<PAGE>

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

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                ----------------

                                    FORM 10-Q

                                ----------------

 [X]    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
        Exchange Act of 1934
                 For the quarterly period ended June 30, 2002

                                       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                             (I.R.S. Employer
           of incorporation or                               Identification No.)
              organization)

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

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



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

         As of August 2, 2002, 50,353,225 shares of common stock, par value $.01
per share of Pure Resources, Inc. were outstanding.

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

<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<S>                                                                                                    <C>
Forward Looking Information and Risk Factors........................................................    1

                                       PART I -- FINANCIAL INFORMATION

Item 1.   Financial Statements

          Consolidated Balance Sheets as of June 30, 2002 (Unaudited) and
                December 31, 2001...................................................................    2
          Unaudited Consolidated Statements of Operations
                for the Three and Six Months Ended June 30, 2002 and 2001...........................    4
          Unaudited Consolidated Statements of Cash Flows
                for the Three and Six Months Ended June 30, 2002 and 2001...........................    5
          Notes to Consolidated Financial Statements................................................    6

Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations.....   28

Item 3.   Quantitative and Qualitative Disclosures About Market Risk................................   44

                                        PART II -- OTHER INFORMATION

Item 1.   Legal Proceedings.........................................................................   48

Item 2.   Changes in Securities and Use of Proceeds.................................................   48

Item 4.   Submission of Matters to a Vote of Security Holders.......................................   48

Item 6.   Exhibits and Reports on Form 8-K..........................................................   49

          Signatures................................................................................   50
</TABLE>

<PAGE>

                              PURE RESOURCES, INC.

                  FORWARD LOOKING INFORMATION AND RISK FACTORS

         Pure Resources, Inc. ("Pure") or its representatives may make forward
 looking statements, oral or written, including statements in this report's
 Management's Discussion and Analysis of Financial Condition and Results of
 Operations, press releases and filings with the Securities and Exchange
 Commission, regarding estimated future net revenues from oil and natural gas
 reserves and the present value thereof, planned capital expenditures (including
 the amount and nature thereof), increases in oil and gas production, the number
 of exploratory and development wells Pure anticipates drilling through 2002,
 potential reserves and Pure's financial position, business strategy and other
 plans and objectives for future operations. Although Pure believes that the
 expectations reflected in these forward looking statements are reasonable,
 there can be no assurance that the actual results or developments anticipated
 by Pure will be realized or, even if substantially realized, that they will
 have the expected effects on its business or operations. Among the factors that
 could cause actual results to differ materially from Pure's expectations are
 general economic conditions, inherent uncertainties in interpreting engineering
 data, operating hazards, delays or cancellations of drilling operations for a
 variety of reasons, competition, fluctuations in oil and gas prices, government
 regulations and other factors set forth in Pure's 2001 Annual Report filed on
 Form 10-K/A Amendment No. 1 and other SEC filings. All subsequent oral and
 written forward looking statements attributable to Pure or persons acting on
 its behalf are expressly qualified in their entirety by these factors. Pure
 assumes no obligation to update any of these statements.

                                       1

<PAGE>

                         PART I - FINANCIAL INFORMATION

 Item 1.  Financial Statements

                              Pure Resources, Inc.

                           Consolidated Balance Sheets
                             (dollars in thousands)

                    ASSETS

<TABLE>
<CAPTION>
                                                                                       June 30,         December 31,
                                                                                        2002               2001
                                                                                    ------------        ------------
                                                                                     (Unaudited)
<S>                                                                                 <C>                 <C>
Current assets:
     Cash and cash equivalents                                                      $      3,704        $      5,593
     Accounts receivable:
        Oil and gas                                                                       53,171              54,946
        Other                                                                             11,775              11,227
     Fair value of derivatives (Note 8)                                                        -               4,918
     Prepaid expenses and other current assets                                             3,216               1,761
                                                                                    ------------        ------------
              Total current assets                                                        71,866              78,445
                                                                                    ------------        ------------

Property, plant and equipment, at cost:
     Oil and gas properties, using the successful efforts method of accounting:
        Proved properties                                                              2,041,581           1,957,723
        Unproved properties                                                               45,108              64,051
     Accumulated depletion, depreciation and amortization                               (787,280)           (714,415)
                                                                                    ------------        ------------
                                                                                       1,299,409           1,307,359
                                                                                    ------------        ------------

Other property and equipment, net                                                         15,799              16,629

Deferred compensation (Note 4)                                                            11,152              14,982

Receivables for under-delivered gas                                                        5,070               5,853

Fair value of derivatives (Note 8)                                                           212                   -

Other assets, net                                                                          9,325              11,540
                                                                                    ------------        ------------

                                                                                    $  1,412,833        $  1,434,808
                                                                                    ============        ============
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       2

<PAGE>

                              Pure Resources, Inc.

                           Consolidated Balance Sheets
                             (dollars in thousands)


                      LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                  June 30,         December 31,
                                                                                     2002             2001
                                                                              ----------------    ---------------
                                                                              (Unaudited)
<S>                                                                           <C>                 <C>
Current liabilities:
     Accounts payable and accrued liabilities:
        Trade                                                                     $    48,779        $    60,713
        Fair value of derivatives (Note 8)                                              2,068                620
        Other (Note 9)                                                                 58,996             52,518
                                                                              ----------------    ---------------
              Total current liabilities                                               109,843            113,851

Long-term debt                                                                        570,636            586,703

Liabilities for over-delivered gas                                                     14,168             11,325

Accrued abandonment, restoration and environmental liabilities                         24,807             22,611

Fair value of derivatives (Note 8)                                                        596                721

Deferred income taxes                                                                 128,936            135,269
                                                                              ----------------    ---------------

              Total liabilities                                                       848,986            870,480
                                                                              ----------------    ---------------


Common stock subject to repurchase (Note 4)                                            92,149             69,800

Minority interest                                                                       6,971              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; 50,325,511
        and 50,206,347 shares issued and outstanding at June 30, 2002
        and December 31, 2001, respectively                                               503                502
     Additional paid-in capital                                                       328,055            345,310
     Notes receivable - officers and employees (Note 13)                               (7,401)            (7,377)
     Deferred compensation (Note 4)                                                    (1,003)            (1,517)
     Accumulated other comprehensive income                                             2,169             10,098
     Retained earnings                                                                142,404            141,067
                                                                              ----------------    ---------------
              Total stockholders' equity                                              464,727            488,083
                                                                              ----------------    ---------------
     Commitments and contingencies (Note 4)
                                                                                  $ 1,412,833        $ 1,434,808
                                                                              ================    ===============
</TABLE>

              See accompanying notes to consolidated financial statements.

                                       3

<PAGE>

                                      Pure Resources, Inc.

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

<TABLE>
<CAPTION>
                                                                      Three Months Ended June 30,     Six Months Ended June 30,
                                                                      ---------------------------    --------------------------
                                                                          2002            2001          2002            2001
                                                                      -----------    ------------    -----------     ----------
<S>                                                                   <C>            <C>             <C>             <C>
Revenues:
     Oil sales                                                          $ 48,917        $ 45,827        $ 87,108       $ 93,613
     Gas sales                                                            61,203          86,021         110,416        162,890
     Other operating                                                         989               -           1,847              -
     Gain on sale of assets                                                   65             427             201            449
                                                                      ----------     -----------     -----------     ----------
                  Total revenues                                         111,174         132,275         199,572        256,952
                                                                      ----------     -----------     -----------     ----------

Expenses:
     Oil and gas production                                               21,196          21,211          41,877         36,819
     Production and other taxes                                            7,988           9,202          16,179         18,523
     General and administrative                                            6,441           8,770          12,538         14,956
     Amortization of deferred compensation (general
       and administrative)                                                  (618)          5,992           7,648         18,685
     Exploration and abandonment (Note 10)                                12,738           6,466          20,829          9,805
     Depletion, depreciation and amortization                             42,287          36,301          80,808         60,304
     Office closure costs                                                    954               -             954              -
                                                                      ----------     -----------     -----------     ----------
                  Total expenses                                          90,986          87,942         180,833        159,092
                                                                      ----------     -----------     -----------     ----------
                  Operating income                                        20,188          44,333          18,739         97,860
                                                                      ----------     -----------     -----------     ----------

Other income (expense):
     Interest income                                                         381             275             881            471
     Interest expense                                                     (8,353)         (6,986)        (16,802)       (11,036)
     Other                                                                  (277)            129          (1,457)         1,280
                                                                      ----------     -----------     -----------     ----------
                  Income before income taxes and minority interest        11,939          37,751           1,361         88,575

Income tax expense                                                        (2,897)        (12,313)           (117)       (30,099)

Minority interest                                                           (363)           (200)           (526)          (359)
                                                                      ----------     -----------     -----------     ----------
                  Income from continuing operations                        8,679          25,238             718         58,117
                                                                      ----------     -----------     -----------     ----------

Discontinued operations, net of tax (Note 12):
     Income from operations                                                    -             339             181            875
     Gain on disposal                                                          -               -             436              -
                                                                      ----------     -----------     -----------     ----------
                  Income from discontinued operations                          -             339             617            875
                                                                      ----------     -----------     -----------     ----------
                  Net income                                            $  8,679        $ 25,577        $  1,335       $ 58,992
                                                                      ==========     ===========     ===========     ==========


                  Income per share from continuing operations - basic   $   0.17        $   0.50        $   0.01       $   1.16
                                                                      ==========     ===========     ===========     ==========

                  Net income per share - basic                          $   0.17        $   0.51        $   0.03       $   1.18
                                                                      ==========     ===========     ===========     ==========

                  Income per share from continuing operations -
                  assuming dilution                                     $   0.17        $   0.49        $   0.01       $   1.13
                                                                      ==========     ===========     ===========     ==========

                  Net income per share - assuming dilution              $   0.17        $   0.50        $   0.03       $   1.15
                                                                      ==========     ===========     ===========     ==========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       4

<PAGE>

                               Pure Resources, Inc.

