<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 March 31, 2001
                                       or

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


                       Commission File Number:  001-15899


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



                   Delaware                            74-2952918
        (State or other jurisdiction                (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 May 7, 2001, 50,044,918 shares of common stock, par value $.01
per share of Pure Resources, Inc. were outstanding.

================================================================================
<PAGE>

                               TABLE OF CONTENTS
                               -----------------


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

                        PART I -- FINANCIAL INFORMATION
Item 1.    Financial Statements
           --------------------

           Consolidated Balance Sheets as of March 31, 2001 (Unaudited) and
            December 31, 2000....................................................................   3
           Unaudited Consolidated Statements of Operations for the Three Months Ended
            March 31, 2001 and 2000..............................................................   5
           Unaudited Consolidated Statements of Cash Flows for the Three Months Ended
            March 31, 2001 and 2000..............................................................   6
           Unaudited Consolidated Statements of Comprehensive Income for the Three Months Ended
            March 31, 2001 and 2000..............................................................   7

           Notes to Consolidated Financial Statements............................................   8

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations.  18
           -------------------------------------------------------------------------------------

Item 3.    Quantitative and Qualitative Disclosures About Market Risk............................  27
           ----------------------------------------------------------

                          PART II -- OTHER INFORMATION

Item 1.    Legal Proceedings.....................................................................  30
           -----------------

Item 2.    Changes in Securities and Use of Proceeds.............................................  30
           -----------------------------------------

Item 4.    Submission of Matters to a Vote of Security Holders...................................  30
           ---------------------------------------------------

Item 6.    Exhibits and Reports on Form 8-K......................................................  30
           --------------------------------

           Signatures............................................................................  32
</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.  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

                                                                                             March 31,      December 31,
                                                                                                2001             2000
                                                                                          ------------------------------
                                                                                            (Unaudited)
<S>                                                                                        <C>              <C>
Current assets:
    Cash and cash equivalents                                                                $    9,870       $    3,325
    Accounts receivable:
                  Oil and gas                                                                    50,538           46,749
                  Other                                                                              38            1,702
    Prepaid expenses and other current assets                                                     1,582              883
                                                                                          -------------     ------------
                              Total current assets                                               62,028           52,659
                                                                                          -------------     ------------

Property, plant and equipment, at cost:
    Oil and gas properties, using the successful efforts method of accounting:
                  Proved properties                                                           1,452,553        1,140,209
                  Unproved properties                                                            28,872           21,743
    Accumulated depletion, depreciation and amortization                                       (600,846)        (577,532)
                                                                                          -------------     ------------
                                                                                                880,579          584,420
                                                                                          -------------     ------------

Other property and equipment, net                                                                 7,235            6,449

Deferred compensation (Note 5)                                                                   73,787           63,903

Receivables for under-delivered gas                                                               8,965           10,274

Other assets, net                                                                                 1,487            1,410
                                                                                          -------------     ------------
                                                                                             $1,034,081       $  719,115
                                                                                          =============     ============
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       3
<PAGE>

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



<TABLE>
<CAPTION>


                          LIABILITIES AND STOCKHOLDERS' EQUITY

                                                                                           March 31,                  December 31,
                                                                                             2001                         2000
                                                                                        --------------           ------------------
<S>                                                                                     <C>                          <C>
                                                                                          (Unaudited)
Current liabilities:
   Accounts payable and accrued liabilities:
                  Trade                                                                     $   12,636                     $ 18,228
                  Fair value of derivatives and deferred commodity hedges (Note 10)              3,756                        6,781
                  Other (Note 8)                                                                44,847                       25,125

                                                                                        --------------           ------------------
                                 Total current liabilities                                      61,239                       50,134
                                                                                        --------------           ------------------

Long-term debt                                                                                 307,856                       68,000

Liabilities for over-delivered gas                                                              16,777                       17,791

Accrued abandonment, restoration and environmental liabilities                                  15,328                       14,331

Deferred income taxes                                                                           59,479                       55,456

Common stock subject to repurchase (Note 5)                                                    155,356                      135,617

Minority interest                                                                                5,159                            -

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;
     50,042,656 shares and 50,037,402 shares issued and outstanding at
     March 31, 2001 and December 31, 2000, respectively                                            500                          500
   Additional paid-in capital                                                                  329,574                      326,827
   Notes receivable -affiliates                                                                 (7,056)                      (6,952)
   Deferred compensation (Note 5)                                                               (2,128)                      (2,296)
   Accumulated other comprehensive income (loss)                                                (1,126)                           -
   Retained earnings                                                                            93,123                       59,707
                                                                                        --------------           ------------------
                                 Total stockholders' equity                                    412,887                      377,786
                                                                                        --------------           ------------------
   Commitments and contingencies (Note 5)
                                                                                            $1,034,081                     $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
                                                                         March 31,
                                                          ----------------------------------------
                                                                 2001                   2000
                                                          -----------------      -----------------
<S>                                                       <C>                    <C>
Revenues:
   Oil sales                                                       $ 48,865                $26,098
   Gas sales                                                         77,489                 16,300
   Other operating                                                        -                    118
   Gain on sale of assets                                                22                      -

