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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   ----------

                                   FORM 10-K/A
                                 Amendment No. 1

                                   ----------

[X]  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934

                  For the fiscal year ended December 31, 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 Number: 001-15899

                              PURE RESOURCES, INC.
             (Exact name of Registrant as specified in its charter)

           Delaware                                              74-2952918
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                               Identification No.)

           500 West Illinois
             Midland, Texas                                         79701
(Address of principal executive offices)                         (Zip Code)

                                 (915) 498-8600
              (Registrant's telephone number, including area code)

           Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, $.01 par value
                                (Title of Class)

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

          Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [X]

          As of March 1, 2002, the Registrant had outstanding 50,183,372 shares
of common stock. The aggregate market value of the Common Stock held by
non-affiliates of the Registrant, based upon the closing sale price of the
Common Stock on March 1, 2002, as reported on the New York Stock Exchange was
approximately $293,676,520.

                       Documents Incorporated by Reference

          Portions of the definitive proxy statement for the Registrant's 2001
Annual Meeting of Stockholders to be held on or about May 16, 2002, are
incorporated by reference in Part III of this Form 10-K. Such definitive proxy
statement will be filed with the Securities and Exchange Commission not later
than 120 days subsequent to December 31, 2001.

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                                       1

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                     Form 10-K/A Amendment No. 1 Explanation

          On January 1, 2002, Pure adopted SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets. In
March 2002, Pure sold assets in the Permian Basin region for $23 million,
subject to adjustments. These properties represented an insignificant portion of
the value of Pure's reserves. In accordance with SFAS No. 144, Pure is required
to reflect this disposition of assets as discontinued operations. Pure is filing
this Form 10-K/A Amendment No. 1 to present the financial statements and related
data to reflect the discontinued operations. See Note 22 of Notes to
Consolidated Financial Statements for additional information.

                                       2

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                                TABLE OF CONTENTS

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                                                                                                             Page
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                                     PART I

<S>                                                                                                          <C>
Item 1.   Business........................................................................................     4

Item 2.   Properties......................................................................................    11

Item 3.   Legal Proceedings ..............................................................................    16

Item 4.   Submission of Matters to a Vote of Security Holders.............................................    17

Officers and Directors of the Registrant..................................................................    17

                                     PART II

Item 5.   Market for Registrant's Common Equity and Related Stockholder Matters...........................    20

Item 6.   Selected Financial Data.........................................................................    21

Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations...........    24

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk......................................    53

Item 8.   Financial Statements and Supplementary Data.....................................................    57

Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............    57

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant..............................................    58

Item 11.  Executive Compensation..........................................................................    58

Item 12.  Security Ownership of Certain Beneficial Owners and Management..................................    58

Item 13.  Certain Relationships and Related Party Transactions............................................    58

                                     PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................    59

          Glossary of Oil and Gas Terms...................................................................    65

          Signatures......................................................................................    68

Index to Consolidated Financial Statements................................................................   F-1
</TABLE>

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                              PURE RESOURCES, INC.

                2001 ANNUAL REPORT ON FORM 10-K/A Amendment No. 1

                                     PART I

ITEM 1. BUSINESS

          Pure Resources, Inc. ("Pure") is an independent energy company engaged
in the exploitation, development, exploration and acquisition of oil and gas
properties located in the Permian Basin of West Texas and southeastern New
Mexico, the San Juan Basin of New Mexico and Colorado, offshore in the Gulf of
Mexico and the Gulf Coast region covering Texas, Louisiana, Arkansas,
Mississippi, Alabama and Florida.

          Pure is a Delaware corporation and was organized in 1999. Its
principal executive offices are located at 500 West Illinois, Midland, Texas
79701, and its telephone number is (915) 498-8600.

Recent or Significant Transactions

          Hallwood Merger

          On March 30, 2001, Pure and Hallwood Energy Corporation ("Hallwood")
announced the signing of a definitive merger agreement pursuant to which Pure
Resources II, Inc., an indirect wholly-owned subsidiary of Pure, would acquire
all the outstanding shares of common stock of Hallwood at a price of $12.50 per
share and all the outstanding shares of Series A Cumulative Preferred Stock of
Hallwood at a price of $10.84 per share. The all-cash transaction was structured
as a first step tender offer followed by a cash merger to acquire all remaining
shares of Hallwood. Total cash purchase price for the transaction is estimated
to be approximately $260.4 million, including assumed debt.

          On May 8, 2001, Pure accepted for payment approximately 85% of the
common stock and 78% of the preferred stock of Hallwood. On May 30, 2001, after
completion of a subsequent tender offer period, Pure completed the acquisition
of the remaining common and preferred shares through consummation of the cash
merger. The results of operations of Hallwood have been included in Pure's since
May 1, 2001.

          At May 1, 2001, Pure estimated the total proved reserves acquired (SEC
10% basis) to have been approximately 36,800 MBOE with an SEC 10% present value
at approximately $386 million. The total proved reserves were approximately 80%
natural gas. The Hallwood properties are primarily located in the Permian Basin,
the San Juan Basin, South Texas and onshore southern Louisiana.

          7.125% Senior Notes

          In June 2001, Pure issued $350 million in unsecured senior notes which
bear interest at 7.125%. The 7.125% senior notes were issued at a discount to
their face value which resulted in the 7.125% senior notes having a yield of
7.232%. The 7.125% senior notes pay interest each June 15 and December 15
beginning in December 2001. The maturity date of the 7.125% senior notes is June
15, 2011. Pure has the right to redeem the 7.125% senior notes at any time for
an amount equal to the principal plus a make-whole premium.

          International Paper Transaction

          On January 31, 2001, Pure (a) acquired oil and gas properties, fee
mineral and royalty interests from International Paper Company and (b)
contributed cash for controlling general and limited partnership interests, in a
partnership that owns oil and gas properties contributed by International Paper,
for a total of approximately $261 million, subject to adjustment, for cash. The
transaction was funded from Pure's revolving credit facilities.

          The transaction provides Pure with additional areas of focus,
primarily offshore in the Gulf of Mexico and in the Gulf Coast region covering
Texas, Louisiana, Arkansas, Mississippi, Alabama and Florida. Pure also

                                       4

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acquired over 6 million gross (3.2 million net) acres of fee mineral ownership,
primarily across the southern Gulf Coast region of the United States.

          At December 31, 2000, Pure estimated the total proved reserves
acquired (SEC 10% basis) to have been approximately 25,000 MBOE with an SEC 10%
present value of approximately $629 million. The total proved reserves were
approximately 69% natural gas, and 96% of the reserves are proved developed.

Union Oil Merger

          On December 13, 1999, Titan Exploration, Inc. ("Titan") and Union Oil
Company of California ("Union Oil") entered into an agreement to merge Titan and
the Permian Basin business unit of Union Oil into a new company. The resulting
company is Pure Resources, Inc. Titan had historically been involved in oil and
gas exploration and production in the Permian Basin of West Texas and
southeastern New Mexico, the Brenham Dome area of south central Texas and the
Central Gulf Coast region of Texas.

          The combination of Pure and the Permian Basin business unit is treated
as a combination of entities under common control since Union Oil owned 100% of
the Permian Basin business unit prior to the "Contribution" (as defined in Note
1 of the Notes to Consolidated Financial Statements) and also owned 100% of the
capital stock of Pure immediately subsequent to the Contribution (without giving
effect to the Titan merger). Consequently, the accompanying historical financial
results and operational data are those of the Permian Basin business unit of
Union Oil.

          On May 24, 2000, the Titan stockholders approved the merger and on May
25, 2000, Union Oil and Titan closed the merger. The merger was treated as a
business combination with Titan being acquired by Pure. Pure began trading on
the New York Stock Exchange under the symbol "PRS" on May 26, 2000.

          Immediately following completion of the merger, Pure had approximately
50 million shares of common stock outstanding, Union Oil held approximately
65.4% (32.7 million shares) of those Pure shares and the remaining 34.6 % (17.3
million shares) were held by the previous stockholders of Titan common stock,
who were entitled in the merger to exchange each share of Titan common stock for
..4302314 of a share of Pure common stock.

Commodity Prices

          Our revenues, operating results, liquidity and future growth depend
substantially on prevailing oil and natural gas prices. Price volatility in oil
and natural gas markets has remained prevalent in the last few years. At
December 31, 2000, the NYMEX prices for crude oil and natural gas were $26.80
per barrel and $9.78 per Mcf, respectively, as compared to $19.84 per barrel of
crude oil and $2.57 per Mcf of natural gas at December 31, 2001. By way of
comparison, at February 28, 2002, NYMEX prices were $21.74 per barrel of crude
oil and $2.36 per Mcf of natural gas.

          A significant duration of these low commodity prices could have a
further negative effect on Pure's results of operations and cash flows, on the
quantities of crude oil and natural gas that could be economically produced from
its fields and on the quantities and economic values of its proved reserves.

                                       5

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Overview

          Pure is an independent energy company engaged in the exploitation,
development, exploration and acquisition of oil and gas properties. Pure's
strategy is to grow reserves, production, cash flows and net income per share
by:

          .    identifying acquisition opportunities that provide significant
               development and exploratory drilling potential,
          .    exploiting and developing its reserve base,
          .    pursuing exploration opportunities for oil and gas reserves,
          .    capitalizing on advanced technology to identify, explore and
               exploit projects, and
          .    emphasizing a low overhead and operating cost structure.

          Pure's original capital budget for 2002 was approximately $225
million. As a result of the recent precipitous drop in commodity prices
subsequent to the establishment of the original budget, Pure expects capital
spending to be between $105 to $150 million in 2002. However, Pure will maintain
flexibility to accelerate or increase 2002 capital spending should commodity
prices increase.

          As of December 31, 2001, Pure had proved reserves of approximately
80.5 MMBbls of oil and condensate and 985.7 Bcf of gas, or an aggregate of 244.8
MMBOE, with an SEC 10% present value of $1.1 billion. On a pro forma basis
(assuming the International Paper and Hallwood transactions occurred as of
January 1, 2001), Pure's properties had an average reserve life of approximately
10.5 years. Pure's proved reserves were 67% natural gas, and 80% were classified
as proved developed.

          As of December 31, 2001, Pure operated over 4,500 gross productive
wells (over 2,400 net productive wells) which represented over 81% of its total
proved SEC 10% present value as of such date. Pure's emphasis on acting as
operator of properties in which it has an interest enables it to manage
expenses, capital allocation and other aspects of development and exploration.

          Pure's proved oil and gas properties are located in more than 400
fields/areas in the Permian Basin, the San Juan Basin, the offshore Gulf of
Mexico and the Gulf Coast region. The Permian Basin, Pure's most significant
concentration of properties, is characterized by complex geology with numerous
known producing horizons and provides significant opportunities to increase
reserves, production and ultimate recoveries through development, exploratory
and horizontal drilling, recompletions, secondary and tertiary recovery methods
and use of 3-D seismic and other advanced technologies.

Acquisitions

          Pure's strategic plan includes the acquisition of additional reserves,
including through business combination transactions. Pure regularly pursues and
evaluates acquisition opportunities (including opportunities to acquire oil and
gas properties or related assets or entities owning oil and gas properties or
related assets and opportunities to engage in mergers, consolidations or other
business combinations with entities owning oil and gas properties or related
assets) and at any given time may be in various stages of evaluating these
opportunities. These stages may take the form of internal financial and oil and
gas property analysis, preliminary due diligence, the submission of an
indication of interest, preliminary negotiations, negotiation of a letter of
intent, or negotiation of a definitive agreement.

                                       6

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Oil and Gas Marketing and Major Customers

          The revenues generated by Pure's operations are highly dependent upon
the prices of, and demand for, oil and gas. The price received by Pure for its
oil and gas production depends on numerous factors beyond Pure's control,
including seasonal weather and demand patterns, the United States and world
economy, foreign imports, political and economic conditions in other oil and gas
producing countries, the actions of OPEC and domestic government regulation,
legislation and policies. Decreases in the prices of oil and natural gas could
decrease the value of Pure's proved reserves and reduce Pure's revenues,
profitability and cash flow. Although Pure is not currently experiencing any
significant involuntary curtailment of its oil or gas production, market,
economic and regulatory factors may in the future harm Pure's ability to sell
its oil or gas production.

          In 2001, sales to Conoco and affiliates accounted for approximately
11% of total oil and gas revenues. Pure does not have any significant long-term
oil and gas purchase agreements. Pure at regular intervals will arrange for the
sale of its oil and gas production in a bidding process in the commodity markets
and sells its production to the party or parties offering the best terms. Due to
the availability of other markets and pipeline connections, Pure does not
believe that the loss of any single crude oil or gas customer would have a
material adverse effect on its results of operations. In 2001, Pure had sales to
Union Oil of less than .02%.

          In 2000 and 1999, sales to Union Oil and its affiliates, accounted for
approximately 37%, and 83% of total oil and gas revenues, respectively. Pure has
not entered into any long term oil and gas purchase agreements with Union Oil.

Competition

          The oil and gas industry is highly competitive. Pure encounters
competition from other oil and gas companies in all areas of its operations,
including the acquisition of producing properties. Pure's competitors include
major integrated oil and gas companies and numerous independent oil and gas
companies, individuals and drilling and income programs. Many of its competitors
are large, well established companies with substantially larger operating staffs
and greater capital resources than Pure. Such companies may be able to pay more
for productive oil and gas properties and exploratory prospects and to define,
evaluate, bid for and purchase a greater number of properties and prospects than
Pure's financial or human resources permit. Pure's ability to acquire additional
properties and to discover reserves in the future will be dependent upon its
ability to evaluate and select suitable properties and to consummate
transactions in a highly competitive environment.

Title to Properties

          Pure believes that it has satisfactory title to all of Pure's
producing properties in accordance with standards generally accepted in the oil
and gas industry. Pure's properties are subject to customary royalty interests,
liens incident to operating agreements, liens for current taxes and other
burdens which Pure believes do not materially interfere with the use of or
affect the value of such properties. Pure has leaseholds in force for portions
of its net acreage by virtue of production on that acreage in paying quantities.
The remaining acreage will initially be held by lease rentals and similar
provisions and require production in paying quantities prior to expiration of
various time periods to avoid lease termination.

Governmental Regulation

          Extensive rules and regulations govern Pure's oil and gas exploration,
production and related operations. Pure's failure to comply with these rules and
regulations can result in substantial penalties. The regulatory burden of the
oil and gas industry increases Pure's cost of doing business and affects its
profitability. Although Pure believes it is in substantial compliance with all
applicable laws and regulations, because such rules and regulations are
frequently amended or reinterpreted, it is unable to predict the future cost or
impact of complying with such laws. Significant expenditures may be required to
comply with governmental laws and regulations and may have a material adverse
effect on Pure's financial condition and results of operations. The cost of
compliance with regulations in 2001 was minimal. Pure anticipates no material
changes in 2002.

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          Such regulation requires permits for drilling operations, drilling
bonds and reports concerning operations and imposes other requirements relating
to the exploration and production of oil and gas. Such state and federal
agencies have statutes or regulations addressing conservation matters, including
provisions for the unitization or pooling of oil and gas properties, the
establishment of maximum rates of production from wells, and the regulation of
spacing, plugging and abandonment of such wells.

          The Federal Energy Regulatory Commission, or "FERC", regulates
interstate natural gas transportation rates and service conditions, which affect
the marketing of gas produced by Pure as well as the revenues received by Pure
for sales of such production. FERC has eliminated or substantially reduced the
interstate pipelines' traditional role as wholesalers of natural gas, and has
substantially increased competition and volatility in natural gas markets. The
price Pure receives from the sale of oil and natural gas liquids is affected by,
among other things, the cost of transporting products to market. Some of FERC's
regulations impact this cost, and Pure is not able to predict with certainty the
effect, if any, of these regulations on Pure's operations. However, the
regulations may increase transportation costs or reduce wellhead prices for oil
and natural gas liquids.

          Some of Pure's operations are located on federal natural gas and oil
leases, which are administered by the Minerals Management Service pursuant to
the Outer Continental Shelf Lands Act. These leases require compliance with
detailed Minerals Management Service regulations and orders that are subject to
interpretation and change by the Minerals Management Service. To cover various
obligations of lessees on the Outer Continental Shelf, the Minerals Management
Service generally requires that lessees have substantial net worth or post bonds
or other acceptable assurances that such obligations will be met. The costs of
these bonds or assurances can be substantial, and there is no assurance that
they can be obtained in all cases. Pure currently has several supplemental bonds
in place. Under some circumstances, the Minerals Management Service may require
any of Pure's operations on federal leases to be suspended or terminated. Any
such suspension or termination could materially adversely affect Pure's
financial condition and results of operations.

Environmental Matters

          Extensive and changing federal, state and local laws and regulations
relating to environmental protection including the generation, storage,
handling, emission, transportation and discharge of materials into the
environment, and their relation to safety and health govern Pure's operations
and properties. The recent trend in environmental legislation and regulation
generally is moving toward stricter standards, and this trend will likely
continue. These laws and regulations may require the acquisition of a permit or
other authorization before construction or drilling commences and for some other
activities; limit or prohibit construction, drilling and other activities on
some lands lying within wilderness and other protected areas; and impose
substantial liabilities for pollution resulting from Pure's operations. The
permits required for various operations of Pure are subject to revocation,
modification and renewal by issuing authorities. Governmental authorities have
the power to enforce compliance with their regulations, and violators are
subject to fines or injunction, or both. In the opinion of management, Pure is
in substantial compliance with current applicable environmental laws and
regulations, and Pure has no material commitments for capital expenditures to
comply with existing environmental requirements. Nevertheless, changes in
existing environmental laws and regulations or in interpretations thereof could
have a significant impact on Pure, as well as the oil and gas industry in
general. The Comprehensive Environmental Response, Compensation, and Liability
Act, or "CERCLA", and comparable state statutes impose strict, joint and several
liability on owners and operators of sites and on persons who disposed of or
arranged for the disposal of "hazardous substances" found at such sites. It is
not uncommon for neighboring landowners and other third parties to file claims
for personal injury and property damage allegedly caused by the hazardous
substances released into the environment. Resource Conservation and Recovery
Act, or "RCRA", and comparable state statutes govern the disposal of "solid
waste" and "Hazardous waste" and authorize the imposition of substantial fines
and penalties for noncompliance. Although CERCLA currently excludes petroleum
from its definition of "Hazardous substance", state laws affecting Pure's
operations impose clean-up liability relating to petroleum and petroleum related
products. In addition, although RCRA classifies some oil field wastes as
"nonhazardous," such exploration and production wastes could be reclassified as
hazardous wastes thereby making such wastes subject to more stringent handling
and disposal requirements.

                                       8

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          Federal regulations require some owners or operators of facilities
that store or otherwise handle oil, such as Pure, to prepare and implement spill
prevention, control countermeasure and response plans relating to the possible
discharge of oil into surface waters. The Oil Pollution Act of 1990, as amended,
or "OPA", contains numerous requirements relating to the prevention of and
response to oil spills into waters of the United States. For onshore and
offshore facilities that may affect waters of the United States, OPA requires
responsible parties to demonstrate financial responsibility. The impact of any
legislation is not expected to be any more burdensome to Pure than it will be to
other similarly situated companies involved in oil and gas exploration and
production.

          In addition, the Outer Continental Shelf Lands Act authorizes
regulations relating to safety and environmental protection applicable to
lessees and permitees operating on the outer Continental Shelf. Violations of
lease conditions or regulations issued pursuant to the Outer Continental Shelf
Lands Act can result in substantial civil and criminal penalties, as well as
potential court injunctions curtailing operations and the cancellation of
leases. Such enforcement liabilities can result from either governmental or
private prosecution.

          The Federal Water Pollution Control Act, or "FWPCA", imposes
restrictions and strict controls regarding the discharge of produced waters and
other oil and gas wastes into navigable waters. Permits must be obtained to
discharge pollutants into state and federal waters. The FWPCA and analogous
state laws provide for civil, criminal and administrative penalties for any
unauthorized discharges of oil and other hazardous substances in reportable
quantities and, along with the OPA, may impose substantial potential liability
for the costs of removal, remediation and damages. State water discharge
regulations and the federal National Pollutant Discharge Elimination System, or
"NPDES", prohibit or are expected to prohibit within the next year the discharge
of produced water and sand, and some other substances related to the oil and gas
industry, into coastal waters. Although the costs to comply with zero discharge
mandates under federal or state law may be significant, the entire industry will
experience similar costs and Pure believes that these costs will not have a
material adverse impact on Pure's financial conditions and operations. Some oil
and gas exploration and production facilities are required to obtain permits for
their storm water discharges. Pure may incur costs in connection with treatment
of wastewater or developing storm water pollution prevention plans.

          Regulations are currently being developed under federal and state laws
concerning oil pollution prevention and other matters that may impose additional
regulatory burdens on Pure. In addition, the Clean Water Act and analogous state
laws require permits to be obtained to authorize discharge into surface waters
or to construct facilities in wetland area. With respect to some of its
operations, Pure is required to maintain such permits or meet general permit
requirements. The Environmental Protection Agency, or "EPA", has adopted
regulations concerning discharges of storm water runoff. This program requires
covered facilities to obtain individual permits, participate in a group or seek
coverage under an EPS general permit. Pure believes that it will be able to
obtain, or be included under, such permits, where necessary, and to make minor
modifications to existing facilities and operations that would not have a
material effect on Pure.

          The implementation of new, or the modification of existing, laws or
regulations could have a material adverse effect on Pure. The discharge of oil,
gas or other pollutants into the air, soil or water may give rise to significant
liabilities on the part of Pure to the government and third parties and may
require Pure to incur substantial costs of remediation. We cannot assure you
that existing environmental laws or regulations, as currently interpreted or
reinterpreted in the future, or future laws or regulations will not materially
adversely affect Pure's results of operations and financial condition or that
material indemnity claims will not arise against Pure with respect to properties
acquired by Pure.

          Pure has acquired leasehold interests in numerous properties that for
many years have produced oil and gas. Although the previous owners of these
interests may have used operating and disposal practices that were standard in
the industry at the time, hydrocarbons or other wastes may have been disposed of
or released on or under the properties. In addition, some of Pure's properties
are operated by third parties over whom Pure has no control. Notwithstanding
Pure's lack of control over properties operated by others, the failure of the
operator to comply with applicable environmental regulations may, in some
circumstances, materially adversely impact Pure.

                                       9

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Abandonment Costs

          Pure is responsible for payment of plugging and abandonment costs on
the oil and gas properties pro rata to its working interest. Pure established
reserves, net of salvage value, to provide for the eventual abandonment of its
properties. Pure estimates the net abandonment of its properties to be
approximately $58.6 million (based on abandonment cost studies performed by an
independent third party and estimates prepared by Pure) as of December 31, 2001,
which is accrued over the life of the properties. In addition, abandonment costs
and their timing may change due to many factors including actual production
results, inflation rates and changes in environmental laws and regulations.

Employees

          As of December 31, 2001, Pure had 321 full-time employees, none of
whom are represented by a labor union. Included in the total are 196
administrative employees, 148 located in Pure's office in Midland, Texas, 30
located in Pure's office in Houston, Texas and 18 located in Pure's office in
Corpus Christi, Texas. Ten of the administrative employees located in the
Midland office are involved in the management of Pure. Pure considers its
relations with its employees to be good.

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ITEM 2. PROPERTIES

General

          As of December 31, 2001, Pure had proved reserves of approximately
80.5 MMBbls of oil and condensate and 985.7 Bcf of natural gas, or an aggregate
of 244.8 MMBOE, with an SEC 10% present value of $1.1 billion. As of December
31, 2001, Pure's properties had an average reserve life, on a pro forma basis
(assuming the International Paper and Hallwood transactions occurred as of
January 1, 2001), of approximately 10.5 years, and, of Pure's proved reserves,
67% were natural gas, and 80% were classified as proved developed.

          As of December 31, 2001, Pure operated over 4,500 gross productive
wells (over 2,400 net productive wells) which represented over 81% of its total
proved SEC 10% present value. Pure's emphasis on controlling the operation of
its properties enables it to better manage expenses, capital allocation and
other aspects of development and exploration.

          Pure's proved oil and gas properties are located in more than 400
fields/areas. The Permian Basin, Pure's most significant concentration of
properties, is characterized by complex geology with numerous known producing
horizons and provides significant opportunities to increase reserves, production
and ultimate recoveries through development, exploratory and horizontal
drilling, recompletions, secondary and tertiary recovery methods, and use of 3-D
seismic and other advanced technologies. The following table summarizes Pure's
estimated proved reserves by region at December 31, 2001:

                              Oil and     Natural     Future       SEC 10%
                             Condensate     Gas         Net       Present
       Region                  (MBbl)      (MMcf)    Revenues      Value
--------------------------   ----------   -------   ----------   ----------
                                          (dollars in thousands)
Permian Basin.............     72,852     584,473   $1,264,389   $  681,789
San Juan Basin............      1,583     291,631      424,127      213,306
Gulf of Mexico............        510      30,544       64,045       48,943
Gulf Coast and other......      5,604      79,083      205,810      136,667
                               ------     -------   ----------   ----------
                               80,549     985,731   $1,958,371   $1,080,705
                               ======     =======   ==========   ==========

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Oil and Natural Gas Reserves

          The following table summarizes the estimates of Pure's historical net
proved reserves as of December 31, 2001 and 2000, and the present values
attributable to these reserves at such dates. In 2001, the reserves and present
value data of Pure were prepared by Pure (approximately 33% of the total
estimated proved reserves) and Pure's independent petroleum consultants,
Netherland, Sewell & Associates, Inc. (approximately 66% of the total estimated
proved reserves) and Ryder Scott Company (approximately 1% of the total
estimated proved reserves). In 2000, the reserves and present value data of Pure
were prepared by Pure (approximately 25% of the total estimated proved reserves)
and Pure's independent petroleum consultants, Netherland, Sewell & Associates,
Inc. (approximately 75% of the total estimated proved reserves).

<TABLE>
<CAPTION>
                                                                          December 31,
                                                                     -----------------------
                                                                        2001         2000
                                                                     ----------   ----------
                                                                     (dollars in thousands)
<S>                                                                  <C>          <C>
Estimated proved reserves:
   Oil and condensate (MBbls).....................................       80,549       72,606
   Gas (MMcf).....................................................      985,730      662,357
   MBOE (6 Mcf per Bbl)...........................................      244,837      182,999
Proved developed reserves as a percentage of proved reserves......           80%          81%
SEC 10% present value.............................................   $1,080,704   $2,807,618
Standardized measure of discounted future net cash flows..........   $  883,852   $1,896,144
</TABLE>

          In accordance with applicable SEC requirements, estimates of Pure's
proved reserves and future net revenues are made using sales prices and costs,
estimated to be in effect as of the date of such reserve estimates, that are
held constant throughout the life of the properties, except to the extent a
contract specifically provides for escalation. The average realized prices for
Pure's reserves as of December 31, 2001 were $17.99 per Bbl of oil and $2.23 per
Mcf of natural gas, compared to average realized prices for Pure's reserves as
of December 31, 2000 of $25.76 per Bbl of oil and $8.49 per Mcf of natural gas.
Estimates of oil and natural gas reserves and their estimated values require
numerous engineering assumptions as to the productive capacity and production
rates of existing geological formations and require the use of certain SEC
guidelines as to assumptions regarding costs to be incurred in developing and
producing reserves and prices to be realized from the sale of future production.
Accordingly, estimates of reserves and their value are inherently imprecise and
are subject to constant revision and change and should not be construed as
representing the actual quantities of future production or cash flows to be
realized from Pure's oil and natural gas properties or the fair market value of
such properties.

          At December 31, 2001, the NYMEX prices for crude oil and natural gas
were $19.84 per barrel and $2.57 per Mcf, respectively. By way of comparison, at
February 28, 2002, the NYMEX prices for crude oil and natural gas were $21.74
per barrel and $2.36 per Mcf, respectively.

                                       12

<PAGE>

Productive Wells and Acreage

          Productive Wells

          The following table sets forth Pure's productive wells as of December
31, 2001:

                                                 Actual
                                             -------------
                                             Gross    Net
                                             -----   -----

                           Oil Wells......   4,521   2,497
                           Gas Wells......   1,532     744
                                             -----   -----
                              Total.......   6,053   3,241
                                             =====   =====

          Productive wells consist of producing wells and wells capable of
production, including gas wells waiting pipeline connections. Wells that are
completed in more than one producing horizon are counted as one well.

          Acreage Data

          Undeveloped acreage includes leased acres on which wells have not been
drilled or completed to a point that would permit the production of commercial
quantities of oil and gas, regardless of whether or not such acreage contains
proved reserves. A gross acre is an acre in which an interest is owned. A net
acre is deemed to exist when the sum of fractional ownership interests in gross
acres equals one. The number of net acres is the sum of the fractional interests
owned in gross acres expressed as whole numbers. The following table sets forth
the approximate developed and undeveloped acreage in which Pure held a leasehold
mineral or other interest as of December 31, 2001:

<TABLE>
<CAPTION>
                      Developed            Undeveloped                Total
                  -----------------   ---------------------   ---------------------
                   Gross      Net       Gross        Net        Gross        Net
                  -------   -------   ---------   ---------   ---------   ---------
<S>               <C>       <C>       <C>         <C>         <C>         <C>
Leasehold......   784,688   356,291   1,373,712     854,488   2,158,400   1,210,779
Minerals.......     1,887       203   6,089,058   3,193,942   6,090,945   3,194,145
Other..........    28,100     1,713       1,730           8      29,830       1,721
                  -------   -------   ---------   ---------   ---------   ---------
Total..........   814,675   358,207   7,464,500   4,048,438   8,279,175   4,406,645
                  =======   =======   =========   =========   =========   =========
</TABLE>

                                       13

<PAGE>

Drilling Activities

          The following table sets forth the drilling activity for the periods
presented.

                                  2001            2000           1999
                              -------------   ------------   ------------
                              Gross    Net    Gross   Net    Gross   Net
                              -----   -----   -----   ----   -----   ----
Exploratory:
   Productive .............    75.0    48.6    15.0    7.7    1.0     1.0
   Dry ....................    18.0    11.8    10.0    6.1    2.0     2.0
                              -----   -----   -----   ----   ----    ----
      Total ...............    93.0    60.4    25.0   13.8    3.0     3.0
                              =====   =====   =====   ====   ====    ====

Development:
   Productive .............   154.0    80.7    95.0   37.4   27.0    14.5
   Dry ....................      --      --      --     --     --      --
                              -----   -----   -----   ----   ----    ----
      Total ...............   154.0    80.7    95.0   37.4   27.0    14.5
                              =====   =====   =====   ====   ====    ====

Total:
   Productive .............   229.0   129.3   110.0   45.1   28.0    15.5
   Dry ....................    18.0    11.8    10.0    6.1    2.0     2.0
                              -----   -----   -----   ----   ----    ----
      Total ...............   247.0   141.1   120.0   51.2   30.0    17.5
                              =====   =====   =====   ====   ====    ====

          At December 31, 2001, Pure had 25 gross wells (14.5 net wells) being
drilled and not included in the above table.

                                       14

<PAGE>

Net Production, Unit Prices and Costs

          The following table presents certain information with respect to oil
and gas production, prices and costs attributable to all oil and gas property
interests owned by Pure for the periods presented (a):

<TABLE>
<CAPTION>
                                                                    Year ended December 31,
                                                                 -----------------------------
                                                                   2001       2000      1999
                                                                 --------   --------   -------
<S>                                                              <C>        <C>        <C>
Production:
   Oil and condensate (MBbls) ................................      7,822      5,171     3,659
   Natural gas (MMcf) ........................................     81,875     38,610    28,899
   Total (MBOE) ..............................................     21,468     11,606     8,476

Average daily production:
   Oil and condensate (Bbls) .................................     21,430     14,128    10,026
   Natural gas (Mcf) .........................................    224,315    105,492    79,175
   Total (BOE) ...............................................     58,816     31,710    23,222

Average sales price per unit (including effects of hedging):
   Oil and condensate (per Bbl) ..............................   $  23.61   $  29.03   $ 17.66
   Natural gas (per Mcf) .....................................   $   3.58   $   3.41   $  1.68
   Total (per BOE) ...........................................   $  22.27   $  24.29   $ 13.36

Expenses per BOE:
   Production costs, excluding production and other taxes ....   $   3.87   $   4.06   $  3.81
   Production and other taxes ................................   $   1.64   $   1.89   $  1.01
   General and administrative ................................   $   1.24   $   1.06   $  0.92
   Depletion, depreciation and amortization ..................   $   6.70   $   3.86   $  3.79
</TABLE>

----------
(a) The operating data does not include the effects of the operating results for
the assets presented as discontinued operations as discussed in Note 22 of Notes
to Consolidated Financial Statements. The production from the properties
associated with the discontinued operations, not included in the table, were 741
and 477 BOE per day in 2001 and 2000, respectively. There were no results of
operations related to the discontinued operations in 1999, as the sold
properties were acquired in the Titan merger.

Office Facilities

          Pure leases approximately 119,000 square feet of office space in
Midland, Texas, where its executive offices are located. The term of the lease
is through January 2008. Pure leases approximately 22,500 and 6,600 square feet
of office space in Houston, Texas and Corpus Christi, Texas respectively, where
it maintains divisional offices. The remaining terms of the leases range from
month-to-month to six years.

          Pure acquired leased office space of approximately 25,000 square feet
in Denver, Colorado as a result of the Hallwood merger. The term of the lease is
through December 2006. Pure closed the Denver office as a part of the Hallwood
merger plan and has subleased the office space through December 2006.

                                       15

<PAGE>

ITEM 3. LEGAL PROCEEDINGS

          Litigation

          Hallwood Petroleum, Inc. has been named as a defendant in a suit
styled Lamson Petroleum Corporation v. Hallwood Petroleum, Inc. et al, which was
filed May 17, 2001 in the 15th Judicial District Court, Lafayette Parish,
Louisiana. Lamson Petroleum Corporation seeks proceeds from the sale of gas and
condensate produced and sold from units on 200 acres of land in the parish and a
declaratory judgement recognizing its interest in production from the units.
Hallwood Petroleum, Inc. and the other working interest owners in the leases
involved offered to settle the matter for $250,000 (approximately 50% of this
amount would be Pure's share). The settlement offer was not an admission of
liability but an attempt to limit the parties' future costs to vigorously defend
the matter. Lamson rejected this offer and countered with an offer to settle the
matter for $25 million. All parties rejected this offer.

          We are unable at this time to assess the likelihood of an unfavorable
outcome. We strongly believe the suit is without merit and will vigorously
defend against it. In our opinion, the ultimate disposition of this lawsuit in
the event of an unfavorable outcome, if the matter does go to trial, should not
have a material adverse effect on Pure's financial position or liquidity, but
could adversely impact results of operations in a given reporting period.

          Pure is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on Pure's
financial position, results of operations or liquidity.

                                       16

<PAGE>

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

(a)  Inapplicable.

(b)  Inapplicable.

(c)  Inapplicable.

(d)  Inapplicable

OFFICERS AND DIRECTORS OF REGISTRANT

          The following individuals are the current officers and directors of
Pure:

<TABLE>
<CAPTION>
Name                            Age   Position
<S>                              <C>  <C>
Jack D. Hightower............    53   President, Chief Executive Officer and Chairman of the Board
George G. Staley.............    67   Executive Vice President - Exploration and Director
William K. White.............    59   Vice President - Finance and Chief Financial Officer
Gary M. Dupriest.............    44   Vice President - Operations
Dan P. Colwell...............    57   Vice President - Acquisitions, Divestitures and Land
Thomas H. Moore..............    57   Vice President - Business Development
Rodney L. Woodard............    46   Vice President - Reserves and Evaluation
John L. Benfatti.............    56   Vice President - Finance and Controller
Susan D. Rowland.............    41   Vice President - Administration and Corporate Secretary
Darin G. Holderness..........    38   Assistant Controller
Darrell D. Chessum...........    52   Director
Keith A. Covington...........    38   Director
Graydon H. Laughbaum, Jr.....    62   Director
Timothy H. Ling..............    44   Director
HD Maxwell...................    70   Director
Herbert C. Williamson, III...    53   Director
</TABLE>

          Set forth below is a description of the backgrounds of each individual
who currently serves as an officer and director of Pure Resources.

