<PAGE>   1
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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   ----------

                                   FORM 10-Q



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

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001

                                       OR

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

          FOR THE TRANSITION PERIOD FROM _____________TO_____________

                         COMMISSION FILE NO. 001-11899

                                   ----------

                        THE HOUSTON EXPLORATION COMPANY
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)



          DELAWARE                                    22-2674487
(STATE OR OTHER JURISDICTION OF             INCORPORATION OR ORGANIZATION)
(IRS EMPLOYER IDENTIFICATION NO.)

                        1100 LOUISIANA STREET, SUITE 2000
                            HOUSTON, TEXAS 77002-5215
              (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)

                                 (713) 830-6800
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

                                   ----------


         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  [ ]

         As of July 30, 2001, 30,354,880 shares of Common Stock, par value $.01
per share, were outstanding.


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<PAGE>   2




                         THE HOUSTON EXPLORATION COMPANY

                                TABLE OF CONTENTS


<Table>
<Caption>
                                                                                                        Page
                                                                                                        ----
<S>           <C>                                                                                       <C>
FACTORS AFFECTING FORWARD LOOKING STATEMENTS...............................................................3

PART I.       FINANCIAL INFORMATION

Item 1.       Consolidated Financial Statements (unaudited)

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

              Consolidated Statements of Operations-- Three Month and Six Month Periods Ended
                  June 30, 2001 and 2000...................................................................5

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

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

Item 2.       Management's Discussion and Analysis of Financial Condition and
                  Results of Operations...................................................................12

Item 3.       Qualitative and Quantitative Disclosures About Market Risk..................................20

PART II.      OTHER INFORMATION

Item 2.       Changes in Securities and Use of Proceeds...................................................21
Item 4.       Submission of Matters to a Vote of Security Holders.........................................21
Item 6.       Exhibits and Reports on Form 8-K............................................................21

SIGNATURES................................................................................................22
</Table>


                                       -2-

<PAGE>   3



                  FACTORS AFFECTING FORWARD LOOKING STATEMENTS

         This Quarterly Report on Form 10-Q contains certain "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1993, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
words "anticipate," "believe," "estimate," "expect," "project" and similar
expressions are intended to identify forward-looking statements. Without
limiting the foregoing, all statements under the caption "Item 2--Management's
Discussion and Analysis of Financial Condition and Results of Operations"
relating to the Company's anticipated capital expenditures, future cash flows
and borrowings, pursuit of potential future acquisition opportunities and
sources of funding for exploration and development are forward-looking
statements. Such statements are subject to certain risks and uncertainties, such
as the volatility of natural gas and oil prices, uncertainty of reserve
information and future net revenue estimates, reserve replacement risks,
drilling risks, operating risks of natural gas and oil operations, acquisition
risks, substantial capital requirements, government regulation, environmental
matters and competition. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, believed, estimated, expected or
projected. For additional discussion of such risks, uncertainties and
assumptions, see "Items 1 and 2. Business and Properties" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in the Company's Annual Report on Form 10-K filed under the
Securities Exchange Act of 1934, as amended.

         Unless otherwise indicated, references to "Houston Exploration" or the
"Company" refer to The Houston Exploration Company and its subsidiary on a
consolidated basis.


                                       -3-

<PAGE>   4



PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS


                         THE HOUSTON EXPLORATION COMPANY
                           CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT SHARE DATA)


<Table>
<Caption>
                                                                                              JUNE 30,          DECEMBER 31,
                                                                                                2001                2000
                                                                                          ---------------      ---------------
                                                                                             (UNAUDITED)
<S>                                                                                       <C>                  <C>
ASSETS:
Cash and cash equivalents ...........................................................     $         3,965      $         9,675
Accounts receivable .................................................................              96,349              100,966
Accounts receivable-- Affiliate .....................................................                 173               13,635
Inventories .........................................................................               2,081                1,923
Prepayments and other ...............................................................               1,937                1,913
                                                                                          ---------------      ---------------
         Total current assets .......................................................             104,505              128,112
Natural gas and oil properties, full cost method
  Unevaluated properties ............................................................             149,545              142,890
  Properties subject to amortization ................................................           1,302,198            1,162,000
Other property and equipment ........................................................               9,980                9,852
                                                                                          ---------------      ---------------
                                                                                                1,461,723            1,314,742
Less: Accumulated depreciation, depletion and amortization ..........................            (669,620)            (609,352)
                                                                                          ---------------      ---------------
                                                                                                  792,103              705,390
Other assets ........................................................................               5,204                3,882
                                                                                          ---------------      ---------------
         TOTAL ASSETS ...............................................................     $       901,812      $       837,384
                                                                                          ===============      ===============

LIABILITIES:
Accounts payable and accrued expenses ...............................................     $        89,060      $       108,366
                                                                                          ---------------      ---------------
         Total current liabilities ..................................................              89,060              108,366

Long-term debt and notes ............................................................             160,000              245,000
Deferred federal income taxes .......................................................             144,562               87,040
Other deferred liabilities ..........................................................                  --                  236
                                                                                          ---------------      ---------------
         TOTAL LIABILITIES ..........................................................             393,622              440,642

COMMITMENTS AND CONTINGENCIES (SEE NOTE 3):

STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value, 50,000,000 shares authorized and 30,339,120 shares
   issued and outstanding at June 30, 2001 and 29,829,050 shares issued and
   outstanding at December 31, 2000, respectively ...................................                 303                  298
Additional paid-in capital ..........................................................             333,600              325,205
Retained earnings ...................................................................             154,438               71,239
Unearned compensation ...............................................................                (235)                  --
Accumulated other comprehensive income ..............................................              20,084                   --
                                                                                          ---------------      ---------------
          TOTAL STOCKHOLDERS' EQUITY ................................................             508,190              396,742
                                                                                          ---------------      ---------------
          TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................     $       901,812      $       837,384
                                                                                          ===============      ===============
</Table>



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


                                       -4-

<PAGE>   5



                         THE HOUSTON EXPLORATION COMPANY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)


<Table>
<Caption>
                                                                  THREE MONTHS ENDED,                 SIX MONTHS ENDED,
                                                                       JUNE 30,                           JUNE 30,
                                                             -----------------------------     -----------------------------
                                                                  2001            2000             2001             2000
                                                             ------------     ------------     ------------     ------------
                                                                                       (UNAUDITED)
<S>                                                          <C>              <C>              <C>              <C>
REVENUES:
  Natural gas and oil revenues .........................     $     98,916     $     57,533     $    222,912     $    106,451
  Other ................................................              392              397              738              827
                                                             ------------     ------------     ------------     ------------
          Total revenues ...............................           99,308           57,930          223,650          107,278
OPERATING EXPENSES:
  Lease operating ......................................            6,759            5,712           13,004           12,089
  Severance tax ........................................            3,015            2,095            7,729            3,701
  Depreciation, depletion and amortization .............           30,044           20,250           60,263           41,007
  General and administrative, net ......................            2,614            2,572           10,579            4,761
                                                             ------------     ------------     ------------     ------------
          Total operating expenses .....................           42,432           30,629           91,575           61,558

Income from operations .................................           56,876           27,301          132,075           45,720

Other (income) and expense .............................            1,500               --              119            1,752
Interest expense, net ..................................              543            2,517            2,470            6,538
                                                             ------------     ------------     ------------     ------------

Net income before income taxes .........................           54,833           24,784          129,486           37,430

Provision for federal income taxes .....................           18,978            8,456           46,287           12,653
                                                             ------------     ------------     ------------     ------------

