $  (0.07)  $   0.02      $  (0.45)    $  (0.01)
                                                                    ========   ========      ========     ========

DILUTED EARNINGS (LOSS) PER SHARE COMPUTATION
     Income (loss) before extraordinary item....................    $ (1,341)  $    411      $ (8,687)    $      3
     Adjustment for effect of assumed conversions:
         Convertible promissory note............................          --        143            --           --
                                                                    --------   --------      --------     --------
     Adjusted income (loss) before extraordinary item...........      (1,341)       554        (8,687)           3
     Extraordinary item.........................................          --       (166)           --         (166)
                                                                    --------   --------      --------     --------
     Net income (loss)..........................................    $ (1,341)  $    388      $ (8,687)    $   (163)
                                                                    ========   ========      ========     ========

     Weighted average common shares outstanding.................      19,479     13,101        19,430       12,836
     Incremental shares from:
         Convertible promissory note............................          --      3,704            --           --
         Stock options and Veritas warrants.....................          --      1,284            --           --
                                                                    --------   --------      --------     --------
     Diluted weighted average common shares outstanding.........      19,479     18,089        19,430       12,836
                                                                    ========   ========      ========     ========

     Earnings (loss) per share - Diluted
         Income (loss) before extraordinary item................    $  (0.07)  $   0.03      $  (0.45)    $   0.00
         Extraordinary item.....................................          --      (0.01)           --        (0.01)
                                                                    --------   --------      --------     --------
         Net income (loss)......................................    $  (0.07)  $   0.02      $  (0.45)    $  (0.01)
                                                                    ========   ========      ========     ========
</TABLE>

         Options, warrants and restricted stock were not included in the
computation of diluted earnings per share for the three-month period ended
September 30, 2001 and the nine-month periods ended September 30, 2001 and 2000
because their effect was antidilutive.

(4)      Long-Term Debt

         Bank Debt

         On July 19, 2000, the Company entered into a senior credit facility
with Bank One, which replaced its prior credit facility with Bank of Montreal,
Houston Agency. The credit facility has a 30-month term with an interest rate of
either the Bank One prime rate plus 2% or LIBOR plus 4%, at the Company's
option. Under the credit facility the Company was required to make monthly
payments of $0.5 million from August 1, 2000, until the borrowing base
re-determination that occurred on January 1, 2001. The new borrowing base
determined by Bank One as of August 1, 2001 was $7.5 million. The borrowing base
will be reduced by $0.5 million per month until the next re-determination
scheduled for January 1, 2002. The outstanding Bank One credit facility balance
was $4.5 million at September 30, 2001.

                                        9

<PAGE>

                           MILLER EXPLORATION COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

(4)  Long-Term Debt (continued)

     The Bank One credit facility includes certain covenants that impose
restrictions on the Company with respect to, among other things, incurrence of
additional indebtedness, limitations on financial ratios, making investments and
mergers and consolidation. As a result of the loss created by the $7.5 million
cost ceiling writedown in June 2001, the minimum tangible net worth covenant as
defined by the credit facility agreement has been amended to $24.0 million. The
obligations under the credit facility are secured by a lien on all of the
Company's real and personal property.

     Other

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

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

     Under the terms of the amended note and Warrant Agreement, the maturity of
the Veritas note was extended from April 15, 2001 to July 21, 2003 and the
expiration date for all warrants issued was extended until June 21, 2004. The
annual interest rate has been reduced from 18% to 9 3/4%, provided the entire
note balance is paid in full by December 31, 2001. If all principal and interest
under the Veritas note is not paid by December 31, 2001, then the note bears
interest at 13 3/4% until paid in full. As of September 30, 2001, the Company
cannot assure that the principal balance will be paid in full by December 31,
2001, therefore the Company has accrued additional interest of approximately
$145,000 at the incremental 4% rate for the period October 15, 2000 through
September 30, 2001. Interest accrues and is payable on each October 15 and April
15 until principal is paid in full. Interest is required to be paid in warrants
under the terms of the Warrant Agreement until the Company is in compliance with
the net borrowing base formula as defined in the Bank One credit facility, at
which time interest is to be paid in cash only. Since October 15, 2000, interest
payments have been paid in cash.

     Under the amended Veritas note, a principal payment of $500,000 was made on
July 19, 2000, the effective date of the amendment, and another $500,000 payment
was made in December 2000. The balance due Veritas at September 30, 2001, is
$3.7 million, with the entire balance classified as long-term debt in the
accompanying financial statements.

                                       10

<PAGE>

                           MILLER EXPLORATION COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

(4)  Long-Term Debt (continued)

     Any additional proceeds derived by the Company from the exercise of
warrants issued or excess proceeds from other debt or equity transactions must
be used to pay interest and principal on the amended Veritas note until paid in
full. Effective November 1, 2000, Veritas exercised 500,000 warrants to receive
496,923 shares (net of exercise price) of Company Common Stock.

