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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, 1998

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

Commission file number 333-52263

MICHAEL PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)

Texas 76-0510239
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

13101 Northwest Freeway
Suite 320
Houston, Texas 77040
(Address of principal executive offices including zip code)

(713) 895-0909
(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 [ ] No [X*]

* The registrant became subject to the reporting requirements of Section 13 of
the Securities Exchange Act of 1934 (pursuant to Section 15(d) thereunder) on
July 22, 1998.

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

As of August 7, 1998, there were 10,000 shares of the Registrant's Common
Stock, par value $0.10 per share, outstanding.

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MICHAEL PETROLEUM CORPORATION

BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)

JUNE 30, DECEMBER 31,
1998 1997
--------- ------------
(UNAUDITED)

ASSETS

Current assets:
Cash and cash equivalents $ 5,330 $ 782
Accounts receivable 7,944 4,472
Prepaid expenses and other 8,527 1
--------- ---------
Total current assets 21,801 5,255
Oil and gas properties, (successful efforts method) at cost 132,426 34,977
Less: accumulated depreciation, depletion and amortization (11,465) (6,966)
--------- ---------
120,961 28,011
Other assets 5,794 351
--------- ---------
TOTAL ASSETS $ 148,556 $ 33,617
========= =========

LIABILITIES AND STOCKHOLDER'S DEFICIT

Current liabilities:
Accounts payable $ 6,386 $ 5,502
Accrued liabilities 11,464 298
Current portion of long-term debt 87 8,056
--------- ---------
Total current liabilities 17,937 13,856
Long-term debt 132,775 19,885
Deferred income taxes 1,070 1,791
--------- ---------
Total liabilities 151,782 35,532

Commitments and contingencies

Stockholder's deficit:
Preferred stock ($.10 par value, 50,000,000 shares
authorized, no shares issued)
Common Stock ($.10 par value, 100,000,000 shares
authorized, 10,000 shares issued) 1 1
Additional paid-in capital 610 610
Accumulated deficit (3,837) (2,526)
--------- ---------
Total stockholder's deficit (3,226) (1,915)
--------- ---------

TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT $ 148,556 $ 33,617
========= =========

The accompanying notes are an integral part of the financial statements.

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MICHAEL PETROLEUM CORPORATION

STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)

THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------

Revenues:
Oil and natural gas sales $ 6,437 $ 1,798 $ 9,697 $ 3,648

Operating expenses:
Production costs 1,125 491 1,600 917
Exploration 79 -- 79 24
Depreciation, depletion and
amortization 3,150 725 4,499 1,711
General and administrative 256 137 517 300
-------- -------- -------- --------
4,610 1,353 6,695 2,952
-------- -------- -------- --------

Operating income 1,827 445 3,002 696
-------- -------- -------- --------

Other income (expenses):
Interest income and other 198 11 214 25
Interest expense (3,527) (405) (4,417) (775)
-------- -------- -------- --------

(3,329) (394) (4,203) (750)
-------- -------- -------- --------

(Loss) income before income taxes and
extraordinary item (1,502) 51 (1,201) (54)
Benefit (provision) for income taxes before
extraordinary item 526 (18) 421 19
-------- -------- -------- --------

(Loss) income before extraordinary item (976) 33 (780) (35)
-------- -------- -------- --------

Extraordinary item - extinguishment of T.E.P
Financing, net of tax of $285 (531) -- (531) --
======== ======== ======== ========
Net (loss) income $ (1,507) $ 33 $ (1,311) $ (35)
======== ======== ======== ========

The accompanying notes are an integral part of the financial statements.

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MICHAEL PETROLEUM CORPORATION

STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)

SIX MONTHS
ENDED JUNE 30,
------------------------
1998 1997
--------- ---------

Cash flows from operating activities:
Net loss $ (1,311) $ (35)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation, depletion and amortization 4,499 1,711
Gain on sale of oil and natural gas properties (50) --
Deferred income taxes (421) (19)
Extraordinary item - extinguishment of T.E.P
Financing, net of taxes 470 --
Amortization of bond issuance costs 213 --
Amortization of deferred loss on early
termination of commodity swap agreement 245 --
Amortization of discount of debt 117 66
Changes in assets and liabilities:
Accounts receivable (3,321) 71
Prepaid expenses and other (2,051) 55
Accounts payable 884 724
Accrued liabilities 3,680 (155)
Other 35 --
--------- ---------
Net cash provided by operating activities 2,989 2,418
--------- ---------
Cash flows from investing activities:
Additions to oil and natural gas properties (87,591) (4,860)
Prepaid natural gas contract as consideration
for non-producing oil and gas properties (9,994) --
--------- ---------
Net cash used in investing activities (97,585) (4,860)
--------- ---------

