<PAGE>
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D. C.  20549

                                   FORM 10-K
                                        
  [x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
      Act of 1934

      For the fiscal year ended December 31, 1998 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 1-8483

                              UNOCAL CORPORATION
            (Exact name of registrant as specified in its charter)
<TABLE> 
<CAPTION> 
<S>                                                             <C> 
           DELAWARE                                             95-3825062
(State or other jurisdiction of                              (I.R.S. Employer
 incorporation or organization)                             Identification No.)

   2141 Rosecrans Avenue, Suite 4000, El Segundo, California       90245
            (Address of principal executive offices)             (Zip Code)
</TABLE> 

      Registrant's telephone number, including area code:  (310) 726-7600

Securities registered pursuant to Section 12(b) of the Act:
<TABLE> 
<CAPTION> 
<S>                                             <C> 
      Title of each class                       Name of each exchange on which registered
      -------------------                       -----------------------------------------
Common Stock, par value $1.00 per share                 New York Stock Exchange
                                                        Pacific Exchange
                                                        Chicago Stock Exchange
Preferred Stock Purchase Rights                         New York Stock Exchange
                                                        Pacific Exchange
                                                        Chicago Stock Exchange
</TABLE> 
Securities registered pursuant to Section 12(g) of the Act: None

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

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

The aggregate market value of the common stock held by non-affiliates of the
registrant as of February 28, 1999 (based upon the average of the high and low
prices of these shares reported in the New York Stock Exchange Composite
Transactions listing for that date) was approximately $6.74 billion.

Shares of common stock outstanding as of February 28, 1999: 241,518,668

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement for its 1999 Annual
Meeting of Stockholders (to be filed with the Securities and Exchange Commission
on or about April 12, 1999) are incorporated by reference into Part III.
<PAGE>
 
                               TABLE OF CONTENTS



                                        
<TABLE>
<CAPTION>
ITEM (S)                                                PART I                                                PAGE
 
<S>        <C>                                                                                                <C>
 1. and 2. Business and Properties.........................................................................     1         
      3.   Legal Proceedings...............................................................................    13         
      4.   Submission of Matters to a Vote of Security Holders.............................................    18         
           Executive Officers of the Registrant............................................................    18         
                                                                                                                          
                                                       PART II                                                            
      5.   Market for  Registrant's Common Equity and Related Stockholder Matters..........................    20         
      6.   Selected Financial Data.........................................................................    20         
      7.   Management's Discussion and Analysis of Financial Condition and Results of Operations...........    21         
     7A.   Quantitative and Qualitative Disclosures about Market Risk......................................    42         
      8.   Financial Statements and Supplementary Data.....................................................    44         
      9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............    90         
                                                                                                                          
                                                                                                                          
                                                       PART III                                                           
     10.   Directors and Executive Officers of the Registrant..............................................    91         
     11.   Executive Compensation..........................................................................    91         
     12.   Security Ownership of Certain Beneficial Owners and Management..................................    91         
     13.   Certain Relationships and Related Transactions..................................................    91         
                                                                                                                          
                                                                                                                          
                                                       PART IV                                                            
     14.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................    91         
</TABLE>
<PAGE>
 
                                    PART I

ITEMS 1 AND 2 - BUSINESS AND PROPERTIES

Unocal Corporation was incorporated in Delaware on March 18, 1983, to operate as
the parent of Union Oil Company of California (Union Oil), which was
incorporated in California on October 17, 1890.  Virtually all operations are
conducted by Union Oil and its subsidiaries.  The terms "Unocal" and "the
company" as used in this report mean Unocal Corporation and its subsidiaries,
except where the text indicates otherwise.

Unocal is one of the world's largest independent oil and gas exploration and
production companies, with major oil and gas exploration and production
activities in Asia and the United States Gulf of Mexico.  Unocal is also a
leading producer of geothermal energy; a provider of electrical power; and a
manufacturer and marketer of nitrogen-based fertilizers, petroleum coke,
graphites and specialty minerals.  Other activities include project development,
ownership in proprietary and common carrier pipelines, and the marketing and
trading of hydrocarbon commodities.

                                STRATEGIC FOCUS

In 1998, Unocal continued to focus on its strategy of growth through crude oil
and natural gas exploration and the pursuit of market-to-resource project
developments with the goal of creating value for its stockholders.  Since the
inception of this strategy in 1994, the company has transformed itself in three
distinct phases.  First, Unocal sold its low-return refining and marketing
assets to concentrate on its exploration and production operations.  Second, the
company has been concentrating its exploration and production activities in
distinct geographic regions where it has a strong competitive advantage, sees a
growing energy market, and has the opportunity to leverage its technical skills,
relationships, and low cost structure.  Third, the company's management is
strengthening its focus on the financial returns of its operations in an effort
to maximize values.

In carrying out this strategy, the company has actively managed its portfolio of
assets by divesting its lower-return or non-strategic assets and re-investing in
potentially high-return exploration and production assets primarily in Asia and
the Gulf of Mexico.  Activity in 1998 included the divestiture of most of the
company's Canadian properties, the announcement of plans to reorganize or divest
most of the Diversified Business Group's assets, and the acquisition of
additional blocks in the deepwater areas of the Gulf of Mexico, Indonesia and
Gabon.  Activity in early 1999 included an agreement for the sale of United
States geothermal assets at The Geysers in Northern California and an agreement
for the exchange of most of the company's Rocky Mountain oil and gas assets.

Unocal's potential growth areas include Indonesia, Thailand, the Gulf of Mexico,
Bangladesh, Brazil, and West Africa.  These areas have similar geological
environments that the company understands well.  This should allow the company
to leverage its drilling expertise and lower operating costs.  Conversely, the
company is withdrawing from non-strategic areas, mostly in Central Asia (except
Azerbaijan), where there are lower potential returns, heightened political
risks, questionable market development, or unacceptable payout timelines.

                           DEPRESSED COMMODITY PRICES

Crude oil and natural gas prices were severely depressed in 1998.  This was
especially true of the company's worldwide average crude oil price, which
finished the year approximately 34 percent below the average for 1997.  The
company's worldwide average natural gas price in 1998 was approximately 14
percent below the 1997 average.  These depressed prices were primarily the
result of an oversupply of crude oil on world markets, a drop in demand in
Southeast Asia, a warm winter in the Northern Hemisphere, and a build-up of
United States natural gas inventories.

This low commodity price environment produces both challenges and opportunities.
The challenge for the company is to deliver earnings, maintain production, and
maintain a manageable level of debt without 

                                       1
<PAGE>
 
sacrificing key growth projects. The company will reduce capital spending over
the short-term, and leverage its strengths to capture the opportunities. Unocal
will focus on its highest-potential growth assets, withdraw from or suspend
projects in other areas, adjust capital expenditures with available cash flows
and implement targeted cost reductions to weather this depressed price
environment.

                             ASIAN ECONOMIC CRISIS

Unocal has major operations in Thailand and Indonesia, two of the countries
affected by the current economic downturn afflicting Asia. Although the economic
situation in Asia indirectly impacts the company as well as other oil and gas
companies in terms of a worldwide commodity price decline, currently the
company's oil and gas operations in Thailand and Indonesia remain largely
unaffected by the economic crisis.

The primary risks for the company in these countries are foreign currency
fluctuations, declining demand for contractual commodity deliveries, and
political instability.  Most of the company's operating revenues are largely
protected from foreign currency fluctuations through existing contracts and, in
Indonesia, oil and liquefied natural gas exports are sold in dollar-based world
markets.  In Thailand, increased usage of indigenous natural gas as an
alternative fuel for power generation has kept natural gas demand strong even as
the demand for electricity has declined.  To date, no oil and gas production or
sales contracts have been nullified or significantly altered as a consequence of
political turmoil or financial crises in these countries.

The company's geothermal operations agreements at Gunung Salak, in Indonesia,
are also designed to insulate the company from foreign currency fluctuations.
The energy sales agreement calls for payments in U.S. dollars and is guaranteed
by the government of Indonesia.  However, only partial payments have been
received.  As of December 31, 1998, the company's geothermal operations in
Indonesia had a gross receivable balance of approximately $100 million, most of
which was for steam sales from the Gunung Salak field.  The company is
vigorously pursuing collection of the outstanding receivables.

The company has been developing resources and energy projects that have
strengthened Asian economies for more than three decades.  The company is
monitoring the crisis and will continue to work closely with host governments
and business associates through this difficult period.

                         DISPOSITION OF COMPANY ASSETS

In April 1998, the company received shares of common stock and debentures of
Tarragon Oil and Gas Limited (Tarragon) valued at approximately $212 million for
the exchange of its Alberta, Canada, exploration and production assets.  In the
third quarter of 1998, the company converted the debentures and common stock to
cash as a result of a tender offer from USX-Marathon for the purchase of
Tarragon's outstanding common stock.  The total after-tax gain recorded for
these transactions was $101 million and the proceeds from the sale were $261
million.   Also in 1998, the company received proceeds from the sales of its
interests in the Alliance Pipeline project and its Oklahoma oil and gas assets
of $52 million and $34 million, respectively.

In January 1999, the company reached an agreement to sell its interest in a
geothermal steam venture at The Geysers in Northern California for $101 million.
The transaction is expected to close by the end of the first quarter of 1999.

In March 1999, the company signed a letter of intent to trade most of its Rocky
Mountain oil and gas assets for 5.8 million shares of a domestic oil and gas
exploration and production company and $5 million in cash.  The total value of
the exchange is approximately $76 million.  The exchange is expected to close in
the second quarter of 1999.

                                       2
<PAGE>
 
                       SEGMENT AND GEOGRAPHIC INFORMATION
                                        
Financial information relating to the company's business segments, geographic
areas of operations, and sales revenues by classes of products is presented
under Note 26 to the Consolidated Financial Statements and Selected Financial
Data on Pages 74 and 88, respectively, of this report.

Information regarding oil and gas financial data, oil and gas reserve data and
the related present value of future net cash flows from oil and gas operations
is presented on pages 81 through 87 of this report.  During 1998, certain
estimates of underground oil and gas reserves were filed with the Department of
Energy under the name of Union Oil.  Such estimates were consistent with reserve
data filed with the Securities and Exchange Commission.

                           EXPLORATION AND PRODUCTION

Unocal's primary activities are oil and gas exploration, development, and
production. Spirit Energy 76, Alaska, New Ventures, and International Operations
conducts the company's exploration and production activities. Spirit Energy 76,
Alaska and International Operations are engaged in the exploration, development,
production, and sale of crude oil and natural gas in ten countries around the
world.

In 1998, the company produced approximately 184 thousand barrels of crude oil
and condensate per day and 1,826 million cubic feet of natural gas per day
primarily from the United States Gulf Coast, Thailand, and Indonesia.
Exploration and production operations accounted for approximately 62 percent of
Unocal's total assets at December 31, 1998.  Approximately 49 percent of the
company's exploration and production assets are in the United States.

Unocal has focused its growth efforts on exploration and production projects in
the Gulf of Mexico and Southeast Asia.  In addition, Unocal is pursuing
potential high-value, market-to-resource project opportunities in other key
growth areas.

Net Proved Reserves at Year End

Estimated net quantities of the company's proved oil and gas reserves at
December 31, 1998 were as follows:
<TABLE>
<CAPTION>
                                                                          1998             1997             1996
------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>              <C>             <C>           
Crude oil and condensate - million barrels (a)                             
           United States                                                   184              209              236
           Far East                                                        190              158              166
           Other International                                             158              166              111
                                                                      -------------------------------------------- 
           Worldwide                                                       532              533              513
 
Natural gas - billion cubic feet (a) (b)
           United States                                                 1,941            2,120            2,575
           Far East                                                      3,955            4,189            4,057
           Other International                                             226              241              163
                                                                      --------------------------------------------  
           Worldwide                                                     6,122            6,550            6,795
 
(a)  Includes host countries' shares under certain
      production sharing contracts of:
           Crude oil and condensate - million barrels                       52               59               70
           Natural gas - billion cubic feet                                389              444              530
 
(b)  Natural gas is reported on a wet-gas basis.
</TABLE>

                                       3
<PAGE>
 
Net Daily Production

Net quantities of crude oil and condensate, natural gas, and natural gas liquid
produced by the company per day were as follows:
<TABLE>
<CAPTION>
                                                                      1998             1997             1996
--------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>              <C>             <C>          
Crude oil and condensate - thousand barrels (a)                        
           United States                                                73               76               96
           Far East                                                     80               95               84
           Other International                                          31               26               27
                                                                     ------------------------------------------  
           Worldwide                                                   184              197              207
 
Natural gas - million cubic feet (a) (b)
           United States                                               928              993            1,075
           Far East                                                    853              795              669
           Other International                                          45               60               68
                                                                     ------------------------------------------   
           Worldwide                                                 1,826            1,848            1,812
 
Natural gas liquids - thousand barrels (c)
           United States                                                14               12               14
           Far East                                                      5                6                6
                                                                     ------------------------------------------   
           Worldwide                                                    19               18               20
 
(a)  Includes host country share in Indonesia of:
           Crude oil and condensate - thousand barrels                  10               28               28
           Natural gas - million cubic feet                             49               28               27
 
(b)  Natural gas is reported on a wet gas basis and excludes gas consumed on
     lease.
 
(c)  Host country share of natural gas liquids production is
     insignificant.


</TABLE> 

Natural Gas Production Available for Sale

Quantities of natural gas production available for sale were as follows:

<TABLE>
<CAPTION>
Million cubic feet per day                                                     1998               1997                1996
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>                <C>                 <C>
United States                                                                   758                813                 891
International                                                                   827                820                 705
                                                                          ----------------------------------------------------
Worldwide                                                                     1,585              1,633               1,596
</TABLE>


Oil and Gas Acreage

As of December 31, 1998, the company's holdings of oil and gas rights acreage
were as follows:

<TABLE>
<CAPTION>
                                                                                As of December 31, 1998
                                                                                  (thousands of acres)
-----------------------------------------------------------------------------------------------------------------------------------
                                                                 Proved Acreage                            Prospective Acreage
                                                      -------------------------------------          -------------------------------

                                                              Gross                 Net                    Gross              Net
                                                      -----------------       -------------          --------------      -----------
<S>                                                           <C>                   <C>                    <C>                <C>
 
United States                                                   852                 551                   2,691               1,879
Far East                                                        334                 242                  37,432              20,167
Other International                                             114                  51                  13,677               5,014
                                                      -----------------       -------------          --------------      -----------

Worldwide                                                     1,300                 844                  53,800              27,060
</TABLE>

                                       4
<PAGE>
 
Producible Oil and Gas Wells

The approximate numbers of producible wells at December 31, 1998 were as
follows:

<TABLE>
<CAPTION>
                                                          
                                                                              As of December 31, 1998
---------------------------------------------------------------------------------------------------------------------------------
                                                                   Oil                                         Gas
                                                   ------------------------------------          --------------------------------
                                                          Gross                 Net                   Gross               Net
                                                   -----------------      -------------          -------------      -------------
<S>                                                   <C>                    <C>                    <C>                <C>
United States                                                  2,736              1,621                    974                610
Far East                                                         202                153                    705                490
Other International                                              872                295                     34                 24
                                                   -----------------      -------------          -------------      -------------
Worldwide                                                      3,810              2,069                  1,713              1,124
</TABLE>
 
The company had 260 gross and 191 net producible wells with multiple
completions.

Drilling in Progress

The numbers of wells in progress at December 31, 1998 were as follows:

<TABLE>
<CAPTION>
                                                                                                  As of December 31, 1998
                                                                                                     Oil and Gas Wells *
---------------------------------------------------------------------------------------------------------------------------------
                                                                                                   Gross                 Net
                                                                                             --------------      ----------------
<S>                                                                                             <C>                 <C>
United States                                                                                            27                    11
Far East                                                                                                 46                    25
Other International                                                                                       3                     1
                                                                                             --------------      ----------------
Worldwide                                                                                                76                    37
 
* Excludes service wells in progress (6 gross, 2 net).
</TABLE>
 
The company had no waterflood projects in progress at December 31, 1998.


Net Oil and Gas Wells Completed and Dry Holes

The following table shows the number of net wells drilled to completion by the
company:

<TABLE>
<CAPTION> 
                                                     Productive                                           Dry
                                -------------------------------------------------    ----------------------------------------------
                                    1998              1997              1996             1998             1997             1996
                                -------------     ------------      ------------     ------------     ------------     ------------
<S>                             <C>               <C>               <C>              <C>              <C>              <C>
Exploratory
   United States                           20               14                13               18                7               11
   Far East                                15                7                 2               13               17               14
   Other International                      2                1                 2                3                1                5
                                -------------     ------------      ------------     ------------     ------------     ------------
   Worldwide                               37               22                17               34               25               30
 
Development
   United States                           76               48                76                2                -                4
   Far East                               119              124                90                7                1                -
   Other International                     23               64                26                1                6                2
                                -------------     ------------      ------------     ------------     ------------     ------------
   Worldwide                              218              236               192               10                7                6
</TABLE>

                                       5
<PAGE>
 
UNITED STATES - Spirit Energy 76 is Unocal's United States lower 48 exploration
and production unit.  Spirit Energy 76 is active in exploration, development,
and production activities in the onshore, shelf, and deepwater areas of the Gulf
of Mexico region.  Onshore operations are located in Texas, Louisiana, Michigan,
New Mexico, Alabama, and Utah.  On December 31, 1998, the company sold
substantially all of its oil and gas assets in Oklahoma.

The company's Alaska upstream oil and gas operations are managed by the
Agricultural Products business unit.  Most of the natural gas produced by the
company's Alaska fields is used for feedstock at the company's fertilizer
manufacturing facility in Kenai.

The company holds approximately 1,879 thousand net acres of prospective land in
the United States.  Nearly 71 percent of the prospective acreage is located
offshore in the Gulf of Mexico.  Onshore prospective lands are primarily located
in Alaska, Texas, Colorado, New Mexico, and Louisiana.

The company holds approximately 551 thousand net acres of proved lands in 19
states.  Approximately 37 percent of these lands are located offshore in the
Gulf of Mexico.  Onshore proved acreage is primarily located in Texas,
Louisiana, Alaska, New Mexico, and Alabama.

Unocal's 1998 United States crude oil was produced from fields in Alaska (40
percent), the offshore Gulf of Mexico (24 percent), Texas (24 percent), and
Louisiana (7 percent).  Various other states contributed the remaining amount (5
percent).  The company's United States natural gas production in 1998
principally came from fields in the offshore Gulf of Mexico (52 percent),
Louisiana (14 percent), Alaska (14 percent), Texas (9 percent), and New Mexico
(5 percent).  Various other states contributed the remaining amount (6 percent).

Unocal has various ownership interests in 13 natural gas processing plants
located near major gas fields in the United States.  The company operates six of
these plants, none of which were 100 percent owned.  Twelve plants were active
in 1998.

Most of the company's United States crude oil and natural gas production is sold
to the company's Global Trade segment.  A small portion is sold to third parties
at spot market prices or under long-term contracts.

Onshore and Shelf Gulf of Mexico

Spirit Energy 76 recorded a 64 percent success rate in its core Gulf of Mexico
shelf exploration program during 1998.  The latest discoveries included Mobile
918 No.1 in the Norphlet play offshore Alabama, marking the beginning of a
multi-year drilling program on this trend.  The well encountered 250 feet of gas
pay.  Production is expected to begin in March 1999 at a gross flow rate of 25
to 35 million cubic feet per day (mmcfd).  Spirit Energy 76 is the operator and
has a 45.65 percent working interest.

Another discovery was the West Cameron 278 LeMans well, offshore Louisiana,
which encountered 53 feet of gas pay.  The well is planned to be placed on
production in late March 1999 at a rate exceeding 25 mmcfd.  Spirit Energy 76 is
the operator with a 70 percent working interest.

During 1998, Spirit Energy 76 had 21 discoveries on the shelf.  The company
ended 1998 with an onshore and shelf Gulf of Mexico inventory of more than 130
drilling prospects, about 2  1/2 times the number that Spirit Energy 76 had two
years ago.

Deepwater Gulf of Mexico

In 1998, Spirit Energy 76 acquired interests in 53 additional deepwater tracts
in United States federal lease sales bringing the total inventory of deepwater
Gulf of Mexico blocks in which it has interests to 213.  The company currently
has plans to drill or participate in four to six deepwater exploratory wells in
1999.

Spirit Energy 76 is currently participating in two deepwater exploration wells
and expects to spud its first operated well in the second quarter of 1999.
Through its exploration efforts in the Far East, the company 

                                       6
<PAGE>
 
has developed cost-effective drilling design and techniques that it believes can
reduce the cost of Gulf of Mexico deepwater exploration wells by 50 percent or
more, compared with conventional drilling approaches.

INTERNATIONAL - Unocal produces oil and gas in nine countries outside of the
United States. The company, through its International Operations and
subsidiaries, currently operates or participates in production operations in
Thailand, Indonesia, Canada, The Netherlands, Azerbaijan, Myanmar, Yemen, the
Democratic Republic of Congo, and Bangladesh.  Unocal's international operations
in 1998 accounted for 49 percent of the company's natural gas production and 60
percent of its oil production.

International Operations also includes the exploration activities of the
company's New Ventures group.  The New Ventures group is involved in developing
energy projects primarily in Asia, Latin America and West Africa.

Thailand

The company currently operates eleven natural gas and condensate fields in the
Gulf of Thailand with an average 64 percent net working interest.  The Thailand
operation, producing since 1981, has drilled over 1,100 wells and has installed
78 platforms in the Gulf of Thailand.  The newest offshore Thailand gas field,
Pailin, is expected to commence production in the second half of 1999.  The
company had 1,138 employees in its Thailand operations at year-end 1998.
Approximately 91 percent of these employees were Thai nationals.

Gross natural gas production from all the Unocal operated fields averaged nearly
one billion cubic feet per day in 1998, nearly two-thirds of the natural gas
used by Thailand.  The natural gas is mainly used in power generation, but also
in the transportation sector and the petrochemical industry.  Natural gas
produced by the company yields about one quarter of the electricity consumed in
Thailand.  Natural gas production growth in Thailand has averaged 18 percent per
year since 1981 but production is expected to decline in 1999.   Gross
condensate production averaged nearly 34 thousand barrels per day in 1998, and
is used as a blending stock in oil refineries, as a chemical solvent, and as a
petrochemical feedstock.

The company sells substantially all of its natural gas production to the
Petroleum Authority of Thailand (PTT) under long-term contracts. The contract
prices are based on formulas that allow prices to fluctuate with market prices
for crude oil and refined products and are indexed to the U.S. dollar. In 1998,
$561 million, or approximately 11 percent, of the company's total external sales
and operating revenues were attributable to PTT. The company has typically
supplied more natural gas to PTT than is called for in the daily contract
quantity provisions of its sales contracts. In 1998, the company, through its
subsidiaries, began initial delivery of gas to Thailand from the Yadana field,
offshore Myanmar. The company's obligation to deliver gas to PTT is limited to
the available economic production from its properties in Thailand and Myanmar.

In 1998, successful delineation wells confirmed the commerciality of the
Pakarang gas field in the Gulf of Thailand.  Pakarang is located in concession
block 11, north of Unocal's Erawan field. Also in 1998, the company discovered
another new natural gas field in the Gulf of Thailand.  The South Gomin field
lies in concession block 13, southeast of Unocal's Erawan field and south of the
Funan field, which are among the eleven fields in the Gulf of Thailand that are
operated by the company.  Both new fields are covered under a company sales
contract with PTT.

In 1998, the company also signed a farm-in agreement with PTT Exploration and
Production Plc covering blocks B-14, B-15, and B-16 on the Thai side of the
Thai-Vietnam overlap area in the Gulf of Thailand.  These blocks adjoin the
company's established contract areas in Thailand.

Indonesia

The company currently operates nine producing oil and gas fields offshore East
Kalimantan, including Indonesia's largest offshore oil and gas field, Attaka,
which the company discovered in 1970.  Oil 

                                       7
<PAGE>
 
production from its northern fields is processed at the Santan terminal liquid
extraction plant and the dry gas is transported by pipelines to a fertilizer
plant and liquefied natural gas (LNG) plant, both located nearby at Bontang,
East Kalimantan. LNG is currently sold to Japan, Korea and Taiwan and the
extracted liquefied petroleum gas is exported to Japan. Oil and gas from its
southern fields are sent to the Unocal operated Lawe-Lawe terminal located near
the fields. The stored oil is either exported by tanker or transported by
pipeline to a refinery in Balikpapan owned by Pertamina, the state-owned oil and
gas company. The gas is sent by pipeline to the refinery and utilized as fuel.
Company operated fields averaged gross production of 76 thousand barrels of
crude oil and condensate per day and 337 million cubic feet of natural gas per
day in 1998. The company holds varying interests in more than 5.2 million acres
offshore East Kalimantan.

The discovery in 1998 of a significant new oil field in the deepwater Kutei
Basin area offshore East Kalimantan opens up a new hydrocarbon province for the
company.  The first successful exploration well drilled on the Seno prospect,
West Seno #2, is located on the Makassar Strait production-sharing contract
(PSC) area.  The latest delineation well on the Seno prospect, West Seno #4,
tested at over 19,000 barrels of oil and 18 million cubic feet of gas per day
from three zones.  The company plans on submitting its plan of development to
Pertamina early in the second quarter of 1999.

The company also drilled successful wells in the deepwater Merah Besar
area, in the Kutei Basin, further delineating a 1997 discovery.  The wells
encountered shallow gas on the East Kalimantan PSC area.  The company plans on
submitting a plan of development to Pertamina for the Merah Besar area.  The
Merah Besar area is located on the East Kalimantan PSC and northern portion of
the Makassar Strait PSC and could be developed as a cost-efficient satellite
development to the West Seno field.  Production from the West Seno and Merah
Besar fields is expected to begin in 2001.

In Indonesia, the company had 1,476 employees at year-end 1998.  Approximately
93 percent were Indonesian nationals.

Myanmar


The company, through subsidiaries, has a 28 percent non-operating interest in a
project to produce natural gas from the Yadana field, offshore Myanmar in the
Andaman Sea, and transport it by pipeline to Thailand for power generation.
Yadana is the first cross-border energy project in Southeast Asia.

The Yadana project included development of the Yadana field (four offshore
platforms with 14 wells) and construction of a pipeline extending from the
offshore field across Myanmar's remote southern panhandle to Ban-I-Trong at the
Myanmar-Thailand border.

The gas will be used to fuel a 2,800-megawatt power plant currently under
construction and to be operated by the Electric Generating Authority of Thailand
at Ratchaburi, located southwest of Bangkok.  Limited production began in 1998
and is expected to increase in 1999.  Commercial production is beginning later
than originally expected due to construction delays at the power plant.