     The Amerada Hess Corporation ("AHC") note was paid off in August 2001.

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

     Bank One credit facility                                  $  4,500
     Veritas note                                                 3,696
     Other                                                           16
                                                               --------
         Total                                                    8,212
     Less current portion of long-term debt                         (16)
                                                               --------
                                                               $  8,196
                                                               ========

(5)  Capital Transactions and Common Stock Warrants

     On July 11, 2000, the Company entered into a Securities Purchase Agreement
(the "Securities Purchase Agreement") with Guardian Energy Management Corp.
("Guardian"). Pursuant to the Securities Purchase Agreement, the Company issued
to Guardian a convertible promissory note in the amount of $5.0 million, and
three warrants exercisable for 1,562,500, 2,500,000 and 9,000,000 shares of the
Company's Common Stock, respectively. The issuance of the shares of Common Stock
on the conversion of the note and exercise of the warrants was approved by the
Company's stockholders at a meeting on December 7, 2000.

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

     Common Stock Warrants

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

<TABLE>
<CAPTION>
     Warrants                                 Exercise Price        Expiration Date
     --------                                 --------------        ---------------
     <S>                                      <C>                   <C>
      2,343,750 shares...................        $ 1.35             December 7, 2001
      3,750,000 shares...................          2.50             December 7, 2002
      600,498 shares.....................          0.01             July 21, 2004
      9,000,000 shares...................          3.00             December 7, 2004
</TABLE>


                                       11

<PAGE>

                           MILLER EXPLORATION COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

(6)  Risk Management Activities and Derivative Transactions

     The Company uses a variety of derivative instruments ("derivatives") to
manage exposure to fluctuations in commodity prices (see Note 1). The Company
periodically enters into certain derivatives for a portion of its oil and
natural gas production to achieve a more predictable cash flow, as well as to
reduce the exposure to price fluctuations. The Company's hedging arrangements
apply only to a portion of its production, provide only partial price protection
against volatility in oil and natural gas prices and limit potential gains from
future increases in prices. Such hedging arrangements may expose the Company to
risk of financial loss in certain circumstances, including instances where
production is less than expected, the Company's customers fail to purchase
contracted quantities of oil or natural gas or a sudden unexpected event
materially impacts oil or natural gas prices. The Company expects that the
amount of hedge contracts that it has in place will vary from time to time. For
the nine months ended September 30, 2001 and 2000, the Company realized
approximately $(2.2) million and $(1.1) million, respectively, of hedging losses
which are included in oil and natural gas revenues in the consolidated
statements of operations. For the nine months ended September 30, 2001 and 2000,
the Company had hedged 53% and 46%, respectively, of its oil and natural gas
production, and as of September 30, 2001, the Company had 0.7 Bcf of open
natural gas contracts for the period October 2001 through March 2002.

(7)  Commitments and Contingencies

     Stock-Based Compensation

     During 1997, the Company adopted the Stock Option and Restricted Stock Plan
of 1997 (the "1997 Plan"). The Board of Directors contemplates that the 1997
Plan primarily will be used to grant stock options. However, the 1997 Plan
permits grants of restricted stock and tax benefit rights if determined to be
desirable to advance the purposes of the 1997 Plan. These stock options,
restricted stock and tax benefit rights are collectively referred to as
"Incentive Awards." Persons eligible to receive Incentive Awards under the 1997
Plan are directors, corporate officers and full-time employees of the Company
and its subsidiary. A maximum of 2.4 million shares of Common Stock (subject to
certain antidilution adjustments) are available for Incentive Awards under the
1997 Plan. In February 2000, 43,500 restricted shares of stock issued pursuant
to the 1997 Plan vested and the Company recognized compensation expense of
approximately $60,000.

     On January 1, 2000, the Company granted 163,500 stock options to certain
employees with an exercise price of $0.01 per share and expire ten years from
grant date. The right to exercise the options vests and they become exercisable
only when the average trading price of the Common Stock on the market remains
above the designated target prices for a period of five consecutive trading days
as follows:

              Five-Day Daily Average Target           Percentage Vested
              -----------------------------           -----------------

                           $2.00                             40%
                           $2.75                             30%
                           $3.50                             30%

                                       12

<PAGE>

                           MILLER EXPLORATION COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

(7)  Commitments and Contingencies (continued)

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

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

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

     Other

     On May 1, 2000, the Company filed a lawsuit in the United States District
Court for the District of Montana against K2 America Corporation and K2 Energy
Corporation (hereinafter collectively referred to as "K2"). The Company's
lawsuit includes certain claims for relief and allegations by the Company
against K2, including breach of contract arising from failure by K2 to agree to
escrow, repudiation, and rescission; specific performance; declaratory relief;
partition of K2 lands that are subject to the IMDA Agreement between K2 and the
Blackfeet ("K2/Blackfeet IMDA"); negligence; and tortuous interference with
contract. On September 4, 2001, the Federal District Court in Montana dismissed
without prejudice the lawsuit, while acknowledging the right of the Company to
continue its lawsuit before the Blackfeet Tribal Court in Montana.

