<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, 2001
                                      or

 [ ]  Transition Report Pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934 For the transition period from _____ to _____


                       Commission File Number: 001-15899


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



                Delaware                                      74-2952918
      (State or other jurisdiction                         (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 1, 2001, 50,156,089 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, 2001 (Unaudited) and
                    December 31, 2000...................................................................    3
              Unaudited Consolidated Statements of Operations
                    for the Three and Six Months Ended June 30, 2001 and 2000...........................    5
              Unaudited Consolidated Statements of Cash Flows
                    for the Three and Six Months Ended June 30, 2001 and 2000...........................    6
              Notes to Consolidated Financial Statements................................................    7

 Item 2.      Management's Discussion and Analysis of Financial Condition and Results of Operations.....   19
              -------------------------------------------------------------------------------------

 Item 3.      Quantitative and Qualitative Disclosures About Market Risk................................   29
              ----------------------------------------------------------


                                         PART II -- OTHER INFORMATION

 Item 1.      Legal Proceedings.........................................................................   33
              -----------------

 Item 4.      Submission of Matters to a Vote of Security Holders.......................................   33
              ---------------------------------------------------

 Item 6.      Exhibits and Reports on Form 8-K..........................................................   34
              --------------------------------

              Signatures................................................................................   36
</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 2001,
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 2000 Annual Report filed on
Form 10-K 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. ("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").

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

                                       2
<PAGE>

                             Pure Resources, Inc.
                          Consolidated Balance Sheets
                            (dollars in thousands)

<TABLE>
<CAPTION>
                                     ASSETS

                                                                                           June 30,                December 31,
                                                                                             2001                      2000
                                                                                     ---------------------      --------------------
                                                                                         (Unaudited)
<S>                                                                                  <C>                        <C>
Current assets:
     Cash and cash equivalents                                                                $    14,949               $     3,325
     Accounts receivable:
        Oil and gas                                                                                60,903                    46,749
        Other                                                                                       9,317                     1,702
     Fair value of derivatives (Note 11)                                                            1,860                         -
     Prepaid expenses and other current assets                                                      3,494                       883

                                                                                     ---------------------      --------------------
               Total current assets                                                                90,523                    52,659
                                                                                     ---------------------      --------------------

Property, plant and equipment, at cost:
     Oil and gas properties, using the successful efforts method of accounting:
        Proved properties                                                                       1,804,618                 1,140,209
        Unproved properties                                                                        60,767                    21,743
     Accumulated depletion, depreciation and amortization                                        (635,668)                 (577,532)
                                                                                     ---------------------      --------------------
                                                                                                1,229,717                   584,420
                                                                                     ---------------------      --------------------

Other property and equipment, net                                                                  16,563                     6,449

Deferred compensation (Note 5)                                                                     60,704                    63,903

Receivables for under-delivered gas                                                                 6,855                    10,274

Other assets, net                                                                                   5,093                     1,410
                                                                                     ---------------------      --------------------

                                                                                              $ 1,409,455               $   719,115
                                                                                     =====================      ====================
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       3
<PAGE>

                             Pure Resources, Inc.
                          Consolidated Balance Sheets
                            (dollars in thousands)



                     LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                             June 30,               December 31,
                                                                                               2001                     2000
                                                                                        -------------------       -----------------
                                                                                            (Unaudited)
<S>                                                                                     <C>                       <C>
Current liabilities:
     Accounts payable and accrued liabilities:
        Trade                                                                                     $ 70,341                $ 18,228
        Fair value of derivatives and deferred commodity hedges (Note 11)                                -                   6,781
        Other (Note 8)                                                                              58,465                  25,125
                                                                                        -------------------       -----------------
               Total current liabilities                                                           128,806                  50,134
                                                                                        -------------------       -----------------

Long-term debt                                                                                     535,127                  68,000

Liabilities for over-delivered gas                                                                  12,551                  17,791

Accrued abandonment, restoration and environmental liabilities                                      16,543                  14,331

Fair value of derivatives (Note 11)                                                                  2,033                       -

Deferred income taxes                                                                               95,970                  55,456

Other liabilities                                                                                    5,371                       -

Common stock subject to repurchase (Note 5)                                                        144,442                 135,617

Minority interest                                                                                    5,712                       -

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; 50,156,089 shares
        and 50,037,402 shares issued and outstanding at June 30, 2001
        and December 31, 2000, respectively                                                            502                     500
     Additional paid-in capital                                                                    334,968                 326,827
     Notes receivable - affiliates                                                                  (7,166)                 (6,952)
     Deferred compensation (Note 5)                                                                 (1,960)                 (2,296)
     Accumulated other comprehensive income                                                         17,857                       -
     Retained earnings                                                                             118,699                  59,707
                                                                                        -------------------       -----------------
               Total stockholders' equity                                                          462,900                 377,786
                                                                                        -------------------       -----------------

     Commitments and contingencies (Note 5)
                                                                                               $ 1,409,455               $ 719,115
                                                                                        ===================       =================
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       4
<PAGE>

                           Pure Resources, Inc.
              Unaudited Consolidated Statements of Operations
                   (in thousands, except per share data)


<TABLE>
<CAPTION>
                                                                             Three months ended              Six months ended
                                                                                  June 30,                      June 30,
                                                                        -------------------------     -----------------------------
                                                                         2001              2000              2001           2000
                                                                        ----------   ------------     ------------    -------------
<S>                                                                   <C>           <C>              <C>             <C>
Revenues:
     Oil sales                                                          $ 46,767        $ 30,648          $ 95,632         $ 56,746
     Gas sales                                                            86,656          25,075           164,145           41,375
     Gain on sale of assets                                                  427           1,250               449            1,250
                                                                         ----------   ------------     ------------    -------------
                 Total revenues                                          133,850          56,973           260,226           99,371
                                                                         ----------   ------------     ------------    -------------


Expenses:
     Oil and gas production                                               21,740          10,490            37,822           17,291
     Production and other taxes                                            9,298           5,147            18,710            8,202
     General and administrative                                            8,770           2,277            14,956            3,122
     Amortization of deferred compensation (general and administrative)    5,992           1,027            18,685            1,027
     Exploration and abandonment (Note 9)                                  6,465           1,348             9,806            3,078
     Depletion, depreciation and amortization                             36,730           9,454            61,041           17,350
                                                                         ----------   ------------     ------------    -------------

                 Total expenses                                           88,995          29,743           161,020           50,070
                                                                         ----------   ------------     ------------    -------------

                 Operating income                                         44,855          27,230            99,206           49,301
                                                                         ----------   ------------     ------------    -------------

Other income (expense):
     Interest income                                                         275              32               471               32
     Interest expense                                                     (6,986)           (661)          (11,036)            (661)
     Other                                                                   129            (350)            1,280           (1,446)
                                                                         ---------   ------------     ------------    -------------

                 Income before income taxes and minority interest         38,273          26,251            89,921           47,226

Income tax expense                                                       (12,496)         (9,229)          (30,570)         (16,530)

Minority interest                                                           (200)              -              (359)               -
                                                                        ----------   ------------     ------------    -------------

                 Net income                                             $ 25,577        $ 17,022          $ 58,992         $ 30,696
                                                                        ==========   ============     ============    =============

                 Net income per share                                   $   0.51        $   0.44          $   1.18         $   0.86
                                                                        ==========   ============     ============    =============

                 Net income per share - assuming dilution               $   0.50        $   0.44          $   1.15         $   0.86
                                                                        ==========   ============     ============    =============
</TABLE>

                 See accompanying notes to consolidated financial statements.

