<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 September 30, 2001
                                      or

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

                      Commission File Number:  001-15899

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

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

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


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


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

     As of November 6, 2001, 50,162,156 shares of common stock, par value $.01
per share of Pure Resources, Inc. were outstanding.

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

                               TABLE OF CONTENTS
                               -----------------
<TABLE>
<CAPTION>
<S>                                                                                               <C>
Forward Looking Information and Risk Factors.......................................................   1

                        PART I -- FINANCIAL INFORMATION

Item 1.  Financial Statements
         --------------------

         Consolidated Balance Sheets as of September 30, 2001 (Unaudited) and
           December 31, 2000.......................................................................   3
         Unaudited Consolidated Statements of Operations
           for the Three and Nine Months Ended September 30, 2001 and 2000.........................   5
         Unaudited Consolidated Statements of Cash Flows
           for the Three and Nine Months Ended September 30, 2001 and 2000.........................   6
         Notes to Consolidated Financial Statements................................................   7

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.....  23
         -------------------------------------------------------------------------------------

Item 3.  Quantitative and Qualitative Disclosures About Market Risk................................  33
         ----------------------------------------------------------

                          PART II -- OTHER INFORMATION

Item 1.  Legal Proceedings.........................................................................  37
         -----------------

Item 2.  Changes in Securities and Use of Proceeds.................................................  37
         -----------------------------------------

Item 4.  Submission of Matters to a Vote of Security Holders.......................................  37
         ---------------------------------------------------

Item 6.  Exhibits and Reports on Form 8-K..........................................................  37
         --------------------------------

         Signatures................................................................................  38
</TABLE>
<PAGE>

                             PURE RESOURCES, INC.

                 FORWARD LOOKING INFORMATION AND RISK FACTORS

     Pure Resources, Inc. ("Pure") or its representatives may make forward
looking statements, oral or written, including statements in this report's
Management's Discussion and Analysis of Financial Condition and Results of
Operations, press releases and filings with the Securities and Exchange
Commission, regarding estimated future net revenues from oil and natural gas
reserves and the present value thereof, planned capital expenditures (including
the amount and nature thereof), increases in oil and gas production, the number
of exploratory and development wells Pure anticipates drilling through 2001,
potential reserves and Pure's financial position, business strategy and other
plans and objectives for future operations.  Although Pure believes that the
expectations reflected in these forward looking statements are reasonable, there
can be no assurance that the actual results or developments anticipated by Pure
will be realized or, even if substantially realized, that they will have the
expected effects on its business or operations.  Among the factors that could
cause actual results to differ materially from Pure's expectations are general
economic conditions, inherent uncertainties in interpreting engineering data,
operating hazards, delays or cancellations of drilling operations for a variety
of reasons, competition, fluctuations in oil and gas prices, government
regulations and other factors set forth in Pure's 2000 Annual Report filed on
Form 10-K and other SEC filings.  All subsequent oral and written forward
looking statements attributable to Pure or persons acting on its behalf are
expressly qualified in their entirety by these factors.  Pure assumes no
obligation to update any of these statements.

                                       1
<PAGE>

                        PART I - FINANCIAL INFORMATION

Item 1.   Financial Statements

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

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

                                       2
<PAGE>

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

                                    ASSETS

<TABLE>
<CAPTION>
                                                                      September 30,     December 31,
                                                                           2001             2000
                                                                      -------------     ------------
                                                                       (Unaudited)
<S>                                                                   <C>               <C>
Current assets:
  Cash and cash equivalents                                              $   10,013       $    3,325
  Accounts receivable:
    Oil and gas                                                              35,568           46,749
    Other                                                                    18,432            1,702
  Fair value of derivatives (Note 11)                                         9,783                -
  Prepaid expenses and other current assets                                   3,876              883
                                                                      -------------     ------------
        Total current assets                                                 77,672           52,659
                                                                      -------------     ------------
Property, plant and equipment, at cost:
  Oil and gas properties, using the successful
   efforts method of accounting:
    Proved properties                                                     1,871,575        1,140,209
    Unproved properties                                                      66,917           21,743
  Accumulated depletion, depreciation and amortization                     (675,417)        (577,532)
                                                                      -------------     ------------
                                                                          1,263,075          584,420
                                                                      -------------     ------------

Other property and equipment, net                                            16,692            6,449

Deferred compensation (Note 5)                                               39,160           63,903

Receivables for under-delivered gas                                           6,114           10,274

Other assets, net                                                             5,301            1,410
                                                                      -------------     ------------
                                                                         $1,408,014       $  719,115
                                                                      =============     ============
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       3
<PAGE>

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

                     LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                                September 30,     December 31,
                                                                                                     2001             2000
                                                                                                -------------     ------------
                                                                                                 (Unaudited)
<S>                                                                                             <C>               <C>
Current liabilities:
  Accounts payable and accrued liabilities:
    Trade                                                                                          $   27,218         $ 18,228
    Fair value of derivatives and deferred commodity hedges (Note 11)                                       -            6,781
    Other (Note 8)                                                                                     75,884           25,125
                                                                                                -------------     ------------
           Total current liabilities                                                                  103,102           50,134
                                                                                                -------------     ------------
Long-term debt                                                                                        535,193           68,000

Liabilities for over-delivered gas                                                                     11,225           17,791

Accrued abandonment, restoration and environmental liabilities                                         17,582           14,331

Fair value of derivatives (Note 11)                                                                     2,524                -

Deferred income taxes                                                                                 124,422           55,456

Other liabilities                                                                                       5,371                -

Common stock subject to repurchase (Note 5)                                                           114,448          135,617

Minority interest                                                                                       5,839                -

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;
   50,162,156 and 50,037,402 shares issued and outstanding at
   September 30, 2001 and December 31, 2000, respectively                                                 502              500
   Additional paid-in capital                                                                         339,641          326,827
   Notes receivable -affiliates                                                                        (7,273)          (6,952)
   Deferred compensation (Note 5)                                                                      (1,792)          (2,296)
   Accumulated other comprehensive income                                                              16,248                -
   Retained earnings                                                                                  140,982           59,707
                                                                                                -------------     ------------
           Total stockholders' equity                                                                 488,308          377,786
                                                                                                -------------     ------------
   Commitments and contingencies (Note 5)                                                          $1,408,014         $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         Nine months ended
                                                                               September 30,              September 30,
                                                                           --------------------       --------------------
                                                                             2001        2000           2001        2000
                                                                           --------    --------       --------    --------
<S>                                                                        <C>         <C>            <C>         <C>
Revenues:
  Oil sales                                                                $ 51,196    $ 48,071       $146,827    $104,817
  Gas sales                                                                  73,794      41,968        237,938      83,343
  Other operating                                                             1,655           -          1,655           -
  Gain on sale of assets                                                        134          53            584       1,303
                                                                           --------    --------       --------    --------
      Total revenues                                                        126,779      90,092        387,004     189,463
                                                                           --------    --------       --------    --------
Expenses:
  Oil and gas production                                                     23,240      14,638         61,062      31,930
  Production and other taxes                                                  8,586       6,179         27,296      14,381
  General and administrative                                                  6,071       4,055         21,027       7,177
  Amortization of deferred compensation
   (general and administrative)                                              (2,520)      5,121         16,166       6,148
  Exploration and abandonment (Note 9)                                       10,734       6,570         20,539       9,648
  Depletion, depreciation and amortization                                   41,517      13,691        102,558      31,041
                                                                           --------    --------       --------    --------
      Total expenses                                                         87,628      50,254        248,648     100,325
                                                                           --------    --------       --------    --------
      Operating income                                                       39,151      39,838        138,356      89,138
                                                                           --------    --------       --------    --------
Other income (expense):
  Interest income                                                               339         170            811         202
  Interest expense                                                           (9,229)     (1,976)       (20,265)     (2,636)
  Other                                                                        (463)     (1,126)           817      (2,572)
                                                                           --------    --------       --------    --------
      Income before income taxes and minority interest                       29,798      36,906        119,719      84,132

Income tax expense                                                           (7,387)    (12,920)       (37,957)    (29,450)