Cash flows from financing activities:
Proceeds from long-term debt 133,602 4,495
Payments on long-term debt (29,295) (1,427)
Additions to deferred loan costs (5,163) (25)
--------- ---------
Net cash provided by financing activities 99,144 3,043
--------- ---------

Net increase in cash and cash equivalents 4,548 601

Cash and cash equivalents, beginning of period 782 1,182
========= =========
Cash and cash equivalents, end of period $ 5,330 $ 1,783
========= =========

Non-cash transaction:
Non-producing properties acquired through
delivery of natural gas $ 7,485 --

The accompanying notes are an integral part of the financial statements.

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MICHAEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

Michael Petroleum Corporation, a Texas corporation, (the "Company") is a
wholly owned subsidiary of Michael Holdings, Inc., a Texas corporation. The
financial statements included herein have been prepared by the Company are
unaudited, condensed and do not contain all information required by
generally accepted accounting principles to be included in a full set of
financial statements. In the opinion of management, all material
adjustments, consisting of normal recurring adjustments, necessary to
present fairly the results of operations have been included. Due to
seasonal fluctuations, the results of operations for the interim periods
are not necessarily indicative of operating results for the entire fiscal
year. The financial statements in this Form 10-Q should be read in
conjunction with the audited financial statements and notes thereto
included in the Company's Registration Statement on Form S-4, as amended
(Registration No. 333-52263) (the "Registration Statement").

2. OIL AND GAS PROPERTIES

The Company recorded impairment losses of $705,000 and $238,000 for the
six months ended June 30, 1998 and 1997, respectively, which is included in
DD&A.

3. LONG-TERM DEBT

On April 2, 1998, the Company completed a debt offering under Rule 144A of
$135 million of 11 1/2% Senior Notes, due 2005 (the "Series A Notes"). Net
proceeds from the sale were used to prepay outstanding borrowings under a
previous credit agreement (the "T.E.P. Financing") of approximately $28
million. Under the T.E.P. Financing, a 30% net profits interest in all of
the Company's oil and natural gas properties was granted to the lender. In
addition, a warrant to purchase up to 5% of the Company's common stock was
granted to the lender. The value of the net profits interest and the
warrant was recorded as a discount to the T.E.P. Financing. On April 2,
1998, the T.E.P. Financing Agreement was extinguished, and the unamortized
balance of the notes payable discount, the deferred debt issuance costs
and certain fees incurred at closing were written off and reflected in the
income statement as an extraordinary loss, net of taxes.

4. PRO FORMA RESULTS

In March and April 1998, the Company acquired oil and gas properties for
approximately $89.3 million. Accordingly, revenues and expenses from the
properties have been included in the Company's statement of operations
from the date of purchase. The unaudited pro forma results of the
Company's operations, assuming the properties were acquired as of January
1 of each respective year is as follows (in thousands):

SIX MONTHS
ENDED JUNE 30,
----------------------------
1998 1997
-------- --------

Pro Forma (Unaudited):
Revenues $ 13,592 $ 14,242
Net loss before extraordinary item (1,444) (1,217)
Net loss (1,975) (1,217)

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5. SUBSEQUENT EVENTS

On July 22, 1998, the Securities and Exchange Commission ("SEC") declared
the Company's Registration Statement effective pursuant to Section 8(a) of
the Securities Act of 1933, as amended (the "Securities Act"). The
Company's Series A Notes were offered and sold in a transaction exempt from
registration under the Securities Act, subject to contractual registration
rights (see Note 3). The Series A Notes can be exchanged for Series B Notes
(which are the subject of the Registration Statement), the terms of which
are substantially identical to the terms of the Series A Notes. The
exchange offer expires August 31, 1998, unless extended.

On July 31, 1998, the Company acquired all of the capital stock of two
companies owning non-operating working interests in 132 productive wells
on approximately 17,000 gross (500 net) acres primarily in the Lobo Trend
located in Webb and Zapata Counties in Texas for $2.6 million. The working
interest percentages range from 0.5% to 15%, with an average working
interest of approximately 2.5% and an average net revenue interest of
approximately 2.0%.