                 Unaudited Consolidated Statements of Cash Flows
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                      Three Months Ended June 30,      Six Months Ended June 30,
                                                                     ----------------------------   -----------------------------
                                                                        2002           2001             2002            2001
                                                                     -------------  -------------   --------------  -------------
<S>                                                                      <C>           <C>              <C>            <C>
Cash flows from operating activities:
    Net income                                                           $  8,679      $  25,577        $   1,335      $  58,992
    Adjustment to reconcile net income to net cash provided by
       operating activities:
          Depletion, depreciation and amortization                         42,287         36,301           80,808         60,304
          Amortization of deferred compensation                              (618)         5,992            7,648         18,685
          Non-cash effect of derivatives                                   (2,684)        (2,553)          (6,169)        (6,781)
          Exploration and abandonments                                      8,611          3,388           12,302          4,741
          Gain on sale of assets                                              (65)          (427)            (201)          (449)
          Deferred income taxes                                              (740)         1,463             (877)         5,824
          Non-cash effect of discontinued operations, net                       -            612               98          1,208
          Other items                                                         326            567              359           (136)
    Changes in assets and liabilities, excluding acquisitions:
          Accounts receivable                                              (6,024)         6,904            1,058          4,780
          Prepaid expenses and other current assets                           439           (161)          (1,527)          (860)
          Receivables for under-delivered gas                                 514          2,110              783          3,419
          Other assets                                                        901           (698)             432           (850)
          Accounts payable and accrued liabilities                        (16,751)         8,816           (5,188)         7,347
          Income taxes payable                                              2,025          1,052            2,882         11,481
          Liabilities for over-delivered gas                                1,220         (4,226)           2,843         (5,239)
                                                                     -------------  -------------  ---------------  -------------
            Total adjustments                                              29,441         59,140           95,251        103,474
                                                                     -------------  -------------  ---------------  -------------
            Net cash provided by operating activities                      38,120         84,717           96,586        162,466
                                                                     -------------  -------------  ---------------  -------------

Cash flows from investing activities:
    Acquisitions, net of cash acquired                                          -       (146,583)               -       (146,583)
    Investment in oil and gas properties                                  (49,120)       (63,329)        (108,557)      (378,858)
    Additions to other property and equipment                              (1,435)        (9,366)          (2,947)       (10,495)
    Proceeds from sale of assets                                            1,613          1,413            4,763          1,964
    Proceeds from sale of assets - discontinued operations                      -              -           22,450              -
    Notes receivable - officers and employees                                 276              -              276              -
                                                                     -------------  -------------  ---------------  -------------
                Net cash used in investing activities                     (48,666)      (217,865)         (84,015)      (533,972)
                                                                     -------------  -------------  ---------------  -------------

Cash flows from financing activities:
    Proceeds from  (payments of) revolving debt, net                        9,000       (120,100)         (16,200)       119,755
    Proceeds from long-term debt                                                -        347,354                -        347,354
    Payments of long-term debt                                                  -        (87,436)               -        (87,436)
    Exercise of stock options                                               1,372          1,292            1,765          1,340
    Other financing activities                                                 (1)        (2,883)             (25)         2,117
                                                                     -------------  -------------  ---------------  -------------
            Net cash provided by (used in) financing activities            10,371        138,227          (14,460)       383,130
                                                                     -------------  -------------  ---------------  -------------

            Net increase (decrease) in cash and cash equivalents             (175)         5,079           (1,889)        11,624

Cash and cash equivalents, beginning of period                              3,879          9,870            5,593          3,325
                                                                     -------------  -------------  ---------------  -------------

Cash and cash equivalents, end of period                                 $  3,704      $  14,949        $   3,704      $  14,949
                                                                     =============  =============  ===============  =============
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       5

<PAGE>

                              PURE RESOURCES, INC.
                   Notes to Consolidated Financial Statements
                             June 30, 2002 and 2001
                                   (Unaudited)

(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").
Subsequent to the merger with Titan and at the present, Union Oil owns
32,709,067 shares of Pure's common stock, which is approximately 65% of Pure's
outstanding shares at June 30, 2002.

         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.

         Other

         In the opinion of management, the unaudited consolidated financial
statements of Pure as of June 30, 2002 and for the three and six months ended
June 30, 2002 and 2001 include the adjustments and accruals which are necessary
for a fair presentation of the results for the interim periods. These interim
results are not necessarily indicative of results for a full year.

       Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted in this Form 10-Q pursuant
to the rules and regulations of the Securities and Exchange Commission. These
consolidated financial statements should be read in conjunction with the audited
financial statements and notes thereto included in Pure's 2001 Annual Report
filed on Form 10-K/A Amendment No. 1.

         Preparation of the accompanying unaudited 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.

         Reclassifications

         Certain reclassifications have been made to the 2001 amounts to conform
to the 2002 presentation.

         Recently Issued or Adopted Accounting Pronouncements

         In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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

                                       6

<PAGE>

effective for years beginning after June 15, 2002, with earlier application
encouraged. As of June 30, 2002, 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 from that of SFAS
No. 121, except as to the reporting of asset disposals related to discontinued
operations.

     In April 2002, Pure adopted SFAS No. 145, "Rescission of SFAS No. 4, 44,
and 64, Amendment of SFAS No. 13, and Technical Corrections." This Statement
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt",
and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements". This Statement also rescinds or amends
other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The adoption of SFAS No. 145 did not have an effect on Pure's
financial position and results of operations.

     In July 2002, FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities" which establishes requirements for financial
accounting and reporting for costs associated with exit or disposal activities.
This standard is effective for exit or disposal activities initiated after
December 31, 2002. Pure is assessing the impacts this could have on its future
financial statements.

(2)  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 purchase price 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                                   12,679
     Severance and non-compete payments                          20,390
     Acquisition and other related costs                          6,384
                                                              ---------
     Purchase price                                           $ 277,859
                                                              =========

                                       7

<PAGE>

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

     Recorded amount of assets acquired                     $ 372,619
     Assumed debt                                             (87,436)
     Deferred income taxes                                    (36,217)
     Liabilities assumed                                      (75,996)
                                                            ---------

     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 the partnership, which holds certain of the oil and
gas properties, involved in this transaction. The transaction was funded under
Pure's credit facilities. Pure accounted for this transaction on the purchase
method and allocated the transaction value as follows (in thousands):

     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
                                                                       =========

     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).

     Pro Forma Results of Operations (Unaudited)

     The following table reflects the pro forma results of operations for the
six months ended June 30, 2001 as though (a) the International Paper transaction
and (b) the Hallwood merger each occurred as of January 1, 2001. The pro forma
amounts are not necessarily indicative of the results that may be reported in
the future (in thousands, except per share data).

                                                               2001
                                                            -----------

     Revenues                                                $ 309,142
     Net income                                              $  65,064
     Net income per common share - basic                     $    1.30
     Net income per common share - assuming dilution         $    1.26

                                       8

<PAGE>

(3)  Debt

                                            June 30,         December 31,
                                              2002               2001
                                         ----------------   ---------------
                                                   (in thousands)

       5-Year Revolver                   $        65,500     $      58,000
       3-Year Revolver                           157,500           175,000
       Working Capital Revolver                        -             6,200
       7.125% Senior Notes, Due 2011             350,000           350,000
       Senior Notes discount                      (2,364)           (2,497)
                                         ----------------   ---------------
                                         $       570,636     $     586,703
                                         ================   ===============

     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 June 30, 2002, Pure is paying .875% 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
rating with, both, S&P and Moody's changes (i.e. improvement in Pure's debt
rating decreases its margins). At June 30, 2002, 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

                                       9

<PAGE>

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 June 30, 2002 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, if any, 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.

     Maturities of debt are as follows (in thousands):

        2002                               $      -
        2003                                      -
        2004                                157,500
        2005                                 65,500
        2006                                      -
     Thereafter                             350,000

                                       10

<PAGE>

(4)  Commitments and Contingencies

     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.