                                       5
<PAGE>

                              Pure Resources, Inc.
                 Unaudited Consolidated Statements of Cash Flows
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                               Three months ended             Six months ended
                                                                                    June 30,                      June 30,
                                                                           --------------------------    -------------------------
                                                                                2001           2000          2001         2000
                                                                           ------------     ---------    ----------     ----------
<S>                                                                        <C>            <C>             <C>           <C>
Cash flows from operating activities:
    Net income                                                                $ 25,577      $ 17,022      $  58,992     $   30,696
    Adjustment to reconcile net income to net cash provided by
       operating activities:
          Depletion, depreciation and amortization                              36,730         9,454         61,041         17,350
          Amortization of deferred compensation                                  5,992         1,027         18,685          1,027
          Amortization deferred commodity hedges                                (2,553)       (1,991)        (6,781)        (1,991)
          Exploration and abandonments                                           3,388           625          4,741          2,088
          Gain on sale of assets                                                  (427)       (1,250)          (449)        (1,250)
          Deferred income taxes                                                  1,646         1,942          6,295          3,307
          Other items                                                              567          (300)          (136)             -
    Changes in assets and liabilities:
          Accounts receivable                                                    6,904       (14,483)         4,780        (26,748)
          Prepaid expenses and other current assets                               (161)           56           (860)           (62)
          Receivables for under-delivered gas                                    2,110          (875)         3,419         (1,697)
          Other assets                                                            (698)          213           (850)             -
          Accounts payable and accrued liabilities                               8,816         3,435          7,347         19,478
          Income taxes payable                                                   1,052         3,000         11,481          3,000
          Liabilities for over-delivered gas                                    (4,226)        1,233         (5,239)         1,597
          Other non-current liabilities                                              -            89              -            (50)
                                                                            ----------      --------     ----------       --------
                Total adjustments                                               59,140         2,175        103,474         16,049
                                                                            ----------      --------     ----------       --------
                Net cash provided by operating activities                       84,717        19,197        162,466         46,745
                                                                            ----------      --------     ----------       --------

Cash flows from investing activities:
    Acquisitions, net of cash acquired                                        (146,583)         (659)      (146,583)          (659)
    Investment in oil and gas properties                                       (63,329)      (13,150)      (378,858)       (35,883)
    Additions to other property and equipment                                   (9,366)         (101)       (10,495)          (101)
    Proceeds from sale of assets                                                 1,413         1,189          1,964          1,250
    Notes receivable - affiliates                                                    -         2,815              -          2,815
                                                                            ----------     ---------     ----------       --------
                Net cash used in investing activities                         (217,865)       (9,906)      (533,972)       (32,578)
                                                                            ----------     ---------     ----------       --------
Cash flows from financing activities:
    Proceeds from  (payments of) revolving debt, net                          (120,100)      (10,863)       119,755        (10.863)
    Proceeds from long-term debt                                               347,354             -        347,354              -
    Payments of long-term debt                                                 (87,436)            -        (87,436)             -
    Exercise of stock options                                                    1,292           302          1,340            302
    Cash transfer from owner pursuant to merger                                      -        14,528              -         14,528
    Net settlements with owner                                                       -       (10,968)             -        (15,844)
    Other financing activities                                                  (2,883)            -          2,117              -
                                                                            ----------     ---------     ----------       --------
                Net cash provided by (used in) financing activities            138,227        (7,001)       383,130        (11,877)
                                                                            ----------     ---------     ----------       --------

                Net increase in cash and cash equivalents                        5,079         2,290         11,624          2,290

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

Cash and cash equivalents, end of period                                      $ 14,949       $ 2,290      $  14,949        $ 2,290
                                                                            ==========     =========     ==========       ========
</TABLE>

                See accompanying notes to consolidated financial statements.

                                       6
<PAGE>

                              PURE RESOURCES, INC.
                   Notes to Consolidated Financial Statements
                             June 30, 2001 and 2000
                                  (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").

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

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

          Nature of Operations

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

          Basis of Presentation

          The accompanying consolidated financial statements, prior to the
merger, are presented as a carve-out from the financial statements of Union Oil
and reflect the activity related to its Permian Basin business unit during the
periods presented. Certain functions were managed centrally and support several
business units. Effective January 1, 2000, Union Oil established procedures by
which to accumulate actual costs associated only with the Permian Basin business
unit. After December 31, 1999, results of operations for Pure include only
actual costs that are attributable to Pure. Support costs decreased in the first
and second quarter of 2000, as compared to past quarters, as a result of a
reduction of support being provided from Union Oil's Sugar Land, Texas and
Lafayette, Louisiana offices due to the then pending merger of the Permian Basin
business unit with Titan.

          Other

          In the opinion of management, the unaudited consolidated financial
statements of Pure as of June 30, 2001 and for the three and six months ended
June 30, 2001 and 2000 include all adjustments and accruals, consisting only of
normal recurring accrual adjustments, 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 2000 Annual Report
filed on Form 10-K.

                                       7
<PAGE>

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

     Reclassifications

     Certain reclassifications have been made to the 2000 and first quarter of
2001 amounts to conform to the June 30, 2001 presentations.


(2)  Mergers and Acquisitions

     Hallwood Merger

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

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

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

<TABLE>
<S>                                                                        <C>
          Hallwood common and preferred stock                                 $ 145,286
          Hallwood stock options and warrants                                     7,603
          Assumed debt (subsequently refinanced)                                 87,436
          Severance and non-compete payments                                     17,920
          Estimated acquisition and other costs                                  13,077
                                                                             ----------

          Purchase price                                                      $ 271,322
                                                                             ==========
</TABLE>

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

<TABLE>
<S>                                                                         <C>
          Recorded amount of assets acquired                                  $ 359,355
          Assumed debt                                                          (87,436)
          Deferred income taxes                                                 (31,013)
          Other assumed liabilities                                             (99,806)
                                                                             -----------

          Acquisition costs, net of cash acquired                             $ 141,100
                                                                             ===========
</TABLE>


   The other liabilities assumed include approximately (a) $38.6 million of
accrued transaction costs related to stock options and warrants, severance and
non-compete agreements, investment banking fees and other transaction related
costs and (b) $31.2 million of fair value associated with derivative contract
obligations.  At June 30, 2001, Pure had accrued (a) approximately $21.1 million
related to the purchase of common and preferred stock, which was subsequently
paid in July 2001, and (b) $12.0 million of remaining transaction costs.

                                       8
<PAGE>

     International Paper Transaction

     On January 31, 2001, Pure acquired oil and gas properties, fee mineral and
royalty interests from International Paper Company, and certain general and
limited partnership interests, for approximately $261 million, subject to
adjustment, for cash (collectively "IP Transaction").  In addition, Pure
incurred approximately $5.2 million in transaction costs associated with the IP
Transaction.  Affiliates of International Paper own an approximate 5% interest
in a partnership which holds some of the oil and gas properties involved in this
transaction.  The transaction was funded under Pure's Credit Agreements.  Pure
accounted for this transaction on the purchase method and allocated the
transaction value as follows:

     <TABLE>
     <S>                                                                                  <C>
     Partnership interests (included in oil and gas properties in the balance sheet)        $ 240,707
     Oil and gas properties                                                                    20,356
                                                                                           ----------

     Cash paid                                                                              $ 261,063
                                                                                           ==========
</TABLE>

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

     Union Oil Merger and Contribution

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

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

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

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

     <TABLE>
     <S>                                                                                    <C>
     Recorded amount of assets acquired                                                     $ 275,614
     Deferred income tax asset                                                                 27,031
     Liabilities assumed                                                                     (150,560)
     Common stock issued and stock options issued                                            (151,426)
                                                                                           -----------

     Acquisition costs, net of cash acquired                                               $      659
                                                                                           ===========
</TABLE>

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

                                       9
<PAGE>

         Pro Forma Results of Operations (Unaudited)

         The following table reflects the pro forma results of operations for
the six months ended June 30, 2001 and 2000 as though the Titan merger, the
Contribution, the IP Transaction and the Hallwood merger had occurred as of
January 1, 2000. The pro forma amounts are not necessarily indicative of the
results that may be reported in the future (in thousands, except per share
data):

<TABLE>
<CAPTION>
                                                              Six months ended June 30,
                                                              ---------------------------
                                                                2001              2000
                                                              -----------    ------------
          <S>                                                 <C>            <C>
          Revenues                                              $ 309,142       $ 229,158
          Net income                                            $  65,064       $  24,795
          Net income per common share                           $    1.30       $    0.50
          Net income per common share - assuming dilution       $    1.26       $    0.49
</TABLE>

(3)      Debt

         Debt consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                         June 30,          December 31,
                                                           2001                2000
                                                       -------------     --------------
                                                        (Unaudited)
          <S>                                             <C>                 <C>
          Revolver                                        $ 167,756           $ 65,000
          364 Revolver                                       20,000                  -
          Working Capital Revolver                                -              3,000
          7.125% Senior Notes, Due 2011                     350,000                  -
          Senior Notes discount                              (2,629)                 -
                                                       --------------    --------------
                                                          $ 535,127           $ 68,000
                                                       ==============    ==============
</TABLE>

         Line of Credit

         In September 2000, Pure entered into two unsecured credit agreements
(the "Credit Agreements") with The Chase Manhattan Bank (the "Bank") and First
Union National Bank. The Credit Agreements are comprised of (a) a $250 million
five-year revolving credit facility ("Revolver"), with current commitments of
$235 million, and (b) a $250 million 364-day revolving credit facility ("364
Revolver"), with current commitments of $235 million. All amounts outstanding on
the Revolver are due and payable in full on September 29, 2005. All amounts
outstanding on the 364 Revolver on September 28, 2001 will be converted to a
term loan whose outstanding amounts are due and payable in full on September 29,
2002. A portion of the Revolver is available for the issuance of up to $50
million of letters of credit.