Vietnam

The company has tested a significant gas discovery in its first exploration well
on Block B offshore southwestern Vietnam.  In 1998, two drill stem tests on the
exploration well, B-KL-1X, yielded a combined rate of 52.9 million cubic per day
of gas on the Kim Long prospect.  Block B, which contains identified natural gas
prospects, covers more than 1.3 million acres.  Unocal has a 45 percent working
interest and is operator.

In 1998, the company increased its acreage position in the Vietnam portion of
the Gulf of Thailand.  The company signed an agreement with PetroVietnam, the
Vietnam government's oil and gas company, to acquire more than two million acres
directly north of Block B.  The company also acquired exclusive negotiating
rights to Block 52/97, south of Block B, on the Vietnam side of the Thai-Vietnam
overlap area in the Gulf of Thailand.

                                       8
<PAGE>
 
Canada

The company exchanged most of its Alberta, Canada, exploration and production
assets for shares of common stock and debentures of Tarragon, which were
subsequently converted into cash as a result of a tender offer by USX-Marathon.
The company retained its interests in the Aitken Creek Gas Storage Project in
British Columbia, the Cal Ven Pipeline, and oil and gas producing properties
located in Southwest Saskatchewan.

The Netherlands

Average gross oil production in 1998 was approximately eight thousand barrels
per day.  Unocal also produced an average 46 million cubic feet of natural gas
per day from the L11/B and Halfweg fields.  In total, the company has interests
in seven producing fields.

Azerbaijan

Unocal has a ten percent working interest in the Azerbaijan International
Oil Company (AIOC) consortium that is developing offshore oil reserves in the
Caspian Sea from the Azeri and Chirag fields and the deepwater portions of the
Gunashli field.  In 1998, AIOC averaged 48 thousand gross barrels of oil per day
of early production through the northern pipeline route, which connects in
Russia to an existing pipeline system.  A western pipeline route from Baku
through Georgia to the Black Sea is now operating.

Yemen

The company has been involved in oil exploration in Yemen since 1987 when
the company signed the East Shabwa Production Sharing Agreement (PSA) with its
co-venturers and the government of Yemen.  Gross production started from the
East Shabwa PSA in December 1997, and averaged 16 thousand barrels of oil per
day in 1998.  Unocal is a non-operator with 28.57 percent working interest.

Democratic Republic of Congo

The company has been active in the Democratic Republic of Congo (formerly Zaire)
since 1984 when the company acquired a 17.72 percent non-operating working
interest in the rights to explore and produce hydrocarbons in the entire
offshore area of the country.  Gross production averaged about 20 thousand
barrels of oil per day from seven producing fields in 1998.

Gabon

Unocal is a member of the Vanco Gabon Group, a consortium of French and U.S. oil
and gas exploration companies that has entered into production-sharing contracts
for two exploration blocks located in deep water offshore Gabon, West Africa.
Unocal holds a 25 percent working interest in the venture. A 3D seismic program
is scheduled to begin in 1999, followed by the drilling of several exploration
wells starting in 2000.

Bangladesh

The company's involvement in the Bangladesh energy sector includes interests in
two PSCs.  The PSCs cover Blocks 12, 13 and 14, which total more than three
million acres.  The Jalalabad field is being developed on Block 13.  Gas began
flowing from the Jalalabad field in February 1999 and will soon increase to 100
million cubic feet per day.  The company has a 50 percent working interest in
these blocks.

The Bibiyana field, a major new gas field located on Block 12, was discovered in
the summer of 1998.  The Bibiyana discovery is currently being delineated and
appraisal work will continue throughout 1999.

                                       9
<PAGE>
 
Brunei

In 1997, the company signed a farm-in agreement covering Blocks A and CD,
offshore Brunei.  One well was drilled in late 1997, and drilling is expected to
resume in late 1999 or early 2000.  Unocal holds a 50 percent working interest
in both blocks.

Argentina

Unocal has a 47.5 percent and a 50 percent working interest in Blocks CNQ7 and
CNQ7A, respectively, in the Neuquen Basin of Argentina.  The company is the
operator for Block CNQ7A.

The company also has a 50 percent working interest in two offshore blocks in the
San Jorge Basin.  In 1999, the joint venture plans to evaluate recently acquired
seismic data.

India

Unocal has acquired a 26 percent equity interest in the Hindustan Oil
Exploration Company (HOEC).  Unocal also is evaluating the size and commercial
viability of gas resources in Tripura.

Changing political climates and relationships between international oil
companies and host governments in the above-mentioned countries and other parts
of the world, including changes in posted or tax-reference prices for crude oil,
increases in tax rates (sometimes retroactive) and demands for increased
participation in the ownership of operations, could lead to changes in the
status of Unocal's exploration and production activities in these and other
foreign countries during the coming years.  In addition, circumstances could
arise that may have a material adverse impact on the company's future
operations.  These circumstances may include, but not be limited to, further
devaluation of Asian currencies, decreased demand for energy products in areas
where the company has operations, civil unrest, increased inflation and any
prolonged international economic slowdowns.

                CRUDE OIL AND NATURAL GAS MARKETING AND TRADING
                                        
The company formed the Global Trade segment to consolidate its worldwide crude
oil, condensate and natural gas marketing and trading and commodity risk
management activities.  Most of the company's United States crude oil and
natural gas production is sold to the Global Trade segment.  Global Trade also
purchases crude oil, condensate and natural gas from the company's joint venture
partners, royalty owners and other unaffiliated oil and gas producers for
resale.

Effective January 1, 1999, the Pipelines business unit, previously part of the
Diversified Business segment, and the Global Trade segment were combined into a
new organization.  This new organization will help the company compete more
effectively in the midstream sector by bringing the company's energy trading,
risk management, and asset optimization skills under a single management
structure.  Global Trade is responsible for trading and marketing most of the
company's crude oil and gas production worldwide as well as managing the
pipeline and midstream assets.  Global Trade also supports the New Ventures
group through a newly formed International Gas Marketing Group, which will focus
on adding value in new markets where the company has or is developing a
presence, and in the company's fuel management and international pipeline
support activities.

                        GEOTHERMAL AND POWER OPERATIONS
                                        
Unocal is a producer of geothermal energy, with more than 30 years experience in
geothermal resource exploration, reservoir delineation, and management.  Unocal
also has proven experience in planning, designing, building and operating
private power projects and related project finance and economics.

The company operates major geothermal electricity projects at Tiwi and Mak-Ban
in the Philippines, Gunung Salak in Indonesia, and The Geysers in Santa Rosa,
California.  In January 1999, the company 

                                       10
<PAGE>
 
reached an agreement to sell its interest in a geothermal steam venture at The
Geysers in Northern California for $101 million. The transaction is expected to
close by the end of the first quarter of 1999.

Philippine Geothermal, Inc. (PGI), Unocal's Philippine subsidiary, entered into
a provisional agreement with National Power Company of the Philippines (NPC) as
a result of arbitration over the service contract renewal.  This provisional
agreement was in effect until December 31, 1997, when the arbitration court
issued an interlocutory order requiring both parties to maintain status quo
beyond December 31, 1997.  On June 22, 1998, PGI entered into an interim service
agreement with NPC with terms similar to the previous provisional agreement
signed in September 1996 respecting the status quo.  For as long as the parties
are negotiating in good faith, the term of the interim service agreement is
open-ended.  The term will end six months after either NPC or PGI resumes its
arbitration or court cases.  NPC and PGI continue to negotiate in good faith for
a possible settlement.

The company's geothermal reserves and operating data are summarized below:

<TABLE>
<CAPTION>
                                                                                     1998               1997               1996
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>                <C>                <C>
Net proved geothermal reserves at year end: (a)
   billion kilowatt-hours                                                            157                149                155
   million equivalent oil barrels                                                    235                223                232
Net daily production
   million kilowatt-hours                                                             21                 18                 18
   thousand equivalent oil barrels                                                    32                 27                 26
Net geothermal lands in thousand acres
   proved                                                                             20                 16                 16
   prospective                                                                       338                384                384
Net producible geothermal wells                                                      287                241                208
---------------------------------------------------------------------------------------------------------------------------------
</TABLE> 
 
(a)  Includes reserves underlying a service fee arrangement in the Philippines.


                           DIVERSIFIED BUSINESS GROUP
                                        
Agricultural Products

Unocal is a major manufacturer and marketer of nitrogen-based fertilizers
serving the western United States and southeast Asian markets.  The company's
primary fertilizer manufacturing plants, located in Kenai, Alaska, supply
nitrogen-based ammonia and urea fertilizer products to export markets in
southeast Asia and to Unocal's West Coast U.S. terminals.  Natural gas from the
company's southern Alaska operations is the feedstock for the Kenai facilities.
The company also produces ammonia at its Finley, Washington, facility and
manufactures upgraded nitrogen-based fertilizer products at its Kennewick,
Washington, and West Sacramento, California, facilities.

Carbon and Minerals

The Carbon and Minerals business unit produces and markets petroleum coke,
graphites, and specialty minerals.

Green petroleum coke, a by-product of refining operations, is calcined for use
in aluminum production and other industrial applications. Green coke is also
sold in the United States and overseas as fuel.  A calcining plant, owned and
operated by a subsidiary of the company, is located adjacent to the Citgo
refinery in Lemont, Illinois.

The company owns a 75 percent interest in The Needle Coker Company.  The
operation produces calcined needle coke at facilities also adjacent to the Citgo
refinery.  Needle coke is a high quality petroleum coke used to make graphite
electrodes for the production of steel in electric arc furnaces.

                                       11
<PAGE>
 
Through its wholly-owned subsidiary, Poco Graphite, Inc., the company
manufactures premium graphite and silicon carbide materials for use in
electrodes, semiconductors, biomedical products, and other advanced
technologies.

Unocal's mineral operations are carried out by Molycorp, Inc., a wholly-owned
subsidiary.  Molycorp mines, processes, and markets lanthanide and molybdenum
products.  Its mines are located in Mountain Pass, California and Questa, New
Mexico.  Molycorp also has an interest in Companhia Brasileira de Metalurgia e
Mineracao, a niobium operation in Brazil.

Due to persistent low lanthanide prices, a temporary suspension of all mining
and manufacturing operations occurred at the Molycorp's Mountain Pass,
California facilities in 1998.  The suspension of operations will last until
prices improve and resolution of certain regulatory and legal issues occurs.

Also, due to the low molybdenum prices realized during the second half of 1998,
operations at Molycorp's Questa, New Mexico, molybdenum facility were partially
curtailed in January 1999.  The mining operations are planned to continue at a
reduced rate with the mill operating periodically, as deemed necessary, to
maintain inventory levels to meet customer demands.  This operating plan will
continue until prices improve enough to support full-time operations.

Pipelines

The Pipelines business unit principally includes the company's equity interests
in petroleum pipeline companies and wholly-owned pipeline systems throughout the
United States.

Included in Unocal's pipeline investments is the Colonial Pipeline Company, in
which the company holds a 20.75 percent equity interest.  The Colonial Pipeline
system runs from Texas to New Jersey and transports a significant portion of all
petroleum products consumed in its 13-state market area.  Also included is the
Unocal Pipeline Company, a wholly-owned subsidiary of Unocal, which holds a 1.36
percent participation interest in the TransAlaska Pipeline System (TAPS).  TAPS
transports crude oil from the North Slope of Alaska to the port of Valdez in
Alaska.  In addition, the company holds a 27.75 percent interest in the Trans-
Andean oil pipeline, which transports crude oil from Argentina to Chile.  In
December 1998, the company sold its 9.078 percent interest in the Canadian
Alliance Pipeline project.

                                  COMPETITION
                                        
The energy resource industry is highly competitive.  As an independent oil and
gas company, Unocal competes against integrated companies, independent companies
and individual producers and operators for finding, developing, producing,
transporting, marketing, and trading oil and gas resources.  The company
believes that it is in a position to compete effectively.  Competition occurs in
bidding for United States prospective leases or international exploration
rights, acquisition of geological, geophysical and engineering knowledge, and
the cost-efficient exploration, development, production, transportation, and
marketing of oil and gas.  The future availability of prospective United States
leases is subject to competing land uses and federal, state and local statutes
and policies.  The principal factors affecting competition for oil and gas are
sales prices, demand, worldwide production levels, alternative fuels and
government and environmental regulations.  The company's geothermal and power
operations are in competition with producers of other energy resources.

                                   EMPLOYEES
                                        
As of December 31, 1998, Unocal had 7,880 employees down from 8,394 in 1997.  Of
the total Unocal employees at year-end 1998, 575 were represented by various
U.S. labor unions.

                            GOVERNMENT REGULATIONS
                                        
Certain interstate crude oil pipeline subsidiaries of Unocal are regulated (as
common carriers) by the Federal Energy Regulatory Commission.  As a lessee from
the United States government, Unocal is 

                                       12
<PAGE>
 
subject to Department of the Interior regulations covering activities onshore
and on the Outer Continental Shelf (OCS). In addition, state regulations impose
strict controls on both state-owned and privately-owned lands.

Some federal and state bills would, if enacted, significantly and adversely
affect Unocal and the petroleum industry.  These include the imposition of
additional taxes, land use controls, prohibitions against operating in certain
foreign countries and restrictions on development.

Regulations promulgated by the Environmental Protection Agency (EPA), the
Department of the Interior, the Department of Energy, the State Department, the
Department of Commerce and other government agencies are complex and subject to
change.  New regulations may be adopted.  The company cannot predict how
existing regulations may be interpreted by enforcement agencies or court
rulings, whether amendments or additional regulations will be adopted, or what
effect such changes may have on its business or financial condition.

                           ENVIRONMENTAL REGULATION
                                        
Federal, state and local laws and provisions regulating the discharge of
materials into the environment or otherwise relating to environmental protection
have continued to impact the company's operations.  Significant federal
legislation applicable to the company's operations includes the following: the
Clean Water Act, as amended in 1977; the Clean Air Act, as amended in 1977 and
1990; the Solid Waste Disposal Act, as amended by the Resource Conservation and
Recovery Act of 1976, as amended in 1984; the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended in 1986; the Toxic
Substances Control Act of 1976, as amended in 1986; and the Oil Pollution Act of
1990.  Various state and local governments have adopted or are considering the
adoption of similar laws and regulations.  The company believes that it can
continue to meet the requirements of existing environmental laws and
regulations.

The company has been a party to a number of administrative and judicial
proceedings under federal, state and local provisions relating to environmental
protection.  These proceedings include actions for civil penalties or fines for
alleged environmental violations, permit proceedings including hearing requests
into the issuance or modification of National Pollution Discharge Elimination
System (NPDES) permits, requests for temporary variances from air pollution
regulations for manufacturing and/or production facilities, and similar matters.

For information regarding the company's environment-related capital
expenditures, charges to earnings and possible future environmental exposure,
see Item 3 - Legal Proceedings below, the Environmental Matters section of
Management's Discussion and Analysis in Item 7 of this report on pages 35
through 38 and notes 16 and 17 to the consolidated financial statements in Item
8 of this report on pages 65 and 66.

ITEM 3 - LEGAL PROCEEDINGS

There is incorporated by reference the information regarding environmental
remediation reserves in note 16 to the consolidated financial statements in Item
8 of this report on page 65, the discussion thereof in the Environmental Matters
section of Management's Discussion and Analysis in Item 7 of this report on
pages 35 through 38, and the information regarding certain legal proceedings and
other contingent liabilities in note 17 to the consolidated financial statements
in Item 8 of this report on pages 65 and 66. Information with respect to certain
additional legal proceedings is set forth below:

General

1.   In April 1995, Atlantic Richfield Company (Arco), Chevron U.S.A., Inc.,
     Exxon Corporation, Mobil Oil Corporation, Shell Oil Products Company and
     Texaco Refining and Marketing, Inc., filed a lawsuit against the company in
     the U.S. District Court for the Central District of California regarding
     U.S. Letters Patent No. 5,288,393 issued to the company containing several
     patent claims for the composition of reformulated gasolines (Atlantic
                                                                  --------
     Richfield Company, et al. v. Unocal 
     -----------------------------------

                                       13
<PAGE>
 
     Corporation, et al., No. CV-95-2379-RG). The plaintiffs alleged that the
     ------------------                
     company's patent was invalid and unenforceable. In the first phase of the
     trial, the jury, in October 1997, upheld all of the claims of the patent
     and found that Arco and the five other oil companies had infringed the
     patent with respect to approximately 29 percent, or 1.2 billion gallons, of
     the gasolines produced by them for California markets during the five-month
     period ended July 31, 1996. In the subsequent damage phase, the jury, in
     November 1997, awarded the company 5.75 cents per infringing gallon, or $69
     million for the five-month period. Following a third phase of the trial,
     the court, in August 1998, found that the company had not engaged in
     alleged "inequitable conduct" in obtaining the patent, with the result that
     the patent is valid and enforceable. In September 1998, the court entered a
     judgment in favor of the company against the six oil companies for $84
     million, including interest and attorneys' fees. The court also ordered an
     accounting for infringement by the companies since July 1996, but stayed
     the order pending appeal of the judgment. In October 1998, the companies
     appealed to the Federal Circuit Court of Appeals in Washington, D.C.

     In a related matter, Talbert Fuel Systems Patents Company (Talbert) filed
     suit against the company in January 1998, in the U.S. District Court for
     the Central District of California, alleging that Talbert had a prior
     patent covering reformulated gasolines (Talbert Fuel Systems Patents
                                             ----------------------------
     Company v. Unocal Corp., Union Oil Company of California and Tosco
     ------------------------------------------------------------------
     Corporation, CV-98-0412).  The suit seeks to have Unocal's Patent No.
     -----------                                                          
     5,288,393 invalidated as interfering with Talbert's prior patent and seeks
     damages for the company's alleged infringement for the period through March
     1997.  In December 1998, the court dismissed Talbert's interference claim.

2.   In October 1995, the State of Texas and several individuals filed a class
     action lawsuit in the District Court of Lee County, Texas (State of Texas,
                                                                ---------------
     et al. v. Amerada Hess Corporation, et al.), alleging that the defendants,
     -------------------------------------------                               
     including the company, had engaged in a conspiracy to fix posted prices for
     crude oil at artificially low levels and had also discriminated against the
     class of Texas royalty owners by purchasing oil "attributable" to the
     plaintiff class at prices lower than the prices realized by the defendants
     for their own production from the same fields.  Since that time, the
     company has been named a defendant in ten additional class action lawsuits
     alleging oil royalty and working interest underpayments.  Eight of these
     cases were filed in federal courts in Alabama, Louisiana, Mississippi, and
     Texas and subsequently were transferred by The Multi-District Panel to the
     U.S. District Court for the Southern District of Texas, Corpus Christi
     Division, as MDL-1206.  The other three cases remain on file in state
     courts in Alabama and Texas.

     As a group, the lawsuits allege that crude oil postings have been lower
     than true value and assert claims of breach of contract, fraud, conversion,
     and violations of federal and state antitrust laws and the federal
     Racketeer Influenced and Corrupt Organizations (RICO) statute.  Putative
     state-wide and nation-wide class representatives seek recovery of
     unspecified actual and punitive damages, including treble damages for
     antitrust and RICO violations from 1986 forward, as well as attorneys' fees
     and costs.

     In December 1998, the company and twenty-five other oil companies signed a
     supplement to a previously announced settlement agreement in one of the
     above-described federal lawsuits (The McMahon Foundation, et al. v. Amerada
                                       -----------------------------------------
     Hess Corporation, et al., in the U.S. District Court for the Southern
     ------------------------                                             
     District of Texas).  Under this supplemental agreement, the defendants
     agreed to pay $164 million to settle all private non-state-wide-entity oil
     royalty and working interest claims nation-wide.  In December 1998, the
     settlement was given preliminary approval by the court.  Final approval is
     scheduled for consideration in April 1999.  Except as noted below, if
     finally approved, the settlement will bring to an end all of the class
     action litigation described above.  The company is aware, however, that
     some royalty and working interest owners could elect to opt out of the
     settlement.

     One of the lawsuits (The State of Texas et al v. Amerada Hess Corporation,
                          -----------------------------------------------------
     et al., in the 53rd District Court of Travis County, Texas), alleges that
     ------                                                                   
     the underpayment of royalties constituted a violation of the Texas Common
     Purchaser Act and seeks recovery of monetary penalties in an unspecified
     amount on behalf of the State of Texas and a state-wide class of private
     royalty 

                                       14
<PAGE>
 
     owners. These claims have been excluded from the claims settled in the
     McMahon action. The company is vigorously contesting these claims.
     -------                                                            

     In litigation related to the above-described posted price class actions,
     various state taxing authorities are pursuing attempts to collect
     additional severance taxes on the theory that oil companies have
     undervalued the crude oil they produced within those states.  To date, two
     states have initiated lawsuits.  (State of Louisiana and Secretary of the
                                       ---------------------------------------
     Department of Revenue and Taxation v. Union Oil Company of California, in
     ----------------------------------------------------------------------   
     the Fifteenth Judicial Court of Lafayette Parish, Louisiana; and State of
                                                                      --------
     Alabama and State of Alabama Department of Revenue v. Amerada Hess
     ------------------------------------------------------------------
     Corporation, et al., in the Circuit Court of Mobile County, Alabama.)  The
     --------------------                                                      
     company believes it has paid all state severance tax obligations correctly
     and is vigorously contesting these lawsuits.  In the Alabama proceeding,
     the trial judge recently granted the defendants' motion to dismiss for the
     State of Alabama's failure to follow Alabama laws pertaining to assessment
     and collection of state taxes.  The company has been informed the State of
     Alabama intends to appeal this dismissal.

3.   The U.S. Department of Interior Minerals Management Service (MMS) announced
     in July 1996 that it would pursue claims against several oil companies for
     their alleged underpayment of royalties for crude oil produced from federal
     leases in California covering the period from 1980 forward.  Following that
     announcement, the company has received from the MMS three orders to pay
     additional royalties, penalties and interest, covering periods from January
     1980 through April 1996 and totaling in excess of $75 million.  The company
     vigorously disputes the validity of these orders and is pursuing
     appropriate administrative appeals.  In January 1999, the company filed an
     action in the U.S. District Court for the Northern District of Oklahoma
                                                                            
     (Union Oil Company of California v. Bruce Babbitt, et al.) seeking a
     ----------------------------------------------------------          
     declaratory judgment that the applicable statute of limitations bars
     amounts claimed by the MMS for periods prior to July 22, 1991.

4.   In March 1998, the company was served with a lawsuit brought by private
     plaintiffs on behalf of the United States against the company and numerous
     other oil companies (United States, ex rel. Johnson  v. Shell Oil Company
                          ----------------------------------------------------
     et al., in the U.S. District Court for the Eastern District of Texas,
     -------                                                              
     Lufkin Division).  The lawsuit alleges intentional underpayment of
     royalties for oil produced from federal and Indian land leases in violation
     of the federal False Claims Act (FCA) from 1986 forward.  The plaintiffs
     seek recovery of unspecified monetary damages, to be trebled as provided by
     the FCA, plus attorneys' fees and civil penalties authorized by the act.
     On February 12, 1999, the U.S. Department of Justice intervened in the
     lawsuit by filing an amended complaint naming the company.  The Department
     had previously intervened against a number of other defendants.  The
     company believes its royalty payments on federal and Indian land leases
     have been made correctly.  Accordingly, it does not believe it engaged in
     conduct that violated the FCA and is vigorously contesting this lawsuit.

5.   The company was recently made aware that it has been named a defendant in
     two additional FCA proceedings brought by private plaintiffs on behalf of
     the United States alleging underpayment of royalties on natural gas
     production from federal and Indian land leases since the mid-1980's.  The
     first action (United States, ex rel. Harrold E. (Gene) Wright v. Amerada
                   ----------------------------------------------------------
     Hess Corporation, et al., in the U.S. District Court for the Eastern
     -------------------------                                           
     District of Texas, Lufkin Division) was filed in August 1996 against the
     company and 130 other energy industry companies and seeks damages
     collectively from all defendants of $3 billion, which, to the extent
     awarded, would be trebled under the FCA.  The second action (United States,
                                                                  --------------
     ex rel. Jack Grynberg v. Unocal, in the U.S. District Court for the
     --------------------------------                                   
     District of Wyoming) was filed in September 1997, as one of 77 separate
     cases filed by the plaintiff, and seeks damages of approximately $200
     million from the company, which, to the extent awarded, would be trebled
     under the FCA.  To date, the U.S. Department of Justice has not elected to
     intervene in either action.  The company believes the allegations are
     without merit and intends to vigorously defend both cases.

6.   Since December 1997, the company has received from the MMS a number of
     notices of Preliminary Determination of Underpaid Royalties in connection
     with various gas contract settlements entered 

                                       15
<PAGE>
 
     into by the company during the period 1984 through 1992. The total amount
     of the alleged underpaid royalties, together with interest, claimed by the
     MMS totals approximately $35 million.

7.   In June 1996, the case captioned Aguilar, et al. v. Atlantic Richfield, et
                                      -----------------------------------------
     al. (Civil No. 00700810), was filed in the California Superior Court for
     ------------------------                                                
     San Diego County against nine California oil companies, including the
     company, which refined and marketed Phase 2 gasoline mandated by the
     California Air Resources Board (CARB).  The plaintiffs allege that the
     defendants conspired to limit the supply and increase the price of CARB
     gasoline in violation of California antitrust and unfair competition laws.
     The plaintiffs seek treble damages and injunctive relief on behalf of all
     purchasers of CARB gasoline at retail since March 1, 1996.  In May 1997,
     the court certified the case as a class action.  In October 1997, the court
     granted the defendants' motion for summary judgment.  However in January
     1998, the court granted the plaintiffs' motion for a new trial, effectively
     reversing the earlier grant of summary judgment.  The company and its co-
     defendants have appealed to the California Court of Appeals the court's
     orders which certified the class and granted a new trial.

     In February 1998, Unocal and the co-defendants in Aguilar were served with
                                                       -------                 
     a new action in the U.S. District Court for the Southern District of
     California (Gilley, et al. v. Atlantic Richfield, et al., Case No. 98 CV
                 --------------------------------------------                
     0123 BTM (RRB).  This case was filed on behalf of a purported class
     consisting of lessee gasoline dealers who purchased gasoline at the
     wholesale level from the defendants during the period from January 1, 1996
     to the present.  The complaint alleges that Unocal and the co-defendants
     conspired to restrict the supply of CARB gasoline in violation of the
     Sherman Act, 15 U.S.C. Section 1.  This case is also being vigorously
     defended.