     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 5, Pure had accrued $4.4 million and $4.6 million at
June 30, 2002 and December 31, 2001, respectively, for estimated future
environmental assessment and remediation costs at various sites where
liabilities for such costs are probable.

                                       11

<PAGE>

         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
     2,796,107 Pure shares held subject to the put right at June 30, 2002). At
     June 30, 2002, with the net asset value per share of $20.86, Pure's
     obligation to purchase this common stock was approximately $58.3 million.

..    Acquired by the officer pursuant to exercises of stock options currently
     held or granted in the future, (see Note 6 for the shares underlying the
     stock option subject to the put right at June 30, 2002 and the applicable
     exercise prices). At June 30, 2002, there were 4,100,584 stock options
     subject to the put right, of which 4,090,041 had exercise prices that were
     less than the net asset value per share of $20.86 at June 30, 2002. Pure
     would receive proceeds of approximately $51.5 million if the 4,090,041 of
     stock options were exercised and Pure's obligation to purchase the
     4,090,041 shares, at the net asset value per share of $20.86 at June 30,
     2002, was approximately $85.3 million. Accordingly, Pure's net obligation
     related to the stock options subject to the put right at June 30, 2002 was
     approximately $33.8 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:

..    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 June 30, 2002, 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 $20.86, is estimated to be
$92.1 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 $69.2 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 $573 million at June 30, 2002. The
calculated number

                                       12

<PAGE>

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 June 30, 2002, the net asset value per share (based on the data
above) was estimated to be $20.86 and Pure's common stock price closed at $20.80
per share.

         The $92.1 million reflected in the consolidated balance sheet at June
30, 2002 as common stock subject to repurchase is based on the net asset value
per share of $20.86 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).

         The gross deferred compensation related to Pure's potential obligations
to purchase the covered shares (including shares underlying stock options),
which at June 30, 2002 was approximately $34 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 June 30,
          2002; 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 2002, 2001 and 2000, Pure recorded approximately $7.1 million, $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 June 30,
2002 the deferred compensation reflected in the consolidated balance sheet of
$11.2 million is computed by taking the gross deferred compensation of $34
million less the compensation expense recorded in 2002, 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." As a result of this treatment, during the
three and six months ended June 30, 2002, additional paid-in capital was
decreased by $29.8 million and $19.0 million, respectively.

         At June 30, 2002, Pure recorded as common stock subject to repurchase
$92.1 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 $92.1 million nor more than $103.9 million at June 30, 2002. 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

                                       13

<PAGE>

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 June 30, 2002, under this provision is
        approximately $6.2 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.

      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.

                                       14

<PAGE>

         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.

         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 2 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 June 30, 2002 is
approximately $58.3 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.

(5)      Accrued Abandonment, Restoration and Environmental Liabilities

         At June 30, 2002 and December 31, 2001, Pure had accrued $20.4 million
and $18.0 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 $57.2 million at June 30, 2002 and $58.6
million at December 31, 2001. 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 $4.4
million and $4.6 million as of June 30, 2002 and December 31, 2001,
respectively. As part of the Hallwood merger, Pure recorded approximately $3.5
million in estimated environmental remediation obligations.

(6)      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.

                                       15

<PAGE>


         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.

         The following table calculates the number of shares or options
available to grant under Pure's 1999 Incentive Plan as of June 30, 2002:

<TABLE>
<S>                                                                           <C>
         Common stock outstanding                                                50,325,511
         Options awarded under the Pure 1999 Incentive Plan                       6,453,743
         Assumed options from Titan                                                 458,011
         Options exercised                                                         (320,751)
         Options cancelled/forfeited                                               (380,373)
         Common stock equivalents                                               -----------
                                                                                 56,536,141
                                                                                ===========

         Maximum shares/options allowed under the Pure 1999 Incentive Plan        6,784,337

         Less: Outstanding awards under the Pure 1999 Incentive Plan             (5,841,090)
               Outstanding options under the Titan Plans                           (369,540)
                                                                                -----------
         Shares/options available for future grant                                  573,707
                                                                                ===========
</TABLE>

         Pure has granted approximately 2.3 million options to non-officers
since the inception of the Pure 1999 Incentive Plan. 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.

The following table sets forth the stock options held by Pure's officers as of
June 30, 2002:

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

                                 $ 8.58                 15,629
                                   9.30              2,290,000
                                  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
                                  19.60                 10,014
                                  21.36                  6,241
                                  26.89                  4,302
                                                    ----------

                                                     4,100,584
                                                    ==========

                                       16

<PAGE>

(7)  Earnings per Share

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

<TABLE>
<CAPTION>
                                                                        Three Months Ended June 30,      Six Months Ended June 30,
                                                                       -----------------------------    ----------------------------
                                                                          2002             2001            2002            2001
                                                                       -------------   -------------    -------------  -------------
                                                                                  (in thousands except per share amounts)
<S>                                                                     <C>             <C>              <C>            <C>
Numerator:

   Income from continuing operations and numerator for basic
   and dilated income per share from continuing operations              $     8,679     $    25,238      $       718    $    58,117
                                                                       =============   =============    =============  =============

   Net income and numerator for basic and diluted net income
   per share                                                            $     8,679     $    25,577      $     1,335    $    58,992
                                                                       =============   =============    =============  =============

Denominator:
   Denominator for basic income per share from continuing operations
   and net income - weighted average common shares                           50,281          50,067           50,233         50,053

   Effect of dilutive securities - employee stock options
   not subject to "put" right                                                   342             338              318            305

   Dilutive effect of officers' stock options
   subject to the "put" right under employment/severance
   agreements (Note 4)                                                        1,173           1,006            1,111          1,042

   Dilutive effect of officers' individual common stock held
   subject to the "put" right under employment/severance
   agreements (Note 4)                                                            -               -                -             99
                                                                       -------------   -------------    -------------  -------------


   Denominator for diluted income per share from continuing
   operations and net income - adjusted weighted average
   common shares and assumed conversions                                     51,796          51,411           51,662         51,499
                                                                       =============   =============    =============  =============

   Basic income per share from continuing operations                   $      0.17     $      0.50      $      0.01    $      1.16
                                                                       =============   =============    =============  =============

   Diluted income per share from continuing operations                 $      0.17     $      0.49      $      0.01    $      1.13
                                                                       =============   =============    =============  =============


   Basic net income per share                                           $      0.17     $      0.51      $      0.03    $      1.18
                                                                       =============   =============    =============  =============

   Diluted net income per share                                         $      0.17     $      0.50      $      0.03    $      1.15
                                                                       =============   =============    =============  =============
</TABLE>

     Employee stock options to purchase 6,210,630 shares of common stock were
outstanding at June 30, 2002, but only 6,123,519 and 6,107,578 for the three and
six months ended June 30, 2002, respectively 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 for the period of the common
stock of Pure.

     Employee stock options to purchase 5,744,104 shares of common stock were
outstanding at June 30, 2001, but only 3,986,364 and 4,015,500 for the three and
six months ended June 30, 2001 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 for the period of the common stock of
Pure.

                                       17

<PAGE>

(8)  Derivative Financial Instruments

         In 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 which resulted in recording a $17.5
million, ($11.4 million net of tax) decline in fair value to accumulated other
comprehensive income. At June 30, 2002, 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 $2.1
million, net of tax. For the three-months ended June 30, 2002 and 2001, other
income includes approximately ($209,000) and $172,000 of gain (loss) from
changes in fair value of derivatives not qualifying as hedges and approximately
$204,000 and ($17,000) of gain (loss) from the ineffective portion of the cash
flow hedges, respectively. For the six months ended June 30, 2002 and 2001,
other income includes approximately $224,000 and $981,000 of gain from changes
in fair value of derivatives not qualifying as hedges and approximately ($1.4
million) and $375,000 of gain (loss) from the ineffective portion of cash flow
hedges, respectively.

         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 certain Enron subsidiaries. At the
termination date of the contracts, Enron's subsidiaries 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 June 30,
 2002:

<TABLE>
<CAPTION>
                                                                            2002                 2003
                                                                       ------------------   -----------------
<S>                                                                     <C>                  <C>
            Gas related derivatives:
               Collar and swap options:
                    Volume (MMBtu)                                        12,427,200           7,300,000
                    Index price per MMBtu (floor-ceiling prices)         $2.50 - $3.96       $3.75 - $4.53


               Basis differential swaps:
                    Volume (MMBtu)                                          180,000            7,300,000
                    Index price per MMBtu                                $0.16 - $0.31       $0.18 - $0.36


            Oil related derivatives:
               Collar and swap options:
                    Volume (Bbls)                                           36,800                     -
                    Index price per Bbl (floor-ceiling prices)          $24.25 - $24.25                -
</TABLE>

                                       18

<PAGE>

         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. The basis
differential swaps lock in the basis differential between NYMEX Henry Hub and
the El Paso Permian or El Paso San Juan delivery points.