     The Company is preparing pleadings for submission to the Blackfeet Tribal
Court requesting that it determine whether it will decide the Company's claims
against K2. If the Tribal Court declines jurisdiction, the Company intends to
pursue its claims before the Federal Court. The Company will continue to pursue
its claims against K2, whether in the Blackfeet Tribal Court or in the Montana
Federal District Court.

     On May 1, 2000, the Company gave notice to the Blackfeet Tribal Business
Council demanding arbitration of all disputes as provided for under the
Miller/Blackfeet IMDA dated February 19, 1999, and pursuant to the K2/Blackfeet
IMDA dated May 30, 1997. The disputes for which the Company demands arbitration
include but are not limited to the unreasonable withholding of a consent to a
drilling extension as provided in the Miller/Blackfeet IMDA, as well as a
determination by the Blackfeet dated March 16, 2000, that certain wells which
the Company proposed to drill "would not satisfy the mandatory drilling
obligations" under the K2/Blackfeet IMDA. The Company contends the K2/Blackfeet
IMDA, gives it as lessee, and not the Blackfeet, the exclusive right to select
drill sites and well depths.

                                       13

<PAGE>

                           MILLER EXPLORATION COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     The Bureau of Indian Affairs ("BIA") has 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 reasons for the purported termination
being: 1) the Company's failure to pay $525,000 on the second anniversary date,
which the BIA believed to have been February 26, 2000, and 2) the Company's
failure to begin drilling within the time allowed under the Miller/Blackfeet
IMDA.

     The Company has filed an appeal brief with the Interior Department Appeals
Division. In its appeal brief, the Company argued it did not breach the
Miller/Blackfeet IMDA by not paying the $525,000 on February 26, 2000, because
the "second anniversary date" of the Miller/Blackfeet IMDA is actually February
26, 2001, or two years after the date the BIA approved the Miller/Blackfeet
IMDA. The Company further argued that the force majeure clause of the
Miller/Blackfeet IMDA allows the Company the right to an extension of time to
fulfill its drilling obligation under the Miller/Blackfeet IMDA, conditioned
only upon the Company paying a per-acre fee, that the Company had requested such
an extension and offered to pay the fee to the Blackfeet Tribe, and that the
Blackfeet Tribe wrongfully denied the Company an extension of time. The Company
is awaiting a response from the Interior Department Appeals Division.

     The Company is a defendant in a lawsuit filed June 1, 1999 by Energy
Drilling Company ("Energy Drilling"), in the Parish of Catahoula, Louisiana
arising from a blowout of the Victor P. Vegas #1 well that was drilled and
operated by the Company. Energy Drilling, the drilling rig contractor on the
well, is claiming damages related to their destroyed drilling rig and related
costs amounting to approximately $1.2 million, plus interest, attorneys' fees
and costs. In January 2001, the District Court judge ruled against the Company
on two of three claims filed in this case with damages left undetermined. This
ruling is being appealed to the U.S. Fifth Circuit Court of Appeals. In the
event the Company does not prevail in the appeal, legal counsel has advised that
any resulting damages owed would be covered by insurance.

     The Company is a defendant in a lawsuit brought by Victor P. Vegas, the
landowner of the surface location of the blowout well referenced above. The suit
was filed July 20, 1999 in the Parish of Orleans, Louisiana, claiming
unspecified damages related to environmental and other matters. Under a DNR
approved plan, site remediation has been completed and periodic testing is being
performed.

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

     The Company is a party to a lawsuit brought by Bill and Joyce Vasilion
against AHC (the Company's joint venture partner at the site of the alleged
incident). The claim alleges that AHC (the operator) was negligent in failing to
inspect a crane at a well site that was the subject of an accident which
occurred in September 1994. Mediation will take place on November 12, 2001 and,
if unsuccessful, a trial date has been set for December 3, 2001.

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

                                       14

<PAGE>

                           MILLER EXPLORATION COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

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

(8)  Non-Cash Activities

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

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

                                       15

<PAGE>

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


Overview

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

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

         Securities and Exchange Commission ("SEC") Regulation S-X, Rule 4-10
requires companies reporting on a full cost basis to apply a ceiling test
wherein the capitalized costs within the full cost pool may not exceed the net
present value of the Company's proven oil and gas reserves plus the lower of the
cost or market value of unproved properties and deferred income taxes. Any such
excess costs should be charged against earnings. Using unescalated period-end
prices of $2.24 per Mcf of natural gas and $23.43 per barrel of oil, the Company
would have recognized a $3.9 million non-cash cost ceiling writedown. However,
based upon improvements in oil and natural gas prices experienced subsequent to
period-end, the non-cash ceiling writedown has been reduced to $1.0 million. The
reduced writedown is based on using closing commodity prices on November 8,
2001 of $2.96 per Mcf of natural gas and $21.17 per barrel of oil in the
Company's cost ceiling test.