8.   In September 1996, a criminal investigation was commenced by the Office of
     the District Attorney of San Bernardino County, California (District
     Attorney), arising from wastewater pipeline incidents occurring at the
     Mountain Pass, California, lanthanide facility of the company's Molycorp,
     Inc., subsidiary in July and August 1996.  Molycorp has been engaged in
     extensive settlement negotiations with the District Attorney in an effort
     to achieve an appropriate civil resolution of this matter.

     In May 1998, the District Attorney filed a civil complaint against Molycorp
     in the California Superior Court for San Bernardino County - Barstow
     Division for alleged violations of California's Proposition 65 law and
     Hazardous Waste Control law (People of the State of California v. Molycorp,
                                 -----------------------------------------------
     Inc., No.  BCV 03740).  In July 1998, an amended complaint was filed,
     ----                                                                 
     withdrawing the Hazardous Waste Control Law cause of action.  The complaint
     is now limited to alleged violations of Proposition 65.  Molycorp filed its
     answer to the complaint in September 1998.

9.   The company is a defendant in a lawsuit, filed in October 1996, by
     anonymous representatives purportedly on behalf of an alleged class of
     plaintiffs consisting of all residents of the Tenasserim region of Myanmar
     allegedly affected by alleged acts of mistreatment and forced labor by the
     government of Myanmar allegedly in connection with the construction of the
     Yadana natural gas pipeline, which transports natural gas from fields in
     the Andaman Sea to Thailand through a pipeline crossing Myanmar (John Doe
                                                                      --------
     I, et al. v. Unocal Corp., et al., in the U.S. District Court for the
     ----------------------------------                                   
     Central District of California, Civil No. 96-6959-RAP).  Other named
     defendants included the French oil company Total S.A., John F. Imle and
     Roger C. Beach.

     The complaint contains numerous counts and alleges violations of several
     U.S. and California laws and U.S. treaties.  The plaintiffs seek
     compensatory and punitive damages on behalf of the named plaintiffs, as
     well as disgorgement of profits.  Injunctive and declaratory relief is also
     requested on behalf of the named plaintiffs and the alleged class to direct
     the defendants to cease payments to the Myanmar government and to cease
     participation in the Yadana project.

     In March and April 1997, the court granted in part and denied in part the
     company's motion to dismiss the action.  In its answer to an amended
     complaint, the company denied that it was either properly named as a party
     or subject to joint venture, partnership or other liability with respect to

                                       16
<PAGE>
 
     the Yadana pipeline.  In January 1998, the court heard argument on the
     class certification question and took the matter under advisement.  In
     February 1998, the court denied the plaintiffs' motion for a preliminary
     injunction.  In November 1998, the court dismissed Total as a defendant,
     finding that it lacked jurisdiction over that company.

     The company has also been served with a lawsuit, filed in September 1996,
     making similar claims but without the class action allegations (National
                                                                    ---------
     Coalition Government of the Union of Burma, et al. v. Unocal Inc. and the
     -------------------------------------------------------------------------
     Yadana Natural Gas Project, in the U.S. District Court for the Central
     --------------------------                                            
     District of California, Civil No. 96-6112-RAP).

     The court, in November 1997, granted in part and denied in part the
     company's motion to dismiss the action.  Among other things, the court's
     order dismissed the National Coalition Government of the Union of Burma as
     a plaintiff in the action.  The remaining plaintiffs thereafter filed a
     second amended complaint.  In its answer, the company denied that it was
     either properly named as a party or subject to joint venture, partnership
     or other liability with respect to the Yadana pipeline.  In March 1998, the
     court entered an order dismissing the Federation of Trade Unions of Burma
     as a plaintiff.  The remaining plaintiffs have recently filed a motion to
     amend further their complaint, seeking to dismiss certain individual
     plaintiffs, add other individual plaintiffs and allege with greater detail
     the relationship between Unocal and certain of its subsidiaries.

10.  In August 1998, a jury hearing the Group 5 trial in Judicial Council
     Coordination Proceedings No. 2967 (Lockheed Litigation Cases, in the
                                        -------------------------        
     California Superior Court for Los Angeles County) awarded approximately
     $760 million in punitive damages against five defendants, including the
     company.  The company's share of the award was $81.3 million.  The
     defendants supplied petrochemicals to the former Lockheed Corporation
     "Skunkworks" plant in Burbank, California.  The Group 5 trial involved 42
     current and former employees of Lockheed who claimed personal injuries as
     the result of exposure to these chemicals.  In the compensatory damage
     phase of the trial, the company was found liable to eight plaintiffs for a
     total of approximately $750,000 as a consequence of its delivery of two
     drums of naphtha to the plant in 1984.  In November 1998, the court reduced
     the punitive damages award by 50 percent.  The company and the other
     defendants are appealing the judgment to the California Court of Appeal.
     The company is highly confident that the punitive damage award will be
     substantially reduced or completely reversed.

11.  In October 1998, the Attorney General of Hawaii filed an action (Bronster
                                                                      --------
     (State of Hawaii) v. Unocal, et al., in the U.S. District Court for the
     ------------------------------------                                   
     District of Hawaii) on behalf of both the people of Hawaii and the state
     itself against the company and six other major Hawaii oil refiners.  The
     complaint alleges that the defendants conspired to restrict the production
     and fix the price of gasoline in violation of the federal Sherman Act and
     various state laws.  The state seeks damages in an amount exceeding $150
     million covering a period starting in 1995, together with civil penalties
     in excess of $70 million.  If liability were established, the company would
     be jointly and severally liable for any damages awarded.  If a Sherman Act
     violation were found, any damages awarded would be trebled and attorneys'
     fees and costs would also be awarded.  Any such damages would be allocated
     among the defendants according to their respective market shares.

     The company and its co-defendants believe that there is no merit to the
     Attorney General's claim that there was a conspiracy to fix prices or
     restrict the supply of gasoline.  Moreover, even if such an agreement did
     exist among some of the defendants, the company believes that there is no
     evidence linking it to such an agreement.  Further, the company believes
     that the sale of its marketing and refining assets to Tosco Corporation in
     March 1997 would be deemed to constitute an effective withdrawal from any
     alleged conspiracy.  Pretrial discovery has commenced.

12.  In October 1998, a purported class action was filed by direct and indirect
     purchasers of diesel fuel in the state of California from March 19, 1996,
     through December 1997, against the company and eight other major California
     oil refiners (Cal-Tex Citrus Juice, et al. v. Unocal, et al., in the
                   -----------------------------------------------       
     California Superior Court for Sacramento County).  The complaint alleges
     that the defendants conspired to restrict the production and fix the price
     of CARB diesel fuel in violation of the California Cartwright 

                                       17
<PAGE>
 
     and Unfair Competition Acts. The total amount of damages sought by the
     plaintiffs is unknown. If liability were established, the company would be
     jointly and severally liable for any damages awarded. Any such damages
     would be trebled if a Cartwright Act violation were found and attorneys'
     fees and costs would also be recoverable. Fluid recovery and cy pres
     restitution would be available under the Unfair Competition Act if a
     violation of that act were found. Any damages awarded would be allocated
     among the defendants according to their market shares.

     The company and its co-defendants believe that there is no merit to the
     plaintiffs' claim that there was a conspiracy to fix prices or restrict the
     supply of CARB diesel fuel.  Moreover, even if such an agreement did exist
     among some of the defendants, the company believes that there is no
     evidence linking it to such an agreement.  Further, the company believes
     that the sale of its marketing and refining assets to Tosco Corporation in
     March 1997 would be deemed to constitute an effective withdrawal from any
     alleged conspiracy.  Pretrial discovery has commenced.

Certain Additional Environmental Matters Involving Possible Civil Penalties

13.  In June 1997, the State of Arizona filed a lawsuit against the company
                                                                           
     (State of Arizona v. Union Oil Company of California, Superior Court of
     ----------------------------------------------------                   
     Maricopa County, No. CV97-10829) alleging that it has not diligently
     pursued the investigation of the extent of contamination resulting from a
     release of petroleum from underground storage tanks at a service station
     formerly operated by the company in Tempe, Arizona.  The state has informed
     the company that it is seeking civil penalties in excess of $1.5 million,
     as well as other payments.  The company intends to vigorously contest the
     state's allegations.

14.  The South Coast Air Quality Management District (SCAQMD) has notified the
     company concerning past Notices of Violation and emission fees that remain
     outstanding regarding the company's former Los Angeles Refinery Wilmington
     and Carson Plants (which were subsequently sold to Tosco Corporation in
     March 1997).  In the aggregate, penalties concerning these matters could
     exceed $100,000.  The company is working with the SCAQMD towards a
     resolution of these matters.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:  None.



EXECUTIVE OFFICERS OF THE REGISTRANT

<TABLE>
<CAPTION>
Name, age and present
positions with Unocal                                                 Business experience
------------------------------------------------------------------------------------------------------------------
<S>                                           <C>
ROGER C. BEACH, 62                            Mr. Beach has been Chairman of the Board since 1995 and Chief
Chairman of the Board and Chief               Executive Officer since 1994.  He served as President and Chief
Executive Officer                             Operating Officer from 1992 to 1994.
Director since 1988
Chairman of Executive Committee and 
Board and Company Management Committees
------------------------------------------------------------------------------------------------------------------
JOHN F. IMLE, JR., 58                         Mr. Imle has been Vice Chairman of the Board since March 3, 1999.
Vice Chairman of the Board                    He served as President from 1994 to March 1999.  From 1992 to 1994,
Director since 1988                           he served as Executive Vice President and President of the Energy
Member of Board and Company                   Resources Division, which encompassed the company's worldwide oil,
Management Committees                         gas, and geothermal businesses.
------------------------------------------------------------------------------------------------------------------ 
</TABLE> 

                                       18
<PAGE>
 
<TABLE> 
<CAPTION> 
------------------------------------------------------------------------------------------------------------------
<S>                                           <C> 
TIMOTHY H. LING, 41                           Mr. Ling has been Executive Vice President, North American Energy
Executive Vice President,                     Operations, since March 3, 1999, and Chief Financial Officer since
and North American Energy Operations,         October 1997.  He was a partner of McKinsey & Company, Inc.
Chief Financial Officer                       (McKinsey) from 1994 to October 1997 and an employee of the firm
Member of Company Management Committee        from 1989 to 1994.  From 1990 to 1997, Mr. Ling was a leader of the
                                              McKinsey consulting team working with the company, focusing on
                                              development of the company's new corporate strategies and the
                                              improvement of the company's asset and growth portfolios.
------------------------------------------------------------------------------------------------------------------
CHARLES R. WILLIAMSON, 50                     Mr. Williamson has been Executive Vice President, International
Executive Vice President,                     Energy Operations, since March 3, 1999.  He served as Group Vice
International Energy Operations               President, Asia Operations, from February 1998 to March 1999,
Member of Company Management Committee        having previously served as Group Vice President, International
                                              Operations, since 1996.  He was Vice President, Planning and
                                              Economics, from 1995 to 1996 and served as Vice President,
                                              Technology, from 1992 to 1994.
------------------------------------------------------------------------------------------------------------------ 
L. E. (ED) SCOTT, 56                          Mr. Scott has been Group Vice President of the company's
Group Vice President,                         Diversified Business Group since 1994.  From 1990 to 1994, he was
Diversified Business Group                    Vice President, Petroleum Supply and Transportation.
------------------------------------------------------------------------------------------------------------------
DENNIS P.R. CODON, 50                         Mr. Codon has been Vice President, Chief Legal Officer and General
Vice President, Chief Legal Officer           Counsel since 1992.  He also served as Corporate Secretary from
and General Counsel                           1990 to 1996.
------------------------------------------------------------------------------------------------------------------
JOE D. CECIL, 50                              Mr. Cecil has been Vice President and Comptroller since December
Vice President and Comptroller                1997.  From March 1997 to December 1997, Mr. Cecil was Comptroller
                                              of International Operations.  He was Comptroller of the 76 Products
                                              Company from 1995 until the sale of the West Coast refining,
                                              marketing and transportation assets in March 1997.  From 1994 to
                                              1995, Mr. Cecil was Assistant Comptroller, New Ventures, and from
                                              1992 to 1994, he was Comptroller of the Energy Resources Division.
------------------------------------------------------------------------------------------------------------------
JOSEPH A. HOUSEHOLDER, 43                     Mr. Householder has been Vice President, Corporate Development
Vice President, Corporate Development, and    since December 1997, and was appointed Assistant Chief Financial
 Assistant Chief Financial Officer            Officer on March 3, 1999.  He was Vice President, Tax and
                                              Comptroller, from June 1997 until December 1997.  He was Vice
                                              President, Tax, from 1994 until 1997, and General Tax Counsel from
                                              1990 to 1994.
------------------------------------------------------------------------------------------------------------------
WILLIAM T. WILSON, 44                         Mr. Wilson was named Vice President, Commodity Trading and Risk
Vice President, Commodity Trading and Risk    Management, in September 1995, and became President of the newly
 Management, and President, Unocal Global     formed Unocal Global Trade unit in 1997.  In January 1999, the
 Trade                                        responsibility for pipelines and related midstream operations was
                                              consolidated into that unit.  Mr. Wilson joined the company in
                                              March 1995 as General Manager of Risk Management.  From 1990 to
                                              early 1995, he was employed by the British Petroleum Company in
                                              various oil and gas exploration and production management
                                              positions.  His last assignment at that company was Manager of
                                              North American Gas Marketing.
------------------------------------------------------------------------------------------------------------------
</TABLE>

     The bylaws of the company provide that each executive officer shall hold
office until the annual organizational meeting of the Board of Directors, to be
held May 24, 1999, and until his successor shall be elected and qualified,
unless he shall resign or shall be removed or otherwise disqualified to serve.

                                       19
<PAGE>
 
                                    PART II

ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------- 
                                                1998 Quarters                                       1997 Quarters     
                              -------------------------------------------------   ------------------------------------------------
                                1st          2nd           3rd         4th          1st         2nd         3rd          4th 
                              -------------------------------------------------   ------------------------------------------------
<S>                          <C>          <C>           <C>          <C>           <C>         <C>         <C>          <C> 
Market price per share
 of common stock
 - High                      $ 42 1/8     $  42 1/8     $38 3/16     $     37      $45 7/8     $    44     $45 7/8      $ 45 1/4
 - Low                       $33 1/16     $34 13/16     $30 3/16     $28 5/16      $    38     $36 1/4     $36 1/8      $37 9/16
                            ---------------------------------------------------   ------------------------------------------------
Cash dividends paid per
share of common stock        $   0.20     $    0.20     $   0.20     $   0.20      $  0.20     $  0.20     $  0.20      $   0.20
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Prices in the foregoing table are from the New York Stock Exchange Composite
Transactions listing.  On February 28, 1999, the high price per share was $ 28
1/4 and the low price per share was $27 5/8.

Unocal common stock is listed for trading on the New York, Pacific, and Chicago
Stock Exchanges in the United States, and on the Stock Exchange of Switzerland.
The company is in the process of delisting the common stock from the Pacific and
Chicago Stock Exchanges.

As of February 28, 1999, the approximate number of holders of record of Unocal
common stock was 29,329 and the number of shares outstanding was 241,518,668.

Unocal's quarterly dividend declared has been $.20 per common share since the
third quarter of 1993.  The company has paid a quarterly dividend for 83
consecutive years.

ITEM 6 - SELECTED FINANCIAL DATA:  see page 88.

                                       20
<PAGE>
 
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS IF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion and analysis of the consolidated financial condition
and results of operations of Unocal should be read in conjunction with the
historical financial information provided in the consolidated financial
statements and accompanying notes, as well as the business and property
descriptions in Items 1 and 2.  Unless otherwise specified, the following
discussion pertains to the company's continuing operations.

                              CONSOLIDATED RESULTS
                                        
<TABLE>
<CAPTION>
Millions of dollars                                                                  1998               1997               1996
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>                <C>                <C>
Earnings from continuing operations before discontinued operations
     and extraordinary item                                                         $ 130              $ 669              $ 456
Less: special items (net of tax)
     Asset sales                                                                      120                 43                 70
     Asset write-downs                                                                (65)               (43)               (46)
     Bangladesh well blowout                                                            -                 (8)                 -
     Deferred tax adjustments                                                         (29)               207                  -
     Environmental and litigation provisions                                         (101)               (84)              (123)
     Insurance benefits                                                                56                  -                  -
     Restructuring costs                                                              (17)                 -                  -
     UNO-VEN restructuring                                                              -                 40                  -
     Other                                                                              -                 (1)                (7)
-------------------------------------------------------------------------------------------------------------------------------
     Total special items                                                              (36)               154               (106)
-------------------------------------------------------------------------------------------------------------------------------
Adjusted after-tax earnings from continuing operations                              $ 166              $ 515              $ 562
===============================================================================================================================
</TABLE>

1998 vs. 1997 - The company's 1998 adjusted after-tax earnings from continuing
operations decreased $349 million, or 68 percent, as compared to 1997, primarily
due to depressed worldwide crude oil and natural gas sales prices.  Compared to
1997, the company's worldwide average crude oil sales price decreased by $6.04
per barrel, or 34 percent, and its worldwide average natural gas sales price
decreased by $.32 per thousand cubic feet, or 14 percent.  Also contributing to
the decline in adjusted after-tax earnings were lower agricultural products
sales prices, lower United States natural gas and crude oil production,
increased United States dry hole expense, and higher current taxes in Thailand
primarily related to foreign currency fluctuations.  Partially offsetting these
negative factors was lower worldwide depreciation expense.

1997 vs. 1996 - The 1997 after-tax earnings from continuing operations reflected
a lower average worldwide crude oil sales price and decreased United States
crude oil and natural gas production.  In addition, the 1997 results were
impacted by higher worldwide exploration expense, higher international
depreciation and substantially lower average sales prices for agricultural
products.  These conditions were partially offset by a higher average worldwide
natural gas sales price, increased international crude oil and natural gas
production, and lower interest expense.

Revenues

1998 vs. 1997 - The company's 1998 revenues decreased $585 million from 1997,
principally due to lower worldwide crude oil and natural gas sales prices.
Lower agricultural products sales prices and decreased United States natural gas
and crude oil production also contributed to the decline.  Partially offsetting
the decrease were increased activities related to the marketing and trading of
crude oil, condensate and natural gas, increased natural gas production in the
Far East, increased crude oil sales in Indonesia, Azerbaijan and Yemen, gains on
certain international and United States asset sales, and a global insurance
recovery related to past environmental remediation issues.

                                       21
<PAGE>
 
1997 vs. 1996 - In 1997, higher revenues primarily were due to increased
activities related to the marketing and trading of crude oil, condensate and
natural gas.  Also contributing to increased revenues were higher affiliate
earnings, higher average worldwide natural gas prices, increased international
crude oil and natural gas production and transactions related to the UNO-VEN
restructuring.  Partially offsetting these positive factors were lower United
States crude oil, condensate and natural gas production and lower average
worldwide crude oil and condensate prices.

Costs and Other Deductions

<TABLE>
<CAPTION>
Millions of dollars                                                                  1998                1997               1996
-----------------------------------------------------------------------------------------------------------------------------------
Pre-tax costs and other deductions:
<S>                                                                                <C>                <C>                <C>
Crude oil, natural gas and product purchases                                       $2,165             $2,246             $1,502
Operating expense                                                                   1,352              1,389              1,386
Special items:
   Environmental and litigation provisions                                           (170)              (135)              (196)
   Other                                                                               (5)                 -                (11)
                                                                      -------------------------------------------------------------
       Adjusted crude oil, natural gas and product
            purchases and operating expense                                        $3,342             $3,500             $2,681
-----------------------------------------------------------------------------------------------------------------------------------
Selling, administrative and general expense                                        $  136             $  107             $  151
Special item:
   Restructuring costs                                                                (27)                 -                  -
                                                                      -------------------------------------------------------------
       Adjusted selling, administrative and general expense                        $  109             $  107             $  151
-----------------------------------------------------------------------------------------------------------------------------------
Depreciation, depletion and amortization                                           $  867             $  962             $  914
Special item:
   Asset write-downs                                                                  (95)               (69)               (75)
                                                                      -------------------------------------------------------------
      Adjusted depreciation, depletion
           and amortization expense                                                $  772             $  893             $  839
-----------------------------------------------------------------------------------------------------------------------------------
Dry hole costs                                                                     $  184             $  110             $  139
-----------------------------------------------------------------------------------------------------------------------------------
Interest expense                                                                   $  177             $  183             $  279
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


1998 vs. 1997 - Crude oil, natural gas and product purchase expenses were lower
in 1998 principally due to lower worldwide commodity prices.  Partially
offsetting this decrease was increased activities related to the marketing and
trading of crude oil, condensate, and natural gas by the company's Global Trade
group.

Dry hole costs increased 67 percent over the 1997 amount due to the company's
expanded exploratory drilling program in 1998, which focused primarily on the
onshore Gulf Coast and offshore Gulf of Mexico areas.

1997 vs. 1996 - In 1997, higher adjusted crude oil, natural gas and product
purchases were primarily due to marketing activities by the company's Global
Trade group and by transactions related to the UNO-VEN restructuring.  Lower dry
hole costs during 1997 were due to delays in exploratory drilling.  Decreased
interest expense in 1997 was the result of lower debt and increased capitalized
interest.

Restructuring Costs

In response to depressed commodity prices, the company adopted a restructuring
plan during the fourth quarter of 1998 that resulted in the accrual of a $17
million after-tax restructuring charge.  This amount included the estimated
costs of terminating approximately 475 employees. The plan involves the
suspension of mining and manufacturing operations at the Mountain Pass,
California, lanthanide facility, a change in mining operations at the Questa,
New Mexico, molybdenum facility, the withdrawal from non-strategic activities in
Central Asia and a reduction in activities of various business units.

                                       22
<PAGE>
 
The restructuring charge was recorded in aggregate in Corporate and Unallocated.
Approximately $4 million and $7 million of the after-tax charge relates to the
Exploration and Production and Diversified Businesses segments, respectively.

Approximately 240 of the affected employees are from the company's mining
operations, 95 are from various exploration and production business units and
140 are support personnel at various locations.  At December 31, 1998,
approximately 210 employees were terminated or had received termination notices
as a result of the plan.  Cash expenditures related to the restructuring of
approximately $12 million and $4 million are expected for the years 1999 and
2000, respectively.

The company expects the plan to reduce future annualized salaries and benefits
by an estimated $21 million after-tax.  In addition, the company is currently
evaluating additional initiatives to improve the efficiency and alignment of
support services to reduce costs.   This evaluation could result in another
restructuring program in 1999.

For further information, see note 6 to the consolidated financial statements.

Discontinued Operations

In March 1997, the company completed the sale of its West Coast petroleum
refining, marketing and transportation assets.  The results of operations and
assets of the refining, marketing and transportation segment were classified as
discontinued operations. In 1996, the company reported a net loss of $420
million and, in 1997, the company reported an additional $50 million net loss on
these assets. For additional information related to the discontinued operations
see note 8 to the consolidated financial statements.

Extraordinary Item

In 1997, the company recorded a $38 million after-tax charge related to the
purchase of approximately $507 million in aggregate principal amount of three of
its outstanding issues of debt securities.  For further information, see note 9
to the consolidated financial statements.

Outlook

Key issues for the company going into 1999 center around the current low
commodity price environment and the economic situation in Asia.

Depressed Commodity Prices

Energy prices were severely depressed in 1998, particularly in the latter part
of the year.  This situation has continued into the first quarter of 1999.
These depressed prices are primarily the result of an oversupply of crude oil on
world markets, a drop in demand in Southeast Asia, a warm winter in the Northern
Hemisphere, and a build-up of United States natural gas inventories.  The
company's worldwide average crude oil price was 34 percent below the 1997
average and lower than they have been since 1986.  The company's worldwide
average natural gas price in 1998 was approximately 14 percent below the 1997
average.

The company believes that commodity prices will continue to be depressed in
1999.  The company's annual operating plan for 1999 assumes that its average
sales prices will be slightly lower than in 1998.  Actual prices may differ
materially, and the company may adjust its operating activities accordingly.


The company's goal is to operate in the current depressed commodity price
environment without sacrificing growth.  The company plans to limit capital
expenditures, implement targeted cost reductions, and withdraw from or suspend
projects in non-strategic or non-core areas while focussing on the highest-value
growth assets and capturing value-adding opportunities.  The company intends to
keep the total debt-to-capital ratio in its current range.  Current production
levels are expected to be maintained or 

                                       23
<PAGE>
 
decline slightly.

In 1999, capital expenditures are expected to be approximately $1.0 billion,
compared to a total of $1.7 billion for 1998.  Spending will be focused on a
project-by-project approach, with higher-return growth projects in the company's
core asset areas taking precedence.  Specifically, the reduction will be
achieved by a reduction in Gulf of Mexico lease acquisition activity and reduced
capital spending in most project areas except deepwater areas in Indonesia and
in the Gulf of Mexico.

The company has also targeted $150 to $200 million in cash expense reductions
for 1999.  The company expects to accomplish this through lower new venture
expenses as a result of a more narrow geographic focus, the deferral of
geological and geophysical activities in selected areas, lower operating costs
due to lower service contractor costs, and lower operating and overhead costs as
a result of a reduced workforce, suspension of certain mining activities, and
other cost-saving initiatives.

The company has withdrawn from or has suspended projects in Central Asia (except
Azerbaijan).  Under the current circumstances, the company believes that
projects in these areas may have lower potential returns, heightened political
risk, questionable market development, or unacceptable payout timelines and,
therefore, no longer meet the company's more focused criteria for inclusion in
its portfolio of higher-growth prospects.

In 1999, the company plans to focus on its highest-potential growth areas: the
Gulf of Mexico, Thailand, Indonesia, Bangladesh, Brazil, and West Africa.  These
areas are geographically diverse but have similar geological features that the
company understands well, and one which will allow the company to leverage its
drilling expertise.

In a "down cycle", opportunities present themselves that would not otherwise be
available.  The company is looking to acquire attractive assets, but only if
they complement its existing portfolio, enhance leverage in selected areas, or
help build scale in places where it wants to grow.  In addition, the company is
evaluating opportunities to leverage its exploration acreage for swaps or farm-
ins that have current production and upside growth potential.

Asian Economic Outlook

Much of the company's international activity is centered in Southeast Asia,
where the company has been a major presence for more than 35 years.  The region
is going through a difficult economic period at this time.  Since the company
began investing in the region, it has weathered many economic downturns.  The
company believes that the governments in the region are committed to undertaking
the reforms and restructuring necessary to enable their nations to recover from
the current downturn.  Energy development should play an important role in the
region's economic recovery.