         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 June 30, 2002, the above table
includes oil and gas derivatives acquired in the Hallwood merger (a) 147,200
MMBtu's of natural gas at a swap price of $3.96 per MMBtu and (b) 36,800 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. 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 June 30, 2002, 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.

(9)      Other Liabilities

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

<TABLE>
<CAPTION>
                                                          June 30,         December 31,
                                                            2002               2001
                                                      ---------------    ---------------
<S>                                                         <C>                <C>
         Accrued oil and gas production expenses            $ 52,035           $ 48,896
         Income taxes payable                                  4,276              1,394
         Accrued interest payable                              1,500              1,517
         Other                                                 1,185                711
                                                      ---------------    ---------------
                                                            $ 58,996           $ 52,518
                                                      ===============    ===============
</TABLE>

                                       19

<PAGE>

  (10)   Exploration and Abandonment

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

<TABLE>
<CAPTION>
                                                Three months ended June 30,          Six months ended June 30,
                                            --------------------------------     ----------------------------------
                                               2002               2001               2002                2001
                                            -------------     --------------     --------------     ---------------
<S>                                              <C>                <C>                  <C>                 <C>
         Geological and geophysical staff        $ 2,242            $ 1,864              4,522               3,301
         Exploratory dry hole costs                7,414              3,644             10,655               4,023
         Impaired unproved properties              1,197                345              1,647                 718
         Plugging and abandonment costs               81                 18                271                  20
         Seismic costs                             1,044                326              2,454                 926
         Other                                       760                269              1,280                 817
                                            -------------     --------------     --------------     ---------------
                                                $ 12,738            $ 6,466           $ 20,829             $ 9,805
                                            =============     ==============     ==============     ===============
</TABLE>

 (11)    Comprehensive Income

<TABLE>
<CAPTION>
                                                                        Three months ended June 30,   Six months ended June 30,
                                                                       ----------------------------   -------------------------
                                                                            2002          2001           2002           2001
                                                                       ------------   -------------   -----------   -----------
                                                                                             (in thousands)
<S>                                                                        <C>           <C>             <C>         <C>
    Net income                                                             $ 8,679       $ 25,577        $ 1,335     $  58,992


       Cumulative effect of accounting change
          for SFAS No. 133 adoption (a)                                          -              -              -       (11,364)
       Reclassification adjustment for hedging contracts (b)                  (555)         2,025          2,025        10,682
       Changes in fair value of expected cash flows (c)                      1,615         16,958          5,904        18,539
                                                                       ------------   ------------    -----------   -----------

    Comprehensive income                                                   $ 9,739       $ 44,560        $ 9,264     $  76,849
                                                                       ============   ============    ===========   ===========

    ------------

          (a) Net of tax of:                                               $     -       $      -        $     -     $  (6,119)
          (b) Net of tax of:                                               $  (299)      $  1,090        $ 1,090     $   5,752
          (c) Net of tax of:                                               $   869       $  9,125        $ 3,179     $  10,114
</TABLE>

                                       20

<PAGE>

(12)  Discontinued Operations

         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.

         The following are the results of operations from the discontinued
operations:

<TABLE>
<CAPTION>
                                                                Three months ended June 30,      Six months ended June 30,
                                                               -----------------------------   -----------------------------
                                                                  2002              2001           2002             2001
                                                               -------------    ------------   --------------  -------------
                                                                       (dollars in thousands except per share amounts)
<S>                                                                <C>           <C>               <C>              <C>
      Oil and gas sales                                            $      -      $ 1,575           $ 1,075          $ 3,273
      Operating costs                                                     -         (625)             (360)          (1,189)
      Depletion, depreciation and amortization                            -         (429)             (436)            (738)
      Other costs                                                         -            1                 -                -
      Income taxes                                                        -         (183)              (98)            (471)
                                                               ------------- ------------      ------------     ------------
            Income from discontinued operations                           -          339               181              875
                                                               ------------- ------------      ------------     ------------

      Gain on disposal before taxes                                       -            -               671                -
      Income taxes                                                        -            -              (235)               -
                                                               ------------- ------------      ------------     ------------
            Gain on disposal                                              -            -               436                -
                                                               ------------- ------------      ------------     ------------
                  Total income from discontinued operations        $      -      $   339           $   617          $   875
                                                               ============= ============      ============     ============

      Basic income per share:

            Income from discontinued operations                    $      -      $  0.01           $  0.00          $  0.02
            Gain on disposal                                              -            -              0.01                -
                                                               ------------- ------------      ------------     ------------
                  Total income from discontinued operations        $      -      $  0.01           $  0.01          $  0.02
                                                               ============= ============      ============     ============

      Diluted income per share:

            Income from discontinued operations                    $      -      $  0.01           $  0.00          $  0.02
            Gain on disposal                                              -            -              0.01                -
                                                               ------------- ------------      ------------     ------------
                  Total income from discontinued operations        $      -      $  0.01           $  0.01          $  0.02
                                                               ============= ============      ============     ============
</TABLE>

(13)  Notes Receivable - Officers and Employees

         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
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.

         At the May 16, 2002 board of directors meeting, Pure's board extended
until November 11, 2004 the maturity dates of the promissory notes of these
officers and employees.

                                       21

<PAGE>

14)  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 as June 30, 2002 and December 31, 2001 and
for each of the six-month periods ended June 30, 2002 and 2001 for (a) Pure
(Parent), (b) Guarantor subsidiaries and (c) Non-guarantor subsidiaries.
Virtually all of Pure's operations are conducted by Pure's subsidiaries.

                                       22

<PAGE>

Condensed Consolidated Balance Sheet
June 30, 2002
(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                $   1,147      $     2,542        $      15     $          -     $     3,704
              Accounts receivable                          6,267           43,933           14,746                -          64,946
              Other current assets                           279            2,937                -                -           3,216
                                                     ------------  ---------------   --------------   --------------  --------------
                      Total current assets                 7,693           49,412           14,761                -          71,866
                                                     ------------  ---------------   --------------   --------------  --------------

       Properties, net                                         -        1,082,192          233,016                -       1,315,208
       Investment in subsidiaries                        595,267        2,786,481           44,227       (3,425,975)              -
       Deferred compensation                              11,152                -                -                -          11,152
       Other assets                                        4,776            9,142          244,626         (243,937)         14,607
                                                     ------------  ---------------   --------------   --------------  --------------
                      Total assets                     $ 618,888      $ 3,927,227        $ 536,630     $ (3,669,912)    $ 1,412,833
                                                     ============  ===============   ==============   ==============  ==============


Liabilities and equity

       Current liabilities:

              Accounts payable                         $      65      $    44,459        $   4,255     $          -     $    48,779
              Other current liabilities                    7,223           51,270            2,571                -          61,064
                                                     ------------  ---------------   --------------   --------------  --------------
                      Total current liabilities            7,288           95,729            6,826                -         109,843

       Long-term debt                                    570,636                -                -                -         570,636
       Accrued abandonment, restoration and
         environmental liabilities                             -           23,652            1,155                -          24,807
       Deferred income taxes                              (5,848)         142,168           (7,384)               -         128,936
       Other liabilities                                       -           14,159              605                -          14,764
                                                     ------------  ---------------   --------------   --------------  --------------
                      Total liabilities                  572,076          275,708            1,202                -         848,986

       Common stock subject to repurchase                 92,149                -                -                -          92,149

       Minority interest                                       -                -            1,971            5,000           6,971

       Equity                                            (45,337)       3,651,519          533,457       (3,674,912)        464,727
                                                     ------------  ---------------   --------------   --------------  --------------
                      Total liabilities and equity     $ 618,888      $ 3,927,227        $ 536,630     $ (3,669,912)    $ 1,412,833
                                                     ============  ===============   ==============   ==============  ==============
</TABLE>

                                       23

<PAGE>

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
                                                   -----------    -----------   -----------        -----------        -----------
                    Total liabilities                  595,884        274,725          (129)               -              870,480

     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>

                                       24

<PAGE>

Condensed Consolidated Statement of Operations
For the six months ended June 30, 2002
(in thousands)

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

       Oil and gas sales                                        $     -      $ 174,467    $  23,057    $     -      $ 197,524
       Other operating revenues                                       -          2,048          -            -          2,048

                                                                ---------    ---------    ---------    ---------    ---------
              Total revenues                                          -        176,515       23,057          -        199,572
                                                                ---------    ---------    ---------    ---------    ---------

Expenses:

       Operating and other expenses                                 1,038       62,242        7,314          -         70,594
       Amortization of deferred compensation                        7,648         --            -            -          7,648
       Exploration and abandonments                                   -         20,758           71          -         20,829
       Depreciation, depletion and amortization                       592       67,285       12,931          -         80,808
       Office closure costs                                           -            954          -            -            954