On July 1, 1998, the shareholders of Michael Holdings, Inc. ("MHI"), the
parent company and owner of all of the outstanding common stock of the
Company, approved the Michael Holdings, Inc. 1998 Stock Option Plan. The
Stock Option Plan will be available for grant to substantially all
employees and directors of MHI and the Company. The Stock Option Plan will
be administered by the Compensation Committee of the Board of Directors of
MHI. A maximum of 194,000 shares of MHI common stock is available for grant
under the Stock Option Plan. Effective August 1, 1998, the Company granted,
at fair market value, a total of 69,650 shares to nineteen employees and
directors of MHI and the Company.

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

The following is management's discussion and analysis of certain
significant factors that have affected certain aspects of the Company's
financial position and operating results during the periods included in the
accompanying unaudited condensed financial statements. For supplemental
information, it is suggested that this Item 2. "Management's Discussion and
Analysis of Financial Condition and Results of Operations" be read in
conjunction with the corresponding section included in the Company's Amendment
No. 2 to Form S-4 (the "Form S-4") filed with the Securities and Exchange
Commission on July 20, 1998. The Form S-4 includes the Company's Audited
Financial Statements and the Notes thereto for certain prior periods, as well as
other relevant financial and operating information.

GENERAL

The Company is an independent energy company engaged in the acquisition,
development and production of oil and natural gas, principally in the Lobo Trend
of South Texas. The Company began operations in 1983, and, since its inception,
has increased its reserves and production as a result of acquisitions and
development of its oil and natural gas properties. In August 1996, the Company
consummated an acquisition of approximately 21,000 gross acres (12,700 net
acres) in the Lobo Trend for a purchase price of approximately $15.3 million. In
1997, the Company participated in the drilling of 19 natural gas wells,
completing 15 capable of commercial production (a success rate of 79%). In March
and April 1998, the Company completed acquisitions adding approximately 51,000
gross acres (48,400 net acres) in the Lobo Trend for an aggregate purchase price
of approximately $89.3 million. For the six months ended June 30, 1998, the
Company participated in the drilling of 11 natural gas wells, two of which were
completed as producers.

From July 1, 1998 through August 12, 1998, the Company completed six
natural gas wells and participated in the drilling of three additional wells.

The Company utilizes the "successful efforts" method of accounting for its
oil and natural gas activities as described in Note 1 of the Notes to the
Financial Statements in the Form S-4.

RESULTS OF OPERATIONS

The following table summarizes production volumes, average sale prices
and operating revenues for the Company's oil and natural gas operations for the
three and six-month periods ended June 30, 1998 and 1997:

THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30,
----------------- -----------------
1998 1997 1998 1997
------ ------ ------ ------

Production volumes:
Oil and condensate (MBlbs) 23 13 35 17
Natural gas (Mmcf) 2,909 763 4,397 1,488

Average sales prices:
Oil and condensate (per Bbl) $11.22 $18.16 $12.39 $18.85
Natural gas (per Mcf) 2.12 2.05 2.11 2.24

Operating revenues ($ 000's):
Oil and condensate $ 261 $ 230 $ 437 $ 314
Natural gas 6,176 1,568 9,260 3,334
------ ------ ------ ------
Total $6,437 $1,798 $9,697 $3,648
====== ====== ====== ======

COMPARISON OF THREE MONTH PERIODS ENDED JUNE 30, 1998 AND 1997

Oil and natural gas revenues for the three months ended June 30, 1998
increased 258% to $6.44 million from $1.80 million for the three months ended
June 30, 1997. Production volumes for natural gas for the second quarter ended
June 30, 1998 increased 281% to 2,909 MMcf from 763 MMcf for the second quarter
of 1997. Average natural gas prices increased 3% to $2.12 per Mcf for 1998 from
$2.05 per Mcf for 1997. The increase in

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natural gas production was a result of the Company's 1998 acquisitions and new
wells online resulting from the Company's drilling program.

Oil and natural gas production costs for the three months ended June 30,
1998 increased 129% to $1.13 million from $491,000 for the three months ended
June 30, 1997 primarily due to the increase in production. However, production
costs per equivalent unit decreased to $.37 per Mcfe for the three-months ended
June 30, 1998 from $.59 per Mcfe for the three-months June 30, 1997. The
decrease on an equivalent basis was due to a reduction in workover costs and
increased efficiencies in the Lobo Trend properties as a result of increased
production and acquisition activities.