Some signs of recovery are becoming apparent in Thailand and Indonesia.
Thailand's recession seems to be easing somewhat, with the baht stabilizing and
interest rates coming down.  The nation has worked closely with the
International Monetary Fund and has shown discipline and determination in
adopting economic reforms.  The improved picture in Thailand is reflected in
recent gross domestic product (GDP) forecasts.  In 1998, Thailand's GDP declined
by eight percent.  A recent consensus forecast has GDP remaining flat in 1999.
Forecasters predict the economy could show moderate growth as early as 2000.
This should translate into growth in demand for electricity, which is key to the
company's gas sales in Thailand.  (For more information, please refer to the
Outlook section for International Exploration and Production.)

Indonesia continues to face serious economic problems, but conditions may be
stabilizing.  Parliament recently passed a political reform package, and new
elections are scheduled for June 1999.  Indonesia recognizes that oil and gas
development is critical to the nation's economic recovery. (For more
information, please refer to the Outlook section for International Exploration
and Production.)

                                       24
<PAGE>
 
                   UNITED STATES EXPLORATION AND PRODUCTION

Included in this category are Spirit Energy 76 and Alaska oil and gas
operations.  Spirit Energy 76 is responsible for oil and gas operations in the
Lower 48 United States, with emphasis on the shelf and deepwater areas in the
Gulf of Mexico and on the Permian Basin in West Texas.  A substantial portion of
Spirit Energy 76's crude oil and natural gas production is sold to the company's
Global Trade segment.  The remainder is sold under contract to third parties,
sold in the spot market or, in the case of Alaska natural gas production, sold
to the company's agricultural products operations.

<TABLE>
<CAPTION>
Millions of dollars                                                                   1998               1997               1996
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>                <C>                <C>
After-tax earnings
     Spirit Energy 76                                                               $   -              $ 191              $ 276
     Alaska                                                                             6                 60                122
-----------------------------------------------------------------------------------------------------------------------------------
     Total after-tax earnings                                                           6                251                398
Less:  special items (net of tax)
     Asset sales (Spirit Energy 76) (a)                                                14                  7                 65
     Asset write-downs (Spirit Energy 76)                                             (27)               (41)               (12)
     Asset write-downs (Alaska)                                                       (12)                 -                (20)
     Litigation (Spirit Energy 76)                                                      7                  -                  -
     Other (Spirit Energy 76)                                                           -                  -                  4
-----------------------------------------------------------------------------------------------------------------------------------
     Total special items                                                              (18)               (34)                37
-----------------------------------------------------------------------------------------------------------------------------------
Adjusted after-tax earnings                                                         $  24              $ 285              $ 361
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

 (a)  1998 includes the sale of the Oklahoma oil and gas properties. 1996
      includes the sale of California oil and gas properties.

1998 vs. 1997 - Adjusted after-tax earnings in 1998 decreased by 92 percent from
1997 principally due to lower average crude oil and natural gas sales prices.
The average crude oil sales price declined $5.96 per barrel, or 35 percent, from
1997 while the average natural gas sales price declined $.39 per thousand cubic
feet (mcf), or 17 percent.  Additionally, crude oil and natural gas production
declined by an average of three thousand barrels per day and 66 million cubic
feet (mmcf) per day, respectively.  The production declines were principally
attributable to the postponement of certain development drilling projects and
natural production declines.  Dry hole expense increased by $58 million as a
result of increased exploratory drilling activity in the Gulf of Mexico.
Partially offsetting these negative factors was decreased depreciation expense.

1997 vs. 1996 - Adjusted after-tax earnings for 1997 decreased 21 percent from
the 1996 results primarily due to lower crude oil, condensate and natural gas
production, lower average crude oil and condensate sales prices, and higher
exploration expense.  During 1997, crude oil production decreased 20 percent to
approximately 76 thousand barrels per day from 96 thousand barrels per day.
Natural gas production decreased eight percent to 993 mmcf per day from 1,075
mmcf per day.  The average crude oil sale price decreased to $17.13 per barrel
in 1997 from $18.51 per barrel in 1996.  Exploration expense, excluding dry hole
costs, increased to $60 million in 1997 from $26 million in 1996 due to
increased geological and geophysical activities in the Gulf Coast shelf and
deepwater exploration areas.  Partially offsetting these factors were increased
average natural gas sales prices.  The average natural gas sales price increased
to $2.36 per mcf in 1997 from $2.27 per mcf in 1996.

Outlook

Currently, Spirit Energy 76 has more than 130 drilling prospects in the shelf
inventory, which is more than double the number of prospects from two years ago.
In the deepwater, the company now has interests in 213 blocks, more than a five-
fold increase in just two years.  Spirit Energy 76 has interests in two
deepwater wells that are currently being drilled and evaluated and is expected
to participate in four to six deepwater wells in 1999.

                                       25
<PAGE>
 
In March 1999, the company signed a letter of intent to trade most of its Rocky
Mountain oil and gas assets for 5.8 million shares of Tom Brown, Inc., a
domestic oil and gas exploration company, and $5 million in cash.  Based upon 
the closing price on March 9, 1999 of Tom Brown, Inc. shares, the total
value of the exchange is approximately $76 million.  The stock holding in Tom 
Brown, Inc. is subject to certain restrictions.  The exchange is expected to
close in the second quarter of 1999.

To optimize the company's deepwater drilling program in the Gulf of Mexico, the
company recently transferred some key employees from its highly successful
Indonesian deepwater drilling team to Spirit Energy 76.  The goal is to drill
deepwater Gulf of Mexico wells for 50 percent of the industry's average cost.

As part of its strategy to enter the deep waters in the Gulf of Mexico, the
company signed a letter agreement with Transocean Offshore, Inc. to contract for
the deepwater drill ship, the Discoverer Spirit, with a minimum daily rate of
$210 thousand for five years.  The new drill ship will be capable of operating
in water depths of up to 10,000 feet and is designed with dual drilling activity
capabilities.  The company is scheduled to take delivery of the drill ship in
2000.  In order to accelerate the deepwater drilling program, the company also
contracted the semi-submersible drilling unit, the Transocean Richardson, for 
six months. The first well to be drilled from the Transocean Richardson is
expected to spud in April 1999.

                   INTERNATIONAL EXPLORATION AND PRODUCTION
                                        
Unocal's international operations include the company's oil and gas exploration
and production activities outside of the United States.  Major areas of
operations include Thailand, Indonesia, Myanmar, and Azerbaijan.  The company is
also involved in oil and gas activities in Yemen, Canada, The Netherlands, the
Democratic Republic of Congo, Bangladesh, Brunei, Gabon, India, Brazil,
Argentina, and Vietnam.

<TABLE>
<CAPTION>
Millions of dollars                                                                   1998               1997               1996
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>                <C>                <C>
After-tax earnings/(loss)
     Far East                                                                       $ 195              $ 392              $ 237
     Other                                                                             41                (45)                77
 ---------------------------------------------------------------------------------------------------------------------------------
     Total after-tax earnings                                                         236                347                314
Less:  special items (net of tax)
     Asset sales (Other) (a)                                                          101                (16)                41
     Asset write-downs (Other)                                                         (4)                (2)                 -
     Bangladesh well blowout (Other)                                                    -                 (8)                 -
     Deferred tax adjustment (Far East)                                               (20)                94                  -
     Deferred tax adjustment (Other)                                                   (9)                 -                  -
-----------------------------------------------------------------------------------------------------------------------------------
     Total special items                                                               68                 68                 41
-----------------------------------------------------------------------------------------------------------------------------------
Adjusted after-tax earnings                                                         $ 168              $ 279              $ 273
-----------------------------------------------------------------------------------------------------------------------------------

 (a)  The 1998 amount represents the exchange of Canadian assets for common shares and debtentures of Tarragon Oil and Gas Limited
      and the subsequent conversion of the Tarragon securities into cash.
</TABLE>

In April 1998, the company received shares of common stock and debentures of
Tarragon Oil and Gas Limited (Tarragon) valued at approximately $212 million for
the exchange of its Alberta, Canada, exploration and production assets.  In the
third quarter 1998, the company converted the debentures and common stock to
cash as the result of a tender offer by USX-Marathon for the purchase of
Tarragon's outstanding common stock.  The total after-tax gain recorded for
these transactions was $101 million and the proceeds from the sale were $261
million.

1998 vs. 1997 - The 1998 adjusted after-tax earnings declined primarily due to
substantially lower average sales prices for crude oil and natural gas.  The
average crude oil and condensate sales price decreased 34 percent to $12.04 per
barrel, while the average natural gas sales price declined ten percent to $2.07
per mcf. Also contributing to the decrease in adjusted after-tax earnings were
higher current 

                                       26
<PAGE>
 
taxes in Thailand primarily related to currency exchange rate fluctuations. The
decrease in adjusted after-tax earnings was partially offset by higher natural
gas production in Thailand and Indonesia, higher Indonesia crude oil liftings,
higher crude oil production in 1998 in Azerbaijan and Yemen, and lower
depreciation expense.

During 1998, average daily natural gas production increased over 1997 by five
percent to 898 mmcf per day, primarily due to improved production levels in
Thailand and Indonesia.  Average daily crude oil and condensate production
decreased eight percent to 111 thousand barrels per day primarily due to the
disposition of the company's Alberta, Canada, oil and gas properties in the
Tarragon transaction and natural production declines in Indonesia.

1997 vs. 1996 - International adjusted after-tax earnings increased $32 million
in 1997 due primarily to increased Far East crude oil and natural gas production
and a higher average natural gas sales price.  Partially offsetting these
positive factors were a lower average crude oil and condensate sales price and
increased depreciation and exploration expenses.

In 1997, crude oil and condensate production increased to 121 thousand barrels
per day from 111 thousand barrels per day.  Natural gas production increased 16
percent to 855 mmcf per day from 737 mmcf per day.  These positive factors were
mainly the result of increased production in Indonesia and Thailand.

The average crude oil and condensate price decreased to $18.21 per barrel from
$19.18 per barrel.  The average natural gas sales price increased to $2.30 per
mcf from $2.23 per mcf.

In 1997, exploration expense increased 30 percent as a result of the company's
increased exploration programs in Indonesia, Thailand, Brunei, Azerbaijan and
Bangladesh.

Outlook

Thailand

The company's Thailand operations continued its strong performance despite the
Asian economic downturn.  Gas demand has remained firm as Thailand continues to
convert power plants that run on imported fuel oil to indigenous natural gas.
This fuel switching enabled the company to maintain gross gas production at just
under one billion cubic feet per day in 1998.  The company's gas sales price
remained relatively stable, averaging $2.11 per thousand cubic feet in 1998, but
this could decline in 1999 by about ten percent.

The company expects to maintain current production levels of just under one
billion cubic feet per day for the first half of 1999.  The company anticipates
some declines from the current production levels in the second half of the year
based on forecasts of 1999 power and gas demand.  The extent of the decline will
depend on the timing and pace of economic recovery in Thailand, the level of
additional fuel switching, and the additional production of competitive gas.
The company estimates full-year production in Thailand to fall seven to ten
percent from its 1998 average, and will continue to have some volumes at risk
above the contract minimums, which aggregate to approximately 740 gross mmcf per
day.  The Pailin field, expected to commence production in the second half of
1999, has additional separate contract minimums of approximately 330 gross mmcf
per day.  Longer term, the company has a positive outlook for gas sales growth
as power demand increases with the economic recovery and fuel switching
continues.

Indonesia

The company is optimistic about its oil and gas future growth prospects in
Indonesia.  The company has a substantial acreage position offshore East
Kalimantan and is one of the most active explorers in the region.  Nearly half
of this acreage is in Indonesia's new deepwater exploration frontier where there
is excellent potential.  The company has also recently signed two new production
sharing contracts (PSCs) for the Sangkarang and Lompa contract areas in another
deepwater section of the Makassar Strait.  In 

                                       27
<PAGE>

total, the company has interests in nearly ten million undeveloped gross
acres. The company also remains optimistic due to other factors: the government
of Indonesia is encouraging accelerated oil and gas development; the company's
revenues remain relatively secure as most of its oil and gas production is sold
to the export markets for payment in U.S. dollars; and the company's operations
are located in areas that have not experienced civil unrest.

The company is preparing a development program for the deepwater West Seno oil
and gas field and expects to submit its plan of development to Pertamina, the
Indonesian government's oil and gas company, in the second quarter of 1999.  The
West Seno field is the first deepwater oil and gas field offshore East
Kalimantan that the company and its partner plan to develop and one of several
prospective areas on the greater Seno structure in the Kutei Basin.  In
addition, the company anticipates submitting a plan of development for the
deepwater Merah Besar field in 1999.  Production from both of these deepwater
fields is expected to begin in 2001.

The company plans to continue its drilling program in the Kutei Basin throughout
1999, with 20 to 25 deepwater exploration and delineation wells.  The company
has also identified five attractive prospects within nine miles of the Seno
discovery on the adjacent Rapak PSC area and northern portion of the Makassar
Strait PSC area.

Myanmar

The company's subsidiaries are awaiting completion of the Ratchaburi power plant
in Thailand for commercial production from the Yadana field to begin.  The
current expectation is for commercial production in the third quarter of 1999,
increasing to full capacity in 2000.

The gas sales agreement with the Petroleum Authority of Thailand (PTT) includes
a "Take or Pay" provision, which requires PTT to purchase a contract quantity of
natural gas.  Due to the delay in the completion of the Ratchaburi power plant,
PTT could not meet their contract minimum volume obligation for 1998.
Therefore, the joint venture billed PTT for the 1998 "Take or Pay" obligation.
Payment, which was due March 1, 1999, is currently outstanding.  The joint
venture partners are in discussions with PTT to resolve the "Take or Pay" issue.

Bangladesh

In northeast Bangladesh, the company and its partner are jointly exploring three
blocks and developing the Jalalabad natural gas field.  Gas began flowing from
the Jalalabad field in February 1999 and will soon increase to 100 million cubic
feet per day.  The company maintains a 50 percent working interest.

The Bibiyana field, a major new gas field, was discovered in mid-1998.  The
Bibiyana discovery is currently being delineated and appraisal work will
continue throughout 1999.

The company is looking to significantly expand its activity in Bangladesh.  Last
year the company submitted bids with partners on additional blocks.  Pending the
outcome of bids, the company is currently in discussions with the other
companies and Bangladesh government officials to explore the possibility of
cross-assigning interests in all of the affected blocks.

Azerbaijan

The company has a ten percent working interest in the Azerbaijan International
Operating Company (AIOC) oil development project offshore Azerbaijan in the
Caspian Sea.  Although the company is curtailing other activity elsewhere in
this part of the world, it is retaining its interest in AIOC.  Early oil
production, which began in the fourth quarter of 1997, is now averaging above
100,000 gross barrels per day.  The oil is moving through the northern pipeline
route through Russia to the Black Sea port of Novorossiysk.  The western line to
the Georgian port of Supsa on the Black Sea has been completed and is now taking
crude.  First oil delivery at Supsa is expected early in the second quarter of
1999.

                                       28
<PAGE>
 
Latin America

Latin America is one of the company's newest growth focus areas, presenting a
number of opportunities to leverage its exploration and production skills,
technical competencies, and international experience.  In Brazil, political and
economic reforms are expanding access and improving commercial terms.  The
company is focusing on four emerging basins in Brazil: Campos, Santos, Potiguar,
and Espirito Santo.  The depositional environment in these areas is very similar
to the Gulf of Mexico, Indonesia, and West Africa, and is well suited to the
company's experience and drilling expertise.

The company's goals for entry into Brazil are to establish solid, long-term
relationships with Petrobras, the Brazilian national oil and gas company, and
others and to build a strong exploration and production portfolio with shelf as
well as deepwater prospects.

In Argentina and elsewhere in Latin America, the company has joint venture
operations and is exploring additional joint venture opportunities.

West Africa

In November 1998, the company acquired a 25 percent working interest in two
deepwater blocks offshore Gabon, Anton and Astrid.  Exploration of these two
blocks has begun.  First drilling is expected to begin in late 2000 or early
2001.  The company is in charge of drilling and logistics.

                                 GLOBAL TRADE
                                        
The Global Trade segment is responsible for most of the company's worldwide
crude oil, condensate and natural gas marketing, trading, and commodity risk
management activities.  Global Trade also purchases crude oil, condensate and
natural gas from the company's joint venture partners, royalty owners and other
unaffiliated oil and gas producers for resale.

1998 vs. 1997 - In 1998, adjusted after-tax earnings increased $5 million to $21
million as compared to 1997.  Average gross margins on total natural gas volumes
also increased to 4.2 cents per million Btu (MMBtu) over the IFERC index price
in 1998.  The IFERC index price is a standard price reference point in the
natural gas industry that is published in the trade newsletter "Inside FERC".
This index price is a combination of prices, at particular locations, for gas
sold on the first day of the month and is used as a reference point in
negotiating the purchase or sales price of natural gas.  Global Trade averaged
1.5 billion cubic feet of gas traded daily in 1998.  Average crude oil gross
margins increased three percent over 1997 margins.  Total 1998 revenues declined
13 percent from 1997 to $3.06 billion primarily due to lower crude oil and
natural gas sales prices.

1997 vs. 1996 - In 1997, after-tax earnings were $16 million compared with $16
million in 1996.  Gross margins on total natural gas volumes averaged 3.8 cents
per MMBtu over the IFERC index price in 1997. Global Trade averaged 1.3 billion
cubic feet of gas traded daily in 1997. Gross margins on crude oil trading
averaged $0.40 per barrel over the applicable indices, a 14 percent increase
over the 1996 average margin.  Total revenues were $3.5 billion, up nearly seven
percent from 1996.

Outlook

In October 1998, the company signed a 10-year natural gas sales agreement to
supply 72 billion cubic feet of gas to the Public Energy Authority of Kentucky
Trust (PEAK), a Kentucky municipal joint action agency.  PEAK made a
nonrefundable advance payment to the company of $120 million on January 1, 1999.
The company will also receive a fixed monthly reservation fee from PEAK over the
life of the contract.  The company is investigating the possibility of more
forward sale arrangements in the future.

On January 1, 1999, the Pipelines business unit, previously part of the
Diversified Business segment, was combined with the Global Trade segment.  The
Global Trade segment is now responsible for trading and 

                                       29
<PAGE>
 
marketing the company's crude oil and gas production worldwide as well as
managing the pipeline and midstream assets.

                        GEOTHERMAL AND POWER OPERATIONS
                                        
This business segment explores for, produces and sells geothermal resources, and
constructs and operates electrical generating plants.

<TABLE>
<CAPTION>
Millions of dollars                                                                   1998               1997              1996
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>                <C>                <C>
After-tax earnings (loss)                                                           $  52              $  26              $ (55)
Less:  special items (net of tax)
      Asset sales                                                                       -                  -                (57)
      Asset write-downs                                                                 -                  -                (14)
      Deferred tax adjustment - Sarulla                                                 -                 10                  -
      Other                                                                             -                  -                  2
-----------------------------------------------------------------------------------------------------------------------------------
      Total special items                                                               -                 10                (69)
-----------------------------------------------------------------------------------------------------------------------------------
Adjusted after-tax earnings                                                         $  52              $  16              $  14
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


1998 vs. 1997 - 1998 adjusted after-tax earnings increased by $36 million over
1997 principally as the result of an increase in power generation and the
related sale of electricity from the Indonesian Gunung Salak generating Units 3
through 6, which came on line at various times during the second half of 1997.
The increase in 1998 adjusted after-tax earnings was partially offset by
accounts receivable provisions in Indonesia related mostly to the steam sales at
Salak and an accounts receivable write-off in the Philippines.

1997 vs. 1996 - Adjusted 1997 earnings reflected lower depreciation expense due
to the sale of certain United States geothermal assets in 1996.  In Indonesia,
at the Salak field, three new 55-megawatt power units came on line in 1997,
which contributed to the improved results.  Offsetting these positive factors
was decreased earnings in the Philippines due to a contract dispute between the
company and the National Power Company (NPC) of the Philippines.  In addition,
earnings were negatively impacted by foreign exchange translation losses and
increased dry hole expense.

Outlook

In 1998, Philippine Geothermal, Inc. (PGI) entered into an interim service
agreement with NPC.  For as long as the parties are negotiating in good faith,
the term of the interim service agreement is open-ended.  The term will end six
months after either NPC or PGI resumes its arbitration or court cases.  NPC and
PGI continue to negotiate in good faith for a possible settlement.

As of December 31, 1998, the company's geothermal operations in Indonesia had a
gross receivable balance of approximately $100 million, most of which was for
steam sales from the Salak field.  Approximately $35 million was due by March 1,
1999, of which $26 million represents a shortfall in payments for March through
October 1998 steam deliveries to the Gunung Salak electric generating Units 1, 2
and 3.  Partial payments have been received on a timely basis.  Agreements allow
for payments over the next several years.  The company is vigorously pursuing
collection of the outstanding receivables.  Provisions covering a portion of
these receivables were recorded in 1998.  In February 1999, PLN, the state-owned
electricity company, announced that a team would begin meeting with independent
power producers to discuss outstanding contract issues.

In January 1999, the company reached an agreement to sell its interest in a
geothermal steam venture at The Geysers in Northern California for $101 million.
The transaction is expected to close at the end of the first quarter of 1999.
The company anticipates that the proceeds will be used in worldwide oil and gas
exploration and production activities.

                                       30
<PAGE>
 
                          DIVERSIFIED BUSINESS GROUP
                                        
The Agricultural Products business unit manufactures and markets nitrogen-based
products for wholesale agricultural and industrial markets supplying the western
United States and the Pacific Rim.  The Carbon and Minerals business unit
produces and markets petroleum coke, graphites and specialty minerals.  The
Pipelines business unit principally includes the company's equity interests in
petroleum pipeline companies.  The Other category includes the company's equity
interest in The UNO-VEN Company prior to its May 1, 1997 restructuring.

<TABLE>
<CAPTION>
Millions of dollars                                                                   1998               1997               1996
-----------------------------------------------------------------------------------------------------------------------------------
After-tax earnings
<S>                                                                                 <C>                <C>                <C>
     Agricultural Products                                                          $  37              $  54              $  98
     Carbon and Minerals                                                               (9)                76                 47
     Pipelines                                                                         67                 59                 69
     Other                                                                              -                 38                 14
-----------------------------------------------------------------------------------------------------------------------------------
     Total after-tax earnings                                                          95                227                228
Less:  special items (net of tax)
     Asset sales (Carbon and Minerals)                                                  -                 41                  -
     Asset sales (Pipelines)                                                            5                  -                  9
     Asset write-downs (Carbon and Minerals)                                          (22)                 -                  -
     Environmental and litigation provisions (Carbon and Minerals)                    (17)                (6)                (1)
     Other (Carbon and Minerals)                                                        -                 (1)                 -
     UNO-VEN restructuring (Other)                                                      -                 40                  -
-----------------------------------------------------------------------------------------------------------------------------------
     Total special items                                                              (34)                74                  8
-----------------------------------------------------------------------------------------------------------------------------------
Adjusted after-tax earnings                                                         $ 129              $ 153              $ 220
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

1998 vs. 1997 - Adjusted after-tax earnings in 1998 decreased 16 percent from
1997 primarily due to depressed average sales prices for agricultural products
and lower United States fertilizer sales volumes.  The decrease in United States
sales volumes was due, in part, to inclement weather during the first four
months of 1998.  Earnings were also down in the Carbon and Minerals group due to
losses incurred in the company's lanthanide and molybdenum operations.  The
temporary shutdown of the separations plant and wastewater pipeline at the
company's Mountain Pass, California, mining facility was the principal cause.
Higher export fertilizer sales volume and lower maintenance related expenses at
the company's Kenai, Alaska, fertilizer plant due to a plant turnaround in 1997
partially offset this earnings decline.  Partial-year results from the Unocal
Hydrocarbon Sales business unit before its disposition and for UNO-VEN before
its restructuring were included in 1997.

1997 vs. 1996 - Adjusted after-tax earnings decreased 30 percent from 1996 due
primarily to lower Agricultural Products sales prices and volumes and lower
production levels at the Kenai, Alaska manufacturing plant.  Worldwide nitrogen
fertilizer prices were significantly lower in 1997.  Agricultural Products'
production rates were lower in 1997 due to scheduled maintenance and a
production curtailment due to low margins on urea at the Kenai manufacturing
plant.  Carbon and Minerals results were lower in 1997 due to lower margins on
lanthanide products and lower operating earnings from its Unocal Hydrocarbon
Sales business unit as a consequence of its sale.  Partially offsetting these
negative results were higher operating earnings from petroleum coke operations.

Outlook

In June 1998, the company commenced a review of various reorganization options
for the Diversified Business segment.  The move was envisioned as part of a
continuing transformation of the company.  However, depressed commodity prices
have stalled the company's efforts to obtain full value for its Agricultural
Products and Carbon and Minerals businesses.  The company has temporarily
suspended its plans to sell these assets.  In addition, the company has decided
to retain its remaining pipeline interests and combine them with its Global
Trade segment.

                                       31
<PAGE>
 
Due to persistent low lanthanide prices, a temporary suspension of all mining
and manufacturing operations occurred at the company's Mountain Pass,
California, facilities.  The suspension of operations will last until prices
improve and resolution of certain regulatory and legal issues occurs.

Also, due to the low molybdenum prices realized during the second half of 1998,
operations at the company's Questa, New Mexico, molybdenum facilities were
partially curtailed in January 1999 to control costs and supply.  The mining
operations are planned to continue at a reduced rate with the mill operating
periodically, as deemed necessary, to maintain inventory levels to meet customer
demand.  This operating plan will continue until prices improve enough to
support full-time operations.

                           CORPORATE AND UNALLOCATED
                                        
Corporate and Unallocated expense includes general corporate overhead, the non-
exploration and production related activities of the New Ventures group and
other unallocated costs.  Net interest expense represents interest expense, net
of interest income and capitalized interest.