          Jack D. Hightower has served as President, Chief Executive Officer and
Chairman of the Board of Directors of Pure since May 2000 and Titan since
formation of Titan's predecessor in March 1995.

          George G. Staley has served as Executive Vice President, Exploration
and Director of Pure since May 2000 and of Titan since its formation. From 1975
until 1995, Mr. Staley served as President and Chief Executive Officer of Staley
Gas Co., Inc. and Staley Operating Co., which are oil and gas exploration and
operating companies.

          William K. White has served as Vice President, Finance and Chief
Financial Officer of Pure since May 2000 and of Titan since September 1996.

          Gary M. Dupriest has served as Vice President, Operations of Pure
since May 2000. From March 1999 to May 2000 he served as Vice President of the
Permian Basin business unit of Union Oil. From 1997 to February 1999, he was the
business unit's exploitation manager. From 1994 to 1997, Mr. Dupriest was Union
Oil's South Permian asset manager. He had been employed by Union Oil since 1980.

                                       17

<PAGE>

          Dan P. Colwell has served as Vice President, Acquisitions,
Divestitures and Land of Pure since May 2000 and of Titan since its formation.
Form 1993 to 1995, Mr. Colwell served as Vice President of Land for Enertex,
Inc. Mr. Colwell was employed by ARCO as Director of Business Development from
1991 to 1993 and Area Land Manager from 1987 to 1991.

          Thomas H. Moore has served as Vice President, Business Development of
Pure since May 2000 and of Titan since its formation. From 1992 to 1995, Mr.
Moore served as managing partner of Magnum Energy Corporation, L.L.C. From 1991
until 1992, Mr. Moore served as Executive Vice President - Exploration and
Production, Chief Operating Officer and Director of Clayton Williams Energy,
Inc. From 1985 to 1991, Mr. Moore served ad President, Chief Operating Officer
and Director of Clayton W. Williams, Jr. Inc.

          Rodney L. Woodard has served as Vice President, Reserves and
Evaluations of Pure since May 2000 and as Vice President, Engineering for Titan
since its formation. From 1985 to 1995, Mr. Woodard served as Vice President of
Selma International Investment Limited.

          John L. Benfatti has served as Vice President, Accounting and
Controller of Pure since May 2000 and of Titan since its formation. From 1980 to
1995, Mr. Benfatti served as Controller and Treasurer of Staley Gas Co., Inc.

          Susan D. Rowland has served as Vice President, Administration and
Corporate Secretary of Pure since May 2000 and of Titan since its formation.
From 1986 to 1996, Ms. Rowland served as a corporate officer and administrative
manager of a number of companies, including Amber Energy, Inc.

          Darin G. Holderness has served as Assistant Controller of Pure since
May 2000 and of Titan since January 1998. From January 1996 to December 1997,
Mr. Holderness served as Manager of Financial Reporting for Aquila Gas Pipeline
Corporation. From May 1986 to December 1995, Mr. Holderness served as a senior
manager and in other staff positions with KPMG LLP.

          Darrell D. Chessum has served as a director of Pure since its
inception. Mr. Chessum has served as Treasurer of Unocal Corporation since 1990.
Since 1998, Mr. Chessum has served as a director for the following energy
industry mutual insurance companies: (a) Oil Investment Corporation Ltd., (b)
Oil Casualty Investment Corporation Ltd., (c) Oil Investment (Barbados) Ltd.,
and (d) Oil Casualty Investment (Barbados) Ltd.

          Keith A. Covington has served as a director of Pure since May 2000.
Since January 2002 to present, Mr. Covington has been self-employed as a real
estate investor. From January 1991 to January 2002, Mr. Covington was employed
by the Davis Companies, a privately held family company in Los Angeles, with
responsibility as vice president for real estate and venture capital
investments. Mr. Covington served as a project analyst of Janss Corporation, a
real estate developer in Santa Monica, California from September 1989 to
December 1990. He served as a Financial Analyst - Corporate Finance of
PaineWebber Group Inc., an investment banking, securities and commodities firm,
from August 1985 through June 1987.

          Graydon H. Laughbaum, Jr. has served as a director of Pure since May
2000. Mr. Laughbaum has served as an advisor to Unocal Corporation on global
energy issues since July 1, 1999. From August 1, 1997 until January 1, 1999, Mr.
Laughbaum was Senior Vice President of New Ventures for Unocal Corporation.
Prior to his appointment as Senior Vice President, he served as Corporate Vice
President of Worldwide Exploration, Vice President for New Ventures in East Asia
and Latin America and Vice President of Operations in the Energy Resources
Division of Unocal Corporation from 1993 to 1997. From 1968 to 1993, he served
in several management positions with Unocal Corporation. Mr. Laughbaum joined
Union Oil as a Geological Engineer in 1964.

                                       18

<PAGE>

          Timothy H. Ling has served as a director of Pure since its inception.
He was named President and Chief Operating Officer of Unocal Corporation in
January, 2001. Prior to this he served as Executive Vice President for North
American Operations from March 1999 through December 2000 and was Unocal
Corporation's Chief Financial Officer from October 1997 to May 2000. He was
elected as a Director of Unocal Corporation in January 2000. Prior to joining
Unocal Corporation he was a partner of McKinsey & Company, Inc. and also worked
as a geologist for the United States Geological Survey in Woods Hole,
Massachusetts. Mr. Ling serves as a director of Astro All Asia Networks Ltd., a
Malaysian company involved in radio and television broadcasting and direct
satellite distribution in Asia and a director of Natural Health Link, a small
private healthcare company. He is also a director and officer of the Los Angeles
Philharmonic Association.

          HD Maxwell has served as a director of Pure since May 2000. Prior to
retiring in 1993, he served as Chairman of Union Oil Company of Great Britain
from 1992. Prior to 1992, he served in several management positions with Unocal
Corporation. From 1988 to 1992, Mr. Maxwell was the President of Union Oil's
North American Oil and Gas Division. He served as Vice President of Union Oil's
Western Region from 1987 to 1988 and as Vice President of the Central Region
from 1985 to 1987. He served as Vice President of the MEA Region from 1983 to
1985. During the period from 1976 to 1983, he was the President and Managing
Director of Union Oil Company of Great Britain. Mr. Maxwell joined Union Oil in
1960 as a Reservoir Engineer.

          Herbert C. Williamson, III has served as a director of Pure since May
2000 and of Titan since August 1999. At the present, Mr. Williamson is
self-employed as a consultant. From March 2001 to March 2002 Mr. Williamson had
served as an investment banker with Petrie Parkman & Co. From April 1999 to
March 2001 served as chief financial officer and from August 1998 to March 2001
as a director of Merlon Petroleum Company, a private oil and gas company
involved in exploration and production in Egypt. Mr. Williamson served as
Executive Vice President, Chief Financial Officer and director of Seven Seas
Petroleum, Inc., a publicly traded oil and gas exploration company, from March
1998 to April 1999. From 1995 through April 1998, he served as Director in the
Investment Banking Department of Credit Suisse First Boston. Mr. Williamson
served as Vice Chairman and Executive Vice President of Parker and Parsley
Petroleum Company, a publicly traded oil and gas exploration company (now
Pioneer Natural Resources Company) from 1985 through 1995.

                                       19

<PAGE>

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

          Pure's common stock has been publicly traded on the New York Stock
Exchange "PRS" since May 26, 2000. The following table summarizes the high and
low reported sales prices on NYSE for each quarterly period presented below:

                                                   Common Stock
                                                  ---------------
                                                   High     Low
                                                  ------   ------

2000:
Second Quarter (Trading began May 26, 2000) ...   $20.94   $13.88
Third Quarter .................................   $21.19   $14.88
Fourth Quarter ................................   $21.19   $16.19

2001:
First Quarter .................................   $22.50   $18.13
Second Quarter ................................   $25.30   $17.60
Third Quarter .................................   $20.55   $15.00
Fourth Quarter ................................   $20.50   $15.04

2002:
First Quarter (through March 1, 2002) .........   $20.68   $19.37

          As of March 1, 2002, Pure estimates there were more than 350 record
holders and more than 2,000 beneficial holders of Pure's common stock.

          No dividends have been declared or paid on Pure's common stock to
date. Currently, Pure plans to retain all future earnings for the development of
its business

          The merger agreement between Union Oil and Titan contains an agreement
by Pure that for three years following the merger it will not pay any dividend
on the outstanding shares of Pure common stock in cash or property, other than
capital stock, in excess of $5 million per year unless approved by a majority of
the members of the board of directors of Pure who are not affiliates of Union
Oil.

          Under Pure's revolving current credit facilities Pure may only pay
dividends up to $10 million annually.

                                       20

<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

          The following selected consolidated financial data should be read in
conjunction with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Pure's consolidated financial statement
and related notes included in "Item 8. Consolidated Financial Statements and
Supplementary Data".

                                       21

<PAGE>

<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,
                                                                   -------------------------------------------------------
                                                                    2001 (a)     2000 (b)     1999       1998       1997
                                                                   ----------   ---------   --------   --------   --------
                                                                         (dollars in thousands, except per unit data)
<S>                                                                <C>          <C>         <C>        <C>        <C>
Statement of Operations Data:
   Total revenues ..............................................   $  484,459   $ 283,442   $114,125   $106,850   $138,190
   Expenses:
      Oil and gas production ...................................       83,033      47,130     32,268     39,430     36,538
      Production and other taxes ...............................       35,298      21,888      8,579      8,881     11,621
      General and administrative ...............................       26,655      12,281      7,836      7,674      8,264
      Amortization of deferred compensation ....................        1,518      15,386         --         --         --
      Exploration and abandonment ..............................       54,766      19,883      6,491      3,623      1,358
      Depletion, depreciation and amortization .................      143,815      44,785     32,133     33,139     37,552
      Impairment of long-lived assets ..........................           --          --        345      7,387      9,562
                                                                   ----------   ---------   --------   --------   --------
         Total expenses ......................................        345,085     161,353     87,652    100,134    104,895
                                                                   ----------   ---------   --------   --------   --------
   Operating income ............................................      139,374     122,089     26,473      6,716     33,295
      Interest expense .........................................      (28,308)     (4,396)        --         --         --
      Other income (expense) ...................................        4,313      (2,455)        --        106         58
      Income taxes expense .....................................      (33,744)    (34,066)    (8,685)    (1,780)   (11,180)
      Minority interest ........................................       (1,445)         --         --         --         --
                                                                   ----------   ---------   --------   --------   --------
   Income from continuing operations ...........................       80,190      81,172     17,788      5,042     22,173
      Discontinued operations, net of tax ......................        1,170       1,688         --         --         --
                                                                   ----------   ---------   --------   --------   --------
   Net income ..................................................   $   81,360   $  82,860   $ 17,788   $  5,042   $ 22,173
                                                                   ==========   =========   ========   ========   ========

   Income from continuing operations per share - basic .........   $     1.60   $    1.89   $   0.54   $   0.15   $   0.68
   Net income per common share - basic .........................   $     1.62   $    1.93   $   0.54   $   0.15   $   0.68
   Income from continuing operations per share - diluted .......   $     1.57   $    1.86   $   0.54   $   0.15   $   0.68
   Net income per common share - diluted .......................   $     1.59   $    1.90   $   0.54   $   0.15   $   0.68
   Weighted average equivalent common shares outstanding .......       50,108      42,835     32,709     32,709     32,709
Other Data:
   Net cash provided by (used in):
      Operating activities (c) .................................   $  308,294   $ 143,101   $ 58,403   $ 47,117   $ 63,388
      Investing activities .....................................     (739,530)   (100,051)   (19,113)   (41,892)   (21,982)
      Financing activities .....................................      433,504     (39,725)   (39,290)    (5,225)   (41,106)
   Net settlements with owner (c) ..............................       (2,948)     15,844     39,290      5,225     41,106
   EBITDAX (d) .................................................      314,167     185,854     65,505     50,865     81,767
   Capital expenditures ........................................      743,932     104,734     19,427     42,612     23,295

Consolidated Operating Data:
   Production:
      Oil and condensate (MBbls) ...............................        7,822       5,171      3,659      3,991      4,021
      Natural gas (MMcf) .......................................       81,875      38,610     28,899     29,962     28,367
      Total (MBOE) .............................................       21,468      11,606      8,476      8,985      8,749
   Average Sales Prices Per Unit (including effects of hedging):
      Oil and condensate (per Bbl) .............................   $    23.61   $   29.03   $  17.66   $  13.18   $  18.69
      Natural gas (per Mcf) ....................................         3.58        3.41       1.68       1.78       2.21
      Total (per BOE) ..........................................        22.27       24.29      13.36      11.76      15.78
   Expenses per BOE:
      Production costs, excluding production and other taxes:      $     3.87   $    4.06   $   3.81   $   4.39   $   4.20
      Production and other taxes ...............................         1.64        1.89       1.01       0.99       1.32
      General and administrative ...............................         1.24        1.06       0.92       0.85       0.96
      Depletion, depreciation and amortization .................         6.70        3.86       3.79       3.69       4.32
Consolidated Balance Sheet Data (at period end):
   Cash and cash equivalents ...................................   $    5,593   $   3,325   $     --   $     --   $     --
   Total assets ................................................    1,434,808     719,115    294,690    311,270    307,826
   Long-term obligations .......................................      586,703      68,000         --         --         --
   Stockholders' equity and owner's net investment .............      488,083     377,786    202,624    224,126    224,309
</TABLE>

                                       22

<PAGE>

----------
(a)  In 2001 and 2000, amounts reflect the discontinued operations associated
     with assets sold in March 2002 and Pure's adoption of SFAS No. 144 on
     January 1, 2002. See Note 22 of Notes to Consolidated Financial Statements
     for additional information. There were no results of operations for the
     discontinued operations in 1999, 1998 and 1997.
(b)  Pure completed the International Paper transaction in January 2001 and the
     Hallwood merger in May 2001. The International Paper transaction and
     Hallwood merger were accounted for as purchase business combinations.
     Accordingly, the results of operations since February 2001 reflect the
     impact of the International Paper transaction and since May 2001 reflect
     the impact of the Hallwood merger. Pure adopted SFAS No. 133 "Accounting
     for Derivative Instruments and Hedging Activities" as of January 1, 2001.
(c)  Pure completed the Titan merger in May 2000. This transaction was accounted
     for as a purchase of Titan. Accordingly, the results of operations since
     the Titan merger reflect the impact of the purchase.
(d)  The effect of certain working capital changes are included in net
     settlements with owners for 1999 through 1997.
(e)  EBITDAX as used herein is calculated by adding interest expense, income
     taxes, depletion, depreciation and amortization, impairment of property,
     plant and equipment, exploration expense and dry hole costs, and other
     noncash items to income from continuing operations. EBITDAX is not intended
     to represent cash flow or any other measure of performance in accordance
     with GAAP. EBITDAX is included herein because management believes that
     investors find it to be a useful analytical tool. Other companies may
     calculate EBITDAX differently, and we cannot assure you that such figures
     are comparable with similarly titled figures for such other companies.

                                       23

<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

General

          Pure is an independent energy company engaged in the exploitation,
development, exploration and acquisition of oil and gas properties. Pure's
strategy is to grow reserves, production, cash flows and net income per share
by:

          .    identifying acquisition opportunities that provide significant
               development and exploratory drilling potential,
          .    exploiting and developing its reserve base,
          .    pursuing exploration opportunities for oil and gas reserves,
          .    capitalizing on advanced technology to identify, explore and
               exploit projects, and
          .    emphasizing a low overhead and operating cost structure.

Impact of Commodity Prices

          Our revenues, operating results and future growth depend substantially
on prevailing oil and natural gas prices. Price volatility in the oil and
natural gas markets has remained prevalent in the last few years. During 1998
and through the first quarter of 1999, we experienced a decline in energy
commodity prices. However, in the summer of 1999 and continuing into early 2000,
prices improved. The average prices received by producers in all our core areas
rose sharply in the first half of 2001 and 2000 compared to 1999. The NYMEX
average price for crude oil and natural gas was $19.30 per barrel and $2.32 per
Mcf for 1999, compared to $30.25 per barrel and $4.32 per Mcf for 2000 and
compared to $26.00 per barrel and $4.14 per Mcf in 2001, respectively. At
December 31, 2001, the NYMEX prices for crude oil and natural gas were $19.84
per barrel and $2.57 per Mcf, respectively. By way of comparison, at February
28, 2002, the NYMEX prices for crude oil and natural gas were $21.74 per barrel
and $2.36 per Mcf, respectively.

          In an effort to mitigate the impact of commodity prices Pure, at
times, utilizes financial commodity derivatives. At December 31, 2001, Pure has
financial commodity derivatives for 19,092,000 MMBtu of natural gas and 373,000
barrels of crude oil to mitigate the impact of commodity prices on its estimated
2002 production.

          Low prices for crude oil, natural gas or other commodities sold by
Pure could have a material adverse effect on Pure's results of operations and
cash flows, on the quantities of crude oil and natural gas that can be
economically produced from its fields, and on the quantities and economic values
of its proved reserves and potential resources. Such adverse pricing scenarios
could result in write-downs of the carrying values of Pure's properties and
materially adversely affect Pure's financial condition, as well as its results
of operations and cash flows.

Hallwood Merger

          On March 30, 2001, Pure and Hallwood Energy Corporation ("Hallwood")
announced the signing of a definitive merger agreement pursuant to which Pure
Resources II, Inc., an indirect wholly-owned subsidiary of Pure, would acquire
all the outstanding shares of common stock of Hallwood at a price of $12.50 per
share and all the outstanding shares of Series A Cumulative Preferred Stock of
Hallwood at a price of $10.84 per share. The all-cash transaction was structured
as a first step tender offer followed by a cash merger to acquire all remaining
shares of Hallwood. Total cash purchase price for the transaction is estimated
to be approximately $260.4 million, including assumed debt. Purchase accounting
treatment was utilized in this transaction which resulted in a total purchase
price of approximately $275.6 million.

          On May 8, 2001, Pure accepted for payment approximately 85% of the
common stock and 78% of the preferred stock of Hallwood. On May 30, 2001, after
completion of a subsequent tender offer period, Pure completed the acquisition
of the remaining common and preferred shares through consummation of the cash
merger. The results of operations of Hallwood have been included in Pure's since
May 1, 2001.

                                       24

<PAGE>

          At May 1, 2001, Pure estimated the total proved reserves acquired (SEC
10% basis) to have been approximately 36,800 MBOE with an SEC 10% present value
at approximately $386 million. The total proved reserves were approximately 80%
natural gas. The Hallwood properties are primarily located in the Permian Basin,
the San Juan Basin, South Texas and onshore southern Louisiana.

International Paper Transaction

          On January 31, 2001, Pure (a) acquired oil and gas properties, fee
mineral and royalty interests from International Paper Company and (b)
contributed cash for a controlling general and limited partnership interests, in
a partnership that owns oil and gas properties contributed by International
Paper, for a total of approximately $261 million, subject to adjustment, for
cash. The transaction was funded from Pure's credit facilities.

          The transaction provides Pure with additional areas of focus,
primarily offshore in the Gulf of Mexico and in the Gulf Coast region covering
Texas, Louisiana, Arkansas, Mississippi, Alabama and Florida. Pure also acquired
over 6 million gross (3.2 million net) acres of fee mineral ownership, primarily
across the southern Gulf Coast region of the United States.

          At December 31, 2000, Pure estimated the total proved reserves
acquired (SEC 10% basis) to have been approximately 25,000 MBOE with an SEC 10%
present value of approximately $629 million. The total proved reserves were
approximately 69% natural gas, and 96% of the reserves are proved developed.

7.125% Senior Notes

          In June 2001, Pure issued $350 million in unsecured senior notes which
bear interest at 7.125%. The 7.125% senior notes were issued at a discount to
their face value which resulted in the 7.125% senior notes having a yield of
7.232%. The 7.125% senior notes pay interest each June 15 and December 15
beginning in December 2001. The maturity date of the 7.125% senior notes is June
15, 2011. Pure has the right to redeem the 7.125% senior notes at any time for
an amount equal to the principal plus a make-whole premium.

Union Oil Merger

          On December 13, 1999, Titan Exploration, Inc. ("Titan") and Union Oil
Company of California ("Union Oil") entered into an agreement to merge Titan and
the Permian Basin business unit of Union Oil into a new company. The resulting
company is Pure Resources, Inc. Titan had historically been involved in oil and
gas exploration and production in the Permian Basin of West Texas and
southeastern New Mexico, the Brenham Dome area of south central Texas and the
Central Gulf Coast region of Texas.

          The combination of Pure and the Permian Basin business unit is treated
as a combination of entities under common control since Union Oil owned 100% of
the Permian Basin business unit prior to the "Contribution" (as defined in Note
1 of the Notes to Consolidated Financial Statements) and also owned 100% of the
capital stock of Pure immediately subsequent to the Contribution (without giving
effect to the Titan merger). Consequently, the accompanying historical financial
results and operational data are those of the Permian Basin business unit of
Union Oil.

          On May 24, 2000, the Titan stockholders approved the merger and on May
25, 2000, Union Oil and Titan closed the merger. The merger was treated as a
business combination with Titan being acquired by Pure. Pure began trading on
the New York Stock Exchange under the symbol "PRS" on May 26, 2000.

          Immediately following completion of the merger, Pure had approximately
50 million shares of common stock outstanding, Union Oil held approximately
65.4% (32.7 million shares) of those Pure shares and the remaining 34.6 % (17.3
million shares) were held by the previous stockholders of Titan common stock,
who were entitled in the merger to exchange each share of Titan common stock for
..4302314 of a share of Pure common stock.

                                       25

<PAGE>

Business Opportunities Agreement

          In order to minimize conflicts of interest between Union Oil and Pure
and to permit Union Oil to continue to conduct its business without undue risk
of liability, the parties entered into a business opportunities agreement in
which Pure agreed that it has no interest or expectancy in business
opportunities developed by Union Oil in accordance with standards set forth in
the business opportunities agreement. Pure also agreed that, without the consent
of Union Oil, it will not conduct any business other than the oil and gas
exploration, development and production business and will not pursue any new
business opportunities that are outside of certain geographic areas. As a result
of the business opportunities agreement, as affected by limited waivers that
Pure has obtained from Union Oil, Pure is contractually prohibited from
conducting business outside of the continental United States and designated
areas in the offshore Gulf of Mexico region of the United States, which
designated areas relate to the programs and partnerships Pure acquired in the
International Paper transaction. Further, unless conducted through one of such
programs or partnerships, Pure is prohibited from conducting business in the
designated offshore areas if the opportunity relates to a prospect with gross
unrisked reserve target potential of less than 20 Bcf without Union Oil's
consent. Also, the limited waiver with respect to the offshore areas will
terminate on March 31, 2003, if Union Oil notifies Pure in September 2002 that
it will not extend the limited waiver. The restrictions on our ability to
expand, develop and explore certain offshore assets related to those acquired
from International Paper may limit our ability to realize fully the value of
certain of the acquired assets. Because of Pure's geographic concentration, any
regional events that increase costs, reduce availability of equipment or
supplies, reduce demand or limit production may impact Pure more than if its
operations were more geographically diversified. The business opportunities
agreement does not affirmatively restrict Union Oil's business activities,
including within the designated areas. However, the agreements remaining
restrictions may limit Pure's ability to diversify its operating base and may
limit its ability to realize fully the value of certain of the assets acquired
in the International Paper transaction.

Employment/Severance Arrangements

          Put Right

          Pursuant to the employment and/or severance and put right agreements
("employment/severance agreements") entered into between Pure and its officers,
under certain circumstances described below, each covered officer has the right
to require Pure to purchase ("put right"), at a price equal to the "net asset
value" per share, the shares of Pure common stock:

..    Received by the officer in the Titan merger in exchange for shares of Titan
     common stock held by the officer on December 1, 1999 (of which there were
     2,811,107 Pure shares held subject to the put right at December 31, 2001).
     At December 31, 2001, with the net asset value per share of $17.54, Pure's
     obligation to purchase this common stock was approximately $49.3 million.
..    Acquired by the officer pursuant to exercise of stock options currently
     held or granted in the future, (see Note 11 of Notes to Consolidated
     Financial Statements for the shares underlying the stock option subject to
     the put right at December 31, 2001 and the applicable exercise prices). At
     December 31, 2001, there were 4,120,570 stock options subject to the put
     right, of which 3,449,068 had exercise prices that were less than the net
     asset value per share of $17.54 at December 31, 2001. Pure would receive
     proceeds of approximately $40.0 million if the 3,449,068 of stock options
     were exercised and Pure's obligation to purchase the 3,449,068 shares, at
     the net asset value per share of $17.54 at December 31, 2001, was
     approximately $60.5 million. Accordingly, Pure's net obligation related to
     the stock options subject to the put right at December 31, 2001 was
     approximately $20.5 million.

          The put right is exercisable by the covered officer upon the
occurrence of a "put event" by providing written notice to Pure within 90 days
after the date of the put event. The date of that exercise notice establishes
the "put date" for purposes of making certain calculations to be utilized in the
closing of the related purchase of shares, or "put closing." If the officer
either does not exercise the put right in a situation other than in connection
with a change of control of Pure or Unocal, or exercises the put right with
respect to only a portion of the covered shares, the officer cannot later cause
Pure to purchase additional shares after another put event. A put event means
any one of the following:

                                       26

<PAGE>

..    Termination of the officer's employment for any reason after May 25, 2003
     (for example, as a result of voluntary resignation or termination for
     cause, as defined in the applicable agreement).
..    Termination of the officer's employment by Pure without cause, as defined
     in the applicable agreement.
..    Change of control, as defined in the applicable agreement, of Pure.
..    Change of control, as defined in the applicable agreement, of Unocal.
..    Death or disability of the officer.
..    Resignation of the officer for good reason, as defined in the applicable
     agreement and discussed below.
..    Acquisition by Union Oil and its affiliates of beneficial ownership of 85%
     or more of Pure's voting securities.

          If a put event occurs and one or more of the covered officers
exercises the put right, Pure will require cash to satisfy its obligation to
purchase the shares covered by the put exercise. Because the
employment/severance agreements provide the covered officer the right to include
in the amount of shares to be purchased by Pure any specified shares that are
acquired pursuant to stock option exercises after the put event or put date but
before the related put closing, Pure may receive cash from stock option
exercises in connection with exercises of the put right. If Pure does not have
enough cash, net of the amount received by Pure in related stock option
exercises, to satisfy its obligations, Pure would have to incur additional
indebtedness. At December 31, 2001, the net amount of required cash, assuming
all individuals subject to the put exercise their put right at the net asset
value per share of $17.54, is estimated to be $69.8 million (which is reflected
in the consolidated balance sheet as the amount of the common stock subject to
repurchase). At the end of the calendar quarters since the origination of the
employment/severance agreements containing the put right, the amount of the
common stock subject to repurchase has ranged from $69.8 million to $155.5
million, as calculated in accordance with the following paragraph. Accordingly,
it could require substantial financial resources of Pure to fund the put right.

          The net asset value per share is computed by dividing the net asset
value, as defined below, by the number of fully-diluted outstanding shares. The
net asset value is computed as 110% of the pre-tax present value (discounted at
10%) of Pure's proved reserves, utilizing the average of the three-year NYMEX
commodity strip price for the 120 days prior to the put date (adjusted for
commodity hedges in place at the put date), less the funded debt of Pure at the
put date. Funded debt was approximately $589.2 million at December 31, 2001. The
calculated number of fully-diluted outstanding shares as the sum of (a) the
total issued and outstanding common shares of Pure at the put date and (b) the
total number of outstanding stock options (regardless of whether the options are
in-the-money or out-of-the-money) or other securities convertible into common
stock as of the put date (for both management and employees).

          For purposes of valuing the proved reserves, the board of directors of
Pure, in its sole discretion, will determine the proved reserves ("initial
valuation"). Messrs. Hightower and Staley have the right to request a second
valuation at their expense by a third party independent engineering firm
("second valuation"). If the second valuation is not acceptable to Pure, Pure
must select another third party independent engineering firm to perform a third
evaluation ("final valuation") and the cost of the final valuation will be
shared equally by Pure and the officer. If the final evaluation exceeds the
second valuation, the second valuation must be used to determine the net asset
value. If the initial valuation exceeds the final evaluation, the initial
valuation must be used to determine the net asset value. If the final evaluation
is between the initial valuation and the second valuation, an average of all
three evaluations must be used to determine the value of the proved reserves.

          At December 31, 2001, the net asset value per share (based on the data
above) was estimated to be $17.54, and Pure's common stock price closed at
$20.10 per share.

          The $69.8 million reflected in the consolidated balance sheet at
December 31, 2001 as common stock subject to repurchase is based on the net
asset value per share of $17.54 discussed above and has been calculated as (a)
the amount required to purchase all covered shares of common stock (including
shares underlying stock options) of all covered officers, less (b) the proceeds
Pure would receive from the exercise by all covered officers of all of their
in-the-money stock options (options whose exercise price is less than the net
asset value per share).

                                       27

<PAGE>

          The gross deferred compensation related to Pure's potential
obligations to purchase the covered shares (including shares underlying stock
options), which at December 31, 2001 was approximately $30.7 million, is
calculated as the sum of the following:

          (a)  the product of (x) the difference between the net asset value per
               share and Pure's common stock price (but only if the net asset
               value per share is higher), times (y) the total of the number of
               all covered officers' covered shares that were actually
               outstanding at December 31, 2001; plus
          (b)  the product of (x) the difference between the higher of the net
               asset value per share or Pure's common stock price and the
               exercise price of all covered officers' stock options with an
               exercise price that is less than the higher of net asset value
               per share or Pure's common stock price, times (y) the number of
               shares underlying these stock options.

          In 2001 and 2000, Pure recorded approximately $915,000 and $14.8
million, respectively, in compensation expense related to these compensation
arrangements. The total deferred compensation periodically determined will be
amortized as compensation expense over a three-year period for common stock held
at May 26, 2000 (date of the Titan merger), and the vesting period of each of
the applicable stock option agreements. At December 31, 2001 the deferred
compensation reflected in the consolidated balance sheet of $15.0 million is
computed by taking the gross deferred compensation of $30.7 million less the
compensation expense recorded in 2001 and 2000, as noted above. After May 26,
2003, any changes in gross deferred compensation, except for stock options not
fully vested, for each quarterly determination period will be charged or
credited to compensation expense in each quarterly determination period.

          This compensation arrangement is being treated as a "variable plan"
under Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees," and related interpretations including FASB Interpretation No. 44
"Accounting for Certain Transactions involving Stock Compensation an
interpretation of APB Opinion No. 25."

          At December 31, 2001, Pure recorded as common stock subject to
repurchase $69.8 million based on Pure's historical method of calculating this
liability. Due to interpretational factors and circumstances that could exist at
the time of the exercise of the put right, Pure estimates this put obligation
would be not less than $69.8 million nor more than $81.2 million at December 31,
2001. The aforementioned interpretations and circumstances relate to the
treatment and application of the proceeds from the exercise of the stock options
and to the number of shares to be considered or utilized as fully-diluted
shares. Additionally, the common stock subject to repurchase could differ due to
(a) the imprecision associated with the engineering of oil and gas reserves and
(b) the multiple valuations of the proved reserves that could be required under
the put right, as discussed above.

          Severance Benefits

          Pursuant to the employment/severance agreements, upon the occurrence
of a termination event for severance benefits, as defined in the applicable
agreement and discussed below, each covered officer is entitled to severance
benefits including the following:

     .    Cash payment equal to one to three times (depending on officer) of the
          sum of (a) the annual base salary and (b) greater of the bonus from
          the preceding year or the average of the bonus from the three previous
          years, with a gross-up payment to offset fully the effect of any
          federal excise tax imposed on the severance payment. The aggregate
          payment potentially payable, at December 31, 2001, under this
          provision is approximately $6.0 million, excluding the effect of any
          gross-up payment, if any.
     .    Immediate vesting of all restricted stock, options and other rights
          granted to the officer.
     .    Action by Pure to prevent automatic termination of the officer's stock
          options as a result of termination.

                                       28

<PAGE>

          A termination event, as defined in the applicable agreements, for
purposes of the severance benefits is any one of the following:

..    Termination of employment of the officer by Pure for any reason other than
     cause.
..    Voluntarily termination of employment by the officer for good reason, with
     good reason including the following:
     .    Material change in the nature and scope of the officer's duties and
          responsibilities from those at May 26, 2000.
     .    Reduction in the officer's status with Pure below their current
          position.
     .    Reduction of the officer's base salary below the base salary
          immediately prior to May 26, 2000, except for proportionate,
          officer-wide reductions.
     .    Material diminution in the officer's eligibility to participate in the
          benefit and incentive plans of Pure provided to the officer
          immediately prior to May 26, 2000.
     .    Relocation of the officer outside the state of Texas or required
          travel in excess of the greater of (a) 90 days per year or (b) the
          level of travel of the officer the year immediately prior to May 26,
          2000.
..    Change of control of Pure and failure to reach agreement on employment
     terms following the change of control, which terms are acceptable to the
     officer.
..    Change of control of Unocal and failure to reach agreement on employment
     terms following the change of control, which terms are acceptable to the
     officer.
..    Acquisition by Union Oil and its affiliates of beneficial ownership of 85%
     or more of Pure's voting securities.

                                       29

<PAGE>

Critical Accounting Policies and Practices

          Successful Efforts

          Pure uses the successful efforts method of accounting for its oil and
gas producing activities, which is highly dependent on estimates of its oil and
gas reserves which are inherently imprecise. Costs to acquire mineral interests
in oil and gas properties, to drill and equip exploratory wells that result in
proved reserves, and to drill and equip development wells are capitalized. Costs
to drill exploratory wells that do not result in proved reserves and geological
and geophysical costs are expensed. Costs of significant nonproducing
properties, wells in the process of being drilled and significant development
projects are excluded from depletion until such time as the related project is
developed and proved reserves are established or impairment is determined.

          Provision for depletion of oil and gas properties, under the
successful efforts method, is calculated using the unit-of-production method
(which utilizes proved reserves, which are based on the subjective process of
petroleum engineering) on the basis of an aggregation of properties with a
common geologic structural feature or stratigraphic condition, typically a field
or reservoir.

          Impairment of Long-Lived Assets

          Pure, in accordance with SFAS No.121, estimated its expected future
cash flows of its oil and gas properties by amortization unit and compared the
amounts determined to the carrying amount of its oil and gas properties less the
accrued abandonment and restoration obligations to determine if the carrying
amounts were recoverable. For those oil and gas properties for which the
carrying amount less the accrued abandonment and restoration obligations
exceeded the estimated future net cash flows, an impairment was determined to
exist; therefore, Pure adjusted the carrying amount of those oil and gas
properties to their estimated fair value as determined by discounting their
expected future net cash flows at a discount rate commensurate with the risks
involved in the industry. As a result of this process, Pure recognized an
impairment of approximately $345,000 related to its oil and gas properties
during 1999, which resulted from reserve revisions and decreased cash flows
related to severely decreased commodity prices. Pure had no impairments in 2001
and 2000.