Depreciation, depletion and amortization ("DD&A") expense for the three
months ended June 30, 1998 increased 334% to $3.15 million from $725,000 for the
same period in 1997. The increase was due to increased production during 1998
resulting from the acquisitions and the new wells completed in 1998. In
addition, a $705,000 impairment charge was taken in the three-months ended June
30, 1998 with no corresponding charge in the same period in 1997.

General and administrative expenses for the three months ended June 30,
1998 increased 87% to $256,000 from $137,000 for the three months ended June 30,
1997 due to the salaries and related benefits for six new employees, plus
increases in legal and professional fees in connection with the Senior Notes
offerings.

Interest expense, net of capitalized interest, for the three months ended
June 30, 1998 increased 771% to $3.53 million from $405,000 for the same period
in 1997. The increase was due to the higher level of outstanding debt for the
three months ended June 30, 1998 compared to the same period of 1997. This was
primarily due to the issuance of the Series A Notes during the three-months
ended June 30, 1998.

The extraordinary loss of $531,000 (net of the income tax benefit of
$285,000) for the three months ended June 30, 1998 was due to an extinguishment
of the T.E.P. Financing. No extraordinary items occurred in the three months
ended June 30, 1997.

The net loss for the three months ended June 30, 1998 was $1.51 million
compared to net income of $33,000 for the three months ended June 30, 1997,
primarily as a result of the factors discussed above.

COMPARISON OF SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1997

Oil and natural gas revenues for the six months ended June 30, 1998
increased 166% to $9.70 million from $3.65 million for the six months ended June
30, 1997. Production volumes for natural gas for the six months ended June 30,
1998 increased 195% to 4,397 MMcf from 1,488 MMcf for the first six months of
1997. Average natural gas prices decreased 6% to $2.11 per Mcf for six months
ended June 30, 1998 from $2.24 per Mcf for the same period in 1997. The increase
in natural gas production was due to the Company's 1998 acquisitions and new
wells online resulting from the Company's drilling program.

Oil and natural gas production costs for the six months ended June 30, 1998
increased 75% to $1.6 million from $917,000 for the six months ended June 30,
1997 primarily due to the increase in production and acquisition activities.
However, production costs per equivalent unit decreased to $.35 per Mcfe for the
six months ended June 30, 1998 from $.58 per Mcfe for the six months ended June
30, 1997. The decrease on an equivalent basis was due to a reduction in workover
costs and increased efficiencies in the Lobo Trend properties as a result of
increased production.

Depreciation, depletion and amortization ("DD&A") expense for the six
months ended June 30, 1998 increased 163% to $4.50 million from $1.71 million
for the same period in 1997. The increase was due to increased production during
1998 and acquisition activities, partially offset by a $705,000 impairment
charge taken in the six months ended June 30, 1998 compared to a $238,000
impairment charge taken in the same period in 1997.

General and administrative expenses increased 72% to $517,000 from $300,000
for the six months ended June 30, 1997 due to the addition of salaries and
related benefits for six new employees, plus increases in legal and professional
fees in connection with the Senior Notes offering.

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Interest expense, net of capitalized interest, for the six months ended
June 30, 1998 increased 470% to $4.42 million from $775,000 for the same period
in 1997. The increase was due to the higher level of outstanding debt for the
three months ended June 30, 1998 compared to the same period of 1997. This was
primarily due to the Series A Notes outstanding during the six months ended June
30, 1998.

The extraordinary loss of $531,000 (net of the income tax benefit of
$285,000) for the six months ended June 30, 1998 was due to an extinguishment of
the T.E.P. Financing. No extraordinary items occurred in the six months ended
June 30, 1997.

The net loss for the six months ended June 30, 1998 was $1.31 million
compared to a loss of $35,000 for the six months ended June 30, 1997, primarily
as a result of the factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES

In April 1998, the Company completed the Series A Notes offering.
Approximately $28 million of the net proceeds from the sale of the Series A
Notes were used to repay indebtedness incurred under the T.E.P. Financing.
Approximately $89.3 million of the net proceeds were used to fund acquisitions
and the remaining balance to provide additional working capital for general
corporate purposes. In May 1998, the Company entered into a new credit facility
with Christiania Bank og KreditKasse as described under "Financing Arrangements"
below. As of June 30, 1998 and August 12, 1998, no amounts had been drawn on the
new credit facility. Substantially all of the Company's current indebtedness
exists as a result of the Senior Notes outstanding.

The Company had cash and cash equivalents at June 30, 1998 of $5.3 million,
consisting primarily of short-term money market investments, compared to
$782,000 at December 31, 1997. Working capital was $3.9 million at June 30, 1998
compared to a working capital deficit of $8.6 million at December 31, 1997.