<TABLE>
<CAPTION>
Millions of dollars                                                                   1998               1997               1996
-----------------------------------------------------------------------------------------------------------------------------------
After-tax earnings effect
<S>                                                                                 <C>                <C>                <C>
     Administrative and general expense                                             $ (79)             $ (81)             $ (99)
     Net interest expense                                                            (113)              (106)              (175)
     Environmental and litigation expense                                            (102)               (91)              (143)
     New Ventures (non-exploration and production)                                    (22)               (33)               (23)
     Other                                                                             36                113                 (5)
-----------------------------------------------------------------------------------------------------------------------------------
     Total after-tax earnings effect                                                 (280)              (198)              (445)
Less:  special items (net of tax)
     Asset sales (Other)                                                                -                 11                 11
     Environmental and litigation provisions                                          (91)               (78)              (122)
     Deferred tax adjustment (Other)                                                    -                103                  -
     Insurance benefits (Other)                                                        56                  -                  -
     Miscellaneous (Other)                                                              -                  -                (12)
     Restructuring costs (Other)                                                      (17)                 -                  -
-----------------------------------------------------------------------------------------------------------------------------------
     Total special items                                                              (52)                36               (123)
-----------------------------------------------------------------------------------------------------------------------------------
Adjusted after-tax earnings effect                                                  $(228)             $(234)             $(322)
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

1998 vs. 1997 - The adjusted after-tax earnings effect was reduced by three
percent as compared to 1997 essentially due to lower non-exploration and
production project expenditures by the company's New Ventures group.  Higher
interest expense due to higher debt levels in 1998 partially offset the lower
adjusted after-tax earnings impact (see note 15 to the consolidated financial
statements).

1997 vs. 1996 - Net interest expense for 1997 decreased 39 percent over 1996 as
a result of a decreased debt level and increased capitalized interest.

                              FINANCIAL CONDITION
<TABLE>
<CAPTION>
                                                                                                 At December 31
                                                                             ------------------------------------------------------
Millions of dollars                                                                 1998                 1997               1996
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>                  <C>                <C>
  Current ratio (a)                                                                1.0:1               1.3:1              2.0:1
  Total debt and capital lease obligations                                       $2,558               $2,170             $3,058
  Trust convertible preferred securities                                            522                  522                522
  Stockholders' equity                                                            2,202                2,314              2,275
  Capitalization                                                                  5,282                5,006              5,855
  Total debt/capitalization                                                         48%                  43%                52%
  Floating-rate debt/total debt                                                     26%                  12%                17%
-----------------------------------------------------------------------------------------------------------------------------------
 (a)  1998 includes liabilities associated with a pre-paid crude oil sale.
      1996 includes net assets of discontinued operations.
</TABLE>

                                       32
<PAGE>
 
Cash Flows from Operating Activities

Cash flows from operating activities, including discontinued operations and
working capital and other changes, were $1,003 in 1998, $1,133 million in 1997
and $1,684 million in 1996.

1998 vs. 1997 - The 1998 decrease was primarily attributable to the effect of
lower crude oil, natural gas and fertilizer product prices and increased
receivables in Indonesia.  These negative factors were partially offset by lower
foreign income tax payments than in 1997, the receipt of a $100 million advance
payment for a crude oil sales contract (see note 24 to the consolidated
financial statements), and the receipt of $88 million related to insurance
settlements and benefits.

1997 vs. 1996 - The 1997 amount reflects a payment of $80 million for the
settlement of the Catacarb civil lawsuits and the cash effects of the UNO-VEN
restructuring.  Lower average worldwide sales prices for crude oil, condensate
and nitrogen-based agricultural products also impacted cash flows.  Cash flows
from working capital decreased in 1997 largely due to cash payments for accounts
payable relating to the company's discontinued operations (see note 8 to the
consolidated financial statements).

Capital Expenditures For Continuing Operations

<TABLE>
<CAPTION>
                                                                  Estimated
Millions of dollars                                                 1999               1998               1997              1996
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>               <C>                 <C>                <C>
Exploration and Production
   United States                                                  $ 433              $  810             $  367            $  418
   International                                                    433                 762                801               509
-----------------------------------------------------------------------------------------------------------------------------------
   Total                                                            866               1,572              1,168               927
Geothermal and Power Operations                                      24                  26                102               114
Diversified Business Group
   Agricultural Products                                             21                   8                 18                12
   Carbon and Minerals                                               18                  42                 30                16
   Pipelines                                                          7                  28                 11                54
Corporate and Unallocated                                            14                  28                 49                51
----------------------------------------------------------------------------------------------------------------------------------
      Total                                                       $ 950              $1,704             $1,378            $1,174
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Forecasted 1999 capital expenditures for the company are expected to be reduced
by approximately 44 percent from 1998 levels.  The capital spending reduction
will primarily come from a reduction in Gulf of Mexico lease acquisition
activity and reduced capital spending in most project areas except deepwater
areas in Indonesia and in the Gulf of Mexico.

The company's capital spending plans are reviewed and adjusted periodically
depending on current economic conditions.

1998 vs. 1997 - Capital expenditures for continuing operations in 1998 increased
by 24 percent.  The increase was primarily due to increased drilling activities
and lease acquisitions in the Gulf of Mexico partially offset by lower
geothermal expenditures.

1997 vs. 1996 - International oil and gas exploration and production capital
spending in 1997 increased 57 percent from 1996, reflecting increased
expenditures in Thailand, Indonesia, Myanmar, Azerbaijan, Bangladesh and Canada.
Geothermal energy projects in 1997 included expenditures at the Gunung Salak
field.

                                       33
<PAGE>
 
Asset Sale Proceeds

Pre-tax proceeds from asset sales in 1998 were $435 million and consisted of
$261 million from the sales of the company's Tarragon investments, $52 million
from the sale of the company's interest in the Alliance Pipeline project, $34
million from the sale of Oklahoma oil and gas properties, $41 million from the
sale of other United States oil and gas assets, and $47 million from the sale of
miscellaneous real estate and other assets.

In 1997, the company realized $1,889 million in pre-tax proceeds from asset
sales. The sale of the company's West Coast refining, marketing and
transportation assets contributed $1,789 million (see note 8 to the consolidated
financial statements). The remaining proceeds consisted of $29 million from the
sale of miscellaneous real estate properties, $29 million from certain oil and
gas properties, $25 million from the sale of Unocal Hydrocarbon Sales and $17
million from the sale of miscellaneous corporate assets and pipeline interests.

In 1996, the company generated $609 million in pre-tax proceeds from asset
sales.  The 1996 amount included $472 million in proceeds from the sale of
California oil and gas properties, $28 million from the sale of certain United
States geothermal assets and $23 million from the sale of exploration blocks in
the United Kingdom.

Long-term Debt

The company's debt at year-end 1998, including the current portion, increased by
18 percent from 1997.  The increase included $550 million borrowed under the
company's $1.0 billion Bank Credit Agreement, $200 million from the issuance of
7 percent debentures due May 1, 2028, and $100 million from the issuance of 6
1/2 percent notes due May 1, 2008.  The proceeds of the new borrowings were
primarily used to refinance scheduled long-term debt maturities, retire $160
million outstanding under a $250 million revolving credit facility, and for
general corporate purposes.  The revolving credit facility had been established
in 1993 for the purpose of funding certain oil and gas developments in Thailand.
In February 1999, the revolving credit facility was terminated.

The company's debt at year-end 1997, including the current portion and capital
lease obligations, decreased $888 million from year-end 1996 to $2,170 million.
The principal decrease was due to the company's purchase of approximately $507
million in debt securities, pursuant to its tender offer in May 1997.  The debt
securities were purchased at an aggregate price of approximately $555 million,
including a pre-tax premium of $48 million over their total carrying value. The
premium and related costs were recorded as an extraordinary item in the
company's consolidated statement of earnings (see note 9 to the consolidated
financial statements).  Cash flows associated with the premium were reported in
the Other category of cash flows from financing activities in the consolidated
statement of cash flows.  The remaining $381 million in debt reduction
principally consisted of scheduled maturities and bank credit agreement
prepayments.

Other Financing Activities

During 1998 and 1997, the company repurchased 1,360,678 and 9,262,100 shares,
respectively, of its common stock at a cost of approximately $411 million,
primarily with proceeds received from the sale of its West Coast refining,
marketing and transportation assets in 1997 (see note 3 to the consolidated
financial statements).

Lower dividend payments in 1997 principally reflected the effects of the
company's completed trust preferred securities exchange offer of 1996.  In
September 1996, the company exchanged 10,437,873 new 6  1/4 percent trust
convertible preferred securities of Unocal Capital Trust for 9,352,962 shares of
Unocal's outstanding $3.50 convertible preferred stock.  Following the exchange
offer, the company called for redemption of the 897,038 unexchanged shares of
$3.50 convertible preferred stock.  All of the unexchanged shares of preferred
stock were converted into Unocal common stock by the redemption date  (see note
19 to the consolidated financial statements).

                                       34
<PAGE>
 
Outlook

On January 1, 1999, the company received a non-refundable payment of $120
million from the Public Energy Authority of Kentucky Trust (PEAK) for the
delivery of 72 billion cubic feet of gas over the next ten years.  The natural
gas sales contract also entitles the company to receive a fixed monthly
reservation fee from PEAK over the life of the contract.

In February 1999, the company issued $350 million of 30 year, 7  1/2 percent
debentures under its $1,439 million universal shelf registration statement.
Proceeds from this issuance are being used to retire a portion of long-term debt
as it matures.  After issuance of the $350 million of debentures, the total
amount available for future issuance of medium term notes, other debt and/or
equity securities under the company's universal shelf registration statement was
approximately $1,089 million.  The company's floating rate debt as a percentage
of its total debt outstanding decreased to 18 percent at the end of February
1999, as a result of the debenture issuance.

The company signed a letter agreement relating to the use for six months of the
Transocean Richardson deepwater semi-submersible drilling unit and expects to
take delivery of the drilling unit in the Gulf of Mexico in April 1999.
Estimated 1999 capital expenditure amounts have been included in the United
States Exploration and Production category of the Capital Expenditures for
Continuing Operations table.  The company has also signed a letter agreement
regarding the Transocean Discoverer Spirit deepwater drill ship, scheduled for
delivery in the Gulf of Mexico in 2000, with a minimum daily rate of $210
thousand for five years.

The company expects cash generated from operating activities, asset sales, and
cash on hand to be sufficient to cover most of its operating requirements,
capital spending and dividend payments in 1999.  Any shortfalls are expected to
be covered by increases in debt and other financing activities.  The company has
substantial borrowing capacity to meet unanticipated cash requirements.  At
December 31, 1998, the company had approximately $600 million of undrawn credit
facilities available with major banks in addition to the balance remaining under
its universal shelf registration statement.

                             ENVIRONMENTAL MATTERS

The company continues to incur substantial capital and operating expenditures
for environmental protection and to comply with federal, state and local laws
and provisions regulating the discharge of materials into the environment.  In
many cases, investigatory or remedial work is now required at various sites even
though past operations followed practices and procedures that were considered
acceptable under environmental laws and regulations, if any, existing at the
time.

<TABLE>
<CAPTION>
                                                                            Estimated
Millions of dollars                                                              1999        1998        1997        1996
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>         <C>         <C>         <C>
Environment-related capital expenditures
   Continuing operations                                                        $  23       $  11       $  40       $  15
   Discontinued operations                                                      $   -       $   -       $  16       $  57
</TABLE>

Environment-related capital expenditures include additions and modifications to
company facilities to mitigate and/or eliminate emissions and waste generation.
Most of these capital expenditures are required to comply with federal, state
and local laws and regulations.

Amounts recorded for environment-related expenses were approximately $200
million in 1998, $180 million in 1997 and $230 million in 1996.  The increase in
1998 was primarily due to higher provisions for remediation costs as described
below.  The reduction in 1997 reflects the sale of the refining, marketing and
transportation assets.  Environmental expenses include remediation costs and
operating, maintenance and administrative costs related to environmental
compliance.  These expenses include provisions for future remediation costs that
were identified during the company's ongoing review of its 

                                       35
<PAGE>
 
environmental obligations. Provisions in 1998 primarily consisted of remediation
costs for the Guadalupe, Avila Beach and Mountain Pass sites in California. The
provisions are discussed in more detail below.

At December 31, 1998, the company's reserves for environmental remediation
obligations totaled $312 million, of which $142 million was included in current
liabilities.  The total amount is grouped into the following five categories:

Environmental Reserve Summary

<TABLE>
<CAPTION>
                                                                                                         Year end
Millions of dollars                                                                                          1998
---------------------------------------------------------------------------------------------------------------------
<S>                                                                                                        <C>
   Superfund and similar sites                                                                             $  16
   Former company-operated sites                                                                              16
   Company facilities sold with
     retained liabilities                                                                                     64
   Inactive or closed company facilities                                                                     166
   Active company facilities                                                                                  50
---------------------------------------------------------------------------------------------------------------------
      Total reserves                                                                                       $ 312
---------------------------------------------------------------------------------------------------------------------
</TABLE>

Superfund and similar sites - At year end 1998, Unocal had received notification
from the U.S. Environmental Protection Agency that the company may be a
potentially responsible party (PRP) at 38 sites and may share certain
liabilities at these sites.  In addition, various state agencies and private
parties had identified 42 other similar PRP sites that may require investigation
and remediation. Of the total, the company has denied responsibility at five
sites and at another eight sites the company's liability, although unquantified,
appears to be de minimis.  The total also includes 28 sites, which are under
investigation or in litigation, for which the company's potential liability is
not presently determinable.  At another two sites, the company has made
settlement payments and is in the final process of resolving its liabilities.
Of the remaining 37 sites, where probable costs can be estimated, reserves of
$16 million have been established for future remediation and settlement costs.

These 80 sites exclude 68 sites where the company's liability has been settled,
or where the company has no evidence of liability and there has been no further
indication of liability by government agencies or third parties for at least a
12-month period.

Unocal does not consider the number of sites for which it has been named a PRP
as a relevant measure of liability.  Although the liability of a PRP is
generally joint and several, the company is usually just one of several
companies designated as a PRP.  The company's ultimate share of the remediation
costs at those sites often is not determinable due to many unknown factors as
discussed in note 17 to the consolidated financial statements.  The solvency of
other responsible parties and disputes regarding responsibilities may also
impact the company's ultimate costs.

Former company-operated sites - Reserves of $16 million have been established
for this category of sites.  Included are service station sites on leased
properties at which operations have ceased and which the company is obligated to
remediate before returning the properties to the owners.  Also included are
service station sites that the company previously owned or leased. The current
owners of such properties are holding the company responsible for environmental
remediation costs.  This reserve also includes estimated remediation costs for
oil and gas fields in California that were previously operated by the company.

Company facilities sold with retained liabilities - This category has reserves
of $64 million for environmental liabilities related to former company
businesses and assets that have been sold.  Included are the company's former
West Coast refining, marketing and transportation assets sold to Tosco
Corporation in March 1997.  Also included are the auto/truckstop facilities, a
former mine site in Wyoming, 

                                       36
<PAGE>
 
California oil and gas properties, industrial chemical and polymer sites and
agricultural chemical sites. In each sale, the company retained a contractual
remediation or indemnification obligation and is responsible only for certain
environmental problems associated with its past operations. The reserves
represent presently estimated future costs for investigation/feasibility studies
and identified remediation work as a result of claims made by buyers of the
properties.

Inactive or closed company facilities - Reserves of $166 million have been
established for these types of facilities.  The major sites in this category are
the Guadalupe and Avila beach sites and oil and gas properties in California's
Santa Maria Valley.  Also included in this category is the former Beaumont
refinery in Texas.  In 1998, the company added approximately $105 million to the
remediation reserve for updated cost estimates related to cleanup and other
costs associated with this category of sites.  Most of the additional reserve
was for estimated costs associated with settlement agreements that the company
entered into with regulatory agencies and other third parties for cleanup of the
Avila Beach and Guadalupe sites.

Active company facilities - The company has provided $50 million for estimated
future costs of remedial orders, corrective actions and other investigation,
remediation and monitoring obligations at certain operating facilities and
producing oil and gas fields.  Also included in this category are the Questa
molybdenum mine in New Mexico and the Mountain Pass, California, lanthanide
facility, both operated by the company's Molycorp, Inc. (Molycorp) subsidiary.

During 1998, the company added $27 million to the reserve for this category of
sites.  The additional reserve included estimated costs for the cleanup of
wastewater pipeline spills, pipeline reclamation, groundwater monitoring, and
pond closures.

The company is subject to federal, state and local environmental laws and
regulations, including the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended, and the Resource Conservation and
Recovery Act (RCRA).  Under these laws, the company is subject to possible
obligations to remove or mitigate the environmental effects of the disposal or
release of certain chemical and petroleum substances at various sites.
Corrective investigations and actions pursuant to RCRA are being performed at
the company's Beaumont facility, the company's closed shale oil project and the
company's Washington, Pennsylvania, molybdenum roasting facility.  The company
also must provide financial assurance for future closure and post-closure costs
of its RCRA-permitted facilities.  Because these costs will be incurred at
different times and over a period of many years, the company believes that these
obligations are not likely to have a material adverse effect on the company's
results of operations or financial condition.

The total environmental remediation reserves recorded on the consolidated
balance sheet represent the company's estimates of assessment and remediation
costs based on currently available facts, existing technology, and presently
enacted laws and regulations.  The remediation cost estimates, in many cases,
are based on plans recommended to the regulatory agencies for approval and are
subject to future revisions.  The ultimate costs to be incurred will likely
exceed the total amounts reserved, since many of the sites are relatively early
in the remedial investigation or feasibility study phases.  Additional
liabilities may be accrued as the assessment work is completed and formal
remedial plans are formulated.

The company has estimated, to the extent that it was able to do so, that it
could incur approximately $190 million of additional costs in excess of the $312
million accrued at December 31, 1998.  The amount of such possible additional
costs reflects, in most cases, the high end of the range of costs of feasible
alternatives identified by the company for those sites with respect to which
investigation or feasibility studies have advanced to the stage of analyzing
such alternatives.  However, such estimated possible additional costs are not an
estimate of the total remediation costs beyond the amounts reserved, because at
a large number of sites the company is not yet in a position to estimate all, or
in some cases any possible additional costs.  Both the amounts reserved and
estimates of possible additional costs may 

                                       37
<PAGE>
 
change in the near term, in some cases, substantially, as additional information
becomes available regarding the nature and extent of site contamination,
required or agreed-upon remediation methods, and other actions by government
agencies and private parties.

See notes 16 and 17 to the consolidated financial statements for additional
information.

                           FUTURE ACCOUNTING CHANGES
                                        
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities".  The statement establishes accounting and reporting
standards for derivative instruments and for hedging activities.  It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Accounting for changes in the fair value of a derivative depends upon the
intended use of the derivative and the resulting designation.  Unless designated
as a hedge, changes in the fair value of a derivative are to be accounted for as
gains or losses in the period of change.  In the case of certain hedging
activities, changes in the fair value of derivative instruments are to be
deferred and reported as a separate component of other comprehensive income.

The statement applies to all entities and is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999.  The company is planning to adopt
the statement in the first quarter of the year 2000 and is currently evaluating
the impact the statement will have on its reporting for derivative instruments
and hedging activities.

                                YEAR 2000 ISSUE
                                        
The company is actively addressing the Year 2000 (Y2K) issue.  Many existing
computer programs were designed and developed to use only two digits to identify
a year in the date field.  If not addressed, these programs could result in
system failures with possible material adverse effects on the company's
operations at the beginning of the year 2000.

The company's Y2K efforts can be divided into three general categories:
information technology (IT) systems and applications, non-IT embedded systems in
process controls, and its relationships with critical business partners.  The
company has appointed a program manager and has assembled various teams of
professionals, principally at the business unit level, which have developed
plans to implement these efforts.  The plans establish a methodology and
schedules to identify, assess, correct and test the company's IT systems and
applications, its non-IT embedded systems (such as microcontrollers and other
devices used for process control), and its system interfaces with vendors,
suppliers, customers and other outside parties, as well as to assess the Y2K
readiness of such third parties.  The company has contracted with systems
consulting firms to assist with the assessment, correction and testing of the
company's internal systems and their interfaces with third parties.  To ensure
independent review and validation of the implementation of the company's Y2K
plans, internal auditors, assisted by contract auditors, are auditing the Y2K
projects of key business units within the company and reporting their findings
to senior management.

A company-wide initial awareness campaign was completed in June 1998.  The
identification, assessment, and corrections-planning phases of the internal
systems portion of the project have been completed.  The company is in the
process of preparing business contingency and recovery plans for its "mission
critical" systems, applications and processes.  These systems, applications and
processes, if not operable, could materially adversely impact cash flow,
operations, safety or the environment.  The company's Y2K project work includes
the writing and updating of existing contingency plans to address material Y2K
issues.  The company has existing processes for managing emergency situations
and intends to have its Crisis Management Center operating at the time of the
century rollover to assist with implementing any contingency plans if required.

As of December 31, 1998, the company had completed the inventory and assessment
of its IT and embedded systems and detailed planning to correct or work around
the anticipated problems in these 

                                       38
<PAGE>
 
systems. The repair and testing of its IT and embedded systems was approximately
30 percent complete as of December 31, 1998.

The following schedule sets forth the company's estimated timetable for
achieving Y2K readiness of its IT and embedded systems:

<TABLE>
<CAPTION>
Project Phases                                                        Target Completion Dates
--------------                                                        -----------------------
<S>                                                                   <C>
Worldwide inventory of systems                                        Completed
Worldwide assessment                                                  Completed
Initial plan for corrections/work arounds                             Completed
Remediation/renovation                                                Second quarter 1999
Contingency planning                                                  Third quarter 1999
Validation/testing                                                    Third quarter 1999
Implementation                                                        Third quarter 1999
Continuous system review                                              Ongoing - through fourth quarter 1999
</TABLE>

The company has identified approximately 400 "critical business partners" and
contacted 75 percent of these companies regarding their Y2K readiness.  As of
December 31, 1998, the company had received responses from about 160 of the
critical business partners.  Work in this area will continue and contingency
plans will incorporate the possibility of performance failures by multiple
critical business partners.

The company estimates the total expenditures on its Y2K project will approximate
$30 to $35 million.  These expenditures are recorded at the business unit and
corporate levels and are funded from cash provided by operating activities.
Expenditures as of December 31, 1998, were approximately $12 million.  Most of
the remaining expenditures are expected to be incurred in 1999.

The Corporate Information Services group is not aware of any IT projects that
have been delayed due to the Y2K project.

The Y2K problem is real and there is a risk of Y2K related failures.  These
failures could result in an interruption in, or a failure of, certain business
activities or functions.  Such failures could materially and adversely affect
the company's results of operations, liquidity or financial condition.  Due to
the uncertainty surrounding the Y2K problem, including the uncertainty of the
Y2K readiness of the company's customers, suppliers, and partners, the company
is unable at this time to determine the true impact of the Y2K problem to
Unocal.  The principal areas of risk are thought to be oil and gas production
control systems, other embedded operations control systems and third party Y2K
readiness.  The company's Y2K project is expected to reduce this uncertainty.
The company believes that with the completion of the project as planned, the
possibility of significant interruptions of normal operations should be reduced.
There can be no assurance, however, that there will not be a delay in, or
increased costs associated with the implementation of such changes or that such
changes will prove 100 percent effective in resolving all Y2K related issues.
Furthermore, there can be no assurance that critical business partners will not
experience failures, irrespective of the Y2K readiness representations they may
have made.  A likely worst case scenario is that despite the company's efforts,
there could be failures of control systems, which might cause some processes to
be shut down.  Such failures could have a material adverse impact on the
company's operations.  The company is particularly concerned about the status of
key critical business partners' Y2K readiness in Indonesia, Thailand, and the
Gulf of Mexico.  Their failure due to a Year 2000 problem could prevent Unocal
from delivering product and cause a material impact to company cash flow.

                                       39
<PAGE>
 
                     CAUTIONARY STATEMENT FOR PURPOSES OF
                        THE "SAFE HARBOR" PROVISIONS OF
             THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Unocal desires to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, as embodied in Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, and is including this statement in this report in order
to do so.

This report contains forward-looking statements and from time to time in the
future the company's management or other persons acting on the company's behalf
may make, in both written publications and oral presentations, additional
forward-looking statements to inform investors and other interested persons of
the company's estimates and projections of, or increases or decreases in,
amounts of future revenues, prices, costs, earnings, cash flows, capital
expenditures, assets, liabilities and other financial items. Certain statements
may also contain estimates and projections of future levels of, or increases or
decreases in, crude oil and natural gas reserves and related finding and
development costs, potential resources, production and related lifting costs,
sales volumes and related prices, and other statistical items; plans and
objectives of management regarding the company's future operations, projects,
products and services; and certain assumptions underlying such estimates,
projections, plans and objectives. Such forward-looking statements are generally
accompanied by words such as "estimate, "projection", "plan", "target", "goal",
"forecast", "believes", expects", "anticipates" or other words that convey the
uncertainty of future events or outcomes.

While such forward-looking statements are made in good faith, forward-looking
statements and their underlying assumptions are by their nature subject to
certain risks and uncertainties and their outcomes will be influenced by various
operating, market, economic, competitive, credit, environmental, legal and
political factors.  Certain of such factors set forth elsewhere in this report
are important factors that could cause actual results to differ materially from
those expressed in the forward-looking statements.  Set forth below are
additional important factors (but not necessarily all of the important factors)
that could cause actual results to differ materially from those expressed in the
forward-looking statements.

Commodity Prices

An extended continuation of current low prices for crude oil, natural gas or
other commodities sold by the company and/or further declines in such prices
could have a material adverse effect on the company's results of operations, on
the quantities of crude oil and natural gas that could be economically produced
from its fields, and on the quantities and economic values of its proved
reserves and potential resources.  Such adverse pricing scenarios could result
in write-downs of the carrying values of the company's properties and materially
adversely affect the company's financial condition, as well as its results of
operations.

Exploration and Production Risks

The company's exploration and production activities are subject to all of the
risks and uncertainties normally associated with such activities, including, but
not limited to, such hazards as explosions, fires, blowouts, leaks and spills,
some of which may be very difficult and expensive to control and/or remediate,
and damages from hurricanes, typhoons, monsoons and other severe weather
conditions.

The process of estimating quantities of oil and natural gas reserves and
potential resources is inherently uncertain and involves subjective geological,
engineering and economic judgments.  Hence, changes in operating conditions,
such as unforeseen geological complexities and drilling and production
difficulties, and changes in economic conditions, such as finding and
development and production costs and sales prices, could cause material downward
revisions in the company's estimated proved reserves and potential resources.

                                       40
<PAGE>
 
Projections of future amounts of crude oil and natural gas production are also
imprecise because they rely on assumptions about the future levels of prices and
costs, field decline rates, market demand and supply, the political, economic
and regulatory climates and, in the case of the company's foreign production,
the terms of the contracts under which the company operates, which could result
in mandated production cutbacks from existing or projected levels.