          Estimated future cash flows for purposes of determining impairment of
oil and gas properties are determined using the following assumptions:

          .    Reserve economics are adjusted for known changes such as
               extensions and discoveries, acquisitions and dispositions of
               proved properties and changes in production rates and projected
               decline characteristics. Reserves are based on petroleum
               engineering, which is a subjective process of estimating
               underground accumulations of oil and gas that cannot be measured
               in an exact manner. If Pure's reserve estimates had been lower
               than those estimated by Pure's independent petroleum engineers
               and those prepared by Pure's petroleum engineers, which is a
               possibility if other petroleum engineers were utilized due to the
               inexactness of the engineering process, Pure could have incurred
               an impairment in 2001. Pure's management believes its reserve
               estimates are reasonable.
          .    Cash flows from proved oil and gas properties and appropriate
               risk-adjusted probable and possible reserves are considered in
               the analysis.
          .    The prices used for determining cash flows are determined based
               on the near-term (a period of one to four years, depending on
               management's current views of future market conditions) NYMEX
               futures index adjusted for property specific qualitative and
               location differentials. The latest futures price in the near-term
               price outlook is then held constant for the remaining life of the
               properties. Prices estimated for future periods may be above or
               below current pricing levels. Assuming use of another party's
               price outlook, it is possible that Pure could have incurred an
               impairment in 2001; however, Pure's management believes its price
               outlook assumptions were reasonable at December 31, 2001.

          If commodity prices deteriorate from management's view at December 31,
2001, it is possible that Pure could incur an impairment in 2002.

                                       30

<PAGE>

          Put Right

          The put right is accounted for as a "variable plan" under Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees," and
related interpretations including FASB Interpretation No. 44 "Accounting for
Certain Transactions involving Stock Compensation an interpretation of APB
Opinion No. 25." The put right uses the valuation of oil and gas reserves, which
as previously discussed is a subjective process. The amounts associated with the
put right have the potential to have a significant impact on Pure's consolidated
financial statements from period to period, as previously discussed.

                                       31

<PAGE>

Operating Data

          The following sets forth Pure's historical operating data (a):

<TABLE>
<CAPTION>
                                                                         Year ended December 31,
                                                                      -----------------------------
                                                                        2001       2000       1999
                                                                      --------   --------   -------
<S>                                                                   <C>        <C>        <C>
Production:
   Oil and condensate (MBbls)......................................      7,822      5,171     3,659
   Natural gas (MMcf)..............................................     81,875     38,610    28,899
   Total (MBOE)....................................................     21,468     11,606     8,476

Average daily production:
   Oil and condensate (Bbls).......................................     21,430     14,128    10,026
   Natural gas (Mcf)...............................................    224,315    105,492    79,175
   Total (BOE).....................................................     58,816     31,710    23,222

Average sales price per unit (excluding effects of hedging):
   Oil and condensate (per Bbl)....................................   $  23.55   $  29.61   $ 17.66
   Natural gas (per Mcf)...........................................   $   3.37   $   3.48   $  1.68
   Total (per BOE).................................................   $  21.44   $  24.78   $ 13.36

Average sales price per unit (including effects of hedging):
   Oil and condensate (per Bbl)....................................   $  23.61   $  29.03   $ 17.66
   Natural gas (per Mcf)...........................................   $   3.58   $   3.41   $  1.68
   Total (per BOE).................................................   $  22.27   $  24.29   $ 13.36

Expenses per BOE:
   Production costs, excluding production and other taxes..........   $   3.87   $   4.06   $  3.81
   Production and other taxes......................................   $   1.64   $   1.89   $  1.01
   General and administrative......................................   $   1.24   $   1.06   $  0.92
   Depletion, depreciation and amortization........................   $   6.70   $   3.86   $  3.79
</TABLE>

----------
(a) The operating data does not include the effects of the operating results for
the assets presented as discontinued operations as discussed in Note 22 of Notes
to Consolidated Financial Statements. The production from the properties
associated with the discontinued operations, not included in the table, were 741
and 477 BOE per day in 2001 and 2000, respectively. There were no results of
operations related to the discontinued operations in 1999, as the sold
properties were acquired in the Titan merger.

Results of Operations

          Pure closed the International Paper transaction in January 2001 and
the results of operations from these assets have been included in Pure's since
February 1, 2001. Pure completed the Hallwood and Titan mergers in May 2001 and
2000, respectively. The transactions were accounted for as a purchase of
Hallwood and Titan. Accordingly, the results of operations since May 1, 2001 for
Hallwood and June 1, 2000 for Titan have been included in Pure's.

          Years ended 2001 as compared to 2000

          Pure's revenues from the sale of oil and natural gas were $184.7
million and $293.4 million for 2001 and $150.1 million and $131.8 million for
2000, respectively. Including the effects of hedging, compared with 2000, Pure's
2001 average oil sales prices decreased by $5.42 per Bbl, or 19%, while average
gas sales prices increased by $0.17 per Mcf, or 5%. The increase in production
of 9,862 MBOE in 2001 is primarily the result of the Titan merger, International
Paper transaction, Hallwood merger and the success of Pure's capital program,
offset by

                                       32

<PAGE>

normal production declines. The Titan, International Paper transaction and
Hallwood properties contributed approximately 8,792 MBOE of production in 2001.

          Pure's oil and gas production expenses, excluding production and other
taxes, were $83.0 million ($3.87 per BOE) and $47.1 million ($4.06 per BOE) for
2001 and 2000, respectively. Production expenses increased $35.9 million, which
is the result of (a) production costs from the Titan properties of $9.6 million,
International Paper transaction properties of $11.3 million and Hallwood merger
properties of $12.6 million (b) significant increases in the costs of services
and products and (c) decrease of $900,000 between periods in Union Oil's
indirect costs. As of the date of the Titan merger, Pure no longer incurs Union
Oil's indirect costs. As a result of the merger and new management of all of
Pure properties, there have been certain fundamental changes in how the assets
are managed. Certain costs that a major oil company, such as Union Oil, treated
as production costs may be more readily seen as general and administrative costs
by an independent oil company, such as Pure. Accordingly, certain costs will be
reflected in general and administrative costs.

          Other operating revenues are primarily the result of Hallwood's
monetization of its Section 29 credits, prior to Pure's acquisition of Hallwood.
Pure will continue to receive a portion of this revenue through December 2002
when the Section 29 credits are currently set to expire. In December 2001, Pure
acquired one of the entities which paid Pure for Section 29 credits.
Accordingly, Pure will no longer receive a portion of this revenue, but will
have the Section 29 credits available to reduce its federal income tax
liability.

          Production and other taxes were $35.3 million ($1.64 per BOE) and
$21.9 million ($1.89 per BOE) for 2001 and 2000, respectively. The increase in
production and other taxes is primarily attributable to increase in oil and gas
revenues associated with increased revenues from the assets in the Titan merger,
International Paper transaction and the Hallwood merger.

          General and administrative expenses were $26.7 million ($1.24 per BOE)
and $12.3 million ($1.06 per BOE) for 2001 and 2000, respectively. General and
administrative expenses increased as a result of (a) the Titan merger, the
International Paper transaction and Hallwood merger, (b) subsequent to the Titan
merger, the classification of certain costs as general and administrative versus
production expense, and (c) offset by a $1.4 million decrease in Union Oil's
indirect costs between periods. As of the date of the Titan merger, Pure no
longer incurs Union Oil's indirect costs.

          Depletion, depreciation, and amortization expense ("DD&A") was $143.8
million ($6.70 per BOE) and $44.8 million ($3.86 per BOE) for 2001 and 2000,
respectively. DD&A increased in absolute amounts due primarily to the inclusion
of the properties from the Titan merger, the International Paper transaction,
the Hallwood merger and Pure's capital program for 2001. The increase in the per
unit amount is primarily attributable to (a) the per unit acquisition costs from
the International Paper transaction and Hallwood merger and (b) the downward
revision in proved reserves as a result of a decrease in the underlying oil and
gas prices.

          Pure's exploration and abandonment expense was $54.8 million and $19.9
million for 2001 and 2000, respectively. Increase in exploration expenses is
primarily related to (a) an increase in geological and geophysical staff and
related costs as a result of the Titan merger, the International Paper
transaction and Hallwood merger, (b) exploratory dry hole costs, (c) seismic
costs and (d) offset by a $200,000 decrease in Union Oil's indirect costs
between periods. The significant increase in exploratory dry hole costs is
related to the significant increase in the exploratory capital expended in 2001.

          In 2001, Pure had interest expense due to (a) Pure's significant
capital expenditure program, (b) the International Paper transaction that closed
in January 2001 and (c) the assumption of the Hallwood debt and the cash tender
offer in the Hallwood merger in May 2001. In June 2001, Pure issued $350 million
of 7.125% fixed rate senior notes. Interest expense in 2000 was due primarily to
the assumption of debt in the Titan merger.

          In 2001, other income (expense) includes $4.7 million of gain
attributable to the ineffective portion of the cash flow hedges and the change
in fair value of certain derivatives not qualifying as hedges under SFAS No.
133. In 2001, other income (expense) includes approximately $2.0 million of bad
debt expense primarily related to uncollectible receivables owed by Enron to
Pure on derivative contracts. In 2000, other expense primarily relates to
transitional type costs associated with the Union Oil contribution of properties
into Pure and certain transaction costs of Union Oil directly related to the
Titan merger.

                                       33

<PAGE>

          Income tax expense was $33.7 million and $34.1 million for 2001 and
2000, respectively. Income tax expense decreased, primarily, due to (a)
decreased earnings between periods, (b) a $2.6 million adjustment made in 2001
related to Pure's 2000 income taxes as previously reported in 2000 and (c) a
reduction in Pure's expected effective tax rate in 2001 as compared to 2000.

          In the first quarter of 2002, Pure sold properties located in the
Permian Basin region for approximately $23 million, subject to adjustments,
which resulted in a gain of approximately $617,000. As a result of selling these
properties, Pure was required to reflect this disposition of assets as
discontinued operations under the provisions of SFAS No. 144. In 2001 and 2002,
the results of operations, before income taxes, from these assets was
approximately $1.8 million and $2.6 million, respectively.

          Years ended 2000 as compared to 1999

          Pure's revenues from the sale of oil and natural gas were $150.1
million and $131.8 million for 2000 and $64.6 million and $48.6 million for
1999, respectively. Including the effects of hedging, compared with 1999, Pure's
2000 average oil sales prices increased by $11.37 per Bbl, or 64%, while average
gas sales prices increased by $1.73 per Mcf, or 103%. The increase in production
of 3,130 MBOE in 2000 is primarily the result of the Titan merger, offset by
normal production declines. The historical Titan properties contributed
approximately 3,383 MBOE of production in 2000.

          Pure's oil and gas production expenses, excluding production and other
taxes, were $47.1 million ($4.06 per BOE) and $32.3 million ($3.81 per BOE) for
2000 and 1999, respectively. Production expenses increased $14.9 million, which
is the result of (a) production costs from the Titan properties of $17.5
million, (b) an increase of $4.9 million in special well repair expenditures
between periods, and (c) decrease of $2.7 million between periods in Union Oil's
indirect costs. As of the date of the Titan merger, Pure no longer incurs Union
Oil's indirect costs. As a result of the merger and new management of all of
Pure properties, there have been certain fundamental changes in how the assets
are managed. Certain costs that a major oil company, such as Union Oil, treated
as production costs may be more readily seen as general and administrative costs
by an independent oil company, such as Pure. Accordingly, certain costs will be
reflected in general and administrative costs.

          Production and other taxes were $21.9 million ($1.89 per BOE) and $8.6
million ($1.01 per BOE) for 2000 and 1999, respectively. The increase in
production and other taxes is primarily attributable to increase in oil and gas
revenues associated with increased commodity prices and the revenues from the
assets in the Titan merger.

          General and administrative expenses were $12.3 million ($1.06 per BOE)
and $7.8 million ($.92 per BOE) for 2000 and 1999, respectively. General and
administrative expenses increased as a result of (a) the Titan merger and (b)
subsequent to merger, the classification of certain costs as general and
administrative versus production costs as described above, with the increase
partially offset by a $5.8 million decrease in Union Oil's indirect costs
between periods. As of the date of the Titan merger, Pure no longer incurs Union
Oil's indirect costs.

          Depletion, depreciation, and amortization expense ("DD&A") was $44.8
million ($3.86 per BOE) and $32.1 million ($3.79 per BOE) for 2000 and 1999,
respectively. DD&A increased in absolute amounts due primarily to the inclusion
of the Titan properties since May 31, 2000.

          Pure's exploration and abandonment expense was $19.9 million and $6.5
million for 2000 and 1999, respectively. The $13.4 million increase in
exploration expenses is primarily related to (a) increase in geological and
geophysical staff and related costs as a result of the Titan merger, (b) dry
hole costs increased $10.4 million between the periods due to increased
exploratory drilling activity in 2000 and (c) offset by a $1.9 million decrease
in Union Oil's indirect costs between periods.

          In 2000, Pure had interest expense due to assuming the debt of Titan
and the establishment of the new credit facility.

                                       34

<PAGE>

          Other expense primarily relates to transitional type costs associated
with the Titan merger and the Contribution and to certain costs of Union Oil
directly related to the Titan merger.

           Income tax expense was $34.1 million and $8.7 million for 2000 and
1999, respectively. Income tax expense increased due to increased earnings
between periods.

                                       35

<PAGE>

Liquidity and Capital Resources

          Pure's primary capital resources are net cash flows provided by
operating activities and the availability under its revolving credit facilities,
of which approximately $277 million was available at December 31, 2001. Unlike
many energy related companies, Pure's revolving credit facilities do not require
Pure to undergo borrowing base redeterminations, which could result in reduced
credit availability. In June 2001, Pure completed the issuance of 7.125% senior
notes due in 2011, the proceeds from which were used to pay off the interim
financing for the Hallwood merger and reduce existing borrowings under Pure's
revolving credit facilities. Pure requires capital primarily for its
exploration, development and acquisition of oil and gas properties, repayment of
indebtedness and general working capital needs. When appropriate, Pure would
consider use of debt and equity financing, non-recourse transactions and asset
sales.

Net Cash Provided by Operating Activities

          Cash flow from operating activities for Pure was $308.3 million for
2001 compared to $143.1 million for 2000. The increase in net cash provided by
operating activities was primarily due to (a) increased commodity prices,
primarily in the first half of 2001, (b) Pure's significant capital expenditure
program, (c) the Hallwood merger, (d) the International Paper transaction and
(e) the Titan merger. Commodity prices are highly volatile and Pure's cash flow
can vary dramatically from period to period. A substantial period of low
commodity prices could have a substantial negative impact on Pure's cash flow.

Capital Expenditures

          For 2001, Pure's initial drilling and related capital budget was
approximately $160 million. With the International Paper transaction and the
Hallwood merger, the drilling and related capital budget increased to $241
million ($230 million of which is the exploration and production budget). The
revised budget was comprised of approximately (a) $83 million in development
projects, (b) $62 million in exploration projects, (c) $62 million in
probable/possible projects, (d) $23 million to acquire additional acreage and
seismic data and (e) $11 million in other corporate items. In 2001, Pure
actually spent approximately $744 million on capital expenditures, which
included $439 million related to the International Paper transaction and
Hallwood merger that were not budgeted. Pure does not budget acquisitions.

          Pure requires capital primarily for the acquisition, exploration and
development of oil and gas properties as well as for general working capital
needs. The following table sets forth the costs incurred by Pure in its
acquisition, exploration and development activities.

                                             Year ended December 31,
                                          -----------------------------
                                            2001       2000      1999
                                          --------   --------   -------
                                            (in thousands of dollars)
                Property acquisition:
                   Proved                 $598,093   $245,314   $   676
                   Unproved                 62,404     20,416        88
                Exploration                141,351     39,206     4,519
                Development                115,541     47,251    17,256
                                          --------   --------   -------
                   Total costs incurred   $917,389   $352,187   $22,539
                                          ========   ========   =======

          For 2002, Pure's initial drilling and related capital budget was
approximately $225 million. The initial budget was comprised of approximately
(a) $66 million in development projects, (b) $49 million in exploration
projects, (c) $84 million in probable/possible projects, (d) $24 million to
acquire additional acreage and seismic data

                                       36

<PAGE>

and (e) $2 million in other corporate items. In light of recent declines in
commodity prices, Pure has reviewed its 2002 drilling and related capital
spending plan and currently expects approximately $105 to $150 million will be
spent in 2002. Pure will maintain flexibility to accelerate or increase 2002
capital spending should commodity prices increase. The final determination with
respect to the drilling of any well, including those currently budgeted, will
depend on a number of factors, including (i) the results of exploration efforts
and the review and analysis of the seismic data, (ii) the availability of
sufficient capital resources by Pure and other participants for drilling
prospects, (iii) economic and industry conditions at the time of drilling,
including prevailing and anticipated prices for natural gas and oil and the
availability and costs of drilling rigs and crews, (iv) the financial resources
and results of Pure, and (v) the availability of leases on reasonable terms and
permitting for the potential drilling location. There can be no assurance that
the budgeted wells will encounter, if drilled, recompleted or worked over,
reservoirs of commercial quantities of natural gas or oil.

          While Pure regularly engages in discussions relating to potential
acquisitions of oil and gas properties, Pure has no present agreement,
commitment or understanding with respect to any such acquisition, other than the
acquisition of oil and gas properties and interests in its normal course of
business.

Capital Resources

          Pure's current primary capital resources are net cash flows provided
by operating activities and the availability under the revolving credit
facilities, of which approximately $277 million was available at December 31,
2001. Pure has significant contractual obligations in the future that will
require capital resources. The following table is a summary of the significant
contractual obligations:

<TABLE>
<CAPTION>
                                                        Obligations Due in Period
                                         -------------------------------------------------------
     Contractual Cash Obligations          2002    2003-2004   2005-2006   Thereafter     Total
--------------------------------------   -------   ---------   ---------   ----------   --------
                                                        (dollars in thousands)
<S>                                      <C>       <C>          <C>         <C>         <C>
7.125% senior notes                      $    --   $     --     $    --     $350,000    $350,000
5-Year Revolver                               --         --      58,000           --      58,000
3-Year Revolver                               --    175,000          --           --     175,000
Working Capital Revolver                   6,200         --          --           --       6,200
Non-cancelable operating leases            2,577      5,041       4,758        1,367      13,743
Non-cancelable subleases                    (155)      (778)       (909)          --      (1,842)
Commodity derivatives                      4,918         --          --           --       4,918
Interest rate derivatives                    620        721          --           --       1,341
Common stock subject to repurchase (a)        --         --          --       69,800      69,800
                                         -------   --------     -------     --------    --------
Total contractual cash obligations       $14,160   $179,984     $61,849     $421,167    $677,160
                                         =======   ========     =======     ========    ========
</TABLE>

----------
(a)  The contractual due date of the common stock subject to repurchase is not
     determinable at the present.

          Details regarding the significant contractual cash obligations are
discussed below. A change in Pure's credit rating will not accelerate any of the
contractual cash obligations. Pure's ability to obtain additional sources of
financing are dependent on its operating cash flows and the value of its oil and
gas reserves. Commodity prices are extremely volatile and could negatively
impact Pure's ability to obtain additional sources of financing.

                                       37

<PAGE>

          At December 31, 2001, Pure had the following financial commitments:

<TABLE>
<CAPTION>
                                                Commitment Expiration per Periods
                                     -------------------------------------------------------
       Financial Commitments           2002    2003-2004   2005-2006   Thereafter     Total
----------------------------------   -------   ---------   ---------   ----------   --------
                                                     (dollars in thousands)
<S>                                  <C>        <C>         <C>            <C>      <C>
3-Year Revolver                      $    --    $275,000    $     --       $--      $275,000
5-Year Revolver                           --          --     235,000        --       235,000
Working Capital Revolver              10,000          --          --        --        10,000
Performance bonds                     11,352          --          --        --        11,352
Standby letters of credit                 --          --          --        --            --
Pure guarantees                           --          --          --        --            --
                                     -------    --------    --------       ---      --------
Total contractual cash obligations   $21,352    $275,000    $235,000       $--      $531,352
                                     =======    ========    ========       ===      ========
</TABLE>

          At December 31, 2001, of the financial commitments under Pure's 3-Year
Revolver, 5-Year Revolver and Working Capital Revolver, there was $100 million,
$177 million and $3.8 million of availability. In the normal course of business,
Pure has performance obligations which are supported by surety bonds and letters
of credit. These obligations primarily cover site restoration and dismantlement
or other programs where governmental organizations require such support.

          At December 31, 2001, the common stock subject to repurchase was
approximately $69.8 million, as reflected in Pure's consolidated balance sheet.
In the quarters since the origination of the employment/severance agreements
containing the put right the amount of the common stock subject to repurchase
has ranged from $69.8 million to $155.5 million. Accordingly, it could require
substantial financial resources, in excess of those at December 31, 2001, of
Pure to fund the put right. If this occurred, this could reduce Pure's capital
resources available to be utilized towards its debt, capital budget and
acquisitions.

Credit Facilities and Senior Notes

          5-Year Revolver

          In September 2000, Pure entered into an unsecured credit agreement for
a $250 million five-year revolving credit facility ("5-Year Revolver") with
JPMorgan Chase Bank (the "Bank") and First Union National Bank. The 5-Year
Revolver has current commitments of $235 million. All amounts outstanding on the
5-Year Revolver are due and payable in full on September 29, 2005. A portion of
the 5-Year Revolver is available for the issuance of up to $50 million of
letters of credit. At December 31, 2001, $58 million was outstanding under the
5-Year Revolver.

          At Pure's option, borrowings under the 5-Year Revolver bear interest
at either (a) the "Alternative Base Rate" (i.e. the higher of the Bank's prime
rate, or the federal funds rate plus .50% per annum), or (b) the Eurodollar rate
plus a margin ranging from .80% to .95% per annum for the 5-Year Revolver. These
margins increase as Pure's debt coverage ratio decreases. Participation fees on
letters of credit are due quarterly and range from .925% to 1.075% per annum of
the outstanding amount of letters of credit. Facility fees are due quarterly on
the total of the outstanding commitments under the 5-Year Revolver and range
from .20% to .30% per annum. At December 31, 2001, Pure is paying .80% margin on
its Eurodollar tranches.

          The 5-Year Revolver contains various restrictive covenants and
compliance requirements, which include (a) limiting the incurrence of additional
indebtedness, (b) restrictions as to merger, sale or transfer of assets and
transactions with affiliates without the lenders' consent, (c) limitation on
dividends and distributions, (d) other financial covenants and (e) limitation on
hedging arrangements.

                                       38

<PAGE>

          3-Year Revolver

          In November 2001, Pure entered into an unsecured credit agreement with
JPMorgan Chase, First Union National Bank and BNP Paribas for a $275 million
3-year revolving credit facility ("3-Year Revolver"). All amounts outstanding
under the 3-Year Revolver are due and payable in full on November 20, 2004. A
portion of the 3-Year Revolver is available for the issuance of up to $50
million of letters of credit. At December 31, 2001, $175 million was outstanding
under the 3-Year Revolver.

          At Pure's option, borrowings under the 3-Year Revolver bear interest
at either (a) the "Alternate Base Rate" (i.e., higher of the Bank's prime rate,
or the federal funds rate plus .50% per annum) or (b) the Eurodollar rate plus a
margin ranging from .375% to .950% per annum. These margins vary as Pure's debt
ratings with S&P and Moody's change (i.e. improvement in Pure's debt rating
decreases its margins). At December 31, 2001, Pure is paying .750% margin on its
Eurodollar tranches.

          Participation fees on letters of credit are due quarterly and range
from .500% to .750% per annum on the outstanding amount of letters of credit.
Facility fees are due quarterly on the total of the outstanding commitments
under the 3-Year Revolver and range from .125% to .300% per annum. Utilization
fees of .25% are due quarterly on the outstanding principal and letters of
credit for the periods when the lenders' exposure exceeds 33% of the total
commitments.

          The 3-Year Revolver contains various restrictive covenants and
compliance requirements (which are identical to the 5-Year Revolver), which
include (a) limiting the incurrence of additional indebtedness, (b) restrictions
as to merger, sale or transfer of assets and transactions with affiliates
without the lenders' consent, (c) limitation on dividends and distributions, (d)
other financial covenants and (e) limitation on hedging arrangements.

          7.125% Senior Notes

          In June 2001, Pure issued $350 million in unsecured senior notes which
bear interest at 7.125%. The 7.125% senior notes were issued at a discount to
their face value which resulted in the 7.125% senior notes having a yield of
7.232%. The 7.125% senior notes pay interest each June 15 and December 15
beginning in December 2001. The maturity date of the 7.125% senior notes is June
15, 2011. Pure has the right to redeem the 7.125% senior notes at any time for
an amount equal to the principal plus a make-whole premium.

          The 7.125% senior notes are fully and unconditionally guaranteed, on a
joint and several basis, by certain wholly-owned subsidiaries of Pure. Each of
the guarantees is an unsecured obligation of the guarantor and ranks pari passu
with the guarantees provided by and the obligations of such guarantor
subsidiaries under the 5-Year Revolver and 3-Year Revolver and with all existing
and future unsecured indebtedness of such guarantor for borrowed money that is
not, by its terms, expressly subordinated in right of payment to such guarantee.

          The 7.125% senior notes indenture contains covenants, which include
limitations on (a) liens, (b) sale/leaseback transactions and (c) mergers and
consolidations. Pursuant to a registration rights agreement, in November 2001
Pure completed an exchange offer pursuant to which the 7.125% senior notes were
exchanged for a new, registered issue of 7.125% senior notes.

          Credit Rating Agencies

          Pure, as a part of issuing its 7.125% senior notes, received credit
ratings from Fitch, Moody's and Standards & Poor ("S&P"). Pure received, from
the rating agencies, investment grade ratings (Baa3 with Fitch, Baa3 with
Moody's and BBB- with S&P). Pure is subject to regular reviews by the rating
agencies. In April 2002, Moody's announced it was placing Pure's long-term debt
rating "under review for possible downgrade," while our ratings with Fitch and
S&P were recently reaffirmed. If Pure were to be downgraded by any of the rating
agencies it could have an impact on Pure's (a) ability to get additional
financing in the future and (b) interest rates and fees it would be able to
obtain on new financing. As noted above, under Pure's 3-Year Revolver the
interest rate and fees are adjusted upon changes to Pure's credit rating, both
positively and negatively by two or more rating agencies. At

                                       39

<PAGE>

the present, Pure does not have any obligations whose payment would be
accelerated in the event of a downgrade of Pure's credit rating.

Liquidity and Working Capital

          At December 31, 2001, Pure had $5.6 million of cash and cash
equivalents. Pure's ratio of current assets to current liabilities was 0.69 at
December 31, 2001. Pure maintains low cash levels for cash management purposes.
Pure, at December 31, 2001 and 2000, had availability under its revolving credit
facilities to fund any working capital deficit.

          Working Capital Revolver

          In October 2000, for purposes of maximizing its daily cash management
activity, Pure entered into an unsecured $10 million working capital credit
facility (the "Working Capital Revolver") with a bank. Individual borrowings may
be made for up to a three week period. The Working Capital Revolver has no
maturity date and is cancelable at anytime by the bank. The interest rate of
each loan under the Working Capital Revolver is determined by agreement between
Pure and the bank. The rate shall not exceed the maximum interest rate permitted
under applicable law. Interest rates generally are at the bank's cost of funds
plus 1% per annum. At December 31, 2001, there was an outstanding principal of
$6.2 million under the Working Capital Revolver. Pure has the ability and intent
to finance the principal outstanding under the Working Capital Revolver
utilizing Pure's long-term revolving credit facilities.

Other Matters

          Stock Options and Compensation Expense

          Pure has issued options in 2001 and 2000 to officers and non-officers
to purchase 1,176,716 and 5,166,560 shares, respectively, of Pure common stock.
Upon the formation of Pure certain options awarded the officers and non-officers
had an exercise price that was below the Pure stock price on the date of grant.
Accordingly, Pure recorded deferred compensation of $2.9 million related to
non-officer options and will expense the amount over a four-year period. In 2001
and 2000, Pure expensed approximately $779,000 and $600,000 , respectively,
related to these options. The options related to officers are subject to the put
right discussed in the following paragraph.

          As discussed in Note 6 of the Notes to Consolidated Financial
Statements, officers of Pure have the right to require Pure to purchase shares
of Pure common stock (or equivalently converted shares) directly held by the
officer on December 1, 1999, of which there were 2,811,107 shares held subject
to the put right at December 31, 2001 or are obtained by the exercise of any
stock options held or granted in the future, of which there were 4,120,570 stock
options subject to the put right, by the officer, at a calculated "net asset
value" per share. The circumstances under which certain officers may exercise
the put right are discussed in Note 6 of the Notes to Consolidated Financial
Statements. As a result of the put right, the consolidated balance sheet at
December 31, 2001 reflects approximately $69.8 million as common stock subject
to repurchase and Pure recorded approximately $30.7 million in deferred
compensation as of December 31, 2001, of which Pure recognized deferred
compensation expense of approximately $915,000 and $14.8 million in 2001 and
2000, respectively. This arrangement is being treated as a variable plan under
Accounting Principles Board Opinion No. 25 "Accounting for Stock Based
Compensation," and related interpretations including FASB Interpretation No. 44
"Accounting for Certain Transactions involving Stock Compensation; an
Interpretation of APB Opinion No. 25." Consequently, the total compensation for
both shares held and shares subject to option will be measured at the end of
each quarter as the calculated amount of net asset value and the market price of
Pure shares change. The total amount determined will be amortized as
compensation expense over a three-year period for common stock and the vesting
period of the stock options with any changes after three years for common stock
and the vesting period of the stock options being expensed in the period of
determination.

                                       40

<PAGE>

          Disclosure about Market Risk

          Pure may use swap agreements and other financial instruments in an
attempt to reduce the risk of fluctuating oil and gas prices and interest rates.
Settlement of gains or losses on the hedging transactions are generally based on
the difference between the contract price and a formula using NYMEX or other
major indices related prices and is reported as a component of oil and gas
revenues as the associated production occurs. At December 31, 2001, Pure had
hedging transactions with respect to approximately 19,092,000 MMBtu of its
future 2002 estimated natural gas production and 373,000 barrels of its future
2002 estimated crude oil production, respectively. For additional information,
see Note 16 of Notes to Consolidated Financial Statements and Item 7A -
Quantitative and Qualitative Disclosures about Market Risk.

          At December 31, 2001, Pure had $37.5 million in notional principal of
fixed for floating interest rate swaps, which were acquired as part of the
Hallwood merger. Pure pays a fixed rate of 5.23% and receives a LIBOR floating
rate. The derivative contracts mature in February 2004.

          Environmental and Other Laws and Regulations

          Pure's business is subject to certain federal, state and local laws
and regulations relating to the exploration for the development, production and
transportation of oil and gas, as well as environmental and safety matters. Many
of these laws and regulations have become more stringent in recent years, often
imposing greater liability on a larger number of potentially responsible
parties. Although Pure believes it is in substantial compliance with all
applicable laws and regulations, the requirements imposed by such laws and
regulations are frequently changed and subject to interpretation, and Pure is
unable to predict the ultimate cost of compliance with these requirements or
their effect on its operations. Pure has no material commitment for capital
expenditures to comply with existing environmental requirements.

          Nevertheless, changes in existing environmental laws or in
interpretations thereof could have a significant adverse impact on the operating
costs of Pure, as well as the oil and gas industry in general.

          Recently Adopted and Issued Accounting Pronouncements

          As of January 1, 2001, Pure adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities. These standards require that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair value of
derivative instruments which are not designated and qualify as effective hedges
or are defined by SFAS No. 133 as being "fair value hedges" are recorded in
earnings as the changes occur. For derivatives designated as cash flow hedges,
changes in fair value are recognized in accumulated other comprehensive income
until the hedged item is recognized in earnings. The effectiveness of hedges is
measured at least quarterly based on the relative changes in fair value between
the derivative contract and the hedged item over time. When it is determined
that a derivative is not highly effective as a hedge or that it has ceased to be
a highly effective hedge, Pure discontinues hedge accounting prospectively. Any
change in fair value resulting from ineffectiveness of a portion of a derivative
contract, as defined by SFAS No. 133, is recognized immediately in earnings. The
failure to continually meet the hedge accounting criteria will result in the
changes in fair value being recorded in income which could result in material
volatility in quarterly earnings. All of Pure's commodity price derivatives are
designated as cash flow hedges. See Note 16 of Notes to Consolidated Financial
Statements for additional information.

          In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141 "Business Combinations" and No. 142 "Goodwill and Other Intangible
Assets". SFAS No. 141 requires that all business combinations initiated after
June 30, 2001, be accounted for under the purchase method and SFAS No. 142
requires that goodwill no longer be amortized to earnings, but instead be
reviewed for impairment. There is no impact to Pure's financial statements as we
have not entered into any business combinations subsequent to June 30, 2001 that
required the recording of goodwill and other intangible assets.

                                       41

<PAGE>

          In October 2001, FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations" which establishes requirements for accounting for
removal-type costs associated with asset retirements. The standard is effective
for years beginning after June 15, 2002, with earlier application encouraged. As
of December 31, 2001, Pure is assessing the impact on its financial statements.

          In October 2001, FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 superseded SFAS No. 121 and the accounting and reporting provisions
of APB Opinion No. 30. SFAS No. 144 is effective for fiscal years beginning
after December 15, 2001. Pure adopted the SFAS No. 144 on January 1, 2002. Pure
believes that the impact from SFAS No. 144 on Pure's financial position and
results of operations should not be significantly different than those from SFAS
No. 121, except as to the reporting of asset disposals related to discontinued
operations. In March 2002, Pure sold assets in the Permian Basin region for $23
million, subject to adjustments. These properties represented an insignificant
portion of the value of Pure's reserves. In accordance with SFAS No. 144, Pure
is required to reflect this disposition of assets as discontinued operations.
Pure is filing this Form 10-K/A Amendment No. 1 to present the financial
statements and related data to reflect the discontinued operations. See Note 22
of Notes to Consolidated Financial Statements for additional information.

                                       42

<PAGE>

Pure Unaudited Pro Forma Data

          The following reflects unaudited pro forma data related to the
Contribution, the Titan merger, the International Paper transaction and the
Hallwood merger, discussed in Notes 1 and 5 of the Notes to Consolidated
Financial Statements. The unaudited pro forma combined data assumes the
Contribution, the Titan merger, the International Paper transaction and the
Hallwood merger had taken place as of January 1, 2000 with respect to the
unaudited pro forma combined statements of operations and related operational
data. The pro forma amounts are not necessarily indicative of the results that
may be reported in the future (dollars in thousands, except per unit amounts):

Statement of Operations Data
                                           Year ended December 31,
                                           -----------------------
                                              2001        2000
                                            ---------   ---------

Total revenues                              $ 533,376   $ 522,969
Oil and gas production costs                  (90,142)    (80,563)
Production and other taxes                    (38,777)    (35,114)
General and administrative expenses           (30,714)    (32,426)
Amortization of deferred compensation         (10,787)    (11,067)
Exploration and abandonment costs             (56,605)    (32,613)
Depreciation, depletion and amortization     (159,866)   (132,729)
Other expenses, net                           (32,320)    (46,203)
Income tax expense                            (39,958)    (53,290)
Minority interest                              (1,667)     (1,603)
Discontinued operations, net of tax             1,170       1,688
                                            ---------   ---------
   Net income                               $  73,710   $  99,049
                                            =========   =========
EBITDAX (a)                                 $ 348,038   $ 361,553
                                            =========   =========

          These pro forma amounts differ from those disclosed in Note 5 of the
Notes to the Consolidated Financial Statements, due to the elimination of merger
costs incurred by Pure in 2000.

----------
(a)  EBITDAX as used herein is calculated by adding interest expense, income
     taxes, depletion, depreciation and amortization, impairment of long-lived
     assets, restructuring costs, amortization of deferred compensation,
     exploration and abandonment costs, and other noncash items to income from
     continuing operations. EBITDAX is included herein because management
     believes that investors find it to be a useful analytical tool. Other
     companies may calculate EBITDAX differently, and we cannot assure you that
     such figures are comparable with similarly titled figures for such other
     companies.