         At Pure's option, borrowings under the Credit Agreements 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 Revolver and .85% to
1.00% per annum for the 364 Revolver. These margins increase as Pure's debt
coverage ratio increases. 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 Credit Agreements and range from .20% to .30%
per annum on the Revolver and .15% to .25% per annum for the 364 Revolver.

         The Credit Agreements contain 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.

                                       10
<PAGE>

         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.

         7.125% Senior Notes

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

       The 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 Credit Agreements 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 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, Pure is required to
file an exchange offer registration statement with respect to an offer to
exchange the Senior Notes for a new, registered issue of Senior Notes.


(4)      Accrued Abandonment, Restoration and Environmental Liabilities

         At June 30, 2001 and December 31, 2000, Pure had accrued $15.4 million
and $13.2 million, respectively, for the estimated future costs to abandon and
remove well equipment 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 $39.8 million and $34.9 million at June
30, 2001 and December 31, 2000, respectively. This estimate is based on
abandonment cost studies performed by an independent third party and estimates
prepared by Pure.

         Pure's reserve for environmental remediation obligations totaled $1.1
million as of June 30, 2001 and December 31, 2000.


(5)      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.

         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

                                       11
<PAGE>

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 4, Pure had accrued $1.1 million at June 30, 2001
and December 31, 2000 for estimated future environmental assessment and
remediation costs at various sites where liabilities for such costs are
probable.

         Pure Resources Employment and Severance Agreements

         Under circumstances specified in the employment and/or severance
agreements entered into between Pure and its officers, each covered officer has
the right to require Pure to purchase shares of Pure common stock that either
were received in the Titan merger or exchanged for Titan common stock held by
the officer on December 1, 1999 or are obtained by the exercise of any option
held by the officer, at a calculated "net asset value" per share (as defined in
each officer's employment/severance agreement). The circumstances under which
certain officers may exercise this right include the termination of the
officer's employment for any reason after three years following the merger, the
termination of the officer without cause, a change in control of either Pure or
Unocal Corporation ("Unocal") and other events specified in the agreements. The
net asset value per share is calculated by reference to each common share's pro
rata pre-tax amount of the present value of proved reserves discounted at 10%,
as defined, times 110%, less funded debt, as defined. The $144.4 million
reflected in the consolidated balance sheet at June 30, 2001, as common stock
subject to repurchase is the estimated net asset value, as defined, for each
applicable officer's covered shares, and unexercised option shares less the
amount of proceeds that would be received upon exercise of the related options.
Deferred compensation related to such shares and options is calculated as the
difference between the estimated net asset value of the relevant number of Pure
shares and the market value of Pure shares held by each covered officer in the
case of shares held or the exercise price of shares subject to option. As of
June 30, 2001, Pure recorded approximately $93.8 million of deferred
compensation, of which it recognized amortization expense of approximately $5.8
million and $18.3 million for the three and six months ended June 30, 2001,
respectively, and $14.8 million for the year 2000. This arrangement is being
treated as a variable plan under Accounting Principles Board Opinion No. 25
"Accounting for Stock Based Compensation." 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.

         Each employment and/or severance agreement will also obligate Pure to
make a severance payment ranging from one to three times the officer's salary,
including an average bonus, upon the occurrence of specified events such as
termination without cause or upon change in control. The aggregate severance
amounts potentially payable under these agreements total $4.9 million based on
the current salaries of the affected officers.

         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

                                       12
<PAGE>

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.

         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. We
are unable at this time to assess the likelihood of an unfavorable outcome. We
believe the suit is without merit and shall vigorously defend against it. In our
opinion, the ultimate disposition of this lawsuit, in the event of an
unfavorable outcome, should not have a material adverse effect on Pure's
financial position or liquidity, but could adversely impact results of
operations in a given reporting period unless the matter is resolved prior to
May 2002 (end of Hallwood merger allocation period).

         Other matters

         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, 2001 is
approximately $75 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.

         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.

                                       13
<PAGE>

(6)      Earnings per Common Share

         The following table sets forth the computation of basic and diluted
earnings per common share (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                          Three months ended             Six months ended
                                                                              June 30,                         June 30,
                                                                     -----------------------------    -----------------------------
                                                                         2001            2000             2001            2000
                                                                     --------------  -------------    --------------   ------------
         <S>                                                         <C>            <C>                 <C>            <C>
         Numerator:
              Net income and numerator for basic and diluted
              net income per common share - income available
              to common stockholders                                      $ 25,577       $ 17,022          $ 58,992       $ 30,696
                                                                     --------------  -------------    --------------   ------------

         Denominator:
              Denominator for basic net income per common
              share - weighted average common shares (a)                    50,067         38,410            50,053         35,559

              Effect of dilutive securities - employee stock
              options not subject to "put" right                               338             31               305             16

              Dilutive effect of officers' stock options
              subject to the "put" right under employment/
              severance agreements (Note 5)                                  1,006             15             1,042              7

              Dilutive effect of officers' individual common
              stock held subject to the "put" right under
              employment/severance agreements (Note 5)                           -            181                99             91
                                                                     --------------  -------------    --------------   ------------

              Denominator for diluted net income per common
              share - adjusted weighted average common shares
              and assumed conversions                                       51,411         38,637            51,499         35,673
                                                                     ==============  =============    ==============   ============

              Basic net income per common share                           $   0.51       $   0.44          $   1.18       $   0.86
                                                                     ==============  =============    ==============   ============

              Diluted net income per common share                         $   0.50       $   0.44          $   1.15       $   0.86
                                                                     ==============  =============    ==============   ============
</TABLE>

__________
(a)    Assumes that the common stock Union Oil received for its contribution of
       the Permian Basin business unit was issued and outstanding since January
       1, 2000.

       Employee stock options to purchase 5,744,104 and 4,947,363 shares of
common stock were outstanding at June 30, 2001 and 2000, respectively, but only
3,986,364 and 4,015,500 for the three and six months ended June 30, 2001,
respectively, and 4,361,442 for the three and six months ended June 30, 2000
were included in the computation of diluted net income per common share due to
the average market price of Pure common stock being greater than the option
price. The remaining 1,757,740 and 585,921 shares for the three months ended
June 30, 2001 and 2000, respectively, and 1,728,604 and 585,921 shares for the
six months ended June 30, 2001 and 2000, respectively, were anti-dilutive due to
(a) the option price being greater than the average market price of the common
stock of Pure or (b) the assumed proceeds under the treasury stock method
derived more shares being repurchased than the related options.


(7)      Incentive Plans

         Pure 1999 Incentive Plan

         Pure's board of directors adopted, and Union Oil as sole stockholder of
Pure (at that time) 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

                                       14
<PAGE>

options under Section 422 of the Internal Revenue Code, (b) stock appreciation
rights, or "SARs", (c) cash awards, (d) stock awards and (e) performance awards.
These awards, other than cash awards, may be settled in shares of restricted or
unrestricted common stock of Pure.