The amounts of the company's future crude oil and natural gas reserves and
production will also be affected by its ability to replace declining reservoirs
in existing fields with new reserves through its exploration and development
programs and through acquisitions.  The ability of the company to replace
reserves will depend not only on its ability to obtain acreage and contracts in
the countries in which it currently operates, as well as in new countries, and
to delineate prospects which prove to be successful geologically, but also to
drill, find, develop and produce recoverable quantities of oil and gas
economically in the price environment prevailing at the time.

A significant portion of the company's expectation for future oil and gas
development involves large projects, primarily offshore in increasingly deeper
waters.  The timing and amounts of production from such projects will be
dependent upon, among other things, the formulation of development plans and
their approval by foreign governmental authorities and other working interest
partners, the receipt of necessary permits and other approvals from governmental
agencies, the obtaining of adequate financing, either internally or externally,
the availability and costs of drilling rigs and other equipment, and the timely
construction of platforms, pipelines and other necessary infrastructure by
specialized contractors.

Certain Political and Economic Risks

The company's operations outside of the United States are subject to risks
inherent in foreign operations, including, without limitation, the loss of
revenues, property and equipment from hazards such as expropriation,
nationalization, war, insurrection and other political risks, increases in taxes
and governmental royalties or other takes, abrogation or renegotiation of
contracts by governmental entities, changes in laws and policies governing
operations of foreign-based companies, currency conversion and repatriation
restrictions and exchange rate fluctuations, and other uncertainties arising out
of foreign government sovereignty over the company's international operations.
Laws and policies of the U.S. government affecting foreign trade and taxation
may also adversely affect the company's international operations.

The company's ability to market crude oil, natural gas and other commodities
produced in foreign countries, and the prices the company will be able to obtain
for such production, will depend on many factors which are often beyond the
company's control, such as the existence or development of markets for its
discoveries, the proximity and capacity of pipelines and other transportation
facilities or the timely construction thereof, fluctuating demand for oil and
natural gas, the availability and costs of competing fuels, and the effects of
foreign governmental regulation of production and sales.

The company's operations in the United States are also subject to political,
regulatory and economic conditions.

In light of the foregoing, investors should not place undue reliance on forward-
looking statements, which reflect management's views only as of the date they
are published or presented.  Although the company from time to time may
voluntarily revise its forward-looking statements to reflect subsequent events
or circumstances, it undertakes no obligation to do so.

                                       41
<PAGE>
 
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk generally represents the risk that losses may occur in the values of
financial instruments as a result of movements in interest rates, foreign
currency exchange rates and commodity prices. As part of its overall risk
management strategies, the company uses derivative financial instruments to
manage and reduce risks associated with these factors.  The company also pursues
outright pricing positions in certain hydrocarbon derivative financial
instruments, such as futures contracts.

Interest Rate Risk - From time to time the company temporarily invests its
excess cash in interest-bearing temporary investments of high-quality issuers.
Company policies limit the amount of investment to any one financial
institution.  Due to the short time the investments are outstanding and their
general liquidity, these instruments are classified as cash equivalents in the
consolidated balance sheet and do not represent a material interest rate risk to
the company. The company's primary market risk exposure for changes in interest
rates relates to the company's long-term debt obligations.  The company manages
its exposure to changing interest rates principally through the use of a
combination of fixed and floating rate debt (see note 23 to the consolidated
financial statements).  Interest rate sensitive derivative financial
instruments, such as swaps, options, floors, caps, and collars may also be used
depending upon market conditions.

In 1998, the company changed its quantitative disclosure method for risks
associated with interest-rate-sensitive financial instruments from the tabular
method to sensitivity analysis.  This change provides the required information
to the readers and allows the company to decrease the length of its disclosure.
Prior year disclosures have been restated for comparative purposes.  The company
evaluated the potential effect that near term changes in interest rates would
have had on the fair value of its interest rate risk sensitive financial
instruments at year-end 1998.  Assuming a ten percent decrease in the company's
weighted average borrowing costs at year-end 1998, the potential increase in the
fair value of the company's debt obligations and associated derivative
instruments would have been approximately $69 million at December 31, 1998.
Assuming a ten percent decrease in the company's weighted average borrowing
costs at year-end 1997, the potential increase in the fair value of the
company's debt obligations and associated derivative instruments would have been
approximately $53 million at December 31, 1997.

Foreign Exchange Rate Risk - The company conducts business in various parts of
the world and in various foreign currencies.  To limit the company's foreign
currency exchange rate risk related to operating income, foreign sales
agreements generally contain price provisions designed to insulate the company's
sales revenues against adverse foreign exchange rates. In most countries, energy
products are valued and sold in U.S. dollars and foreign currency operating cost
exposures have not been significant. In other countries, the company is paid for
product deliveries in local currencies but at prices indexed to the U.S. dollar.
These funds, less amounts retained for operating costs, are converted to U.S.
dollars as soon as practicable. The company's Canadian subsidiary is paid in
Canadian dollars for its crude oil and natural gas sales.  Excess Canadian funds
generally have been invested in other Unocal foreign operations rather than
remitted to the U.S. parent.

In 1998, the company changed its quantitative disclosure method for risks
associated with foreign-currency-sensitive financial instruments from the
tabular method to sensitivity analysis.  This change provides the required
information to the readers and allows the company to decrease the length of its
disclosure.  Prior year disclosures have been restated for comparative purposes.
From time to time the company may purchase foreign currency options or enter
into foreign currency exchange contracts to limit the exposure related to its
foreign currency obligations.  At year-end 1998, the company had various foreign
currency forward exchange contracts outstanding to hedge scheduled tax payments
to be paid in local currencies to entities in Canada and Thailand in 1999.  At
year-end 1998, the company evaluated the effect that near term changes in
foreign exchange rates would have had on the fair value of the company's
combined foreign currency position related to its outstanding foreign currency
forward exchange contracts.  Assuming an adverse change of ten percent in
foreign exchange rates at year-end 1998, the potential decrease in fair value of
the company's foreign currency forward exchanges contracts would have been
approximately $14 million at December 31, 1998.  At year-end 1997, a portion of
the company's 

                                       42
<PAGE>
 
borrowings were denominated in foreign currencies and the company had offsetting
foreign currency swap agreements in place to mitigate the associated exchange
rate risk (all foreign denominated debt and associated swap agreements were
retired during 1998). Assuming an adverse change of ten percent in foreign
exchange rates at year-end 1997, the potential decrease in fair value of the
company's foreign currency position related to its foreign currency denominated
debt and associated foreign currency swap agreements at December 31, 1997 would
have been approximately $13 million.

Commodity Price Risk - The company is a producer, purchaser, marketer and trader
of certain hydrocarbon commodities such as crude oil and condensate, natural gas
and petroleum-based products and is subject to the associated price risks.  The
company generally uses hydrocarbon derivative financial instruments, such as
futures contracts, swaps and options with maturities of 24 months or less, to
mitigate its exposure to fluctuations in hydrocarbon commodity prices.  The
company may also enter into swaps, options, or other contracts to hedge
contractual delivery commitments and future crude oil and natural gas production
against price exposure.  In certain cases, the company enters into longer-term
derivative instruments, such as swap contracts, to hedge its exposure to long-
term fixed price commitments.  The company also takes pricing positions in
hydrocarbon derivative financial instruments (primarily exchange regulated
futures and options contracts) subject to internal policy limitations.

The company uses a value at risk model to assess the market risk of its
hydrocarbon-price-sensitive derivative instruments.  Value at risk represents
the potential loss in fair value the company would experience on its hydrocarbon
price sensitive derivative instruments, using calculated volatilities and
correlations over a specified time period with a given confidence level.  The
company's model is based on historical data and uses a one-week time interval
with a 95 percent confidence level.  Based upon the company's model, the value
at risk related to hydrocarbon-price-sensitive derivative financial instruments
held for purposes other than trading was approximately $16 million at December
31, 1998.  The value at risk related to hydrocarbon-price-sensitive derivative
financial instruments held for trading purposes was approximately $6 million at
December 31, 1998.  Value at risk related to hydrocarbon-price-sensitive
derivative financial instruments at December 31, 1997 was immaterial.

                                       43
<PAGE>
 
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to the Consolidated Financial Statements and Financial Statement Schedule

<TABLE>
<CAPTION>
                                                                                            Page
                                                                                            ----
 
<S>                                                                         <C>
Report on Management's Responsibilities                                                      45
 
Report of Independent Accountants                                                            46
 
Financial Statements
     Consolidated Earnings                                                                   47
     Consolidated Balance Sheet                                                              48
     Consolidated Cash Flows                                                                 49
     Consolidated Stockholders' Equity and Comprehensive Income                              50
     Notes to Consolidated Financial Statements                                              51
 
Supplemental Information
     Quarterly Financial Data                                                                80
     Oil and Gas Financial Data                                                              81
     Oil and Gas Reserve Data                                                                83
     Present Value of Future Net Cash Flow Related
          To Proved Oil and Gas Reserves                                                     85
     Selected Financial Data                                                                 88
     Operating Summary                                                                       89
 
Supporting Financial Statement Schedule covered
   By the Foregoing Report of Independent Accountants:
   Schedule II  Valuation and Qualifying Accounts and Reserves                               95
</TABLE>

All other financial statement schedules have been omitted as they are not
applicable, not material or the required information is included in the
financial statement or notes thereto.

                                       44
<PAGE>
 
REPORT ON MANAGEMENT'S RESPONSIBILITIES
---------------------------------------

To the Stockholders of Unocal Corporation:

Unocal's management is responsible for the integrity and objectivity of the
financial information contained in this Annual Report.  The financial statements
included in this report have been prepared in accordance with generally accepted
accounting principles and, where necessary, reflect the informed judgments and
estimates of management.

The financial statements have been audited by the independent accounting firm of
PricewaterhouseCoopers LLP.  Management has made available to
PricewaterhouseCoopers LLP all the company's financial records and related data,
minutes of the meetings of the board and its executive and management committees
and all internal audit reports.  The independent accountants conduct a review of
internal accounting controls to the extent required by generally accepted
auditing standards and perform such tests and procedures as they deem necessary
to arrive at an opinion on the fairness of the financial statements presented
herein.

Management maintains and is responsible for systems of internal accounting
controls designed to provide reasonable assurance that the company's assets are
properly safeguarded, transactions are executed in accordance with management's
authorization and the books and records of the company accurately reflect all
transactions.  The systems of internal accounting controls are supported by
written policies and procedures and by an appropriate segregation of
responsibilities and duties.  The company maintains an extensive internal
auditing program that independently assesses the effectiveness of these internal
controls with written reports and recommendations issued to the appropriate
levels of management.  Management believes that the existing systems of internal
controls are achieving the objectives discussed herein.

Unocal's Accounting and Auditing Committee, consisting solely of directors
who are not employees of Unocal, is responsible for: reviewing the company's
financial reporting, accounting and internal control practices; recommending the
selection of independent accountants (which in turn are approved by the Board of
Directors and annually ratified by the stockholders); monitoring compliance with
applicable laws and company policies; and initiating special investigations as
deemed necessary.  The independent accountants and the internal auditors have
full and free access to the Accounting and Auditing Committee and meet with it,
with and without the presence of management, to discuss all appropriate matters.



<TABLE>
<S>                                   <C>                          <C>                            <C> 
Roger C. Beach                        John F. Imle, Jr.            Timothy H. Ling                Joe D. Cecil
Chairman of the Board                 Vice Chairman of the         Executive Vice President,      Vice President and
and Chief Executive Officer           Board                        North American Energy          Comptroller
                                                                   Operations, and
                                                                   Chief Financial Officer
</TABLE>

March 15, 1999

                                       45
<PAGE>
 
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------


To the Stockholders of Unocal Corporation:

We have audited the accompanying consolidated balance sheets of Unocal
Corporation and its subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of earnings, cash flows and stockholders' equity
and comprehensive income for each of the three years in the period ended
December 31, 1998 and the related financial statement schedule.  These financial
statements and financial statement schedule are the responsibility of Unocal
Corporation's management.  Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.

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

In our opinion, the financial statements referred to above, which appear on
pages 47 through 82 of this Annual Report on Form 10-K, present fairly, in all
material respects, the consolidated financial position of Unocal Corporation and
its subsidiaries as of December 31, 1998 and 1997 and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.  In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial
statements, taken as a whole, presents fairly, in all material respects, the
information required to be included therein.



PricewaterhouseCoopers LLP
February 12, 1999, except as to note 27,
which is as of March 10, 1999
Los Angeles, California

                                       46
<PAGE>
 
<TABLE>
<CAPTION>
CONSOLIDATED EARNINGS
 
                                                                                    Years ended  December 31
                                                                          --------------------------------------
Millions of dollars except per share amounts                                 1998           1997           1996
----------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>            <C>            <C>
Revenues
Sales and operating revenues                                               $5,003         $5,781          $5,101       
Interest, dividends and miscellaneous income                                  169             49              49              
Equity in earnings of affiliated companies                                     96            154             106              
Gain on sales of assets                                                       211             80              72              
----------------------------------------------------------------------------------------------------------------            
      Total revenues                                                        5,479          6,064           5,328              
Costs and other deductions                                                                                                    
Crude oil, natural gas and product purchases                                2,165          2,246           1,502              
Operating expense                                                           1,352          1,389           1,386              
Selling, administrative and general expense                                   136            107             151              
Depreciation, depletion and amortization                                      867            962             914              
Dry hole costs                                                                184            110             139              
Exploration expense                                                           203            193             117              
Interest expense (a)                                                          177            183             279              
Property and other operating taxes                                             57             70              72              
Distributions on convertible preferred securities of subsidiary trust          33             33              10              
----------------------------------------------------------------------------------------------------------------            
      Total costs and other deductions                                      5,174          5,293           4,570              
----------------------------------------------------------------------------------------------------------------            
Earnings from continuing operations before income taxes                       305            771             758              
Income taxes                                                                  175            102             302              
----------------------------------------------------------------------------------------------------------------            
Earnings from continuing operations before discontinued                                                                       
   operations and extraordinary item                                          130            669             456              
Discontinued operations                                                                                                       
      Earnings from operations (b)                                              -              -              71              
      Loss on disposal (c)                                                      -            (50)           (491)             
----------------------------------------------------------------------------------------------------------------            
      Loss from discontinued operations                                         -            (50)           (420)             
Extraordinary item                                                                                                            
   Early extinguishment of debt (d)                                             -            (38)              -              
----------------------------------------------------------------------------------------------------------------            
Net earnings                                                               $  130         $  581          $   36              
Dividends on preferred stock                                                    -              -              18              
Non-cash charge related to exchange of preferred securities                     -              -              54              
----------------------------------------------------------------------------------------------------------------            
      Net earnings (loss) applicable to common stock                       $  130         $  581          $  (36)             
                                                                           =====================================            
                                                                                                                              
Basic earnings (loss) per share of common stock:                                                                              
      Continuing operations                                                $ 0.54         $ 2.69          $ 1.54              
      Net earnings (loss)                                                  $ 0.54         $ 2.34          $(0.15)             
                                                                                                                              
Diluted earnings (loss) per share of common stock:                                                                            
      Continuing operations                                                $  0.54        $ 2.65          $ 1.53              
      Net earnings (loss)                                                  $  0.54        $ 2.31           (0.07)             
----------------------------------------------------------------------------------------------------------------            
                                                                                                                              
(a)  Net of capitalized interest of :                                      $  (26)        $  (35)         $  (15)             
(b)  Net of tax expense of :                                               $    -         $    -          $   44              
(c)  Net of tax benefit of :                                               $    -         $  (31)         $ (301)             
(d)  Net of tax benefit of :                                               $    -         $  (14)         $    -       
</TABLE> 
 
                See Notes to Consolidated Financial Statements.

                                       47
<PAGE>
 
CONSOLIDATED BALANCE SHEET

<TABLE> 
<CAPTION> 
                                                                                    At December 31
                                                                          --------------------------------
Millions of dollars                                                               1998                1997
----------------------------------------------------------------------------------------------------------
<S>                                                                       <C>                 <C> 
Assets
Current assets
   Cash and cash equivalents                                               $       238         $       338    
   Accounts and notes receivable                                                   807                 897                         
   Inventories                                                                     179                 172                         
   Deferred income taxes                                                           142                  71                         
   Other current assets                                                             22                  23                         
----------------------------------------------------------------------------------------------------------                         
      Total current assets                                                       1,388               1,501                         
Investments and long-term receivables                                            1,143               1,113                         
Properties - net                                                                 5,276               4,816                         
Deferred income taxes                                                               23                   7                         
Other assets                                                                       122                  93                         
----------------------------------------------------------------------------------------------------------                         
      Total assets                                                         $     7,952         $     7,530                         
----------------------------------------------------------------------------------------------------------                         
Liabilities and Stockholders' Equity                                                                                               
Current liabilities                                                                                                                
   Accounts payable                                                        $       709         $       785                         
   Taxes payable                                                                   260                 126                         
   Interest payable                                                                 52                  54                         
   Current portion of environmental liabilities                                    142                 100                         
   Other current liabilities                                                       213                  95                         
----------------------------------------------------------------------------------------------------------                         
      Total current liabilities                                                  1,376               1,160                         
Long-term debt                                                                   2,558               2,169                         
Deferred income taxes                                                              132                 137                         
Accrued abandonment, restoration and environmental liabilities                     622                 627                         
Other deferred credits and liabilities                                             540                 601                         
Company-obligated mandatorily redeemable convertible preferred                                                                     
   securities of a subsidiary trust holding solely parent debentures               522                 522                         
Common stock ($1.00 par value)                                                                                                     
   Shares authorized:  750,000,000 (a)                                             252                 252                         
Capital in excess of par value                                                     460                 452                         
Unearned portion of restricted stock issued                                        (24)                (31)                        
Retained earnings                                                                1,959               2,021                         
Accumulated other comprehensive loss                                               (34)                (18)                        
Treasury stock - at cost (b)                                                      (411)               (362)                        
----------------------------------------------------------------------------------------------------------
         Total stockholders' equity                                              2,202               2,314                         
----------------------------------------------------------------------------------------------------------                         
            Total liabilities and stockholders' equity                     $     7,952         $     7,530                         
----------------------------------------------------------------------------------------------------------                        
(a)  Number of shares outstanding                                          241,378,280         242,526,174                        
(b)  Number of shares                                                       10,622,778           9,262,100   
The company follows the successful efforts method of accounting for its oil and gas activities.
</TABLE> 

              See Notes to the Consolidated Financial Statements.

                                       48
<PAGE>
 
<TABLE>
<CAPTION>
CONSOLIDATED CASH FLOWS
 
 
                                                                                  Years ended December 31
                                                                          --------------------------------------
Millions of dollars                                                          1998           1997           1996
----------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>            <C>            <C>
Cash Flows from Operating Activities
Net earnings                                                               $   130        $   581        $    36
Adjustments to reconcile net earnings to                                                                   
   net cash provided by operating activities                                                               
      Depreciation, depletion and amortization                                 867            962          1,059
      Dry hole costs                                                           184            110            139
      Deferred income taxes                                                    (72)          (249)          (332)
      Gain on sales of assets (pre-tax)                                       (211)           (80)           (77)
      Loss on disposal of discontinued operations (pre-tax)                      -             81            743
      Extraordinary item - early extinguishment of debt (pre-tax)                -             52              -
      Other                                                                     35           (162)           113
      Working capital and other changes related to operations                                                
         Accounts and notes receivable                                          42            142           (130)
         Inventories                                                            (7)           (60)            10
         Accounts payable                                                      (76)          (223)           208
         Taxes payable                                                         134           (107)            38
         Other                                                                 (23)            86           (123)
----------------------------------------------------------------------------------------------------------------
            Net cash provided by operating activities                        1,003          1,133          1,684
Cash Flows from Investing Activities                                                                       
   Capital expenditures (includes dry hole costs)                           (1,704)        (1,427)        (1,398)
   Proceeds from sales of assets                                               435            100            609
   Proceeds from sale of discontinued operations                                 -          1,789              -
----------------------------------------------------------------------------------------------------------------
            Net cash provided by (used in) investing activities             (1,269)           462           (789)
                                                                                                              
Cash Flows from Financing Activities                                                                                                
   Proceeds from issuance of common stock                                        5             14             33
   Long-term borrowings                                                        891            470            375
   Reduction of long-term debt and capital lease obligations                  (472)        (1,336)          (943)
   Dividends paid on preferred stock                                             -              -            (27)
   Dividends paid on common stock                                             (193)          (199)          (199)
   Repurchases of common stock                                                 (48)          (362)             -
   Other                                                                       (17)           (61)           (11)
----------------------------------------------------------------------------------------------------------------
         Net cash provided by (used in) financing activities                   166         (1,474)          (772)
                                                                                                             
Increase (decrease) in cash and cash equivalents                              (100)           121            123
Cash and cash equivalents at beginning of year                                 338            217             94
----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                   $   238        $   338        $   217
----------------------------------------------------------------------------------------------------------------
                                                                                                          
Supplemental disclosure of cash flow information:                                                         
   Cash paid during the period for:                                                                       
      Interest (net of amount capitalized)                                 $   182        $   187        $   276
      Income taxes (net of refunds)                                        $   172        $   313        $   332
</TABLE> 

              See Notes to the Consolidated Financial Statements.

                                       49
<PAGE>
 
<TABLE>
<CAPTION>
CONSOLIDATED STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
 
 
Millions of dollars except per share amounts                                 1998           1997           1996
---------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>            <C>            <C>
Preferred stock
   Balance at beginning of year                                            $    -         $    -         $  513
   Exchange of preferred stock for convertible preferred securities             -              -           (468)
   Conversion of preferred stock to common stock                                -              -            (45)
---------------------------------------------------------------------------------------------------------------
      Balance at end of year                                                    -              -              -
Common stock                                                                                                       
   Balance at beginning of year                                               252            251            247
   Issuance of common stock                                                     -              1              4
---------------------------------------------------------------------------------------------------------------
      Balance at end of year                                                  252            252            251
Capital in excess of par value                                                                                     
   Balance at beginning of year                                               452            412            319
   Issuance of common stock                                                     8             40             93
---------------------------------------------------------------------------------------------------------------
      Balance at end of year                                                  460            452            412
Unearned portion of restricted stock issued                                                                        
   Balance at beginning of year                                               (31)           (14)           (13)
   Issuance of restricted stock                                                (3)           (26)            (5)
   Current year amortization                                                   10              9              4
---------------------------------------------------------------------------------------------------------------
      Balance at end of year                                                  (24)           (31)           (14)
Retained earnings                                                                                                  
   Balance at beginning of year                                             2,021          1,639          1,874
   Net earnings for year                                                      130            581             36
   Cash dividends declared                                                                                         
       Preferred stock ($1.75 per share in 1996)                                -              -            (18)
       Common stock ($.80 per share)                                         (192)          (199)          (199)
   Exchange of 6-1/4% convertible preferred securities of                                                          
      Unocal Capital Trust for Unocal's $3.50 preferred stock                   -              -            (54)
---------------------------------------------------------------------------------------------------------------
      Balance at end of year                                                1,959          2,021          1,639
Treasury stock                                                                                                     
   Balance at beginning of year                                              (362)             -              -
   Purchased at cost                                                          (49)          (362)             -
---------------------------------------------------------------------------------------------------------------
      Balance at end of year                                                 (411)          (362)             -
Accumulated other comprehensive loss                                                                               
   Balance at beginning of year                                               (18)           (13)           (10)
   Current year adjustment                                                    (16)            (5)            (3)
---------------------------------------------------------------------------------------------------------------
      Balance at end of year  (a)                                             (34)           (18)           (13)
---------------------------------------------------------------------------------------------------------------
Total stockholders' equity                                                 $2,202         $2,314         $2,275
---------------------------------------------------------------------------------------------------------------
</TABLE> 

(a)  At year end 1998, other comprehensive loss was comprised of unrealized
     translation losses of $25 and minimum pension liability adjustments of $9.
     Year-end 1997 and 1996 balances consisted entirely of unrealized
     translation losses.

<TABLE> 
<CAPTION>  
Comprehensive income                                                  1998           1997          1996
-------------------------------------------------------------------------------------------------------
<S>                                                                  <C>            <C>            <C> 
   Net income                                                         $130           $581           $36
   Unrealized translation adjustments   (no tax effect)                 (7)            (5)           (3)
   Minimum pension liability adjustment   (net of $5 tax effect)        (9)             -             -
-------------------------------------------------------------------------------------------------------
Total comprehensive income                                            $114           $576           $33
-------------------------------------------------------------------------------------------------------
</TABLE> 
 
              See Notes to the Consolidated Financial Statements.

                                       50
<PAGE>

                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation - For the purpose of this report, Unocal Corporation
(Unocal) and its consolidated subsidiaries, including Union Oil Company of
California (Union Oil), will be referred to as the company.

The consolidated financial statements of the company include the accounts of
subsidiaries more than 50 percent owned.  Investments in affiliates owned 50
percent or less are accounted for by the equity method.  Under the equity
method, the investments are stated at cost plus the company's equity in
undistributed earnings and losses after acquisition.  Income taxes estimated to
be payable when earnings are distributed are included in deferred income taxes.

Use of Estimates - The consolidated financial statements are prepared in
conformity with generally accepted accounting principles, which require
management to make estimates and assumptions that affect the amounts of assets
and liabilities and the disclosures of contingent liabilities as of the
financial statement date and the amounts of revenues and expenses during the
reporting period.  Actual results could differ from those estimates.

Inventories - Inventories are valued at lower of cost or market.  The costs of
crude oil, other petroleum products and agricultural products inventories are
determined using the last-in, first-out (LIFO) method.  The costs of other
inventories are determined by using various methods.  Cost elements primarily
consist of raw materials and production expenses.

Impairment of Assets - Oil and gas producing properties are regularly assessed
for possible impairment on a field-by-field basis using the estimated
undiscounted future cash flows of each field.  Generally, impairment loss is
charged to depreciation, depletion and amortization expense when the estimated
undiscounted future cash flows are less than the current net book values of the
properties in a field.

Impairment charges are also made for other long-lived assets when it is
determined that the carrying values of the assets may not be recoverable.  A
long-lived asset is reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of the asset may not be
recoverable.

Oil and Gas Exploration and Development Costs - The company follows the
successful-efforts method of accounting for its oil and gas activities.

Acquisition costs of exploratory acreage are capitalized.  Full amortization of
such costs related to the portion of unproved properties is provided over the
shorter of the exploratory period or the lease holding period.  Costs of
successful leases are transferred to proved properties.  Exploratory drilling
costs are initially capitalized.  If exploratory wells are determined to be
commercially unsuccessful, the related costs are expensed.  Geological and
geophysical costs for exploration and leasehold rentals for unproved properties
are expensed.