                                       43

<PAGE>

Operational Data

<TABLE>
<CAPTION>
                                                               Year ended December 31,
                                                               -----------------------
                                                                    2001      2000
                                                                  -------   -------
<S>                                                               <C>       <C>
Production:
   Oil and condensate (MBbls)...............................        8,103     7,758
   Natural gas (MMcf).......................................       89,861    89,676
   Total (MBOE).............................................       23,080    22,704

Average sales price per unit (including effects of hedging):
   Oil and condensate (per Bbl).............................      $ 23.71   $ 27.71
   Natural gas (per Mcf)....................................      $  3.69   $  3.34
   Total (per BOE)..........................................      $ 22.69   $ 22.65
</TABLE>

                                       44

<PAGE>

Risk Factors

          We are controlled by Union Oil.

          Union Oil, a wholly-owned subsidiary of Unocal Corporation, owns
approximately 65.2% of the outstanding Pure common stock and is not prohibited
from acquiring more. By virtue of its stock ownership, Union Oil has the power
to control the direction and policies of Pure, the election of a majority of its
directors and the outcome of any matter requiring stockholder approval,
including adopting amendments to Pure's certificate of incorporation and
approving mergers or sales of all or substantially all of Pure's assets. In
addition, Pure has entered into agreements that enable Union Oil to maintain its
position of control. These include:

          .    A non-dilution agreement, which provides that if Pure issues
               additional shares of common stock Union Oil will have preemptive
               rights to acquire additional securities to maintain its
               percentage ownership of Pure, up to 65.4%. This agreement could
               make it more difficult for Pure to raise funds through future
               offerings of capital stock or to close acquisitions using equity
               for payment. Union Oil will be the only Pure stockholder with
               preemptive rights.
          .    A stockholders voting agreement which provides that Union Oil and
               Jack Hightower (Pure's Chairman of the Board, President and Chief
               Executive Officer) will vote their shares of Pure to cause two
               persons designated by Mr. Hightower, up to five designees of
               Union Oil and an additional director agreed upon by Union Oil to
               be elected to Pure's board of directors. As long as Mr. Hightower
               owns all of his stock this agreement gives Union Oil the power to
               control the election of a majority of the directors even if it
               owns as little as 35% of Pure's common stock.

          We have agreed to limit our business activities.

          In order to minimize conflicts of interest between Union Oil and Pure
and to permit Union Oil to continue to conduct its business without undue risk
of liability, the parties entered into a business opportunities agreement in
which Pure agreed that it has no interest or expectancy in business
opportunities developed by Union Oil in accordance with standards set forth in
the business opportunities agreement. Pure also agreed that, without the consent
of Union Oil, it will not conduct any business other than the oil and gas
exploration, development and production business and will not pursue any new
business opportunities that are outside of certain geographic areas. As a result
of the business opportunities agreement, as affected by limited waivers that
Pure has obtained from Union Oil, Pure is contractually prohibited from
conducting business outside of the continental United States and designated
areas in the offshore Gulf Coast region of the United States, which designated
areas relate to the programs and partnerships Pure acquired in the International
Paper transaction. Further, unless conducted through one of such programs or
partnerships, Pure is prohibited from conducting business in the designated
offshore areas if the opportunity relates to a prospect with gross unrisked
reserve target potential of less than 20 Bcf. The restrictions on our ability to
expand, develop and explore certain offshore assets related to those acquired
from International Paper may limit our ability to realize fully the value of
certain of the acquired assets. Because of Pure's geographic concentration, any
regional events that increase costs, reduce availability of equipment or
supplies, reduce demand or limit production may impact Pure more than if its
operations were more geographically diversified. The business opportunities
agreement does not affirmatively restrict Union Oil's business activities,
including within the designated areas.

          Potential conflicts of interest between Pure and Union Oil may arise.

          Conflicts of interest may arise between Pure and Union Oil. The
interests of Union Oil under contractual arrangements between Pure and Union Oil
entered into in connection with the Titan merger, such as a registration rights
agreement, a non-dilution agreement and the parties' agreements to indemnify
each other with respect to specified matters, will conflict with the interests
of Pure. Other conflicts may arise in the future if Union Oil and Pure enter
into additional contractual arrangements, which could include agreements
relating to marketing of production, financing, insurance or other matters.
Because Union Oil is free to engage in activities that may be competitive with
Pure, conflicts of interest may arise in acquisitions of oil and gas properties
or companies or other transactions that Union Oil may pursue.

                                       45

<PAGE>

          There are no contractual restrictions on Union Oil's ability to
          dispose of its shares of Pure common stock.

          Although Union Oil has no current plans to dispose of its shares of
Pure common stock, the market price of such shares could drop due to sales of a
large number of shares of Pure capital stock or the perception that they could
occur.

          Rights granted to Pure officers may result in charges to our earnings
          and may increase our leverage.

          Mr. Hightower's employment agreement and Pure officer severance
agreements entitle the covered officers to require Pure to purchase his or her
Pure common stock at a price that may be in excess of market value if specified
events occur. On December 31, 2001, when the trading price of Pure common stock
was $20.10 per share, the "per share net asset value" of Pure, calculated in
accordance with the agreements, was estimated at approximately $17.54, and the
covered shares of Pure common stock on that date (including shares underlying
options) totaled 6.9 million. The amortization amounts and potential effect on
our leverage may change quarterly based on relative changes in the net asset
value and market value of Pure shares. For more details of these arrangements
see Management's Discussion and Analysis of Financial Conditions and Results of
Operations.

          Contingent obligations of Pure may increase our leverage.

          Under the terms of a partnership agreement with affiliates of
International Paper, Pure would be required to make contingent payments to its
other partners in the partnership if Pure causes the partnership, prior to
January 2008, to dispose of assets, as defined in the partnership agreement,
with a fair market value in excess of $25 million. Pure's maximum contingent
payment at December 31, 2001 is approximately $63 million. Pure, at the present
time, does not believe it is probable it will incur any of the contingent
payment. To the extent Pure incurred all or some of the contingent payment, it
would reflect the contingent payment as additional basis in its oil and gas
properties.

          A suit has been filed in Louisiana against our subsidiary.

          Hallwood Petroleum, Inc. has been named as a defendant in a suit
styled Lamson Petroleum v. Hallwood Petroleum, Inc. et al., which was filed May
17, 2001 in the 15th Judicial District Court, Lafayette Parish, Louisiana.
Lamson Petroleum seeks proceeds from the sale of gas and condensate produced and
sold from units on 200 acres of land in the parish and a declaratory judgment
recognizing its interest in production from the units. We are unable at this
time to assess the likelihood of an unfavorable outcome. We believe the suit is
without merit and shall vigorously defend against it. In our opinion, the
ultimate disposition of this lawsuit, in the event of an unfavorable outcome,
should not have a material adverse effect on our financial position or
liquidity, but could adversely affect results of operations in a given reporting
period.

          Our rapid growth has placed significant demands upon our resources.

          Our brief operating history has been characterized by rapid growth
that places significant demands on our financial, operational and administrative
resources. Any future growth of our oil and gas reserves, production and
operations would place significant further demands on our financial, operational
and administrative resources. Our future performance and profitability will
depend in part on our ability to successfully integrate the administrative and
financial functions of acquired properties and companies into our operations, to
hire additional personnel and to implement necessary enhancements to our
management systems.

                                       46

<PAGE>

          You should not place undue reliance on our reserve data because
          numerous uncertainties are inherent in the estimation of the reserve
          data.

          Petroleum engineering is a subjective process of estimating
underground accumulations of oil and gas that cannot be measured in an exact
manner. Estimates of economically recoverable oil and gas reserves and of future
net cash flow necessarily depend upon a number of variable factors and
assumptions, including the following:

          .    historical production from the area compared with production from
               other producing areas;
          .    the assumed effects of regulations by governmental agencies;
          .    assumptions concerning future oil and gas prices; and
          .    assumptions concerning future operating costs, severance, ad
               valorem and excise taxes, development costs and workover and
               remedial costs.

     Because all reserve estimates are to some degree subjective, each of the
following items may differ materially from those assumed in estimating reserves:

          .    the quantities of oil and gas that are ultimately recovered;
          .    the production and operating costs incurred;
          .    the amount and timing of future development expenditures; and
          .    future oil and gas sales prices.

          Furthermore, different reserve engineers may make different estimates
of reserves and cash flows based on the same available data. Our actual
production, revenues and expenditures with respect to reserves will likely be
different from estimates and the difference may be material.

          The discounted future net cash flows in this document should not be
considered as the current market value of the estimated oil and gas reserves
attributable to our properties. As required by the SEC, the estimated discounted
future net cash flows from proved reserves are generally based on prices and
costs as of the date of the estimate, while actual future prices and costs may
be materially higher or lower. Actual future net cash flows also will be
affected by factors such as:

          .    the amount and timing of actual production;
          .    supply and demand of oil and gas;
          .    increases or decreases in consumption; and
          .    changes in governmental regulations or taxation.

          In addition, the SEC 10% discount factor, which is required by the SEC
to be used to calculate discounted future net cash flows for reporting purposes,
is not necessarily the most appropriate discount factor based on interest rates
in effect from time to time and risks associated with Pure or the oil and gas
industry in general.

          Maintaining reserves and revenues in the future depends on successful
          exploration and development.

          Our future success will depend upon our ability to find or acquire
additional oil and gas reserves that are economically recoverable. Unless we
successfully explore or develop properties containing proved reserves, our
proved reserves will generally decline as a result of continued production. The
decline rate varies depending upon reservoir characteristics and other factors.
Our oil and gas reserves and production, and, therefore, cash flow and income,
will depend greatly upon our success in exploiting our current reserves and
acquiring or finding additional reserves.

                                       47

<PAGE>

          Our exploration and development activities are subject to significant
          risks.

          The nature of the oil and gas business involves operating hazards such
as well blowouts, cratering, explosions, uncontrollable flows of oil, gas or
well fluids, fires, formations with abnormal pressures, pollution, releases of
toxic gas and other environmental hazards and risks. Any of these operating
hazards could result in substantial losses to us.

          In addition, we may be liable for environmental damages caused by
previous owners of property purchased by Pure or its predecessors. As a result,
substantial liabilities to third parties or governmental entities may be
incurred. The payment of these amounts could reduce or eliminate the funds
available for exploration, development or acquisitions. These reductions in
funds could result in a loss of our properties.

          Offshore operations are also subject to a variety of operating risks
peculiar to the marine environment, such as capsizing, collisions or damage or
loss from hurricanes or other adverse weather conditions. These conditions can
cause substantial damage to facilities and interrupt production. As a result, we
could incur substantial liabilities.

          We cannot assure you that the new wells we drill will be productive or
that we will recover all or any portion of our investment in wells drilled.
Drilling for oil and gas may involve unprofitable efforts, not only from dry
wells, but also from wells that are productive but do not produce net reserves
to return a profit after drilling, operating and other costs. The cost of
drilling, completing and operating wells is often uncertain. Numerous factors,
many of which are beyond our control, including economic conditions, mechanical
problems, title problems, weather conditions, compliance with governmental
requirements and shortages and delays in the delivery of equipment and services
may curtail, delay or cancel our drilling operations.

          In accordance with customary industry practices, we maintain insurance
against some, but not all, of such risks and losses. The occurrence of an event
that is not fully covered by insurance could have a material adverse effect on
our financial position and results of operations.

          Our use of enhanced oil recovery techniques involves certain risks,
especially the use of water flooding and CO2 flooding techniques. Part of our
inventory of development prospects includes enhanced recovery projects. Enhanced
recovery techniques involve significant capital expenditures and uncertainty as
to the total amount of recoverable secondary and tertiary reserves. In such
operations, there is generally a delay between the initiation of water or CO2
injection into a formation containing hydrocarbons and any resulting increase in
production. The operating cost per unit of production of enhanced recovery
projects is generally higher during the initial phases of such projects due to
the purchase of injection water or CO2 and related costs, as well as during the
later stages of the life of the project as production declines. The degree of
success, if any, of any enhanced recovery program depends on a large number of
factors, including the porosity of the formation, the technique used and the
location of injector wells.

          We cannot assure you that our planned development and exploration
projects and acquisition activities will result in significant additional
reserves or that we will have success drilling productive wells at low finding
and development costs. Furthermore, while our revenues may increase if
prevailing oil and gas prices increase significantly, our finding costs for
additional reserves could also increase.

                                       48

<PAGE>

          We face the risk of volatility of oil and gas prices.

          Our revenues, operating results and future rate of growth depend upon
the prices we receive for our oil and gas. Historically, the markets for oil and
gas have been volatile and may continue to be volatile in the future. Various
factors that are beyond our control will affect prices of oil and gas, such as:

          .    the worldwide and domestic supplies of oil and gas;
          .    the ability of the members of the Organization of Petroleum
               Exporting Countries ("OPEC") to agree to and maintain oil price
               and production controls;
          .    political instability or armed conflict in oil-producing regions;
          .    the price and level of foreign imports;
          .    the level of consumer demand;
          .    the price and availability of alternative fuels;
          .    the availability of pipeline capacity;
          .    weather conditions;
          .    domestic and foreign governmental regulations and taxes; and
          .    the overall economic environment.

          We are unable to predict the long-term effects of these and other
conditions on the prices of oil and gas. Lower oil and gas prices may reduce the
amount of oil and gas we will be able to produce economically, which may
adversely affect our revenues and operating income. Lower oil and gas prices may
also require a reduction in the carrying value of our oil and gas properties.
Currently, we anticipate making substantially all of our sales of oil and gas in
the spot market or under contracts based on spot market prices and not under
long-term fixed price contracts.

          Our hedging activities may not adequately offset risks we face.

          Our use of hedging contracts to reduce our sensitivity to oil and gas
price volatility is subject to a number of risks. If we do not produce reserves
at the rates we estimate due to inaccuracies in the reserve estimation process,
operational difficulties or regulatory limitations, we would be required to
satisfy obligations we may have under fixed price sales and hedging contracts on
potentially unfavorable terms without the ability to hedge that risk through
sales of comparable quantities of our own production. The terms under which we
will enter into fixed price sales and hedging contracts will be based on
assumptions and estimates of numerous factors, including transportation costs to
delivery points. Substantial variations between the assumptions and estimates we
will use and actual results we will experience could adversely affect our
anticipated profit margins and our ability to manage the risks associated with
fluctuations in oil and gas prices. Additionally, fixed price sales and hedging
contracts limit the benefits we will realize if actual prices rise above the
contract prices. Hedging contracts are also subject to the risk that the
counterparty may not be able or willing to perform its obligations, as many
parties encountered with Enron in 2001.

                                       49

<PAGE>

          Our acquisition strategy involves a degree of risk.

          Our strategic plan includes the acquisition of additional reserves,
including through business combination transactions. We may not be able to
consummate future acquisitions on favorable terms. Additionally, acquisitions
may not achieve favorable financial results.

          Acquisitions may require substantial financial expenditures that will
need to be financed through cash flow from operations or future debt and equity
offerings by Pure. We may not be able to acquire companies or oil and gas
properties using our equity as currency. In the case of cash acquisitions, we
may not be able to generate sufficient cash flow from operations or obtain debt
or equity financing sufficient to fund future acquisitions or reserves.

          Although our management will review and analyze the properties that we
will acquire, such reviews are subject to uncertainties. The acquisition of
producing properties will involve an assessment of several factors, including
recoverable reserves, future oil and gas prices, operating costs, potential
environmental and other liabilities and other factors beyond our control. These
assessments are necessarily inexact, and it is generally not possible to review
in detail every individual property involved in an acquisition. However, even a
detailed review of all properties may not reveal all existing structural and
environmental problems. We will generally assume preclosing liabilities,
including environmental liabilities, and will generally acquire interests in oil
and gas properties on an "as is" basis. In addition, volatile oil and gas prices
will make it difficult for us to accurately estimate the value of producing
properties for acquisition and may cause disruption in the market for oil and
gas producing properties. Price volatility also makes it difficult to budget for
and project the return on acquisitions and development and exploration projects.
We will not be able to assure you that our acquisitions will achieve desired
profitability objectives.

          Our business requires substantial capital expenditures.

          We make substantial capital expenditures for the exploration,
development, acquisition and production of oil and gas reserves. We intend to
finance these capital expenditures primarily with funds provided by operations,
the incurrence of debt, the issuance of equity and the sale of non-core assets.
If revenues decrease as a result of lower oil or gas prices or for other
reasons, we may not be able to expend the capital necessary to replace our
reserves or to maintain production levels, resulting in a decrease in production
over time. If our cash flow from operations and availability under our credit
facilities are not sufficient to satisfy our capital expenditure requirements,
we may not be able to obtain additional debt or equity financing to meet these
requirements.

          Our use of leverage may limit our operational flexibility.

          We have certain debt obligations that may affect our operations,
including:

          .    our need to dedicate a substantial portion of our cash flow from
               operations to the payment of interest on our indebtedness which
               prevents us from using these funds for other purposes;
          .    the covenants contained in our credit facilities limit our
               ability to borrow additional funds or to dispose of assets and
               may affect our flexibility in planning for, and reacting to,
               changes in business conditions; and
          .    our potential inability to obtain additional financing in the
               future for working capital, capital expenditures, acquisitions,
               general corporate purposes or other purposes.

          Moreover, future acquisition or development activities may require us
to alter our capitalization significantly. These changes in capitalization may
significantly alter our leverage structure. Our ability to meet our debt service
obligations and to reduce our total indebtedness will depend on future
performance, which will be subject to general economic conditions and to
financial, business and other factors affecting our operations, many of which
are beyond our control.

                                       50

<PAGE>

          We may not be able to market our production.

          The marketability of our production depends, in part, upon the
availability and capacity of natural gas gathering systems, pipelines and
processing facilities. Most of our natural gas is delivered through gas
gathering systems and gas pipelines that we do not own. Our ability to produce
and market our oil and gas is subject to several factors, including federal and
state regulation of oil and gas production and transportation, tax and energy
policies, changes in supply and demand and general economic conditions.

          We are subject to extensive government regulations.

          Our business is subject to federal, state and local laws and
regulations relating to the oil and gas industry as well as regulations relating
to safety matters. Although we believe we are in substantial compliance with all
applicable laws and regulations, the requirements imposed by such laws and
regulations change frequently, and these laws and regulations are subject to
interpretation. Consequently, we cannot predict the ultimate cost of compliance
with these requirements or their effect on our operations. We may have to expend
a significant amount of resources to comply with government laws and
regulations.

          We are subject to substantial environmental regulations.

          Our operations are subject to complex and constantly changing
environmental laws and regulations adopted by federal, state and local
governmental authorities. The implementation of new or modified laws or
regulations could have a material adverse effect on our business or our
financial condition. The discharge of oil, gas or other pollutants into the air,
soil or water may lead to significant liability to the government and third
parties and may require us to incur substantial costs. Moreover, we have agreed
to indemnify sellers of producing properties purchased in each of our
substantial acquisitions against environmental claims associated with these
properties. Furthermore, material indemnity claims may arise against us.

          The competition in our industry is intense, some of our competitors
          have significantly greater resources than Pure, and this competition
          may adversely affect our operations.

          We operate in the highly competitive areas of oil and gas exploration,
development, acquisition and production with other companies, many of which have
substantially larger financial resources, staffs and facilities. In seeking to
acquire desirable producing properties or new leases for future exploration and
in marketing our oil and gas production, we face intense competition from both
major and independent oil and gas companies. Many of these competitors have
financial and other resources substantially in excess of those that will be
available to us. This highly competitive environment could have a material
adverse effect on us.

          We depend heavily on certain key personnel, and our failure to retain
          these individuals could adversely affect the management of Pure.

          Our success is highly dependent on Jack Hightower, our Chief Executive
Officer, and a limited number of other senior management personnel. Loss of the
services of Mr. Hightower or any of those other individuals could have a
material adverse effect on our operations. We maintain a $3.0 million key man
life insurance policy on the life of Mr. Hightower, with one-half of the
benefits payable to Pure, but no other senior management personnel. We cannot
assure you that we will be successful in retaining key personnel. Our failure to
hire additional personnel, if necessary, or retain our key personnel could have
a material adverse effect on our business, financial condition and results of
operations.

                                       51

<PAGE>

           CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

          Pure has made forward-looking statements in this document and in
documents incorporated by reference into this document which are subject to
risks and uncertainties. These statements are based on the beliefs and
assumptions of our management and on the information currently available to
them. Among the factors that could cause actual results to differ materially
from expectations are:

          .    inherent uncertainties in interpreting engineering and reserve or
               production data;

          .    operating hazards, delays or cancellations of drilling operations
               for a variety of reasons;

          .    competition;

          .    fluctuations and volatility in oil and gas prices;

          .    our ability to successfully integrate the business and operations
               of acquired companies;

          .    government and environmental regulations;

          .    increases in our cost of borrowing or inability or unavailability
               of capital resources to fund capital expenditures, dependence on
               key personnel, changes in general economic conditions and/or in
               the markets in which we compete or may, from time to time,
               compete; and

          .    other factors including but not limited to those set forth above
               in "Risk Factors."

          Statements and calculations concerning oil and gas reserves and their
present value also may be deemed to be forward-looking statements in that they
reflect the determination, based on estimates and assumptions, that oil and gas
reserves may be profitably exploited in the future. When used or referred to in
this document, these forward-looking statements may be preceded by, followed by,
or otherwise include the words "believes," "expects," "anticipates," "intends,"
"plans," "estimates," "projects" or similar expressions, or statements that
events or conditions "will" or "may" occur.

          Except for its ongoing obligations to disclose material information as
required by the federal securities laws, Pure does not have any intention or
obligation to update forward-looking statements after it distributes this
document.

                                       52

<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

          The following quantitative and qualitative information is provided
about financial instruments to which Pure is a party as of December 31, 2001,
and from which Pure may incur future earnings gains or losses from changes in
market interest rates and commodity prices.

Quantitative Disclosures

          Commodity Price Risk:

          The following table provides information about Pure's derivative
financial instruments that are sensitive to changes in natural gas and crude oil
commodity prices. See Note 16 of Notes to Consolidated Financial Statements
included in "Item 8. Financial Statements" for specific information regarding
the terms of Pure's commodity derivative financial instruments that are
sensitive to natural gas and crude oil commodity prices.

                                                           2002       Fair Value
                                                        -----------   ----------

Natural Gas Hedge Derivatives (a):

Collar option contracts:
Notional volumes (MMBtu)                                 19,092,000   $3,406,858

Weighted average long put strike price per MMBtu (b)    $     2.778
Weighted average short call strike price per MMBtu (b)  $     3.340

Crude Oil Hedge Derivatives (a):

Collar option contracts:
Notional Volume (Bbls)                                      373,000   $1,296,316
Weighted average long put strike price per Bbl (b)      $    24.050
Weighted average short call strike price per Bbl (b)    $    27.710

----------
(a)  See Note 16 of Notes to Consolidated Financial Statements included in "Item
     1. Financial Statements" for additional information related to hedging
     activities.
(b)  The strike prices are based on prices of either a NYMEX Henry hub or
     Permian Basin hub.
(c)  The strike prices are based on the prices traded on the NYMEX.

          Enron Bankruptcy

          In the fourth quarter of 2001, Pure and many other parties were
affected by the bankruptcy of Enron Corp. and subsidiaries. Pure had various
natural gas and crude oil swaps with Enron. As a result of the Enron bankruptcy,
Pure terminated its derivative contracts with Enron. At the termination date of
the contracts, Enron owed Pure a net receivable of approximately $2.0 million.
Due to the uncertainty of collecting this amount, Pure wrote-off the majority of
the amount due from Enron. Enron's bankruptcy has caused Pure and many other
parties to re-examine their exposure to credit risk and take additional measures
to protect themselves in the future.

                                       53

<PAGE>

Interest Rate Risk:

          The following table provides information about Pure's financial
instruments that are sensitive to interest rates. The debt obligations are
presented in the table at their contractual maturity dates together with the
weighted average interest rates expected to be paid on the debt. The weighted
average interest rates for the variable debt represents the weighted average
interest paid and/or accrued in December 2001. See Note 4 of Notes to
Consolidated Financial Statements included in "Item 8. Financial Statements" for
specific information regarding the terms of Pure's debt obligations that are
sensitive to interest rates.

<TABLE>
<CAPTION>
                                    2004       2005      2011       Total    Fair Value
                                  --------   -------   --------   --------   ----------
                                           (in thousands, except interest rates)
<S>                               <C>        <C>       <C>        <C>         <C>
Debt (a):

Variable rate debt:

   Five-Year Revolver (b)         $     --   $58,000   $     --   $ 58,000    $ 58,000
      Average interest rate             --%     4.71%        --%

   Three-Year Revolver (b)        $175,000   $    --   $     --   $175,000    $175,000
      Average interest rate           2.88%       --%        --%

   Working Capital Revolver (b)   $     --   $ 6,200   $     --   $  6,200    $  6,200
      Average interest rate             --%     3.73%        --%

Fixed rate debt:

   Senior Notes                   $     --   $    --   $350,000   $350,000    $335,440
      Interest rate                     --%       --%     7.125%
</TABLE>

----------
(a)  See Note 4 of Notes to Consolidated Financial Statements included in "Item
     8. Financial Statements" for additional information related to debt.
(b)  Lenders are The JPMorgan Chase Bank, First Union National Bank and BNP
     Paribas among others and all borrowings are unsecured.

          Interest Rate Swaps:

          At December 31, 2001, Pure had an interest rate swap, acquired in the
Hallwood merger, as set forth below:

                Period                 Notional Amount   Fixed Price
------------------------------------   ---------------   -----------

                 2002                    $37,500,000        5.23%
                 2003                    $37,500,000        5.23%
  Two months ended February 29, 2004     $37,500,000        5.23%

          Pure pays the fixed rate and receives a LIBOR floating rate. At
December 31, 2001, the fair value of the interest rate swap was a liability of
approximately $1,341,000.

                                       54

<PAGE>

Qualitative Disclosures

                       Derivatives and Hedging Objectives

          Pure may enter into derivative contracts to protect against commodity
price risk and interest rate risk when in management's opinion it may be
appropriate to support its future cash flows in the following situations:

          Commodity Price Risk:

          .    Protect Pure's cash flow relative to its near-term capital
               budget,
          .    Protect the economics of acquisitions,
          .    Protect the economics of price sensitive developmental projects,
          .    Protect Pure's ability to meet debt service requirements, and
          .    Protect against potential significant negative price declines.

          Interest Rate Risk:

          .    Protect cash flows against potential significant interest rate
               increases and
          .    To fix interest rate cash outflows to allow Pure to protect the
               availability of cash flows for its capital budget.

                       Derivatives and Hedging Strategies

          To meet the above objectives, management may utilize the following
types of derivative instruments to manage cash flows resulting from commodity
price risk and interest rate risk.

          Commodity Price Risk:

          .    Commodity price collars,
          .    Commodity price swaps,
          .    Futures contracts (e.g., puts and calls),
          .    Physical delivery contracts,
          .    Energy swaps, and
          .    Commodity basis differential swaps.

          Interest Rate Risk:

          .    Interest rate swaps,
          .    Interest rate collars,
          .    Purchased options, and
          .    Interest rate caps.

          The derivative contracts Pure may enter into are intended to be an
economic hedge of a commodity price risk or interest rate risk. However, Pure
may unwind a derivative contract at anytime for any reason at management's
discretion.

          The above objectives and strategies have been approved by Pure's board
of directors and any significant changes to the objectives and strategies must
be ratified by the board of directors. Management and the executive committee
are authorized to hedge up to 25% and 75%, respectively, of Pure's future
equivalent oil and gas production utilizing these objectives and strategies. To
exceed the 25% level, management must obtain approval of the executive committee
up to the 75% level. The executive committee must obtain approval of the board
of directors to exceed the 75% level. The chief executive officer is required to
approve all derivative contracts prior to their execution.

          Pure historically had held no derivative instruments related to
interest rate exposure risks, as Union Oil had historically retained all the
debt and related interest charges.

                                       55

<PAGE>

          Pure is a producer of various hydrocarbon commodities such as crude
oil and condensate, natural gas and associated petroleum-based products and is
subject to the associated price risks. Prior to the Titan merger, Union Oil (not
Pure) had historically mitigated its exposure to fluctuations in crude oil and
natural gas prices through an affiliate of Union Oil. Historically, hedging and
trading gains and losses incurred by Union Oil were not allocated to Pure and
were not reflected in the Permian Basin business units presented results.
Therefore, historically, Pure's associated price risks were not mitigated.

          As of December 31, 2001, Pure's primary risk exposures associated with
financial instruments to which it is a party include crude oil and natural gas
price volatility and interest rate volatility. Pure's primary risk exposures
associated with financial instruments have not changed significantly since
December 31, 2000.

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<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

          Pure's Consolidated Financial Statements required by this item are
included on the pages immediately following the Index to Consolidated Financial
Statements appearing on page F-1

          Pure Resources, Inc., a Delaware corporation, was, until May 25, 2000,
a wholly-owned subsidiary of Union Oil Company of California ("Union Oil"). Pure
was formed in December 1999 in connection with the Agreement and Plan of Merger
(the "Merger Agreement") dated December 13, 1999, as amended and among Union
Oil, Pure, TRH, Inc. and Titan Exploration, Inc. ("Titan").

          On May 25, 2000, pursuant to the Merger Agreement, Union Oil
contributed its Permian Basin business unit to a subsidiary of Pure in exchange
for 32,708,067 shares of Pure common stock and the assumption by Pure of the
associated liabilities of Union Oil's Permian Basin business unit. These
transactions are referred to as the "Contribution". Simultaneously with the
Contribution, a subsidiary of Pure was merged with and into Titan. (See Note 1
for additional information related to the Merger Agreement and the merger.) The
amounts and results of operations of Pure included in these financial statements
reflect the historical amounts and results of operations of the Permian Basin
business unit operations of Union Oil. The effect of the merger is reflected in
the results of operations and cash flows since May 31, 2000. The acquisition of
Titan by Pure was accounted for on the purchase method.

          On January 1, 2002, Pure adopted SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets. In
March 2002, Pure sold assets in the Permian Basin region for $23 million,
subject to adjustments. These properties represented an insignificant portion of
the value of Pure's reserves. In accordance with SFAS No. 144, Pure is required
to reflect this disposition of assets as discontinued operations. Pure is filing
this Form 10-K/A Amendment No. 1 to present the financial statements and related
data to reflect the discontinued operations. See Note 22 of Notes to
Consolidated Financial Statements for additional information.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

          On May 25, 2000, Titan merged with the Permian Basin business unit of
Union Oil to form Pure. Prior to the merger, KPMG LLP audited Titan, and
PricewaterhouseCoopers LLP audited the Permian Basin business unit. As part of
the Titan merger, Titan's management team remained intact and now manages Pure.
At a meeting held on June 27, 2000, the Board of Directors and Audit Committee
of Pure approved the engagement of KPMG LLP as Pure's independent auditors. In
light of this decision, PricewaterhouseCoopers LLP was terminated as auditors of
Pure.

          The report of PricewaterhouseCoopers LLP on the Permian Basin business
unit's financial statements for the 1999 fiscal year did not contain an adverse
opinion or a disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope, or accounting principles.

          In connection with the audit of the Permian Basin business unit's
financial statements for the year ended December 31, 1999, and in the subsequent
interim period, there was no disagreement with PricewaterhouseCoopers LLP on any
matters of accounting principles or practices, financial statement disclosure,
or auditing scope and procedures which, if not resolved to the satisfaction of
PricewaterhouseCoopers LLP would have caused PricewaterhouseCoopers LLP to make
reference to the matter in their report.

                                       57

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                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

          The information required by this item is incorporated by reference to
information under the caption "Proposal 1 - Election of Directors" and to the
information under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" in Pure's definitive Proxy Statement (the "2002 Proxy Statement" )
for its annual meeting of stockholders to be held on or about May 16, 2002. The
2002 Proxy Statement will be filed with the Securities and Exchange Commission
(the "Commission") not later than 120 days subsequent to December 31, 2001.

          Pursuant to Item 401(b) of Regulation S-K, the information required by
this item with respect to executive officers of Pure is set forth in Part I of
this report.

ITEM 11. EXECUTIVE COMPENSATION

          The information required by this item is incorporated herein by
reference to the 2002 Proxy Statement, which will be filed with the Commission
not later than 120 days subsequent to December 31, 2001.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

          The information required by this item is incorporated herein by
reference to the 2002 Proxy Statement, which will be filed with the Commission
not later than 120 days subsequent to December 31, 2001.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

          The information required by this item is incorporated herein by
reference to the 2002 Proxy Statement, which will be filed with the Commission
not later than 120 days subsequent to December 31, 2001.

                                       58

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                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K

(a)  1. Consolidated Financial Statements:

     See Index to Consolidated Financial Statements on page F-1

     2. Financial Statement Schedules:

     See Index to Consolidated Financial Statements on page F-1

     3. Exhibits: The following documents are filed as exhibits to this report:

Exhibit
Number                            Description of Document
-------                           -----------------------

2.1       Agreement and Plan of Merger, dated as of December 13, 1999, by and
          among Union Oil Company of California, Pure Resources, Inc. (formerly
          named Titan Resources Holdings, Inc.), TRH, Inc. and Titan
          Exploration, Inc. (filed as Exhibit 2.1 to Titan Exploration, Inc.'s
          Current Report of Form 8-K, date of report December 13, 1999, and
          incorporated herein by reference).

2.2       Amendment No. 1 to Merger Agreement, dated as of April 14, 2000, by
          and among Union Oil Company of California, Pure Resources, Inc.
          (formerly named Titan Resources Holdings, Inc.), TRH, Inc. and Titan
          Exploration, Inc. (filed as Exhibit 2.2 to Pure's Registration
          Statement on Form S-4, Registration No. 333-34970, and incorporated by
          reference herein).

2.3       Agreement and Plan of Merger by and among Pure Resources, Inc., Pure
          Resources II, Inc. and Hallwood Energy Corporation dated as of March
          29, 2001 (incorporated herein by reference to Exhibit 99.(d)(1) to the
          Schedule TO filed by Pure Resources II, Inc., Titan Exploration, Inc.,
          Pure Resources, Inc., Union Oil Company of California and Unocal
          Corporation on April 10, 2001).

3.1       Certificate of Incorporation of Pure Resources, Inc. (formerly named
          Titan Resources Holdings, Inc.) (filed as Exhibit 3.1 to Pure's
          Registration Statement on Form S-4, Registration No. 333-34970, and
          incorporated by reference herein).

3.2       Certificates of Amendment of Certificate of Incorporation of Pure
          Resources, Inc. (formerly named Titan Resources Holdings, Inc.) (filed
          as Exhibit 3.2 to Pure's Registration Statement on Form S-4,
          Registration No. 333-34970, and incorporated by reference herein).

3.3       Bylaws of Pure Resources, Inc. (formerly named Titan Resources
          Holdings, Inc.) (filed as Exhibit 3.3 to Pure's Registration Statement
          on Form S-4, Registration No. 333-34970, and incorporated by reference
          herein).

10.1      Registration Rights Agreement, dated December 13, 1999, by and between
          Pure Resources, Inc., (formerly named Titan Resources Holdings, Inc.)
          and Union Oil Company of California (filed as Exhibit 10.1 to Pure's
          Registration Statement on Form S-4, Registration No. 333-34970, and
          incorporated by reference).

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<PAGE>

10.2      Registration Rights Agreement by and between Jack D. Hightower and
          Pure Resources, Inc. dated as of May 25, 2000 (filed as Exhibit 4.1 to
          Jack D. Hightower's Schedule 13D filed June 5, 2000 and relating to
          securities of Pure Resources, Inc. and incorporated herein by
          reference).

10.3      Amended and Restated Stockholders Voting Agreement dated April 10,
          2000 by and among Pure Resources, Inc. (formerly named Titan Resources
          Holdings, Inc.), Union Oil Company of California and Jack D. Hightower
          (filed as Exhibit 10.20 to Titan Exploration, Inc.'s Annual Report on
          Form 10-K, as amended, as filed on April 12, 2000, and incorporated
          herein by reference).