NET INCOME .............................................     $     35,855     $     16,328     $     83,199     $     24,777
                                                             ============     ============     ============     ============

Net income per share ...................................     $       1.19     $       0.56     $       2.77     $       0.93
                                                             ============     ============     ============     ============
Net income per share-- assuming dilution ...............     $       1.17     $       0.56     $       2.73     $       0.93
                                                             ============     ============     ============     ============

Weighted average shares outstanding ....................           30,165           29,041           30,064           26,510
Weighted average shares outstanding-- assuming
    dilution ...........................................           30,554           29,402           30,528           26,752
</Table>






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

                                       -5-

<PAGE>   6



                         THE HOUSTON EXPLORATION COMPANY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)


<Table>
<Caption>
                                                                         SIX MONTHS ENDED JUNE 30,
                                                                      ------------------------------
                                                                          2001              2000
                                                                      ------------      ------------
                                                                                (UNAUDITED)
<S>                                                                   <C>               <C>
OPERATING ACTIVITIES:
Net income ......................................................     $     83,199      $     24,777
Adjustments to reconcile net income to net cash
  provided by operating activities:
  Depreciation, depletion and amortization ......................           60,263            41,007
  Deferred income tax expense ...................................           46,707            13,094
 Stock compensation expense .....................................               21                --
  Changes in operating assets and liabilities:
     Decrease (increase) in accounts receivable .................           48,978            (8,842)
     Increase in inventories ....................................             (158)             (654)
     Increase in prepayments ....................................              (24)           (2,855)
    (Increase) decrease in other assets and liabilities .........           (1,558)              274
     Decrease in accounts payable and accrued expenses ..........          (19,306)          (10,751)
                                                                      ------------      ------------

Net cash provided by operating activities .......................          218,122            56,050

INVESTING ACTIVITIES:
Investment in property and equipment ............................         (146,976)          (67,688)
                                                                      ------------      ------------

Net cash used in investing activities ...........................         (146,976)          (67,688)

FINANCING ACTIVITIES:
Proceeds from long term borrowings ..............................           67,000            16,000
Repayments of long term borrowings ..............................         (152,000)          (20,000)
Proceeds from issuance of common stock ..........................            8,144             1,696
                                                                      ------------      ------------

Net cash used in financing activities ...........................          (76,856)           (2,304)
                                                                      ------------      ------------

Decrease in cash and cash equivalents ...........................           (5,710)          (13,942)

Cash and cash equivalents, beginning of period ..................            9,675            15,502
                                                                      ------------      ------------

Cash and cash equivalents, end of period ........................     $      3,965      $      1,560
                                                                      ============      ============

Cash paid for interest ..........................................     $      8,737      $     13,729
                                                                      ============      ============

Cash paid for taxes .............................................     $         --      $         --
                                                                      ============      ============
</Table>








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


                                       -6-

<PAGE>   7


                         THE HOUSTON EXPLORATION COMPANY
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE 1 -- SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

         Organization

         Houston Exploration is an independent natural gas and oil company
engaged in the exploration, development, exploitation and acquisition of
domestic natural gas and oil properties. The Company's operations are currently
focused offshore in the Gulf of Mexico and onshore in South Texas, South
Louisiana, the Arkoma Basin, East Texas and West Virginia. Houston Exploration's
strategy is to utilize its geological and geophysical expertise to grow its
reserve base through a combination of: (i) exploratory drilling in the Gulf of
Mexico; (ii) lower risk, high impact exploitation and development drilling
onshore; and (iii) selective opportunistic acquisitions both offshore and
onshore. At December 31, 2000, the Company had net proved reserves of 562 Bcfe,
94% of which were natural gas and 77% of which were classified as proved
developed.

         Houston Exploration began exploring for natural gas and oil in December
1985 on behalf of The Brooklyn Union Gas Company ("Brooklyn Union") and in
September 1996 the Company completed an initial public offering of its common
stock. Brooklyn Union became an indirect wholly-owned subsidiary of KeySpan
Corporation ("KeySpan") in May 1998 through the combination of Brooklyn Union's
parent company KeySpan Energy Corporation and Long Island Lighting Company. As
of June 30, 2001, THEC Holdings Corp., an indirect wholly owned subsidiary of
KeySpan, owned approximately 68% of the outstanding shares of Houston
Exploration's common stock. KeySpan, a member of the Standard & Poor's 500
Index, is a diversified energy provider that (i) distributes natural gas to 2.4
million customers in the Brooklyn, Long Island, Queens and Staten Island areas
of New York and to customers in eastern and central Massachusetts and central
New Hampshire; (ii) generates and manages electricity transmission and
distribution through the ownership and operation of generating plants throughout
New York state and through its contract with the Long Island Power Authority to
manage electricity service to 1.1 million customers in the Long Island area; and
(iii) through its other subsidiaries, is involved in various energy services and
energy related investments including wholesale and retail gas and electric
marketing, appliance service and installation, large energy-system installation
and management, fiber optic telecommunications and energy-related internet
activities.

         Principles of Consolidation

         The consolidated financial statements include the accounts of The
Houston Exploration Company and its wholly owned subsidiary, Seneca Upshur
Petroleum Company (collectively the "Company"). All significant intercompany
balances and transactions have been eliminated.

         Interim Financial Statements

         The balance sheet of the Company at June 30, 2001 and the statements of
operations and cash flows for the periods indicated herein have been prepared by
the Company without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted, although the
Company believes that the disclosures contained herein are adequate to make the
information presented not misleading. The balance sheet at December 31, 2000 is
derived from the December 31, 2000 audited financial statements, but does not
include all disclosures required by generally accepted accounting principles.
The Interim Financial Statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2000.



                                       -7-

<PAGE>   8


                         THE HOUSTON EXPLORATION COMPANY
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

         In the opinion of management, all adjustments, consisting of normal
recurring accruals, necessary to present fairly the information in the
accompanying financial statements have been included. The results of operations
for such interim periods are not necessarily indicative of the results for the
full year.

         Reclassifications and Use of Estimates

         The preparation of the 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 dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. The Company's most significant financial estimates are based
on remaining proved natural gas and oil reserves. Because there are numerous
uncertainties inherent in the estimation process, actual results could differ
from the estimates. Certain reclassifications of prior year items have been made
to conform with current year presentation.

         Net Income Per Share

         Basic earnings per share ("EPS") is calculated by dividing net income
by the weighted average number of shares of common stock outstanding during the
period. No dilution for any potentially dilutive securities is included in the
Basic EPS calculation. Diluted EPS assumes the conversion of all potentially
dilutive securities and is calculated by dividing net income, as adjusted, by
the weighted average number of shares of common stock outstanding plus all
potentially dilutive securities.