         A substantial portion (74%) of the Company's reserves are comprised of
natural gas. As a result, natural gas commodity price volatility can have a
material effect on the Company's cost ceiling test. As an example of the effect
of price volatility, had the Company used closing commodity prices on November 1
or 2, 2001, a writedown would not have been required. The November 8, 2001
valuation date was used because it was closer to the Company's Form 10-Q
Quarterly Report filing date.

         Although the Company has had recent success with the Price #1 well in
Jones County, Mississippi, preliminary reserves have been assigned to this well
until more production history can be obtained. The Company has three additional
wells in Mississippi and one in Alabama that are currently at various stages of
drilling and completion. The addition of proved oil and gas reserves from any of
these wells along with improved commodity prices will help the Company avoid or
mitigate future cost ceiling writedowns.

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):

                                       16

<PAGE>

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

<TABLE>
<CAPTION>
                                                                   Three Months                    Nine Months
                                                                Ended September 30,            Ended September 30,
                                                                -------------------            --------------------
                                                                2001          2000             2001           2000
                                                              --------      --------         --------      ---------
<S>                                                           <C>           <C>              <C>           <C>
Production volumes:
        Crude oil and condensate (MBbls)                            35            54              110           158
        Natural gas (MMcf)                                         764         1,400            2,718         4,548
        Natural gas equivalent (MMcfe)                             974         1,724            3,378         5,496

Revenues:
        Crude oil and condensate                              $    795      $  1,463         $  2,621      $  3,978
        Natural gas                                              2,695         5,466           12,072        14,807

Operating expenses:
        Lease operating expenses and production taxes         $    655      $    970         $  2,418      $  1,985
        Depletion, depreciation and amortization                 2,793         4,235           10,505        13,021
        General and administrative                                 383           427            1,459         1,598
        Cost ceiling writedown                                   1,000            --            8,500            --

Interest expense                                              $    241      $    782         $    829      $  2,449

Net income (loss)                                             $ (1,341)     $    245         $ (8,687)     $   (163)

Average sales prices:
        Crude oil and condensate ($ per Bbl)                  $  22.71      $  27.09         $  23.83      $  25.18
        Natural gas ($ per Mcf)                                   3.53          3.90             4.44          3.26
        Natural gas equivalent ($ per Mcfe)                       3.58          4.02             4.35          3.42

Average Costs ($ per Mcfe):
        Lease operating expenses and production taxes         $   0.67      $   0.56         $   0.72      $   0.36
        Depletion, depreciation and amortization                  2.87          2.46             3.11          2.37
        General and administrative                                0.39          0.25             0.43          0.29
</TABLE>

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

         Oil and natural gas revenues for the three months ended September 30,
2001 decreased 50% to $3.5 million from $6.9 million for the same period in
2000. The revenues for the three months ended September 30, 2001 and 2000
include $0.5 million and $(0.7) million of hedging gains (losses), respectively
(see "Risk Management Activities and Derivative Transactions" below). Total gas
production for the three months ended September 30, 2001 declined 45% to 764
MMcf from 1,400 MMcf for the same period in 2000. Total oil production volumes
during the three months ended September 30, 2001 decreased 35% to 35 MBbls from
54 MBbls for the same period in 2000. The drop in oil and natural gas production
is attributable to the Company's Mississippi Salt Basin properties, which is due
to the combined effect of the following factors: 1) the Company's drilling
success rate and the production rates of new discoveries over the past few years
has been lower than expected, and 2) during 1999 and much of 2000, the Company
sold down its working interest in many undeveloped prospects and used a
significant portion of its operational cash flow to pay down bank debt, thereby
limiting the Company's drilling activities during this period. The limitation on
the number of wells drilled and the resultant working interest retained therein
made it more difficult for the Company to replace production from the prolific,
short-lived Mississippi Salt Basin properties. Average natural gas prices
decreased 9% to $3.53 per Mcf for the three months ended September 30, 2001 from
$3.90 per Mcf in the same period in 2000. Average oil prices decreased 16% to
$22.71 per barrel during the three months ended September 30, 2001 from $27.09
per barrel in the same period in 2000. Natural gas and oil prices are impacted
by various economic (domestic and global) and weather related issues. The
Company expects commodity price volatility to continue.