Minority interest                                                              (128)          -           (487)          -
                                                                           --------    --------       --------    --------
      Net income                                                           $ 22,283    $ 23,986       $ 81,275    $ 54,682
                                                                           ========    ========       ========    ========
      Net income per share                                                 $   0.44    $   0.48       $   1.62    $   1.35
                                                                           ========    ========       ========    ========
      Net income per share - assuming dilution                             $   0.43    $   0.47       $   1.58    $   1.34
                                                                           ========    ========       ========    ========
</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                Nine months ended
                                                                              September 30,                      September 30,
                                                                          ---------------------             ----------------------
                                                                            2001         2000                  2001         2000
                                                                          --------     --------             ---------     --------
<S>                                                                       <C>          <C>                  <C>           <C>
Cash flows from operating activities:
  Net income                                                              $ 22,283     $ 23,986             $  81,275     $ 54,682
  Adjustment to reconcile net income to net cash
   provided by operating activities:
    Depletion, depreciation and amortization                                41,517       13,691               102,558       31,041
    Amortization of deferred compensation                                   (2,520)       5,121                16,166        6,148
    Amortization of deferred commodity hedges                                    -       (5,831)               (6,781)      (7,822)
    Non-cash effect of derivatives                                         (11,665)           -               (10,774)           -
    Exploration and abandonments                                             4,026        4,617                 8,767        6,705
    Gain on sale of assets                                                    (134)         (53)                 (584)      (1,303)
    Deferred income taxes                                                   29,318        5,533                35,613        8,840
    Other items                                                                 87         (138)                  605         (138)
  Changes in assets and liabilities:
    Accounts receivable                                                     16,220      (11,662)               21,000      (38,410)
    Prepaid expenses and other current assets                                 (382)         (35)               (1,241)         (97)
    Receivables for under-delivered gas                                        740       (4,554)                4,159       (6,251)
    Other assets                                                              (331)        (584)               (1,181)        (584)
    Accounts payable and accrued liabilities                                (5,442)       2,083                 1,905       21,561
    Income taxes payable                                                    (9,278)       3,887                 2,203        6,887
    Fair value of derivatives                                               (1,001)           -                (2,547)           -
    Liabilities for over-delivered gas                                      (1,327)       5,638                (6,566)       7,235
    Other non-current liabilities                                                -            -                     -          (50)
                                                                          --------     --------             ---------     --------
         Total adjustments                                                  59,828       17,713               163,302       33,762
                                                                          --------     --------             ---------     --------
         Net cash provided by operating activities                          82,111       41,699               244,577       88,444
                                                                          --------     --------             ---------     --------
Cash flows from investing activities:
  Acquisitions, net of cash acquired                                       (21,123)           -              (167,706)        (659)
  Investment in oil and gas properties                                     (64,789)     (27,113)             (443,647)     (62,996)
  Additions to other property and equipment                                   (683)      (1,222)              (11,178)      (1,323)
  Proceeds from sale of assets                                                 707           95                 2,671        1,345
  Notes receivable - affiliates                                                  -           31                     -        2,846
                                                                          --------     --------             ---------     --------
         Net cash used in investing activities                             (85,888)     (28,209)             (619,860)     (60,787)
                                                                          --------     --------             ---------     --------
Cash flows from financing activities:
  Proceeds from (payments of) revolving debt, net                                -      (13,000)              119,756      (23,863)
  Proceeds from long-term debt                                                   -            -               347,354            -
  Payments of long-term debt                                                     -            -               (87,436)           -
  Exercise of stock options                                                     71          105                 1,410          407
  Cash transfer from Union Oil pursuant to merger                            1,777            -                 1,777       14,528
  Net settlements with Union Oil                                            (2,948)           -                (2,948)     (15,844)
  Other financing activities                                                   (59)           -                 2,058            -
                                                                          --------     --------             ---------     --------
         Net cash provided by (used in) financing activities                (1,159)     (12,895)              381,971      (24,772)
                                                                          --------     --------             ---------     --------
         Net increase (decrease) in cash and cash equivalents               (4,936)         595                 6,688        2,885

Cash and cash equivalents, beginning of period                              14,949        2,290                 3,325            -
                                                                          --------     --------             ---------     --------
Cash and cash equivalents, end of period                                  $ 10,013     $  2,885             $  10,013     $  2,885
                                                                          ========     ========             =========     ========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       6
<PAGE>

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


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

     Organization

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

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

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

     Nature of Operations

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

     Basis of Presentation

     The accompanying consolidated financial statements, prior to the merger,
are presented as a carve-out from the financial statements of Union Oil and
reflect the activity related to its Permian Basin business unit during the
periods presented.  Certain functions were managed centrally and supported
several business units of Union Oil.  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 September 30, 2001 and for the three and nine months
ended September 30, 2001 and 2000 include the adjustments and accruals which are
necessary for a fair presentation of the results for the interim periods.  These
interim results are not necessarily indicative of results for a full year.

   Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted in this Form 10-Q pursuant
to the rules and regulations of the Securities and Exchange Commission.  These
consolidated financial statements should be read in conjunction with the audited
financial statements and notes thereto included in Pure's 2000 Annual Report
filed on Form 10-K.

                                       7
<PAGE>

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

     Reclassifications

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


(2)  Mergers and Acquisitions

     Hallwood Merger

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

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

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

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

     Purchase price                                              $271,322
                                                                 ========

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

     Recorded amount of assets acquired                          $359,355
     Assumed debt                                                 (87,436)
     Deferred income taxes                                        (31,013)
     Other assumed liabilities                                    (73,200)
                                                                 --------

     Acquisition costs, net of cash acquired                     $167,706
                                                                 ========

     The other liabilities assumed include approximately (a) $38.6 million of
accrued transaction costs related to stock options and warrants, severance and
non-compete agreements, investment banking fees and other transaction related
costs and (b) $31.2 million of fair value associated with derivative contract
obligations.  In July, 2001, Pure paid approximately $21.1 million related to
the purchase of common and preferred stock which had previously not been
tendered to the exchange agent.

                                       8
<PAGE>

     International Paper Transaction

     On January 31, 2001, Pure acquired oil and gas properties, fee mineral and
royalty interests from International Paper Company, and certain general and
limited partnership interests, for approximately $261 million, subject to
adjustments which totaled $4.9 million, for cash (collectively "IP
Transaction").  In addition, Pure incurred approximately $5.2 million in
transaction costs associated with the IP Transaction.  Affiliates of
International Paper own an approximate 5% interest in a partnership which holds
some of the oil and gas properties involved in this transaction.  The
transaction was funded under Pure's Credit Agreements.  Pure accounted for this
transaction on the purchase method and allocated the transaction value as
follows:

Partnership interests (included in oil and gas
  properties in the balance sheet)                             $244,952
Oil and gas properties                                           21,038
                                                               --------

Cash paid                                                      $265,990
                                                               ========

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

     Union Oil Merger and Contribution

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

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

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

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

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

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

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

                                       9
<PAGE>

     Pro Forma Results of Operations (Unaudited)

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

                                                        Nine months ended
                                                          September 30,
                                                       -------------------
                                                         2001       2000
                                                       --------   --------
Revenues                                               $435,921   $373,400
Net income                                             $ 81,404   $ 57,808
Net income per common share                            $   1.63   $   1.16
Net income per common share - assuming dilution        $   1.59   $   1.14


(3)  Debt

     Debt consists of the following (in thousands):

                                         September 30,     December 31,
                                             2001             2000
                                         -------------     ------------
                                          (Unaudited)
Revolver                                 $           -     $     65,000
364 Revolver                                   187,756                -
Working Capital Revolver                             -            3,000
7.125% Senior Notes, Due 2011                  350,000                -
Senior Notes discount                           (2,563)               -
                                         -------------     ------------
                                         $     535,193     $     68,000
                                         =============     ============

     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 no current commitments available.  All amounts outstanding on
the Revolver are due and payable in full on September 29, 2005.  All amounts
outstanding on the 364 Revolver 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.  Pure is presently syndicating the refinancing of
the 364 Revolver.

     At Pure's option, borrowings under the Credit Agreements bear interest at
either (a) the "Alternative Base Rate" (i.e. the higher of the Bank's prime
rate, or the federal funds rate plus .50% per annum), or (b) the Eurodollar rate
plus a margin ranging from .80% to .95% per annum for the Revolver and .85% to
1.00% per annum for the 364 Revolver.  These margins increase as Pure's debt
coverage ratio increases.  Participation fees on letters of credit are due
quarterly and range from .925% to 1.075% per annum of the outstanding amount of
letters of credit.  Facility fees are due quarterly on the total of the
outstanding commitments under the Credit Agreements and range from .20% to .30%
per annum on the Revolver and .15% to .25% per annum for the 364 Revolver.

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

                                       10
<PAGE>

     Working Capital Revolver

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

     7.125% Senior Notes

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

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

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


(4)  Accrued Abandonment, Restoration and Environmental Liabilities

     At September 30, 2001 and December 31, 2000, Pure had accrued $16.5 million
and $13.2 million, respectively, for the estimated future costs to abandon and
remove well equipment and production facilities.  The amounts were charged to
depreciation, depletion and amortization expense.  The total amount chargeable
to operations for abandonment (to be predominantly accrued on a unit-of-
production basis) is estimated to be approximately $39.8 million and $34.9
million at September 30, 2001 and December 31, 2000, respectively.  This
estimate is based on abandonment cost studies performed by an independent third
party and estimates prepared by Pure.

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


(5)  Commitments and Contingencies

     General

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

     Environmental matters

     Pure is subject to loss contingencies pursuant to federal, state and local
environmental laws and regulations.  These include existing and possible future
obligations to investigate the effects of the release or disposal of certain
petroleum and chemical substances at various sites; to remediate or restore
these sites; to compensate others for damage to property and natural resources,
for remediation and restoration costs and for personal injuries; and to pay
civil penalties

                                       11
<PAGE>

and, in some cases, criminal penalties and punitive damages. These obligations
relate to sites owned by Pure or others and are associated with past and present
operations.