<Table>
<Caption>
                                                                    THREE MONTHS ENDED,             SIX MONTHS ENDED,
                                                                          JUNE 30,                      JUNE 30,
                                                                 -------------------------     -------------------------
                                                                    2001           2000           2001           2000
                                                                 ----------     ----------     ----------     ----------
                                                                           (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                              <C>            <C>            <C>            <C>
Net income .................................................     $   35,855     $   16,328     $   83,199     $   24,777
                                                                 ==========     ==========     ==========     ==========

Weighted average shares outstanding ........................         30,165         29,041         30,064         26,510
Add: dilutive securities
          Options ..........................................            389            361            464            242
                                                                 ----------     ----------     ----------     ----------
Total weighted average shares outstanding and dilutive
  securities ...............................................         30,554         29,402         30,528         26,752
                                                                 ==========     ==========     ==========     ==========

Net income per share .......................................     $     1.19     $     0.56     $     2.77     $     0.93
                                                                 ==========     ==========     ==========     ==========
Net income per share-- assuming dilution ...................     $     1.17     $     0.56     $     2.73     $     0.93
                                                                 ==========     ==========     ==========     ==========
</Table>



                                       -8-

<PAGE>   9


                         THE HOUSTON EXPLORATION COMPANY
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE 2 -- LONG-TERM DEBT AND NOTES


<Table>
<Caption>
                                                        JUNE 30, 2001    DECEMBER 31, 2000
                                                       --------------    -----------------
                                                                (IN THOUSANDS)
<S>                                                    <C>                <C>
SENIOR DEBT:
Bank revolving credit facility, due 2003 .........     $       60,000     $      145,000
SUBORDINATED DEBT:
8 5/8% Senior Subordinated Notes, due 2008 .......            100,000            100,000
                                                       --------------     --------------
    Total long-term debt and notes ...............     $      160,000     $      245,000
                                                       ==============     ==============
</Table>


         The carrying amount of borrowings outstanding under the revolving bank
credit facility approximates fair value as the interest rates are tied to
current market rates. At June 30, 2001, the quoted market value of the Company's
$100 million of 8 5/8% Senior Subordinated Notes was 99.5% of the $100 million
carrying value or $99.5 million.

         Credit Facility

         The Company entered into a revolving bank credit facility (the "Credit
Facility") with a syndicate of lenders led by The Chase Manhattan Bank, National
Association ("Chase"). The Credit Facility, as amended, provides a maximum
commitment of $250 million, subject to borrowing base limitations. At June 30,
2001, the Company's borrowing base was $250 million. Up to $2.0 million of the
borrowing base is available for the issuance of letters of credit to support
performance guarantees. The Credit Facility matures on March 1, 2003 and is
unsecured. At June 30, 2001, $60 million was outstanding under the Credit
Facility and $0.4 million was outstanding in letter of credit obligations.

         Interest is payable on borrowings under the Credit Facility, at the
Company's option, at (i) a fluctuating rate ("Base Rate") equal to the greater
of the Federal Funds rate plus 0.5% or Chase's prime rate, or (ii) a fixed rate
("Fixed Rate") equal to a quoted LIBOR rate plus a variable margin of 0.875% to
1.625%, depending on the amount outstanding under the Credit Facility. Interest
is payable at calendar quarters for Base Rate loans and at the earlier of
maturity or three months from the date of the loan for Fixed Rate loans. In
addition, the Credit Facility requires a commitment fee of: (i) between 0.25%
and 0.375% per annum on the unused portion of the Designated Borrowing Base, and
(ii) an unavailable commitment fee equal to 33% of the commitment fee in (i)
above on the difference between the lesser of the Facility Amount or the
Borrowing Base and the Designated Borrowing Base.

         The Credit Facility contains covenants of the Company, including
certain restrictions on liens and financial covenants which require the Company
to, among other things, maintain (i) an interest coverage ratio of 2.5 to 1.0 of
earnings before interest, taxes and depreciation ("EBITDA") to cash interest;
(ii) a total debt to capitalization ratio of less than 60%, exclusive of
non-cash charges; and (iii) sets a maximum limit of 70% on the amount of natural
gas production the Company may hedge during any 12 month period. In addition to
maintenance of certain financial ratios, cash dividends and/or purchase or
redemption of the Company's stock is restricted as well as the encumbering of
the Company's gas and oil assets or the pledging of the assets as collateral. As
of June 30, 2001, the Company was in compliance with all such covenants.




                                       -9-

<PAGE>   10


                         THE HOUSTON EXPLORATION COMPANY
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

         Senior Subordinated Notes

         On March 2, 1998, the Company issued $100 million of 8 5/8% senior
subordinated notes (the "Notes") due January 1, 2008. The Notes bear interest at
a rate of 8 5/8% per annum with interest payable semi-annually on January 1 and
July 1. The Notes are redeemable at the option of the Company, in whole or in
part, at any time on or after January 1, 2003 at a price equal to 100% of the
principal amount plus accrued and unpaid interest, if any, plus a specified
premium if the Notes are redeemed prior to January 1, 2006. Upon the occurrence
of a change of control (as defined), the Company will be required to offer to
purchase the Notes at a purchase price equal to 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest, if any. The Notes are general
unsecured obligations of the Company and rank subordinate in right of payment to
all existing and future senior debt, including the Credit Facility, and will
rank senior or equal in right of payment to all existing and future subordinated
indebtedness.

NOTE 3 -- COMMITMENTS AND CONTINGENCIES

         The Company is involved from time to time in various claims and
lawsuits incidental to its business. In the opinion of management, the ultimate
liability thereunder, if any, will not have a material adverse affect on the
financial position or results of operations of the Company.

NOTE 4 -- RELATED PARTY TRANSACTIONS

         Restricted Stock Grant to New President and Chief Executive.

         On April 4, 2001, the Company's Board of Directors appointed William G.
Hargett to serve as the Company's President and Chief Executive Officer and
Director. Effective April 4, 2001, the Company entered into an employment
agreement with Mr. Hargett, and pursuant to the employment agreement, Mr.
Hargett received a grant of 10,000 restricted shares of Houston Exploration
common stock with a fair market value of approximately $256,000. The stock is
restricted from transfer and subject to forfeiture in the event Mr. Hargett's
employment is terminated prior to the third anniversary of his employment
agreement and will otherwise vest, be nonforfeitable and freely transferable in
equal one-third increments on each anniversary of the effective date of his
employment agreement. The cost of the restricted stock will be recognized in
earnings as compensation expense over the stock's three year vesting period.

         Termination of Employment Agreements for Retiring Executives.

         Effective March 31, 2001, the Company's President and Chief Executive
Officer and Director, James G. Floyd, and the Senior Vice President -
Exploration and Production, Randall J. Fleming, retired from the Company. Each
had served in their respective positions since the Company's inception in 1986.
In connection with their retirement as executive officers of the Company, each
Messrs. Floyd and Fleming agreed to the termination of their respective
employment agreements. They received lump sum severance payments of $2.3 million
and $1.4 million, respectively.

         KeySpan Joint Venture

         Effective January 1, 1999, the Company entered into a joint exploration
agreement ( the "KeySpan Joint Venture") with KeySpan Exploration & Production,
LLC, a subsidiary of KeySpan, to explore for natural gas and oil over an initial
two year term expiring December 31, 2000. Under the terms of the KeySpan Joint
Venture, the Company contributed all of its then undeveloped offshore acreage to
the joint venture and KeySpan received 45% of Houston Exploration's working
interest in all prospects drilled under the program. KeySpan paid 100% of actual
intangible drilling costs for the joint venture up to a specified maximum and
all additional intangible drilling costs incurred were paid 51.75% by KeySpan
and 48.25% by Houston Exploration. Revenues are shared 55% Houston



                                      -10-

<PAGE>   11


                         THE HOUSTON EXPLORATION COMPANY
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

Exploration and 45% KeySpan. In addition, the Company received reimbursements
from KeySpan for a portion of its general and administrative costs.

         During the initial two-year term of the joint drilling program
beginning January 1, 1999 and ending December 31, 2000, the Company, together
with KeySpan, drilled a total of 21 wells: 17 exploratory and four development,
five of which were unsuccessful. KeySpan spent a total of $82.1 million on
exploration and development, $46.5 million in 2000 and $35.6 million in 1999.
Houston Exploration received a total of $7.3 million in general and
administrative cost reimbursements, $2.5 million in 2000 and $4.8 million in
1999.