                                       17

<PAGE>

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

         Lease operating expenses and production taxes for the three months
ended September 30, 2001 decreased 32% to $0.7 million from $1.0 million for the
same period in 2000. Lease operating expenses were unchanged for the quarter
ended September 30, 2001 compared to the same period of the prior year.
Production taxes decreased by approximately $0.3 million due primarily to the
fact that production taxes are based on the sales value of the hydrocarbons
being produced. Since oil and gas sales decreased for the quarter ended
September 30, 2001, production taxes decreased accordingly.

         Depreciation, depletion and amortization ("DD&A") expense for the three
months ended September 30, 2001 decreased 34% to $2.8 million from $4.2 million
for the same period in 2000. The decreased DD&A expense is attributable to the
$7.5 million cost ceiling writedown recorded in June 2001, which created a
corresponding decrease in the oil and gas property costs which are subject to
DD&A and declining production.

         General and administrative expense for the three months ended September
30, 2001 were unchanged from the same period of the prior year.

         Interest expense for the three months ended September 30, 2001
decreased 69% to $0.3 million from $0.8 million for the same period in 2000. The
significant decrease in interest expense is attributable to the combined effects
of: 1) a decrease in the average outstanding bank debt and lower effective
interest rates for the quarter ended September 30, 2001, compared to the same
period of the prior year; 2) lower interest expense on the Veritas note due to
the reduced interest rate and lower outstanding debt for the quarter ended
September 30, 2001 compared to the same period of the previous year, and 3) the
approximate $0.2 million of interest expense that was accrued in September 2000
in connection with the $5.0 million convertible promissory note issued to
Guardian (as more fully discussed in Note 5 to the Consolidated Financial
Statements).

         Net income (loss) for the three months ended September 30, 2001 was
$(1.3) million compared to net income of $0.2 million for the same period in
2000, as a result of the factors described above.

         Nine Months Ended September 30, 2001 compared to Nine Months Ended
September 30, 2000

         Oil and natural gas revenues for the nine months ended September 30,
2001 decreased 22% to $14.7 million from $18.8 million for the comparable period
in the prior year. The revenues for the nine months ended September 30, 2001 and
2000 include approximately $(2.2) million and $(1.1) million of hedging losses,
respectively (see "Risk Management Activities and Derivative Transactions"
below). Total gas production for the nine months ended September 30, 2001
declined 40% to 2,718 MMcf from 4,548 MMcf for the same period in 2000. Total
oil production volumes for the nine months ended September 30, 2001 decreased
30% to 110 MBbls from 158 MBbls for the same period in 2000. The drop in oil and
natural gas production is attributable to the Company's Mississippi Salt Basin
properties, which is due to the combined effect of the following factors: 1) the
Company's drilling success rate and the production rates of new discoveries over
the past few years has been lower than expected, and 2) during 1999 and much of
2000, the Company sold down its working interest in many undeveloped prospects
and used a significant portion of its operational cash flow to pay down bank
debt, thereby limiting the Company's drilling activities during this period. The
limitation on the number of wells drilled and the resultant working interest
retained therein made it more difficult for the Company to replace production
from the prolific, short-lived Mississippi Salt Basin properties. Realized
natural gas prices for the nine months ended September 30, 2001 increased 36% to
$4.44 per Mcf from $3.26 per Mcf for the comparable period of the prior year.
Average realized oil prices decreased 7% to $23.83 per barrel from the $25.18
per barrel experienced during the comparable period of 2000. Natural gas and oil
prices are impacted by various economic (domestic and global) and weather
related issues. The Company expects commodity price volatility to continue.

                                       18

<PAGE>

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

         Lease operating expenses and production taxes for the nine months ended
September 30, 2001 increased 22% to $2.4 million from $2.0 million for the
comparable period in the prior year. Lease operating expenses increased by
approximately $0.1 million. This increase is attributable to reworks on
Mississippi Salt Basin wells in 2001 above the level expended for similar
operations during the same period of 2000. Production taxes increased by
approximately $0.6 million due primarily to the phase out of the 6% State of
Mississippi production tax exemption that occurred in June 2000.

         Depreciation, depletion and amortization expense for the nine months
ended September 30, 2001 decreased 19% to $10.5 million from $13.0 million for
the comparable period in the prior year. The lower depletion expense is
attributable to the $7.5 million cost ceiling writedown recorded in June 2001,
which created a corresponding decrease in the oil and gas property costs which
are subject to DD&A and declining production.

         General and administrative expenses for the nine months ended September
30, 2001 decreased 9% to $1.5 million from $1.6 million for the comparable
period in the prior year. This decrease is primarily attributable to a
significant decrease in legal and professional fees.