                                                          -----------------      -----------------
      Total revenues                                                126,376                 42,516
                                                          -----------------      -----------------

Expenses:
   Oil and gas production                                            16,082                  6,919
   Production and other taxes                                         9,412                  3,055
   General and administrative                                         6,186                    845
   Amortization of deferred                                          12,693                      -
   compensation (general and administrative)
   Exploration and abandonment (Note 9)                               3,340                  1,730
   Depletion, depreciation and amortization                          24,312                  7,896
                                                          -----------------      -----------------
      Total expenses                                                 72,025                 20,445
                                                          -----------------      -----------------

      Operating income                                               54,351                 22,071
                                                          -----------------      -----------------

Other income (expense):
   Interest income                                                      197                      -
   Interest expense                                                  (4,050)                     -
   Other                                                              1,151                 (1,096)
                                                          -----------------      -----------------

      Income before income taxes and minority interest               51,649                 20,975

Income tax expense                                                  (18,074)                (7,301)

Minority interest                                                      (159)                     -
                                                          -----------------      -----------------

      Net income                                                   $ 33,416                $13,674
                                                          =================      =================

      Net income per share                                            $0.67                  $0.42
                                                          =================      =================

      Net income per share - assuming dilution                        $0.65                  $0.42
                                                          =================      =================
</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
                                                                                                             March 31,
                                                                                                   ------------------------------
                                                                                                        2001             2000
                                                                                                   -------------     ------------
<S>                                                                                                  <C>             <C>
Cash flows from operating activities:
   Net income                                                                                          $  33,416         $ 13,674
   Adjustment to reconcile net income to net cash provided by
    operating activities:
        Depletion, depreciation and amortization                                                          24,312            7,896
        Amortization of deferred compensation                                                             12,693                -
        Amortization deferred commodity hedges                                                            (4,227)               -
        Exploration and abandonments                                                                       1,353            1,463
        Gain on sale of assets                                                                               (22)               -
        Deferred income taxes                                                                              4,648            1,365
        Other items                                                                                         (703)             300
   Changes in assets and liabilities:
        Accounts receivable                                                                               (2,124)         (12,265)
        Prepaid expenses and other current assets                                                           (699)            (118)
        Receivables for under-delivered gas                                                                1,309             (822)
        Other assets                                                                                        (151)            (213)
        Accounts payable and accrued liabilities                                                          (1,471)          16,043
        Income taxes payable                                                                              10,429                -
        Liabilities for over-delivered gas                                                                (1,014)             364
        Other non-current liabilities                                                                          -             (139)
                                                                                                   -------------     ------------
              Total adjustments                                                                           44,333           13,874
                                                                                                   -------------     ------------
              Net cash provided by operating activities                                                   77,749           27,548
                                                                                                   -------------     ------------

Cash flows from investing activities:
   Investment in oil and gas properties                                                                 (315,529)         (22,733)
   Additions to other property and equipment                                                              (1,130)               -
   Proceeds from sale of assets                                                                              551               61
                                                                                                   -------------     ------------

              Net cash used in investing activities                                                     (316,108)         (22,672)
                                                                                                   -------------     ------------

Cash flows from financing activities:
   Proceeds from revolving debt, net                                                                     239,856                -
   Exercise of stock options                                                                                  48                -
   Net settlements with owner                                                                                  -           (4,876)
   Other financing activities                                                                              5,000                -
                                                                                                   -------------     ------------

              Net cash provided by (used in) financing activities                                        244,904           (4,876)
                                                                                                   -------------     ------------


              Net increase in cash and cash equivalents                                                    6,545                -

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

Cash and cash equivalents, end of period                                                               $   9,870         $      -
                                                                                                   =============     ============

</TABLE>

         See accompanying notes to consolidated financial statements.

                                       6
<PAGE>

                                Resources, Inc.
           Unaudited Consolidated Statements of Comprehensive Income
                                (in thousands)

                                                          Three months ended
                                                               March 31,
                                                         -------------------
                                                           2001       2000
                                                         --------   --------

 Net income                                              $ 33,416   $ 13,674
                                                         --------   --------
    Other comprehensive income (loss), net of tax:

          Cumulative effect of accounting change          (11,364)         -
          Reclassification to earnings                      8,656          -
          Changes in fair value of cash flow hedges         1,582          -
                                                         --------   --------
    Other comprehensive loss, net of tax                   (1,126)         -
                                                         --------   --------

   Comprehensive income                                  $ 32,290   $ 13,674
                                                         ========   ========


         See accompanying notes to consolidated financial statements.