         Effective December 31, 2000, the Company and KeySpan agreed not to
renew the primary or exploratory term of the KeySpan Joint Venture. As a result,
KeySpan will not participate in the Company's future offshore exploration
prospects nor will the Company receive any reimbursement from KeySpan for future
general and administrative costs. However, pursuant to the terms of the joint
venture agreement, KeySpan will continue to maintain its working interest in all
wells drilled under the KeySpan Joint Venture. For the year 2001, KeySpan has
agreed to commit approximately $17 million for the development of prospects
successfully drilled during 1999 and 2000. During the three month periods ended
June 30, 2001 and 2000, KeySpan incurred approximately $7.4 million and $1.3
million, respectively, in capital costs under the KeySpan Joint Venture. For the
six month periods ended June 30, 2001 and 2000, KeySpan incurred approximately
$10.1 million and $13.8 million, respectively in capital costs. The Company
received no reimbursements for general and administrative expenses during 2001
compared to $0.6 million per quarter or $1.2 million for the first six months of
2000.

         KeySpan Credit Facility and Conversion.

         On November 30, 1998, the Company entered into a revolving credit
facility with KeySpan (the "KeySpan Facility"), which provided a maximum
commitment of $150 million. The Company borrowed $80 million under the KeySpan
Facility to finance a portion of the November 1998 acquisition of the Mustang
Island A-31 Field. Under the terms of the KeySpan Facility, on March 31, 2000,
the outstanding borrowings of $80 million were converted into 5,085,177 shares
of the Company's common stock at a conversion price of $15.732 per share. As a
result of the conversion, KeySpan's ownership interest in the Company increased
from 64% to 68%. The conversion price was determined based upon the average of
the closing prices of the Company's common stock, rounded to three decimal
places, as reported under "NYSE Composite Transaction Reports" in the Wall
Street Journal during the 20 consecutive trading days ending three trading days
prior to March 31, 2000. The issuance of additional shares of Company common
stock to KeySpan as a result of the conversion of the KeySpan Facility was
approved by the Company's stockholders at the Company's annual meeting held
April 27, 1999. Borrowings under the facility bore interest at LIBOR plus 1.4%
and the Company incurred a quarterly commitment fee of 0.125% on the unused
portion of the maximum commitment. Pursuant to the conversion, the KeySpan
Facility terminated on March 31, 2000. For the three months ended March 31,
2000, the Company incurred $1.5 million in interest and fees to KeySpan.



                                      -11-

<PAGE>   12



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

         The following discussion is intended to assist in an understanding of
the Company's historical financial position and results of operations for the
three months and the six months ended June 30, 2001 and 2000. The Company's
consolidated financial statements and notes thereto included elsewhere in this
report contain detailed information that should be referred to in conjunction
with the following discussion.

GENERAL

         The Houston Exploration Company is an independent natural gas and oil
company engaged in the exploration, development, exploitation and acquisition of
domestic natural gas and oil properties. The Company's offshore properties are
located primarily in the shallow waters of the Gulf of Mexico, and its onshore
properties are located in South Texas, South Louisiana, the Arkoma Basin, East
Texas and the Appalachian Basin in West Virginia. The Company has utilized its
geological and geophysical expertise to grow its reserve base through a
combination of (i) high potential exploratory drilling in the Gulf of Mexico;
(ii) lower risk, high impact exploitation and development drilling onshore; and
(iii) selective opportunistic acquisitions both offshore and onshore.

         At December 31, 2000, net proved reserves were 562 Bcfe with a
discounted present value of cash flows before income taxes ("PV-10%") of $2.8
billion. The Company's focus is natural gas and approximately 94% of its net
proved reserves at December 31, 2000 were natural gas and approximately 77% were
classified as proved developed. The Company operates approximately 85% of its
production.

         As an independent oil and gas producer, the Company's revenue,
profitability and future rate of growth are substantially dependent upon
prevailing prices for natural gas, oil and condensate, which are dependent upon
numerous factors beyond the Company's control, such as economic, political and
regulatory developments and competition from other sources of energy. The energy
markets have historically been very volatile, as evidenced by the recent
volatility of natural gas and oil prices, and there can be no assurance that
commodity prices will not be subject to wide fluctuations in the future. A
substantial or extended decline in natural gas and oil prices could have a
material adverse effect on the Company's financial position, results of
operations, cash flows, quantities of natural gas and oil reserves that may be
economically produced and access to capital.

         The Company uses the full cost method of accounting for its investment
in natural gas and oil properties. Under the full cost method of accounting, all
costs of acquisition, exploration and development of natural gas and oil
reserves are capitalized into a "full cost pool" as incurred, and properties in
the pool are depleted and charged to operations using the unit-of-production
method based on the ratio of current production to total proved natural gas and
oil reserves. To the extent that such capitalized costs (net of accumulated
depreciation, depletion and amortization) less deferred taxes exceed the present
value (using a 10% discount rate) of estimated future net cash flows from proved
natural gas and oil reserves and the lower of cost or fair value of unproved
properties, such excess costs are charged to operations. If a write down is
required, it would result in a charge to earnings but would not have an impact
on cash flows from operating activities. Once incurred, a write down of oil and
gas properties is not reversible at a later date even if oil and gas prices
increase.

         New Accounting Pronouncements.

         In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement, as amended, requires
companies to report the fair market value of derivatives on the balance sheet
and record in income or in accumulated other comprehensive income, as
appropriate, any changes in the fair market value of the derivative. The Company
adopted SFAS No. 133 effective January 1, 2001 and the adoption of SFAS No. 133
has had no effect on net income. At June 30, 2001, the Company recorded an asset
of $30.9 million representing the fair market value of its hedge position and
because the Company's natural gas hedges qualify for hedge accounting and there
is no ineffectiveness, the Company has correspondingly recorded a credit to
accumulated other comprehensive income for $20.1 million representing the fair
market value of its hedge position, net of tax.


                                      -12-

<PAGE>   13



         Recent Developments.

         Increase in Capital Expenditure Budget. At the Company's quarterly
meeting of its Board of Directors held July 25, 2001, the Company's capital
expenditure budget for the year 2001 was increased by $75 million from $225
million to $300 million.

         Appointment of New Executive Officer. Effective July 16, 2001, the
Board of Directors appointed Tracy Price as the Company's Senior Vice President
- Land. Prior to joining Houston Exploration, Mr. Price had been Manager of Land
and Business Development for Newfield Exploration Company since September 1990.
From 1986 to 1990, Mr. Price was Land Manager with Apache Corporation. Prior to
joining Apache Corporation, Mr. Price served as Senior Landman for Challenger
Minerals Inc. from 1983 to 1986 and worked as a landman for Phillips Petroleum
Company from 1981 to 1983. He received his B.B.A. in Petroleum Land Management
from The University of Texas.



                                      -13-

<PAGE>   14



RESULTS OF OPERATIONS

         The following table sets forth the Company's historical natural gas and
oil production data during the periods indicated:


<Table>
<Caption>
                                                            THREE MONTHS ENDED,                SIX MONTHS ENDED,
                                                                  JUNE 30,                          JUNE 30,
                                                       -----------------------------     -----------------------------
                                                           2001             2000             2001             2000
                                                       ------------     ------------     ------------     ------------
<S>                                                    <C>              <C>              <C>              <C>
PRODUCTION:
    Natural gas (MMcf) ...........................           21,295           18,472           43,390           37,816
    Oil (MBbls) ..................................               99               99              211              174
    Total (MMcfe) ................................           21,889           19,066           44,656           38,860

AVERAGE SALES PRICES:
    Natural gas (per Mcf) realized(1) ............     $       4.54     $       2.98     $       5.02     $       2.70
    Natural gas (per Mcf) unhedged ...............             4.48             3.37             5.69             2.88
    Oil (per Bbl) ................................            23.29            24.40            24.51            25.19

OPERATING EXPENSES (PER MCFE):
    Lease operating ..............................     $       0.31     $       0.30     $       0.29     $       0.31
    Severance tax ................................             0.14             0.11             0.17             0.10
    Depreciation, depletion and amortization .....             1.37             1.06             1.35             1.06
    General and administrative, net(2) ...........             0.12             0.13             0.24             0.12
</Table>

----------


(1)      Reflects the effects of hedging.