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

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

     Pure Resources Employment and Severance Agreements

     Under circumstances specified in the employment and/or severance agreements
entered into between Pure and its officers, each covered officer has the right
to require Pure to purchase shares of Pure common stock that either were
received in the Titan merger or exchanged for Titan common stock held by the
officer on December 1, 1999 or are obtained by the exercise of any option held
by the officer, at a calculated "net asset value" per share (as defined in each
officer's employment/severance agreement). The circumstances under which certain
officers may exercise this right include the termination of the officer's
employment for any reason after three years following the merger, the
termination of the officer without cause, a change in control of either Pure or
Unocal Corporation ("Unocal") and other events specified in the agreements.  The
net asset value per share, which at September 30, 2001 was $24.34 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 $114.4 million reflected in the consolidated
balance sheet at September 30, 2001, as common stock subject to repurchase is
the estimated net asset value, as defined, for each applicable officer's covered
shares, and unexercised option shares less the amount of proceeds that would be
received upon exercise of the related options.  Deferred compensation related to
such shares and options is calculated as the difference between the estimated
net asset value of the relevant number of Pure shares and the market value of
Pure shares held by each covered officer in the case of shares held or the
exercise price of shares subject to option.  As of September 30, 2001, Pure
recorded approximately $69.6 million of deferred compensation, of which it
recognized amortization expense of approximately $(2.7) million and $15.6
million for the three and nine months ended September 30, 2001, respectively,
and $14.8 million for the year 2000.  This arrangement is being treated as a
variable plan under Accounting Principles Board Opinion No. 25 "Accounting for
Stock Based Compensation." Consequently, the total compensation for both shares
held and shares subject to option will be measured at the end of each quarter as
the calculated amount of net asset value and the market price of Pure shares
change. The total amount determined will be amortized as compensation expense
over a three-year period for common stock and the vesting period of the stock
options with any changes after three years for common stock and the vesting
period of the stock options being expensed in the period of determination.

     The net asset value per share of $24.34 at September 30, 2001 utilizes the
funded debt levels at September 30, 2001.  The assumed proceeds Pure would
receive from the exercise of the options subject to the employment agreements is
not used to reduce Pure's funded debt in the calculation of net asset value per
share.  If such assumed proceeds from the exercise of the options were used to
reduce funded debt at September 30, 2001 the net asset value would be greater
than $24.34 per share.

     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

                                       12
<PAGE>

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.

     Litigation

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

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

     Other matters

     Under the terms of a partnership agreement with affiliates of International
Paper (see Note 2 on the International Paper transaction), Pure would be
required to make contingent payments to its other partners in the partnership if
Pure causes the partnership, prior to January 2008, to dispose of assets, as
defined in the partnership agreement, with a fair market value in excess of $25
million.  Pure's maximum contingent payment at September 30, 2001 is
approximately $65 million.  Pure, at  the present, does not believe it is
probable it will incur any of the contingent payment.  To the extent Pure
incurred all or some of the contingent payment, it would reflect the contingent
payment as additional basis in its oil and gas properties.

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

                                       13
<PAGE>

(6)  Earnings per Common Share

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

<TABLE>
<CAPTION>
                                                 Three months ended           Nine months ended
                                                    September 30,                September 30,
                                                --------------------         --------------------
                                                  2001         2000            2001         2000
                                                -------      -------         -------      -------
<S>                                             <C>          <C>             <C>          <C>
Numerator:
    Net income and numerator for basic and
    diluted net income per common share -
    income available to common stockholders     $22,283      $23,986         $81,275      $54,682
                                                -------     --------     -----------      -------
Denominator:
    Denominator for basic net income per
    common share - weighted average common
    shares (a)                                   50,158       50,028          50,089       40,417

    Effect of dilutive securities -
    employee stock options not subject to
    "put" right                                     174          209             271           77

    Dilutive effect of officers' stock
    options subject to the "put" right
    under employment/severance agreements
    (Note 5)                                      1,082          270             983          125

    Dilutive effect of officers'
    individual common stock held subject
    to the "put" right under
    employment/severance agreements (Note 5)        186          576               -          313
                                                -------     --------     -----------      -------
    Denominator for diluted net income per
    common share - adjusted weighted
    average common shares and assumed
    conversions                                  51,600       51,083          51,343       40,932
                                                =======     ========     ===========      =======

    Basic net income per common share           $  0.44      $  0.48         $  1.62      $  1.35
                                                =======     ========     ===========      =======

    Diluted net income per common share         $  0.43      $  0.47         $  1.58      $  1.34
                                                =======     ========     ===========      =======
</TABLE>

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

     Employee stock options to purchase 5,717,987 and 5,035,928 shares of common
stock were outstanding at September 30, 2001 and 2000, respectively, but only
4,422,174 and 4,039,360 for the three and nine months ended September 30, 2001,
respectively, and 4,764,660 and 4,754,660 for the three and nine months ended
September 30, 2000 were included in the computation of diluted net income per
common share due to the average market price of Pure common stock being greater
than the option price.  The remaining 1,295,813 and 271,268 shares for the three
months ended September 30, 2001 and 2000, respectively, and 1,678,627 and
281,268 shares for the nine months ended September 30, 2001 and 2000,
respectively, were anti-dilutive due to (a) the option price being greater than
the average market price of the common stock of Pure or (b) the assumed proceeds
under the treasury stock method derived more shares being repurchased than the
related options.


(7)  Incentive Plans

     Pure 1999 Incentive Plan

     Pure's board of directors adopted, and Union Oil as sole stockholder of
Pure (at that time) approved, the Pure 1999 Incentive Plan. The plan provides
that Pure may grant awards of Pure common stock under the Pure 1999 Incentive

                                       14
<PAGE>

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 settl ed 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 September 30, 2001:

     Common stock outstanding                                       50,162,156
     Options awarded under the Pure 1999 Incentive Plan              5,641,276
     Assumed options from Titan                                        458,011
     Options exercised                                                (159,206)
     Options cancelled/forfeited                                      (222,094)
                                                                    ----------
     Common stock equivalents                                       55,880,143
                                                                    ==========


     Maximum shares/options allowed under the Pure 1999
      Incentive Plan                                                 6,705,617

     Less:  Outstanding awards under the Pure 1999 Incentive Plan   (5,336,557)
            Outstanding options under the Titan Plans                 (381,430)
                                                                    ----------
     Shares/options available for future grant                         987,630
                                                                    ==========

(8)  Other Current Liabilities

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

                                                  September 30,    December 31,
                                                      2001            2000
                                                  -------------    ------------
                                                   (Unaudited)

     Accrued oil and gas production expenses            $61,461         $20,923
     Income taxes payable                                 5,502           3,298
     Accrued interest payable                             8,222             904
     Other                                                  699               -
                                                  -------------    ------------
                                                        $75,884         $25,125
                                                  =============    ============

                                       15
<PAGE>

(9)  Exploration and Abandonment

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

<TABLE>
<CAPTION>
                                          Three months ended       Nine months ended
                                             September 30,           September 30,
                                          ------------------      -------------------
                                            2001       2000         2001        2000
                                          -------     ------      -------      ------
<S>                                       <C>         <C>         <C>          <C>
Geological and geophysical staff          $ 3,305     $1,201      $ 6,606      $2,061
Exploratory dry hole costs                  3,695      3,261        7,718       4,650
Impaired unproved properties                  331        643        1,049       1,333
Plugging and abandonment costs                513        477          533         556
Seismic costs                               2,566        714        3,493         723
Other                                         324        274        1,140         325
                                          -------     ------      -------      ------
                                          $10,734     $6,570      $20,539      $9,648
                                          =======     ======      =======      ======
</TABLE>

(10) Comprehensive Income

<TABLE>
<CAPTION>
                                          Three months ended       Nine months ended
                                             September 30,           September 30,
                                          ------------------      -------------------
                                            2001       2000         2001        2000
                                          -------    -------      --------    -------
                                                        (in thousands)
<S>                                       <C>        <C>          <C>         <C>
Net income                                $22,283    $23,986      $ 81,275    $54,682

   Cumulative effect of accounting
    change for SFAS No. 133 adoption (a)        -          -       (11,364)         -
   Reclassification adjustment for
    settled hedging contracts (b)          (4,555)         -         6,127          -
   Changes in fair value of expected
    cash flows (c)                          2,946          -        21,485          -
                                          -------    -------      --------    -------
Comprehensive income                      $20,674    $23,986      $ 97,523    $54,682
                                          =======    =======      ========    =======

------------------
     (a) Net of tax of:                   $     -    $     -      $  6,119    $     -
     (b) Net of tax of:                   $ 2,453    $     -      $ (3,299)   $     -
     (c) Net of tax of:                   $(1,586)   $     -      $(11,569)   $     -
</TABLE>

(11) Derivative Financial Instruments

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

                                       16
<PAGE>

     Adoption of SFAS No. 133, resulted in recording a $17.5 million, ($11.4
million net of tax) decline in fair value to accumulated other comprehensive
income.  At September 30, 2001, the estimated net amount of the existing gains
within accumulated other comprehensive income that are expected to be
reclassified into earnings within the next 12 months is approximately $14.4
million, net of tax.  For the three months ended September 30, 2001, other
income includes approximately $1,687,000 of loss from changes in fair value of
derivatives not qualifying as hedges and approximately $1,499,000 of gain from
the ineffective portion of the cash flow hedges.  For the nine months ended
September 30, 2001, other income includes approximately $706,000 of loss from
changes in fair value of derivatives not qualifying as hedges and approximately
$1,874,000 of gain from the ineffective portion of the cash flow hedges.