10.4      Non-Dilution Agreement dated December 13, 1999 by and between Pure
          Resources, Inc. (formerly named Titan Resources Holdings, Inc.) and
          Union Oil Company of California (filed as Exhibit 10.21 to Titan
          Exploration, Inc.'s Annual Report on Form 10-K, as amended, as filed
          on April 12, 2000, and incorporated herein by reference).

10.5      Business Opportunities Agreement, dated as of December 13, 1999, by
          and among Union Oil Company of California, Pure Resources, Inc.
          (formerly named Titan Resources Holdings, Inc.), TRH, Inc. and Titan
          Exploration, Inc. (filed as Exhibit 10.20 to Titan Exploration, Inc.'s
          Form 10-K, as amended, as filed on April 12, 2000, and incorporated
          herein by reference).

10.6      Letter Agreement, dated January 30, 2001, related to the Business
          Opportunities Agreement, dated as of December 13, 1999, by and among
          Union Oil Company of California, Pure Resources, Inc., TRH, Inc. and
          Titan Exploration, Inc. (filed as Exhibit 10.6 to Pure's Annual Report
          on Form 10-K for the year ended December 31, 2000, and incorporated
          herein by reference).

10.7      Letter Agreement, dated March 29, 2001, related to the Business
          Opportunities Agreement dated as of December 13, 1999, by and among
          Union Oil Company of California, Pure Resources, Inc., TRH, Inc., and
          Titan Exploration, Inc. (filed as Exhibit 10.7 to Pure's Annual Report
          on Form 10-K for the year ended December 31, 2001, and incorporated
          herein by reference).

10.8      Letter Agreement, dated May 9, 2001, related to the Business
          Opportunities Agreement dated as of December 13, 1999, by and among
          Union Oil Company of California, Pure Resources, Inc., TRH, Inc. and
          Titan Exploration, Inc. (filed as Exhibit 10.13 to Pure's Quarterly
          Report on Form 10-Q for the quarter ended March 31, 2001, and
          incorporated herein by reference).

10.9*     Pure Resources, Inc. 1999 Incentive Plan (filed as Exhibit 10.3 to
          Pure's Registration Statement on Form S-4, Registration No. 333-34970,
          and incorporated herein by reference).

10.10*    Form of Option Agreement under Pure Resources, Inc. 1999 Incentive
          Plan (filed as Exhibit 10.8 to Pure's Annual Report on Form 10-K for
          the year ended December 31, 2000, and incorporated herein by
          reference).

10.11*    Pure Resources, Inc. Equity Plan for Outside Directors (filed as
          Exhibit 10.9 to Pure's Registration Statement on Form S-4,
          Registration No. 333-34970, and incorporated herein by reference.)

10.12*    Titan 401(k) Plan (filed as Exhibit 4.1 to Titan Exploration, Inc.'s
          Registration Statement on Form S-8, Registration No. 333-62115, and
          incorporated herein by reference).

10.13*    Amendment to Titan 401(k) Plan, renaming it the Pure Resources 401(k)
          Plan and otherwise amending the plan (filed as Exhibit 4.1.1 to Pure's
          Registration Statement on Form S-8, Registration No. 333-37868, and
          incorporated herein by reference).

10.14*    Titan Matching Plan, effective as of September 1, 1998 (filed as
          Exhibit 10.2 to Titan Exploration, Inc.'s Form 10-Q for the period
          ended September 30, 1998, and incorporated herein by reference).

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<PAGE>

10.15*    Amendment No. 1 to the Titan Matching Plan, renaming it the Pure
          Resources Matching Plan (filed as Exhibit 10.13 to Pure's Annual
          Report on Form 10-K for the year ended December 31, 2000, and
          incorporated herein by reference).

10.16*    Titan Exploration, Inc. 1999 Stock Option Plan (filed as Exhibit 10.2
          to Titan Exploration, Inc.'s Current Report on Form 8-K, as filed on
          June 11, 1999, and incorporated herein by reference).

10.17*    Titan Exploration, Inc. 1996 Incentive Plan (filed as Exhibit 10.9 to
          Titan Exploration, Inc.'s Registration Statement on Form S-1,
          Registration No. 333-14029, and incorporated herein by reference).

10.18*    Offshore Energy Development Corporation 1996 Stock Awards Plan (filed
          as Exhibit 10.22 to the Offshore Energy Development Corporation
          Registration Statement on Form S-1, Registration No. 33-11269, and
          incorporated herein by reference).

10.19*    Employment Agreement, dated December 13, 1999, by and between Pure
          Resources, Inc. (formerly named Titan Resources Holdings, Inc.) and
          Jack Hightower (filed as Exhibit 10.19 to Titan Exploration, Inc.'s
          Annual Report on Form 10-K, as amended, as filed on April 12, 2000,
          and incorporated herein by reference).

10.20*    Letter agreement, dated July 20, 2000, between Jack D. Hightower and
          Pure Resources, Inc. regarding amendment to Jack D. Hightower's
          Employment Agreement which was effective May 25, 2000 (filed as
          Exhibit 10.8 to Pure's Quarterly Report on Form 10-Q for the period
          ended September 30, 2000, and incorporated herein by reference).

10.21*    Amendment to Employment Agreement, dated August 8, 2000, between Pure
          Resources, Inc. and Jack D. Hightower (filed as Exhibit 10.9 to Pure's
          Quarterly Report on Form 10-Q for the period ended September 30, 2000,
          and incorporated herein by reference).

10.22*    Executive officer letter agreement dated May 25, 2000 between Pure
          Resources I, Inc. (formerly named Titan Resources I, Inc.) and each of
          certain officers (filed as Exhibit 10.5 to Pure's Quarterly Report on
          Form 10-Q for the period ended June 30, 2000, and incorporated herein
          by reference).

10.23*    Confidentiality and Non-Compete Agreement dated May 25, 2000 between
          Pure Resources, Inc., Titan Exploration, Inc. and Pure Resources I,
          Inc. (formerly named Titan Resources I, Inc.) and each of certain
          officers (filed as Exhibit 10.6 to Pure's Quarterly Report on Form
          10-Q for the period ended June 30, 2000, and incorporated herein by
          reference).

10.24*    Confidentiality and Non-Compete Agreement dated August 8, 2000 between
          Pure Resources I, Inc. and Gary M. Dupriest (filed as Exhibit 10.5 to
          Pure's Quarterly Report on Form 10-Q for the period ended September
          30, 2000, and incorporated herein by reference).

10.25*    Indemnity Agreement, dated August 9, 2000, between Pure Resources,
          Inc. and its officers and directors (filed as Exhibit 10.10 to Pure's
          Quarterly Report on Form 10-Q for the period ended September 30, 2000,
          and incorporated herein by reference).

10.26*    Officer Severance and Put Right Agreement dated August 1, 2000 between
          Pure Resources, Inc. and George G. Staley (filed as Exhibit 10.7 to
          Pure's Quarterly Report on Form 10-Q for the period ended September
          30, 2000, and incorporated herein by reference).

10.27*    Officer Severance and Put Right Agreement dated August 1, 2000, August
          31, 2000 or September 14, 2000 between Pure Resources, Inc. and
          certain executive officers (filed as Exhibit 10.6 to Pure's Quarterly
          Report on Form 10-Q for the period ended September 30, 2000, and
          incorporated herein by reference).

10.28     Credit Agreement, dated September 29, 2000, among Pure Resources,
          Inc., the Lenders party thereto, The Chase Manhattan Bank, as
          Administrative Agent, First Union National Bank, as Syndication Agent,
          and

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<PAGE>

          Credit Lyonnais New York Branch, as Documentation Agent (filed as
          Exhibit 10.13 to Pure's Quarterly Report on Form 10-Q for the period
          ended September 30, 2000, and incorporated herein by reference).

10.29     Credit Agreement, dated September 29, 2000, among Pure Resources,
          Inc., the Lenders party thereto, The Chase Manhattan Bank, as
          Administrative Agent, First Union National Bank, as Syndication Agent,
          and BNP Paribas, as Documentation Agent (filed as Exhibit 10.14 to
          Pure's Quarterly Report on Form 10-Q for the period ended September
          30, 2000 and incorporated herein by reference).

10.30     Consent and Waiver Letter dated January 31, 2001, to the Credit
          Agreements dated September 29, 2000, among Pure Resources, Inc., the
          Lenders party thereto, The Chase Manhattan Bank, as Administrative
          Agent and First Union National Bank, as Syndication Agent (filed as
          Exhibit 10.28 to Pure's Annual Report on Form 10-K for the year ended
          December 31, 2000, and incorporated herein by reference).

10.31     Consent and Waiver Letter, dated April 27, 2001, to the Credit
          Agreements dated September 29, 2000, among Pure Resources, Inc., the
          Lenders party thereto, The Chase Manhattan Bank, as Administrative
          Agent and First Union National Bank, as Syndication Agent (filed as
          Exhibit 10.31 to Pure's Annual Report on Form 10-K for the year ended
          December 31, 2001, and incorporated herein by reference).

10.32     First Amendment, dated February 28, 2001, to Credit Agreement
          (Five-Year Revolving Credit Facility) dated as of September 29, 2000
          among Pure Resources, Inc., the lenders party thereto, and The Chase
          Manhattan Bank, individually, as Issuing Bank and Administrative Agent
          (filed as Exhibit 10.3 to Pure Resources, Inc. Current Report on Form
          8-K/A Amendment No. 1 (date of report: May 9, 2001) filed on June 1,
          2001, and incorporated herein by reference).

10.33     Credit Agreement, dated November 20, 2001, among Pure Resources, Inc.,
          the Lender's party thereto, JPMorgan Chase Bank, as Administrative
          Agent and First Union National Bank and BNP Paribas as Co-Syndication
          Agents (filed as Exhibit 10.33 to Pure's Annual Report on Form 10-K
          for the year ended December 31, 2001, and incorporated herein by
          reference).

10.34     Indenture, dated as of June 8, 2001, among Pure Resources, Inc., the
          guarantors named therein and First Union Nation Bank, as trustee,
          relating to $350,000,000 aggregate principal amount of Series A and
          Series B 7-1/8% Notes Due June 15, 2011 (filed as Exhibit 10.9 to
          Pure's Quarterly Report on Form 10-Q for the quarter ended June 30,
          2001, and incorporated herein by reference).

10.35     Form of 7-1/8% Series B Note due June 15, 2011 (filed as Exhibit 4.2
          to Pure's Registration Statement on Form S-4 Registration No.
          333-69642-07, and incorporated herein by reference).

10.36     Purchase Agreement dated June 5, 2001, by and among Pure Resources,
          Inc., the guarantors named therein, Credit Suisse First Boston
          Corporation, First Union Securities, BNP Paribas Securities Corp.,
          Fleet Securities, Inc., Credit Lyonnais Securities (USA) Inc., BNY
          Capital Markets, Inc., and Wells Fargo Brokerage, LLC (filed as
          Exhibit 10.12 to Pure's Quarterly Report on Form 10-Q for the quarter
          ended June 30, 2001, and incorporated herein by reference).

10.37     Master Promissory Note, dated October 18, 2000, between Pure
          Resources, Inc. and The Chase Manhattan Bank (filed as Exhibit 10.12
          to Pure's Quarterly Report on Form 10-Q for the period ended September
          30, 2000, and incorporated herein by reference).

10.38     Office Lease Agreement, dated July 5, 2000, between Midland Prop., LTD
          and Pure Resources I, Inc. (filed as Exhibit 10.9 to Pure's Quarterly
          Report on Form 10-Q for the period ended June 30, 2000, and
          incorporated herein by reference).

10.39     Joint Development Agreement, effective date: March 10, 2000, by and
          between Pure Resources, L.P. and Chaparral Royalty Company, DDDF
          Company, Inc., J. Don Looney, and George G. Staley (filed as Exhibit
          10.11 to Pure's Quarterly Report on Form 10-Q for the period ended
          September 30, 2000, and incorporated herein by reference).

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<PAGE>

10.40     Joint Development Agreement, effective date: January 30, 2001, by and
          between Pure Resources, L.P. and F. H. Mills, Jr., Lon Slaughter, and
          George G. Staley (filed as Exhibit 10.8 to Pure's Quarterly Report on
          Form 10-Q for the quarter ended June 30, 2001, and incorporated herein
          by reference).

10.41     Agreement for Purchase and Sale dated as of January 29, 2001, by and
          among International Paper Company, International Paper Realty
          Corporation, IP Farms, Inc., IP Petroleum Company, Inc., IP
          Timberlands Operating Company, Ltd., GCO Minerals Company, The
          Long-Bell Petroleum Company, Inc., American Central Corporation,
          Champion Realty Corporation and Sustainable Forests L.L.C. and Pure
          Resources, L.P. (filed as Exhibit 2.1 to Pure's Current Report on Form
          8-K, filed February 15, 2001 (date of report: January 31, 2001), and
          incorporated herein by reference).

10.42     Contribution Agreement dated as of January 29, 2001, by and among IP
          Petroleum Company, Inc., International Paper Realty Corporation,
          Transtates Properties Incorporated, Southland Energy Company, Pure
          Resources, L.P., Pure Resources I, Inc., PK I, L.P., PK II, L.P., PK
          III, L.P., PK IV, L.P. and Pure Partners, L.P. (filed as Exhibit 2.2
          to Pure's Current Report on Form 8-K, filed February 15, 2001 (date of
          report: January 31, 2001), and incorporated herein by reference).

10.43     Amended and Restated Agreement of Limited Partnership of Pure
          Partners, L.P. dated as of January 31, 2001, by and among Pure
          Resources I, Inc., IP Petroleum Company, Inc., and Southland Energy
          Company, each as a Class A Limited Partner, PK I, L.P., PK II, L.P.,
          PK III, L.P., each as a Class B Limited Partner, and International
          Paper Realty Corporation, Transtates Properties Incorporated and PK
          IV, L.P., each as a Limited Partner (filed as Exhibit 10.1 to Pure's
          Current Report on Form 8-K, filed February 15, 2001 (date of report:
          January 31, 2001), and incorporated herein by reference).

10.44     Indemnity Agreement dated as of January 31, 2001, by Pure Partners,
          L.P. and Pure Resources I, Inc. to Southland Energy Company, IP
          Petroleum Company, Inc., International Paper Realty Corporation,
          Transtates Properties Incorporated or any of their successors or
          assigns with respect to their partnership interests in Pure Partners,
          L.P., and International Paper Company (filed as Exhibit 10.2 to Pure's
          Current Report on Form 8-K, filed February 15, 2001 (date of report:
          January 31, 2001), and incorporated herein by reference).

10.45     Guaranty Agreement dated January 31, 2001, by Pure Resources, L.P. to
          IP Petroleum Company, Inc., Southland Energy Company, International
          Paper Realty Corporation and Transtates Properties Incorporated (filed
          as Exhibit 10.3 to Pure's Current Report on Form 8-K, filed February
          15, 2001 (date of report: January 31, 2001), and incorporated herein
          by reference).

10.46     Senior Note Agreement dated January 31, 2001, by and between The
          Branigar Organization, Inc. and Pure Partners, L.P. (filed as Exhibit
          10.4 to Pure's Current Report on Form 8-K, filed February 15, 2001
          (date of report: January 31, 2001), and incorporated herein by
          reference).

10.47     Promissory Note dated January 31, 2001, by the Branigar Organization,
          Inc. payable to the order of Pure Partners, L.P. (filed as Exhibit
          10.5 to Pure's Current Report on Form 8-K, filed February 15, 2001
          (date of report: January 31, 2001), and incorporated herein by
          reference).

10.48     Guaranty Agreement dated as of January 31, 2001, by International
          Paper Company to Pure Partners, L.P. (filed as Exhibit 10.6 to Pure's
          Current Report on Form 8-K, filed February 15, 2001 (date of report:
          January 31, 2001), and incorporated herein by reference).

10.49     Master Offset Agreement dated as of January 31, 2001, among IP
          Petroleum Company, Inc., Southland Energy Company, The Branigar
          Organization, Inc. and Pure Partners, L.P. (filed as Exhibit 10.7 to
          Pure's Current Report on Form 8-K, filed February 15, 2001 (date of
          report: January 31, 2001), and incorporated herein by reference).

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10.50     Stockholders Agreement by and among Pure Resources, Inc., Pure
          Resources II, Inc. and certain stockholders of Hallwood Energy
          Corporation dated as of March 29, 2001 (filed as Exhibit (d)(2) to
          Schedule TO by Pure Resources II, Inc. and others on April 10, 2001,
          and incorporated herein by reference).

10.51     Noncompetition Agreement by and among Pure Resources, Inc., Hallwood
          Energy Corporation and The Hallwood Group Incorporated dated as of
          March 29, 2001 (filed as Exhibit (d)(3) to Schedule TO by Pure
          Resources II, Inc. and others on April 10, 2001, and incorporated
          herein by reference).

10.52     Stock Option Agreement by and among Hallwood Energy Corporation, Pure
          Resources, Inc. and Pure Resources II, Inc. dated as of March 29, 2001
          (filed as Exhibit (d)(4) to Schedule TO by Pure Resources II, Inc. and
          others on April 10, 2001, and incorporated herein by reference).

10.53     Services Agreement, dated April 1, 1995, between Pure Resources I,
          Inc. (formerly named Titan Resources, I, Inc.) and Pure Resources,
          L.P. (formerly named Titan Resources, L.P.) (filed as Exhibit 10.17 to
          Titan Exploration, Inc.'s Registration Statement on Form S-1,
          Registration No. 333-14029, and incorporated herein by reference).

21.1      Subsidiaries of the Registrant (filed as Exhibit 21.1 to Pure's Annual
          Report on Form 10-K for the year ended December 31, 2001, and
          incorporated herein by reference).

23.1      Consent of KPMG LLP, independent auditors.

23.2      Consent of PricewaterhouseCoopers LLP, independent accountants.

23.3      Consent of Netherland, Sewell & Associates, Inc.

23.4      Consent of Ryder Scott Company.

23.5      Consent of Gary M. Dupriest.

23.6      Consent of Twatchman Snyder & Byrd, Inc.

99.1      Certification of Chief Executive Officer

99.2      Certification of Chief Financial Officer

----------
* Represents a management contract or compensatory plan arrangement.

(b)  No matters were reported during the fourth quarter of 2001.

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<PAGE>

                          GLOSSARY OF OIL AND GAS TERMS

          The following are abbreviations and definitions of terms commonly used
in the oil and gas industry and this report. Unless otherwise indicated in this
report, natural gas volumes are stated at the legal pressure base of the state
or area in which the reserves are located and at 60 degrees Fahrenheit and in
most instances are rounded to the nearest major multiple. BOEs are determined
using the ratio of six Mcf of natural gas to one Bbl of oil.

"Bbl" or "barrel" means 42 U.S. gallons.

"Bcf" means billion cubic feet of natural gas.

"Bcfe" means billion equivalent cubic feet of natural gas, calculated by
converting oil to equivalent Mcf at a ratio of 6 Mcf to 1 Bbl of oil.

"BOE" means equivalent barrels of oil, calculated at a ratio of 6 Mcf to 1 Bbl
of oil.

"Completion" means the installation of permanent equipment for the production of
oil or gas.

"Development well" means a well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.

"Exploratory well" means a well drilled to find and produce oil or gas in an
unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir, or to extend a known reservoir.

"Gross," when used with respect to acres or wells, refers to the total acres or
wells in which Pure has a working interest.

"Horizontal drilling" means a drilling technique that permits the operator to
contact and intersect a larger portion of the producing horizon than
conventional vertical drilling techniques and can result in both increased
production rates and greater ultimate recoveries of hydrocarbons.

"MBbls" means thousand barrels.

"Mcf" means thousand cubic feet.

"Mcfe" means thousand equivalent cubit feet of natural gas, calculated by
converting oil to equivalent Mcf at a ratio of 6 Mcf to 1 Bbl of oil.

"MMBbls" means million of barrels.

"MMBOE" means millions of barrels of oil equivalent on a 6:1 basis.

"MMcf" means million cubic feet of natural gas.

"MMcfe" means million cubic feet equivalent, determined using the ratio of 6 Mcf
of natural gas to 1 Bbl of oil.

"Net," when used with respect to acres or wells, refers to gross acres of wells
multiplied, in each case, by the percentage working interest owned by Pure.

"Net production" means production that is owned by Pure less royalties and
production due others.

"Oil" means crude oil or condensate.

                                       65

<PAGE>

"Operator" means the individual or company responsible for the exploration,
development, and production of an oil or gas well or lease.

"Proved developed reserves" means reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods. Additional
oil and gas expected to be obtained through the application of fluid injection
or other improved recovery techniques for supplementing the natural forces and
mechanisms of primary recovery will be included as "proved developed reserves"
only after testing by a pilot project or after the operation of an installed
program has confirmed through production response that increased recovery will
be achieved.

"Proved reserves" means the estimated quantities of crude oil, natural gas, and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions, i.e., prices and costs as of
the date the estimate is made. Prices include consideration of changes in
existing prices provided only by contractual arrangements, but not on
escalations based upon future conditions.

          i. Reservoirs are considered proved if economic productibility is
supported by either actual production or conclusive formation test. The area of
a reservoir considered proved includes (A) that portion delineated by drilling
and defined by gas-oil and/or oil-water contacts, if any; and (B) the
immediately adjoining portions not yet drilled, but which can be reasonably
judged as economically productive on the basis of available geological and
engineering data. In the absence of information on fluid contacts, the lowest
known structural occurrence of hydrocarbons controls the lower proved limit of
the reservoir.

          ii. Reserves which can be produced economically through application of
improved recovery techniques (such as fluid injection) are included in the
"proved" classification when successful testing by a pilot project, or the
operation of an installed program in the reservoir, provides support for the
engineering analysis on which the project or program was based.

          iii. Estimates of proved reserves do not include the following: (A)
oil that may become available from known reservoirs but is classified separately
as "indicated additional reserves"; (B) crude oil, natural gas, and natural gas
liquids, the recovery of which is subject to reasonable doubt because of
uncertainty as to geology, reservoir characteristics, or economic factors; (C)
crude oil, natural gas, and natural gas liquids that may occur in undrilled
prospects; and (D) crude oil, natural gas, and natural gas liquids that may be
recovered from oil shales, coal, gilsonite and other such sources.

"Proved undeveloped reserves" means reserves that are expected to be recovered
from new wells on undrilled acreage, or from existing wells where a relatively
major expenditure is required for recompletion. Reserves on undrilled acreage
shall be limited to those drilling units offsetting productive units that are
reasonably certain of production when drilled. Proved reserves for other
undrilled units can be claimed only where it can be demonstrated with certainty
that there is continuity of production from the existing productive formation.
Under no circumstances should estimates for proved undeveloped reserves be
attributable to any acreage for which an application of fluid injection or other
improved recovery technique is contemplated, unless such techniques have been
proved effective by actual tests in the area and in the same reservoir.

"Recompletion" means the completion for production of an existing well bore in
another formation from that in which the well has been previously completed.

"Reserves" means proved reserves.

"Royalty" means an interest in an oil and gas lease that gives the owner of the
interest the right to receive a portion of the production from the leased
acreage (or of the proceeds of the sale thereof), but generally does not require
the owner to pay any portion of the costs of drilling or operating the wells on
the leased acreage. Royalties may be either landowner's royalties, which are
reserved by the owner of the leased acreage at the time the lease is granted, or
overriding royalties, which are usually reserved by an owner of the leasehold in
connection with a transfer to a subsequent owner.

                                       66

<PAGE>

"3-D seismic" means seismic data that are acquired and processed to yield a
three-dimensional picture of the subsurface.

"SEC 10% present value" means the pretax present value of estimated future
revenues to be generated from the production of proved reserves calculated in
accordance with SEC guidelines, net of estimated production and future
development costs, using prices and costs as of the date of estimation without
future escalation, without giving effect to non-property related expenses such
as general and administrative expenses, debt service and depreciation, depletion
and amortization, and discounted using an annual discount rate of 10%.

"Standardized measure of discounted future net cash flows" is the SEC 10%
present value defined above, less applicable income taxes.

"Tertiary recovery" means enhanced recovery methods for the production of oil or
gas. Enhanced recovery of crude oil requires a means for displacing oil from the
reservoir rock, modifying the properties of the fluids in the reservoir and/or
the reservoir rock to cause movement of oil in an efficient manner, and
providing the energy and drive mechanism to force its flow to a production well.
Pure injects chemicals or energy as required for displacement and for the
control of flow rate and flow pattern in the reservoir, and a fluid drive is
provided to force the oil toward a production well.

"Working interest" means an interest in an oil and gas lease that gives the
owner of the interest the right to drill for and produce oil and gas on the
leased acreage and requires the owner to pay a share of the costs of drilling
and production operations. The share of production to which a working interest
owner is entitled will always be smaller than the share of costs that the
working interest owner is required to bear, with the balance of the production
accruing to the owners of royalties. For example, the owner of a 100% working
interest in a lease burdened only by a landowner's royalty of 12.5% would be
required to pay 100% of the costs of a well but would be entitled to retain
87.5% of the production.

"Workover" means operations on a producing well to restore or increase
production.

                                       67

<PAGE>

                                   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, as of July 29, 2002.

                                    PURE RESOURCES, INC.

                                    Registrant


                                    By: /s/ Jack Hightower
                                        ----------------------------------------
                                        Jack Hightower
                                        President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below as of July 29, 2002, by the following persons on behalf of
the Registrant and in the capacity indicated.


/s/ Jack Hightower
---------------------------------------------------
Jack Hightower
President, Chief Executive Officer and Chairman
of the Board of Directors


/s/ George G. Staley
---------------------------------------------------
George G. Staley
Executive Vice President, Exploration and Director


/s/ William K. White
---------------------------------------------------
William K. White
Vice President, Finance and Chief Financial Officer


/s/ Darrell D. Chessum
---------------------------------------------------
Darrell D. Chessum
Director


/s/ Keith A. Covington
---------------------------------------------------
Keith A. Covington
Director


/s/ Graydon H. Laughbaum, Jr.
---------------------------------------------------
Graydon H. Laughbaum, Jr.
Director

                                       68

<PAGE>


/s/ Timothy H. Ling
---------------------------------------------------
Timothy H. Ling
Director


/s/ Hd Maxwell
---------------------------------------------------
HD Maxwell
Director


/s/ Herbert C. Williamson, III
---------------------------------------------------
Herbert C. Williamson, III
Director

                                       69

<PAGE>



                   Index To Consolidated Financial Statements

Consolidated Financial Statements of Pure Resources, Inc.:              Page

   Independent Auditor's Report - KPMG LLP                               F-2

   Report of Independent Accountants - PricewaterhouseCoopers LLP        F-3

   Consolidated Balance Sheets as of December 31, 2001 and 2000          F-4

   Consolidated Statements of Operations for the years ended
      December 31, 2001, 2000 and 1999                                   F-6

   Consolidated Statements of Stockholders' Equity and Owner's Net
      Investment for the years ended December 31, 2001, 2000 and 1999    F-7

   Consolidated Statements of Cash Flows for the years ended
      December 31, 2001, 2000 and 1999                                   F-8

   Notes to Consolidated Financial Statements                            F-9

All schedules are omitted, as the required information is inapplicable or the
information is presented in the financial statements or related notes.

                                       F-1

<PAGE>

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders of
Pure Resources, Inc.

          We have audited the accompanying consolidated balance sheets of Pure
Resources, Inc. and subsidiaries ("Pure") as of December 31, 2001 and 2000 and
the related consolidated statements of operations, stockholders' equity and
owner's net investment and cash flows for the years ended December 31, 2001 and
2000. These consolidated financial statements are the responsibility of Pure's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

          We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

          In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Pure
Resources, Inc. as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for the years ended December 31, 2001 and 2000,
in conformity with accounting principles generally accepted in the United States
of America.

          As discussed in Note 2 to the consolidated financial statements, Pure
changed its method of accounting for derivative instruments and hedging
activities in 2001 to adopt the provisions of Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities."


                                    KPMG LLP

Midland, Texas
February 14, 2002, except for
   Note 22, which is dated
   July 26, 2002

                                       F-2

<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Directors and Stockholders of
Pure Resources, Inc.

We have audited the accompanying consolidated statements of operations, of cash
flows, and of changes in stockholders' equity and owner's net investment of Pure
Resources, Inc. and its subsidiaries, formerly referred to as Union Oil's
Permian Basin business unit, for the year ended December 31, 1999. These
financial statements are the responsibility of Pure Resources, Inc.'s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Pure Resources, Inc. and its subsidiaries for the year ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States of America. We have not audited the consolidated financial
statements of Pure Resources, Inc. for any period subsequent to December 31,
1999.


PricewaterhouseCoopers LLP

Los Angeles, California
March 10, 2000

                                       F-3

<PAGE>

                              Pure Resources, Inc.

                           Consolidated Balance Sheets
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                     ASSETS
                                                                                December 31,   December 31,
                                                                                    2001           2000
                                                                                ------------   ------------
<S>                                                                              <C>            <C>
Current assets:
   Cash and cash equivalents                                                     $    5,593     $    3,325
   Accounts receivable:
      Oil and gas                                                                    54,946         46,749
      Other                                                                          11,227          1,702
   Fair value of derivatives (Note 16)                                                4,918             --
   Prepaid expenses and other current assets                                          1,761            883
                                                                                 ----------     ----------
         Total current assets                                                        78,445         52,659
                                                                                 ----------     ----------

Property, plant and equipment, at cost:
   Oil and gas properties, using the successful efforts method of accounting:
      Proved properties                                                           1,957,723      1,140,209
      Unproved properties                                                            64,051         21,743
   Accumulated depletion, depreciation and amortization                            (714,415)      (577,532)
                                                                                 ----------     ----------
                                                                                  1,307,359        584,420
                                                                                 ----------     ----------
Other property and equipment, net                                                    16,629          6,449
Deferred compensation (Note 6)                                                       14,982         63,903
Receivables for under-delivered gas                                                   5,853         10,274
Other assets, net                                                                    11,540          1,410
                                                                                 ----------     ----------
                                                                                 $1,434,808     $  719,115
                                                                                 ==========     ==========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       F-4

<PAGE>

                              Pure Resources, Inc.

                           Consolidated Balance Sheets
                             (dollars in thousands)

<TABLE>
<CAPTION>
                      LIABILITIES AND STOCKHOLDERS' EQUITY
                                                                             December 31,   December 31,
                                                                                 2001           2000
                                                                             ------------   ------------
<S>                                                                           <C>             <C>
Current liabilities:
   Accounts payable and accrued liabilities:
      Trade                                                                   $   60,713      $ 18,228
      Fair value of derivatives and deferred commodity hedges (Note 16)              620         6,781
      Other (Note 18)                                                             52,518        25,125
                                                                              ----------      --------
         Total current liabilities                                               113,851        50,134
                                                                              ----------      --------

Long-term debt                                                                   586,703        68,000

Liabilities for over-delivered gas                                                11,325        17,791

Accrued abandonment, restoration and environmental liabilities                    22,611        14,331

Fair value of derivatives (Note 16)                                                  721            --

Deferred income taxes                                                            135,269        55,456

Common stock subject to repurchase (Note 6)                                       69,800       135,617

Minority interest                                                                  6,445            --

Stockholders' equity:
   Preferred stock, $.01 par value, 10,000,000 shares authorized; none
      issued and outstanding                                                          --            --
   Common stock, $.01 par value, 200,000,000 shares authorized; 50,175,777
      and 50,037,402 shares issued and outstanding at December 31, 2001
      and 2000, respectively                                                         502           500
   Additional paid-in capital                                                    345,310       326,827
   Notes receivable - affiliates                                                  (7,377)       (6,952)
   Deferred compensation (Note 6)                                                 (1,517)       (2,296)
   Accumulated other comprehensive income                                         10,098            --
   Retained earnings                                                             141,067        59,707
                                                                              ----------      --------
         Total stockholders' equity                                              488,083       377,786
                                                                              ----------      --------
   Commitments and contingencies (Note 6)
                                                                              $1,434,808      $719,115
                                                                              ==========      ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       F-5

<PAGE>

                              Pure Resources, Inc.

                      Consolidated Statements of Operations
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
                                                                        ------------------------------
                                                                          2001       2000       1999
                                                                        --------   --------   --------
<S>                                                                     <C>        <C>        <C>
Revenues:
   Oil sales                                                            $184,683   $150,131   $ 64,613
   Gas sales                                                             293,394    131,758     48,633
   Other operating                                                         5,551        217        942
   Gain on sale of assets                                                    831      1,336        (63)
                                                                        --------   --------   --------
      Total revenues                                                     484,459    283,442    114,125
                                                                        --------   --------   --------

Expenses:
   Oil and gas production                                                 83,033     47,130     32,268
   Production and other taxes                                             35,298     21,888      8,579
   General and administrative                                             26,655     12,281      7,836
   Amortization of deferred compensation (general and administrative)      1,518     15,386         --
   Exploration and abandonment (Note 19)                                  54,766     19,883      6,491
   Depletion, depreciation and amortization                              143,815     44,785     32,133
   Impairment of long-lived assets                                            --         --        345
                                                                        --------   --------   --------

      Total expenses                                                     345,085    161,353     87,652
                                                                        --------   --------   --------

      Operating income                                                   139,374    122,089     26,473
                                                                        --------   --------   --------

Other income (expense):
   Interest income                                                         1,696        455         --
   Interest expense                                                      (28,308)    (4,396)        --
   Other                                                                   2,617     (2,910)        --
                                                                        --------   --------   --------

      Income before income taxes and minority interest                   115,379    115,238     26,473

Income tax expense                                                       (33,744)   (34,066)    (8,685)

Minority interest                                                         (1,445)        --         --
                                                                        --------   --------   --------

      Income from continuing operations                                   80,190     81,172     17,788
                                                                        --------   --------   --------

Discontinued operations, net of tax (Note 22):
   Income from operations                                                  1,170      1,688         --
   Gain on disposal                                                           --         --         --
                                                                        --------   --------   --------
      Income from discontinued operations                                  1,170      1,688         --
                                                                        --------   --------   --------
      Net income                                                        $ 81,360   $ 82,860   $ 17,788
                                                                        ========   ========   ========

      Income per share from continuing operations - basic               $   1.60   $   1.89   $   0.54
                                                                        ========   ========   ========

      Net income per share - basic                                      $   1.62   $   1.93   $   0.54
                                                                        ========   ========   ========

      Income per share from continuing operations - assuming dilution   $   1.57   $   1.86   $   0.54
                                                                        ========   ========   ========

      Net income per share - assuming dilution                          $   1.59   $   1.90   $   0.54
                                                                        ========   ========   ========
</TABLE>

           See accompanying notes to consolidated financial statements

                                       F-6

<PAGE>

                              Pure Resources, Inc.