(2)      For the six months ended June 30, 2001, includes one-time payments in
         connection with the termination of employment contracts for retiring
         executives combined with an increase in incentive compensation
         expenses.


RECENT FINANCIAL AND OPERATING RESULTS

COMPARISON OF THREE MONTHS ENDED JUNE 30, 2000 AND 2001

         Production. Houston Exploration's production increased 15% from 19,066
million cubic feet equivalent (MMcfe) for the three months ended June 30, 2000
to 21,889 MMcfe for the three months ended June 30, 2001. The increase in
production was primarily attributable to newly developed offshore production
brought on-line since the end of the second quarter of 2000 at West Cameron 587,
Matagorda Island 704, Galveston Island 144, 190, 241 and 389, High Island
115/133 and North Padre Island 883. Offshore production increased a total of 37%
or 33 MMcfe/day from 90 MMcfe/day during the second quarter of 2000 to 123
MMcfe/day during the second quarter of 2001. Onshore, total production decreased
slightly by 2%, from 120 MMcfe/day during the second quarter of 2000 to 118
MMcfe/day during the second quarter of 2001. Production at the Company's Charco
Field remained unchanged at an average of 82 MMcfe/day during both the second
quarter of 2000 and 2001.

         Natural Gas and Oil Revenues. Natural gas and oil revenues increased
72% from $57.5 million for the three months ended June 30, 2000 to $98.9 million
for the three months ended June 30, 2001. The increase in revenues was due to
the 52% increase in average realized natural gas prices from $2.98 per Mcf for
the three months ended June 30, 2000 to $4.54 per Mcf for the three months ended
June 30, 2001 combined with the 15% increase in production.

         Natural Gas Prices. As a result of hedging activities, the Company
realized an average gas price of $4.54 per Mcf for the three months ended June
30, 2001, which was 101% of the average unhedged natural gas price of $4.48 that
otherwise would have been received, resulting in natural gas and oil revenues
for the second quarter of 2001 that were $1.3 million higher than the revenues
the Company would have achieved if hedges had not been in place during the
period. For the corresponding three month period of 2000, the Company realized
an average gas


                                      -14-

<PAGE>   15



price of $2.98 per Mcf, which was 88% of the average unhedged natural gas price
of $3.37 per Mcf that otherwise would have been received, resulting in natural
gas and oil revenues that were $7.1 million lower than the revenues the Company
would have achieved if hedges had not been in place during the period.

         Lease Operating Expenses and Severance Tax. Lease operating expenses
increased 19% from $5.7 million for the three months ended June 30, 2000 to $6.8
million for the three months ended June 30, 2001. On an Mcfe basis, lease
operating expenses increased from $0.30 during the second quarter of 2000 to
$0.31 during the second quarter of 2001. The increase in both the lease
operating expenses and lease operating expense per Mcfe during the second
quarter of 2001 is primarily a result of the continued expansion of the
Company's operations combined with higher service costs across the industry.
Severance tax, which is a function of volume and revenues generated from
production onshore and offshore in state waters, increased 43% from $2.1 million
for the three months ended June 30, 2000 to $3.0 million for the three months
ended June 30, 2001. On an Mcfe basis, severance tax increased from $0.11 per
Mcfe, during the second quarter of 2000 to $0.14 per Mcfe, during the second
quarter of 2001. The increase in severance tax expense and severance tax per
Mcfe is due to higher natural gas prices realized during the second quarter of
2001 as compared to prices realized during the corresponding period of 2000
combined with an increase in production from offshore properties in state
waters.

         Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization expense increased 48% from $20.3 million for the three months ended
June 30, 2000 to $30.0 million for the three months ended June 30, 2001.
Depreciation, depletion and amortization expense per Mcfe increased by 29% from
$1.06 for the three months ended June 30, 2000 to $1.37 for the corresponding
three months in 2001. The increase in depreciation, depletion and amortization
expense reflects the 15% increase in production during the second quarter of
2001 as compared to the second quarter of 2000 combined with an increase in the
depletion rate. The higher rate is a result of a higher level of capital
spending during the second quarter of 2001 as compared to the second quarter of
2000 combined with the addition of fewer new reserves since the end of the
second quarter of 2000.

         General and Administrative Expenses. General and administrative
expenses, net of overhead reimbursements received from other working interest
owners, of $0.9 million and $0.3 million, for the three months ended June 30,
2000 and 2001, respectively, remained unchanged at $2.6 million for both the
three month periods ended June 30, 2000 and 2001. Included in reimbursements
received from working interest owners for the second quarter of 2000 were
reimbursements totaling $0.6 million received from KeySpan pursuant to the
KeySpan Joint Venture (see Note 4 -- Related Party Transactions). Effective
December 31, 2000 and pursuant to the expiration of the initial exploratory term
of the KeySpan Joint Venture, the Company no longer receives reimbursement of
general and administrative expenses from KeySpan. The Company capitalized
general and administrative expenses directly related to oil and gas exploration
and development activities of $2.9 million and $2.5 million, respectively, for
the three months ended June 30, 2000 and 2001. On an Mcfe basis, general and
administrative expenses decreased by 8% from $0.13 for the three months ended
June 30, 2000 to $0.12 for the three months ended June 30, 2001. The lower rate
per Mcfe during the second quarter of 2001 reflects the 15% increase in
production for the second quarter of 2001 combined with essentially no increase
in net general and administrative expenses.

         Strategic Review Expenses. During the second quarter of 2001, the
Company paid additional expenses of $1.5 million incurred in connection with the
review of strategic alternatives for the Company which was initiated at the end
of the third quarter of 1999. In September 1999, the Company and KeySpan, the
Company's majority stockholder, announced their intention to review strategic
alternatives for the Company and KeySpan's investment in Houston Exploration.
KeySpan was assessing the role of Houston Exploration within its future
strategic plan, and was considering a full range of strategic transactions
including the possible sale of all or a portion of Houston Exploration. On
February 25, 2000, KeySpan and the Company jointly announced that the review of
strategic alternatives for Houston Exploration was complete. KeySpan announced
that it planned to retain its equity position in Houston Exploration for the
foreseeable future. A reserve for strategic review expenses of $1.8 million was
established by the Company during the first quarter of 2000. At March 31, 2001,
the Company reevaluated the established reserve and felt that a portion of the
reserve was no longer required. As a result of this reevaluation, during the
first quarter of 2001, the Company recognized $1.4 million in other income
relating to the reversal of a portion of the reserve. As noted above, the
reserve was ultimately required. The net effect of the first quarter 2001

                                      -15-

<PAGE>   16



reversal of $1.4 million and the second quarter payment and recognition of $1.5
million in additional expenses is $119,000 in additional strategic review
expenses for the six months ended June 30, 2001.