     Commodity Derivatives

     Pure may utilize various option and swap contracts and other financial
instruments to economically hedge the effect of price changes on future oil and
gas production and changes in interest rates related to Pure's debt obligations.
The counterparties to Pure's financials 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 September 30,
2001:

<TABLE>
                                                                2001               2002
                                                          ---------------    ---------------
<S>                                                       <C>                <C>
Gas related derivatives:
   Collar and swap options:
        Volume (MMBtu)                                          7,612,750         26,339,870
        Index price per MMBtu (floor-ceiling prices)      $  1.56 - $6.97    $  2.10 - $4.07

Oil related derivatives:
   Collar and swap options:
        Volume (Bbls)                                             531,760            673,000
        Index price per Bbl (floor-ceiling prices)        $20.91 - $30.68    $24.00 - $28.56
</TABLE>

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

     As a result of the Hallwood merger, Pure marked-to-market as of the merger
date all the outstanding financial derivatives held by Hallwood which resulted
in a liability of approximately $31.2 million.  At September 30, 2001, the above
table includes oil and gas derivatives acquired in the Hallwood merger for the
remainder of 2001 and 2002 (a) 2,712,750 and 5,139,870 MMBtu's of natural gas at
index prices (floor - ceiling) of $1.56 - $4.64 and $2.10 - $3.95 per MMBtu and
(b) 71,760 and 73,000 Bbls of oil at index prices (floor - ceiling) of $20.91 -
$28.95 and $24.25 - $24.25 per Bbl, respectively.

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

     In October 2001, Pure entered into a costless basis swap based on the price
spread between NYMEX and a regional hub for  30,000 MMBtu per day of its natural
gas for the production months November 2001 to December 2002.  The basis
difference is $.154 per MMBtu.  These basis derivative contracts do not qualify
as cash flow hedges and, accordingly, will be marked-to-market in each reporting
period.

                                       17
<PAGE>

     Interest Rate Derivatives

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

(12) Supplemental Condensed Consolidating Financial Information

     Certain subsidiaries of Pure have fully and unconditionally guaranteed the
Senior Notes.  The following tables present the condensed consolidating
financial information for each of the nine months ended September 30, 2001 and
September 30, 2001 for (a) Pure (Parent), (b) Guarantor subsidiaries and (c)
Non-guarantor subsidiaries.  The financial information for the period prior to
May 31, 2000 are those of Union Oil's Permian Basin business unit whose assets
were ultimately merged into a subsidiary of Pure that is a guarantor of the
Senior Notes.  Virtually all of Pure's operations are conducted by Pure's
subsidiaries.

<TABLE>
<CAPTION>
Condensed Consolidated Balance Sheet
September 30, 2001
(in thousands)

                                                                                   Non-
                                                     Pure        Guarantor       Guarantor
                                                   (Parent)    Subsidiaries    Subsidiaries    Eliminations    Consolidated
                                                   --------    ------------    ------------    ------------    ------------
<S>                                                <C>         <C>             <C>             <C>             <C>
Assets
  Current assets

    Cash and cash equivalents                      $  1,900    $     8,109     $         4     $         -     $     10,013
    Accounts receivable                              10,526         26,730          16,744               -           54,000
    Other current assets                                244         13,400              15               -           13,659
                                                   --------    -----------     -----------     -----------     ------------
      Total current assets                           12,670         48,239          16,763               -           77,672
                                                   --------    -----------     -----------     -----------     ------------
    Properties, net                                       -      1,056,684         223,083               -        1,279,767
    Investment in subsidiaries                      599,857      2,356,201          42,512      (2,998,570)               -
    Deferred compensation                            39,160              -               -               -           39,160
    Other assets                                      4,453          6,481         244,265        (243,784)          11,415
                                                   --------    -----------     -----------     -----------     ------------
      Total assets                                 $656,140    $ 3,467,605     $   526,623     $(3,242,354)    $  1,408,014
                                                   ========    ===========     ===========     ===========     ============

Liabilities and stockholders' equity

  Current liabilities

    Accounts payable                               $     48    $    27,000     $       170     $         -     $     27,218
    Other current liabilities                        14,224         55,827           5,833               -           75,884
                                                   --------    -----------     -----------     -----------     ------------
      Total current liabilities                      14,272         82,827           6,003               -          103,102
                                                   --------    -----------     -----------     -----------     ------------
  Long-term debt                                    535,193              -               -               -          535,193
  Accrued abandonment, restoration and
   environmental liabilities                              -         16,835             747               -           17,582
  Deferred income taxes                             (16,125)       148,371          (7,824)              -          124,422
  Other liabilities                                       -         19,011             108               -           19,119
  Common stock subject to repurchase                114,448              -               -               -          114,448
  Minority interest                                       -              -             840           5,000            5,840
  Stockholders' equity                                8,352      3,200,561         526,749      (3,247,354)         488,308
                                                   --------    -----------    ------------     -----------     ------------
      Total liabilities and
       stockholders' equity                        $656,140    $ 3,467,605    $    526,623     $(3,242,354)    $  1,408,014
                                                   ========    ===========    ============     ===========     ============
</TABLE>

                                       18
<PAGE>

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

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

  Current assets

    Cash and cash equivalents           $     (4)    $      3,329    $          -    $          -    $      3,325
    Accounts receivable                        -           48,457              (6)              -          48,451
    Other current assets                     262              606              15               -             883
                                        --------     ------------    ------------    ------------    ------------
      Total current assets                   258           52,392               9               -          52,659
                                        --------     ------------    ------------    ------------    ------------
  Properties, net                              -          590,869               -               -         590,869
  Investment in subsidiaries             497,927           58,316               -        (556,243)              -
  Deferred compensation                   63,903                -               -               -          63,903
  Other assets                            55,938           10,283          39,528         (94,065)         11,684
                                        --------     ------------    ------------    ------------    ------------
      Total assets                      $618,026         $711,860    $     39,537    $   (650,308)   $    719,115
                                        ========     ============    ============    ============    ============

Liabilities and stockholders' equity

  Current liabilities

    Accounts payable                    $    804     $     17,245    $        179    $          -    $     18,228
    Other current liabilities              4,389           27,404             113               -          31,906
                                        --------     ------------    ------------    ------------    ------------
      Total current liabilities            5,193           44,649             292               -          50,134
                                        --------     ------------    ------------    ------------    ------------
  Long-term debt                          65,000            3,000               -               -          68,000
  Accrued abandonment, restoration
   and environmental liabilities               -           14,331               -               -          14,331
  Deferred income taxes                    4,325           53,901          (2,770)              -          55,456
  Other liabilities                            -          107,135           4,721         (94,065)         17,791

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

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

                                       19
<PAGE>

<TABLE>
Condensed Consolidated Statement of Operations
For the nine months ended September 30, 2001
(in thousands)
                                                                         Non-
                                          Pure        Guarantor       Guarantor
                                        (Parent)     Subsidiaries    Subsidiaries    Eliminations    Consolidated
                                        --------     ------------    ------------    ------------    ------------
<S>                                     <C>          <C>             <C>             <C>             <C>
Revenues:

  Oil and gas sales                     $      -     $    326,500    $     58,265    $          -    $    384,765
  Other operating revenues                     -            2,239               -               -           2,239
                                        --------     ------------    ------------    ------------    ------------
      Total revenues                           -          328,739          58,265               -         387,004
                                        --------     ------------    ------------    ------------    ------------
Expenses:

  Operating and other expenses             1,159           96,215          12,011               -         109,385
  Amortization of deferred
   compensation                           16,166                -               -               -          16,166
  Exploration and abandonments                 -           18,471           2,068               -          20,539
  Depreciation, depletion and
   amortization                              427           70,416          31,715               -         102,558
                                        --------     ------------    ------------    ------------    ------------
      Total expenses                      17,752          185,103          45,794               -         248,648
                                        --------     ------------    ------------    ------------    ------------
      Operating income                   (17,752)         143,637          12,471               -         138,356

Other income (expense):