   Consolidated Statements of Stockholders' Equity and Owner's Net Investments
                                 (in thousands)

<TABLE>
<CAPTION>
                                Owner's             Additional     Notes
                                  Net      Common    Paid-in     Receivable     Deferred
                              Investment   Stock     Capital     Affiliates   Compensation
                              ----------   ------   ----------   ----------   ------------
<S>                           <C>           <C>      <C>          <C>           <C>
Balance, December 31, 1998    $ 224,126     $ --     $     --     $    --       $    --

Net income                       17,788       --           --          --            --
Net settlements with owner      (39,290)      --           --          --            --
                              ---------     ----     --------     -------       -------

Balance, December 31, 1999      202,624       --           --          --            --

Net income                       23,153       --           --          --            --
Assets contributed by Union
   Oil                            4,921       --           --          --            --
Cash transfer from owner
   pursuant to merger            14,528       --           --          --            --
Net settlements with owner      (15,844)      --           --          --            --
Acquisition of Titan
   Exploration, Inc.                 --      173      151,253      (6,706)           --
Amortization of deferred
   compensation                      --       --        2,893          --        (2,893)
Officer severance
   agreements (Note 6)               --       --      (56,925)         --            --
Accrued interest                     --       --           --        (246)           --
Amortization of deferred
   compensation                      --       --           --          --           597
Stock options exercised              --       --          454          --            --
Tax benefit of stock
   options exercised                 --       --           71          --            --
Director and other stock
   awards                            --       --           26          --            --
Transfer of owner's net
   investment and issuance
   of  common stock
   pursuant to the merger      (229,382)     327      229,055          --            --
                              ---------     ----     --------     -------       -------

Balance, December 31, 2000    $      --     $500     $326,827     $(6,952)      $(2,296)

Net income                           --       --           --          --            --
Adoption of SFAS No. 133:            --       --           --          --            --
   SFAS No. 133 transition
      adjustment                     --       --           --          --            --
   SFAS No. 133
      reclassification to
      earnings                       --       --           --          --            --
   SFAS No. 133 net gain
      (loss) on cash flow
      hedges                         --       --           --          --            --

Comprehensive income


Cash transfer from owner
   pursuant to merger                --       --        1,777          --            --
Net settlements with owner           --       --       (2,948)         --            --
Amortization of deferred
   compensation                      --       --           --          --           779
Officer severance
   agreements (Note 6)               --       --       17,635          --            --
Accrued interest                     --       --           --        (425)           --
Stock options exercised              --        2        1,548          --            --
Tax benefit of stock
   options exercised                 --       --          428          --            --
Director and other stock
   awards                            --       --           43          --            --
                              ---------     ----     --------     -------       -------

Balance, December 31, 2001    $      --     $502     $345,310     $(7,377)      $(1,517)
                              =========     ====     ========     =======       =======

<CAPTION>
                                          Accumulated           Total
                                             Other       Stockholders' Equity
                              Retained   Comprehensive      and Owner's Net
                              Earnings      Income            Investment
                              --------   -------------   --------------------
<S>                           <C>          <C>                 <C>
Balance, December 31, 1998    $     --     $     --            $224,126

Net income                          --                           17,788
Net settlements with owner          --           --             (39,290)
                              --------     --------            --------

Balance, December 31, 1999          --           --             202,624

Net income                      59,707           --              82,860
Assets contributed by Union
   Oil                              --           --               4,921
Cash transfer from owner
   pursuant to merger               --           --              14,528
Net settlements with owner          --           --             (15,844)
Acquisition of Titan
   Exploration, Inc.                --           --             144,720
Amortization of deferred
   compensation                     --           --                  --
Officer severance
   agreements (Note 6)              --           --             (56,925)
Accrued interest                    --           --                (246)
Amortization of deferred
   compensation                     --           --                 597
Stock options exercised             --           --                 454
Tax benefit of stock
   options exercised                --           --                  71
Director and other stock
   awards                           --           --                  26
Transfer of owner's net
   investment and issuance
   of  common stock
   pursuant to the merger           --           --                  --
                              --------     --------            --------

Balance, December 31, 2000    $ 59,707     $     --            $377,786

Net income                      81,360           --              81,360
Adoption of SFAS No. 133:           --      (11,364)            (11,364)
   SFAS No. 133 transition
      adjustment                    --          456                 456
   SFAS No. 133
      reclassification to
      earnings                      --        4,034               4,034
   SFAS No. 133 net gain
      (loss) on cash flow
      hedges                        --       16,972              16,972
                                                               --------
Comprehensive income                                             91,458
                                                               --------

Cash transfer from owner
   pursuant to merger               --           --               1,777
Net settlements with owner          --           --              (2,948)
Amortization of deferred
   compensation                     --           --                 779
Officer severance
   agreements (Note 6)              --           --              17,635
Accrued interest                    --           --                (425)
Stock options exercised             --           --               1,550
Tax benefit of stock
   options exercised                --           --                 428
Director and other stock
   awards                           --           --                  43
                              --------     --------            --------

Balance, December 31, 2001    $141,067     $ 10,098            $488,083
                              ========     ========            ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       F-7

<PAGE>

                              Pure Resources, Inc.

                      Consolidated Statements of Cash Flows
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                                                  --------------------------------
                                                                    2001        2000        1999
                                                                  ---------   ---------   --------
<S>                                                               <C>         <C>         <C>
Cash flows from operating activities:
   Net income                                                     $  81,360   $  82,860   $ 17,788
   Adjustment to reconcile net income to net cash provided by
      operating activities:
         Depletion, depreciation and amortization                   143,815      44,785     32,133
         Impairment of long-lived assets                                 --          --        345
         Amortization of deferred compensation                        1,518      15,386         --
         Amortization of deferred commodity hedges                   (6,781)    (12,497)        --
         Non-cash effect of derivatives                             (19,255)         --         --
         Exploration and abandonments                                37,701      15,228      3,035
         Bad debt expense                                             2,046          --         --
         Gain on sale of assets                                        (831)     (1,336)        63
         Deferred income taxes                                       42,391       7,937      2,074
         Non-cash effect of discontinued operations, net              2,291       1,550
         Other items                                                  1,169        (245)       412
   Changes in assets and liabilities, excluding acquisitions:
         Accounts receivable                                         13,784     (35,894)        --
         Prepaid expenses and other current assets                     (286)        425         --
         Receivables for under-delivered gas                          4,420      (7,393)     1,660
         Other assets                                                (2,039)     (1,484)        --
         Accounts payable and accrued liabilities                    21,709      21,522         --
         Income taxes payable                                        (7,603)      3,299         --
         Liabilities for over-delivered gas                          (7,207)      9,008      1,052
         Other non-current liabilities                                   92         (50)      (159)
                                                                  ---------   ---------   --------
            Total adjustments                                       226,934      60,241     40,615
                                                                  ---------   ---------   --------
            Net cash provided by operating activities               308,294     143,101     58,403
                                                                  ---------   ---------   --------

Cash flows from investing activities:
   Acquisitions, net of cash acquired                              (172,970)       (659)        --
   Investment in oil and gas properties                            (559,026)   (102,066)   (19,427)
   Additions to other property and equipment                        (11,936)     (2,009)        --
   Proceeds from sale of assets                                       4,402       1,837        314
   Notes receivable - affiliates                                         --       2,846         --

                                                                  ---------   ---------   --------
            Net cash used in investing activities                  (739,530)   (100,051)   (19,113)
                                                                  ---------   ---------   --------

Cash flows from financing activities:
   Proceeds from  (payments of) revolving debt, net                 171,200     (38,863)        --
   Proceeds from long-term debt                                     347,354          --         --
   Payments of long-term debt                                       (87,436)         --         --
   Exercise of stock options                                          1,550         454         --
   Cash transfer from Union Oil pursuant to merger                    1,777      14,528         --
   Net settlements with Union Oil                                    (2,948)    (15,844)   (39,290)
   Other financing activities                                         2,007          --         --

                                                                  ---------   ---------   --------
            Net cash provided by (used in) financing activities     433,504     (39,725)   (39,290)
                                                                  ---------   ---------   --------

            Net increase in cash and cash equivalents                 2,268       3,325         --

Cash and cash equivalents, beginning of year                          3,325          --         --
                                                                  ---------   ---------   --------

Cash and cash equivalents, end of year                            $   5,593   $   3,325   $     --
                                                                  =========   =========   ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       F-8

<PAGE>

                              Pure Resources, Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

(1)  Organization, Nature of Operations and Basis of Presentation

          Organization

          Pure Resources, Inc. ("Pure"), a Delaware corporation, was, until May
25, 2000, a wholly-owned subsidiary of Union Oil Company of California ("Union
Oil"). Pure was formed in December 1999 in connection with the Agreement and
Plan of Merger (the "Merger Agreement") dated December 13, 1999, as amended, by
and among Union Oil, Pure, TRH, Inc. and Titan Exploration, Inc. ("Titan").

          The combination of Pure and the Permian Basin business unit is treated
as a combination of entities under common control, since Union Oil owned 100% of
the Permian Basin business unit prior to the Contribution (defined below) and
also owned 100% of the capital stock of Pure immediately subsequent to the
Contribution (without giving effect to the merger). Consequently, the
accompanying financial statements have given effect to the Contribution as if it
were a pooling of interests.

          On May 25, 2000, pursuant to the Merger Agreement, Union Oil
contributed its Permian Basin business unit to a subsidiary of Pure in exchange
for 32,708,067 shares of Pure common stock and the assumption by Pure of the
associated liabilities of the Permian Basin business unit. These transactions
are referred to as the "Contribution." Simultaneously with the Contribution, a
subsidiary of Pure was merged with and into Titan (see Note 2 for additional
information related to the Merger Agreement and the merger). The amounts and
results of operations of Pure included in these financial statements reflect the
historical amounts and results of operations of the Permian Basin business unit
of Union Oil. The effect of the merger is reflected in the results of operations
and cash flows since May 31, 2000. The acquisition of Titan, by Pure, was
accounted for on the purchase method.

          Nature of Operations

          Pure is an independent energy company. Pure is engaged in the
exploration, development and production of oil and natural gas primarily in the
Permian Basin of west Texas and southeastern New Mexico, the San Juan Basin
areas of New Mexico and Colorado, offshore in the Gulf of Mexico and the Gulf
Coast region covering Texas, Louisiana, Arkansas, Mississippi, Alabama and
Florida.

          Basis of Presentation

          The accompanying consolidated financial statements, insofar as they
relate to periods prior to the Titan merger, are presented as a carve-out from
the financial statements of Union Oil and reflect the activity related to its
Permian Basin business unit during the periods presented. The functions listed
below were managed centrally and support several business units. The costs were
allocated based on each business unit's share of total revenues, prior to
December 31, 1999, and were considered reasonable by Union Oil's management.
Effective January 1, 2000, Union Oil established procedures by which to
accumulate actual costs associated only with the Permian Basin business unit.
After December 31, 1999, results of operations for Pure include only actual
costs that are attributable to Pure.

          General and Administrative Costs

          General and administrative costs include charges related to activities
such as accounting, legal, human resources, marketing, planning and public
relations. General and administrative costs allocated from Union Oil to the
Permian Basin business unit were $7.8 million for 1999. General and
administrative costs charged to the Permian Basin business unit were $1.4
million for 2000.

                                                                     (Continued)

                                       F-9

<PAGE>

                              Pure Resources, Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

          Indirect Production Costs

          Indirect production costs include charges for procurement and
logistics, reservoir engineering, production engineering, workover, drilling,
loss control, and health, environment and safety. Indirect production costs
allocated from Union Oil to the Permian Basin business unit were $2.4 million
for 1999. Indirect production costs charged to the Permian Basin business unit
were $900,000 for 2000.

          Indirect Exploration Costs

          Indirect exploration costs include charges for the chief geologist's
department, the chief geophysicist's department, and the land department.
Exploration costs allocated from Union Oil were $2.1 million for 1999. Indirect
exploration costs charged to the Permian Basin business unit were $200,000 for
2000.

(2)  Summary of Significant Accounting Policies

          Principles of Consolidation

          The consolidated financial statements include the accounts of Pure and
its wholly owned subsidiaries. Investments in corporate joint ventures and
partnerships where Pure has ownership interest of 50% or less are accounted for
on the equity method. All other investments with an ownership interest of less
than 20% and no significant influence are accounted for on the cost method. All
material intercompany accounts and transactions have been eliminated in the
consolidation. Pure owns no interests in special purpose entities.

          Use of Estimates in the Preparation of Financial Statements

          Preparation of the accompanying consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Oil and gas reserve estimates are used in
the calculation of depletion expense and in the determination of impairment of
oil and gas properties and are inherently imprecise. Actual results could differ
from those estimates.

          Cash and Cash Equivalents

          For purposes of the statements of cash flows, Pure considers all
demand deposits, money market accounts and certificates of deposit purchased
with an original maturity of three months or less to be cash equivalents.

          Inventories

          Inventories consist of lease and well equipment not currently being
used in production and are accounted for at the lower of cost (first-in,
first-out) or market.

          Oil and Gas Properties

          Pure utilizes the successful efforts method of accounting for its oil
and gas properties. Under this method of accounting, all costs associated with
productive wells and nonproductive development wells are capitalized.
Exploratory drilling costs are capitalized pending determination of whether
proved reserves have been found. If no proved reserves are found, previously
capitalized exploration costs are charged to expense. If, after the passage of
one year, the existence of proved reserves cannot be conclusively established,
any deferred costs are charged to expense.

                                                                     (Continued)

                                      F-10

<PAGE>

                              Pure Resources, Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

          Costs of significant nonproducing properties, wells in the process of
being drilled and development projects are excluded from depletion until such
time as the related project is developed and proved reserves are established or
impairment is determined. Pure capitalizes interest on expenditures for
significant development projects until such time as significant operations
commence.

          Capitalized costs of individual properties abandoned or retired are
charged to accumulated depletion, depreciation and amortization. Sales proceeds
from sales of individual properties are credited to property costs. No gain or
loss is recognized until the entire amortization base is sold or abandoned.

          Other property and equipment are recorded at cost. Major renewals and
betterment are capitalized while the costs of repairs and maintenance are
charged to operating expenses in the period incurred. With respect to
dispositions of assets other than oil and gas properties, the cost of assets
retired or otherwise disposed of, and the applicable accumulated depreciation
are removed from the accounts, and the resulting gains or losses, if any, are
reflected in operations.

          Depletion, Depreciation and Amortization

          Provision for depletion of oil and gas properties is calculated using
the unit-of-production method on the basis of an aggregation of properties with
a common geologic structural feature or stratigraphic condition, typically a
field or reservoir. In addition, estimated costs of future dismantlement,
restoration and abandonment, if any, are accrued as a part of depletion,
depreciation and amortization expense on a unit of production basis; actual
costs are charged to the accrual. Other property and equipment is depreciated
using the straight-line method over the estimated useful lives of the assets.
Non-compete agreements are amortized over the term of the underlying agreements.
Loan financing and the 7.125% senior notes original issue discount costs are
capitalized and amortized to interest expense over the term of the related loan.

          Impairment of Long-Lived Assets

          Pure follows the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). Consequently, Pure
reviews its long-lived assets to be held and used, including oil and gas
properties accounted for under the successful efforts method of accounting and
other identifiable intangible assets, whenever events or circumstances indicate
that the carrying value of those assets may not be recoverable. An impairment
loss is indicated if the sum of the expected future cash flows, on a depletable
unit basis, is less than the carrying amount of such assets. In this
circumstance, Pure recognizes an impairment loss for the amount by which the
carrying amount of the asset exceeds the fair value of the asset.

          Pure accounts for long-lived assets to be disposed of at the lower of
their carrying amount or fair value less estimated cost to sell once management
has committed to a plan to dispose of the assets.

          Income Taxes

          Pure follows the provisions of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). Under the asset and liability
method of SFAS No. 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under SFAS
No. 109, the effect on deferred tax assets and liabilities of a change in tax
rate is recognized in income in the period that includes the enactment date.

                                                                     (Continued)

                                      F-11

<PAGE>

                              Pure Resources, Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

          Environmental

          Pure is subject to extensive federal, state and local environmental
laws and regulations. These laws, which are constantly changing, regulate the
discharge of materials into the environment and may require Pure to remove or
mitigate the environmental effects of the disposal or release of petroleum or
chemical substances at various sites. Environmental expenditures are expensed or
capitalized depending on their future economic benefit. Expenditures that relate
to an existing condition caused by past operations and that has no future
economic benefits are expensed. Liabilities for expenditures of a noncapital
nature are recorded when environmental assessment and/or remediation are
probable, and the costs can be reasonably estimated. Such liabilities are
generally undiscounted unless the timing of cash payments are fixed and readily
determinable.

          Revenue Recognition

          Pure uses the sales method of accounting for crude oil revenues. Under
this method, revenues are recognized based on actual volumes of oil sold to
purchasers.

          Pure utilizes the entitlement method of accounting for natural gas
revenues. Under this method, revenues are recognized based on Pure's
proportionate share of actual sales of natural gas. Pure has a net liability of
approximately $5.5 million and $7.5 million at December 31, 2001 and 2000,
respectively, associated with gas balancing. At December 31, 2001 and 2000, the
associated net volumes related to the gas imbalances were approximately 1.2 Bcf
and 1.0 Bcf, respectively.

          Stock-based Compensation

          Pure accounts for employee stock-based compensation using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"). Accordingly, Pure has
only adopted the disclosure provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").
See Note 11 for the pro forma disclosures of compensation expense determined
under the fair-value provisions of SFAS No. 123.

          Treasury Stock

          Treasury stock purchases are recorded at cost. Upon reissuance, the
cost of treasury shares held is reduced by the average purchase price per share
of the aggregate treasury shares held.

          Derivative Instruments and Hedging Activities

          As of January 1, 2001, Pure adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities. These standards require that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair value of
derivative instruments which are not designated and qualify as effective hedges
or are defined by SFAS No. 133 as being "fair value hedges" are recorded in
earnings as the changes occur. For derivatives designated as cash flow hedges,
changes in fair value are recognized in accumulated other comprehensive income
until the hedged item is recognized in earnings. The effectiveness of hedges is
measured at least quarterly based on the relative changes in fair value between
the derivative contract and the hedged item over time. When it is determined
that a derivative is not highly effective as a hedge or that it has ceased to be
a highly effective hedge, Pure discontinues hedge accounting prospectively. Any
change in fair value resulting from ineffectiveness of a portion of a derivative
contract, as defined by SFAS No. 133, is recognized immediately in earnings. See
Note 16 for additional information.

                                                                     (Continued)

                                      F-12

<PAGE>

                              Pure Resources, Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

          For the years ended December 31, 2000 and 1999, prior to the adoption
of SFAS No. 133, Pure entered into or acquired commodity price swap agreements
and interest rate swap agreements to reduce its exposure to market risks from
changing commodity prices and interest rates. Pure periodically entered into
commodity derivative contracts in order to hedge the effect of price changes on
commodities Pure produced and sold. Gains and losses on contracts that are
designed to hedge commodities were included in income recognized from the sale
of those commodities. Gains and losses on derivative contracts which do not
qualify as hedges are recognized in each period based on the market value of the
related instrument. Pure entered into interest rate swap agreements to
effectively convert a portion of its floating-rate borrowings into fixed rate
obligations. The interest rate differential to be received or paid was
recognized over the lives of the agreements as an adjustment to interest
expense.

          Reclassifications

          Certain reclassifications have been made to the 2000 and 1999 amounts
to conform to the 2001 presentation.

          Recently Issued Accounting Pronouncements

          In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141 "Business Combinations" and No. 142 "Goodwill and Other Intangible
Assets". SFAS No. 141 requires that all business combinations initiated after
June 30, 2001, be accounted for under the purchase method and SFAS No. 142
requires that goodwill no longer be amortized to earnings, but instead be
reviewed for impairment. There is no impact to Pure's financial statements as we
have not entered into any business combinations subsequent to June 30, 2001 that
required the recording of goodwill or other intangible assets.

          In October 2001, FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations" which establishes requirements for accounting for
removal-type costs associated with asset retirements. The standard is effective
for years beginning after June 15, 2002, with earlier application encouraged. As
of December 31, 2001, Pure is assessing the impact on its financial statements.

          In October 2001, FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 superseded SFAS No. 121 and the accounting and reporting provisions
of APB Opinion No. 30. SFAS No. 144 is effective for fiscal years beginning
after December 15, 2001. Pure adopted the SFAS No. 144 on January 1, 2002. Pure,
believes that the impact from SFAS No. 144 on Pure's financial position and
results of operations should not be significantly different than those from SFAS
No. 121, except as to the reporting of asset disposals related to discontinued
operations.

                                                                     (Continued)

                                      F-13

<PAGE>

                              Pure Resources, Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

(3)  Disclosures About Fair Value of Financial Instruments

          The following table presents the carrying amounts and estimated fair
values of Pure's financial instruments (in thousands):

<TABLE>
<CAPTION>
                                                                   December 31,
                                                    -----------------------------------------
                                                           2001                  2000
                                                    -------------------   -------------------
                                                    Carrying     Fair     Carrying     Fair
                                                     Amount     Value      Amount     Value
                                                    --------   --------   --------   --------
                                                                 (in thousands)
<S>                                                 <C>        <C>        <C>        <C>
Financial Assets:
   Cash and  cash equivalents                       $  5,593   $  5,593   $ 3,325    $  3,325
   Notes receivable - affiliates                       7,377      7,377     6,952       6,952
   Commodity price derivatives                         4,918      4,918        --          --

Financial liablilites:
   Interest rate derivatives                           1,341      1,341        --          --
   Debt:
      Revolvers                                      233,000    233,000    65,000      65,000
      Working Capital Revolver                         6,200      6,200     3,000       3,000
      Senior Notes                                   350,000    335,440        --          --

Unrecognized financial instruments (Note 16) (a):
   Commodity prices derivatives                           --         --    (6,781)    (23,391)
</TABLE>

----------
(a) The amount shown under "carrying amount" in 2000 represents the remaining
liability associated with the mark-to-market of the financial derivatives held
by Titan on the date of the Titan merger, see Note 16.

          Cash and cash equivalents, restricted cash, accounts receivable, other
current assets, accounts payable and other current liabilities. The carrying
amounts approximate fair value due to the short maturity of these instruments.

          Notes receivable - affiliates. The carrying amounts approximate fair
value due to the comparability of the interest rate to Pure's borrowing rate.

          Debt. The carrying amount of the revolving long-term debt approximates
fair value because Pure's current borrowing rate does not materially differ from
market rates for similar bank borrowings. The fair value of the senior notes
were obtained from a third-party investment bank.

          Commodity price derivatives. The fair market values of commodity
derivative instruments are estimated based upon the current market price of the
respective commodities at the date of valuation. It represents the amount, which
Pure would be required to pay, or able to receive based upon the differential
between a fixed and a variable commodity price as specified in the hedge
contracts.

          Interest rate derivatives. The fair market values of interest rate
derivative instruments are estimated based upon information provided to Pure by
its counterparty.

                                                                     (Continued)

                                      F-14

<PAGE>

                              Pure Resources, Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

(4)  Debt

                                                      December 31,
                                                   ------------------
                                                     2001      2000
                                                   --------   -------
                                                    (in thousands)

                   5-Year Revolver                 $ 58,000   $65,000
                   3-Year Revolver                  175,000        --
                   Working Capital Revolver           6,200     3,000
                   7.125% Senior Notes, Due 2011    350,000        --
                   Senior Notes discount             (2,497)       --
                                                   --------   -------
                                                   $586,703   $68,000
                                                   ========   =======


          5-Year Revolver

          In September 2000, Pure entered into an unsecured credit agreement for
a $250 million five-year revolving credit facility ("5-Year Revolver") with
JPMorgan Chase Bank (the "Bank") and First Union National Bank. The 5-Year
Revolver has current commitments of $235 million. All amounts outstanding on the
5-Year Revolver are due and payable in full on September 29, 2005. A portion of
the 5-Year Revolver is available for the issuance of up to $50 million of
letters of credit.

          At Pure's option, borrowings under the 5-Year Revolver bear interest
at either (a) the "Alternative Base Rate" (i.e. the higher of the Bank's prime
rate, or the federal funds rate plus .50% per annum), or (b) the Eurodollar rate
plus a margin ranging from .80% to .95% per annum for the 5-Year Revolver. These
margins increase as Pure's debt coverage ratio decreases. Participation fees on
letters of credit are due quarterly and range from .925% to 1.075% per annum of
the outstanding amount of letters of credit. Facility fees are due quarterly on
the total of the outstanding commitments under the 5-Year Revolver and range
from .20% to .30% per annum. At December 31, 2001, Pure is paying .80% margin on
its Eurodollar tranches.

          The 5-Year Revolver contains various restrictive covenants and
compliance requirements, which include (a) limiting the incurrence of additional
indebtedness, (b) restrictions as to merger, sale or transfer of assets and
transactions with affiliates without the lenders' consent, (c) limitation on
dividends and distributions, (d) other financial covenants and (e) limitation on
hedging arrangements.

          3-Year Revolver

          In November 2001, Pure entered into an unsecured credit agreement with
JPMorgan Chase, First Union National Bank and BNP Paribas for a $275 million
3-year revolving credit facility ("3-Year Revolver"). All amounts outstanding
under the 3-Year Revolver are due and payable in full on November 20, 2004. A
portion of the 3-Year Revolver is available for the issuance of up to $50
million of letters of credit.

          At Pure's option, borrowings under the 3-Year Revolver bear interest
at either (a) the "Alternate Base Rate" (i.e. higher of the Bank's prime rate,
or the federal funds rate plus .50% per annum) or (b) the Eurodollar rate plus a
margin ranging from .375% to .950% per annum. These margins vary as Pure's debt
ratings with S&P and

                                                                     (Continued)

                                      F-15

<PAGE>

                              Pure Resources, Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

Moody's change (i.e. improvement in Pure's debt rating decreases its margins).
At December 31, 2001, Pure is paying .750% margin on its Eurodollar tranches.

          Participation fees on letters of credit are due quarterly and range
from .500% to .750% per annum on the outstanding amount of letters of credit.
Facility fees are due quarterly on the total of the outstanding commitments
under the 3-Year Revolver and range from .125% to .300% per annum. Utilization
fees of .25% are due quarterly on the outstanding principal and letters of
credit for the periods when the lender's exposure exceeds 33% of the total
commitment.

          The 3-Year Revolver contains various restrictive covenants and
compliance requirements, which include (a) limiting the incurrence of additional
indebtedness, (b) restrictions as to merger, sale or transfer of assets and
transactions with affiliates without the lenders' consent, (c) limitation on
dividends and distributions, (d) other financial covenants and (e) limitation on
hedging arrangements.

          Working Capital Revolver

In October 2000, for purposes of maximizing its daily cash management activity,
Pure entered into an unsecured $10 million working capital credit facility (the
"Working Capital Revolver") with the Bank. Individual borrowings may be made for
up to a three week period. The Working Capital Revolver has no maturity date and
is cancelable at anytime by the Bank. The interest rate of each loan under the
Working Capital Revolver is determined by agreement between Pure and the Bank,
which at December 31, 2001 was 3.75%. The rate shall not exceed the maximum
interest rate permitted under applicable law. Interest rates generally are at
the Bank's cost of funds plus 1% per annum. Pure has the ability and intent to
finance the principal outstanding under the Working Capital Revolver utilizing
Pure's 5-Year Revolver or 3-Year Revolver.

          7.125% Senior Notes

          In June 2001, Pure issued $350 million in unsecured senior notes which
bear interest at 7.125% ("7.125% senior notes"). The 7.125% senior notes were
issued at a discount to their face value which resulted in the 7.125% senior
notes having a yield of 7.232%. The 7.125% senior notes pay interest each June
15 and December 15 beginning in December 2001. The maturity date of the 7.125%
senior notes is June 15, 2011. Pure has the right to redeem the 7.125% senior
notes at any time for an amount equal to the principal plus a make-whole
premium.

          The 7.125% senior notes are fully and unconditionally guaranteed, on a
joint and several basis, by certain wholly-owned subsidiaries of Pure. Each of
the guarantees is an unsecured obligation of the guarantor and ranks pari passu
with the guarantees provided by and the obligations of such guarantor
subsidiaries under the 5-Year Revolver and 3-Year Revolver and with all existing
and future unsecured indebtedness of such guarantor for borrowed money that is
not, by its terms, expressly subordinated in right of payment to such guarantee.

          The 7.125% senior notes indenture contains covenants, which include
limitations on (a) liens, (b) sale/leaseback transactions and (c) mergers and
consolidations. Pursuant to a registration rights agreement, in November 2001
Pure completed an exchange offer pursuant to which the 7.125% senior notes were
exchanged for a new, registered issue of 7.125% senior notes.

                                                                     (Continued)

                                      F-16

<PAGE>

                              Pure Resources, Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

          Maturities of debt are as follows (in thousands):

                                                   2002      $     --
                                                   2003            --
                                                   2004       175,000
                                                   2005        64,200
                                                   2006            --
                                                Thereafter    350,000

(5)  Acquisitions

          Hallwood Merger

          On March 30, 2001, Pure and Hallwood Energy Corporation ("Hallwood")
announced the signing of a definitive merger agreement pursuant to which Pure
Resources II, Inc., an indirect wholly-owned subsidiary of Pure, would seek to
acquire all the outstanding shares of common stock of Hallwood at a price of
$12.50 per share and all the outstanding shares of Series A Cumulative Preferred
Stock of Hallwood at a price of $10.84 per share. The all-cash transaction was
structured as a first step tender offer followed by a cash merger to acquire all
remaining shares of Hallwood.

          On May 8, 2001, Pure accepted for payment approximately 85% of the
common stock and 78% of the preferred stock of Hallwood. On May 30, 2001, after
completion of a subsequent tender offer period, Pure completed the acquisition
of the remaining common and preferred shares through consummation of the cash
merger. The results of operations of Hallwood have been included in Pure's since
May 1, 2001.

          The preliminary purchase price (the final purchase price and related
allocation is not expected to differ materially from the preliminary purchase
price and related allocation) is calculated as follows (in thousands):

                Hallwood common and preferred stock             $145,286
                Hallwood stock options and warrants                5,684
                Assumed debt (subsequently refinanced)            87,436
                Other obligations assumed                         10,449
                Severance and non-compete payments                20,390
                Estimated acquisition and other related costs      6,384
                                                                --------

                Purchase price                                  $275,629
                                                                ========

                                                                     (Continued)

                                      F-17

<PAGE>

                              Pure Resources, Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

          The acquisition, accounted for on the purchase method, resulted in the
following noncash investing activities (in thousands):

                        Recorded amount of assets acquired        $ 372,676
                        Assumed debt                                (87,436)
                        Deferred income taxes                       (37,736)
                        Liabilities assumed                         (74,534)
                                                                  ---------

                        Acquisition costs, net of cash acquired   $ 172,970
                                                                  =========

          The liabilities assumed include amounts related to preacquisition
contingencies, and fair value of financial derivatives of $31.2 million.

          International Paper Transaction

          On January 31, 2001, Pure (a) acquired oil and gas properties, fee
mineral and royalty interests from International Paper Company and (b)
contributed cash for a controlling general and limited partnership interests, in
a partnership that owns oil and gas properties contributed by International
Paper, for a total of approximately $261 million, subject to adjustments which
totaled $5.0 million, for cash (collectively "International Paper transaction").
In addition, Pure incurred approximately $5.1 million in transaction costs
associated with the International Paper transaction. Affiliates of International
Paper own an approximate 5% interest in a partnership, which holds certain of
the oil and gas properties, involved in this transaction. The transaction was
funded under Pure's Credit Agreements. Pure accounted for this transaction on
the purchase method and allocated the transaction value as follows (in
thousands):

<TABLE>
<S>                                                                                   <C>
Partnership interests (consolidated in oil and gas properties in the balance sheet)   $243,221
Oil and gas properties and other assets                                                 23,703
                                                                                      --------

Cash paid                                                                             $266,924
                                                                                      ========
</TABLE>

Pure also acquired over 6 million gross (3.2 million net) acres of fee mineral
ownership, primarily across the southern Gulf Coast region of the United States
(which are included in oil and gas properties above).

          Union Oil Merger and Contribution

          On December 13, 1999, Pure, Union Oil, TRH, Inc. and Titan entered
into the Merger Agreement. The Merger Agreement provided that a subsidiary of
Pure would merge into Titan and Titan would become a wholly-owned subsidiary of
Pure. On May 24, 2000, the Titan stockholders approved the merger and on May 25,
2000 Union Oil and Titan closed the merger. Pure began trading on the New York
Stock Exchange under the symbol "PRS" on May 26, 2000.

          Simultaneously with the merger, the Contribution occurred and Union
Oil received 32,708,067 shares of Pure common stock. Immediately following the
Contribution and the merger, Union Oil owned approximately 65.4% of outstanding
Pure common stock. Titan stockholders acquired the remaining 34.6% of Pure's
outstanding common stock by exchanging each share of Titan common stock owned
for .4302314 ("Exchange Ratio") of a share of Pure common stock.

          The acquisition was made by the issuance of approximately 17.3 million
shares of Pure's common stock to the stockholders of Titan. The results of
operations of Titan have been included with Pure's since May 31, 2000.

                                                                     (Continued)

                                      F-18

<PAGE>

                               Pure Resources,Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

          The acquisition, accounted for on the purchase method, resulted in the
following noncash investing activities (in thousands):

                Recorded amount of assets acquired             $ 269,661
                Deferred income tax asset                         32,984
                Liabilities assumed                             (150,560)
                Common stock issued and stock options issued    (151,426)
                                                               ---------

                Acquisition costs, net of cash acquired        $     659
                                                               =========

          The liabilities assumed primarily include amounts recorded for
preacquisition contingencies, debt of Titan of $106.9 million, and a commodity
hedge obligation of $19.3 million.

          Pro Forma Results of Operations (Unaudited)

          The following table reflects the pro forma results of operations for
the years ended December 31, 2001 and 2000 as though (a) the Titan merger and
the Contribution, (b) the International Paper transaction and (c) the Hallwood
merger each occurred as of January 1, 2000. The pro forma amounts are not
necessarily indicative of the results that may be reported in the future (in
thousands, except per share data).

                                                  Year ended December 31,
                                                  -----------------------
                                                      2001       2000
                                                    --------   --------

Revenues                                            $533,376   $522,969
Net income                                          $ 73,710   $ 97,429
Net income per common share                         $   1.47   $   1.95
Net income per common share - assuming dilution     $   1.44   $   1.92

                                                                     (Continued)

                                      F-19

<PAGE>

                               Pure Resources,Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

(6)  Commitments and Contingencies

          Operating Leases

          Pure has non-cancelable operating leases for office facilities. Future
minimum lease commitments under non-cancelable operating leases at December 31,
2001 are as follows (in thousands):

                                                   2002      $2,577
                                                   2003       2,547
                                                   2004       2,494
                                                   2005       2,570
                                                   2006       2,188
                                                Thereafter    1,367

          The future minimum lease commitments above have not been reduced, in
total, by minimum sublease rentals of approximately $1,842,000 due in the future
under non-cancelable subleases.

          Lease expense during 2001, 2000 and 1999 was $1,910,000, $1,101,000
and $566,000, respectively. Included in the table are approximately $4.4 million
of future minimum lease payments related to certain unfavorable leases assumed
in the Hallwood merger whose fair value was recorded as a liability in
connection with the Hallwood merger. In 2001, payments related to these
unfavorable leases were approximately $525,000.

          General

          Pure is subject to contingent liabilities with respect to existing or
potential claims, lawsuits and other proceedings, including those involving
environmental, tax and other matters, certain of which are discussed more
specifically below. Pure accrues liabilities when it is probable that future
costs will be incurred and such costs can be reasonably estimated. Such accruals
are based on developments to date and Pure's estimates of the outcomes of these
matters and its experience in contesting, litigating and settling other matters.
As the scope of the liabilities becomes better defined, there will be changes in
the estimates of future costs, which management, currently, believes will not
have a material effect on Pure's results of operations and financial condition
or liquidity.

          Litigation

          Hallwood Petroleum, Inc. has been named as a defendant in a suit
styled Lamson Petroleum Corporation v. Hallwood Petroleum, Inc. et al, which was
filed May 17, 2001 in the 15th Judicial District Court, Lafayette Parish,
Louisiana. Lamson Petroleum Corporation seeks proceeds from the sale of gas and
condensate produced and sold from units on 200 acres of land in the parish and a
declaratory judgement recognizing its interest in production from the units.
Hallwood Petroleum, Inc. and the other working interest owners in the leases
involved offered to settle the matter for $250,000 (approximately 50% of this
amount would be Pure's share). The settlement offer was not an admission of
liability but an attempt to limit the parties' future costs to vigorously defend
the matter. Lamson rejected this offer and countered with an offer to settle the
matter for $25 million. All parties rejected this offer.

          We are unable at this time to assess the likelihood of an unfavorable
outcome. We strongly believe the suit is without merit and will vigorously
defend against it. In our opinion, the ultimate disposition of this lawsuit in
the event of an unfavorable outcome, if the matter does go to trial, should not
have a material adverse effect on Pure's financial position or liquidity, but
could adversely impact results of operations in a given reporting period.