         Interest Expense. Interest expense, net of capitalized interest,
decreased 80% from $2.5 million for the three months ended June 30, 2000 to $0.5
million for the three months ended June 30, 2000. Aggregate interest expense
decreased 39% from $5.9 million for the three months ended June 30, 2000 to $3.6
million for the corresponding three months of 2001. The decrease in aggregate
interest is due to a combination of a decrease in interest rates combined with
the paydown of $117 million in borrowings under the revolving bank credit
facility since June 30, 2000, of which $85 million was paid during the first six
months of 2001. Capitalized interest decreased 9% from $3.4 million during the
second quarter of 2000 to $3.1 million during the corresponding three months of
2001. The decrease in capitalized interest during the second quarter of 2001 is
due to the decrease in aggregate interest expense offset in part by a higher
level of exploratory drilling during the second quarter of 2001.

         Income Tax Provision. The provision for income taxes increased from
$8.5 million for the three months ended June 30, 2000 to $19.0 million for the
three months ended June 30, 2001. The increase in income tax expense for the
second quarter of 2001 as compared to the second quarter of 2000 is due to the
121% increase in pretax income for the three months ended June 30, 2001 as a
result of higher natural gas prices, an increase in production and a decrease in
interest expense, offset in part by higher operating expenses.

         Operating Income and Net Income. For the three months ended June 30,
2001, the 52% increase in natural gas price combined with the 15% increase in
production, offset in part by a 39% increase in operating expense, caused
operating income to increase 108% from $27.3 million during the second quarter
of 2000 to $56.9 million during the second quarter of 2001. Correspondingly, net
income increased 120% from $16.3 million for the three months ended June 30,
2000 to $35.9 million for the three months ended June 30, 2001 and reflects
lower interest expense and higher taxes.

COMPARISON OF SIX MONTHS ENDED JUNE 30, 2000 AND 2001

         Production. Houston Exploration's production increased 15% from 38,860
MMcfe for the six months ended June 30, 2000 to 44,656 MMcfe for the six months
ended June 30, 2001. The increase in production was primarily attributable to
newly developed offshore production brought on-line since the end of the second
quarter of 2000. Offshore production increased 34% from an average of 93
MMcfe/day during the first half of 2000 to an average of 125 MMcfe/day during
the first half of 2001. This increase is primarily attributable to newly
developed production at West Cameron 587, Matagorda Island 704, Galveston Island
144, 190, 241 and 389, High Island 115/133 and North Padre Island 883. Onshore,
daily production rates remained unchanged, increasing only slightly from an
average of 121 MMcfe/day during the first half of 2000 to an average of 122
MMcfe/day during the first half of 2001.

         Natural Gas and Oil Revenues. Natural gas and oil revenues increased
109% from $106.5 million for the six months ended June 30, 2000 to $222.9
million for the six months ended June 30, 2001 as a result of a 86% increase in
average realized natural gas prices, from $2.70 per Mcf in the six months ended
June 30, 2000 to $5.02 per Mcf in the six months ended June 30, 2001, combined
with a 15% increase in production for the same period.

         Natural Gas Prices. As a result of hedging activities, the Company
realized an average gas price of $5.02 per Mcf for the six months ended June 30,
2001, which was 88% of the average unhedged natural gas price of $5.69 that
otherwise would have been received, resulting in natural gas and oil revenues
for the six months ended June 30, 2001 that were $29.2 million lower than the
revenues the Company would have achieved if hedges had not been in place during
the period. For the corresponding six month period during 2000, the Company
realized an average gas price of $2.70 per Mcf, which was 94% of the average
unhedged natural gas price of $2.88 per Mcf that otherwise would have been
received, resulting in natural gas and oil revenues that were $6.8 million lower
than the revenues the Company would have achieved if hedges had not been in
place during the period.

         Lease Operating Expenses and Severance Tax. Lease operating expenses
increased 7% from $12.1 million for the six months ended June 30, 2000 to $13.0
million for the six months ended June 30, 2001. On an Mcfe basis, lease
operating expenses decreased from $0.31 for the six first months of 2000 to
$0.29 for the first six months of

                                      -16-

<PAGE>   17



2001. The increase in lease operating expenses for the six months ended June 30,
2001 is attributable to the continued expansion of the Company's operations
combined with an increase in service costs across the industry. The decrease in
lease operating expenses per Mcfe reflects the 15% increase in production volume
for the first half of 2001. Severance tax, which is a function of volume and
revenues generated from onshore production as well as offshore production in
state waters, increased from $3.7 million for the six months ended June 30, 2000
to $7.7 million for the six months ended June 30, 2001. On an Mcfe basis,
severance tax increased from $0.10 per Mcfe for the six month periods ended June
30, 2000 to $0.17 per Mcfe for the corresponding period of 2001. The increase in
severance tax expense and the rate per Mcfe reflects the higher natural gas
prices realized during the first six months of 2001 as compared to the first six
months of 2000 combined with newly developed offshore production located in
state waters brought on-line since the end of the second quarter of 2000.

         Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization expense increased 47% from $41.0 million for the six months ended
June 30, 2000 to $60.3 million for the six months ended June 30, 2001.
Depreciation, depletion and amortization expense per Mcfe increased 27% from
$1.06 for the six months ended June 30, 2000 to $1.35 for the six months ended
June 30, 2001. The increase in depreciation, depletion and amortization expense
was a result of higher production volumes combined with a higher depletion rate.
The higher depletion rate is a result of a higher level of capital spending
during first six months of 2001 as compared to the corresponding period of 2000
combined with the addition of fewer new reserves since the end of the second
quarter of 2000.

         General and Administrative Expenses. General and administrative
expenses, net of overhead reimbursements received from other working interest
owners, of $1.7 million and $0.6 million for the six months ended June 30, 2000
and 2001, respectively, increased 121% from $4.8 million for the six months
ended June 30, 2000 to $10.6 million for the six months ended June 30, 2001.
Included in reimbursements received from working interest owners for the six
months ended June 30, 2000 were reimbursements totaling $1.2 million received
from KeySpan pursuant to the KeySpan Joint Venture (see Note 4 -- Related Party
Transactions). Overhead reimbursements were terminated December 31, 2000 with
the expiration of the initial exploratory term of the KeySpan Joint Venture, and
as a result the Company no longer receives reimbursement of general and
administrative expenses from KeySpan. The Company capitalized general and
administrative expenses directly related to oil and gas exploration and
development activities of $5.2 million and $7.4 million, respectively, for the
six months ended June 30, 2000 and 2001. The increase in capitalized general and
administrative expenses is a result of higher aggregate general and
administrative expenses during the first six months of 2001 as compared to the
corresponding period of 2000. Aggregate general and administrative expenses are
higher during the first half of 2001 as a result of: (i) one-time payments
totaling $3.7 million in connection with the retirement of executive officers
and the termination of their employment contracts during the first quarter of
2001; (ii) expansion of the Company's workforce; and (iii) an increase in
incentive compensation and benefit related expenses.

         On an Mcfe basis, general and administrative expenses increased 100%
from $0.12 for the six months ended June 30, 2000 to $0.24 for the six months
ended June 30, 2001. Excluding the one-time payments for retiring executives
totaling $3.7 million, general and administrative expenses on a per Mcfe basis
would have increased 25% from $0.12 for the six months ended June 30, 2000 to
$0.15 for the six months ended June 30, 2001. The higher rate per Mcfe during
the first six months of 2001 reflects the increase in aggregate general and
administrative expenses caused by the effects of the termination of
reimbursements received pursuant to the KeySpan Joint Venture which were $0.6
million per quarter during 2000 or $1.2 million for the first six months of 2000
combined with the expansion of the Company's workforce and higher incentive
compensation and benefit related expenses.