         A non-cash cost ceiling writedown of $7.5 million was recognized by the
Company in June 2001 and an additional $1.0 million writedown in September 2001.
The primary reasons for the writedown is attributable to: 1) the Company's
drilling success rate and estimated reserves discovered per well over the past
few years have been lower than expected, 2) during 1999 and much of 2000, one of
the Company's primary objectives was to reduce bank debt, which correspondingly
led to reduced drilling activities. To accomplish this objective, the Company
sold down its interest in many undeveloped prospects and dedicated a significant
portion of operational cash flow to debt service. This resulted in fewer wells
and lower average working interests in those that were drilled. These factors
made it more difficult for the Company to replace the depleting reserves
associated with the prolific, high working interest, yet typically short reserve
life of the Company's Mississippi Salt Basin wells. Additionally, natural gas
commodity prices have rapidly declined from $9.55 per Mcf of natural gas at
December 31, 2000 to $2.96 per Mcf of natural gas at November 8, 2001. The
Company is addressing the issue of short reserve lives by diversifying its
exploration efforts into shallow, long-lived reserve plays in the Blackfeet
Indian Reservation and the coal bed methane project in the Illinois Basin and is
also pursuing strategic long-lived property acquisitions.

         Although the Company has had success with the Price #1 well in Jones
County, Mississippi, preliminary reserve estimates have been assigned to this
well until more production history can be obtained. The Company also has three
wells in Mississippi and one well in Alabama that are currently at various
stages of drilling or completion. The addition of proved oil and gas reserves
from any of these wells along with improved commodity prices will help the
Company avoid or mitigate future cost ceiling writedowns.

         Interest expense for the nine months ended September 30, 2001 decreased
66% to $0.8 million from $2.4 million for the comparable period in the prior
year. The significant decrease in interest expense is attributable to the
combined effects of: 1) a decrease in the average outstanding bank debt balance
during 2001 compared to 2000, 2) more favorable interest rates as a result of
the new credit facility with Bank One that was entered into in July 2000, 3) the
downward trend in the prime rate during the nine months ended September 30, 2001
compared to the same period of 2000, and 4) the approximate $0.2 million of
interest expense that was accrued during the nine months ended September 30,
2000 in connection with the $5.0 million convertible promissory note issued to
Guardian (as more fully discussed in Note 5 to the Consolidated Financial
Statements).

         Net loss for the nine months ended September 30, 2001 increased to
$(8.7) million from ($0.2) million for the comparable period in the prior year,
as a result of the factors described above.

                                       19

<PAGE>

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

Liquidity and Capital Resources

  Liquidity

         The Company's primary source of liquidity is cash generated from
operations. Net cash provided by operating activities was $10.0 million and $8.7
million for the nine months ended September 30, 2001 and 2000, respectively. The
increase in cash provided in 2001 compared to 2000 was primarily attributable to
reduced interest charges in 2001.

         Net cash used in investing activities was $8.0 million and $3.4 million
for the nine months ended September 30, 2001 and 2000, respectively. The
increase in cash used in 2001 compared to 2000 was primarily due to a $3.7
million increase in exploration and development expenditures.

         Net cash used in financing activities was $4.0 million and $7.9 million
for the nine months ended September 30, 2001 and 2000, respectively. Cash used
in financing activities for both years was primarily used to pay down debt.

  Capital Resources

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

         On July 19, 2000, the Company entered into a senior credit facility
with Bank One, which replaced its previous credit facility with Bank of
Montreal, Houston Agency. The credit facility has a 30-month term with an
interest rate of either Bank One prime plus 2% or LIBOR plus 4%, at the
Company's option. The Company's obligations under the credit facility are
secured by a lien on all of its real and personal property. The new credit
facility required the Company to make monthly principal payments of $500,000
from August 1, 2000 until the borrowing base re-determination that occurred on
January 1, 2001. The new borrowing base determined by Bank One as of August 1,
2001 is $7.5 million. The borrowing base will be reduced by $0.5 million per
month until the next re-determination scheduled for January 1, 2002. At
September 30, 2001, the outstanding debt balance under the Company's credit
facility with Bank One was $4.5 million.

         The Bank One credit facility includes certain negative covenants that
impose restrictions on the Company with respect to, among other things,
incurrence of additional indebtedness, limitations on financial ratios, making
investments and mergers and consolidation. As a result of the loss created by
the $7.5 million cost ceiling writedown in June 2001, the minimum tangible net
worth covenant as defined by the credit facility agreement has been amended to
$24.0 million. The obligations under the credit facility are secured by a lien
on all of the Company's real and personal property.