                                                                     (Continued)

                                      F-20

<PAGE>

                               Pure Resources,Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

          Environmental matters

          Pure is subject to loss contingencies pursuant to federal, state and
local environmental laws and regulations. These include existing and possible
future obligations to investigate the effects of the release or disposal of
certain petroleum and chemical substances at various sites; to remediate or
restore these sites; to compensate others for damage to property and natural
resources, for remediation and restoration costs and for personal injuries; and
to pay civil penalties and, in some cases, criminal penalties and punitive
damages. These obligations relate to sites owned by Pure or others and are
associated with past and present operations.

          Liabilities are accrued when it is probable that future costs will be
incurred and such costs can be reasonably estimated. However, in many cases,
investigations are not yet at a stage where Pure is able to determine whether it
is liable or, even if liability is determined to be probable, to quantify the
liability or estimate a range of possible exposure. In such cases, the amounts
of Pure's liabilities are indeterminate due to the potentially large number of
claimants for any given site or exposure, the unknown magnitude of possible
contamination, the imprecise and conflicting engineering evaluations and
estimates of proper clean-up methods and costs, the unknown timing and extent of
the corrective actions that may be required, the uncertainty attendant to the
possible award of punitive damages, the recent judicial recognition of new
causes of action, or other reasons.

          As discussed in Note 7, Pure had accrued $4.6 million and $1.1 million
at December 31, 2001 and 2000, respectively, for estimated future environmental
assessment and remediation costs at various sites where liabilities for such
costs are probable.

          Employment/Severance Agreements

Put Right. Pursuant to the employment and/or severance and put right agreements
("employment/severance agreements") entered into between Pure and its officers,
under certain circumstances described below, each covered officer has the right
to require Pure to purchase ("put right"), at a price equal to the "net asset
value" per share, the shares of Pure common stock:

..    Received by the officer in the Titan merger in exchange for shares of Titan
     common stock held by the officer on December 1, 1999 (of which there were
     2,811,107 Pure shares held subject to the put right at December 31, 2001).
     At December 31, 2001, with the net asset value per share of $17.54, Pure's
     obligation to purchase this common stock was approximately $49.3 million.
..    Acquired by the officer pursuant to exercises of stock options currently
     held or granted in the future, (see Note 11 for the shares underlying the
     stock option subject to the put right at December 31, 2001 and the
     applicable exercise prices). At December 31, 2001, there were 4,120,570
     stock options subject to the put right, of which 3,449,068 had exercise
     prices that were less than the net asset value per share of $17.54 at
     December 31, 2001. Pure would receive proceeds of approximately $40.0
     million if the 3,449,068 of stock options were exercised and Pure's
     obligation to purchase the 3,449,068 shares, at the net asset value per
     share of $17.54 at December 31, 2001, was approximately $60.5 million.
     Accordingly, Pure's net obligation related to the stock options subject to
     the put right at December 31, 2001 was approximately $20.5 million.

          The put right is exercisable by the covered officer upon the
occurrence of a "put event" by providing written notice to Pure within 90 days
after the date of the put event. The date of that exercise notice establishes
the "put date" for purposes of making certain calculations to be utilized in the
closing of the related purchase of shares, or "put closing." If the officer
either does not exercise the put right in a situation other than in connection
with a change of control of Pure or Unocal, or exercises the put right with
respect to only a portion of the covered shares, the officer cannot later cause
Pure to purchase additional shares after another put event. A put event means
any one of the following:

                                                                     (Continued)

                                      F-21

<PAGE>

                               Pure Resources,Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

..    Termination of the officer's employment for any reason after May 25, 2003
     (for example, as a result of voluntary resignation or termination for
     cause, as defined in the applicable agreement).
..    Termination of the officer's employment by Pure without cause, as defined
     in the applicable agreement.
..    Change of control, as defined in the applicable agreement, of Pure. .
..    Change of control, as defined in the applicable agreement, of Unocal.
..    Death or disability of the officer.
..    Resignation of the officer for good reason, as defined in the applicable
     agreement and discussed below.
..    Acquisition by Union Oil and its affiliates of beneficial ownership of 85%
     or more of Pure's voting securities.

          If a put event occurs and one or more of the covered officers
exercises the put right, Pure will require cash to satisfy its obligation to
purchase the shares covered by the put exercise. Because the
employment/severance agreements provide the covered officer the right to include
in the amount of shares to be purchased by Pure any specified shares that are
acquired pursuant to stock option exercises after the put event or put date but
before the related put closing, Pure may receive cash from stock option
exercises in connection with exercises of the put right. If Pure does not have
enough cash, net of the amount received by Pure in related stock option
exercises, to satisfy its obligations, Pure would have to incur additional
indebtedness. At December 31, 2001, the net amount of required cash, assuming
all individuals subject to the put exercise their put right at the net asset
value per share of $17.54, is estimated to be $69.8 million (which is reflected
in the consolidated balance sheet as the amount of the common stock subject to
repurchase). At the end of the calendar quarters since the origination of the
employment/severance agreements containing the put right, the amount of the
common stock subject to repurchase has ranged from $69.8 million to $155.5
million, as calculated in accordance with the following paragraph. Accordingly,
it could require substantial financial resources of Pure to fund the put right.

          The net asset value per share is computed by dividing the net asset
value, as defined below, by the number of fully-diluted outstanding shares. The
net asset value is computed as 110% of the pre-tax present value (discounted at
10%) of Pure's proved reserves, utilizing the average of the three-year NYMEX
commodity strip price for the 120 days prior to the put date (adjusted for
commodity hedges in place at the put date), less the funded debt of Pure at the
put date. Funded debt was approximately $589.2 million at December 31, 2001. The
calculated number of fully-diluted outstanding shares as the sum of (a) the
total issued and outstanding common shares of Pure at the put date and (b) the
total number of outstanding stock options (regardless of whether the options are
in-the-money or out-of-the-money) or other securities convertible into common
stock as of the put date (for both management and employees).

          For purposes of valuing the proved reserves, the board of directors of
Pure, in its sole discretion, will determine the proved reserves ("initial
valuation"). Messrs. Hightower and Staley have the right to request a second
valuation at their expense by a third party independent engineering firm
("second valuation"). If the second valuation is not acceptable to Pure, Pure
must select another third party independent engineering firm to perform a third
evaluation ("final valuation") and the cost of the final valuation will be
shared equally by Pure and the officer. If the final evaluation exceeds the
second valuation, the second valuation must be used to determine the net asset
value. If the initial valuation exceeds the final evaluation, the initial
valuation must be used to determine the net asset value. If the final evaluation
is between the initial valuation and the second valuation, an average of all
three evaluations must be used to determine the value of the proved reserves.

          At December 31, 2001, the net asset value per share (based on the data
above) was estimated to be $17.54, and Pure's common stock price closed at
$20.10 per share.

          The $69.8 million reflected in the consolidated balance sheet at
December 31, 2001 as common stock subject to repurchase is based on the net
asset value per share of $17.54 discussed above and has been calculated as (a)
the amount required to purchase all covered shares of common stock (including
shares underlying stock options) of all

                                                                     (Continued)

                                      F-22

<PAGE>

                               Pure Resources,Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

covered officers, less (b) the proceeds Pure would receive from the exercise by
all covered officers of all of their in-the-money stock options (options whose
exercise price is less than the net asset value per share).

          The gross deferred compensation related to Pure's potential
obligations to purchase the covered shares (including shares underlying stock
options), which at December 31, 2001 was approximately $30.7 million, is
calculated as the sum of the following:

     (a)  the product of (x) the difference between the net asset value per
          share and Pure's common stock price (but only if the net asset value
          per share is higher), times (y) the total of the number of all covered
          officers' covered shares that were actually outstanding at December
          31, 2001; plus
     (b)  the product of (x) the difference between the higher of the net asset
          value per share or Pure's common stock price and the exercise price of
          all covered officers' stock options with an exercise price that is
          less than the higher of net asset value per share or Pure's common
          stock price, times (y) the number of shares underlying these stock
          options

     In 2001 and 2000, Pure recorded approximately $915,000 and $14.8 million,
respectively, in compensation expense related to these compensation
arrangements. The total deferred compensation periodically determined will be
amortized as compensation expense over a three-year period for common stock held
at May 26, 2000 (date of the Titan merger), and the vesting period of each of
the applicable stock option agreements. At December 31, 2001 the deferred
compensation reflected in the consolidated balance sheet of $15.0 million is
computed by taking the gross deferred compensation of $30.7 million less the
compensation expense recorded in 2001 and 2000, as noted above. After May 26,
2003, any changes in gross deferred compensation, except for stock options not
fully vested, for each quarterly determination period will be charged or
credited to compensation expense in each quarterly determination period.

          This compensation arrangement is being treated as a "variable plan"
under Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees," and related interpretations including FASB Interpretation No. 44
"Accounting for Certain Transactions involving Stock Compensation an
interpretation of APB Opinion No. 25."

          At December 31, 2001, Pure recorded as common stock subject to
repurchase $69.8 million based on Pure's historical method of calculating this
liability. Due to interpretational factors and circumstances that could exist at
the time of the exercise of the put right, Pure estimates this put obligation
would be not less than $69.8 million nor more than $81.2 million at December 31,
2001. The aforementioned interpretations and circumstances relate to the
treatment and application of the proceeds from the exercise of the stock options
and to the number of shares to be considered or utilized as fully-diluted
shares. Additionally, the common stock subject to repurchase could differ due to
(a) the imprecision associated with the engineering of oil and gas reserves and
(b) the multiple valuations of the proved reserves that could be required under
the put right, as discussed above.

Severance Benefits. Pursuant to the employment/severance agreements, upon the
occurrence of a termination event for severance benefits, as defined in the
applicable agreement and discussed below, each covered officer is entitled to
severance benefits including the following:

     .    Cash payment equal to one to three times (depending on officer) of the
          sum of (a) the annual base salary and (b) greater of the bonus from
          the preceding year or the average of the bonus from the three previous
          years, with a gross-up payment to offset fully the effect of any
          federal excise tax imposed on the severance payment. The aggregate
          payment potentially payable, at December 31, 2001, under this
          provision is approximately $6.0 million, excluding the effect of any
          gross-up payment, if any.
     .    Immediate vesting of all restricted stock, options and other rights
          granted to the officer.
     .    Action by Pure to prevent automatic termination of the officer's stock
          options as a result of termination.
                                                                     (Continued)

                                      F-23

<PAGE>

                               Pure Resources,Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

     A termination event, as defined in the applicable agreements, for purposes
of the severance benefits is any one of the following:

..    Termination of employment of the officer by Pure for any reason other than
     cause.
..    Voluntarily termination of employment by the officer for good reason, with
     good reason including the following:
     .    Material change in the nature and scope of the officer's duties and
          responsibilities from those at May 26, 2000.
     .    Reduction in the officer's status with Pure below their current
          position.
     .    Reduction of the officer's base salary below the base salary
          immediately prior to May 26, 2000, except for proportionate,
          officer-wide reductions.
     .    Material diminution in the officer's eligibility to participate in the
          benefit and incentive plans of Pure provided to the officer
          immediately prior to May 26, 2000.
     .    Relocation of the officer outside the state of Texas or required
          travel in excess of the greater of (a) 90 days per year or (b) the
          level of travel of the officer the year immediately prior to May 26,
          2000.
..    Change of control of Pure and failure to reach agreement on employment
     terms following the change of control, which terms are acceptable to the
     officer.
..    Change of control of Unocal and failure to reach agreement on employment
     terms following the change of control, which terms are acceptable to the
     officer.
..    Acquisition by Union Oil and its affiliates of beneficial ownership of 85%
     or more of Pure's voting securities.

          Non-Dilution Agreement

          Pure and Union Oil entered into a non-dilution agreement that provides
Union Oil with the right to maintain its percentage ownership of Pure. If Pure
issues capital stock, other than common stock issued under board-approved
incentive plans, for cash or credit, Union Oil will have the right to purchase
or subscribe for the number or amount of such capital stock equal to its
ownership percentage of Pure, up to 65.4%, at the same price at which the
capital stock is being issued. Pure must provide Union Oil with notice of an
issuance subject to this preemptive right at least 10 days prior to the issuance
and, if Union Oil elects to exercise the right, it must do so in such a way as
not to delay pricing and closing of the issuance. The preemptive right given by
Pure will terminate if unexercised within 10 days after receipt of the notice of
the issuance of the capital stock.

          If Pure issues any capital stock in exchange for property other than
cash or credit, Union Oil will have the right to purchase from Pure the
additional number of shares of capital stock necessary to enable Union Oil to
maintain its ownership percentage in Pure, up to 65.4%. Pure must give Union Oil
written notice of the issuance not later than 20 days prior to such issuance,
and Union Oil will have 30 days from the date of the issuance to elect to
exercise its rights by giving written notice to Pure. The cash price per share
to be paid by Union Oil for the additional shares of capital stock will be the
market trading price per share of Pure's common stock at the time of the
issuance or in the case of other capital stock, as determined in good faith by
the Pure board of directors.

          International Paper Transaction

          Under the partnership agreement with affiliates of International Paper
the partnership has loaned, under a senior note agreement guaranteed by
International Paper, for a 30-year term, approximately $243.9 million to an
affiliate of International Paper which pays interest to the partnership
quarterly. The loan was funded through the initial contributions by Pure in
connection with the International Paper transaction. Affiliates of International
Paper own common, preferred and mezzanine capital in the partnership, of which
the partnership quarterly pays returns on the preferred capital. The partnership
has a master offset agreement which allows the partnership to offset the loan to
the International Paper affiliates with the common and preferred capital owned
by affiliates of International Paper, as a result the loan and common and
preferred capital are eliminated in the consolidated balance sheet.

                                                                     (Continued)

                                      F-24

<PAGE>

                               Pure Resources,Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

          The loan to the International Paper affiliates exposes Pure, through
its ownership of the partnership, to potential credit risk. Under the terms of
the senior note agreement there are provisions to allow Pure to accelerate
payment of the loan or offset the loan against the preferred and common capital
if International Paper and its affiliates fail to perform or its credit is
downgraded pursuant to the senior note agreement. Pure believes, at the present,
the partnerships risk of loss from the loan to be remote.

          Under the terms of a partnership agreement with affiliates of
International Paper (see Note 5 on the International Paper transaction), Pure
would be required to make contingent payments to its other partners in the
partnership if Pure causes the partnership, prior to January 2008, to dispose of
assets, as defined in the partnership agreement, with a fair market value in
excess of $25 million. Pure's maximum contingent payment at December 31, 2001 is
approximately $63 million. Pure, at the present, does not believe it is probable
it will incur any of the contingent payment. To the extent Pure incurred all or
some of the contingent payment, it would reflect the contingent payment as
additional basis in its oil and gas properties.

          Other Matters

          Pure also has certain other contingent liabilities with respect to
litigation, claims and contractual agreements arising in the ordinary course of
business. On the basis of management's best assessment of the ultimate amount
and timing of these events, such expenses, or judgments, are not expected to
have a material adverse effect on Pure's financial condition or liquidity.

(7)  Accrued Abandonment, Restoration and Environmental Liabilities

          At December 31, 2001 and 2000, Pure had accrued $18.0 million and
$13.2 million, respectively, for the estimated future costs to abandon and
remove wells and production facilities. The amounts were charged to
depreciation, depletion and amortization expense. The total amount chargeable to
operations for abandonment (to be predominantly accrued on a unit-of-production
basis) is estimated to be approximately $58.6 million at December 31, 2001 and
$34.9 million at December 31, 2000. These estimates are based on abandonment
cost studies performed by an independent third party and on estimates prepared
by Pure.

          Pure's accrual for environmental remediation obligations totaled $4.6
million and $1.1 million as of December 31, 2001 and 2000, respectively. As part
of the Hallwood merger, Pure recorded approximately $3.5 million in estimated
environmental remediation obligations.

(8)  Statements of Cash Flows

          Interest expense of $27,695,000 and $4,435,000 was paid in 2001 and
2000, respectively. No interest expense was paid in 1999.

          Income taxes, net of refunds, of $1,521,000, $22,323,000 and
$6,611,000 were paid in 2001, 2000 and 1999, respectively. In 2000 and 1999,
income taxes of $10,223,000 and $6,611,000 were paid to Union Oil.

                                                                     (Continued)

                                      F-25

<PAGE>

                               Pure Resources,Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

(9)  Income Taxes

          Total income tax expense was allocated as follows:

                                                   Year ended December 31,
                                                 --------------------------
                                                  2001      2000      1999
                                                 -------   -------   ------
                                                        (in thousands)

Income from continuing operations                $33,744   $34,066   $8,685
Discontinued operations                              630       909       --
Stockholders' equity for compensation expense
   for tax purposes in excess of amounts
   recognized for financial reporting purposes      (428)      (71)      --
                                                 -------   -------   ------
                                                 $33,946   $34,904   $8,685
                                                 =======   =======   ======

          Income tax expense attributable to income from continuing operations
consists of the following:

                                                  Year ended December 31,
                                               ----------------------------
                                                 2001       2000      1999
                                               ---------   -------   ------
                                                      (in thousands)
                               Current:
                                   Federal    $(10,041)   $25,389   $5,857
                                   State         1,394        740      754
                                              ---------   -------   ------
                                                 (8,647)   26,129    6,611
                                              ---------   -------   ------
                               Deferred:
                                   Federal       42,391    12,542    1,874
                                   State             --    (4,605)     200
                                              ---------   -------   ------
                                                 42,391     7,937    2,074
                                              ---------   -------   ------
                                   Total      $  33,744   $34,066   $8,685
                                              =========   =======   ======


                                                                     (Continued)

                                      F-26

<PAGE>

                              Pure Resources, Inc.

                   Notes to Consolidated Financial Statements
                       December 31, 2001, 2000, and 1999

          The reconciliation between the tax expense computed by multiplying
pretax income from continuing operations by the U.S. federal statutory rate and
the reporting amounts of income tax expense is as follows:

<TABLE>
<CAPTION>
                                                           Year ended December 31,
                                                         ---------------------------
                                                           2001      2000     1999
                                                         -------   -------   -------
                                                                (in thousands)
<S>                                                      <C>       <C>       <C>
Income from continuing operations at statutory rate      $40,383   $40,333   $ 9,266
Changes in state income tax rates                             --    (4,684)       --
State income taxes, net of federal benefit                   906       819       619
Tax credit                                                (4,761)   (2,500)   (1,200)
Prior year accrual to tax return adjustments and other    (2,784)       98        --
                                                         -------   -------   -------

Income tax expense                                       $33,744   $34,066   $ 8,685
                                                         =======   =======   =======
</TABLE>

          The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows:

                                                          December 31,
                                                      --------------------
                                                        2001        2000
                                                      ---------   --------
                                                         (in thousands)
Deferred tax assets (liabilities):
   Net operating loss                                 $  18,125   $ 24,348
   Compensation, principally due to accrual for
      financial reporting purposes                        6,055      5,385
   Accrued abandonment and restoration costs              6,122      4,643
   Property, plant and equipment, principally due
      to differences in basis upon acquisition,
      depletion, impairment and the deduction
      of intangible drilling costs for tax purposes    (170,894)   (95,482)
   Other                                                  5,323      5,650
                                                      ---------   --------
Net deferred tax liability                            $(135,269)  $(55,456)
                                                      =========   ========

          A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized. Based on
expectations for the future and the availability of certain tax planning
strategies that would generate taxable income to realize the net tax benefits,
if implemented, management has determined that it is not more likely than not
that a portion of the deferred tax assets will be realized.

          At December 31, 2001, Pure had net operating loss carryforwards
("NOLs") for U.S. federal income tax purposes of approximately $51.8 million,
which are available to offset future regular taxable income, if any. All the
NOL's relates to pre-acquisition NOL's from Titan and Hallwood, which are
subject to an annual limitation of approximately $22.1 million. The
carryforwards begin to expire in 2010.

                                                                     (Continued)

                                      F-27

<PAGE>

                              Pure Resources, Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

(10) Related Party Transactions

          Union Oil has a common ownership interest in oil and gas properties
that are operated by Pure and, in accordance with a standard operating
agreement, makes payments to Pure for leasehold costs, drilling costs and lease
operating and supervision charges. These payments were approximately $4.0
million and $2.5 million in 2001 and 2000, respectively. Revenue received in
connection with these oil and gas properties were approximately $5.7 million and
$4.7 million in 2001 and 2000, respectively.

          Certain officers and their affiliates have a common ownership interest
in oil and gas properties that are operated by Pure and, in accordance with a
standard industry operating agreement, make payments to Pure for leasehold
costs, drilling costs and lease operating and supervision charges. These parties
made payments of approximately $652,000 in 2001. These parties received payments
of approximately $23,000 in 2000 from salvage value of equipment, net of lease
operating expenses. Revenue received in connection with these oil and gas
properties were approximately $106,000 and $11,000 in 2001 and 2000,
respectively. These interests were owned by certain officers and their
affiliates prior to the formation of Pure and its predecessor entities, except
as discussed in the next two paragraphs

          In 2000, Pure entered into a Joint Development Agreement ("JDA") to
explore a designated prospect area with a group of industry partners, one of
which was an officer and director of Pure. The properties associated with the
JDA represents assets owned by the officer prior to his employment with Pure and
its predecessor entities. The officer has a 10% interest in the JDA. There was
no cash initially paid to the partners as Pure is carrying the partners in the
drilling of the first four wells in the JDA, subject to various provisions of
the JDA. Pure owns a 60% interest in the JDA. In 2001, Pure spent approximately
$115,000 to acquire additional acreage in the JDA and incurred approximately
$12.7 million of expenditures in drilling of the carried wells under the JDA. In
2000, Pure spent approximately $450,000 to acquire additional acreage in the JDA
and incurred approximately $3.5 million of expenditures in drilling of the first
well under the JDA.

          In 2001, Pure entered into a Joint Development Agreement ("JDA II") to
explore a designated prospect area with a group of industry partners, one of
which is an officer and director of Pure. The properties associated with the JDA
II represent assets owned by the industry partners and the officer prior to his
employment with Pure and its predecessor entities. The officer has a 6.25%
interest in the JDA II. Pure paid such officer approximately $13,500 for
reimbursement of prospect costs. Pure is carrying these industry partners,
excluding the officer, in the drilling of the first well in the JDA II, subject
to various other provisions of the JDA II.

          In 2000, Pure entered into an office lease with an affiliate of an
officer and director of Pure. The officer and director associated with this
underlying transaction was not directly involved in the negotiations of the
transaction. In 2001, the affiliate of the officer and director sold all of his
commercial real estate interests including the building and related office lease
to an unrelated third party. Pure paid rent expense of $312,000 in 2001 and
$642,000 in 2000 to the affiliate of officer and director.

          Prior to the Titan merger, certain officers and employees of Titan
entered into promissory notes with Titan for the purpose of receiving funds to
exercise stock options and pay tax obligations related to the option exercises.
The option agreements of these officers and employees provided for the use of
the promissory notes to exercise the options. The promissory notes and related
interest are recourse to the officers and employees. The promissory notes are
primarily secured by Pure common stock. The interest rate on the promissory
notes is currently 6.43%. The principal and interest on the promissory notes is
due in full on November 11, 2002.

          In 2001, Pure paid approximately $186,000 of commissions on the
purchase of oil and gas leases and granted an overriding royalty interest in the
underlying leases to a relative of an officer and director of Pure. The officer
and director associated with this underlying transaction was not directly
involved in the negotiations of the transaction.

                                                                     (Continued)

                                      F-28

<PAGE>

                              Pure Resources, Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

These oil and gas leases were located in an area where Pure has ongoing
exploration activity and the relative is in the business of brokering, buying
and selling of oil and gas leases.

          In 2001, Pure entered into an exploration agreement to explore a
designated prospect with an industry partner. The industry partner was an
affiliate of the employer of an outside independent director of Pure. The
director held the position of vice president with this employer through January
2002. The director's former employer was engaged in a different line of business
than that of the industry partner involved in this transaction and the director
was not directly involved in the related negotiations. Pure paid this affiliate
$285,000 for the prospect and agreed to be promoted on the first well.

(11) Incentive Plan

          Pure 1999 Incentive Plan

          In connection with the Titan merger agreement, Pure's board of
directors adopted, and Union Oil as sole stockholder of Pure approved, the Pure
1999 Incentive Plan. The plan provides that Pure may grant awards of Pure common
stock under the Pure 1999 Incentive Plan. The awards under the Pure 1999
Incentive Plan include (a) stock options that do not qualify as incentive stock
options under Section 422 of the Internal Revenue Code, (b) stock appreciation
rights, or "SARs", (c) cash awards, (d) stock awards and (e) performance awards.
These awards, other than cash awards, may be settled in shares of restricted or
unrestricted common stock of Pure.

          The number of shares of Pure common stock that may be subject to
outstanding awards under the Pure 1999 Incentive Plan at any one time is equal
to twelve percent of the total number of outstanding shares of Pure common stock
plus outstanding common stock equivalents, as defined in the 1999 Pure Incentive
Plan, minus the total number of shares of Pure common stock subject to
outstanding awards under any other stock-based plan for employees or directors
of Pure. The number of shares authorized under the Pure 1999 Incentive Plan and
the number of shares subject to an award under the Pure 1999 Incentive Plan will
be adjusted for stock splits, stock dividends, recapitalizations, mergers, and
other changes affecting the capital stock of Pure.

          The board of directors of Pure or any committee designated by it will
administer the Pure 1999 Incentive Plan. Currently, Pure's Compensation
Committee administers the plan and has broad discretion to administer the Pure
1999 Incentive Plan, interpret its provisions and adopt policies for
implementing the Pure 1999 Incentive Plan.

                                                                     (Continued)

                                      F-29

<PAGE>

                              Pure Resources, Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

          The following table calculates the number of shares or options
available to grant under Pure's 1999 Incentive Plan as of December 31, 2001:

Common stock outstanding                                            50,175,777
Options awarded under the Pure 1999 Incentive Plan                   6,343,276
Assumed options from Titan                                             458,011
Options exercised                                                     (172,253)
Options cancelled/forfeited                                           (245,219)
                                                                    ----------
Common stock equivalents                                            56,559,592
                                                                    ==========

Maximum shares/options allowed under the Pure 1999 Incentive Plan    6,787,151

Less: Outstanding awards under the Pure 1999 Incentive Plan         (6,004,182)
      Outstanding options under the Titan Plans                       (379,633)
                                                                    ----------

Shares/options available for future grant                              403,336
                                                                    ==========

          Pure granted 856,146 and 1,366,560 options to non-office rs in 2001
and 2000, respectively. Certain grants in 2000 were made with an exercise price
below Pure's stock price on the date of grant; consequently, Pure recorded
deferred compensation of $2.9 million. The deferred compensation will be
amortized over the vesting period, generally four years.

                                                                     (Continued)

                                      F-30

<PAGE>

                              Pure Resources, Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

          A summary of Pure's stock option plans as of December 31, 2001 and
2000 and changes during 2001 and 2000 is presented below:

<TABLE>
<CAPTION>
                                          December 31, 2001      December 31, 2000
                                         --------------------   --------------------
                                                     Weighted               Weighted
                                          Number      Average     Number    Average
                                         of shares    Price     of shares    Price
                                         ---------   --------   ---------   --------
<S>                                      <C>          <C>       <C>          <C>
Stock options:
   Outstanding at beginning of year      5,483,112    $12.93           --    $   --
      Options canceled/forfeited          (139,832)   $16.55     (105,387)   $15.30
      Options assumed                           --    $   --      458,011    $15.79
      Options exercised                   (136,181)   $11.37      (36,072)   $11.88
      Options granted                    1,176,716    $18.64    5,166,560    $12.72
                                         ---------              ---------

   Outstanding at end of year            6,383,815    $13.94    5,483,112    $12.93
                                         =========              =========

   Exercisable at end of year            2,744,486    $12.72    1,455,848    $12.75
                                         =========              =========

Weighted average fair value of options
   granted during the year                            $ 7.07                 $ 9.21
                                                      ======                 ======
</TABLE>

          No options were granted in 1999.

          The following table summarizes information about the stock options
outstanding at December 31, 2001:

<TABLE>
<CAPTION>
                                         Options Outstanding                     Options Exercisable
                           -----------------------------------------------   ----------------------------
                               Number of           Weighted       Weighted       Number of       Weighted
                                 Shares            Average         Average        Shares          Average
                             Outstanding at       Remaining       Exercise    Exercisable at     Exercise
Range of Exercise Prices   December 31, 2001   Contractual Life     Price    December 31, 2001    Price
------------------------   -----------------   ----------------   --------   -----------------   --------

<S>                      <C>                 <C>                <C>        <C>                 <C>
     $ 8.57 - $9.01              163,510          7.61 years       $ 8.92             62,631      $28.80
         $ 9.30                2,351,500          7.87 years         9.30          1,421,501        9.30
     $10.83 - $17.08           2,297,012          7.97 years        15.41            967,250       15.57
     $17.13 - $20.00           1,279,550          8.91 years        18.25            171,236       18.00
     $20.05 - $29.64             292,243          6.52 years        23.57            121,868       24.48
</TABLE>

                                                                     (Continued)

                                      F-31

<PAGE>

                              Pure Resources, Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

SFAS No. 123

          Pure applies APB No. 25 and related interpretations in accounting for
its stock option plans. If compensation expense for the stock option plans had
been determined in a manner consistent with SFAS No. 123. Pure's net income and
net income per share would have been adjusted to the pro forma amounts indicated
below:

                                             Year Ended December 31,
                                           ---------------------------
                                            2001      2000      1999
                                           -------   -------   -------
                                            (in thousands, except per
                                                 share amounts)

Net income                                 $72,344   $87,341   $17,788
Net income per common share                $  1.44   $  2.04   $  0.54
Net income per share - assuming dilution   $  1.42   $  2.00   $  0.54

          The pro forma net income and pro forma net income per share amounts
noted above are not likely to be representative of the pro forma amounts to be
reported in future years. Pro forma adjustments in future years will include
compensation expense associated with the options granted in 2001 and 2000 plus
compensation expense associated with any options awarded in future years. As a
result, such pro forma compensation expense is likely to be higher than the
levels experienced in 2001 and 2000. No options were granted or outstanding in
1999.

          The total fair value of stock options granted in 2001 and 2000 was
approximately $8.3 million and $47.6 million, respectively. No options were
granted in 1999. The fair value of each stock option grant is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions used:

                                                2001      2000    1999
                                              -------   -------   ----

                    Risk-free interest rate    4.49%     5.80%     N/A
                    Expected life             5 years   7 years    N/A
                    Expected volatility          34%       45%     N/A
                    Expected dividend yield      --        --      N/A

                                                                     (Continued)

                                      F-32

<PAGE>

                              Pure Resources, Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

The following table sets forth the stock options held by Pure's officers as of
December 31, 2001:

                                        Exercise   Number of
                                         Price      Options
                                        --------   ---------

                                        $ 8.58       15,629
                                          9.30    2,320,000
                                         10.83       78,847
                                         14.53       86,046
                                         15.69        8,546
                                         17.08      940,000
                                         17.63      300,000
                                         18.35      351,000
                                         19.31        9,959
                                         21.36        6,241
                                         26.89        4,302
                                                  ---------

                                                  4,120,570
                                                  =========

(12) Non-Employee Director Equity Plan

          In 2000, Pure adopted the Equity Plan for Outside Directors (the
"Director Plan"), which was approved by the sole stockholder, Union Oil, prior
to the merger with Titan. Directors who are not employees of Pure and Union Oil
are eligible for this plan. The Director Plan has 200,000 shares available for
awards. Currently, each eligible director receives $30,000 in annual
compensation, which is paid on a quarterly basis. In addition, effective January
1, 2002, each outside director will receive $3,500 for each board meeting
attended. Under the Director Plan, the fee generally is paid 40% in cash and 60%
in Pure common stock at market prices, but an outside director may elect to
substitute Pure common stock for some or all of his cash fee. An outside
director may also elect to defer payment of some or all of his cash or stock
fee, in which case fictional interest and/or dividend credits will be credited
to a deferred compensation account.

          In 2001, Pure paid cash of $16,900 and issued 2,126 shares of Pure
common stock (fair value on the date of awards was $43,129) to the eligible
directors under the Director Plan. Certain directors have elected to defer some
or all of their compensation in 2001, of which those directors deferred cash of
$12,077 and 2,361 shares of Pure common stock (fair value on date of awards was
$47,894). In 2000, subsequent to the Titan merger, Pure paid cash of $8,467 and
issued 1,201 shares of Pure common stock (fair value on date of awards was
$21,540) to the eligible directors under the Director Plan. Certain directors
have elected to defer some or all of their compensation in 2000, of which those
directors deferred cash of $6,032 and 1,336 shares of Pure common stock (fair
value on date of awards was $23,961).

                                                                     (Continued)

                                      F-33

<PAGE>

                              Pure Resources, Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

(13) Earnings per Common Share

          The following table sets forth the computation of basic and diluted
earnings per common share:

<TABLE>
<CAPTION>
                                                                                Year ended December 31,
                                                                              ---------------------------
                                                                               2001      2000      1999
                                                                              -------   -------   -------
<S>                                                                           <C>       <C>       <C>
Numerator:

   Income from continuing operations and numerator for basic and
   diluted income per share from continuing operations                        $80,190   $81,172   $17,788
                                                                              =======   =======   =======

   Net income and numerator for basic and diluted net income per share        $81,360   $82,860   $17,788
                                                                              =======   =======   =======

Denominator:
   Denominator for basic income per share from continuing operations
   and net income - weighted average common shares                             50,108    42,835    32,709

   Effect of dilutive securities - employee stock options not subject to
   "put" right                                                                    265        87        --

   Dilutive effect of officers' stock options subject to the "put" right
   under employment/severance agreements (Note 6)                                 726       355        --

   Dilutive effect of officers' individual common stock held subject to the
   "put" right under employment/severance agreements (Note 6)                      --       361        --
                                                                              -------   -------   -------

   Denominator for diluted income per share from continuing operations
   and net income - adjusted weighted average common shares and
   assumed conversions                                                         51,099    43,638    32,709
                                                                              =======   =======   =======

   Basic income per share from continuing operations                          $  1.60   $  1.89   $  0.54
                                                                              =======   =======   =======

   Diluted income per share from continuing operations                        $  1.57   $  1.86   $  0.54
                                                                              =======   =======   =======

   Basic net income per share                                                 $  1.62   $  1.93   $  0.54
                                                                              =======   =======   =======

   Diluted net income per share                                               $  1.59   $  1.90   $  0.54
                                                                              =======   =======   =======
</TABLE>

          Employee stock options to purchase 6,383,315 shares of common stock
were outstanding at December 31, 2001, but only 5,817,583 were included in the
computation of diluted net income per common share because the employee stock
options' exercise price was greater than the average market price of the common
stock of Pure for the 565,732 options shares excluded.

                                                                     (Continued)

                                      F-34

<PAGE>

                              Pure Resources, Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

          Employee stock options to purchase 5,481,112 shares of common stock
were outstanding at December 31, 2000, but only 5,119,718 were included in the
computation of diluted net income per common share because the employee stock
options' exercise price was greater than the average market price of the common
stock of Pure for the 361,394 options shares excluded.

(14) 401(k) Plan and Employee Benefit Expenses

          Pure has established a qualified cash or deferred arrangement under
IRS code section 401(k) covering substantially all employees. Under the plan,
the employees have an option to make elective contributions of a portion of
their eligible compensation, not to exceed specified annual limitations, to the
plan and Pure has an option to match with cash a portion of the employee's
contribution. Pure, subsequent to the merger with Titan, made matching cash
contributions to the plan totaling $1.9 million in 2001 and $897,000 in 2000.

          The employees of the Permian Basin business unit prior to the
Contribution were included in various employee benefits plans of Union Oil.
These plans include the Union Oil Retirement Plan, employee and retiree medical,
dental and life insurance plan, 401(k) and other such benefits. For purposes of
these financial statements prior to the Contribution, the Permian Basin business
unit is considered a participant in multi-employer benefit plans.