         Strategic Review Expenses. During the first six months of 2001, the
Company incurred an additional $119,000 in strategic review expenses which
compares to $1.8 million in expenses that were recognized during the first six
months of 2000. In September 1999, the Company and KeySpan, the Company's
majority stockholder, announced their intention to review strategic alternatives
for the Company and KeySpan's investment in Houston Exploration. KeySpan was
assessing the role of Houston Exploration within its future strategic plan, and
was considering a full range of strategic transactions including the possible
sale of all or a portion of Houston Exploration. On February 25, 2000, KeySpan
and the Company jointly announced that the review of strategic alternatives for
Houston Exploration was complete. KeySpan also announced that it planned to
retain its equity position in Houston Exploration for the foreseeable future.


                                      -17-

<PAGE>   18



         Interest Expense, Net. Interest expense, net of capitalized interest,
decreased 62% from $6.5 million for the six months ended June 30, 2000 to $2.5
million for the six ended June 30, 2001. Aggregate interest expense decreased
34% from $13.2 million for the six months ended June 30, 2000 to $8.7 million
during the corresponding period of 2001. The decrease in aggregate interest is
due to a combination of a decrease in interest rates combined with (i) the
paydown of $117 million in borrowings under the revolving bank credit facility
since June 30, 2000, of which $85 million was paid during the first six months
of 2001; and (ii) the March 31, 2000 conversion of $80 million in outstanding
borrowings under a revolving credit facility with KeySpan into shares of common
stock of the Company (see Note 4 -- Related Party Transactions -- KeySpan Credit
Facility and Conversion). Capitalized interest decreased 7% from $6.7 million
for the six months ended June 30, 2000 to $6.2 million for the six months ended
June 30, 2001 and reflects the decrease in aggregate interest expense offset in
part by a higher level of exploratory drilling during the first six months of
2001.

         Income Tax Provision. The provision for income taxes increased from
$12.7 million for the first six months of 2000 to $46.3 million for the first
six months of 2001 due to the 246% increase in pretax income during the first
half of 2001 from $37.4 million for the six months ended June 30, 2000 to $129.5
million for the first six months of 2001 as a result of the combination of
higher natural gas prices, an increased in production, a decrease in interest
expense offset in part by higher operating expenses.

         Operating Income and Net Income. For the six months ended June 30,
2001, the 86% increase in natural gas prices combined with the 15% increase in
production, offset in part by a 49% increase in operating expenses, caused
operating income to increase 189% from $45.7 million during the first six months
of 2000 to $132.1 million during the first six months of 2001. Correspondingly,
net income increased 235% from $24.8 million for the six months ended June 30,
2000 to $83.2 million for the six months ended June 30, 2001 and reflects lower
interest expense and higher taxes.

LIQUIDITY AND CAPITAL RESOURCES

         The Company has historically funded its operations, acquisitions,
capital expenditures and working capital requirements from cash flows from
operations, equity capital from KeySpan as well as public sources, public debt
and bank borrowings. On March 31, 2000, the Company converted $80 million in
outstanding borrowings under a revolving credit facility established in November
1998 with KeySpan (the "KeySpan Facility") into 5,085,177 shares of common stock
of the Company at a conversion price of $15.732 per share. The KeySpan Facility
was terminated at conversion and as a result of the issuance of Company common
stock to KeySpan in connection with the conversion, KeySpan's ownership interest
in the Company has increased from 64% at December 31, 1999 to 68% as of June 30,
2001.

         Cash Flows From Operations. As of June 30, 2001, the Company had
working capital of $15.4 million and $189.6 million of borrowing capacity
available under its revolving bank credit facility. Net cash provided by
operating activities for the six months ended June 30, 2001 was $218.1 million
compared to $56.1 million for the six months ended June 30, 2000. The increase
in net cash provided by operating activities is due to an increase in net income
caused by substantially higher natural gas prices and an increase in production
combined with an increase in working capital. The increase in working capital
during the first six months of 2001 is primarily related to the timing of cash
receipts and payments. Receivables are higher due to the increase in natural gas
revenues caused by an increase in both natural gas price and production volume,
and payables are higher due to an increase in drilling activity combined with an
increase in operating costs. The Company's cash position decreased during the
first six months of 2001 by a net paydown of borrowings under its revolving bank
credit facility of $85 million. In addition, cash increased by $8.1 million
during the first six months of 2001 due to proceeds received from the issuance
of common stock as a result of the exercise of stock options. Funds used in
investing activities consisted of $147 million for investments in property and
equipment. As a result of these activities, cash and cash equivalents decreased
$5.7 million from $9.7 million at December 31, 2000 to $4.0 million at June 30,
2001.

         Capital Expenditures. During the first half of 2001, the Company
invested a total of $146.9 million in natural gas and oil properties. This
included $49.7 million for exploration, $73 million for development drilling,
workovers and construction of platforms and pipelines, $24.2 million for
leasehold and leasehold acquisition costs.


                                      -18-

<PAGE>   19



         At the Company's quarterly meeting of its Board of Directors held on
July 25, 2001, the Company's capital expenditure budget for the year 2001 was
increased from $225 million to $300 million. The increase allows for up to
$153.1 million to be spent on oil and gas capital expenditures during the second
half of 2001. The Company does not include property acquisition costs in its
capital expenditure budget as the size and timing of capital requirements for
property acquisitions are inherently unpredictable. The capital expenditure
budget includes exploration and development costs associated with projects in
progress or planned for the current year and amounts are contingent upon
drilling success. No significant abandonment or dismantlement costs are
anticipated in 2001. The Company will continue to evaluate its capital spending
plans throughout the year. Actual levels of capital expenditures may vary
significantly due to a variety of factors, including drilling results, natural
gas prices, industry conditions and outlook and future acquisitions of
properties. The Company believes cash flows from operations and borrowings under
its revolving bank credit facility will be sufficient to fund these
expenditures. The Company intends to continue to selectively seek acquisition
opportunities for proved reserves with substantial exploration and development
potential both offshore and onshore, although there can be no assurance that the
Company will be able to identify and make acquisitions of proved reserves on
terms it considers favorable.

         Shelf Offering. On May 20, 2000, the Company filed a "shelf"
registration with the Securities and Exchange Commission to offer and sell in
one or more offerings up to a total offering amount of $250 million in
securities which could include shares of the Company's common stock, shares of
preferred stock or unsecured debt securities or a combination thereof. Depending
on market conditions and the Company's capital needs, the Company may utilize
the shelf registration in order to raise capital. The Company would use the net
proceeds received from the sale of any securities for the repayment of debt
and/or to fund an acquisition. The Company may not be able to consummate any
offering on acceptable terms.

         Capital Structure

         Revolving Bank Credit Facility. The Company entered into a revolving
bank credit facility (the "Credit Facility") with a syndicate of lenders led by
The Chase Manhattan Bank, National Association. The Credit Facility, as amended,
provides a maximum commitment of $250 million, subject to borrowing base
limitations. At June 30, 2001, the borrowing base was $250 million. Up to $2.0
million of the borrowing base is available for the issuance of letters of credit
to support performance guarantees. The Credit Facility matures on March 1, 2003
and is unsecured. At June 30, 2001, $60 million was outstanding under the Credit
Facility and $0.4 million was outstanding in letter of credit obligations.