  Equity in earnings of subsidiaries     101,930          365,732           2,692        (470,354)              -
  Interest expense                       (19,876)            (389)              -               -         (20,265)
  Other                                    8,887           (7,951)         11,960         (11,268)          1,627
                                        --------     ------------    ------------    ------------    ------------
      Income before income taxes and
       minority interest                  73,189          501,029          27,123        (481,622)        119,719

Income tax expense                        17,647          (55,602)             (2)              -         (37,957)
Minority interest                              -                -            (840)            353            (487)
                                        --------     ------------    ------------    ------------    ------------
      Net income                        $ 90,836     $    445,427    $     26,281    $   (481,269)   $     81,275
                                        ========     ============    ============    ============    ============
</TABLE>

                                       20
<PAGE>

<TABLE>
Condensed Consolidated Statement of Operations
For the nine months ended September 30, 2000
(in thousands)

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

  Oil and gas sales                     $      -     $    188,160    $          -    $          -    $    188,160
  Other operating revenues                     -            1,303               -               -           1,303
                                        --------     ------------    ------------    ------------    ------------
      Total revenues                           -          189,463               -               -         189,463
                                        --------     ------------    ------------    ------------    ------------
Expenses:

  Operating and other expenses               452           53,027               9               -          53,488
  Amortization of deferred
   compensation                            6,148                -               -               -           6,148
  Exploration and abandonments                 -            9,648               -               -           9,648
  Depreciation, depletion and
   amortization                                -           31,041               -               -          31,041
                                        --------     ------------    ------------    ------------    ------------
      Total expenses                       6,600           93,716               9               -         100,325
                                        --------     ------------    ------------    ------------    ------------
      Operating income                    (6,600)          95,747              (9)              -          89,138

Other income (expense):

  Equity in earnings of subsidiaries      59,166                -               -         (59,166)              -
  Interest expense                             -           (2,636)              -               -          (2,636)
  Other                                     (293)          (2,077)              -               -          (2,370)
                                        --------     ------------    ------------    ------------    ------------
      Income before income taxes
       and minority interest              52,273           91,034              (9)        (59,166)         84,132

Income tax expense                         2,410          (31,863)              3               -         (29,450)
Minority interest                              -                -               -               -               -
                                        --------     ------------    ------------    ------------    ------------
      Net income                        $ 54,683     $     59,171    $         (6)   $    (59,166)   $     54,682
                                        ========     ============    ============    ============    ============
</TABLE>

                                       21
<PAGE>

Condensed Consolidated Statement of Cash Flows
For the nine months ended September 30, 2001
(in thousands)

<TABLE>
                                                                                   Non-
                                                    Pure        Guarantor       Guarantor
                                                  (Parent)     Subsidiaries    Subsidiaries    Eliminations    Consolidated
                                                ----------     ------------    ------------    ------------    ------------
<S>                                               <C>          <C>             <C>             <C>             <C>
Cash flows from operating activities             $(465,503)    $    700,464    $      9,616    $          -    $    244,577

Cash flows from investing activities

  Capital expenditures and acquisitions                  -         (369,135)       (253,396)              -        (622,531)
  Proceeds from sale of assets                           -            2,671               -               -           2,671
  Other                                                  -         (243,784)              -         243,784               -
                                                 ---------     ------------    ------------    ------------    ------------
      Net cash used in investing activities              -         (610,248)       (253,396)        243,784        (619,860)
                                                 ---------     ------------    ------------    ------------    ------------
Cash flows from financing activities

  Change in debt                                   470,110          (90,436)              -               -         379,674
  Other                                             (2,703)           5,000         243,784        (243,784)          2,297
                                                 ---------     ------------    ------------    ------------    ------------
      Net cash provided by (used
      in) financing activities                     467,407          (85,436)        243,784        (243,784)        381,971
                                                 ---------     ------------    ------------    ------------    ------------

Increase (decrease) in cash and cash equivalents     1,904            4,780               4               -           6,688

Cash and cash equivalents, beginning of period          (4)           3,329               -               -           3,325
                                                 ---------     ------------    ------------    ------------    ------------
Cash and cash equivalents, end of period         $   1,900     $      8,109    $          4    $          -    $     10,013
                                                 =========     ============    ============    ============    ============
</TABLE>

Condensed Consolidated Statement of Cash Flows
For the nine months ended September 30, 2000
(in thousands)
<TABLE>
                                                                                   Non-
                                                    Pure        Guarantor       Guarantor
                                                  (Parent)     Subsidiaries    Subsidiaries    Eliminations    Consolidated
                                                  --------     ------------    ------------    ------------    ------------
<S>                                               <C>          <C>             <C>             <C>             <C>
Cash flows from operating activities              $   (505)    $     88,949    $          -    $          -    $     88,444

Cash flows from investing activities

  Capital expenditures and acquisitions                  -          (64,978)              -               -         (64,978)
  Proceeds from sale of assets                           -            1,345               -               -           1,345
  Other                                                  -            2,846               -               -           2,846
                                                 ---------     ------------    ------------    ------------    ------------
      Net cash used in investing activities              -          (60,787)              -               -         (60,787)
                                                 ---------     ------------    ------------    ------------    ------------
Cash flows from financing activities

  Change in debt                                         -          (23,863)              -               -         (23,863)
  Other                                                407           (1,316)              -               -            (909)
                                                 ---------     ------------    ------------    ------------    ------------
      Net cash provided by (used
      in) financing activities                           -          (25,179)              -               -          24,772
                                                 ---------     ------------    ------------    ------------    ------------
Increase (decrease) in cash and cash equivalents       (98)           2,983               -               -           2,885

Cash and cash equivalents, beginning of period           -                -               -               -               -
                                                 ---------     ------------    ------------    ------------    ------------
Cash and cash equivalents, end of period          $    (98)    $      2,983    $          -    $          -    $      2,885
                                                 =========     ============    ============    ============    ============
</TABLE>

                                       22
<PAGE>

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


Hallwood Merger

     On March 30, 2001, Pure and Hallwood Energy Corporation ("Hallwood")
announced the signing of a definitive merger agreement pursuant to which Pure
Resources II, Inc., an indirect wholly-owned subsidiary of Pure, would acquire
all the outstanding shares of common stock of Hallwood at a price of $12.50 per
share and all the outstanding shares of Series A Cumulative Preferred Stock of
Hallwood at a price of $10.84 per share. The all-cash transaction was structured
as a first step tender offer followed by a cash merger to acquire all remaining
shares of Hallwood. Total purchase price for the transaction is estimated to be
approximately $271 million, including assumed debt.

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

International Paper Transaction

     On January 31, 2001, Pure acquired oil and gas properties, fee mineral and
royalty interests from International Paper Company, and certain general and
limited partnership interests, for approximately $261 million, subject to
adjustments which totaled $4.9 million, for cash plus $5.2 million in
transaction costs.  The transaction was funded from Pure's credit facilities.

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

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

Union Oil Merger

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

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

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

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

                                       23
<PAGE>

General

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

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

 .    exploiting and developing its reserve base,

 .    pursuing exploration opportunities for oil and gas reserves,

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

 .    emphasizing a low overhead and operating cost structure.

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


Impact of Commodity Prices

     Our revenues, operating results and future growth depend substantially on
prevailing oil and natural gas prices.  Price volatility in the oil and natural
gas markets has remained prevalent in the last few years.  During 1998 and
through the first quarter of 1999, we experienced a decline in energy commodity
prices.  The average prices received by producers in all our core areas have
risen sharply in 2001 and 2000 compared to 1999.  At December 31, 2000, the
NYMEX prices for crude oil and natural gas were $26.80 per barrel and $9.78 per
Mcf, respectively.  In perspective, at September 30, 2001, the NYMEX prices for
crude oil and natural gas were $23.43 per barrel and $2.24 per Mcf,
respectively.  As indicated by these price movements, oil and natural gas prices
remain subject to volatility, and could decline again.

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

Impact on Pure of Business Opportunities Agreement and Severance Arrangements

     Under a business opportunity agreement between Pure and Union Oil, Pure has
agreed to limit its business activities. Union Oil has granted Pure certain
limited waivers of the agreement, including a waiver dated May 9, 2001, which
significantly broadened the geographic areas in which Pure is allowed to conduct
business.  However, the agreement's remaining restrictions may limit Pure's
ability to diversify its operating base and may limit its ability to realize
fully the value of certain of the assets acquired in the IP Transaction.

     Mr. Hightower's employment agreement and the Pure officer severance
agreements entitle covered Pure officers to require Pure to purchase his or her
Pure common stock at a price that may be in excess of market value in the event
of a change of control of Pure or Unocal Corporation ("Unocal") and in some
circumstances following termination of employment.  On September 30, 2001, when
the trading price of Pure common stock was $15.95 per share, the "per share net
asset value" of Pure, calculated in accordance with the agreements, was
estimated at approximately $24.34. The amortization amounts will change
quarterly based on relative changes in the net asset value and market value of
the Pure shares.