Cash flows provided by operating activities from the Company's operations
were approximately $3.0 million and $2.4 million for the six months ended June
30, 1998 and 1997, respectively. The increase in operating cash flows for the
six months ended June 30, 1998 over the same period in 1997 was primarily due to
increased production, revenue and operating income as a result of 1998
acquisitions and the Company's drilling program.

Cash flows used in investing activities by the Company were $97.6 million
and $4.9 million for the six months ended June 30, 1998 and 1997, respectively.
Property additions resulted primarily from the 1998 acquisitions and drilling
and development activities described above. The increase in cash flows used in
investing activities for the six months ended June 30, 1998 over the same period
in 1997 resulted primarily from the acquisitions completed in March and April
1998 and an increase in the number of wells drilled during the period ended June
30, 1998. For the six months ended June 30, 1998, 11 wells were drilled,
compared to 8 wells drilled for the same period in 1997.

Cash flows provided by financing activities were $99.1 million and $3.0
million for the six months ended June 30, 1998 and 1997, respectively. The
increase in the amount of cash flows provided by financing activities for the
six months ended June 30, 1998 was primarily due to the net proceeds received
from the $135 million offering of the Series A Notes, offset by the repayment
of the indebtedness under the T.E.P Financing.

CAPITAL EXPENDITURES

Capital expenditures for the first six months of 1998 totaled $97.59
million compared to $4.86 million in 1997.

The Company has experienced and expects to continue to experience
substantial working capital requirements due to the Company's development
program. Capital expenditures for 1998 are estimated to be $26.0 million,
exclusive of acquisitions discussed above. Substantially all of the capital
expenditures will be used to fund drilling activities, property acquisitions and
3-D seismic surveys in the Company's project areas. The Company anticipates
drilling 29 gross (25 net) wells in 1998. While the net proceeds from the
offering of the Senior Notes, cash flows from operations and borrowings under
the new credit facility should allow the Company to implement its present
development drilling strategy, additional financing may be required in the
future to fund the Company's further growth through acquisitions of

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additional properties. In addition, the Company's indebtedness contains certain
negative and financial covenants which may limit the Company's capital
expenditures. See "Financing Arrangements". In the event such capital resources
are not available to the Company, future significant property acquisitions may
be limited.

FINANCING ARRANGEMENTS

Credit Facility

In May 1998, the Company entered into a five-year credit facility (the
"Credit Facility") with Christiania Bank og KreditKasse ("Christiania") which
provides a maximum loan totaling $50.0 million, subject to borrowing base
limitations. The borrowing base will be determined semi-annually by Christiania
based on the Company's proved oil and natural gas reserves (the initial
borrowing base is $30 million). The maturity date of all indebtedness under the
Credit Facility is May 28, 2002.

The interest rate for borrowings under the Credit Facility are
determined at either (i) the ABR rate, or (ii) the Eurodollar Rate plus 1.75%,
at the election of the Company. The "ABR" rate is the higher of (i) Christiania
Bank's prime rate then in effect, (ii) the secondary market rate then in effect
for three-month certificates of deposit plus 1% or (iii) the federal funds rate
then in effect plus 0.5%. Interest will generally be due on a quarterly basis.
The Credit Facility is secured by substantially all of the oil and natural gas
assets of the Company, including accounts receivable, equipment and gathering
systems. The proceeds of the Credit Facility may be used to finance working
capital needs and for general corporate purposes of the Company in the ordinary
course of its business.

The Credit Facility contains certain covenants by the Company,
including (i) limitations on additional indebtedness and on guaranties by the
Company except as permitted under the Credit Facility, (ii) limitations on
additional investments except those permitted under the Credit Facility and
(iii) restrictions on dividends or distributions on or repurchases or
redemptions of capital stock by the Company except for those involving
repurchases of Michael Holdings, Inc. capital stock which may not exceed
$500,000 in any fiscal year. In addition, the Credit Facility requires the
Company to maintain and comply with certain financial covenants and ratios,
including a minimum interest coverage ratio, a minimum current ratio and a
covenant requiring that the Company's general and administrative expenses may
not exceed 12.5% of the Company's gross revenues in a calendar year. As of
August 12, 1998, the Company had no outstanding indebtedness under the Credit
Facility.