                                       7
<PAGE>

                              PURE RESOURCES, INC.
                   Notes to Consolidated Financial Statements
                            March 31, 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, and the Gulf Coast region of Texas.  As a result of the IP
Transaction (see Note 2), Pure has additional areas of focus, primarily,
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 March 31, 2001 and for the three months ended March 31,
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.

                                       8
<PAGE>

     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.

     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 March 31, 2001 presentations.


(2)  The Merger, Contribution and Acquisitions

     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").  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).  At December 31, 2000, Pure
estimated the total proved reserves to be approximately 25,000 MBOE with an SEC
10% present value of approximately $629 million.

     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.

                                       9
<PAGE>

     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)
                                                        ---------
        Cash 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.

     Pro Forma Results of Operations (Unaudited)

     The following table reflects the pro forma results of operations for the
three months ended March 31, 2001 and 2000 as though the Titan merger, the
Contribution, and the IP Transaction 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>
                                                        Three months ended March 31,
                                                        ----------------------------
                                                             2001          2000
                                                        ------------    ------------
        <S>                                             <C>             <C>
        Revenues                                           $143,149       $87,886
        Net income                                         $ 38,720       $17,760
        Net income per common share                        $   0.77       $  0.36
        Net income per common share - assuming dilution    $   0.75       $  0.36
</TABLE>

(3)  Debt

     Debt consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                 March 31,            December 31,
                                                   2001                   2000
                                             ------------------       ----------------
                                                 (Unaudited)
        <S>                                    <C>                    <C>
        Revolver                                       $209,856                $65,000
        364 Revolver                                     98,000                      -
        Working Capital Revolver                              -                  3,000
                                             ------------------       ----------------
                                                       $307,856                $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.

                                       10
<PAGE>

     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.

     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.


(4)  Accrued Abandonment, Restoration and Environmental Liabilities

     At March 31, 2001 and December 31, 2000, Pure had accrued $14.2 million and
$13.2 million, respectively, for the estimated future costs to abandon and
remove wells and production facilities.  The amounts were charged to
depreciation, depletion and amortization expense.  The total amount chargeable
to operations for abandonment (to be predominantly accrued on a unit-of-
production basis) is estimated to be approximately $39.8 million and $34.9
million at March 31, 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 totalled $1.1
million as of March 31, 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 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

                                       11
<PAGE>

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 March 31, 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 $155.4 million
reflected in the consolidated balance sheet at March 31, 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
March 31, 2001, Pure recorded approximately $101.1 million of deferred
compensation, of which it recognized amortization expense of approximately $12.5
million in the first quarter of 2001 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 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.

                                       12
<PAGE>

     Other matters

     Under the terms of a partnership agreement with affiliates of International
Paper (see Note 5 on the International Paper transaction), Pure would be
required to make contingent payments to its other partners in the partnership if
Pure causes the partnership, prior to January 2008, to dispose of assets, as
defined in the partnership agreement, with a fair market value in excess of $25
million.  Pure's maximum contingent payment at March 31, 2001 is approximately
$90 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.


(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
                                                               March 31,
                                                -------------------------------------
                                                       2001                2000
                                                -----------------   -----------------
<S>                                             <C>                 <C>
Numerator:
   Net income and numerator for basic and
   diluted net income per common share -
   income available to common stockholders                $33,416             $13,674
                                                -----------------   -----------------

Denominator:
   Denominator for basic net income per
   common share - weighted average common
   shares (a)                                              50,039              32,709

   Effect of dilutive securities - employee
   stock options not subject to "put" right                   262                   -

   Dilutive effect of officers' stock
   options subject to the "put" right under
   employment/severance agreements (Note 5)                   912                   -

   Dilutive effect of officers' individual
   common stock held subject to the "put"
   right under employment/severance
   agreements (Note 5)                                        271                   -
                                                -----------------   -----------------

   Denominator for diluted net income per
   common share - adjusted weighted average
   common shares and assumed conversions                   51,484              32,709
                                                =================   =================

   Basic net income per common share                      $  0.67             $  0.42
                                                =================   =================

   Diluted net income per common share                    $  0.65             $  0.42
                                                =================   =================
</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.

                                       13
<PAGE>

     Employee stock options to purchase 5,572,919 shares of common stock were
outstanding at March 31, 2001 but only 3,949,360 were included in the
computation of diluted net income per common share for the three months ended
March 31, 2001, due to the average market price of Pure common stock being
greater than the option price.  The remaining 1,623,559 shares for the three
months ended March 31, 2001 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.  There were no potentially dilutive
securities in the first quarter of 2000.