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

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

         The following table calculates the number of shares or options
available to grant under Pure's 1999 Incentive Plan as of June 30, 2001:

<TABLE>
             <S>                                                                           <C>
             Common stock outstanding                                                       50,156,089
             Options awarded under the Pure 1999 Incentive Plan                              5,277,776
             Assumed options from Titan                                                        458,011
             Options exercised                                                                (153,760)
             Options cancelled/forfeited                                                      (163,423)
                                                                                           -----------
             Common stock equivalents                                                       55,574,693
                                                                                           ===========


             Maximum shares/options allowed under the Pure 1999 Incentive Plan               6,668,963

             Less:   Outstanding awards under the Pure 1999 Incentive Plan                  (5,362,228)
                     Outstanding options under the Titan Plans                                (381,876)
                                                                                           -----------
             Shares/options available for future grant                                         924,859
                                                                                           ===========
</TABLE>

(8)      Other Current Liabilities

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

<TABLE>
<CAPTION>
                                                                       June 30,       December 31,
                                                                         2001             2000
                                                                     -------------    ------------
                                                                      (Unaudited)
            <S>                                                      <C>              <C>
            Accrued oil and gas production expenses                  $      41,886    $     20,923
            Income taxes payable                                            14,779           3,298
            Accrued interest payable                                         1,800             904
                                                                     -------------    ------------
                                                                     $      58,465    $     25,125
                                                                     =============    ============
</TABLE>

                                       15
<PAGE>

(9)      Exploration and Abandonment

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

<TABLE>
<CAPTION>
                                                       Three months ended        Six months ended
                                                            June 30,                 June 30,
                                                      --------------------     ---------------------
                                                        2001        2000         2001        2000
                                                      --------    --------     --------    ---------
             <S>                                      <C>         <C>          <C>         <C>
             Geological and geophysical staff         $  1,863    $    596     $  3,301    $     860
             Exploratory dry hole costs                  3,662         271        4,043        1,389
             Impaired unproved properties                  345         423          718          768
             Seismic costs                                 326           9          926            9
             Other                                         269          49          818           52
                                                      --------   ---------     --------    ---------
                                                      $  6,465   $   1,348     $  9,806    $   3,078
                                                      ========   =========     ========    =========
</TABLE>

(10)   Comprehensive Income

<TABLE>
<CAPTION>
                                                                            Three months ended        Six months ended
                                                                                 June 30,                 June 30,
                                                                           --------------------     ---------------------
                                                                             2001        2000         2001        2000
                                                                           --------    --------     --------    ---------
                                                                                           (in thousands)
    <S>                                                                    <C>         <C>          <C>         <C>
    Net income                                                             $ 25,577    $ 17,022     $ 58,992    $ 30,696


       Cumulative effect of accounting change
          for SFAS No. 133 adoption (a)                                           -           -      (11,364)          -
       Reclassification adjustment for settled hedging contracts (b)          2,025           -       10,682           -
       Changes in fair value of cash flow hedges (c)                         16,958           -       18,539           -
                                                                           --------    --------     --------    --------

    Comprehensive income                                                   $ 44,560    $ 17,022     $ 76,849    $ 30,696
                                                                           ========    ========     ========    ========

    ___________

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

(11)  Derivative Financial Instruments

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

         Adoption of SFAS No. 133, 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, 2001, the estimated net amount of the existing gains within

                                       16
<PAGE>

accumulated other comprehensive income that are expected to be reclassified into
earnings within the next 12 months is approximately $14.1 million, net of tax.
For the three months ended June 30, 2001, other income includes approximately
$172,000 of gain from changes in fair value of derivatives not qualifying as
hedges and approximately $17,000 of loss from the ineffective portion of the
cash flow hedges. For the six months ended June 30, 2001, other income includes
approximately $981,000 of gain from changes in fair value of derivatives not
qualifying as hedges and approximately $375,000 of gain from the ineffective
portion of the cash flow hedges.


         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, 2001:

<TABLE>
<CAPTION>
                                                                                   2001                2002
                                                                              ---------------    ----------------
              <S>                                                             <C>                <C>
              Gas related derivatives:
                 Collar and swap options:
                    Volume (MMBtu)                                              11,265,500           5,139,870
                    Index price per MMBtu (floor-ceiling prices)              $ 1.56 - $7.03      $ 2.08 - $ 3.95

              Oil related derivatives:
                 Collar and swap options:
                    Volume (Bbls)                                                1,063,520            673,000
                    Index price per Bbl (floor-ceiling prices)                $20.91 - $30.68     $24.00 - $28.56
</TABLE>

         The index price for the natural gas collars and swaps settles
based on either a NYMEX Henry hub, San Juan Basin hub, Rocky Mountain hub or a
Gulf Coast hub. The oil collars and swaps settle based on the prices for West
Texas Intermediate on NYMEX.

         As a result of 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, 2001, the
above table includes oil and gas derivatives acquired in the Hallwood merger for
the remainder of 2001 and 2002 (a) 5,425,500 and 5,139,870 MMBtu's of natural
gas at index prices (floor - ceiling) of $1.56 - $4.64 and $2.08 - $3.95 per
MMBtu and (b) 143,250 and 73,000 Bbls of oil at index prices (floor - ceiling)
of $20.91 - $28.95 and $24.25 - $24.25 per Bbl, respectively.

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

         In July 2001, Pure entered into two costless collars totaling 40,000
MMBtu per day of its natural gas for the production months November 2001 to
April 2002. The floor price is $3.25 per MMBtu and the ceiling price is $4.07
per MMBtu.

         Interest Rate Derivatives

         At June 30, 2001, Pure has $37.5 million in notional principal of fixed
for floating interest rate swaps, which were acquired as part of the Hallwood
merger. Pure pays a fixed rate of 5.23% and receives a LIBOR floating rate. The
derivative contracts mature in February 2004. These derivative contracts do not
qualify as cash flow hedges as a result of the mismatch of maturities with
Pure's debt instruments and, accordingly, will be marked-to-market each
reporting period.

                                       17
<PAGE>

(12)  Related Party Transactions


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

                                       18
<PAGE>

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


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 purchase price for the transaction is estimated to be
approximately $271 million, including assumed debt.

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

International Paper Transaction

        On January 31, 2001, Pure acquired oil and gas properties, fee mineral
and royalty interests from International Paper Company, and certain general and
limited partnership interests, for approximately $261 million, subject to
adjustment, for cash plus $5.2 million in transaction costs. 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 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 estimates the total proved reserves acquired
(SEC 10% basis) to be approximately 25,000 MBOE with an SEC 10% present value of
approximately $629 million. The total proved reserves are approximately 69%
natural gas, and 96% proved developed.

Union Oil Merger

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

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

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

        Immediately following completion of the merger, Pure had approximately
50 million shares of common stock outstanding, Union Oil held approximately
65.4% (32.7 million shares) of those Pure shares and the remaining 34.6% (17.3
million shares) were held by the previous stockholders of Titan common stock.

                                       19
<PAGE>

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 and net income per share by:

 .      identifying acquisition opportunities that provide significant
       development and exploratory drilling potential,

 .      exploiting and developing its reserve base,

 .      pursuing exploration opportunities for oil and gas reserves,

 .      capitalizing on advanced technology to identify, explore and exploit
       projects, and

 .      emphasizing a low overhead and operating cost structure.

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


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. The average prices received by producers in all our core areas have
risen sharply in 2001 and 2000 compared to 1999. At December 31, 2000, the NYMEX
prices for crude oil and natural gas were $26.80 per barrel and $9.78 per Mcf,
respectively. In perspective, at June 30, 2001, the NYMEX prices for crude oil
and natural gas were $26.25 per barrel and $3.18 per Mcf, respectively. As
indicated by these price movements, oil and natural gas prices remain subject to
volatility, and could decline again.

       A return to historically 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.

Impact on Pure of Business Opportunities Agreement and Severance Arrangements

       Under a business opportunity agreement between Pure and Union Oil, Pure
has agreed to limit its business activities. Union Oil has granted Pure certain
limited waivers of the agreement, including a waiver dated May 9, 2001, which
significantly broadened the geographic areas in which Pure is allowed to conduct
business. However, the agreement's 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 IP Transaction.

       Mr. Hightower's employment agreement and the Pure officer severance
agreements entitle covered Pure officers to require Pure to purchase his or her
Pure common stock at a price that may be in excess of market value in the event
of a change of control of Pure or Unocal Corporation ("Unocal") and in some
circumstances following termination of employment. On June 30, 2001, when the
trading price of Pure common stock was $18.00 per share, the "per share net
asset value" of Pure, calculated in accordance with the agreements, was
estimated at approximately $28.90. The amortization amounts will change
quarterly based on relative changes in the net asset value and market value of
the Pure shares.