Basis of Presentation

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

                                       24
<PAGE>

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

     General and Administrative Costs

     General and administrative costs include charges related to activities such
as accounting, legal, human resources, marketing, planning and public relations.
General and administrative costs charged to the Permian Basin business unit were
$1.4 million for the nine months ended September 30, 2000.  There were no
allocated general and administrative costs charged to the Permian Basin Business
unit for the three months ended September 30, 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 $900,000 for the nine months ended September
30, 2000.  There were no allocated indirect production costs charged to the
Permian Basin Business unit for the three months ended September 30, 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
$200,000 for the nine months ended September 30, 2000, respectively.  There were
no allocated indirect exploration costs charged to the Permian Basin Business
unit for the three months ended September 30, 2000.

Operating Data

<TABLE>
<CAPTION>
                                                                             Three months ended       Nine months ended
                                                                                September 30,           September 30,
                                                                            -------------------     -------------------
                                                                             2001         2000       2001         2000
                                                                            -------------------     -------------------
<S>                                                                         <C>       <C>           <C>       <C>
Production:
    Oil and condensate (MBbls) ......................................          2,090     1,643         5,847     3,683
    Natural gas (MMcf) ..............................................         23,821    11,733        59,513    27,412
    Total (MBOE) ....................................................          6,060     3,599        15,765     8,251

Average daily production:
    Oil and condensate (Bbls) .......................................         22,715    17,862        21,416    13,440
    Natural gas (Mcf) ...............................................        258,927   127,532       217,996   100,045
    Total (BOE) .....................................................         65,870    39,117        57,749    30,114

Average sales price per unit (excluding effects of hedging):
    Oil and condensate (per Bbl) ....................................       $  24.38  $  30.14      $  25.32  $  28.95
    Natural gas (per Mcf) ...........................................       $   2.41  $   3.57      $   3.86  $   3.04
    Total (per BOE) .................................................       $  17.88  $  25.41      $  23.96  $  23.01

Average sales price per unit (including effects of hedging):
    Oil and condensate (per Bbl) ....................................       $  24.50  $  29.25      $  25.11  $  28.46
    Natural gas (per Mcf) ...........................................       $   3.10  $   3.58      $   4.00  $   3.04
    Total (per BOE) .................................................       $  20.63  $  25.02      $  24.41  $  22.80

Expenses per BOE:
    Production costs, excluding production and other taxes ..........       $   3.84  $   4.08      $   3.87  $   3.89
    Production and other taxes ......................................       $   1.42  $   1.72      $   1.73  $   1.74
    General and administrative ......................................       $   1.00  $   1.13      $   1.33  $   0.87
    Depletion, depreciation and amortization ........................       $   6.85  $   3.80      $   6.51  $   3.76
</TABLE>

                                       25
<PAGE>

Results of Operations

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

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

     Pure's revenues from the sale of oil and natural gas were $51.2 million and
$73.8 million for the three months ended September 30, 2001 and $48.1 million
and $42.0 million for the three months ended September 30, 2000, respectively.
Compared with 2000, Pure's average oil sales prices decreased by $4.76 per Bbl,
or 16%, while average gas sales prices decreased by $0.48 per Mcf, or 13%.  The
increase in production of 2.5 million BOE in 2001 is primarily the result of the
IP Transaction, Hallwood merger and the success of Pure's capital program,
offset by normal production declines.  The IP Transaction and Hallwood merger
properties contributed approximately 2.2 million BOE of production in the third
quarter of 2001.

     Other operating revenues are primarily the result of Hallwood's
monetization of its Section 29 credits, prior to Pure's acquisition of Hallwood.
Pure will continue to receive this revenue through December 2002 when the
Section 29 credits will expire.

     Pure's oil and gas production expenses excluding production and other taxes
were $23.2 million ($3.84 per BOE) and $14.6 million ($4.08 per BOE) for the
three months ended September 30, 2001 and 2000, respectively.  Production
expenses increased $8.6 million which is primarily the result of (a) IP
Transaction properties of $3.5 million and Hallwood merger properties of $4.2
million and (b) significant increases in the costs of services and products.

     Production and other taxes were $8.6 million ($1.42 per BOE) and $6.2
million ($1.72 per BOE) for the three months ended September 30, 2001 and 2000,
respectively.  The increase in production and other taxes is primarily
attributable to increase in oil and gas revenues associated with increased
revenues from the assets in the IP Transaction and the Hallwood merger.

     General and administrative expenses were $6.1 million ($1.00 per BOE) and
$4.1 million ($1.13 per BOE) for the three months ended September 30, 2001 and
2000, respectively.  General and administrative expenses increased, primarily,
as a result of the IP Transaction and the Hallwood merger and, to a lesser
extent, the increase in Pure's technical staff.  Pure's general and
administrative expense in the third quarter of 2001 are lower by approximately
$1.0 million due to the reclass of certain costs associated with Pure's district
exploration staff for the previous two quarters that had been classified as
general and administrative expense.

     Depletion, depreciation, and amortization expense (DD&A) was $41.5 million
($6.85 per BOE) and $13.7 million ($3.80 per BOE) for the three months ended
September 30, 2001 and 2000, respectively.  DD&A increased in absolute amounts
due primarily to the inclusion of the properties from the IP Transaction, the
Hallwood merger and Pure's capital program for the three months ended September
30, 2001.  The increase in the per unit amount is primarily attributable to per
unit acquisition costs from the IP Transaction and Hallwood merger.

     Pure's exploration and abandonment expense was $10.7 million and $6.6
million for the three months ended September 30, 2001 and 2000, respectively.
Increase in exploration expenses is primarily related to (a) an increase in
geological and geophysical staff and related costs as a result of the IP
Transaction and the Hallwood merger, (b) seismic costs and (c) exploratory dry
hole costs.

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

     In 2001, other income (expense) includes $188,000 of loss attributable to
the ineffective portion of the cash flow hedges and the change in fair value of
certain derivatives not qualifying as hedges under SFAS No. 133.  In 2000, other
expense primarily relates to transitional type costs associated with the Union
Oil contribution of properties into Pure and certain transaction costs of Union
Oil directly related to the Titan merger.

     Income tax expense was $7.4 million and $12.9 million for the three months
ended September 30, 2001 and 2000, respectively.  Income tax expense decreased,
primarily, due to (a) decreased earnings between periods, (b) a $2.6

                                       26
<PAGE>

million adjustment related to Pure's 2000 income taxes as previously reported in
2000 and (c) a reduction in Pure's estimate of its expected effective tax rate.


     Nine Months Ended September 30, 2001 as compared to Nine Months Ended
     September 30, 2000

     Pure's revenues from the sale of oil and natural gas were $146.8 million
and $237.9 million for the nine months ended September 30, 2001 and $104.8
million and $83.3 million for the nine months ended September 30, 2000,
respectively.  Compared with 2000, Pure's average oil sales prices decreased by
$3.35 per Bbl, or 12%, while average gas sales prices increased by $0.96 per
Mcf, or 32%. The increase in production of 7.5 million BOE in 2001 is primarily
the result of the Titan merger, IP Transaction, Hallwood merger and the success
of Pure's capital program, offset by normal production declines.  The Titan, IP
Transaction and Hallwood merger properties contributed approximately 6.7 million
BOE of production in 2001.

     Pure's oil and gas production expenses excluding production and other taxes
were $61.1 million ($3.87 per BOE) and $31.9 million ($3.89 per BOE) for the
nine months ended September 30, 2001 and 2000, respectively.  Production
expenses increased $29.1 million which is primarily the result of (a) production
costs from the Titan properties of $7.0 million, IP Transaction properties of
$8.2 million and Hallwood merger properties of $6.9 million, (b) significant
increases in the costs of services and products and (c) decrease of $900,000
between periods in Union Oil's indirect costs.  As of the date of the Titan
merger, Pure no longer incurs Union Oil's indirect costs.  As a result of the
Titan merger and new management of all of Pure properties, there have been
certain fundamental changes in how the assets are managed.  Certain costs that a
major oil company, such as Union Oil, treated as production expenses may be more
readily seen as general and administrative expenses by an independent oil
company, such as Pure.  Accordingly, certain costs will be reflected in general
and administrative expenses.

     Other operating revenues are primarily the result of Hallwood's
monetization of its Section 29 credits, prior to Pure's acquisition of Hallwood.
Pure will continue to receive this revenue through December 2002 when the
Section 29 credits will expire.

     Production and other taxes were $27.3 million ($1.73 per BOE) and $14.4
million ($1.74 per BOE) for the nine months ended September 30, 2001 and 2000,
respectively.  The increase in production and other taxes is primarily
attributable to increase in oil and gas revenues associated with increased
commodity prices and the revenues from the assets in the Titan merger, the IP
Transaction and the Hallwood merger.

     General and administrative expenses were $21.0 million ($1.33 per BOE) and
$7.2 million  ($.87 per BOE) for the nine months ended September 30, 2001 and
2000, respectively.  General and administrative expenses increased as a result
of (a) the Titan merger, the IP Transaction and Hallwood merger, (b) subsequent
to the Titan merger, the classification of certain costs as general and
administrative versus production expense, and (c) offset by a $1.4 million
decrease in Union Oil's indirect costs between periods.  As of the date of the
Titan merger, Pure no longer incurs Union Oil's indirect costs.