(7)  Incentive Plans

     Pure 1999 Incentive Plan

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

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

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

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

<TABLE>
        <S>                                                                     <C>
        Common stock outstanding                                                       50,042,656
        Options awarded under the Pure 1999 Incentive Plan                              5,277,776
        Assumed options from Titan                                                        458,011
        Options exercised                                                                 (40,810)
        Options cancelled/forfeited                                                      (115,648)
                                                                                  ---------------
        Common stock equivalents                                                       55,621,985
                                                                                  ===============

        Maximum shares/options allowed under the Pure 1999 Incentive Plan               6,674,638

        Less:    Outstanding awards under the Pure 1999 Incentive Plan                 (5,168,366)
                 Outstanding options under the Titan Plans                               (404,553)
                                                                                  ---------------
        Shares/options available for future grant                                       1,101,719
                                                                                  ===============
</TABLE>

                                       14
<PAGE>

(8)  Other Current Liabilities

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

<TABLE>
                                                                                March 31,                 December 31,
                                                                                   2001                      2000
                                                                          --------------------        ------------------
                                                                               (Unaudited)
        <S>                                                               <C>                         <C>

        Accrued oil and gas production expenses                                        $31,021                   $20,923
        Income taxes payable                                                            13,727                     3,298
        Accrued interest payable                                                            99                       904
                                                                          --------------------        ------------------
                                                                                       $44,847                   $25,125
                                                                          ====================        ==================
</TABLE>

(9)  Exploration and Abandonment

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

<TABLE>
<CAPTION>
                                                                          Three months ended
                                                                               March 31,
                                                                --------------------------------------
                                                                     2001                  2000
                                                                ----------------     -----------------
        <S>                                                       <C>                  <C>
        Geological and geophysical staff                                  $1,438                $  264
        Uneconomical exploratory projects                                    379                 1,119
        Impaired unproved properties                                         374                   344
        Seismic costs                                                        601                     -
        Other                                                                549                     3
                                                                ----------------     -----------------
                                                                          $3,341                $1,730
                                                                ================     =================
</TABLE>
(10) 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.  It requires the recognition of all derivative instruments
as assets or liabilities in Pure's consolidated balance sheet and measurement of
those instruments at fair value.  The accounting  treatment of changes in fair
value is dependent upon whether or not a derivative instrument is designated as
a hedge and if so, the type of hedge.  For derivatives designated as cash flow
hedges, changes in fair value are recognized in other comprehensive income until
the hedged item is recognized in earnings.  Hedge effectiveness is 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, as defined by SFAS No. 133, is recognized
immediately in earnings.  All of Pure's commodity price derivatives, with the
exception of Pure's natural gas basis differential swaps, are designated as cash
flow hedges.  Changes in the fair value of derivative instruments which are not
designated as hedges or are defined by SFAS No. 133 as being "fair value hedges"
are recorded in earnings as the changes occur.

     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, consisting of $17.5 million to short-term derivatives.  At March 31,
2001, the estimated net amount of the existing losses within other comprehensive
income that are expected to be reclassified into earnings within the next 12
months is approximately $1.7 million.  In 2001, included in other income is
approximately $808,000 of gain from the increase in fair value of non-cash flow
hedges and approximately $392,000 of gain from the ineffectiveness of the cash
flow hedges.

                                       15
<PAGE>

     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 March 31, 2001:

<TABLE>
                                                                                  2001
                                                                             ---------------
        <S>                                                                <C>
        Gas related derivatives:
           Collar options:
                Volume (MMBtu)                                                    9,925,000
                Index price per MMBtu (floor-ceiling prices)                $  2.60 - $7.28

           Basis differential swaps:
                Volume (MMBtu)                                                    1,365,000
                Index Price per MMBtu                                       $          0.12

        Oil related derivatives:
           Collar options:
                Volume (Bbls)                                                       227,500
                Index price per Bbl (floor-ceiling prices)                  $16.50 - $20.48
</TABLE>

   The index price for the natural gas collars settles based on NYMEX Henry Hub,
while the oil collar settles based on the prices for West Texas Intermediate on
NYMEX. The basis differential swaps lock in the basis differential between NYMEX
Henry Hub and the Waha West Texas delivery point.

   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 May 2001, Pure entered into a costless collar of 5,000 barrels per day of
its crude oil for the production months July 2001 to April 2002.  For 2001, the
floor price is $25.00 per barrel and the ceiling price is $30.68 per barrel,
while in 2002 the floor price is $24.00 per barrel and the ceiling price is
$28.55 per barrel.

(11)  Hallwood Transaction

     Tender Offer

     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, will 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 is
structured as a first step tender offer followed by a cash merger to acquire all
remaining shares of Hallwood.  Total consideration for the transaction is
estimated to be approximately $268 million, including assumed debt.

     On May 8, 2001, Pure completed its initial tender offer period for all of
the outstanding shares of common stock and preferred stock of Hallwood and has
commenced a subsequent offering period set to expire May 15, 2001, unless
further extended.  On May 9, 2001, Pure accepted for payment 8,204,711 shares of
Hallwood common stock that had been tendered (including 212,139 shares that were
guaranteed to be delivered), which represented approximately 85% of the issued
and outstanding shares of Hallwood common stock as of such date. Pure Resources
also accepted for payment 1,765,289 shares of Hallwood preferred stock that had
been tendered (including 4,525

                                       16
<PAGE>

shares that were guaranteed to be delivered), which represented approximately
78% of the issued and outstanding shares of Hallwood preferred stock as of such
date. On May 11, 2001, Pure paid approximately $124.6 million for the common and
preferred stock tendered during the initial tender period and the additional
shares tendered through May 10, 2001. Pure expects the completion of the merger
will occur within 120 days.