Senior Notes

The indenture governing the Senior Notes (the "Indenture") contains
certain covenants that, among other things, limit the ability of the Company to
incur additional indebtedness, pay dividends, repurchase equity interests or
make other Restricted Payments (as defined in the Indenture), create liens,
enter into transactions with affiliates, sell assets or enter into certain
mergers and consolidations. In the event of certain asset dispositions, the
Company is required under certain circumstances to use the excess proceeds from
such a disposition to offer to repurchase the Senior Notes (and other Senior
Indebtedness for which an offer to repurchase is required to be concurrently
made) having an aggregate principal amount equal to the excess proceeds at a
purchase price equal to 100% of the principal amount of the New Notes, together
with accrued and unpaid interest and Liquidated Damages (as defined in the
Indenture), if any, to the date of repurchase (a "Net Proceeds Offer"). For
additional information regarding the terms of the Senior Notes, see
"Description of Notes" in the Form S-4.

HEDGING ACTIVITIES

In an effort to achieve more predictable cash flows and earnings and
reduce the effects of volatility of the price of oil and natural gas on the
Company's operations, the Company has hedged in the past, and in the future
expects to hedge oil and natural gas prices through the use of swap contracts,
put options and costless collars. While the use of these hedging arrangements
limits the downside-risk of adverse price movements, it also limits future
gains from favorable movements. The Company accounts for these transactions as
hedging activities and, accordingly, gains and losses are included in oil and
natural gas revenues in the periods in which the related production occurs. The
Company does not engage in hedging arrangements in which the production amounts
are in excess of the Company's actual production.

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Although the Company's former hedging contracts in effect (incurred in
connection with the T.E.P. Financing) were terminated on April 2, 1998, the
Company has entered into additional hedging contracts. On April 7, 1998, the
Company entered into a costless collar contract with a third party which
provides a floor price of $2.25 per Mmbtu and ceiling price of $2.99 per Mmbtu.
The collar hedges a monthly volume of 450,000 Mmbtu from May 1, 1998 through
April 30, 1999. Any gas revenues over $2.99 per Mmbtu will be paid by the
Company to the third party. Conversely, the third party agreed to pay the
Company all revenues equal to the difference between $2.25 per Mmbtu, and any
revenues under $2.25 per Mmbtu will be paid to the Company. In addition, on
April 7, 1998, in a separate transaction with another third party, the Company
purchased put options having a strike price of $2.25 per Mmbtu for
approximately $230,000. The put options hedge a volume of 150,000 Mmbtu per
month from May 1, 1998 to April 30, 1999. The fair value of the put option at
June 30, 1998 was approximately $92,000. All prices are relative to the
Houston Ship Channel Index.

CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD LOOK STATEMENTS

Item 2. "Management's Discussion and Analysis of Financial Condition
and Results of Operations" of this Quarterly Report on Form 10-Q contains
projections and other forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934. These statements can be identified
by the use of forward-looking terminology, such as "believes," "expects,"
"may," "should" or "anticipates" or the negative thereof or comparable
terminology, or by discussions of strategy that involve risks and
uncertainties. In addition, all statements other than statements of historical
facts included in this Quarterly Report, including, without limitation,
statements regarding the Company's business strategy, future governmental
regulation, oil and natural gas reserves, future drilling and development
opportunities and operations, future acquisitions, future production of oil and
natural gas (and the prices thereof and the costs therefor), anticipated
results of hedging activities, future capital expenditures and future net cash
flows, are forward-looking statements and may contain certain information
concerning financial results, economic conditions, trends and known
uncertainties. Such statements reflect the Company's current views with respect
to future events and financial performance, and involve risks and
uncertainties. Actual results could differ materially from those projected in
the forward-looking statements as a result of these various risks and
uncertainties, including, without limitation, (i) factors such as natural gas
price fluctuations and markets, uncertainties of estimates of reserves and
future net revenues, competition in the oil and natural gas industry, risks
associated with oil and natural gas operations, risks associated with future
acquisitions, risks associated with the Company's future capital requirements
and the availability of sources of capital and regulatory and environmental
risks, (ii) adverse changes to the properties and leases acquired in 1998 or
the failure of the Company to achieve the anticipated benefits of such
acquisitions and (iii) adverse changes in the market for the Company's oil and
natural gas production. For a more detailed description of these and certain
other risks associated with the Company's operations, see "Risk Factors" in
the Form S-4.