         Senior Subordinated Notes. On March 2, 1998, the Company issued $100
million of 8 5/8% Senior Subordinated Notes (the "Notes") due January 1, 2008.
The Notes bear interest at a rate of 8 5/8% per annum with interest payable
semi-annually on January 1 and July 1. The Notes are redeemable at the option of
the Company, in whole or in part, at any time on or after January 1, 2003 at a
price equal to 100% of the principal amount plus accrued and unpaid interest, if
any, plus a specified premium if the Notes are redeemed prior to January 1,
2006. Upon the occurrence of a change of control (as defined in the indenture
governing the Notes), the Company will be required to offer to purchase the
Notes at a purchase price equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest, if any. The Notes are general
unsecured obligations of the Company and rank subordinate in right of payment to
all existing and future senior debt, including the Credit Facility, and rank
senior or equal in right of payment to all existing and future subordinated
indebtedness.



                                      -19-

<PAGE>   20



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Natural Gas Hedging. The Company utilizes derivative commodity
instruments to hedge future sales prices on a portion of its natural gas
production to achieve a more predictable cash flow, as well as to reduce its
exposure to adverse price fluctuations of natural gas. While the use of these
hedging arrangements limits the downside risk of adverse price movements, the
use also limits future revenues from possible favorable price movements. The use
of hedging transactions also involves the risk that the counterparties are
unable to meet the financial terms of such transactions. Hedging instruments
used are swaps, collars and options, and are generally placed with major
financial institutions that the Company believes are minimal credit risks. The
Company accounts for these transactions as hedging activities and, accordingly,
gains or losses are included in natural gas and oil revenues in the period the
hedged production occurs. If any ineffectiveness occurs, amounts will be
recorded directly to other income or expense.

         At June 30, 2001, Company's hedge position had a positive fair market
value of approximately $30.9 million, representing hedged production for the
remaining months of 2001 of 160,000 MMBtu/day at ceilings between $6.11 - $6.37
and a floor of $4.00 and hedged production for all months of 2002 of 40,000
MMBtu/day at a ceiling of $7.00 and a floor of $4.00. Subsequent to June 30,
2001, the Company hedged an additional 40,000 MMBtu/day for the months September
2001 through December 2001 and an additional 120,000 MMBtu/day for all months of
2002. The table below reflects the Company's position as of July 30, 2001 and
includes all hedges subsequent to June 30, 2001. Natural gas production during
the month of June 2001 was 7,145 MMcf (7,385 MMMbtu) or 238 MMcf/day (246
MMMBtu/day).


<Table>
<Caption>
                                                                       COLLARS
                                                   -------------------------------------------------
                                                                                NYMEX
                                                    VOLUME              EFFECTIVE CONTRACT PRICE
               PERIOD                              (MMMBTU)         AVERAGE FLOOR    AVERAGE CEILING
               ------                              --------         -------------    ---------------
<S>                                                <C>              <C>              <C>
July 2001...................................        4,960                4.000              6.110
August 2001.................................        4,960                4.000              6.110
September 2001..............................        6,000                3.840              5.654
October 2001................................        6,200                3.840              5.654
November 2001...............................        6,000                3.840              5.863
December 2001...............................        6,200                3.840              5.863
January 2002................................        4,960                3.523              5.172
February 2002...............................        4,480                3.523              5.172
March 2002..................................        4,960                3.523              5.172
April 2002..................................        4,800                3.523              5.172
May 2002....................................        4,960                3.523              5.172
June 2002...................................        4,800                3.523              5.172
July 2002...................................        4,960                3.523              5.172
August 2002.................................        4,960                3.523              5.172
September 2002..............................        4,800                3.523              5.172
October 2002................................        4,960                3.523              5.172
November 2002...............................        4,800                3.523              5.172
December 2002...............................        4,960                3.523              5.172
</Table>

         These hedging transactions are settled based upon the average of the
reported settlement prices on the New York Mercantile Exchange (the "NYMEX") for
the final trading day of the month (the "settlement price").

         With respect to any particular swap transaction, the counterparty is
required to make a payment to the Company in the event that the settlement price
for any settlement period is less than the swap price for such transaction, and
the Company is required to make payment to the counterparty in the event that
the settlement price for any settlement period is greater than the swap price
for such transaction. For any particular collar transaction, the counterparty is
required to make a payment to the Company if the settlement price for any
settlement period is below the floor price for such transaction, and the Company
is required to make payment to the counterparty if the settlement price for any
settlement period is above the ceiling price for such transaction. The Company
is not required to make or receive any payment in connection with a collar
transaction if the settlement price is between the floor and the ceiling. For
option contracts, the Company has the option, but not the obligation, to buy
contracts at the strike price up to the day before the last trading day for that
NYMEX contract.



                                      -20-

<PAGE>   21



PART II. OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

         (c)      Recent Sales of Unregistered Securities

         On March 31, 2000, the Company issued 5,085,177 shares of its common
stock to THEC Holdings, Inc., an indirect wholly owned subsidiary of KeySpan
Corporation, the Company's majority stockholder, as a result of the conversion
of the $80 million principal amount outstanding on March 31, 2000 under the
revolving credit facility entered into by the Company and KeySpan on November
30, 1998 (the "KeySpan Facility"). The number of shares issued was based on a
conversion price of $15.732 per share, which was determined based upon the
average of the closing prices of the Company's common stock, rounded to three
decimal places, as reported under "NYSE Composite Transaction Reports" in the
Wall Street Journal during the 20 consecutive trading days ending three trading
days prior to March 31, 2000. The conversion of the KeySpan Facility was
approved by the Company's stockholders at the Company's annual meeting held
April 27, 1999. The 5,085,177 shares of the Company's common stock issued to
THEC Holdings, Inc. are exempt from registration pursuant to Section 3(a)(9) of
the Securities Act of 1933, as amended.

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

         On May 15, 2001, the company held its annual meeting of shareholders.
All matters brought for a vote before the shareholders as listed in the
Company's proxy statement were approved as follows:

         1.       The election of the following nine Directors of the Company to
                  serve until the Company's next annual meeting:

<Table>
<Caption>
     DIRECTOR                    VOTES FOR         VOTES WITHHELD
     --------                    ---------         --------------
<S>                             <C>                <C>
Robert B. Catell                27,220,913              862,523
William G. Hargett              26,946,091            1,137,345
Gordon F. Ahalt                 28,054,671               28,765
David G. Elkins                 28,054,946               28,490
Russell D. Gordy                28,054,946               28,490
Gerald Luterman                 27,254,122              829,314
Craig G. Matthews               27,256,822              826,614
H. Neil Nichols                 27,259,422              824,014
James Q. Riordan                28,054,271               29,165
Donald C. Vaughn                27,955,526              127,910
</Table>

         2.       The appointment of Arthur Andersen LLP as the Company's
                  independent public accountants for the fiscal year ending
                  December 31, 2001.

<Table>
<Caption>
     VOTES FOR          VOTES AGAINST            ABSTAINED
    ----------          -------------         --------------
<S>                     <C>                   <C>
    28,078,980                  4,048                    408
</Table>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits:

                  None.

         (b)      Reports on Form 8-K:

                  None.



                                      -21-

<PAGE>   22



                                   SIGNATURES

         Pursuant to the requirements 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.


                                    THE HOUSTON EXPLORATION COMPANY

                                    By: /s/ William G. Hargett
                                       ----------------------------------------
                                                 William G. Hargett
Date: July 30, 2001                      President and Chief Executive Officer



                                    By: /s/ James F. Westmoreland
                                       ----------------------------------------
                                               James F. Westmoreland
Date: July 30, 2001                   Vice President, Chief Accounting Officer,
                                         Comptroller, Secretary and Principal
                                                Accounting Officer


                                      -22-