     Depletion, depreciation, and amortization expense (DD&A) was $102.6 million
($6.51 per BOE) and $31.0 million ($3.76 per BOE) for the nine months ended
September 30, 2001 and 2000, respectively.  DD&A increased in absolute amounts
due primarily to the inclusion of the properties from the Titan merger, the IP
Transaction, the Hallwood merger and Pure's capital program for the nine months
ended September 30, 2001.  The increase in the per unit amount is primarily
attributable to per unit acquisition costs from the IP Transaction and Hallwood
merger.

     Pure's exploration and abandonment expense was $20.5 million and $9.6
million for the nine months ended September 30, 2001 and 2000, respectively.
Increase in exploration expenses is primarily related to (a) an increase in
geological and geophysical staff and related costs as a result of the Titan
merger, the IP Transaction and Hallwood merger, (b) exploratory dry hole costs,
(c) seismic costs and (d) offset by a $200,000 decrease in Union Oil's indirect
costs between periods.

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

     In 2001, other income (expense) includes $1.2 million of gain attributable
to the ineffective portion of the cash flow hedges and the change in fair value
of certain derivatives not qualifying as hedges under SFAS No. 133.  In 2000,

                                       27
<PAGE>

other expense primarily relates to transitional type costs associated with the
Union Oil contribution of properties into Pure and certain transaction costs of
Union Oil directly related to the Titan merger.

     Income tax expense was $38.0 million and $29.5 million for the nine months
ended September 30, 2001 and 2000, respectively. Income tax expense decreased,
primarily, due to (a) decreased earnings between periods, (b) a $2.6 million
adjustment related to Pure's 2000 income taxes as previously reported in 2000
and (c) a reduction in Pure's estimate of its expected effective tax rate.


Liquidity and Capital Resources

     Pure's primary capital resources are net cash flows provided by operating
activities and the availability under the Credit Agreements, of which
approximately $235 million was available at September 30, 2001.  In June 2001,
Pure completed the issuance of 7.125% Senior Notes due in 2011, the proceeds
from which were used to pay off the interim financing for the Hallwood merger
and reduce existing borrowings under the Credit Agreements.  Pure requires
capital primarily for its exploration, development and acquisition of oil and
gas properties, repayment of indebtedness and general working capital needs.
When appropriate, Pure would consider use of debt and equity financing, non-
recourse transactions and asset sales.

     Net Cash Provided by Operating Activities

     Cash flow from operating activities for Pure was $82.1 million for the
three months ended September 30, 2001 compared to $41.7 million for the three
months ended September 30, 2000.  Cash flow from operating activities for Pure
was $244.6 million for the nine months ended September 30, 2001 compared to
$88.4 million for the nine months ended September 30, 2000.  The increase in net
cash provided by operating activities was primarily due to increased commodity
prices and production increases resulting from (a) Pure's drilling activities,
(b) the Titan merger, (c) the IP Transaction and (d) the Hallwood merger.

     Capital Expenditures

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


                                    Three months ended     Nine months ended
                                       September 30,         September 30,
                                    ------------------    -------------------
                                      2001       2000       2001       2000
                                    -------    -------    --------   --------
                                            (in thousands of dollars)
Property acquisition:
        Proved                      $ 4,784    $   885    $573,301   $245,278
        Unproved                      8,376      3,702      50,441     16,489
Exploration                          25,851     11,008      43,062     17,926
Development                          44,812     12,951     131,334     28,171
                                    -------    -------    --------   --------
        Total costs incurred        $83,823    $28,546    $798,138   $307,864
                                    =======    =======    ========   ========


     For 2001, Pure's initial capital budget was approximately $160 million.
With the IP Transaction and the Hallwood merger, the capital budget has
increased to $241 million ($230 million of which is the exploration and
production budget).  The revised budget is comprised of approximately (a) $83
million in development projects, (b) $62 million in exploration projects, (c)
$62 million in probable/possible projects, (d) $23 million to acquire additional
acreage and seismic data and (e) $11 million in other corporate items. The final
determination with respect to the drilling of any well, including those
currently budgeted, will depend on a number of factors, including (i) the
results of exploration efforts and the review and analysis of the seismic data,
(ii) the availability of sufficient capital resources by Pure and other
participants for drilling prospects, (iii) economic and industry conditions at
the time of drilling, including prevailing and anticipated prices for natural
gas and oil and the availability and costs of drilling rigs and crews, (iv) the
financial resources and results of Pure, and (v) the availability of leases on
reasonable terms and permitting for the potential drilling location.  There can
be no assurance that the budgeted wells will encounter, if drilled, recompleted
or worked over,

                                       28
<PAGE>

reservoirs of commercial quantities of natural gas or oil.  Pure
is currently in the midst of its capital budgeting process for 2002 and expects
to present its plan for board approval in November, 2001.

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

     Credit Agreement

     In September 2000, Pure entered into two unsecured credit agreements (the
"Credit Agreements") with The Chase Manhattan Bank (the "Bank") and First Union
National Bank.  The Credit Agreements are comprised of (a) a $250 million five-
year revolving credit facility ("Revolver"), with current commitments of $235
million, and (b) a $250 million 364-day revolving credit facility ("364
Revolver"), with no current commitments available.  All amounts outstanding on
the Revolver are due and payable in full on September 29, 2005.  All amounts
outstanding on the 364 Revolver 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 September 30, 2001, there was outstanding
principal of $187.8 million under the 364 Revolver.  Pure is presently
syndicating the refinancing of the 364 Revolver.

     At Pure's option, borrowings under the Credit Agreements bear interest at
either (a) the "Alternative Base Rate" (i.e. the higher of the Bank's prime
rate, or the federal funds rate plus .50% per annum), or (b) the Eurodollar rate
plus a margin ranging from .80% to .95% per annum for the Revolver and .85% to
1.00% per annum for the 364 Revolver.  These margins increase as Pure's debt
coverage ratio increases.  Participation fees on letters of credit are due
quarterly and range from .925% to 1.075% per annum of the outstanding amount of
letters of credit.  Facility fees are due quarterly on the total of the
outstanding commitments under the Credit Agreements and range from .20% to .30%
per annum on the Revolver and .15% to .25% per annum for the 364 Revolver.

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

     7.125% Senior Notes

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

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

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

     Liquidity and Working Capital

     At September 30, 2001, Pure had $10.0 million of cash and cash equivalents.
Pure's ratio of current assets to current liabilities was 0.75 and 1.05 at
September 30, 2001 and December 31, 2000, respectively. Pure maintains
relatively low cash levels for cash management purposes.  Pure, at September 30,
2001, had availability under its Credit Agreement to fund any working capital
deficit, if any.

                                       29
<PAGE>

     Working Capital Revolver

     In October 2000, for purposes of maximizing its daily cash management
activity, Pure entered into an unsecured $10 million working capital credit
facility  (the "Working Capital Revolver")  with the Bank.  Individual
borrowings may be made for up to a three week period.  The Working Capital
Revolver has no maturity date and is cancelable at anytime by the Bank.  The
interest rate of each loan under the Working Capital Revolver is determined by
agreement between Pure and the Bank.  The rate shall not exceed the maximum
interest rate permitted under applicable law.  Interest rates generally are at
the Bank's cost of funds plus 1% per annum.  At September 30, 2001, there was no
outstanding principal under the Working Capital Revolver.

Other Matters

     Stock Options and Compensation Expense

     Pure has issued options as of September 30, 2001 to officers and non-
officers to purchase 5,641,276 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 nine months of 2001 and in the year
2000,  Pure expensed approximately $504,000 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, which at September 30, 2001 was $24.34 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 $114.4 million reflected in the consolidated
balance sheet at September 30, 2001, as common stock subject to repurchase is
the estimated net asset value, as defined, for each applicable officer's covered
shares and unexercised option shares less the amount of proceeds that would be
received upon exercise of the related options.  Deferred compensation related to
such shares and options is calculated as the difference between the estimated
net asset value of the relevant number of Pure shares and the market value of
Pure shares held by each covered officer in the case of shares held or the
exercise price of shares subject to option.  As of September 30, 2001, Pure
recorded approximately $69.6 million of deferred compensation, of which it
recognized amortization expense of approximately $(2.7) million and $15.6
million for the three and nine months ended September 30, 2001, respectively,
and $14.8 million for the year 2000, respectively.  This arrangement is being
treated as a variable plan under Accounting Principles Board Opinion No. 25
"Accounting for Stock Based Compensation." Consequently, the total compensation
for both shares held and shares subject to option will be measured at the end of
each quarter as the calculated amount of net asset value and the market price of
Pure shares change. The total amount determined will be amortized as
compensation expense over a three-year period for common stock and the vesting
period of the stock options with any changes after three years for common stock
and the vesting period of the stock options being expensed in the period of
determination.