                                                                ---------    ---------    ---------    ---------    ---------
              Total expenses                                        9,278      151,239       20,316          -        180,833
                                                                ---------    ---------    ---------    ---------    ---------

              Operating income (loss)                              (9,278)      25,276        2,741          -         18,739

Other income (expense):

       Equity in earnings of subsidiaries                           9,716       70,679       (3,359)     (77,036)         -
       Interest expense                                           (16,779)         (22)          (1)         -        (16,802)
       Other                                                       12,987       (9,759)       4,364       (8,168)        (576)

                                                                ---------    ---------    ---------    ---------    ---------
              Income (loss) before income taxes
               and minority interest                               (3,354)      86,174        3,745      (85,204)       1,361

Income tax benefit (expense)                                        4,689       (4,756)         (50)         -           (117)
Minority interest                                                     -            -           (526)         -           (526)
                                                                ---------    ---------    ---------    ---------    ---------

              Income (loss) from continuing operations              1,335       81,418        3,169      (85,204)         718

Income from discontinued operations                                   -            617          -            -            617
                                                                ---------    ---------    ---------    ---------    ---------

              Net income (loss)                                 $   1,335    $  82,035    $   3,169    $ (85,204)   $   1,335
                                                                =========    =========    =========    =========    =========
</TABLE>

                                       25

<PAGE>

Condensed Consolidated Statement of Operations
For the six months ended June 30, 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                                 $      -        $ 213,953        $ 42,550      $        -       $ 256,503
       Other operating revenues                                 -              449               -               -             449
                                                     -------------  ---------------   -------------  -------------- ---------------
              Total revenues                                    -          214,402          42,550               -         256,952
                                                     -------------  ---------------   -------------  -------------- ---------------

Expenses:

       Operating and other expenses                           865           61,482           7,951               -          70,298
       Amortization of deferred compensation               18,685                -               -               -          18,685
       Exploration and abandonments                             -            9,808              (3)              -           9,805
       Depreciation, depletion and amortization               253           39,955          20,096               -          60,304
                                                     -------------  ---------------   -------------  -------------- ---------------
          Total expenses                                   19,803          111,245          28,044               -         159,092
                                                     -------------  ---------------   -------------  -------------- ---------------

          Operating income (loss)                         (19,803)         103,157          14,506               -          97,860

Other income (expense):

       Equity in earnings of subsidiaries                  82,884           21,631               -        (104,515)              -
       Interest expense                                   (10,660)            (376)              -               -         (11,036)
       Other                                                  182            1,459           7,129          (7,019)          1,751
                                                     -------------  ---------------   -------------  -------------- ---------------
          Income (loss) before income taxes
            and minority interest                          52,603          125,871          21,635        (111,534)         88,575

Income tax expense                                          6,389          (36,483)             (5)              -         (30,099)
Minority interest                                               -                -            (712)            353            (359)
                                                     -------------  ---------------   -------------  -------------- ---------------

          Income (loss) from continuing operations         58,992           89,388          20,918        (111,181)         58,117

Income from discontinued operations                             -              875               -               -             875
                                                     -------------  ---------------   -------------  -------------- ---------------

          Net income (loss)                              $ 58,992        $  90,263        $ 20,918      $ (111,181)      $  58,992
                                                     =============  ===============   =============  ============== ===============
</TABLE>

                                       26

<PAGE>

Condensed Consolidated Statement of Cash Flows
For the six months ended June 30, 2002
(in thousands)

<TABLE>
<CAPTION>
                                                                                          Non-
                                                             Pure         Guarantor     Guarantor
                                                          (Parent)      Subsidiaries   Subsidiaries   Eliminations  Consolidated
                                                        ------------    ------------  --------------  ------------  ------------
<S>                                                     <C>             <C>           <C>             <C>           <C>
Cash flows from operating activities                    $    10,387     $     85,030  $       1,169   $        -    $    96,586

Cash flows from investing activities:

       Capital expenditures and acquisitions                      -         (110,250)        (1,254)           -       (111,504)
       Proceeds from sale of assets                               -            4,763              -            -          4,763
       Proceeds from sale of assets - discontinued
        operations                                                -           22,450                                     22,450
       Other                                                      -              276              -            -            276
                                                        ------------    ------------  --------------  ------------  ------------
               Net cash used in investing activities              -          (82,761)        (1,254)           -        (84,015)
                                                        ------------    ------------  --------------  ------------  ------------

Cash flows from financing activities:

       Change in debt                                       (16,200)               -              -            -        (16,200)
       Other                                                  1,740                -              -            -          1,740
                                                        ------------    ------------  --------------  ------------  ------------
               Net cash provided by (used in)
                 financing activities                       (14,460)               -              -            -        (14,460)
                                                        ------------    ------------  --------------  ------------  ------------

Increase (decrease) in cash and cash equivalents             (4,073)           2,269            (85)           -         (1,889)

Cash and cash equivalents, beginning of period                5,220              273            100            -          5,593
                                                        ------------    ------------  --------------  ------------  ------------
Cash and cash equivalents, end of period                $     1,147     $      2,542  $          15   $        -    $     3,704
                                                        ============    ============  ==============  ============  ============
</TABLE>


Condensed Consolidated Statement of Cash Flows
For the six months ended June 30, 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                    $ (373,220)   $    522,821    $     12,865    $          -  $   162,466

Cash flows from investing activities:

       Capital expenditures and acquisitions                     -        (288,096)       (247,840)              -     (535,936)
       Proceeds from sale of assets                              -           1,964               -               -        1,964
       Other                                                     -        (240,707)              -         240,707            -
                                                        ----------    ------------    ------------    ------------  -----------
               Net cash used in investing activities             -        (526,839)       (247,840)        240,707     (533,972)
                                                        ----------    ------------    ------------    ------------  -----------

Cash flows from financing activities:

       Change in debt                                      379,673               -               -               -      379,673
       Other                                                (1,543)          5,000         240,707        (240,707)       3,457
                                                        ----------    ------------    ------------    ------------  -----------
               Net cash provided by (used in)
                 financing activities                      378,130           5,000         240,707        (240,707)     383,130
                                                        ----------    ------------    ------------    ------------  -----------
Increase (decrease) in cash and cash equivalents             4,910             982           5,732               -       11,624

Cash and cash equivalents, beginning of period                  (4)          3,329               -               -        3,325
                                                        ----------    ------------    ------------    ------------  -----------
Cash and cash equivalents, end of period                $    4,906    $      4,311    $      5,732    $          -     $ 14,949
                                                        ==========    ============    ============    ============  ===========
</TABLE>

                                       27

<PAGE>

 ITEM 2. 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 average
NYMEX price for crude oil and natural gas was $19.30 per barrel and $2.32 per
Mcf for 1999, $30.25 per barrel and $4.32 per Mcf for 2000 and $26.00 per barrel
and $4.14 per Mcf in 2001. In the second quarter of 2002 the average NYMEX
prices were $26.27 per barrel of crude oil and $3.42 per Mcf of natural gas. At
June 30, 2002, the NYMEX prices for crude oil and natural gas were $26.86 per
barrel and $3.25 per Mcf, respectively. By way of comparison, at August 7, 2002,
the NYMEX prices for crude oil and natural gas were $26.50 per barrel and $2.66
per Mcf, respectively.

         In an effort to mitigate the impact of commodity prices Pure, at times,
utilizes financial commodity derivatives. At June 30, 2002, Pure had financial
commodity derivatives for 12,427,200 and 7,300,000 MMBtu of natural gas to
mitigate the impact of natural gas prices on its estimated 2002 and 2003 natural
gas production, respectively. Also, at June 30, 2002, Pure had commodity
derivatives for 36,800 barrels of oil on its estimated 2002 oil production and
none for its 2003 oil 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.

Recent Events

         In the second quarter of 2002, Pure closed its Corpus Christi, Texas
office and consolidated those operations primarily into its Houston, Texas
office. The primary reason for the closure was a reduction in the activities
conducted by the Corpus Christi office and the ability to conduct Pure's south
Texas activities from its Houston office. As a result of this closure, Pure
incurred a charge in the second quarter of 2002 of approximately $1.0 million
related to severance and closure costs. Pure expects to achieve a reduction of
approximately $3.0 to $3.5 million in general and administrative and exploration
staff costs due to the closure.

         In the first quarter of 2002, Pure sold properties located in the
Permian Basin region, with an effective date of January 1, 2002, for
approximately $23 million, subject to adjustments. As a result of selling these
properties, Pure was required to reflect this disposition of assets as
discontinued operations under the provisions of the SFAS No. 144 which Pure was
required to adopt on January 1, 2002.

                                       28

<PAGE>

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 $277.9 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.

         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.

Business Opportunities Agreement

         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.

         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

                                       29

<PAGE>

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
     2,796,107 Pure shares held subject to the put right at June 30, 2002). At
     June 30, 2002, with the net asset value per share of $20.86, Pure's
     obligation to purchase this common stock was approximately $58.3 million.