     Financing

     As of May 8, 2001, Pure entered into a $200 million unsecured line of
credit with Credit Suisse First Boston ("CSFB") and First Union National Bank
("First Union"), which was fully funded on May 11, 2001. The line of credit
matures on July 16, 2001. At maturity, the line of credit will convert to a 5-
year term loan maturing on July 16, 2006 subject to the condition the term loan
has been fully syndicated prior to conversion. At the present, Pure has
commitments of $50 million (from CSFB) and $45 million (from First Union)
towards the syndication and management expects it will obtain the remaining
commitment or will have obtained other financing by July 16, 2001. The terms of
the line of credit and term loan are comparable to those of its current
facilities.

                                       17
<PAGE>

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


Hallwood Tender Offer

     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, will 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 is
structured as a first step tender offer followed by a cash merger to acquire all
remaining shares of Hallwood.  Total consideration for the transaction is
estimated to be approximately $268 million, including assumed debt.

     On May 8, 2001, Pure completed its initial tender offer period for all of
the outstanding shares of common stock and preferred stock of Hallwood and has
commenced a subsequent offering period set to expire May 15, 2001, unless
further extended.  On May 9, 2001, Pure accepted for payment 8,204,711 shares of
Hallwood common stock that had been tendered (including 212,139 shares that were
guaranteed to be delivered), which represented approximately 85% of the issued
and outstanding shares of Hallwood common stock as of such date. Pure Resources
also accepted for payment 1,765,289 shares of Hallwood preferred stock that had
been tendered (including 4,525 shares that were guaranteed to be delivered),
which represented approximately 78% of the issued and outstanding shares of
Hallwood preferred stock as of such date.  On May 11, 2001, Pure paid
approximately $124.6 million for the common and preferred stock tendered during
the initial tender period and the additional shares tendered through May 10,
2001.  Pure expects the completion of the merger will occur within 120 days.

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.  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.

                                       18
<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.  The NYMEX average price for
crude oil and natural gas was $30.25 per barrel and $4.32 per Mcf for 2000,
compared to $28.67 per barrel and $6.24 per Mcf for the first quarter of 2001,
respectively. Despite this recent improvement, oil and natural gas prices remain
subject to volatility, and could decline again.

     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 March 31,
2001, the NYMEX prices for crude oil and natural gas were $26.29 per barrel and
$5.03 per Mcf, respectively.

     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 March 31, 2001, when the
trading price of Pure common stock was $19.30 per share, the "per share net
asset value" of Pure, calculated in accordance with the agreements, was
estimated at approximately $30.43. The amortization amounts will change
quarterly based on relative changes in the net asset value and market value of
the Pure shares.

                                       19
<PAGE>

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 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
$800,000 for 2000.

   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 $600,000 for 2000.

   Indirect Exploration Costs

   Indirect exploration costs include charges for the chief geologist's
department, the chief geophysicist's department, and the land department.
Indirect exploration costs charged to the Permian Basin business unit were
$100,000 for 2000.

                                       20
<PAGE>

Operating Data

<TABLE>
<CAPTION>

                                                                                                  Three months ended
                                                                                                      March 31,
                                                                                         ------------------------------------
                                                                                             2001                     2000
                                                                                         -------------            ------------
<S>                                                                                      <C>                          <C>
Production:
    Oil and condensate (MBbls)..........................................................         1,810                     926
    Natural gas (MMcf)..................................................................        14,719                   7,156
    Total (MBOE)........................................................................         4,263                   2,119

Average daily production:
    Oil and condensate (Bbls)...........................................................        20,106                  10,176
    Natural gas (Mcf)...................................................................       163,541                  78,637
    Total (BOE).........................................................................        47,363                  23,282

Average sales price per unit (excluding effects of hedging):
    Oil and condensate (per Bbl)........................................................   $     27.39              $    28.18
    Natural gas (per Mcf)...............................................................   $      5.83              $     2.28
    Total (per BOE).....................................................................   $     31.77              $    20.01

Average sales price per unit (including effects of hedging):
    Oil and condensate (per Bbl)........................................................   $     27.00              $    28.18
    Natural gas (per Mcf)...............................................................   $      5.26              $     2.28
    Total (per BOE).....................................................................   $     29.64              $    20.01

Expenses per BOE:
    Production costs, excluding production and other taxes .............................   $      3.77              $     3.27
    Production and other taxes..........................................................   $      2.21              $     1.44
    General and administrative..........................................................   $      1.45              $     0.40
    Depletion, depreciation and amortization............................................   $      5.70              $     3.73
</TABLE>

Results of Operations

     Pure completed the Titan merger in May 2000 and the IP Transaction on
January 31, 2001.  The results of operations and cash flows for Pure include (a)
Titan since June 2000 and (b) the IP Transaction since February 2001.