YEAR 2000 COMPLIANCE

The Company has reviewed its computer systems and hardware to locate
potential operational problems associated with the year 2000 issue. The Company
believes that all year 2000 problems in its internal information processing
computer systems have been resolved and have not caused and will not cause
disruption of its operations, or have a material adverse effect on its
financial condition or results of operations. The Company is in the process of
contacting and receiving verification of year 2000 issue compliance from its
vendors, purchasers, suppliers, transporters of its production and its
financial service providers. At this time, the Company does not anticipate any
material disruption in its operations as a result of any year 2000 compliance
issues, but will continue to monitor the situation with third parties.

EFFECTS OF INFLATION AND CHANGES IN PRICE

The Company's results of operations and cash flows are affected by
changes in oil and natural gas prices. If the price of oil and natural gas
increases (decreases), there could be a corresponding increase (decrease) in
the operating cost that the Company is required to bear for operations, as well
as an increase (decrease) in revenues. Inflation has had only a minimal effect
on the Company.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has in the past and will in the future enter into swap
contracts, put options and costless collars in an effort to hedge oil and
natural gas prices. For a description of the Company's hedging activities, see
Item 2. "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Hedging Activities."

Because the Company is not yet required to provide disclosures
otherwise mandated under Item 305 of Regulation S-K promulgated by the
Securities and Exchange Commission, the foregoing disclosures under this Item 3
do not and are not intended to comply with Item 305.

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12

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.................................................................... Not Applicable

Item 2. Changes in Securities and Use of Proceeds............................................ None

For a description of certain negative and financial covenants imposed
by the Company's Credit Facility and the Senior Notes, see Item 2.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financing Arrangements."

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..................................................... None

(A) EXHIBITS. The following exhibits are filed as part of
this report:

EXHIBIT NO.

3.1 Articles of Incorporation of Michael Petroleum
Corporation. (Exhibit 3.1 to Michael Petroleum
Corporation's Registration Statement on Form S-4
filed May 8, 1998, No. 333-52263, is hereby
incorporated by reference.)

3.2 By-Laws of Michael Petroleum Corporation. (Exhibit
3.2 to Michael Petroleum Corporation's Registration
Statement on Form S-4 filed May 8, 1998, No.
333-52263, is hereby incorporated by reference.)

4.1 Purchase Agreement, dated as of April 30, 1998, by
and among Michael Petroleum Corporation, Michael
Holdings, Inc., Bear, Stearns & Co. Inc., Jefferies &
Company, Inc. and Raymond James & Associates, Inc.
(Exhibit 4.1 to Michael Petroleum Corporation's
Registration Statement on Form S-4 filed May 8, 1998,
No. 333-52263, is hereby incorporated by reference.)

4.2 Indenture, dated as of April 2, 1998, between Michael
Petroleum Corporation and State Street Bank and Trust
Company, as Trustee. (Exhibit 4.2 to Michael
Petroleum Corporation's Registration Statement on
Form S-4 filed May 8, 1998, No. 333-52263, is hereby
incorporated by reference.)

4.3 Registration Rights Agreement dated March 30, 1998,
by and among Michael Petroleum Corporation, Bear,
Stearns & Co. Inc, Jefferies & Company, Inc. and
Raymond James & Associates, Inc. (Exhibit 4.3 to
Michael Petroleum Corporation's Registration
Statement on Form S-4 filed May 8, 1998, No.
333-52263, is hereby incorporated by reference.)

10.1 Michael Holdings, Inc. 1998 Stock Option Plan.
(Exhibit 10.1 to Michael Petroleum Corporation's
Amendment No. 1 to the Registration Statement on Form
S-4 filed June 26, 1998, No. 333-52263, is hereby
incorporated by reference.)

10.2 Employment Agreement dated April 1, 1998 between
Michael Petroleum Corporation and Glenn D. Hart.
(Exhibit 10.2 to Michael Petroleum Corporation's
Registration Statement on Form S-4 filed May 8, 1998,
No. 333-52263, is hereby incorporated by reference.)

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13

10.3 Employment Agreement dated April 1, 1998 between
Michael Petroleum Corporation and Michael G. Farmar.
(Exhibit 10.3 to Michael Petroleum Corporation's
Registration Statement on Form S-4 filed May 8, 1998,
No. 333-52263, is hereby incorporated by reference.)

10.4 Employment Agreement dated April 1, 1998 between
Michael Petroleum Corporation and Jerry F. Holditch.
(Exhibit 10.4 to Michael Petroleum Corporation's
Registration Statement on Form S-4 filed May 8, 1998,
No. 333-52263, is hereby incorporated by reference.)