Development costs of proved properties, including unsuccessful development
wells, are capitalized.

Depreciation, Depletion and Amortization - Depreciation, depletion and
amortization related to proved oil and gas properties and estimated future
abandonment and removal costs for onshore and offshore producing facilities are
calculated at unit-of-production rates based upon estimated proved reserves.
Depreciation of other properties is generally on a straight-line method using
various rates based on estimated useful lives.

Maintenance and Repairs - Expenditures for maintenance and repairs are expensed.
In general, improvements are charged to the respective property accounts.

                                       51
<PAGE>
 
Retirement and Disposal of Properties - Upon retirement of facilities
depreciated on an individual basis, remaining book values are charged to
depreciation expense.  For facilities depreciated on a group basis, remaining
book values are charged to accumulated allowances.  Gains or losses on sales of
properties are included in current earnings.

Income Taxes - The company uses the liability method for reporting income taxes,
under which current and deferred tax liabilities and assets are recorded in
accordance with enacted tax laws and rates.  Under this method, the amounts of
deferred tax liabilities and assets at the end of each period are determined
using the tax rate expected to be in effect when taxes are actually paid or
recovered.  Future tax benefits are recognized to the extent that realization of
such benefits is more likely than not.

Deferred income taxes are provided for the estimated income tax effect of
temporary differences between financial and tax bases in assets and liabilities.
Deferred tax assets are also provided for certain tax credit carryforwards.  A
valuation allowance to reduce deferred tax assets is established when deemed
appropriate.

Foreign Currency Translation - Foreign exchange translation adjustments as a
result of translating a foreign entity's financial statements from its
functional currency into U.S. dollars are included as a separate component of
stockholders' equity.  The functional currency for all operations, except Canada
and equity investments in Thailand and Brazil, is the U.S. dollar.  Gains or
losses incurred on currency transactions in other than a country's functional
currency are included in net earnings.

Environmental Expenditures - Expenditures that relate to existing conditions
caused by past operations are expensed.  Environmental expenditures that create
future benefits or contribute to future revenue generation are capitalized.

Liabilities related to environmental assessments and future remediation costs
are recorded when such liabilities are probable and the amounts can be
reasonably estimated.  The company considers a site to present a probable
liability when an investigation has identified environmental remediation
requirements for which the company is responsible.  The timing of accruing for
remediation costs generally coincides with the company's completion of
investigation or feasibility work and its recommendation of a remedy or
commitment to an appropriate plan of action.

Environmental liabilities are not discounted or reduced by possible recoveries
from third parties.  However, accrued liabilities for Superfund and similar
sites reflect anticipated allocations of liabilities among settling
participants.

Environmental remediation expenditures required for properties held for sale are
capitalized.  A valuation allowance is established when the aggregate book
values of the properties, including capitalized remediation costs, exceed net
aggregate realizable values.

Risk Management - The primary objectives of the company's risk management
policies are to reduce the overall volatility of the company's cash flows and to
preserve revenues.  As part of its overall risk management strategy, the company
enters into various derivative instrument contracts to protect its exposures to
changes in interest rates, changes in foreign currency exchange rates, and
fluctuations in crude oil and natural gas prices.   The company also pursues
outright pricing positions in certain hydrocarbon derivative financial
instruments, such as futures contracts.

Interest Rates - The company enters into interest rate swap contracts to manage
the interest cost of its debt with the objective of minimizing the volatility
and magnitude of the company's borrowing costs.  Net amounts under the swap
contracts are recorded on the accrual basis as interest expense.  Net related
counterparty amounts are included in interest payable.  Associated cash flows
are presented in the operating activities section of the consolidated cash flows
statement.

From time to time, the company may purchase interest rate options to protect its
interest rate positions.  These purchases are designated as hedges of future
transactions and gains or losses on the options are 

                                       52
<PAGE>
 
deferred until the underlying transactions occur. Option costs are recognized as
part of the underlying transactions unless the transactions do not occur, at
which time, the option costs are recognized in earnings. Related cash flows are
presented in the operating activities section of the consolidated cash flows
statement.

Foreign Currency - Various foreign currency forward, option and swap contracts
are entered into by the company to manage its exposures to adverse impacts of
foreign currency fluctuations under debt and other obligations.  Generally,
gains and losses on the outstanding contracts are recognized in earnings and
offset the foreign currency gains or losses of the underlying obligations.  Net
related counterparty amounts are included in accounts receivable.  Associated
cash flows at settlement are presented in the financing activities section of
the consolidated cash flows statement for contracts related to debt obligations.
Cash flows related to other foreign currency obligations are presented in the
operating activities section of the consolidated cash flows statement.

Commodities - The company enters into futures, swaps, and other hydrocarbon
derivative contracts to mitigate the company's overall exposure to fluctuations
in crude oil and natural gas prices.  Generally, the company uses hydrocarbon
derivative contracts to establish price protection for its forecasted oil and
gas transactions; however, market conditions may arise causing certain positions
to be closed out prior to their scheduled maturity dates.  The company also
pursues outright pricing positions in certain hydrocarbon derivative financial
instruments, such as futures contracts.  Accordingly, hydrocarbon derivative
financial instruments related to the enterprise's general risk management and
trading activities are marked to market, and gains and losses are recognized on
a current basis in the underlying commodity revenues.  Net related counterparty
amounts are included in accounts receivable.

The company may hedge a portion of an operating group's future crude oil or
natural gas production against price exposure and may also use hydrocarbon
derivative financial instruments to hedge certain firm delivery commitments.
These agreements are designated as hedges for accounting purposes.  To qualify
for hedge accounting the item must be designated as a hedge at the inception of
the derivative contract, the hedged item must expose the company to price risk,
the derivative instrument must reduce the company's price risk exposure, and
there must be a high correlation of changes in the fair value of the derivative
instrument and the fair value of the underlying item being hedged.  Gains or
losses in the fair value of the derivative are deferred and recognized as part
of the underlying commodity revenue when the designated item is sold,
extinguished or terminated.  If a designated transaction is no longer expected
to occur or if correlation no longer exists, then a gain or loss is recognized
to the extent the future results are not offset by the changes on the hedged
item since the inception of the hedge.  Net related counterparty amounts are
included in accounts receivable.  Cash flows related to derivative contracts
settled during the period are reported in the operating activities section of
the consolidated cash flows statement.

Stock-Based Compensation - The company accounts for its stock-based compensation
plans using the intrinsic value method prescribed in Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees".  Statement of
Financial Accounting Standards (SFAS) No. 123,  "Accounting for Stock-Based
Compensation", allows companies to record stock-based employee compensation
plans at fair value.  The company has elected to continue accounting for stock-
based compensation in accordance with APB No. 25, but complies with the required
disclosures under SFAS No. 123 (see note 22).

Earnings Per Share - Basic earnings per share (EPS) was computed by dividing
earnings available to common stockholders by the weighted-average number of
common shares outstanding during the period.  Diluted EPS is similar to basic
EPS except that the denominator was increased to include the number of
additional common shares that would have been outstanding if potential dilutive
common shares had been issued.  The numerator was also adjusted for convertible
securities by adding back any convertible preferred distributions.  Each group
of potential dilutive common shares must be ranked and included in the diluted
EPS calculation by first including the most dilutive, then the next dilutive,
and so on, to the least dilutive shares.  The process stops when the resulting
diluted EPS is the lowest figure obtainable.

                                       53
<PAGE>
 
Capitalized Interest - Interest is capitalized on certain construction and
development projects as part of the costs of the assets.

Other - The company considers cash equivalents to be all highly liquid
investments purchased with a maturity of three months or less.

Certain items in prior year financial statements have been reclassified to
conform to the 1998 presentation.

NOTE 2 - ACCOUNTING CHANGES

Effective in the first quarter of 1998, the company adopted SFAS No. 130,
"Reporting Comprehensive Income", which established standards for reporting and
displaying comprehensive income and its components.  The company has chosen to
display its comprehensive income in the Consolidated Stockholders' Equity and
Comprehensive Income statement.  Prior period data presented has been restated
to conform to the new standard.

The company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" in the fourth quarter of 1998.  This statement requires
the disclosure of certain financial information by operating segments.
Operating segments are based on the way that management organizes segments
within an enterprise for making operating decisions and assessing performance.
Adoption of this statement did not materially impact the company's prior segment
disclosures.

During the fourth quarter of 1998, the company adopted SFAS No. 132, "Employers
Disclosures about Pensions and Other Postretirement Benefits".  This statement
requires the disclosure of reconciliations of beginning and ending balances of
plan benefit obligations as well as the fair value of plan assets.  It also
requires the disclosure of the effect a one percentage-point change (increase
and decrease) in the health-care trend rate on the service and interest cost
components of net periodic postretirement-health care benefit costs and on the
accumulated postretirement benefit obligation for health care benefits.  It
eliminates the disclosures for plan descriptions, types of benefit formulas and
funding policies.  The company has restated prior period information to conform
to the required disclosures.

NOTE 3 - DISPOSITIONS OF ASSETS

During 1998, the company received proceeds totaling $435 million from the sale
of assets and recorded a total pre-tax gain of $211 million.  of the total
proceeds, $261 million was from the sale of Tarragon Oil and Gas Limited
(Tarragon) common stock and debentures acquired earlier in the year in exchange
for the company's Alberta, Canada, exploration and production assets.  The asset
exchange and subsequent sale of the Tarragon securities resulted in a total pre-
tax gain of $155 million.  The company received proceeds of $52 million from the
sale of its interests in the Alliance Pipeline project and recorded a pretax
gain of $8 million.  Proceeds of $34 million from the sale of the company's
Oklahoma oil and gas properties resulted in a pre-tax gain of $22 million.
Proceeds from the sale of other United States oil and gas assets were $41
million, with pre-tax gains of $12 million.  The company also received proceeds
of $47 million from the sale of miscellaneous real estate and other assets that
generated pre-tax gains of $14 million.

In 1997, the company's proceeds from asset sales were $100 million, with pre-tax
gains of $80 million.  The proceeds consisted of:  $29 million for miscellaneous
real estate properties, with pre-tax gains of $13 million; $29 million for the
sale of miscellaneous oil and gas assets, with a pre-tax loss of $4 million; $25
million for the sale of Unocal Hydrocarbon Sales, with a pre-tax gain of $66
million; and $17 million for miscellaneous assets, with pre-tax gains of $5
million.  The company also received proceeds of  $1,789 million from the sale of
its West Coast refining, marketing and transportation assets, resulting in a
pre-tax loss on disposal of $792 million recognized in 1996.

Proceeds received from asset sales during 1996 were $609 million with recorded
pre-tax gains of $77 million. The total proceeds from the sale of oil and gas
assets included $472 million from the sale of 

                                       54
<PAGE>
 
California oil and gas properties with a pre-tax gain of $109 million. Proceeds
and a note receivable totaling $28 million from the sale of geothermal assets
were received resulting in a pre-tax loss of $92 million. The company also
received $23 million from the sale of exploration blocks in the United Kingdom
with a pre-tax gain of $18 million, and $30 million from the sale of
miscellaneous real estate assets, with a pre-tax gain of $17 million.

NOTE 4 - LEASE RENTAL OBLIGATIONS

Future minimum rental payments for operating leases having initial or remaining
noncancelable lease terms in excess of one year are as follows:

<TABLE>
<CAPTION>
Millions of dollars
-------------------------------------------------------
<S>                                              <C>
1999                                              $119
2000                                                69
2001                                                26
2002                                                22
2003                                                19
Balance                                             96
------------------------------------------------------
Total minimum lease rental payments               $351
------------------------------------------------------
</TABLE>


Net operating lease rental expense for continuing operations was as follows:

<TABLE>
<CAPTION>
Millions of dollars                                        1998           1997           1996
---------------------------------------------------------------------------------------------
<S>                                                        <C>            <C>            <C>
Fixed rentals                                               $53            $61            $73
Contingent rentals (based primarily on sales and usage)       8              9             11
Sublease rental income                                       (5)            (7)            (3)
---------------------------------------------------------------------------------------------
   Net Rental Expense                                       $56            $63            $81
---------------------------------------------------------------------------------------------
</TABLE>

NOTE 5 - IMPAIRMENT OF ASSETS

As a result of recent price declines and the forecasted continuation of a low-
price environment for crude oil, natural gas, certain ores and minerals, and
other commodity prices, the company reviewed its oil and gas properties, mining
facilities and other long-lived assets in 1998 for possible impairment.  In
accordance with its accounting policy regarding asset impairment, the company
recorded pre-tax charges of $66 million to depreciation, depletion and
amortization expense for the impairment of certain United States and
international oil and gas properties.  The company recorded a pre-tax charge of
$2 million to equity in the earnings of an affiliate for impairment related to
an investment in a United States oil and gas affiliate.  A pre-tax charge of $29
million was also recorded to depreciation, depletion and amortization expense
for the impairment of the company's Mountain Pass, California, mining
operations.

In 1997, the company recorded pre-tax charges of $69 million to depreciation,
depletion and amortization expense for the impairment of certain United States
and international oil and gas properties.

In 1996, the company recorded pre-tax charges of $52 million to depreciation,
depletion and amortization expense for the impairment of certain United States
oil and gas properties and $23 million to depreciation, depletion and
amortization expense for the impairment of certain united states geothermal
properties.

NOTE 6 - RESTRUCTURING COSTS

The company adopted a restructuring plan during the fourth quarter of 1998 that
resulted in the accrual of a $27 million pre-tax restructuring charge.  This
amount included the costs of terminating approximately 475 employees. The charge
was included in selling, administrative and general expense on the consolidated
earnings statement. The plan involves the suspension of mining and manufacturing
operations at the Mountain Pass, California, lanthanide facility, a change in
mining operations at the 

                                       55

<PAGE>
 
Questa, New Mexico, molybdenum facility, the withdrawal from non-strategic
activities in Central Asia and a reduction in the activities of various business
units.

Approximately 240 of the affected employees are from the company's mining
operations, 95 are from various exploration and production business units and
140 are support personnel at various locations.  The restructuring charge
included approximately $23 million for termination costs to be paid to the
employees over time, about $2 million in benefit plan curtailment costs and
about $2 million related to outplacement and other costs.

At December 31, 1998, about 210 employees had been terminated or had received
termination notices as a result of the plan, with most of the terminations
occurring at year-end.  The amount of unpaid benefits remaining on the
consolidated balance sheet at year-end 1998 was $25 million.

NOTE 7 - INCOME TAXES

The components of the income tax provision for continuing operations were as
follows:

<TABLE>
<CAPTION>
Millions of dollars                                                     1998      1997     1996
-----------------------------------------------------------------------------------------------
<S>                                                                  <C>       <C>       <C>   
Earnings (loss) from continuing operations before income taxes (a)   
   United States                                                      $(220)    $ 397     $ 268
   Foreign                                                              525       374       490
-----------------------------------------------------------------------------------------------
             Total                                                    $ 305     $ 771     $ 758
-----------------------------------------------------------------------------------------------
Income taxes
   Current
      Federal                                                         $ (33)    $  87     $  76
      State                                                               6        12        30
      Foreign                                                           274       285       277
-----------------------------------------------------------------------------------------------
             Total                                                      247       384       383
   Deferred
      Federal                                                          (137)     (168)      (70)
      State                                                              (4)        5       (13)
      Foreign                                                            69      (119)        2
-----------------------------------------------------------------------------------------------
             Total                                                      (72)     (282)      (81)
-----------------------------------------------------------------------------------------------
               Total income taxes                                     $ 175     $ 102     $ 302
-----------------------------------------------------------------------------------------------
(a)  Amounts attributable to the Corporate and Unallocated segment are allocated.
</TABLE>

The following table is a reconciliation of income taxes at the federal statutory
income tax rates to income taxes as reported in the consolidated earnings
statement.

<TABLE>
<CAPTION>
Millions of dollars                                                     1998      1997      1996
-------------------------------------------------------------------------------------------------
<S>                                                                  <C>       <C>       <C>
Federal statutory rate                                                  35%        35%      35%
 
Taxes on earnings from continuing operations at statutory rate        $107      $ 270     $265
Taxes on foreign earnings in excess of (less than) statutory rate       89        (45)      75
U.S. deferred tax adjustment                                             -       (126)     (11)
Dividend exclusion                                                     (14)       (13)     (15)
Other                                                                   (7)        16      (12)
----------------------------------------------------------------------------------------------
             Total                                                    $175      $ 102     $302
----------------------------------------------------------------------------------------------
</TABLE>

                                       56
<PAGE>
 
The significant components of deferred income tax assets and liabilities
included in the consolidated balance sheet at December 31, 1998 and 1997 were as
follows:

<TABLE>
<CAPTION>
Millions of dollars                                           1998     1997
---------------------------------------------------------------------------
<S>                                                        <C>       <C>
Deferred tax assets (liabilities):
   Depreciation and intangible drilling costs               $(765)    $(696)
   Pension assets                                            (168)     (166)
   Other deferred tax liabilities                            (199)     (240)
   Exploratory costs                                          273       236
   Federal alternative minimum tax credits                    202       188
   Litigation and environmental costs                         137       146
   Future abandonment costs                                   130       144
   Depletion                                                   88        98
   Postretirement benefit costs                                83        84
   Other deferred tax assets                                  252       147
---------------------------------------------------------------------------
      Total                                                 $  33     $ (59)
---------------------------------------------------------------------------
</TABLE>


No deferred U.S. income tax liability has been recognized on the undistributed
earnings of foreign subsidiaries that have been retained for reinvestment.  If
distributed, no additional U.S. tax is expected due to the availability of
foreign tax credits.  The undistributed earnings for tax purposes, excluding
previously taxed earnings, were estimated at $1.2 billion as of December 31,
1998.

The company estimates that approximately $95 million of unused foreign tax
credits will be available after the filing of the 1998 consolidated tax return,
with various expiration dates through the year 2002.  No deferred tax asset for
these foreign credits has been recognized for financial statement purposes.  The
federal alternative minimum tax credits are available to offset future U.S.
federal income taxes on an indefinite basis.

NOTE 8 - DISCONTINUED OPERATIONS

In March 1997, the company sold its West Coast refining, marketing and
transportation assets to Tosco Corporation (Tosco) for total cash proceeds of
$1.8 billion.  A participation agreement also provides for up to $250 million in
possible additional payments, which are contingent upon increased refining
premiums and gasoline marketing margins in the years through 2003.

The 1996 consolidated earnings statement reflected the results for the refining,
marketing and transportation operations as a $420 million loss from discontinued
operations. Estimated operating losses during the phase-out period of November
17, 1996 to March 31, 1997 were $72 million net of income tax benefits of $43
million which was included in the $420 million loss. See note 10 for earnings
per share information. At December 31, 1996, the assets held for sale were
reclassified in the consolidated balance sheet from their historical
classifications to separately reflect them as net assets of discontinued
operations. Cash flows related to discontinued operations have not been
segregated in the consolidated statement of cash flows. Consequently, amounts on
the consolidated earnings statements may not agree with certain captions on the
consolidated statement of cash flows.

In 1997, the company recorded an additional loss on disposal of $50 million (net
of a $31 million tax benefit).  The additional provision was primarily due to
adjustments in closing inventory amounts and higher than anticipated termination
costs.

NOTE 9 - EXTRAORDINARY ITEM

In May 1997, the company purchased approximately $507 million in aggregate
principal amount of three of its outstanding issues of debt securities.  The
debt securities consisted of $161 million in debentures with an interest rate of
9  1/4 percent and $346 million in notes with interest rates of 8  3/4 percent
and 9  3/4 percent.  The debt securities were purchased for an aggregate price
of $555 million, including a pre-tax

                                       57
<PAGE>
 
premium of approximately $48 million over their aggregate carrying value.
The premium, together with related costs of $4 million, was recorded as an
extraordinary item on the company's consolidated statement of earnings.

NOTE 10 - EARNINGS PER SHARE

The following table includes reconciliations of the numerators and denominators
of the basic and diluted EPS computations for earnings from continuing
operations.

Not included in the computation of diluted EPS were options to purchase
approximately 5.3 million shares of common stock.  These options were not
included in the computation because the exercise prices were greater than the
average market prices of the common shares at year-end.  The exercise prices of
these options range from $35.94 to $51.01 per share.  The options were
outstanding at December 31, 1998, and will expire periodically up to and in
2008.

<TABLE>
<CAPTION>
                                                                                  Earnings           Shares          Per Share
Millions of dollars except per share amounts                                     (Numerator)      (Denominator)       Amount
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>                  <C>          <C>       <C>
Year ended December 31, 1998
      Earnings from continuing operations                                           $   130                241
         Basic EPS                                                                                                    $   0.54
                                                                                                                ================
      Effect of Dilutive Securities
         Options/common stock equivalents                                                                    1
                                                                           -------------------------------------
         Diluted EPS                                                                    130                242        $   0.54
                                                                                                                ================
         Distributions on subsidiary trust preferred securities (after-tax)              24                 12
                                                                           -------------------------------------
         Antidilutive                                                               $   154                254        $   0.61   (a)

 
Year ended December 31, 1997
      Earnings from continuing operations                                           $   669                248
         Basic EPS                                                                                                    $   2.69
                                                                                                                ================
      Effect of Dilutive Securities
         Options/common stock equivalents                                                                    1
                                                                           -------------------------------------
                                                                                        669                249        $   2.68
         Distributions on subsidiary trust preferred securities (after-tax)              24                 13
                                                                           -------------------------------------
         Diluted EPS                                                                $   693                262        $   2.65
                                                                                                                ================
 
Year ended December 31, 1996
     Earnings from continuing operations                                            $   456
         Less:
              Dividends on preferred stock                                               18
              Non-cash charge related to exchange of                                     54
                  preferred stock for subsidiary trust preferred securities
                                                                           -------------------------------------  
      Earnings from continuing operations                                               384                249
           applicable to common stock
         Basic EPS                                                                                                    $   1.54
                                                                                                                ================
      Effect of Dilutive Securities
         Options/common stock equivalents                                                                    1
                                                                           -------------------------------------
                                                                                        384                250        $   1.54
         Convertible preferred stock                                                     18                 13
                                                                           -------------------------------------
         Diluted EPS                                                                    402                263        $   1.53
                                                                                                                ================
         Distributions on subsidiary trust preferred securities (after-tax)               8                  3
                                                                           -------------------------------------
         Antidilutive                                                               $   410                266        $   1.54   (a)

--------------------------------------------------------------------------------------------------------------------------------
 
(a) The effect of assumed conversion of preferred securities on earnings per share is antidilutive.
</TABLE>

                                       58
<PAGE>
 
Basic and diluted earnings per common share for discontinued operations and the
extraordinary item related to the early extinguishment of debt were as follows:

<TABLE>
<CAPTION>
                                                                                       Years ended December 31
                                                                           ---------------------------------------------------
Millions of dollars except per share amounts                                         1998              1997               1996
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>               <C>               <C>
 
Basic earnings (loss) per share of common stock:
      Discontinued operations:
         Earnings (loss) from discontinued operations                               $   -           $  (50)             $ (420)
         Weighted average common shares outstanding                                     -              248                 249
              Earnings (loss) from  discontinued operations                         $   -           $(0.20)             $(1.69)
      Extraordinary item:
         Early extinguishment of debt (net of tax)                                  $   -           $  (38)             $    -
         Weighted average common shares outstanding                                     -              248                 249
              Loss from  extraordinary item                                         $   -           $(0.15)             $    -
Dilutive earnings (loss) per share of common stock:
      Discontinued operations:
         Earnings (loss) from discontinued operations                               $   -           $  (50)             $ (420)
         Weighted average common shares outstanding                                     -              262                 263
              Earnings (loss) from  discontinued operations                         $   -           $(0.19)             $(1.60)
      Extraordinary item:
         Early extinguishment of debt (net of tax)                                  $   -           $  (38)             $    -
         Weighted average common shares outstanding                                     -              262                 263
              Loss from  extraordinary item                                         $   -           $(0.15)             $    -
</TABLE>

NOTE 11 - INVENTORIES

<TABLE>
<CAPTION>
Millions of dollars                                                                               1998                1997
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                          <C>                 <C>
Crude oil and other petroleum products                                                           $  34               $  34
Agricultural products                                                                               46                  43
Carbon and mineral products                                                                         66                  56
Materials, supplies and other                                                                       33                  39
------------------------------------------------------------------------------------------------------------------------------
       Total                                                                                     $ 179               $ 172
------------------------------------------------------------------------------------------------------------------------------
</TABLE>

The current replacement cost of inventories exceeded the LIFO inventory values
included in the table above by $11 million and $18 million at December 31, 1998
and 1997, respectively.

                                       59
<PAGE>
 
NOTE 12 - INVESTMENTS IN AFFILIATES

Investments in affiliated companies accounted for by the equity method were $479
million, $413 million and $578 million at December 31, 1998, 1997 and 1996,
respectively. These investments are reported as a component of investments and
long-term receivables on the consolidated balance sheet. Dividends or cash
distributions received from these affiliates were $94 million, $83 million and
$89 million for the same years, respectively.

Unamortized excesses of the company's investments in these affiliated companies
have been excluded from the table below.  The unamortized excess of the
company's investments in Colonial Pipeline Company, Inc., West Texas Gulf
Pipeline Company and various other pipeline companies was approximately $109
million at December 31, 1998.

At December 31, 1998, 1997 and 1996, the company's shares of the net capitalized
costs of affiliates engaged in oil and gas exploration and production activities
were $208 million, $158 million and $75 million, respectively.

Summarized financial information for these investments and the company's equity
shares are shown below.
<TABLE>
<CAPTION>
                                               1998                       1997                          1996
                                 ------------------------------------------------------------------------------------
 
                                                    Unocal's                   Unocal's                      Unocal's
Millions of dollars                     Total        Share         Total        Share            Total        Share
---------------------------------------------------------------------------------------------------------------------


<S>                                    <C>          <C>           <C>          <C>        <C>   <C>          <C>
Revenues                                $1,396          $458       $1,764          $620          $2,786        $1,155
Costs and other
   deductions                            1,079           362        1,453           536           2,440         1,049
---------------------------------------------------------------------------------------------------------------------
Net earnings                            $  317          $ 96       $  311          $ 84  (a)     $  346        $  106
---------------------------------------------------------------------------------------------------------------------
Current assets                          $  499          $172       $  493          $176          $  792        $  334
Noncurrent assets                        2,555           711        2,295           610           2,546           800
Current liabilities                        571           182          506           160             711           266
Noncurrent liabilities                   1,310           372        1,157           325           1,228           366
Net equity                               1,173           329        1,125           301           1,399           502
---------------------------------------------------------------------------------------------------------------------
</TABLE> 
 
 
(a)  1997 excludes approximately $70 million recorded to equity in earnings
      related to the Uno-Ven partnership restructuring.