          The Permian Basin business unit's allocated share of employee benefit
expenses is $2.3 million for the year ending December 31, 1999. For the period
in 2000 prior to the Contribution the allocated share of employee benefit
expenses was $854,000. No charges have been made to the Permian Basin business
unit by Union Oil for the qualified Union Oil Retirement Plan as the plan is in
an overfunded position for the periods stated above. Union Oil retains all
liabilities associated with these plans.

(15) Major Customers

          The following purchasers accounted for 10% or more of Pure's oil and
gas sales.

                                                2001   2000   1999
                                                ----   ----   ----

                              Purchaser A (a)    --%    37%    83%
                              Purchaser B         7%    12%    --%
                              Purchaser C        11%     2%    --%

----------
(a)  Purchaser A is an affiliate of Union Oil, a significant stockholder of
     Pure.

                                                                     (Continued)

                                      F-35

<PAGE>

                              Pure Resources, Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

(16) Derivative Financial Instruments

          In 2001, Pure adopted SFAS No. 133 which resulted in recording a $17.5
million, ($11.4 million net of tax) decline in fair value to accumulated other
comprehensive income. At December 31, 2001, the estimated net amount of the
existing gains within accumulated other comprehensive income that are expected
to be reclassified into earnings within the next 12 months is approximately
$10.1 million, net of tax. For the year ended December 31, 2001, other income
includes approximately $126,000 of gain from changes in fair value of
derivatives not qualifying as hedges and approximately $4.5 million of gain from
the ineffective portion of the cash flow hedges.

          Enron Bankruptcy

          In the fourth quarter of 2001, Pure and many other parties were
affected by the bankruptcy of Enron Corp. and subsidiaries. Pure had various
natural gas and crude oil swaps with Enron. As a result of the Enron bankruptcy,
Pure terminated its derivative contracts with Enron. At the termination date of
the contracts, Enron owed Pure a net receivable of approximately $2.0 million.
In the fourth quarter of 2001, the Enron cash flow hedges were no longer highly
effective as a result of the increased credit risk associated with Enron;
accordingly, Pure ceased hedge accounting and marked-to-market the Enron
derivatives up to the termination date and provided an allowance for
substantially all amounts owed Pure, which was charged to other expense in the
fourth quarter of 2001.

          Commodity Derivatives

          Pure may utilize various option and swap contracts and other financial
instruments to economically hedge the effect of price changes on future oil and
gas production and changes in interest rates related to Pure's debt obligations.
The counterparties to Pure's financial instruments may include regulated
exchanges, international and domestic financial institutions and other
industrial companies. All of the counterparties to Pure's financial instruments
must pass certain credit requirements deemed sufficient by management before
trading financial instruments with Pure. These counterparties may expose Pure to
losses in the event of non-performance. In the opinion of management, the
off-balance-sheet risk associated with these instruments is immaterial.

          The following table sets forth the future volumes by year and the
range of prices to be received based upon the fixed price of the individual
option and swap contracts and other financial instruments outstanding at
December 31, 2001:

                                                          2002
                                                     ---------------

Gas related derivatives:
   Collar and swap options:
      Volume (MMBtu)                                   19,092,000
      Index price per MMBtu (floor-ceiling prices)    $2.50 - $4.07

Oil related derivatives:
   Collar and swap options:
      Volume (Bbls)                                      373,000
      Index price per Bbl (floor-ceiling prices)     $24.00 - $28.55

          The index price for the natural gas collars and swaps settles based on
either a NYMEX Henry hub or a Permian Basin hub. The oil collars and swaps
settle based on the prices for West Texas Intermediate on NYMEX.

                                                                     (Continued)

                                      F-36

<PAGE>

                              Pure Resources, Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

          In the Hallwood merger, Pure marked-to-market as of the merger date
all the outstanding financial derivatives held by Hallwood which resulted in a
liability of approximately $31.2 million. At December 31, 2001, the above table
includes oil and gas derivatives acquired in the Hallwood merger (a) 292,000
MMBtu's of natural gas at a swap price of $3.95 per MMBtu and (b) 73,000 Bbls of
oil at a swap price of $24.25 per barrel.

          As a result of the Titan merger, Pure marked-to-market as of the
merger date all the outstanding financial derivatives held by Titan which
resulted in a liability of approximately $19.3 million (see Note 2). The
deferred commodity hedges amount were amortized as a non-cash benefit to oil and
gas revenues over the remaining term of the hedges as the related production
took place. This amortization was completed as of June 30, 2001.

          Interest Rate Derivatives

          At December 31, 2001, Pure has $37.5 million in notional principal of
fixed for floating interest rate swaps, which were acquired as part of the
Hallwood merger. Pure pays a fixed rate of 5.23% and receives a LIBOR floating
rate. The derivative contracts mature in February 2004. These derivative
contracts do not qualify as cash flow hedges as a result of the mismatch of
maturities with Pure's debt instruments and, accordingly, is marked-to-market
each reporting period.

(17) Impairment of Long-Lived Assets

          Pure, in accordance with SFAS No. 121, estimated its expected future
cash flows of its oil and gas properties by amortization unit and compared the
amounts determined to the carrying amount of its oil and gas properties less the
accrued abandonment and restoration obligations to determine if the carrying
amounts were recoverable. For those oil and gas properties for which the
carrying amount less the accrued abandonment and restoration obligations
exceeded the estimated future net cash flows, an impairment was determined to
exist; therefore, Pure adjusted the carrying amount of those oil and gas
properties to their estimated fair value as determined by discounting their
expected future net cash flows at a discount rate commensurate with the risks
involved in the industry. As a result of this process, Pure recognized an
impairment of approximately $345,000 related to its oil and gas properties
during 1999, which resulted from reserve revisions and decreased cash flows
related to severely decreased commodity prices. Pure had no impairments in 2001
and 2000.

          Estimated future cash flows for purposes of determining impairment of
oil and gas properties are determined using the following assumptions:

          .    Reserve economics are adjusted for known changes such as
               extensions and discoveries, acquisitions and dispositions of
               proved properties and changes in production rates and projected
               decline characteristics. Reserves are based on petroleum
               engineering, which is a subjective process of estimating
               underground accumulations of oil and gas that cannot be measured
               in an exact manner. If Pure's reserve estimates had been lower
               than those estimated by Pure's independent petroleum engineers
               and those prepared by Pure's petroleum engineers, which is a
               possibility if other petroleum engineers were utilized due to the
               inexactness of the engineering process, Pure could have incurred
               an impairment in 2001. Pure's management believes its reserve
               estimates are reasonable.
          .    Cash flows from proved oil and gas properties and appropriate
               risk-adjusted probable and possible reserves are considered in
               the analysis.
          .    The prices used for determining cash flows are determined based
               on the near-term (a period of one to four years, depending on
               management's current views of future market conditions) NYMEX
               futures index adjusted for property specific qualitative and
               location differentials. The latest futures price in the near-term
               price outlook is then held constant for the remaining life of the
               properties. Prices estimated for future periods may be above or
               below current pricing levels. Assuming use of another party's
               price outlook, it is possible that Pure could have incurred an
               impairment in 2001; however, Pure's management believes its price
               outlook assumptions were reasonable at December 31, 2001.

                                                                     (Continued)

                                      F-37

<PAGE>

                              Pure Resources, Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

          If commodity prices deteriorate from management's view at December 31,
2001, it is possible that Pure could incur an impairment in 2002.

(18) Other Liabilities

          The other current liabilities consist of the following (in thousands):

                                             December 31,
                                          -----------------
                                            2001     2000
                                          -------   -------

Accrued oil and gas production expenses   $48,896   $20,923
Income taxes payable                        1,394     3,298
Accrued interest payable                    1,517       904
Other                                         711        --
                                          -------   -------

                                          $52,518   $25,125
                                          =======   =======

(19) Exploration and Abandonment

          Exploration and abandonment expense consist of the following (in
thousands):

                                     Year ended December 31,
                                   --------------------------
                                     2001     2000      1999
                                   -------   -------   ------

Geological and geophysical staff   $ 8,236   $ 3,540   $2,062
Exploratory dry hole costs          35,055    10,249    2,120
Impaired unproved properties         2,646     2,548      915
Plugging and abandonment costs         346       600       --
Seismic costs                        6,839     2,431      588
Other                                1,644       515      806
                                   -------   -------   ------

                                   $54,766   $19,883   $6,491
                                   =======   =======   ======

                                                                     (Continued)

                                      F-38

<PAGE>

                              Pure Resources, Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

(20) Comprehensive Income

<TABLE>
<CAPTION>
                                                                     Year ended December 31,
                                                                   ----------------------------
                                                                     2001      2000      1999
                                                                   --------   -------   -------
                                                                          (in thousands)
<S>                                                                <C>        <C>       <C>
Net income                                                         $ 81,360   $82,860   $17,788

   Cumulative effect of accounting change
      for SFAS No. 133 adoption (a)                                 (11,364)       --        --
   Reclassification adjustment for settled hedging contracts (b)      4,490        --        --
   Changes in fair value of expected cash flows (c)                  16,972        --        --
                                                                   --------   -------   -------

Comprehensive income                                               $ 91,458   $82,860   $17,788
                                                                   ========   =======   =======

-------
     (a) Net of tax of:                                            $  6,119   $    --   $    --
     (b) Net of tax of:                                            $ (2,418)  $    --   $    --
     (c) Net of tax of:                                            $ (9,139)  $    --   $    --
</TABLE>

                                                                     (Continued)

                                      F-39

<PAGE>

                              Pure Resources, Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

(21) Supplemental Condensed Consolidating Financial Information

          Certain subsidiaries of Pure have fully and unconditionally guaranteed
the 7.125% senior notes. The following tables present the condensed
consolidating financial information for each of the years ended December 31,
2001 and 2000 for (a) Pure (Parent), (b) Guarantor subsidiaries and (c)
Non-guarantor subsidiaries. The financial information for the period prior to
May 31, 2000 are those of Union Oil's Permian Basin business unit whose assets
were ultimately merged into a subsidiary of Pure that is a guarantor of the
Senior Notes. Virtually all of Pure's operations are conducted by Pure's
subsidiaries.

                                                                     (Continued)

                                      F-40

<PAGE>

                              Pure Resources, Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

Condensed Consolidated Balance Sheet
December 31, 2001
(in thousands)

<TABLE>
<CAPTION>
                                                                       Non-
                                            Pure      Guarantor      Guarantor
                                          (Parent)   Subsidiaries   Subsidiaries   Eliminations   Consolidated
                                          --------   ------------   ------------   ------------   ------------
<S>                                       <C>         <C>             <C>          <C>             <C>
Assets

   Current assets:

      Cash and cash equivalents           $  5,220    $      273      $    100     $        --     $    5,593
      Accounts receivable                    6,293        42,835        17,045              --         66,173
      Other current assets                     188         6,476            15              --          6,679

                                          --------    ----------      --------     -----------     ----------
         Total current assets               11,701        49,584        17,160              --         78,445
                                          --------    ----------      --------     -----------     ----------

   Properties, net                              --     1,081,029       242,959              --      1,323,988
   Investment in subsidiaries              585,551     2,724,156        47,586      (3,357,293)            --
   Deferred compensation                    14,982            --            --              --         14,982
   Other assets                              5,344        11,403       244,583        (243,937)        17,393
                                          --------    ----------      --------     -----------     ----------
         Total assets                     $617,578    $3,866,172      $552,288     $(3,601,230)    $1,434,808
                                          ========    ==========      ========     ===========     ==========

Liabilities and equity

   Current liabilities:

      Accounts payable                    $  6,598    $   49,760      $  4,355     $        --     $   60,713
      Other current liabilities              2,747        48,865         1,526              --         53,138
                                          --------    ----------      --------     -----------     ----------
         Total current liabilities           9,345        98,625         5,881              --        113,851
                                          --------    ----------      --------     -----------     ----------

   Long-term debt                          586,703            --            --              --        586,703
   Accrued abandonment, restoration and
      environmental liabilities                 --        21,696           915              --         22,611
   Deferred income taxes                      (164)      142,867        (7,434)             --        135,269
   Other liabilities                            --        11,537           509              --         12,046

   Common stock subject to repurchase       69,800            --            --              --         69,800

   Minority interest                            --            --         1,445           5,000          6,445

   Equity                                  (48,106)    3,591,447       550,972      (3,606,230)       488,083

                                          --------    ----------      --------     -----------     ----------
         Total liabilities and equity     $617,578    $3,866,172      $552,288     $(3,601,230)    $1,434,808
                                          ========    ==========      ========     ===========     ==========
</TABLE>

                                                                     (Continued)

                                      F-41

<PAGE>

                              Pure Resources, Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

Condensed Consolidated Balance Sheet
December 31, 2000
(in thousands)

<TABLE>
<CAPTION>
                                                                        Non-
                                            Pure       Guarantor     Guarantor
                                          (Parent)   Subsidiaries   Subsidiaries   Eliminations   Consolidated
                                          --------   ------------   ------------   ------------   ------------
<S>                                       <C>          <C>            <C>           <C>             <C>
Assets

   Current assets:

      Cash and cash equivalents           $     (4)    $  3,329       $    --       $      --       $  3,325
      Accounts receivable                       --       48,457            (6)             --         48,451
      Other current assets                     262          606            15              --            883
                                          --------     --------       -------       ---------       --------
         Total current assets                  258       52,392             9              --         52,659
                                          --------     --------       -------       ---------       --------

      Properties, net                           --      590,869            --              --        590,869
      Investment in subsidiaries           497,927       58,316            --        (556,243)            --
      Deferred compensation                 63,903           --            --              --         63,903
      Other assets                          55,938       10,283        39,528         (94,065)        11,684
                                          --------     --------       -------       ---------       --------
         Total assets                     $618,026     $711,860       $39,537       $(650,308)      $719,115
                                          ========     ========       =======       =========       ========

Liabilities and equity

   Current liabilities:

      Accounts payable                    $    804     $ 17,245       $   179       $      --       $ 18,228
      Other current liabilities              4,389       27,404           113              --         31,906
                                          --------     --------       -------       ---------       --------
         Total current liabilities           5,193       44,649           292              --         50,134
                                          --------     --------       -------       ---------       --------

   Long-term debt                           65,000        3,000            --              --         68,000
   Accrued abandonment, restoration and
      environmental liabilities                 --       14,331            --              --         14,331
   Deferred income taxes                     4,325       53,901        (2,770)           --           55,456
   Other liabilities                            --      107,135         4,721         (94,065)        17,791

   Common stock subject to repurchase      135,617           --            --              --        135,617

   Equity                                  407,891      488,844        37,294        (556,243)       377,786
                                          --------     --------       -------       ---------       --------
         Total liabilities and equity     $618,026     $711,860       $39,537       $(650,308)      $719,115
                                          ========     =========      =======       =========       ========
</TABLE>

                                                                     (Continued)

                                      F-42

<PAGE>

                              Pure Resources, Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

Condensed Consolidated Statement of Operations
For the year ended December 31, 2001
(in thousands)

<TABLE>
<CAPTION>
                                                                            Non-
                                                Pure      Guarantor       Guarantor
                                              (Parent)   Subsidiaries   Subsidiaries   Eliminations   Consolidated
                                              --------   ------------   ------------   ------------   ------------
<S>                                           <C>          <C>            <C>            <C>            <C>
Revenues:

   Oil and gas sales                          $     --     $402,746       $ 75,331       $      --      $478,077
   Other operating revenues                         --        6,389             (7)             --         6,382
                                              --------     --------       --------       ---------      --------
      Total revenues                                --      409,135         75,324              --       484,459
                                              --------     --------       --------       ---------      --------

Expenses:

   Operating and other expenses                  1,447      121,462         22,077              --       144,986
   Amortization of deferred compensation         1,518           --             --              --         1,518
   Exploration and abandonments                     --       54,504            262              --        54,766
   Depreciation, depletion and amortization        690      102,550         40,575              --       143,815
                                              --------     --------       --------       ---------      --------
      Total expenses                             3,655      278,516         62,914              --       345,085
                                              --------     --------       --------       ---------      --------

      Operating income (loss)                   (3,655)     130,619         12,410              --       139,374

Other income (expense):

   Equity in earnings of subsidiaries           87,625      310,985          7,766        (406,376)           --
   Interest expense                            (28,097)        (211)            --              --       (28,308)
   Other                                        12,779      (10,410)        17,045         (15,101)        4,313
                                              --------     --------       --------       ---------      --------
      Income before income taxes
         and minority interest                  68,652      430,983         37,221        (421,477)      115,379

Income tax expense                              12,708      (46,057)          (395)             --       (33,744)
Minority interest                                   --           --         (1,445)             --        (1,445)
                                              --------     --------       --------       ---------      --------
      Income from continuing operations         81,360      384,926         35,381        (421,477)       80,190

Income from discontinued operations                 --        1,170             --              --         1,170
                                              --------     --------       --------       ---------      --------
      Net income                              $ 81,360     $386,096       $ 35,381       $(421,477)     $ 81,360
                                              ========     ========       ========       =========      ========
</TABLE>

                                                                     (Continued)

                                      F-43

<PAGE>

                              Pure Resources, Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

Condensed Consolidated Statement of Operations
For the year ended December 31, 2000
(in thousands)

<TABLE>
<CAPTION>
                                                                            Non-
                                                Pure      Guarantor      Guarantor
                                              (Parent)   Subsidiaries   Subsidiaries   Eliminations   Consolidated
                                              --------   ------------   ------------   ------------   ------------
<S>                                           <C>          <C>              <C>         <C>             <C>
Revenues:

   Oil and gas sales                          $     --     $281,762         $127        $      --       $281,889
   Other operating revenues                         --        1,553           --               --          1,553

                                              --------     --------         ----        ---------       --------
      Total revenues                                --      283,315          127               --        283,442
                                              --------     --------         ----        ---------       --------

Expenses:

   Operating and other expenses                    886       80,384           29               --         81,299
   Amortization of deferred compensation        15,386           --           --               --         15,386
   Exploration and abandonments                     --       19,882            1               --         19,883
   Depreciation, depletion and amortization         74       44,711           --               --         44,785

                                              --------     --------         ----        ---------       --------
      Total expenses                            16,346      144,977           30               --        161,353
                                              --------     --------         ----        ---------       --------

      Operating income (loss)                  (16,346)     138,338           97               --        122,089

Other income (expense):

   Equity in earnings of subsidiaries           57,074      222,456          100         (279,630)            --
   Interest expense                             (1,635)      (2,761)          --               --         (4,396)
   Other                                           580       (3,035)          --               --         (2,455)

                                              --------     --------         ----        ---------       --------
      Income before income taxes
         and minority interest                  39,673      354,998          197         (279,630)       115,238

Income tax expense                              43,187      (77,219)         (34)              --        (34,066)

                                              --------     --------         ----        ---------       --------
      Income from continuing operations         82,860      277,779          163         (279,630)        81,172

Income from discontinued operations                 --        1,688           --               --          1,688
                                              --------     --------         ----        ---------       --------

      Net income                              $ 82,860     $279,467         $163        $(279,630)      $ 82,860
                                              ========     ========         ====        =========       ========
</TABLE>

                                                                     (Continued)

                                      F-44

<PAGE>

                              Pure Resources, Inc.

                  Notes to Consolidated Statement of Cash Flows
                      For the year ended December 31, 2001
                                 (in thousands)

Condensed Consolidated Statement of Cash Flows
For the year ended December 31, 2001
(in thousands)

<TABLE>
<CAPTION>
                                                                                  Non-
                                                     Pure       Guarantor      Guarantor
                                                   (Parent)    Subsidiaries   Subsidiaries   Eliminations   Consolidated
                                                   ---------   ------------   ------------   ------------   ------------
<S>                                                <C>          <C>            <C>            <C>            <C>
Cash flows from operating activities               $(513,716)   $ 802,112      $  22,532      $  (2,634)     $ 308,294

Cash flows from investing activities:

   Capital expenditures and acquisitions                  --     (494,631)        (5,364)      (243,937)      (743,932)
   Proceeds from sale of assets                           --        4,402             --             --          4,402
   Other                                                  --     (232,784)      (243,937)       476,721             --

                                                   ---------    ---------      ---------      ---------      ---------
      Net cash used in investing activities               --     (723,013)      (249,301)       232,784       (739,530)
                                                   ---------    ---------      ---------      ---------      ---------

Cash flows from financing activities:

   Change in debt                                    521,554      (90,436)            --             --        431,118
   Other                                              (2,614)       8,281        226,869       (230,150)         2,386

                                                   ---------    ---------      ---------      ---------      ---------
      Net cash provided by (used in)
         financing activities                        518,940      (82,155)       226,869       (230,150)       433,504
                                                   ---------    ---------      ---------      ---------      ---------

Increase (decrease) in cash and cash equivalents       5,224       (3,056)           100             --          2,268

Cash and cash equivalents, beginning of year              (4)       3,329             --             --          3,325

                                                   ---------    ---------      ---------      ---------      ---------
Cash and cash equivalents, end of year             $   5,220    $     273      $     100      $      --      $   5,593
                                                   =========    =========      =========      =========      =========
</TABLE>

                                                                     (Continued)

                                      F-45

<PAGE>

                              Pure Resources, Inc.

                  Notes to Consolidated Statement of Cash Flows
                      For the year ended December 31, 2001
                                 (in thousands)

Condensed Consolidated Statement of Cash Flows
For the year ended December 31, 2000
(in thousands)

<TABLE>
<CAPTION>
                                                                                 Non-
                                                     Pure      Guarantor       Guarantor
                                                   (Parent)   Subsidiaries   Subsidiaries   Eliminations   Consolidated
                                                   --------   ------------   ------------   ------------   ------------
<S>                                                <C>         <C>                <C>            <C>        <C>
Cash flows from operating activities               $ 14,542    $ 128,559          $--            $--        $ 143,101

Cash flows from investing activities:

   Capital expenditures and acquisitions                 --     (104,734)          --             --         (104,734)
   Proceeds from sale of assets                          --        1,837           --             --            1,837
   Other                                                 --        2,846           --             --            2,846

                                                   --------    ---------          ---           ----        ---------
      Net cash used in investing activities              --     (100,051)          --             --         (100,051)
                                                   --------    ---------          ---           ----        ---------

Cash flows from financing activities:

   Change in debt                                   (15,000)     (23,863)          --             --          (38,863)
   Other                                                454       (1,316)          --             --             (862)

                                                   --------    ---------          ---           ----        ---------
      Net cash provided by (used in)
         financing activities                       (14,546)     (25,179)          --             --          (39,725)
                                                   --------    ---------          ---           ----        ---------

Increase (decrease) in cash and cash equivalents         (4)       3,329           --             --            3,325

Cash and cash equivalents, beginning of year             --           --           --             --               --

                                                   --------    ---------          ---           ----        ---------
Cash and cash equivalents, end of year             $     (4)   $   3,329          $--            $--        $   3,325
                                                   ========    =========          ===           ====        =========
</TABLE>

                                                                     (Continued)

                                      F-46

<PAGE>

                              Pure Resources, Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

(22) Discontinued Operations

          On January 1, 2002, Pure adopted SFAS No. 144, as discussed in Note 2.
In March 2002, Pure sold assets in the Permian Basin region for $23 million,
subject to adjustments. These properties represented an insignificant portion of
the value of Pure's reserves. Pure is representing its 2001 and prior
consolidated financial statements to reflect the discontinued operations in
accordance with SFAS No. 144.

          Pure regularly reviews its portfolio of assets for potential
dispositions and receives offers to buy certain of its assets. In March 2002,
Pure received and accepted an offer to sell properties located in the Permian
Basin region for $23 million, subject to adjustments. The properties sold were
an insignificant portion of the value of Pure's reserves. In accordance with
SFAS No. 144, Pure is required to reflect this disposition of assets as
discontinued operations. There were no results of operations in 1999 as the
properties sold were acquired in the Titan merger.

          The following are the results of operations from the discontinued
operations:

                                                   Year ended December 31,
                                                  ------------------------
                                                    2001      2000    1999
                                                  -------   -------   ----
                                                   (dollars in thousands
                                                  except per share amounts)

Oil and gas sales                                 $ 5,976   $ 4,722    $--
Operating costs                                    (2,515)   (1,471)    --
Depletion, depreciation and amortization           (1,661)     (641)    --
Other costs                                            --       (13)    --
Income taxes                                         (630)     (909)    --
                                                  -------   -------    ---
   Income from discontinued operations              1,170     1,688     --
                                                  -------   -------    ---

Gain on disposal before taxes                          --        --     --
Income taxes                                           --        --     --
                                                  -------   -------    ---
   Gain on disposal                                    --        --     --
                                                  -------   -------    ---
      Total income from discontinued operations   $ 1,170   $ 1,688    $--
                                                  =======   =======    ===

Basic income per share:

   Income from discontinued operations            $  0.02   $  0.04    $--
   Gain on disposal                                    --        --     --
                                                  -------   -------    ---
      Total income from discontinued operations   $  0.02   $  0.04    $--
                                                  =======   =======    ===

Diluted income per share:

   Income from discontinued operations            $  0.02   $  0.04    $--
   Gain on disposal                                    --        --     --
                                                  -------   -------    ---
      Total income from discontinued operations   $  0.02   $  0.04    $--
                                                  =======   =======    ===

                                                                     (Continued)

                                      F-47

<PAGE>

                              Pure Resources, Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

(23) Unaudited Supplementary Information

          Capitalized Costs

<TABLE>
<CAPTION>
                                                                      December 31,
                                                          -----------------------------------
                                                             2001         2000         1999
                                                          ----------   ----------   ---------
                                                                     (in thousands)
<S>                                                       <C>          <C>          <C>
Oil and gas operations:
   Proved oil and gas properties                          $1,957,723   $1,140,209   $ 827,340
   Unproved oil and gas properties                            64,051       21,743       3,841
                                                          ----------   ----------   ---------
      Total oil and gas properties                         2,021,774    1,161,952     831,181
   Accumulated depletion, depreciation and amortization     (714,415)    (577,532)   (539,371)
                                                          ----------   ----------   ---------
Net capitalized costs for oil and gas operations          $1,307,359   $  584,420   $ 291,810
                                                          ==========   ==========   =========
</TABLE>

          Costs Incurred

                                            Year Ended December 31,
                                        -----------------------------
                                          2001       2000       1999
                                        --------   --------   -------
                                                 (in thousands)
                Development costs        $115,541   $ 47,251   $17,256
                Exploration costs         141,351     39,206     4,519
                Acquisition costs (a):
                   Unproved properties     62,404     20,416        88
                   Proved properties      598,093    245,314       676
                                         --------   --------   -------
                      Total              $917,389   $352,187   $22,539
                                         ========   ========   =======

----------
(a) Includes approximately $31.8 million and $(27.0) million in 2001 and 2000,
respectively, associated with deferred taxes from utilizing the purchase method
of business combinations, see Note 5.

          Reserve Quantity Information

          The estimates of proved oil and gas reserves, which are located
principally in the United States, were prepared and/or audited (audits are of
significant value properties) by independent petroleum consultants and Pure in
2001 and 2000. In 1999, the estimated proved oil and gas reserves were prepared
by Union Oil. Reserves were estimated in accordance with guidelines established
by the SEC and FASB, which require that reserve estimates be prepared under
existing economic and operating conditions with no provision for price and cost
escalations except by contractual arrangements. Pure has presented the reserve
estimates utilizing an oil price of $17.99, $25.76 and $24.08 per Bbl and a gas
price of $2.23, $8.49 and $1.93 per Mcf as of December 31, 2001, 2000 and 1999,
respectively.

          At December 31, 2001, the NYMEX prices for crude oil and natural gas
were $19.84 per barrel and $2.57 per Mcf, respectively. In perspective, at
February 28, 2002 the NYMEX prices for crude oil and natural gas were $21.74 per
barrel and $2.36 per Mcf, respectively.

                                                                     (Continued)

                                      F-48

<PAGE>

                              Pure Resources, Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

          Oil and gas reserve quantity estimates are subject to numerous
uncertainties inherent in the estimation of quantities of proved reserves and in
the projection of future rates of production and the timing of development
expenditures. The accuracy of such estimates is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Results of subsequent drilling, testing and production may cause either an
upward or downward revision of previous estimates. Further, the volumes
considered to be commercially recoverable fluctuate with changes in prices and
operating costs. Pure emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of currently
producing oil and gas properties. Accordingly, these estimates are expected to
change as additional information becomes available in the future.

                                              Oil and    Natural
                                            Condensate     Gas
                                              (MBbls)     (MMcf)
                                            ----------   -------
Total Proved Reserves:
   Balance, January 1, 1999                   38,538     329,227
      Purchases of minerals-in-place              94         921
      Sales of minerals-in-place                  (2)        (28)
      Extensions and discoveries                 962      26,290
      Revisions of previous estimates          4,049      13,464
      Production                              (3,659)    (28,899)
                                             -------     -------

   Balance, December 31, 1999                 39,982     340,975
      Purchases of minerals-in-place          36,096     243,140
      Sales of minerals-in-place                (170)       (354)
      Extensions and discoveries               1,759      68,466
      Revisions of previous estimates (a)        217      49,146
      Production                              (5,278)    (39,016)
                                             -------     -------

   Balance, December 31, 2000                 72,606     662,357
      Purchases of minerals-in-place          18,295     308,419
      Sales of minerals-in-place                 (58)     (2,363)
      Extensions and discoveries              10,288     207,454
      Revisions of previous estimates (a)    (12,589)   (107,665)
      Production                              (7,993)    (82,472)
                                             -------     -------

   Balance, December 31, 2001                 80,549     985,730
                                             =======     =======

Proved Developed Reserves:
      December 31, 1998                       36,763     310,775
      December 31, 1999                       38,225     308,944
      December 31, 2000                       63,303     504,529
      December 31, 2001                       67,849     763,063

----------
(a) Includes 27.2 MMBoe of negative revisions in 2001 and 3.7 MMBoe of positive
revisions in 2000 related changes in commodity prices between periods.

                                                                     (Continued)

                                      F-49

<PAGE>

                              Pure Resources, Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

          Standardized Measure Of Discounted Future Net Cash Flows

          The standardized measure of discounted future net cash flows is
computed by applying year-end prices of oil and gas (with consideration of price
changes only to the extent provided by contractual arrangements) to the
estimated future production of proved oil and gas reserves, less estimated
future expenditures (based on period-end costs) to be incurred in developing and
producing the proved reserves, less estimated future income tax expenses (based
on period-end statutory tax rates, with consideration of future tax rates
already legislated) to be incurred on pretax net cash flows less tax basis of
the properties and available credits, and assuming continuation of existing
economic conditions. The estimated future net cash flows are then discounted
using a rate of 10% per year to reflect the estimated timing of the future cash
flows.

          Discounted future cash flow estimates like those shown below are not
intended to represent estimates of the fair value of oil and gas properties.
Estimates of fair value should also consider probable reserves, anticipated
future oil and gas prices, interest rates, changes in development and production
costs and risks associated with future production. Because of these and other
considerations, any estimate of fair value is necessarily subjective and
imprecise.

<TABLE>
<CAPTION>
                                                                 December 31,
                                                    --------------------------------------
                                                        2001          2000         1999
                                                    -----------   -----------   ----------
                                                                  (thousands)
<S>                                                 <C>           <C>           <C>
Future cash flows                                   $ 3,650,339   $ 7,494,617   $1,560,792
Future costs:
   Production                                        (1,445,319)   (1,795,597)    (677,415)
   Development (a)                                     (246,649)     (168,813)     (57,485)
                                                    -----------   -----------   ----------

Future net cash flows before income taxes             1,958,371     5,530,207      825,892
Future income taxes                                    (371,988)   (1,815,650)    (276,675)
                                                    -----------   -----------   ----------
Future net cash flows                                 1,586,383     3,714,557      549,217
10% annual discount for estimated timing of
   cash flows                                          (702,531)   (1,818,413)    (244,126)
                                                    -----------   -----------   ----------

Standardized measure of discounted net cash flows   $   883,852   $ 1,896,144   $  305,091
                                                    ===========   ===========   ==========
</TABLE>

----------
(a)  Includes dismantlement and abandonment costs of approximately $58.6
     million, $34.9 million and $34.9 million at December 31, 2001, 2000 and
     1999, respectively.

                                                                     (Continued)

                                      F-50

<PAGE>

                              Pure Resources, Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

     Changes in Standardized Measure of Discounted Future Net Cash Flows

<TABLE>
<CAPTION>
                                                                      Year ended December 31,
                                                               ------------------------------------
                                                                   2001         2000         1999
                                                               -----------   ----------   ---------
                                                                             (thousands)
<S>                                                            <C>           <C>          <C>
Increase (decrease):
   Extensions and discoveries and improved recovery, net
      of future production and development costs               $   187,348   $  331,007   $  31,312
   Accretion of discount                                           250,285       45,484      15,452
   Net change in sales prices, net of production costs          (2,734,640)   1,455,098     257,885
   Net change in income taxes                                      (48,717)    (763,339)   (102,422)
   Purchase of minerals-in place                                 1,048,763      706,431       1,196
   Sales of minerals in place                                       (2,496)      (1,234)        (13)
   Revisions of quantity estimates                                   8,285      176,532      32,698
   Sales, net of production costs                                 (363,207)    (216,122)    (72,399)
   Changes in estimated future development costs                   (34,439)     (43,591)      2,935
   Changes of production rates (timing) and other                  676,526      (99,213)     (6,020)
                                                               -----------   ----------   ---------

      Net increase (decrease)                                   (1,012,292)   1,591,053     160,624

   Standardized measure of discounted future net cash flows:
         Beginning of period                                     1,896,144      305,091     144,467
                                                               -----------   ----------   ---------

         End of period                                         $   883,852   $1,896,144   $ 305,091
                                                               ===========   ==========   =========
</TABLE>

                                                                     (Continued)

                                      F-51

<PAGE>

                              Pure Resources, Inc.

                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

(24) Selected Quarterly Financial Results (Unaudited)

<TABLE>
<CAPTION>
                                                        Quarter
                                      -------------------------------------------
                                        First     Second      Third    Fourth (b)
                                      --------   --------   --------   ----------
                                         (in thousands, except per share data)
<S>                                   <C>        <C>        <C>         <C>
2001:
   Total revenues (a)                 $124,671   $132,275   $125,305    $102,208
   Total expenses (a)                   71,144     87,943     86,627      99,371
   Income from continuing operation     32,880     25,237     21,976          97
   Net income                           33,415     25,577     22,283          85
   Income per share from continuing
   operations - basic                 $   0.66   $   0.50   $   0.44    $   0.00
   Net income per share - basic       $   0.67   $   0.51   $   0.44    $   0.00
   Income per share from continuing
   operations - assuming dilution     $   0.66   $   0.50   $   0.44    $   0.00
   Net income per share -
      assuming dilution               $   0.65   $   0.50   $   0.43    $   0.00

2000:
   Total revenues                     $ 42,606   $ 56,349   $ 88,107    $ 96,380
   Total expenses                       20,535     29,570     49,379      61,869
   Income from continuing operation     13,674     16,728     23,265      27,505
   Net income                           13,674     17,022     23,986      28,178
   Income per share from continuing
   operations - basic                 $   0.42   $   0.44   $   0.47    $   0.55
   Net income per share - basic       $   0.42   $   0.44   $   0.47    $   0.55
   Income per share from continuing
   operations - assuming dilution     $   0.42   $   0.44   $   0.47    $   0.55
   Net income per share -
      assuming dilution               $   0.42   $   0.44   $   0.47    $   0.55
</TABLE>

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(a)  Certain items have been reclassified to conform with the year-end
     presentation.
(b)  In the fourth quarter of 2001, Pure's effective tax rate was adjusted for
     2001, which resulted in recording a tax benefit of approximately $2.8
     million, related to the income tax provision for the previous nine-months
     of 2001.

                                                                     (Continued)

                                      F-52