Basis of Presentation

       The accompanying consolidated financial statements, insofar as they
relate to periods prior to the Titan merger, are presented as a carve-out from
the financial statements of Union Oil and reflect the activity related to its
Permian Basin business unit during the periods presented. The functions listed
below were managed centrally and support several business units. Effective
January 1, 2000, Union Oil established procedures by which to accumulate actual
costs

                                       20
<PAGE>

associated with Permian Basin business unit. After December 31, 1999, results of
operations for Pure include only actual costs that are attributable to Pure.
Support costs decreased in the first and second quarters of 2000, as compared to
past quarters, as a result of a reduction of support being provided from Union
Oil's Sugar Land, Texas and Lafayette, Louisiana offices due to the then pending
merger of the Permian Basin business unit with Titan.

         General and Administrative Costs

       General and administrative costs include charges related to activities
such as accounting, legal, human resources, marketing, planning and public
relations. General and administrative costs charged to the Permian Basin
business unit were $600,000 and $1.4 million for the three and six months ended
June 30, 2000, respectively.

         Indirect Production Costs

         Indirect production costs include charges for procurement and
logistics, reservoir engineering, production engineering, workover, drilling,
loss control, and health, environment and safety. Indirect production costs
charged to the Permian Basin business unit were $300,000 and $600,000 for the
three and six months ended June 30, 2000, respectively.

         Indirect Exploration Costs

         Indirect exploration costs include charges for the chief geologist's
department, the chief geophysicist's department, and the land department.
Indirect exploration costs charged to the Permian Basin business unit were
$100,000 and $200,000 for the three and six months ended June 30, 2000,
respectively.

Operating Data

<TABLE>
<CAPTION>
                                                                           Three months ended                  Six months ended
                                                                                 June 30,                           June 30,
                                                                         -------------------------      --------------------------
                                                                           2001            2000           2001            2000
                                                                         ---------      ----------      ----------    -----------
<S>                                                                      <C>            <C>             <C>           <C>
Production:
   Oil and condensate (MBbls)...........................................     1,947          1,113           3,757         2,039
   Natural gas (MMcf)...................................................    20,973          8,523          35,692        15,679
   Total (MBOE).........................................................     5,443          2,534           9,705         4,652

Average daily production
   Oil and condensate (Bbls)............................................    21,398         12,231          20,756        11,205
   Natural gas (Mcf)....................................................   230,472         93,662         197,192        86,150
   Total (BOE)..........................................................    59,810         27,841          53,621        25,564

Average sales price per unit (excluding effects of hedging):
   Oil and condensate (per Bbl).........................................  $  24.42       $  27.83        $  25.85       $ 27.98
   Natural gas (per Mcf)................................................  $   4.12       $   2.94        $   4.83       $  2.64
   Total (per BOE)......................................................  $  24.62       $  22.12        $  27.76       $ 21.16

Average sales price per unit (including effects of hedging):
   Oil and condensate (per Bbl).........................................  $  24.02       $  27.54        $  25.46       $ 27.83
   Natural gas (per Mcf)................................................  $   4.13       $   2.94        $   4.60       $  2.64
   Total (per BOE)......................................................  $  24.51       $  21.99        $  26.77       $ 21.09

Expenses per BOE:
   Production costs, excluding production and other taxes...............  $   3.99       $   4.14        $   3.90       $  3.72
   Production and other taxes...........................................  $   1.71       $   2.03        $   1.93       $  1.76
   General and administrative...........................................  $   1.61       $   0.90        $   1.54       $  0.67
   Depletion, depreciation and amortization.............................  $   6.75       $   3.73        $   6.29       $  3.73
</TABLE>

                                       21
<PAGE>

Results of Operations

         Pure completed the Titan merger in May 2000, the IP Transaction in
January 2001 and the Hallwood Merger in May 2001. The results of operations and
cash flows for Pure include (a) Titan since June 2000, (b) the IP Transaction
since February 2001 and (c) the Hallwood Merger since May 2001.

         Three Months Ended June 30, 2001 as compared to Three Months Ended June
30, 2000

         Pure's revenues from the sale of oil and natural gas were $46.8 million
and $86.7 million for the three months ended June 30, 2001 and $30.6 million and
$25.1 million for the three months ended June 30, 2000, respectively. Compared
with 2000, Pure's average oil sales prices decreased by $3.52 per Bbl, or 13%,
while average gas sales prices increased by $1.19 per Mcf, or 40%. The increase
in production of 2.9 million BOE in 2001 is primarily the result of the Titan
merger, IP Transaction, Hallwood merger and the success of Pure's capital
program, offset by normal production declines. The Titan, IP Transaction and
Hallwood merger properties contributed approximately 3.1 million BOE of
production in the second quarter of 2001.

         Pure's oil and gas production expenses excluding production and other
taxes were $21.7 million ($3.99 per BOE) and $10.5 million ($4.14 per BOE) for
the three months ended June 30, 2001 and 2000, respectively. Production expenses
increased $11.2 million which is primarily the result of (a) production costs
from the Titan properties of $6.6 million, IP Transaction properties of $2.8
million and Hallwood merger properties of $2.7 million, (b) significant
increases in the costs of services and products and (c) decrease of $300,000
between periods in Union Oil's indirect costs. As of the date of the Titan
merger, Pure no longer incurs Union Oil's indirect costs. As a result of the
Titan merger and new management of all of Pure properties, there have been
certain fundamental changes in how the assets are managed. Certain costs that a
major oil company, such as Union Oil, treated as production expenses may be more
readily seen as general and administrative expenses by an independent oil
company, such as Pure. Accordingly, certain costs will be reflected in general
and administrative expenses.

         Production and other taxes were $9.3 million ($1.71 per BOE) and $5.1
million ($2.03 per BOE) for the three months ended June 30, 2001 and 2000,
respectively. The increase in production and other taxes is primarily
attributable to increase in oil and gas revenues associated with increased
commodity prices and the revenues from the assets in the Titan merger, the IP
Transaction and the Hallwood merger.

         General and administrative expenses were $8.8 million ($1.61 per BOE)
and $2.3 million ($.90 per BOE) for the three months ended June 30, 2001 and
2000, respectively. General and administrative expenses increased as a result of
(a) the Titan merger, the IP Transaction and the Hallwood merger, (b) subsequent
to the Titan merger, the classification of certain costs as general and
administrative versus production expense, and (c) offset by a $600,000 decrease
in Union Oil's indirect costs between periods. As of the date of the Titan
merger, Pure no longer incurs Union Oil's indirect costs.

         Depletion, depreciation, and amortization expense (DD&A) was $36.7
million ($6.75 per BOE) and $9.5 million ($3.73 per BOE) for the three months
ended June 30, 2001 and 2000, respectively. DD&A increased in absolute amounts
due primarily to the inclusion of the properties from the Titan merger, the IP
Transaction and the Hallwood merger for the three months ended June 30, 2001.
The increase in the per unit amount is primarily attributable to per unit
acquisition costs from the IP Transaction and Hallwood merger.

         Pure's exploration and abandonment expense was $6.5 million and $1.3
million for the three months ended June 30, 2001 and 2000, respectively.
Increase in exploration expenses is primarily related to (a) an increase in
geological and geophysical staff and related costs as a result of the Titan
merger, the IP Transaction and the Hallwood merger, (b) exploratory dry hole
costs and (c) offset by a $100,000 decrease in Union Oil's indirect costs
between periods.

         In 2001, Pure had interest expense due to (a) Pure's significant
capital expenditure program, (b) the IP 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 7.125% fixed rate Senior
Notes which will have future effects on interest expense depending on the costs
of floating rate debt. Interest expense in 2000 was due primarily to the
assumption of debt in the Titan merger.

         In 2001, other income (expense) includes $155,000 of gain attributable
to the ineffective portion of the cash flow hedges and the change in fair value
of certain derivatives not qualifying as hedges under SFAS No. 133. In 2000,
other expense primarily relates to transitional type costs associated with the
Union Oil contribution of properties into Pure and certain transaction costs of
Union Oil directly related to the Titan merger.

                                       22
<PAGE>

         Income tax expense was $12.5 million and $9.2 million for the three
months ended June 30, 2001 and 2000, respectively. Income tax expense increased
due to increased earnings between periods.