     Three Months Ended March 31, 2001 as compared to Three Months Ended March
31, 2000

     Pure's revenues from the sale of oil and natural gas were $48.9 million and
$77.5 million for the three months ended March 31, 2001 and $26.1 million and
$16.3 million for the three months ended March 31, 2000, respectively.  Compared
with 2000, Pure's average oil sales prices decreased by $1.17 per Bbl, or 4%,
while average gas sales prices increased by $2.98 per Mcf, or 131%.  The
increase in production of 2.1 million BOE in 2001 is primarily the result of the
Titan merger, IP Transaction and the success of Pure's capital program, offset
by normal production declines.  The Titan and IP Transaction properties
contributed approximately 2.0 million BOE of production in the first quarter of
2001.

     Pure's oil and gas production expenses excluding production and other taxes
were $16.1 million ($3.77 per BOE) and $6.9 million ($3.27 per BOE) for the
three months ended March 31, 2001 and 2000, respectively.  Production expenses
increased $9.2 million which is primarily the result of (a) production costs
from the Titan properties of $5.8 million and IP Transaction properties of $1.8
million, (b) a decrease of $800,000 in special well repair expenditures between
periods, (c) significant increases in the costs of services and products and (d)
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 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.

                                       21
<PAGE>

     Production and other taxes were $9.4 million ($2.21 per BOE) and $3.1
million ($1.44 per BOE) for the three months ended March 31, 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 and the IP
Transaction.

     General and administrative expenses were $6.2 million ($1.45 per BOE) and
$845,000 ($.40 per BOE) for the three months ended March 31, 2001 and 2000,
respectively.  General and administrative expenses increased as a result of (a)
the Titan merger and the IP Transaction, (b) subsequent to merger, the
classification of certain costs as general and administrative versus production
expense, and (c) offset by an $800,000 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 $24.3 million
($5.70 per BOE) and $7.9 million ($3.73 per BOE) for the three months ended
March 31, 2001 and 2000, respectively.  DD&A increased in absolute amounts due
primarily to the inclusion of the properties from the Titan merger and the IP
Transaction for the three months ended  March 31, 2001.  The increase in the per
unit amount is primarily attributable to per unit acquisition costs from the IP
Transaction.

     Pure's exploration and abandonment expense was $3.3 million and $1.7
million for the three months ended March 31, 2001 and 2000, respectively.
Increase in exploration expenses is primarily related to an increase in
geological and geophysical staff and related costs as a result of the Titan
merger and the IP Transaction, offset by a $100,000 decrease in Union Oil's
indirect costs between periods.

     In 2001, Pure had interest expense due to (a) assuming the debt of Titan in
the merger, (b) Pure's significant capital expenditure program and (c) the IP
Transaction that closed January 31, 2001.

     In 2001, other income (expense) includes $1.2 million of gain attributable
to derivative contract ineffectiveness and the change in fair value of certain
derivatives not qualifying as cash flow hedges under SFAS No. 133.  In 2000,
other expense primarily relates to transitional type costs associated with the
merger, the Union Oil contribution of properties into Pure and certain
transaction costs of Union Oil directly related to the merger.

     Income tax expense was $18.1 million and $7.3 million for the three months
ended March 31, 2001 and 2000, respectively.  Income tax expense increased due
to increased earnings between periods.

Liquidity and Capital Resources

   Pure's primary sources of capital subsequent to the Titan merger are its cash
flow from operations and bank financing.  Pure requires capital primarily for
its exploration, development and acquisition of oil and gas properties,
repayment of indebtedness and general working capital needs.  If 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
has 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 $4.9 million for 2000.  Subsequent to
the merger, Union Oil has not provided any additional cash management services
to Pure.

     Net Cash Provided by Operating Activities

     Cash flow from operating activities for Pure was $77.7 million for the
three months ended March 31, 2001 compared to $27.5 million for the three months
ended March 31, 2000.  The increase in net cash provided by operating activities
was primarily due to increased commodity prices, the Titan merger and the IP
Transaction.

                                       22
<PAGE>

     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
                                                               March 31,
                                                  ----------------------------------
                                                       2001                2000
                                                  --------------     ---------------
                                                       (in thousands of dollars)
<S>                                              <C>                <C>
Property acquisition:
       Proved                                           $268,934             $12,339
       Unproved                                            7,614                  53
Exploration                                                5,578               1,489
Development                                               38,812               9,122
                                                  --------------     ---------------
       Total costs incurred                             $320,938             $23,003
                                                  ==============     ===============
</TABLE>
     For 2001, Pure's initial capital budget was approximately $160 million.
With the IP Transaction the capital budget has increased to $200 million.  The
revised budget is comprised of approximately (a) $64 million in development
projects, (b) $62 million in exploration projects, (c) $48 million in
probable/possible projects, (d) $24 million to acquire additional acreage and
seismic data and (e) $2 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 location.  There can
be no assurance that the budgeted wells will encounter, if drilled, recompleted
or worked over, reservoirs of commercial quantities of natural gas or oil.