   The net asset value per share of $24.34 at September 30, 2001 utilizes the
funded debt levels at September 30, 2001.  The assumed proceeds Pure would
receive from the exercise of the options subject to the employment agreements is
not used to reduce Pure's funded debt in the calculation of net asset value per
share.  If assumed such proceeds from the exercise of the options were used to
reduce funded debt at September 30, 2001 the net asset value would be greater
than $24.34 per share.


     Disclosure about Market Risk

     Pure may use swap agreements and other financial instruments in an attempt
to reduce the risk of fluctuating oil and gas prices and interest rates.
Settlement of gains or losses on the hedging transactions are generally based on
the difference between the contract price and a formula using NYMEX or other
major indices related prices and is reported as a component of oil and gas
revenues as the associated production occurs. At September 30, 2001, Pure had
hedging transactions with respect to approximately 7,612,750 and 26,339,870
MMBtu of its future 2001 and 2002 estimated

                                       30
<PAGE>

natural gas production, respectively, and 531,760 and 673,000 barrels of its
future 2001 and 2002 estimated crude oil production, respectively. For
additional information, see Note 11 of Notes to Consolidated Financial
Statements.

     In October 2001, Pure entered into a costless basis swap based on the price
spread between NYMEX and regional hub for 30,000 MMBtu per day of its natural
gas for the production months November 2001 to December 2002.  The basis
difference is $.154 per MMBtu.

     At September 30, 2001, Pure had $37.5 million in notional principal of
fixed for floating interest rate swaps, which was acquired as part of the
Hallwood merger.  Pure pays a fixed rate of 5.23% and receives a LIBOR floating
rate.  The derivative contracts mature in February 2004.

     Environmental and Other Laws and Regulations

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

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

     Recently Adopted and Issued Accounting Pronouncements

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

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

     In October 2001, FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations" which establishes requirements for accounting for removal-type
costs associated with asset retirements.  The standard is effective for years
beginning after June 15, 2002, with earlier application encouraged.  As of
September 30, 2001, Pure is assessing the impact on its financial statements.

     In October 2001, FASB issued SFAS No. 144 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" which addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets.  SFAS No. 144 superseded SFAS No. 121 and the accounting and reporting
provisions of APB Opinion No. 30.  SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001.  Pure is currently in the process of
evaluating the impact that SFAS No. 144 will have on its financial position and
results of operations, if any.

                                       31
<PAGE>

Pure Unaudited Pro Forma Data

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

<TABLE>
<CAPTION>
Statement of Operations

                                                          Three months ended         Nine months ended
                                                             September 30,             September 30,
                                                        ----------------------    -----------------------
                                                           2001         2000         2001         2000
                                                        ---------    ---------    ---------    ----------
<S>                                                     <C>          <C>          <C>          <C>
     Total revenues                                     $126,779       144,242    $ 435,921    $  373,400
     Oil and gas production costs                        (23,240)      (18,284)     (68,171)      (58,811)
     Production and other taxes                           (8,586)      (11,696)     (30,775)      (25,165)
     General and administrative expenses                  (6,071)       (6,151)     (25,086)      (19,357)
     Amortization of deferred compensation                (1,944)       (1,941)     (17,778)      (17,719)
     Exploration and abandonment costs                   (10,734)      (11,101)     (22,378)      (21,649)
     Depreciation, depletion and amortization            (41,517)      (31,975)    (118,444)     (102,235)
     Other expenses, net                                  (9,532)      (12,252)     (26,962)      (37,045)
     Income tax expense                                   (8,687)      (17,795)     (44,214)      (31,998)
     Minority interest                                      (128)          (33)        (709)         (898)
                                                        --------     ---------    ---------    ----------
                             Net income                 $ 16,340     $  33,014    $  81,404    $   58,523
                                                        ========     =========    =========    ==========
     EBITDAX (a)                                        $ 81,268       101,428    $ 297,086       260,023
                                                        ========     =========    =========    ==========
</TABLE>

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

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

<TABLE>
<CAPTION>
Operational Data
                                                                           Three months ended        Nine months ended
                                                                              September 30,            September 30,
                                                                           -------------------     --------------------
                                                                             2001        2000        2001        2000
                                                                           --------------------------------------------
<S>                                                                        <C>          <C>        <C>          <C>
     Production:
        Oil and condensate (MBbls).....................................      2,090      2,029        6,128      5,890
        Natural gas (MMcf).............................................     23,821     22,291       67,499     68,440
        Total (MBOE)...................................................      6,060      5,744       17,378     17,297

     Average sales price per unit (including effects of hedging):
        Oil and condensate (per Bbl)...................................    $ 24.50     $29.63      $ 25.17     $27.01
        Natural gas (per Mcf)..........................................    $  3.10     $ 3.68      $  4.09     $ 3.03
        Total (per BOE)................................................    $ 20.63     $24.76      $ 24.76     $21.19

</TABLE>

                                       32
<PAGE>

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

     The following quantitative and qualitative information is provided about
financial instruments to which Pure is a party as of September 30, 2001, and
from which Pure may incur future earnings gains or losses from changes in market
interest rates and commodity prices.

Quantitative Disclosures

     Commodity Price Sensitivity:

     The following table provides information about Pure's derivative financial
instruments that are sensitive to changes in natural gas and crude oil commodity
prices.  See Note 11 of Notes to Consolidated Financial Statements included in
"Item 1.  Financial Statements" for specific information regarding the terms of
Pure's commodity derivative financial instruments that are sensitive to natural
gas and crude oil commodity prices.

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

Collar and swap option contracts:
Notional volumes (MMBtu)                                        7,612,750      26,339,870     $7,244,000
Weighted average short call strike price per MMBtu (b)         $    3.105     $     2.808
Weighted average long put strike price per MMBtu (b)           $    3.712     $     2.964

Crude Oil Hedge Derivatives (a):

Collar and swap option contracts:
Notional Volume (Bbls)                                            531,760         673,000     $1,568,000
Weighted average short call strike price per Bbl (c)           $   24.900     $    24.030
Weighted average long put strike price per Bbl (c)             $   29.820     $    28.090
</TABLE>

_______________________
(a) See Note 11 of Notes to Consolidated Financial Statements included in "Item
    1.  Financial Statements" for additional information related to hedging
    activities.
(b) The strike prices are based on prices of either a NYMEX Henry hub, San Juan
    Basin hub, Rocky Mountain hub or a Gulf Coast hub.
(c) The strike prices are based on the prices traded on the NYMEX.

                                       33
<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 September 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           2011          Total        Fair Value
                                                --------       --------       --------       --------     -----------
<S>                                             <C>            <C>            <C>            <C>          <C>
                                                                  (in thousands, except interest rates)
Debt (a):

Variable rate debt:
     Five Year Revolver (b)                     $      -       $      -       $      -       $      -      $      -
          Average interest rate                        -%             -%             -%

     364 Revolver (b)                           $187,756       $      -       $      -       $187,756      $187,756
          Average interest rate                     4.43%             -%             -%

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

Fixed  rate debt:

     Senior Notes                               $      -       $      -       $350,000       $350,000      $345,975
          Interest rate                                -%             -%         7.125%
</TABLE>
_________________________

(a)  See Note 3 of Notes to Consolidated Financial Statements included in "Item
     1. Financial Statements" for additional information related to debt.
(b)  Lenders are The Chase Manhattan Bank and First Union National Bank and all
     borrowings are unsecured.

   Interest Rate Swap:

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

<TABLE>
<CAPTION>
                       Period                         Notional Amount            Fixed Price
        ------------------------------------          ---------------           -----------
        <S>                                           <C>                       <C>
        Three months ended December 31, 2001            $37,500,000                5.23%
                        2002                            $37,500,000                5.23%
                        2003                            $37,500,000                5.23%
         Two months ended February 29, 2004             $37,500,000                5.23%
</TABLE>

       Pure pays the fixed rate and receives a LIBOR floating rate.  At
September 30, 2001, the fair value of the interest rate swap was a liability of
approximately $1,552,000.

                                       34
<PAGE>

Qualitative Disclosures

                      Derivatives and Hedging Objectives

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

     Commodity Price Risk:

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

     Interest Rate Risk:

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


                      Derivatives and Hedging Strategies

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

     Commodity Price Risk:

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

     Interest Rate Risk:

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

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

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

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

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

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<PAGE>

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

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

                                       36
<PAGE>

                          PART II - OTHER INFORMATION

Item 1.   Legal Proceedings

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

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


Item 2.   Changes in Securities and Use of Proceeds

     None.

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

     None.


Item 6.   Exhibits and Reports on Form 8-K

(a)  Exhibits:

     None.

(b)  Reports Submitted on Form 8-K:

     1.   Form 8-K filed on September 14, 2001 (date of event September 13,
          2001) reporting updated financial statements for Pure that contained
          the additional disclosures needed to be included in a registration
          statement for a public debt offering.

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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-Finance and Chief
                                         Financial Officer

Date: November 14, 2001

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