         Six Months Ended June 30, 2001 as compared to Six Months Ended June 30,
2000

         Pure's revenues from the sale of oil and natural gas were $95.6 million
and $164.1 million for the six months ended June 30, 2001 and $56.7 million and
$41.4 million for the six months ended June 30, 2000, respectively. Compared
with 2000, Pure's average oil sales prices decreased by $2.37 per Bbl, or 8%,
while average gas sales prices increased by $1.96 per Mcf, or 74%. The increase
in production of 5.1 million BOE in 2001 is primarily the result of the Titan
merger, IP Transaction, Hallwood merger and the success of Pure's capital
program, offset by normal production declines. The Titan, IP Transaction and
Hallwood merger properties contributed approximately 5.1 million BOE of
production in 2001.

         Pure's oil and gas production expenses excluding production and other
taxes were $37.8 million ($3.90 per BOE) and $17.3 million ($3.72 per BOE) for
the six months ended June 30, 2001 and 2000, respectively. Production expenses
increased $20.5 million which is primarily the result of (a) production costs
from the Titan properties of $12.4 million, IP Transaction properties of $4.6
million and Hallwood merger properties of $2.7 million, (b) significant
increases in the costs of services and products and (c) decrease of $600,000
between periods in Union Oil's indirect costs. As of the date of the Titan
merger, Pure no longer incurs Union Oil's indirect costs. As a result of the
Titan merger and new management of all of Pure properties, there have been
certain fundamental changes in how the assets are managed. Certain costs that a
major oil company, such as Union Oil, treated as production expenses may be more
readily seen as general and administrative expenses by an independent oil
company, such as Pure. Accordingly, certain costs will be reflected in general
and administrative expenses.

         Production and other taxes were $18.7 million ($1.93 per BOE) and $8.2
million ($1.76 per BOE) for the six months ended June 30, 2001 and 2000,
respectively. The increase in production and other taxes is primarily
attributable to increase in oil and gas revenues associated with increased
commodity prices and the revenues from the assets in the Titan merger, the IP
Transaction and the Hallwood merger.

         General and administrative expenses were $15.0 million ($1.54 per BOE)
and $3.1 million ($.67 per BOE) for the six months ended June 30, 2001 and 2000,
respectively. General and administrative expenses increased as a result of (a)
the Titan merger, the IP Transaction and Hallwood merger, (b) subsequent to the
Titan merger, the classification of certain costs as general and administrative
versus production expense, and (c) offset by a $1.4 million decrease in Union
Oil's indirect costs between periods. As of the date of the Titan merger, Pure
no longer incurs Union Oil's indirect costs.

         Depletion, depreciation, and amortization expense (DD&A) was $61.0
million ($6.29 per BOE) and $17.4 million ($3.73 per BOE) for the six months
ended June 30, 2001 and 2000, respectively. DD&A increased in absolute amounts
due primarily to the inclusion of the properties from the Titan merger, the IP
Transaction and Hallwood merger for the six months ended June 30, 2001. The
increase in the per unit amount is primarily attributable to per unit
acquisition costs from the IP Transaction and Hallwood merger.

         Pure's exploration and abandonment expense was $9.8 million and $3.1
million for the six months ended June 30, 2001 and 2000, respectively. Increase
in exploration expenses is primarily related to (a) an increase in geological
and geophysical staff and related costs as a result of the Titan merger, the IP
Transaction and Hallwood merger, (b) exploratory dry hole costs, (c) seismic
costs and (d) offset by a $200,000 decrease in Union Oil's indirect costs
between periods.

         In 2001, Pure had interest expense due to (a) Pure's significant
capital expenditure program, (b) the IP 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 7.125% fixed rate Senior
Notes which will have future effects on interest expense depending on the costs
of floating rate debt. Interest expense in 2000 was due primarily to the
assumption of debt in the Titan merger.

         In 2001, other income (expense) includes $1.4 million of gain
attributable to the ineffective portion of the cash flow hedges and the change
in fair value of certain derivatives not qualifying as hedges under SFAS No.
133. In 2000, other expense primarily relates to transitional type costs
associated with the Union Oil contribution of properties into Pure and certain
transaction costs of Union Oil directly related to the Titan merger.

         Income tax expense was $30.6 million and $16.5 million for the six
months ended June 30, 2001 and 2000, respectively. Income tax expense increased
due to increased earnings between periods.

                                       23
<PAGE>

Liquidity and Capital Resources

         Pure's primary capital resources are net cash flows provided by
operating activities and the availability under the Credit Agreements, of which
approximately $282 million was available at June 30, 2001. 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 the Credit Agreements. 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.

         Pure's primary source of capital resources prior to the merger was its
cash flow from operations. Pure's other source of capital resources prior to the
merger, if needed, was infusion of funds from Union Oil. All financing
activities for Pure prior to the closing of the merger were performed at the
corporate level for Union Oil and its business units, and Union Oil has
historically provided cash management services through a centralized treasury
system. Pure prior to the merger maintained no cash balances and no interest had
been charged or received on the cash balances transferred or received from Union
Oil. Pure's net cash settlements with Union Oil were included in the owner's net
investment on the balance sheets and were shown as settlements with owner in the
financing activities on the consolidated statements of cash flows. The net
settlements with Union Oil were $15.8 million for 2000. Subsequent to the
merger, Union Oil has not provided any cash financing or cash management
services to Pure.

         Net Cash Provided by Operating Activities

         Cash flow from operating activities for Pure was $84.7 million for the
three months ended June 30, 2001 compared to $19.2 million for the three months
ended June 30, 2000. Cash flow from operating activities for Pure was $162.5
million for the six months ended June 30, 2001 compared to $46.7 million for the
six months ended June 30, 2000. The increase in net cash provided by operating
activities was primarily due to increased commodity prices and production
increases resulting from (a) Pure's drilling activities, (b) the Titan merger,
(c) the IP Transaction and (d) the Hallwood merger.

         Capital Expenditures

         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 costs incurred by Pure in its acquisition,
exploration and development activities.

<TABLE>
<CAPTION>
                                                        Three months ended             Six months ended
                                                             June 30,                       June 30,
                                                    --------------------------     -------------------------
                                                       2001           2000             2001          2000
                                                    -----------    -----------     -----------    ----------
                                                                     (in thousands of dollars)
          <S>                                       <C>            <C>             <C>            <C>
          Property acquisition:
                  Proved                            $  299,584     $  231,756      $  568,517     $  244,393
                  Unproved                              34,451         13,297          42,065         12,684
          Exploration                                    9,361          3,435          17,200          4,536
          Development                                   47,996          7,992          86,533         19,421
                                                    -----------    -----------     -----------    -----------
                  Total costs incurred              $  391,392     $  256,480      $  714,315     $  281,034
                                                    ===========    ===========     ===========    ===========
</TABLE>

         For 2001, Pure's initial capital budget was approximately $160 million.
With the IP Transaction and the Hallwood merger, the capital budget has
increased to $241 million ($230 million of which is the exploration and
production budget). The revised budget is comprised of approximately (a) $83
million in development projects, (b) $62 million in exploration projects, (c)
$62 million in probable/possible projects, (d) $23 million to acquire additional
acreage and seismic data and (e) $11 million in other corporate items. 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

                                       24
<PAGE>

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.

         Credit Agreement

         In September 2000, Pure entered into two unsecured credit agreements
(the "Credit Agreements") with The Chase Manhattan Bank (the "Bank") and First
Union National Bank. The Credit Agreements are comprised of (a) a $250 million
five-year revolving credit facility ("Revolver"), with current commitments of
$235 million, and (b) a $250 million 364-day revolving credit facility ("364
Revolver"), with current commitments of $235 million. All amounts outstanding on
the Revolver are due and payable in full on September 29, 2005. All amounts
outstanding on the 364 Revolver on September 28, 2001 will be converted to a
term loan whose outstanding amounts are due and payable in full on September 29,
2002. A portion of the Revolver is available for the issuance of up to $50
million of letters of credit. At June 30, 2001, there was outstanding principal
of $167.8 million under the Revolver and $20.0 million under the 364 Revolver.
Pure is presently negotiating the extension of the 364 Revolver.

         At Pure's option, borrowings under the Credit Agreements 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 Revolver and .85% to
1.00% per annum for the 364 Revolver. These margins increase as Pure's debt
coverage ratio increases. 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 Credit Agreements and range from .20% to .30%
per annum on the Revolver and .15% to .25% per annum for the 364 Revolver.