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

Capital Resources

     Pure's primary capital resources are net cash flows provided by operating
activities and the availability under the Credit Agreement, of which
approximately $162 million was available at March 31, 2001.

     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 March 31, 2001, there was outstanding
principal of $209.9 million under the Revolver and $98.0 million under the 364
Revolver.  At May 8, 2001, the outstanding principal on both revolvers combined
was $307.9 million.

     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

                                       23
<PAGE>

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.

     Hallwood Financing

     As of May 8, 2001, Pure entered into a $200 million unsecured line of
credit with Credit Suisse First Boston ("CSFB") and First Union National Bank
("First Union"), which was fully funded on May 11, 2001. The line of credit
matures on July 16, 2001. At maturity, the line of credit will convert to a 5-
year term loan maturing on July 16, 2006 subject to the condition the term loan
has been fully syndicated prior to conversion. At the present, Pure has
commitments of $50 million (from CSFB) and $45 million (from First Union)
towards the syndication and management expects it will obtain the remaining
commitment or will have obtained other financing by July 16, 2001. The terms of
the line of credit and term loan are comparable to those of its current
facilities.

     Liquidity and Working Capital

     At March 31, 2001, Pure had $9.9 million of cash and cash equivalents.
Pure's ratio of current assets to current liabilities was 1.01 and 1.05 at March
31, 2001 and December 31, 2000, respectively. Pure maintains relatively low cash
levels for cash management purposes.  Pure, at March 31, 2001, had availability
under its Credit Agreement to fund working capital deficits, 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 March 31, 2001, there was no
outstanding principal under the Working Capital Revolver.

Other Matters

     Stock Options and Compensation Expense

     Pure has issued options as of March 31, 2001 to officers and non-officers
to purchase 5,277,776 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 first quarter of 2001 and in the year 2000, Pure
expensed approximately $168,000 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 $155.4 million
reflected in the consolidated balance sheet at March 31, 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
March 31, 2001, Pure recorded

                                       24
<PAGE>

approximately $101.1 million of deferred compensation, of which it recognized
amortization expense of approximately $12.5 million in the first quarter of 2001
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

     Prior to the Titan merger, Pure historically held no derivative instruments
related to interest rate exposure risks as Union Oil historically retained all
the debt and related interest charges.  Prior to the Titan merger, Union Oil
(not Pure) had mitigated its exposure to fluctuations in crude oil and natural
gas prices for the Permian Basin business unit.

     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 March 31, 2001 Pure had hedging
transactions with respect to approximately 9,925,000 MMBtu of its future 2001
estimated natural gas production and 227,500 barrels of its future 2001
estimated crude oil production. For additional information, see Note 10 of Notes
to Consolidated Financial Statements. Pure had no interest rate financial
derivatives at March 31, 2001.

     In May 2001, Pure entered into a costless collar of 5,000 barrels per day
of its crude oil for the production months July 2001 to April 2002. For 2001,
the floor price is $25.00 per barrel and the ceiling price is $30.68 per barrel,
while in 2002 the floor price is $24.00 per barrel and the ceiling price is
$28.55 per barrel.

     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 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.  It requires the recognition of all derivative instruments
as assets or liabilities in Pure's consolidated balance sheet and measurement of
those instruments at fair value.  The accounting  treatment of changes in fair
value is dependent upon whether or not a derivative instrument is designated as
a hedge and if so, the type of hedge.  For derivatives designated as cash flow
hedges, changes in fair value are recognized in other comprehensive income until
the hedged item is recognized in earnings.  Hedge effectiveness is 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, as defined by SFAS No. 133, is recognized
immediately in earnings.  All of Pure's commodity price derivatives, with the
exception of Pure's natural gas differential swaps, are designated as cash flow
hedges.  Changes in the fair value of derivative instruments which are not
designated as hedges or are defined by SFAS No. 133 as being "fair value hedges"
are recorded in earnings as the changes occur.  See note 10 of Notes to
Consolidated Financial Statements for additional information.