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

                                       20

<PAGE>

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

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

         Under the terms of the amended note and warrant agreements, the
maturity of the Veritas Note was extended from April 15, 2001 to July 21, 2003
and the expiration date for all warrants issued was extended until June 21,
2004. The annual interest rate has been reduced from 18% to 9 3/4%, provided the
entire note balance is paid in full by December 31, 2001. If all principal and
interest under the Veritas note is not paid by December 31, 2001, then the note
bears interest at 13 3/4% until paid in full. As of June 30, 2001, the Company
cannot assure that the principal balance will be paid in full by December 31,
2001, therefore the Company has accrued additional interest of approximately
$145,000 at the incremental 4% rate for the period October 15, 2000 through
September 30, 2001. Interest accrues and is payable on each October 15 and April
15 until principal is paid in full. Interest was required to be paid in warrants
under the terms of the Warrant Agreement until the Company was in compliance
with the net borrowing base formula as defined in the Bank One credit facility,
at which time interest is to be paid in cash only. Since October 15, 2000,
interest payments have been paid in cash.

         Under the amended Veritas note, a principal payment of $500,000 was
made on July 19, 2000, the effective date of the amendment, and another $500,000
payment was made in December 2000. The balance due Veritas was $3.7 million at
September 30, 2001 with the entire balance classified as long-term debt in the
accompanying financial statements.

         Any additional proceeds derived by the Company from the exercise of
warrants issued or excess proceeds from other debt or equity transactions must
be used to pay interest and principal on the amended Veritas Note until paid in
full. Effective November 1, 2000, Veritas exercised 500,000 warrants to receive
496,923 shares (net of exercise price) of Company common stock.

         The AHC note was paid off in August 2001.

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

         At September 30, 2001, the Company had a working capital deficit of
$1.7 million (excluding the current portion of long-term debt). The Company uses
its excess cash to pay down bank debt under the credit facility to help minimize
interest expense. The outstanding credit facility balance was $4.5 million at
September 30, 2001. Management plans to meet these working capital requirements
from operational cash flow and draws from the revolving credit facility.

                                       21

<PAGE>

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

         The Company anticipates 2001 capital expenditures will be approximately
$10.0 million. Capital expenditures will be used for drilling and development
activities, the acquisition of additional seismic data and processing and
leasehold acquisitions and extensions in strategic project areas. The actual
amounts of capital expenditures and number of wells drilled may differ
significantly from such estimates. Actual capital expenditures for the nine
months ended September 30, 2001 were approximately $8.0 million. The Company
intends to fund its 2001 budgeted capital expenditures largely through
operational cash flow.

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

         The Company has experienced and expects to continue to experience
substantial working capital requirements primarily due to the Company's active
exploration and development program, declining production and eroding commodity
prices. While the Company believes that cash flow from operations and its
natural gas hedge positions should allow the Company to implement its present
business strategy through 2001 and into 2002, additional debt or equity
financing may be required during the remainder of 2001 and in the future to fund
the Company's growth, development and exploration program, and to satisfy its
existing obligations. The failure to obtain and exploit such capital resources
could have a material adverse effect on the Company, including curtailment of
its exploration and other activities.

Effects of Inflation and Changes in Price

         Crude oil and natural gas commodity prices have been very volatile and
unpredictable during 2001 and 2000. The wide fluctuations that have occurred
during these periods have had a significant impact on the Company's results of
operations, cash flow, liquidity, and budgetary planning. Recent rates of
inflation have had a minimal effect on the Company.

Environmental and Other Regulatory Matters

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

                                       22

<PAGE>

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Risk Management Activities and Derivative Transactions

         The Company uses a variety of derivative instruments ("derivatives") to
manage exposure to fluctuations in commodity prices. The Company periodically
enters into certain derivatives for a portion of its oil and natural gas
production to achieve a more predictable cash flow, as well as to reduce the
exposure to price fluctuations. The Company's hedging arrangements apply only to
a portion of its production, provide only partial price protection against
volatility in oil and natural gas prices and limit potential gains from future
increases in prices. Such hedging arrangements may expose the Company to risk of
financial loss in certain circumstances, including instances where production is
less than expected, the Company's customers fail to purchase contracted
quantities of oil or natural gas or a sudden unexpected event materially impacts
oil or natural gas prices. The Company expects that the amount of hedge
contracts that it has in place will vary from time to time. For the nine months
ended September 30, 2001 and 2000, the Company realized approximately $(2.2)
million and $(1.1) million, respectively, of hedging losses which are included
in oil and natural gas revenues in the consolidated statements of operations.
For the nine months ended September 30, 2001 and 2000, the Company had hedged
53% and 46%, respectively, of its oil and natural gas production, and as of
September 30, 2001, the Company had 0.7 Bcf of open natural gas contracts for
the period October 2001 through March 2002.

         Market Risk Information

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

                                       23

<PAGE>

PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

         On May 1, 2000, the Company filed a lawsuit in the United States
District Court for the District of Montana against K2 America Corporation and K2
Energy Corporation (hereinafter collectively referred to as "K2"). The Company's
lawsuit includes certain claims for relief and allegations by the Company
against K2, including breach of contract arising from failure by K2 to agree to
escrow, repudiation, and rescission; specific performance; declaratory relief;
partition of K2 lands that are subject to the IMDA Agreement between K2 and the
Blackfeet ("K2/Blackfeet IMDA"); negligence; and tortuous interference with
contract. On September 4, 2001, the Federal District Court in Montana dismissed
without prejudice the lawsuit, while acknowledging the right of the Company to
continue its lawsuit before the Blackfeet Tribal Court in Montana.