         The Credit Agreement 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.

         7.125% Senior Notes

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

       The 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 Credit Agreements 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 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, Pure is required to
file an exchange offer registration statement with respect to an offer to
exchange the Senior Notes for a new, registered issue of Senior Notes.

                                       25
<PAGE>

         Liquidity and Working Capital

         At June 30, 2001, Pure had $14.9 million of cash and cash equivalents.
Pure's ratio of current assets to current liabilities was 0.70 and 1.05 at June
30, 2001 and December 31, 2000, respectively. Pure maintains relatively low cash
levels for cash management purposes. Pure, at June 30, 2001, had availability
under its Credit Agreement to fund any working capital deficit, if any.

         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, 2001, there was no outstanding principal under
the Working Capital Revolver.

Other Matters

         Stock Options and Compensation Expense

         Pure has issued options as of June 30, 2001 to officers and
non-officers to purchase 5,362,228 shares of Pure common stock. 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 the six months of 2001 and in the year 2000,
Pure expensed approximately $336,000 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 5 of the Notes to Consolidated Financial
Statements, officers of Pure have the right to require Pure to purchase shares
of Pure common stock that either were received in the Titan merger in exchange
for Titan common stock held by the officer on December 1, 1999 or are obtained
by the exercise of any option held by the officer, at a calculated "net asset
value" per share (as defined in each officer's employment/severance agreement).
The circumstances under which certain officers may exercise this right include
the termination of the officer's employment for any reason after three years
following the merger, the termination of the officer without cause, a change in
control of either Pure or Unocal and other events specified in the agreements.
The net asset value per share is calculated by reference to each common share's
pro rata pre-tax amount of the present value of proved reserves discounted at
10%, as defined, times 110%, less funded debt, as defined. The $144.4 million
reflected in the consolidated balance sheet at June 30, 2001, as common stock
subject to repurchase is the estimated net asset value, as defined, for each
applicable officer's covered shares and unexercised option shares less the
amount of proceeds that would be received upon exercise of the related options.
Deferred compensation related to such shares and options is calculated as the
difference between the estimated net asset value of the relevant number of Pure
shares and the market value of Pure shares held by each covered officer in the
case of shares held or the exercise price of shares subject to option. As of
June 30, 2001, Pure recorded approximately $93.8 million of deferred
compensation, of which it recognized amortization expense of approximately $5.8
million and $18.3 million for the three and six months ended June 30, 2001,
respectively, and $14.8 million for the year 2000, respectively. This
arrangement is being treated as a variable plan under Accounting Principles
Board Opinion No. 25 "Accounting for Stock Based Compensation." 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, 2001, Pure had hedging
transactions with respect to approximately 11,265,500 and 5,139,870 MMBtu of its
future 2001 and 2002 estimated natural gas production, respectively, and
1,063,520 and 673,000 barrels of its future 2001 and 2002 estimated crude oil
production, respectively. For additional information, see Note 11 of Notes to
Consolidated Financial Statements.

                                       26
<PAGE>

         In July 2001, Pure entered into two costless collars totaling 40,000
MMBtu per day of its natural gas for the production months November 2001 to
April 2002. The floor price is $3.25 per MMBtu and the ceiling price is $4.07
per MMBtu.

         At June 30, 2001, Pure had $37.5 million in notional principal of fixed
for floating interest rate swaps, which was 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 commitments for capital
expenditures to comply with existing environmental requirements.

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

         Recently Adopted and Issued Accounting Pronouncements

         As of January 1, 2001, Pure adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities. These standards require that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair value of
derivative instruments which are not designated and qualify as effective hedges
or are defined by SFAS No. 133 as being "fair value hedges" are recorded in
earnings as the changes occur. For derivatives designated as cash flow hedges,
changes in fair value are recognized in accumulated other comprehensive income
until the hedged item is recognized in earnings. The effectiveness of hedges are
measured at least quarterly based on the relative changes in fair value between
the derivative contract and the hedged item over time. Any change in fair value
resulting from ineffectiveness of a portion of a derivative contract, as defined
by SFAS No. 133, is recognized immediately in earnings. All of Pure's commodity
price derivatives are designated as cash flow hedges. See Note 11 of Notes to
Consolidated Financial Statements for additional information.

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

         Also, the FASB has voted to issue Statement 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, 2001, Pure is assessing the impact on its financial statements.

                                       27
<PAGE>

Pure Unaudited Pro Forma Data

         The following reflects unaudited pro forma data related to the
Contribution, the Titan merger, the IP Transaction and the Hallwood merger
discussed in Note 2 of the Notes to Consolidated Financial Statements. The
unaudited pro forma combined data assumes the Contribution, the Titan merger,
the IP Transaction and the Hallwood merger had taken place as of January 1, 2000
with respect to the unaudited pro forma combined statements of operations and
related operational data. The pro forma amounts are not necessarily indicative
of the results that may be reported in the future (dollars in thousands, except
per unit amounts):

Statement of Operations Data

<TABLE>
<CAPTION>
                                                                              Six months ended June 30,
                                                                            -----------------------------
                                                                                2001              2000
                                                                            ------------     ------------
            <S>                                                             <C>              <C>
            Total revenues                                                  $   309,142      $   229,158
            Oil and gas production costs                                        (44,931)         (40,527)
            Production and other taxes                                          (22,189)         (13,469)
            General and administrative expenses                                 (19,015)         (13,206)
            Amortization of deferred compensation                               (15,834)         (15,778)
            Exploration and abandonment costs                                   (11,644)         (10,548)
            Depreciation, depletion and amortization                            (76,927)         (70,260)
            Other expenses, net                                                 (17,610)         (24,792)
            Income tax expense                                                  (35,347)         (14,203)
            Minority interest                                                      (581)            (865)
                                                                            ------------     ------------

                                      Net income                            $    65,064      $    25,510
                                                                            ============     ============

            EBITDAX (a)                                                     $   215,818      $   158,595
                                                                            ============     ============
</TABLE>

         These pro forma amounts in 2000 differ from those disclosed in Note 2
of the Notes to the Consolidated Financial Statements, primarily due to the
elimination of merger costs incurred by Pure in 2000.

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

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

Operational Data

<TABLE>
<CAPTION>
                                                                             Six months ended June 30,
                                                                            ---------------------------
                                                                               2001             2000
                                                                            ------------     ----------
            <S>                                                             <C>              <C>
            Production:
               Oil and condensate (MBbls)...................................       4,038          3,861
               Natural gas (MMcf)...........................................      43,678         46,149
               Total (MBOE).................................................      11,318         11,553

            Average sales price per unit (including effects of hedging):
               Oil and condensate (per Bbl).................................     $ 25.52        $ 25.63
               Natural gas (per Mcf)........................................     $  4.63        $  2.72
               Total (per BOE)..............................................     $ 26.98        $ 19.42
</TABLE>

                                       28
<PAGE>

Item 3.  Quantative 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, 2001, and
from which Pure may incur future earnings gains or losses from changes in market
interest rates and commodity prices.

Quantitative Disclosures

         Commodity Price Sensitivity:

         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 11 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>
                                                                                    2001              2002          Fair Value
                                                                                ------------      ------------    ---------------
         <S>                                                                    <C>               <C>             <C>
         Natural Gas Hedge Derivatives (a):

         Collar and swap option contracts:
         Notional volumes (MMBtu)                                                 11,265,500        5,139,870       $  376,056
         Weighted average short call strike price per MMBtu (b)                 $      3.540      $     2.193
         Weighted average long put strike price per MMBtu (b)                   $      4.545      $     2.225

         Crude Oil Hedge Derivatives (a):

         Collar and swap option contracts:
         Notional Volume (Bbls)                                                    1,063,520          673,000       $ (538,870)
         Weighted average short call strike price per Bbl (c)                   $     24.900      $    24.030
         Weighted average long put strike price per Bbl (c)                     $     29.820      $    28.090
</TABLE>

-----------------------
(a)    See Note 11 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, San
       Juan Basin hub, Rocky Mountain hub or a Gulf Coast hub.
(c)    The strike prices are based on the prices traded on the NYMEX.