..    Acquired by the officer pursuant to exercise of stock options currently
     held or granted in the future, (see Note 6 of Notes to Consolidated
     Financial Statements for the shares underlying the stock option subject to
     the put right at June 30, 2002 and the applicable exercise prices). At June
     30, 2002, there were 4,100,584 stock options subject to the put right, of
     which 4,090,041 had exercise prices that were less than the net asset value
     per share of $20.86 at June 30, 2002. Pure would receive proceeds of
     approximately $51.5 million if the 4,090,041 of stock options were
     exercised and Pure's obligation to purchase the 4,090,041, at the net asset
     value per share of $20.86 at June 30, 2002, was approximately $85.3
     million. Accordingly, Pure's net obligation related to the stock options
     subject to the put right at June 30, 2002 was approximately $33.8 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:

..    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 June 30, 2002, 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 $20.86, is estimated to be
$92.1 million (which is reflected in the consolidated balance sheet as the
amount of the common

                                       30

<PAGE>

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 $69.2 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 $573 million at June 30, 2002. 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 June 30, 2002, the net asset value per share (based on the data
above) was estimated to be $20.86 and Pure's common stock price closed at $20.80
per share.

       The $92.1 million reflected in the consolidated balance sheet at June 30,
2002 as common stock subject to repurchase is based on the net asset value per
share of $20.86 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).

       The gross deferred compensation related to Pure's potential obligations
to purchase the covered shares (including shares underlying stock options),
which at June 30, 2002 was approximately $34 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 June 30,
          2002; 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 2002, 2001 and 2000, Pure recorded approximately $7.1 million, $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 June 30,
2002 the deferred compensation reflected in the consolidated balance sheet of
$11.2 million is computed by taking the gross deferred compensation of $34
million less the compensation expense recorded in 2002, 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.

                                       31

<PAGE>

         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." As a result of this treatment, during the
three and six months ended June 30, 2002, additional paid-in capital was
decreased by $29.8 million and $19.0 million, respectively.

         At June 30, 2002, Pure recorded as common stock subject to repurchase
$92.1 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 $92.1 million nor more than $103.9 million at June 30, 2002. 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 June 30, 2002, under this provision is
         approximately $6.2 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.

         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.

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

                                       32

<PAGE>

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. 144 as of January 1, 2002 and SFAS No.
121 for the periods prior to January 1, 2002, 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. Pure had no impairments in 2002 and 2001.

     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 2002. 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 2002; however, Pure's
          management believes its price outlook assumptions were reasonable at
          the time and at June 30, 2002.

     If commodity prices deteriorate from management's view of those prices at
June 30, 2002, it is possible that Pure could incur an impairment during the
remainder of 2002.

     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.

                                       33

<PAGE>

Operating Data

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

<TABLE>
<CAPTION>
                                                                            Three months ended       Six months ended
                                                                                 June 30,                June 30,
                                                                         -----------------------   --------------------
                                                                            2002         2001        2002       2001
                                                                         -----------  ----------   ---------  ---------
<S>                                                                      <C>          <C>          <C>        <C>
Production:
     Oil and condensate (MBbls) ..................................            2,005       1,903       4,029      3,673
     Natural gas (MMcf) ..........................................           22,513      20,812      44,131     35,410
     Total (MBOE) ................................................            5,757       5,372      11,384      9,575

Average daily production:
     Oil and condensate (Bbls) ...................................           22,033      20,912      22,260     20,293
     Natural gas (Mcf) ...........................................          247,396     228,703     243,818    195,635
     Total (BOE) .................................................           63,266      59,029      62,896     52,899

Average sales price per unit (excluding effects of hedging):
     Oil and condensate (per Bbl) ................................         $  24.42    $  24.49    $  21.48   $  25.89
     Natural gas (per Mcf) .......................................         $   2.62    $   4.12    $   2.28   $   4.83
     Total (per BOE) .............................................         $  18.74    $  24.65    $  16.42   $  27.80

Average sales price per unit (including effects of hedging):
     Oil and condensate (per Bbl) ................................         $  24.40    $  24.08    $  21.62   $  25.49
     Natural gas (per Mcf) .......................................         $   2.72    $   4.13    $   2.50   $   4.60
     Total (per BOE) .............................................         $  19.13    $  24.54    $  17.35   $  26.79

Expenses per BOE:
     Production costs, excluding production and other taxes ......         $   3.68    $   3.95    $   3.68   $   3.85
     Production and other taxes ..................................         $   1.39    $   1.71    $   1.42   $   1.93
     General and administrative ..................................         $   1.12    $   1.63    $   1.10   $   1.56
     Depletion, depreciation and amortization ....................         $   7.35    $   6.76    $   7.10   $   6.30
</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 12 of Notes
to Consolidated Financial Statements. The production from the properties
associated with the discontinued operations, not included in the table, were 755
BOE per day for the three months ended June 30, 2001. The production from the
properties associated with the discontinued operations, not included in the
table, were 350 and 725 BOE per day for the six months ended June 30, 2002 and
2001, respectively.

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 merger in May 2001. The
transaction was accounted for as a purchase of Hallwood. Accordingly, the
results of operations since May 1, 2001 for Hallwood have been included in
Pure's results of operations.

         Three-months ended June 30, 2002 as compared to 2001

         Pure's revenues from the sale of oil and natural gas were $48.9 million
and $61.2 million for 2002 and $45.8 million and $86.0 million for 2001,
respectively. Including the effects of hedging, compared with 2001, Pure's 2002
average oil sales prices increased by $0.32 per Bbl, or 1%, while average gas
sales prices decreased by $1.41 per Mcf, or 34%. The increase in production of
385 MBOE in 2002, over the same period in 2001, is primarily the result of the
Hallwood merger and the success of Pure's capital program, offset by normal
production declines. The Hallwood properties contributed approximately 955 MBOE
of production in 2002 as compared to 707 MBOE in 2001, primarily as a result of
2002 having one additional month of production.

         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 this revenue through December 2002 when the
Section 29 credits are currently set to expire.

                                       34

<PAGE>

         Pure's oil and gas production expenses, excluding production and other
taxes, were $21.2 million ($3.68 per BOE) and $21.2 million ($3.95 per BOE) for
2002 and 2001, respectively. In 2002 as compared to 2001, production expenses
include one additional month of costs associated with the Hallwood properties.
Pure is starting to realize the effects of reduced electricity prices as a
result of deregulation in the state of Texas. Production expenses decreased
$0.27 per BOE which is the result of increased production in 2002.

         Production and other taxes were $8.0 million ($1.39 per BOE) and $9.2
million ($1.71 per BOE) for 2002 and 2001, respectively. The decrease in
production and other taxes is primarily attributable to the decrease in oil and
gas revenues resulting from the decreased commodity prices.

         General and administrative ("G&A") expenses were $6.4 million ($1.12
per BOE) and $8.8 million ($1.63 per BOE) for 2002 and 2001, respectively. G&A
costs primarily decreased $2.4 million as a result of closing its Hallwood
offices in early August 2001. The decrease in the per unit amount of G&A costs
primarily relates to the increased production.

         Depletion, depreciation, and amortization expense ("DD&A") was $42.3
million ($7.35 per BOE) and $36.3 million ($6.76 per BOE) for 2002 and 2001,
respectively. DD&A increased in absolute amounts due primarily to the inclusion
of the properties from the Hallwood merger , Pure's capital program for 2002 and
inclusion, in 2002, of approximately $1.4 million of additional DD&A from the
Hallwood properties as a result of finalizing the purchase price allocation. The
increase in the per unit amount is primarily attributable to (a) the per unit
acquisition costs from the Hallwood merger and (b) the additional DD&A recorded
relative to the Hallwood properties as previously discussed.

         Pure's exploration and abandonment expense was $12.7 million and $6.5
million for 2002 and 2001, 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 Hallwood merger, (b) exploratory dry hole
costs, (c) seismic and (d) increase in impairment of unproved properties. The
significant increase in exploratory dry hole costs is related to the increase in
the exploratory capital expended in 2002 as compared to 2001 which exposed Pure
to the risk of increased dry hole costs.

         In 2002 and 2001, Pure had interest expense due to (a) Pure's
significant capital expenditure program in 2001 and continuing into 2002 and (b)
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.

         In 2002 and 2001, other income (expense) includes ($5,000) and $155,000
of gain (loss) 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, respectively.

         Income tax expense was $2.9 million and $12.3 million for 2002 and
2001, respectively. The effective income tax rates (from continuing and
discontinued operations combined) for 2002 and 2001 were approximately 24% and
33%, respectively. The lower effective tax rate is primarily due to the increase
in the Section 29 credits from properties acquired in 2001 and based on Pure's
current expectations for 2002.