         The Company is preparing pleadings for submission to the Blackfeet
Tribal Court requesting that it determine whether it will decide the Company's
claims against K2. If the Tribal Court declines jurisdiction, the Company
intends to pursue its claims before the Federal Court. The Company will continue
to pursue its claims against K2, whether in the Blackfeet Tribal Court or in the
Montana Federal District Court.

         On May 1, 2000, the Company gave notice to the Blackfeet Tribal
Business Council demanding arbitration of all disputes as provided for under the
Miller/Blackfeet IMDA dated February 19, 1999, and pursuant to the K2/Blackfeet
IMDA dated May 30, 1997. The disputes for which the Company demands arbitration
include but are not limited to the unreasonable withholding of a consent to a
drilling extension as provided in the Miller/Blackfeet IMDA, as well as a
determination by the Blackfeet dated March 16, 2000, that certain wells which
the Company proposed to drill "would not satisfy the mandatory drilling
obligations" under the K2/Blackfeet IMDA. The Company contends the K2/Blackfeet
IMDA, gives it as lessee, and not the Blackfeet, the exclusive right to select
drill sites and well depths.

         The Bureau of Indian Affairs ("BIA") has 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 reasons for the purported termination
being: 1) the Company" failure to pay $525,000 on the second anniversary date,
which the BIA believed to have been February 26, 2000, and 2) the Company's
failure to begin drilling within the time allowed under the Miller/Blackfeet
IMDA.

         The Company has filed an appeal brief with the Interior Department
Appeals Division. In its appeal brief, the Company argued it did not breach the
Miller/Blackfeet IMDA by not paying the $525,000 on February 26, 200, because
the "second anniversary date" of the Miller/Blackfeet IMDA is actually February
26, 2001, or two years after the date the BIA approved the Miller/Blackfeet
IMDA. The Company further argued that the force majeure clause of the
Miller/Blackfeet IMDA allows the Company the right to an extension of time to
fulfill its drilling obligations under the Miller/Blackfeet IMDA, conditioned
only upon the Company paying a per-acre fee, that the Company had requested such
an extension and offered to pay the fee to the Blackfeet Tribe, and that the
Blackfeet Tribe wrongfully denied the Company an extension of time.

         The Company is awaiting a response from the Interior Department Appeals
Division.

         The Company has been named as a defendant in a lawsuit filed June 1,
1999 by Energy Drilling Company ("Energy Drilling"), in the Parish of Catahoula,
Louisiana arising from a blowout of the Victor P. Vegas #1 well that was drilled
and operated by the Company. Energy Drilling, the drilling rig contractor on the
well, is claiming damages related to their destroyed drilling rig and related
costs amounting to approximately $1.2 million, plus interest, attorneys' fees
and costs. In January 2001, the District Court judge ruled against the Company
on two of the three claims filed in this case with damages left undetermined.
This ruling is being appealed to the U.S. Fifth

                                       24

<PAGE>

Circuit Court of Appeals. In the event the Company does not prevail in the
appeal, legal counsel has advised that any resulting damages owed would be
covered by insurance.

         The Company is a defendant in a lawsuit brought by Victor P. Vegas, the
landowner of the surface location of the blowout well referenced above. The suit
was filed July 20, 1999 in the Parish of Orleans, Louisiana, claiming
unspecified damages related to environmental and other matters. Under a DNR
approved plan, site remediation has been completed and periodic testing is being
performed.

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

         The Company is a party to a lawsuit brought by Bill and Joyce Vasilion
against AHC (the Company's joint venture partner at the site of the alleged
incident). The claim alleges that AHC (the operator) was negligent in failing to
inspect a crane at a well site that was the subject of an accident which
occurred in September 1994. Mediation will take place on November 12, 2001, and
if unsuccessful, a trial date has been set for December 30, 2001.

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

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

Item 2.  Changes in Securities

         None

Item 3.  Defaults Upon Senior Securities

         None

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

         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:

                                       25

<PAGE>

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

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

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

_____________________

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

                                       26

<PAGE>

                                   SIGNATURES

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

                                MILLER EXPLORATION COMPANY



Date: November 12, 2001         By: /s/ Deanna L. Cannon
                                    --------------------------------------------
                                    Deanna L. Cannon
                                    Vice President-Finance and Secretary
                                    (Principal Accounting and Financial Officer)

                                       27

<PAGE>

                                  EXHIBIT INDEX

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

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

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

_______________________

                                       28