                                       29
<PAGE>

         Interest Rate Sensitivity:

         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 June 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>
                                                   2002              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)                 $      -         $ 167,756          $       -         $ 167,756      $ 167,756
                  Average interest rate                    -%             5.36%                 -%

             364 Revolver (b)                       $ 20,000         $       -          $       -         $  20,000      $  20,000
                  Average interest rate                 5.60%                -%                 -%

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


        Fixed  rate debt:

             Senior Notes                           $      -         $       -          $ 350,000         $ 350,000      $ 344,107
                  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 Chase Manhattan Bank and First Union National Bank and
        all borrowings are unsecured.

      Interest Rate Swap:

             At June 30, 2001, Pure had an interest rate swap, acquired in the
Hallwood merger, as set forth below:

<TABLE>
<CAPTION>
                      Period                                   Notional Amount     Fixed Price
        --------------------------------------                ----------------------------------
        <S>                                                   <C>
        Six months ended December 31, 2001                      $ 37,500,000              5.23%
                       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, 2001, the fair value of the interest rate swap was a liability of
approximately $10,000.

                                       30
<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 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

                                       31
<PAGE>

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

         As of June 30, 2001, Pure's primary risk exposures associated with
financial instruments to which it is a party include crude oil and natural gas
price volatility and interest rate volatility. Pure's primary risk exposures
associated with financial instruments have not changed significantly since
December 31, 2000.

                                       32
<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. We are unable at this time to assess the
         likelihood of an unfavorable outcome. We believe the suit is without
         merit and shall vigorously defend against it. In our opinion, the
         ultimate disposition of this lawsuit, in the event of an unfavorable
         outcome, should not have a material adverse effect on Pure's financial
         position or liquidity, but could adversely impact results of operations
         in a given reporting period unless the matter is resolved prior to May
         2002 (end of Hallwood merger allocation period).

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 Wednesday, May 9, 2001.


         (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 50,042,141 shares of common stock of Pure
         outstanding and entitled to vote, 48,689,216 shares were present in
         person or by proxy, representing approximately 97%. 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 2001. 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                             47,634,438               1,054,778
                    George G. Staley                              47,616,797               1,072,419
                    Darrell D. Chessum                            47,622,405               1,066,811
                    Keith A. Covington                            48,655,542                  33,674
                    Graydon H. Laughbaum, Jr.                     48,650,218                  38,998
                    Timothy H. Ling                               47,579,438               1,109,778
                    H D Maxwell                                   48,650,217                  38,999
                    Herbert C. Williamson, III                    48,655,627                  33,589
</TABLE>


              2.   To approve the selection by the Board of Directors, of the
              firm of KPMG LLP as independent auditors for the Company for 2001.

                   For                    48,685,604
                   Against                     1,273
                   Abstain                     2,339

         (d)  Inapplicable.



                                       33
<PAGE>

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

         2.1   Agreement and Plan of Merger by and among Pure Resources, Inc.,
               Pure Resources II, Inc. and Hallwood Energy Corporation dated as
               of March 29, 2001 (incorporated herein by reference to Exhibit
               99.(d)(1) to the Schedule TO filed by Pure Resources II, Inc.,
               Titan Exploration, Inc., Pure Resources, Inc., Union Oil Company
               of California and Unocal Corporation on April 10, 2001).
        10.1   Agreement and Plan of Merger, dated as of March 29, 2001, among
               Pure Resources, Inc., Pure Resources II, Inc. and Hallwood Energy
               Corporation (filed as Exhibit (d)(1) to Schedule TO by Pure
               Resources II, Inc. and others on April 10, 2001, and incorporated
               herein by reference).
        10.2   Stockholders Agreement by and among Pure Resources, Inc., Pure
               Resources II, Inc. and certain stockholders of Hallwood Energy
               Corporation dated as of March 29, 2001 (filed as Exhibit (d)(2)
               to Schedule TO by Pure Resources II, Inc. and others on April 10,
               2001, and incorporated herein by reference).
        10.3   Noncompetition Agreement by and among Pure Resources, Inc.,
               Hallwood Energy Corporation and The Hallwood Group Incorporated
               dated as of March 29, 2001 (filed as Exhibit (d)(3) to Schedule
               TO by Pure Resources II, Inc. and others on April 10, 2001, and
               incorporated herein by reference).
        10.4   Stock Option Agreement by and among Hallwood Energy Corporation,
               Pure Resources, Inc. and Pure Resources II, Inc. dated as of
               March 29, 2001 (filed as Exhibit (d)(4) to Schedule TO by Pure
               Resources II, Inc. and others on April 10, 2001, and incorporated
               herein by reference).
        10.5   Credit Agreement, dated May 8, 2001, among Pure Resources, Inc.,
               the Lenders party hereto, Credit Suisse First Boston, as
               Administrative Agent, First Union Nation Bank, as Syndication
               Agent, and BNP Paribas, as Documentation Agent (filed as Exhibit
               10.1 to Pure Resources, Inc. Current Report on Form 8-K/A
               Amendment No. 1 (date of report: May 9, 2001) filed on June 1,
               2001, and incorporated herein by reference).
        10.6   First Amendment, dated February 28, 2001, to Credit Agreement
               (364-Day Revolving Credit Facility) dated as of September 29,
               2001 among Pure Resources, Inc., the lenders party thereto, and
               The Chase Manhattan Bank, individually, as Issuing Bank and
               Administrative Agent (filed as Exhibit 10.2 to Pure Resources,
               Inc. Current Report on Form 8-K/A Amendment No. 1 (date of
               report: May 9, 2001) filed on June 1, 2001, and incorporated
               herein by reference).
        10.7   First Amendment, dated February 28, 2001, to Credit Agreement
               (Five-Year Revolving Credit Facility) dated as of September 29,
               2000 among Pure Resources, Inc., the lenders party thereto, and
               The Chase Manhattan Bank, individually, as Issuing Bank and
               Administrative Agent (filed as Exhibit 10.3 to Pure Resources,
               Inc. Current Report on Form 8-K/A Amendment No. 1 (date of
               report: May 9, 2001) filed on June 1, 2001, and incorporated
               herein by reference).
        10.8*  Joint Development Agreement, effective date: January 30, 2001, by
               and between Pure Resources, and F. H. Mills, Jr., Lon Slaughter,
               and George G. Staley.
        10.9*  Indenture of the $350,000,000 Series A and Series B 7.125% Notes
               Due 2001, dated June 8, 2001, by and among Pure Resources, Inc.,
               as issuer, The Guarantors, as guarantors, and First Union
               National Bank as trustee.
       10.10*  Registration Rights Agreement, dated June 5, 2001, by and between
               Pure Resources, Inc. and Credit Suisse First Boston Corporation,
               First Union Securities, BNP Paribas Securities Corp., Fleet
               Securities, Inc., Credit Lyonnais Securities (USA) Inc., BNY
               Capital Markets, Inc., and Wells Fargo Brokerage, LLC.
       10.11*  7.125% Series A Note Due 2011 of Pure Resources, Inc.
       10.12*  Purchase Agreement, dated June 5, 2001, for $350,000,000 of Pure
               Resources, Inc.'s 7.125% Senior Notes Due 2011 to Credit Suisse
               First Boston Corporation, First Union Securities, BNP Paribas
               Securities Corp., Fleet Securities, Inc., Credit Lyonnais
               Securities (USA) Inc., BNY Capital Markets, Inc., and Wells Fargo
               Brokerage, LLC.

       -------
       * Filed herewith

                                       34
<PAGE>

(b) Reports Submitted on Form 8-K:

       1.   Form 8-K/A Amendment No. 1 filed on April 16, 2001 (date of event
            January 31, 2001) reporting the acquisition of oil and gas
            properties, fee mineral and royalty interests from International
            Paper Company and certain general and limited partnership interests
            and including the required historical and pro forma financial
            information.

       2.   Form 8-K filed on May 23, 2001 (date of event May 9, 2001) reporting
            the cash acquisition of the common and preferred stock of Hallwood
            Energy Corporation.

       3.   Form 8-K/A Amendment No. 1 filed on June 1, 2001 (date of event May
            9, 2001) reporting the cash acquisition of the common and preferred
            stock of Hallwood Energy Corporation and including the required
            historical and pro forma financial information.

                                       35
<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 and Chief Financial
                                             Officer

Date: August 14, 2001

                                       36