10.5 Purchase and Sale Agreement dated February 20, 1998
by and between Michael Petroleum Corporation and
Conoco Inc. (Exhibit 10.5 to Michael Petroleum
Corporation's Registration Statement on Form S-4
filed May 8, 1998, No. 333-52263, is hereby
incorporated by reference.)

10.6 Purchase and Sale Agreement dated February 5, 1998 by
and between Michael Petroleum Corporation and Enron
Oil and Gas Company. (Exhibit 10.6 to Michael
Petroleum Corporation's Registration Statement on
Form S-4 filed May 8, 1998, No. 333-52263, is hereby
incorporated by reference.)

10.7 Stock Purchase Warrant granted by Michael Holdings,
Inc. to Cambrian Capital Partners, L.P., dated April
2, 1998. (Exhibit 10.7 to Michael Petroleum
Corporation's Registration Statement on Form S-4
filed May 8, 1998, No. 333-52263, is hereby
incorporated by reference.)

10.8 Form of Indemnification Agreement by and between
Michael Petroleum Corporation and its directors.
(Exhibit 10.8 to Michael Petroleum Corporation's
Registration Statement on Form S-4 filed May 8, 1998,
No. 333-52263, is hereby incorporated by reference.)

10.9 Assets Agreement dated April 20, 1998 by and between
Michael Petroleum Corporation and Mobil Exploration &
Producing U.S. Inc. acting as Agent for Mobil
Producing Texas & New Mexico Inc. (Exhibit 10.9 to
Michael Petroleum Corporation's Registration
Statement on Form S-4 filed May 8, 1998, No.
333-52263, is hereby incorporated by reference.)

10.10 Oil and Gas Lease dated April 20, 1998 by and between
Michael Petroleum Corporation and Mobil Producing
Texas & New Mexico Inc. (Exhibit 10.10 to Michael
Petroleum Corporation's Registration Statement on
Form S-4 filed May 8, 1998, No. 333-52263, is hereby
incorporated by reference.)

10.11 Warrant to Purchase Shares of Common Stock granted by
Michael Holdings, Inc. to Dale L. Schwartzhoff.
(Exhibit 10.11 to Michael Petroleum Corporation's
Registration Statement on Form S-4 filed May 8, 1998,
No. 333-52263, is hereby incorporated by reference.)

10.12 First Amended and Restated Shareholders Agreement of
Michael Petroleum Corporation. (Exhibit 10.12 to
Michael Petroleum Corporation's Registration
Statement on Form S-4 filed May 8, 1998, No.
333-52263, is hereby incorporated by reference.)

10.13 Credit Agreement dated May 15, 1998 among Michael
Petroleum Corporation, Christiania and the lenders
named therein. (Exhibit 10.13 to Michael Petroleum
Corporation's Amendment No. 1 to the Registration
Statement on Form S-4 filed June 26, 1998, No.
333-52263, is hereby incorporated by reference.)

13
14

10.14 Master Commodity Swap Agreement dated May 15, 1998
between Christiania and Michael Petroleum
Corporation. (Exhibit 10.14 to Michael Petroleum
Corporation's Amendment No. 1 to the Registration
Statement on Form S-4 filed June 26, 1998, No.
333-52263, is hereby incorporated by reference.)

10.15 General Terms and Conditions Agreement dated November
6, 1996 between Michael Petroleum Corporation and
Upstream Energy Services, L.L.C. (Exhibit 10.15 to
Michael Petroleum Corporation's Amendment No. 1 to
the Registration Statement on Form S-4 filed June 26,
1998, No. 333-52263, is hereby incorporated by
reference.)

27.1* Financial Data Schedule.

* Filed herewith

(B) Reports on Form 8-K during the quarter ended
June 30, 1998............................................ None

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15

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

MICHAEL PETROLEUM CORPORATION
(REGISTRANT)

Date August 13, 1998 By /s/ Glenn D. Hart
------------------- ------------------------------------
Glenn D. Hart
Chief Executive Officerand Chairman
of the Board

Date August 13, 1998 By /s/ Michael G. Farmar
------------------- ------------------------------------
Michael G. Farmar
President and Chief Operating
Officer

Date August 13, 1998 By /s/ Robert L. Swanson
------------------- ------------------------------------
Robert L. Swanson
Vice President, Finance

Date August 13, 1998 By /s/ Scott R. Sampsell
------------------- ------------------------------------
Scott R. Sampsell
Vice President, Controller and
Treasurer
16
INDEX TO EXHIBITS

EXHIBIT NO. DESCRIPTION

27.1* Financial Data Schedule.

* Filed herewith