                                       25
<PAGE>

Pure Unaudited Pro Forma Data

     The following reflects unaudited pro forma data related to the
Contribution, the Titan merger, and the IP Transaction discussed in Note 2 of
the Notes to Consolidated Financial Statements.  The unaudited pro forma
combined data assumes the Contribution, the Titan merger and the IP Transaction
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):

<TABLE>
<CAPTION>
Statement of Operations Data
                                                                                 Three months ended March 31,
                                                                    ---------------------------------------------------
                                                                             2001                         2000
                                                                    ----------------------       ----------------------
        <S>                                                         <C>                          <C>

          Total revenues                                                          $143,149                     $ 87,886
          Oil and gas production costs                                             (17,084)                     (14,573)
          Production and other taxes                                               (10,118)                      (5,911)
          General and administrative expenses                                       (6,142)                      (3,256)
          Amortization of deferred compensation                                    (12,693)                      (8,715)
          Exploration and abandonment costs                                         (3,340)                      (4,116)
          Depreciation, depletion and amortization                                 (29,653)                     (24,479)
          Other expenses, net                                                       (4,303)                      (7,128)
          Income tax expense                                                       (20,937)                      (6,899)
          Minority interest                                                           (159)                           -
                                                                    ----------------------       ----------------------

                                 Net income                                       $ 38,720                     $ 12,809
                                                                    ======================       ======================

          EBITDAX (a)                                                             $106,611                     $ 64,192
                                                                    ======================       ======================
</TABLE>

     These pro forma amounts differ from those disclosed in Note 2 of the Notes
to the Consolidated Financial Statements, primarily due to the following
additional pro forma adjustments: (a) elimination of merger costs incurred by
Pure in 2000 and (b) recording effects of amortizing deferred compensation for
the periods presented.

____________

(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>

                                                                                        Three months ended March 31,
                                                                            ---------------------------------------------------
                                                                                        2001                        2000
                                                                            -----------------------    ------------------------
<S>                                                                          <C>                        <C>
       Production:
                    Oil and condensate (MBbls)............................                    1,890                       1,737
                    Natural gas (MMcf)....................................                   16,401                      17,229
                    Total (MBOE)..........................................                    4,624                       4,609

       Average sales price per unit (including effects of hedging):
                    Oil and condensate (per Bbl)..........................                  $ 27.06                     $ 25.99
                    Natural gas (per Mcf).................................                  $  5.61                     $  2.46
                    Total (per BOE).......................................                  $ 30.96                     $ 19.07
</TABLE>

                                       26
<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 March 31, 2001, and from
which Pure may incur future earnings gains or losses from changes in market
interest rates and commodity prices.

Quantitative Disclosures

     Commodity Price 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 10 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>
                                                                                   2001                   Fair Value
                                                                         ------------------------    --------------------
<S>                                                                        <C>                         <C>

Natural Gas Hedge Derivatives (a):

Collar option contracts:
Notional volumes (MMBtu)                                                                9,925,000             ($2,271,127)
Weighted average short call strike price per MMBtu (b)                                 $    4.584
Weighted average long put strike price per MMBtu (b)                                   $    6.496

Basis differential contracts (c):
Notional Volumes (MMBtu)                                                                1,365,000            $   (120,659)
Weighted average MMBtu strike price                                                    $    0.120

Crude Oil Hedge Derivatives (a):

Collar option contracts:
Notional Volume (Bbls)                                                                    227,500            $ (1,364,289)
Weighted average short call strike price per Bbl (b)                                   $   16.500
Weighted average long put strike price per Bbl (b)                                     $   20.480
</TABLE>

_______________________
(a)  See Note 10 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 the prices traded on the NYMEX.
(c)  The basis differential relates to the spread between the NYMEX price and
     Waha West Texas price.

                                       27
<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 March 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>
                                            2002                       2005                     Total                 Fair Value
                                    -------------------       --------------------      --------------------     -------------------
                                                               (in thousands, except interest rates)
<S>                                   <C>                       <C>                       <C>                      <C>
Debt (a):

Variable rate debt:

Revolver (b)                                $     -                   $209,856                  $209,856                 $209,856
          Average interest rate                   -  %                    6.15%

364 Revolver (b)                            $98,000                   $      -                  $ 98,000                 $ 98,000
          Average interest rate               6.20%                          -  %

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


Qualitative Disclosures

                       Derivatives and Hedging Objectives

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

     Commodity Price Risk:

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

     Interest Rate Risk:

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

                                       28
<PAGE>

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

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

                                       29
<PAGE>

                          PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

         None.

Item 2.  Changes in Securities and Use of Proceeds

         None.

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

         None.

Item 6.  Exhibits and Reports on Form 8-K

(a) Exhibits:

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

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

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

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

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

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

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

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

    10.7  Master Offset Agreement dated as of January 31, 2001, among IP
          Petroleum Company, Inc., Southland Energy Company, The Branigar
          Organization, Inc. and Pure Partners, L.P. (filed as

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<PAGE>

          Exhibit 10.7 to Pure's Current Report on Form 8-K filed February 15,
          2001, and incorporated herein by reference).

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

    10.9  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).

    10.10 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).

    10.11 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).

    10.12 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).

   10.13* Letter Agreement, dated May 9, 2001, related to the Business
          Opportunities Agreement  dated as of December 13, 1999, by and among
          Union Oil Company of California, Pure Resources, Inc., TRH, Inc. and
          Titan Exploration, Inc.

        _______
        * Filed herewith

(b) Reports Submitted on Form 8-K:

     1.   Form 8-K filed on February 15, 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.

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<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: May 15, 2001

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