                                       35

<PAGE>

         Six-months ended June 30, 2002 as compared to 2001

         Pure's revenues from the sale of oil and natural gas were $87.1 million
and $110.4 million for 2002 and $93.6 million and $162.9 million for 2001,
respectively. Including the effects of hedging, compared with 2001, Pure's 2002
average oil sales prices decreased by $3.87 per Bbl, or 15%, while average gas
sales prices decreased by $2.10 per Mcf, or 46%. The increase in production of
1,809 MBOE in 2002, over the same period in 2001, is primarily the result of the
International Paper transaction, Hallwood merger and the success of Pure's
capital program, offset by normal production declines. The International Paper
transaction and Hallwood properties contributed approximately 3,366 MBOE of
production in 2002 as compared to 2,409 MBOE in 2001. Production for 2002
includes one additional month of production from the International Paper
transaction and four additional months of production from the Hallwood merger,
as compared to 2001.

         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 this revenue through December 2002 when the
Section 29 credits are currently set to expire.

         Pure's oil and gas production expenses, excluding production and other
taxes, were $41.9 million ($3.68 per BOE) and $36.8 million ($3.85 per BOE) for
2002 and 2001, respectively. Production expenses increased $5.1 million, which
is primarily the result of production cost increases associated with the
International Paper transaction properties of $1.3 million and Hallwood merger
properties of $3.4 million. Pure is starting to realize the effects of reduced
electricity prices as a result of deregulation in the state of Texas.

         Production and other taxes were $16.2 million ($1.42 per BOE) and $18.5
million ($1.93 per BOE) for 2002 and 2001, respectively. The decrease in
production and other taxes is primarily attributable to the decrease in oil and
gas prices, offset by the associated additional production from the assets in
the International Paper transaction and the Hallwood merger in 2002.

         General and administrative ("G&A") expenses were $12.5 million ($1.10
per BOE) and $15.0 million ($1.56 per BOE) for 2002 and 2001, respectively. G&A
costs decreased $2.5 million between periods. After reimbursing IP for two
months of G&A costs in 2001, Pure's G&A costs related to the IP assets were less
in the 2nd quarter of 2001 and all of 2002. Pure incurred G&A costs in 2001
related to Hallwood prior to the closing of its offices in early August 2001.
The decrease in the per unit amount of G&A costs relates to the increased
production and reduced G&A costs.

         Depletion, depreciation, and amortization expense ("DD&A") was $80.8
million ($7.10 per BOE) and $60.3 million ($6.30 per BOE) for 2002 and 2001,
respectively. DD&A increased in absolute amounts due primarily to the inclusion
of the properties from the International Paper transaction, the Hallwood merger,
Pure's capital program for 2002 and inclusion, in 2002, of approximately $1.4
million of additional DD&A from the Hallwood properties as a result of
finalizing the purchase price allocation. 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 additional DD&A
recorded relative to the Hallwood properties as previously discussed.

         Pure's exploration and abandonment expense was $20.8 million and $9.8
million for 2002 and 2001, 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 International Paper transaction and Hallwood
merger, (b) exploratory dry hole costs, (c) seismic and (d) increase in
impairment of unproved properties. The significant increase in exploratory dry
hole costs is related to the increase in the exploratory capital expended in
2002 as compared to 2001 which exposed Pure to the risk of increased dry hole
costs.

         In 2002 and 2001, Pure had interest expense due to (a) Pure's
significant capital expenditure program in 2001, (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.

         In 2002 and 2001, other income (expense) includes ($1.2 million) and
$1.4 million of gain (loss) 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, respectively.

                                       36

<PAGE>

         Income tax expense was $117,000 and $30.1 million for 2002 and 2001,
respectively. The effective income tax rates (from continuing and discontinued
operations combined) for 2002 and 2001 was approximately 19% and 34%,
respectively. The lower effective tax rate is primarily due to the increase in
the Section 29 credits from properties acquired in 2001 and based on Pure's
current expectation for 2002.

         In the first six months 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 $671,000. 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 2002 and 2001,
the results of operations, before income taxes, from these assets was
approximately $279,000 and $1.3 million, respectively.

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 $287 million was available at June 30, 2002. 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 $38.1 million for the
three months ended June 30, 2002 compared to $84.7 million for the 2001 period.
Cash flow from operating activities for Pure was $96.6 million for the six
months ended June 30, 2002 compared to $162.5 million for the 2001 period. The
decrease in net cash provided by operating activities was primarily due to
decreased commodity prices between comparable quarters, offset by (a) Pure's
significant capital expenditure program in 2001, (b) the Hallwood merger and (c)
the International Paper transaction. 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 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 and (e) $2 million in other
corporate items. As noted in the fourth quarter of 2001, due to declines in
commodity prices, Pure reviewed its 2002 drilling and related capital spending
plan and expected approximately $105 to $150 million to be spent in 2002. Pure
recently reevaluated its remaining 2002 capital spending plan and expects it may
spend less than $225 million but more than $150 million. Pure will maintain
flexibility to accelerate or decrease 2002 capital spending depending on
commodity prices. 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.

                                       37

<PAGE>

         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.

<TABLE>
<CAPTION>
                                               Three months ended June 30,            Six months ended June 30,
                                              --------------------------------     ---------------------------------
                                                  2002               2001               2002               2001
                                              -------------    ---------------     --------------     --------------
                                                                          (in thousands)
          <S>                                 <C>              <C>                 <C>                <C>
          Property acquisition (a):
                  Proved                       $    24,637      $     299,584       $     24,859       $    568,517
                  Unproved                         (11,925)            34,451             (7,910)            42,065
          Exploration                               29,813              9,361             54,170             17,200
          Development                               16,538             47,996             41,293             86,533
                                              -------------    ---------------     --------------     --------------

                  Total costs incurred         $    59,063      $     391,392       $    112,412       $    714,315
                                              =============    ===============     ==============     ==============
</TABLE>

______________
(a)  In the 2/nd/ quarter of 2002, Pure completed the analysis of its allocated
     fair values to oil and gas properties related to the Hallwood merger. As a
     result, Pure reclassed approximately $16.9 million from unproved to proved
     property acquisition costs. Accordingly, in the second quarter of 2002,
     Pure recorded an additional $1.4 million of depletion expense to capture
     the effects of the reclass since the date of the Hallwood merger.

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 $287 million was available at June 30, 2002. Pure has
significant contractual obligations in the future that will require capital
resources. The following table is a summary of the significant contractual
obligations at June 30, 2002:

<TABLE>
<CAPTION>
                                                                                   Obligations Due in Period
                                                    --------------------------------------------------------------------------------
               Contractual Cash Obligations             2002           2003-2004         2005-2006        Thereafter        Total
         -----------------------------------------  ---------------  ---------------  ----------------  ---------------  -----------
                                                                                      (in thousands)
         <S>                                        <C>              <C>              <C>               <C>              <C>
         7.125% senior notes                         $         -      $         -     $           -      $   350,000     $ 350,000
         5-Year Revolver                                       -                -            65,500                -        65,500
         3-Year Revolver                                       -          157,500                 -                -       157,500
         Working Capital Revolver                              -                -                 -                -             -
         Non-cancelable operating leases                   1,289            5,041             4,758            1,367        12,455
         Non-cancelable subleases                           (155)            (778)             (909)               -        (1,842)
         Commodity derivatives                             1,895             (934)                -                -           961
         Interest rate derivatives                           451            1,039                 -                -         1,490
         Common stock subject to repurchase (a)                -                -                 -           92,149        92,149
                                                    -------------    -------------   ---------------    -------------   -----------
         Total contractual cash obligations          $     3,480      $   161,868     $      69,349      $   443,516     $ 678,213
                                                    =============    =============   ===============    =============   ===========
</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 would 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.

                                       38

<PAGE>

         At June 30, 2002, Pure had the following financial commitments:

<TABLE>
<CAPTION>
                                                                                Commitment Expiration per Periods
                                                       ----------------------------------------------------------------------
                      Financial Commitments                  2002       2003-2004     2005-2006       Thereafter        Total
            ----------------------------------------   ------------    -----------   ------------   ------------  -----------
                                                                              (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                                11,723             -               -           -          11,723
            Standby letters of credit                             -             -               -           -             -
            Pure guarantees                                       -             -               -           -             -
                                                       ------------    -----------   ------------   ------------  -----------
            Total contractual financial commitments    $     21,723    $   275,000   $    235,000   $       -     $   531,723
                                                       ============    ===========   ============   ============  ===========
</TABLE>

         At June 30, 2002, of the financial commitments under Pure's 3-Year
Revolver, 5-Year Revolver and Working Capital Revolver, there was $117.5
million, $169.5 million and $10 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 June 30, 2002, the common stock subject to repurchase was
approximately $92.1 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 $69.2 million to $155.4 million. Accordingly, the exercise of
the put right could require substantial financial resources, in excess of those
available at June 30, 2002, 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 June 30, 2002, $65.5 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 June 30, 2002, Pure is paying .875% 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.

                                       39

<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 June 30, 2002, $157.5 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
rating with S&P and Moody's changes (i.e. improvement in Pure's debt rating
decreases its margins). At June 30, 2002, 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 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 the present, Pure does not have
any obligations whose payment would be accelerated in the event of a downgrade
of Pure's credit rating.

                                       40

<PAGE>

Liquidity and Working Capital

         At June 30, 2002, Pure had $3.7 million of cash and cash equivalents.
Pure's ratio of current assets to current liabilities was 0.65 at June 30, 2002.
Pure maintains low cash levels for cash management purposes. Pure, at June 30,
2002, 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 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. 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 June 30, 2002, there was no outstanding principal under
the Working Capital Revolver. Pure has the ability and intent to finance the
principal outstanding, if any, under the Working Capital Revolver utilizing
Pure's long-term revolving credit facilities.

Other Matters

         Stock Options and Compensation Expense

         Pure has issued approximately 6.5 million options to purchase Pure
common stock to officers and non-officers since the formation of Pure. 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
2002, 2001 and 2000, Pure expensed approximately $511,000, $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 4 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 2,796,107 shares held subject
to the put right at June 30, 2002 or are obtained by the exercise of any stock
options held or granted in the future, of which there were 4,100,584 stock
options subject to the put right at a calculated "net asset value" per share.
The circumstances under which certain officers may exercise the put right are
discussed in Note 4 of the Notes to Consolidated Financial Statements. As a
result of the put right, the consolidated balance sheet at June 30, 2002
reflects approximately $92.1 million as common stock subject to repurchase and
Pure recorded approximately $34 million in deferred compensation as of June 30,
2002, of which Pure recognized deferred compensation expense of approximately
$7.1 million, $915,000 and $14.8 million in 2002, 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.

         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 June 30, 2002, Pure had hedging
transactions with respect to approximately 12,427,200 and 7,300,000 MMBtu of its
future 2002 and estimated 2003 natural gas production, respectively and 36,800
and no barrels of its estimated 2002

                                       41

<PAGE>

and 2003 crude oil production, respectively. For additional information, see
Note 8 of Notes to Consolidated Financial Statements and Item 3 - Quantitative
and Qualitative Disclosures about Market Risk.

         At June 30, 2002, 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

         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.

         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 June 30, 2002, 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 from that of SFAS
No. 121, except as to the reporting of asset disposals related to discontinued
operations.

         In April 2002, Pure adopted SFAS No. 145, "Rescission of SFAS No. 4,
44, and 64, Amendment of SFAS No. 13, and Technical Corrections." This Statement
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt",
and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements". This Statement also rescinds or amends
other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The adoption of SFAS No. 145 did not have an effect on Pure's
financial position and results of operations.

         In July 2002, FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities" which establishes requirements for financial
accounting and reporting for costs associated with exit or disposal activities.
This standard is effective for exit or disposal activities initiated after
December 31, 2002. Pure is assessing the impacts this could have on its future
financial statements.

                                       42

<PAGE>

       Other proposed accounting changes considered from time to time by the
FASB, the U.S. SEC, the American Institute of Certified Public Accountants and
the United States Congress could materially impact Pure's reported financial
position and results of operations.

                                       43

<PAGE>

ITEM 3. 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 June 30, 2002, 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 8 of Notes to Consolidated Financial Statements
included in "Item 1. 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.

<TABLE>
<CAPTION>
                                                                          2002             2003         Fair Value
                                                                       --------------  ------------   ---------------
            <S>                                                        <C>             <C>            <C>
            Natural Gas Hedge Derivatives (a):

            Collar option contracts:
            Notional volumes (MMBtu)                                      12,427,200     7,300,000       $ (1,473,010)
            Weighted average long put strike price per MMBtu (b)        $      2.928    $    3.750
            Weighted average short call strike price per MMBtu (b)      $      3.501    $    4.530


            Basis differential contracts (c):
            Notional volumes (MMBtu)                                         180,000     7,300,000       $    588,537
            Weighted average strike price per MMBtu                     $      0.210    $    0.270


            Crude Oil Hedge Derivatives (a):

            Collar option contracts:
            Notional Volume (Bbls)                                            36,800             -       $    (76,606)
            Weighted average long put strike price per Bbl (b)          $     24.250    $        -
            Weighted average short call strike price per Bbl (b)        $     24.250    $        -
</TABLE>

______________
(a) See Note 8 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 basis differential relates to the spread between the NYMEX price and
    either the El Paso San Juan or El Paso Permian index price.

         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 certain Enron subsidiaries. As a result of
the Enron bankruptcy, Pure terminated its derivative contracts with Enron. At
the termination date of the contracts, Enron's subsidiaries 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.

                                       44

<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 3 of Notes to
Consolidated Financial Statements included in "Item 1. 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)            $       -       $ 65,500           $      -         $  65,500       $  65,500
                  Average interest rate                -%          2.84%                 -%

             Three-Year Revolver (b)           $ 157,500       $      -           $      -         $ 157,500       $ 157,500
                  Average interest rate             2.59%             -%                 -%

             Working Capital Revolver (b)      $       -       $      -           $      -         $       -       $       -
                  Average interest rate                -%             -%                 -%


        Fixed  rate debt:

             Senior Notes                      $       -       $      -           $350,000         $ 350,000       $ 340,405
                  Interest rate                        -%             -%             7.125%
</TABLE>

__________________

(a)  See Note 3 of Notes to Consolidated Financial Statements included in "Item
     1. 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 June 30, 2002, Pure had an interest rate swap, acquired in the Hallwood
merger, as set forth below:

<TABLE>
<CAPTION>
                   Period                         Notional Amount     Fixed Price
       ---------------------------------------    ---------------  -----------------
       <S>                                        <C>              <C>
                    2002                            $ 37,500,000         5.23%
                    2003                            $ 37,500,000         5.23%
         Two months ended February 29, 2004         $ 37,500,000         5.23%
</TABLE>

     Pure pays the fixed rate and receives a LIBOR floating rate. At June 30,
2002, the fair value of the interest rate swap was a liability of approximately
$ 1,490,000.

                                       45

<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.

         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

                                       46

<PAGE>

reflected in the Permian Basin business units presented results. Therefore,
historically, Pure's associated price risks were not mitigated.

         As of June 30, 2002, 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, 2001.

                                       47

<PAGE>

                           PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

         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 shall 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.

Item 2.  Changes in Securities and Use of Proceeds

               None.

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

         (a)   The Annual Meeting of Stockholders of Pure was held at 10:00
               a.m., local time, on Thursday, May 16, 2002.

         (b)   Proxies were solicited by the Board of Directors of Pure pursuant
               to Regulation 14A under the Securities Exchange Act of 1934.
               There were no solicitations in opposition to the Board of
               Directors' nominees as listed in the proxy statement and all of
               such nominees were duly elected.

         (c)   Out of a total of 50,206,597 shares of common stock of Pure
               outstanding and entitled to vote, 49,204,514 shares were present
               in person or by proxy, representing approximately 98%. The only
               matters voted on by the stockholders, as fully described in the
               definitive proxy materials for the annual meeting, were the
               election of directors of Pure and the approval of the selection
               of the independent auditors for Pure for 2002. The results were
               as follows:

               1. To elect a Board of Directors to hold office until the next
               annual meeting of stockholders and until their successors are
               elected and qualified.

<TABLE>
<CAPTION>
                                                      Number of Shares Voting
                                                -------------------------------------
                                                    For              Withholding
                                                Election as     Authority to Vote for
                                  Nominees        Director      Election as Director
                                  --------      --------------  ---------------------
                    <S>                         <C>             <C>
                    Jack D. Hightower               48,699,367         505,147
                    George G. Staley                49,025,652         178,862
                    Darrell D. Chessum              48,698,817         505,697
                    Keith A. Covington              48,698,342         506,172
                    Graydon H. Laughbaum, Jr.       48,698,569         505,945
                    Timothy H. Ling                 49,024,548         179,966
                    HD Maxwell                      49,025,551         178,963
                    Herbert C. Williamson, III      49,025,653         178,861
</TABLE>

                                       48


<PAGE>

               2. To approve the selection by the Board of Directors, of the
               firm of KPMG LLP as independent auditors for the Company for
               2002.

                  For                    49,061,775
                  Against                   141,642
                  Abstain                     1,097

         (d)   Inapplicable.

               None.

Item 6. Exhibits and Reports on Form 8-K

(a)      Exhibits:

         10.1     Officer Severance  Agreement dated May 16, 2002 between Pure
                  Resources,  Inc. and Jack Harper and attached as Exhibit B a
                  Confidentiality  and Non-Compete  Agreement between Pure
                  Resources,  Inc. and Jack Harper.
         99.1     Certification of Chief Executive Officer.
         99.2     Certification of Chief Financial Officer.

(b) Reports Submitted on Form 8-K:

         None.

<PAGE>

                                   SIGNATURES

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

                                     PURE RESOURCES, INC.



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

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

Date: August 14, 2002

                                       50