                                       60
<PAGE>
 
NOTE 13 - PROPERTIES AND CAPITAL LEASES

Investments in owned and capitalized leased properties at December 31, 1998 and
1997 are shown below.  Accumulated depreciation, depletion, and amortization for
continuing operations was $10,193 million and $9,896 million at December 31,
1998 and 1997, respectively.

<TABLE>
<CAPTION>
                                                                  1998                                       1997
                                                     -----------------------------------------------------------------------
Millions of dollars                                      Gross               Net                    Gross                Net
----------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>                <C>                     <C>                <C>
Owned properties (at cost)
   Oil and gas operations:
      Exploration
         United States
            Spirit Energy 76                           $    418            $  386                 $    165           $   140
            Other                                             1                 -                        8                 4
         International                                  
            Far East                                        248               213                      145               132
            Other                                           109                93                       83                31
      Production                                        
         United States                                  
            Spirit Energy 76                              5,502             1,539                    5,474             1,582
            Other                                         1,235               302                    1,189               335
         International                                  
            Far East                                      4,012             1,178                    3,668             1,029
            Other                                         1,207               474                    1,369               506
----------------------------------------------------------------------------------------------------------------------------
         Total oil and gas operations                    12,732             4,185                   12,101             3,759
   Global Trade                                               4                 3                        3                 2
   Geothermal and Power Operations                          937               437                      846               375
   Diversified Business Group                           
      Agricultural Products                                 681               203                      679               216
      Carbon & Minerals                                     330               144                      303               160
      Pipelines                                             344               100                      337                99
   Corporate and Unallocated                                426               203                      428               204
----------------------------------------------------------------------------------------------------------------------------
      Total owned properties                             15,454             5,275                   14,697             4,815
Capitalized leased properties                                15                 1                       15                 1
----------------------------------------------------------------------------------------------------------------------------
            Total                                      $ 15,469           $ 5,276                 $ 14,712           $ 4,816
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       61
<PAGE>
 
NOTE 14 - POSTEMPLOYMENT BENEFIT PLANS

The company has several retirement plans covering substantially all of its
employees.  The company also has medical plans that provide health care benefits
for eligible employees and many of its retired employees.  The following table
sets forth the postretirement benefit obligation recognized in the consolidated
balance sheet at December 31, 1998 and 1997.  Pre-paid pension costs are
reported as a component of investments and long-term receivables on the
consolidated balance sheet.  Postemployment benefit liabilities, including
pensions, postretirement medical benefits and other postemployment benefits, are
reported as a component of other deferred credits and liabilities on the
consolidated balance sheet.

<TABLE>
<CAPTION>
                                                                                                          
                                                                                                               Other Post-
                                                                           Pension  Benefits               retirement Benefits
Millions of dollars                                                        1998         1997                1998         1997
----------------------------------------------------------------     -----------------------------     ------------------------
<S>                                                                     <C>            <C>                <C>           <C>
Change in benefit obligation:
Projected benefit obligation at January 1                               $   900        $   887            $  192         $  201
Service cost                                                                 27             27                 3              3
Interest cost                                                                67             69                13             13
Employee contributions                                                        -              -                 3              3
Disbursements                                                               (99)          (146)              (18)           (17)
Actuarial losses/(gains)                                                     60             96                (1)             6
Plan amendments                                                               1              1                 -              -
Curtailments/settlements                                                     (4)             1                (1)           (17)
Divestitures                                                                 (2)             -                 -              -
Effect of foreign exchange rates                                              3            (35)                -              -
                                                                     -------------------------        -------------------------
Projected benefit obligation at December 31                             $   953        $   900            $  191         $  192
                                                                     -------------------------        -------------------------
Change in plan assets:                                                                                              
Fair value of plan assets at January 1                                  $ 1,213        $ 1,174            $    -         $    -
Actual return on plan assets                                                183            203                 -              -
Employer contributions                                                      (14)           (14)                -              -
Employee contributions                                                        -              -                 -              -
Disbursements                                                               (91)          (137)                -              -
Administrative expenses                                                      (7)            (7)                -              -
Settlements                                                                   -              -                 -              -
Divestiture                                                                  (2)             -                 -              -
Effect of foreign exchange rates                                             (1)            (6)                -              -
                                                                     -------------------------        -------------------------
Fair value of plan assets at December 31                                 $ 1,281       $ 1,213            $    -         $    -
                                                                     -------------------------        -------------------------
Net amount recognized:                                                  
Funded status                                                            $  328        $   313            $ (191)        $ (192)
Unrecognized net (asset)/obligation at transition                             2            (15)                -              -
Unrecognized prior service cost                                              23             27                11             13
Unrecognized net actuarial losses/(gains)                                    62             81               (28)           (31)
                                                                     -------------------------        -------------------------
Net amount recognized                                                    $  415        $   406            $ (208)        $ (210)
                                                                     -------------------------        -------------------------
Amounts recognized in the balance sheet consist of:                     
Prepaid pension cost                                                     $  459        $   446            $    -         $    -
Accrued benefit liability                                                   (62)           (40)             (208)          (210)
Intangible asset                                                              4              -                 -              -
Accumulated other comprehensive income                                        9              -                 -              -
Deferred taxes                                                                5              -                 -              -
                                                                     -------------------------        -------------------------
Net amount recognized                                                    $  415        $   406            $ (208)        $ (210)
                                                                     -------------------------        -------------------------
</TABLE>

                                       62
<PAGE>
 
The assumed rates to measure the benefit obligation and the expected earnings on
plan assets were as follows:
<TABLE>
<CAPTION>
                                                                                                
                                                                                                             Other Post-  
                                                                   Pension Benefits                      retirement Benefits
                                                        ------------------------------------  ----------------------------------
Weighted-average assumptions as of December 31               1998         1997       1996        1998            1997       1996
                                                        ------------  ----------  ----------  ----------  -------------  -------
<S>                                                        <C>           <C>        <C>        <C>              <C>        <C>
Discount rates                                               7.18%       7.47%      7.61%        7.00%          7.00%      7.25%
Rate of salary increases                                     4.25%       4.54%      4.50%        4.00%          4.00%      4.00%
Expected return on plan assets                               9.41%       9.46%      9.50%         N/A            N/A        N/A
</TABLE>


The health care cost trend rates used in measuring the 1998 benefit obligations
were 5.4 percent prior to age 65 and 5.3 percent following age 65, both
decreasing ratably to five percent in 2001.  A one-percentage-point change in
the assumed health care cost trend rates would have had the following effects on
1998 service and interest cost and the accumulated postretirement benefit
obligation at December 31, 1998:
<TABLE>
<CAPTION>
                                                                                  One percent           One percent
Millions of dollars                                                                 Increase              Decrease
---------------------------------------------------------------------------  --------------------  ------------------
<S>                                                                             <C>                   <C>
Effect on total of service and interest cost                                           $2                  $(2)
  components of net periodic expense                                                         
Effect on postretirement benefit obligation                                            21                  (17)
</TABLE>


Net periodic and postretirement benefits cost are comprised of the following
components:
<TABLE>
<CAPTION>
                                                                                                 Other Post-
                                                        Pension Benefits                     retirement Benefits
Millions of dollars                                  1998       1997      1996            1998        1997       1996
----------------------------------------------     --------  --------  ---------     ------------  --------  ---------
<S>                                                 <C>       <C>       <C>           <C>            <C>       <C>
Service cost (net of employee contributions)        $  27     $  27      $  33            $   3      $   3       $   5
Interest cost                                          67        69         65               13         13          15
Expected return on plan assets                       (102)     (105)      (102)               -          -           -
Amortization of:                                                  -                                          
  Transition (asset)/obligation                       (17)      (22)       (22)               -          -           -
  Prior service cost                                    4         3          5                1          2           2
  Net actuarial (gains)/losses                          2         -          2               (1)        (2)          -
Curtailment/settlement (gains)/losses                   -         1         12                -        (17)          -
Cost of special separation benefits                     4         1          2                -          -           -
                                                    -------  --------  -------      -------------  --------  ---------
Net periodic pension cost/(credit)                  $ (15)    $ (26)     $  (5)           $  16      $  (1)      $  22
                                                    -------  --------  -------      -------------  --------  ---------
</TABLE>


The projected benefit obligations, accumulated benefit obligations and fair
value of plan assets for pension plans with accumulated benefit obligations in
excess of plan assets were approximately $101 million, $58 million and $1
million, respectively as of December 31, 1998 and approximately $72 million, $42
million and $1 million, respectively as of December 31, 1997.

In 1998, the company completed the transfer of pension assets and liabilities
from retirement plans from a subsidiary to the Unocal Retirement Plan.  The
company also recorded additional separation costs for those employees displaced
as a result of asset sales and the company's restructuring program.  During
1997, the company completed the sale of substantially all of its West Coast
petroleum refining, marketing and transportation assets and retained the
postretirement benefit obligation and related plan assets for the employees
affected by this transaction.  Also during 1997, the company terminated a
defined benefit pension plan in the United Kingdom.  Many of the affected
employees were transferred to a new plan that also provides coverage to foreign
country nationals employed by the company outside the U.S.

The company has a 401 (k) defined contribution savings plan designed to
supplement retirement income for U.S. employees.  The plan received company
contributions of $16 million, $18 million and $23 million in 1998, 1997 and 1996
respectively.  The company also provides benefits such as workers' compensation
and disabled employees' medical care to former or inactive employees after
employment but before 

                                       63
<PAGE>
 
retirement. The accumulated postemployment benefit obligation was $21 million
and $18 million at December 31, 1998 and 1997 respectively.

NOTE 15 - LONG-TERM DEBT AND CREDIT AGREEMENTS

The following table summarizes the company's long-term debt:

<TABLE>
<CAPTION>
Millions of dollars                                                                                 1998               1997
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                                              <C>                <C>
Bonds and debentures                                                                             
   9-1/4% Debentures due 2003                                                                    $    89            $    89
   9-1/8% Debentures due 2006                                                                        200                200
   6-1/5% Industrial Development Revenue
      Bonds due 1999 to 2008                                                                          23                 23
   7% Debentures due 2028                                                                            200                  -
   Deutsche Mark Bonds due 1998                                                                        -                139
Notes
   Commercial paper  (5.92%) (a) (b)                                                                  60                 99
   Medium-term notes due 1999 to 2015 (8.21%) (a) (b)                                                790                952
   Bank Credit Agreement (5.73%) (a) (b)                                                             550                  -
   Revolving credit facilities                                                                         -                160
   9-3/4% Notes due 2000                                                                              65                 65
   8-3/4% Notes due 2001                                                                              39                 39
   6-3/8% Notes due 2004                                                                             200                200
   7-1/5% Notes due 2005                                                                             200                200
   6-1/2% Notes due 2008                                                                             100                  -
   Azerbaijan Limited Recourse Loans                                                                  44                  -
   Other miscellaneous debt                                                                            2                  4
   Bond (discount)/premium                                                                            (4)                 -
---------------------------------------------------------------------------------------------------------------------------
      Total debt                                                                                   2,558              2,170
      Less current portion of capital leases                                                           -                  1
---------------------------------------------------------------------------------------------------------------------------
      Total long-term debt                                                                       $ 2,558            $ 2,169
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a)  The company has the intent and the ability to refinance current maturities.
(b)  Weighted average interest rate at December 31, 1998

At December 31, 1998, the amounts of long-term debt maturing in 2000, 2001,
2002, and 2003 were $121 million, $106 million, $783 million and $100 million,
respectively.

During 1998, the company repaid $160 million under a $250 million revolving
credit facility that was established in 1993 for the purpose of funding certain
oil and gas developments in Thailand.  This revolving credit facility was
terminated in February 1999.  The balance of commercial paper outstanding at
year-end 1997 was reduced $39 million to $60 million at December 31, 1998.
Additional debt repayments included the retirement at maturity of the $110
million Deutsche Mark bonds, together with a related currency swap agreement,
and the retirement of $162 million in medium-term notes.

In May 1998, the company issued $100 million of 6  1/2 percent notes due May 1,
2008 and $200 million of 7 percent debentures due May 1, 2028.  Proceeds from
the issuances were used to repay a portion of the maturing debt described above,
to retire the $250 million revolving credit facility and for general corporate
purposes.

In December 1998, the company completed a limited recourse project financing for
its separate share of the Azerbaijan International Operating Company Early Oil
Project in Azerbaijan under an International Finance Corporation and European
Bank for Reconstruction and Development loan structure.  The financing is for up
to $77 million, with an initial draw down of $44 million.  The borrowing bears
interest at a 

                                       64
<PAGE>
 
margin above London Interbank Offered Rates (LIBOR). The company has guaranteed
the loan through project completion. Following completion, the company's
guarantee will terminate and the lenders' principal and interest payments will
be payable only out of the Early Oil Project's cash flow. The pre-completion
guarantee excludes certain political events including, but not limited to,
cancellations or material adverse modifications to the relevant Production
Sharing Contract, Joint Operating Agreement, Pipeline Operating or Construction
Agreements and material breaches by any Government or Governmental Agency of any
Project Country.

The company borrowed $550 million under its $1.0 billion Bank Credit Agreement
during the year and had $450 million in additional borrowings available under
the agreement at December 31, 1998.  The company had other undrawn letters of
credit available at year-end 1998 that approximated $156 million.  The majority
of these letters of credit are maintained for operational needs.  Borrowings
under credit facilities bear interest at different margins above LIBOR and the
agreements call for facility fees on either the total or undrawn commitment.
The Bank Credit Agreement and certain of the other revolving credit facilities
provide for the termination of the commitments and require the prepayment of all
outstanding borrowings in the event that any person or group becomes the
beneficial owner of more than 30 percent of the then outstanding voting stock of
Unocal other than in a transaction having the approval of the company's Board of
Directors, at least a majority of which are continuing directors, or continuing
directors shall cease to constitute at least a majority of the Board.

In July 1998, the company filed a new $1.2 billion universal shelf registration
statement with the Securities and Exchange Commission. The unissued $239 million
balance of securities available for issuance under the company's prior shelf
registration statement was combined with the amount of securities under the new
registration statement resulting in a total amount of $1.439 billion available
at year-end 1998.  This amount was initially dedicated to the company's medium-
term note program but was also available for the future issuance of other debt
or equity securities.

NOTE 16 - ACCRUED ABANDONMENT, RESTORATION AND ENVIRONMENTAL LIABILITIES

At December 31, 1998, the company had accrued $452 million for the estimated
future costs to abandon and remove wells and production facilities.  The total
costs for abandonments are predominantly accrued for on a unit-of-production
basis and are estimated to be approximately $679 million.  This estimate was
derived in large part from abandonment cost studies performed by outside firms
and is used to calculate the amount to be amortized.

At December 31, 1998, the company's reserve for environmental remediation
obligations totaled $312 million, of which $142 million was included in current
liabilities.  The reserve included estimated probable future costs of $16
million for federal Superfund and comparable state-managed multi-party disposal
sites; $16 million for formerly-operated sites for which the company has
remediation obligations; $64 million for sites related to businesses or
operations that have been sold with contractual remediation or indemnification
obligations;  $166 million for company-owned or controlled sites where
facilities have been closed or operations shut down; and $50 million for active
sites owned and/or controlled by the company and utilized in its present
operations.

NOTE 17 - CONTINGENT LIABILITIES

The company has contingent liabilities with respect to material existing or
potential claims, lawsuits and other proceedings, including those involving
environmental, tax and other matters, certain of which are discussed more
specifically below.  The company 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, the company'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 could have a
material effect on the company's future results of operations and financial
condition or liquidity.

                                       65
<PAGE>
 
Environmental matters - The company 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, chemical and mineral substances at
various sites; to remediate or restore these sites; to compensate others for
damage to property and natural resources, for remediation and restoration costs
and for personal injuries; and to pay civil penalties and, in some cases,
criminal penalties and punitive damages.  These obligations relate to sites
owned by the company or others and are associated with past and present
operations, including sites at which the company has been identified as a
potentially responsible party (PRP) under the federal Superfund laws and
comparable state laws.

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 the company 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 the company's liabilities are indeterminate due to the
potentially large number of claimants for any given site or exposure, the
unknown magnitude of possible contamination, the imprecise and conflicting
engineering evaluations and estimates of proper clean-up methods and costs, the
unknown timing and extent of the corrective actions that may be required, the
uncertainty attendant to the possible award of punitive damages, the recent
judicial recognition of new causes of action, the present state of the law,
which often imposes joint and several and retroactive liabilities on PRPs, the
fact that the company is usually just one of a number of companies identified as
a PRP, or other reasons.

As disclosed in note 16, at year-end 1998 the company had accrued $312 million
for estimated future environmental assessment and remediation costs at various
sites where liabilities for such costs are probable.  At those sites where
investigations or feasibility studies have advanced to the stage of analyzing
feasible alternative remedies and/or ranges of costs, the company estimates that
it could incur possible additional remediation costs aggregating approximately
$190 million.

Tax matters - In 1994, the company received a Notice of Proposed Deficiency
(Notice) from the Internal Revenue Service (IRS) related to the years 1985
through 1987.    In 1995, the company filed a protest of the proposed tax
deficiency with the Appeals section of the IRS.  A proposed settlement was
reached for all open taxable years prior to 1988 and was approved by the Joint
Committee on Taxation of the U.S. Congress in 1998.  The settlement entitles the
company to a refund for overpayment of tax or interest, but the company will not
receive actual payment until a final resolution of losses carried back from 1993
to pre-1988 taxable years occurs.

The company believes it has adequately provided in its accounts for tax items
and issues not yet resolved.

Other matters - The company has signed a letter agreement regarding the
Transocean Discoverer Spirit deepwater drill ship with a minimum daily rate of
$210 thousand for five years.  The drill ship is scheduled for delivery in the
Gulf of Mexico in 2000.

In February 1996, Bridas Corporation filed a petition against the company and
others in the District Court of Fort Bend County, Texas, alleging that the
defendants conspired to and did tortiously interfere with Bridas' rights under
agreements with the government of Turkmenistan to develop the Yashlar Field and
to transport gas from that field to Pakistan.  The petition also alleged that
the defendants interfered with Bridas' exclusive right to lay a gas pipeline in
Afghanistan.  Bridas sought actual damages, as well as punitive damages, plus
interest.  Bridas' expert witnesses stated in pre-trial discovery that Bridas'
total actual damages for loss of future profits were approximately $1.7 billion.
In the alternative, Bridas was expected to seek an award of approximately $430
million with respect to its total expenditures in Turkmenistan.  In October
1998, the court granted the defendants' motion for summary judgement and
dismissed the action.  In March 1999, Bridas filed a notice of appeal of the
dismissal.

The company also has certain other contingent liabilities with respect to
litigation, claims and contractual agreements arising in the ordinary course of
business.  Although these contingencies could result in 

                                       66
<PAGE>
 
expenses or judgments that could be material to the company's results of
operations for a given reporting period, 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 the company's
consolidated financial condition or liquidity.

NOTE 18 - OTHER FINANCIAL INFORMATION

The consolidated balance sheet at December 31 includes the following:

<TABLE>
<CAPTION>
Millions of dollars                                                                               1998               1997
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                                              <C>                <C>
Other deferred credits and liabilities:                                               
   Postretirement medical benefits obligation                                                    $ 208              $ 210
   Reserve for litigation and other claims                                                         139                181
   Other employee benefits                                                                          93                 70
   Advances related to future production                                                            29                 47
   Minority interest                                                                                26                 29
   Other                                                                                            45                 64
-------------------------------------------------------------------------------------------------------------------------
      Total                                                                                      $ 540              $ 601
-------------------------------------------------------------------------------------------------------------------------
Allowances for doubtful accounts and notes receivable                                            $  78              $  35
Allowances for investments and long-term receivables                                             $  34              $  32
-------------------------------------------------------------------------------------------------------------------------
</TABLE>


NOTE 19 - TRUST CONVERTIBLE PREFERRED SECURITIES

In September 1996, Unocal exchanged 10,437,873 newly issued 6  1/4 percent trust
convertible preferred securities of Unocal Capital Trust, a Delaware business
trust (the Trust), for 9,352,962 shares of Unocal's $3.50 convertible preferred
stock which were tendered in response to Unocal's exchange offer.  Unocal
acquired the convertible preferred securities, which have an aggregate
liquidation value of $522 million, from the Trust, together with 322,821 common
securities of the Trust, which have an aggregate liquidation value of $16
million, in exchange for $538 million principal amount of 6  1/4 percent
convertible junior subordinated debentures of Unocal.  The convertible preferred
securities and common securities of the Trust represent undivided beneficial
interests in the debentures, which are the sole assets of the Trust.

In 1996, a charge to retained earnings of $54 million was recorded for the
exchange to reflect the excess of the $522 million carrying value of the
convertible preferred securities issued (which amount was based on the market
value of the shares of Unocal common stock into which the tendered shares of
$3.50 convertible preferred stock could have been converted) over the $468
million carrying value of the tendered shares.

The convertible preferred securities have a liquidation value of $50 per
security and are convertible into shares of Unocal common stock at a conversion
price of $42.56 per share, subject to adjustment upon the occurrence of certain
events.  Distributions on the convertible preferred securities are cumulative at
an annual rate of 6  1/4 percent of their liquidation amount and are payable
quarterly in arrears on March 1, June 1, September 1 and December 1 of each year
to the extent that the Trust receives interest payments on the debentures, which
payments are subject to deferral by Unocal under certain circumstances.

Upon repayment of the debentures by Unocal, whether at maturity, upon redemption
or otherwise, the proceeds thereof must immediately be applied to redeem a
corresponding amount of the convertible preferred securities and the common
securities of the Trust.

The debentures mature on September 1, 2026, and may be redeemed, in whole or in
part, at the option of Unocal, at any time on or after September 3, 2000, at a
redemption price initially equal to 103.75 percent of the principal amount
redeemed, declining annually to 100 percent of the principal amount redeemed in
2006, plus accrued and unpaid interest thereon to the redemption date.  The
debentures, and hence the convertible preferred securities, may become
redeemable at the option of Unocal upon the occurrence of certain special events
or restructuring transactions.

                                       67
<PAGE>
 
The Trust is accounted for as a consolidated subsidiary of Unocal, with the
debentures and payments thereon by Unocal to the Trust eliminated in the
consolidated financial statements.  The exchange of outstanding shares of $3.50
convertible preferred stock for convertible preferred securities and the
conversion of the remaining shares of $3.50 convertible preferred stock to
common stock were non-cash transactions and, therefore, were excluded from the
1996 cash flow statement.  The payment obligations of the Trust under the
convertible preferred securities are unconditionally guaranteed on a
subordinated basis by Unocal.  Such guarantee, when taken together with Unocal's
obligations under the debentures and the indenture pursuant to which the
debentures were issued and its obligations under the amended and restated
declaration of trust governing the Trust, provides a full and unconditional
guarantee by Unocal of the Trust's obligations under the convertible preferred
securities.

Following the exchange offer, Unocal called the 897,038 unexchanged shares of
the $3.50 convertible preferred stock for redemption.  All of these shares were
converted by the holders into 1,458,575 shares of Unocal common stock prior to
the redemption date.

The numbers of convertible preferred securities outstanding on December 31, 1998
and December 31, 1997 were 10,437,137 and 10,437,212, respectively.

NOTE 20 - CAPITAL STOCK

<TABLE>
<CAPTION>
Common Stock
 
Authorized - 750,000,000
$1.00 Par value per share
Thousands of shares                                                              1998                  1997                  1996
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                   <C>                   <C>
Outstanding at beginning of year                                                242,526               250,671               247,310
Issuances of common stock (a)                                                       213                 1,117                 3,361
Purchase of treasury stock                                                       (1,361)               (9,262)                 -
-----------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year                                                      241,378               242,526               250,671
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE> 
 
(a) net of cancellations

At December 31, 1998, there were approximately 12.3 million shares reserved for
the conversion of Unocal Capital Trust convertible preferred securities, 19.8
million shares for the company's employee benefit plans and Directors'
Restricted Stock Plan and 3.4 million shares for the company's Dividend
Reinvestment and Common Stock Purchase Plan.

Treasury Stock - In December 1996, the company established a common stock
repurchase program.  The Board of Directors authorized the repurchase of up to
$400 million of the common stock outstanding. The program was completed in
January 1998.  In January 1998, the Board of Directors extended the repurchase
program and authorized management to repurchase up to an additional $200 million
of common stock.  At December 31, 1998, the company held 10,622,778 common
shares as treasury stock, which is shown at a cost of $411 million.

Preferred Stock - The company has authorized 100,000,000 shares of preferred
stock with a par value of $0.10 per share.  In July 1992, the company issued
10,250,000 shares of $3.50 convertible preferred stock.  The preferred stock
accrued annual dividends of $3.50.  During 1996, all outstanding shares of
convertible preferred stock were exchanged for 6  1/4 percent Trust convertible
preferred securities of Unocal Capital Trust or were converted into Unocal
common stock (see note 19).

Stockholder Rights Plan - In January 1990, the Board of Directors adopted a
stockholder rights plan (Rights Plan) and declared a dividend of one preferred
stock purchase right (Right) for each share of common stock outstanding.  The
Board also authorized the issuance of one Right for each common share issued
after February 12, 1990, and prior to the earlier of the date on which the
rights become exercisable, the redemption date or the expiration date.

                                       68
<PAGE>
 
The Board of Directors has designated 3,000,000 shares of preferred stock as
Series A Junior Participating cumulative preferred stock (Series A preferred
stock) in connection with the Rights Plan.  The Rights Plan provides that in the
event any person, or group of affiliated persons, becomes, or commences a tender
offer or exchange offer pursuant to which such person or group would become the
beneficial owner of 15 percent or more of the outstanding common shares, each
Right (other than Rights held by the 15 percent stockholder) will be
exercisable, on and after the close of business on the tenth business day
following such event, unless the Rights are redeemed by the Board of Directors
of the company, to purchase units of Series A preferred stock (each consisting
of one one-hundredth of a share) having a market value equal to two times the
then-current exercise price (initially $75).  The Rights Plan further provides
that if, on or after the occurrence of such event, the company is merged into
any other corporation, or 50 percent or more of the company's assets or earning
power are sold, each Right (other than Rights held by the 15 percent
stockholder) will be exercised to purchase shares of the acquiring corporation
having a market value equal to two times the exercise price.

The Rights expire on January 29, 2000, unless previously redeemed by the Board
of Directors.  The Rights do not have voting or dividend rights and, until they
become exercisable, have no diluting effect on the earnings of the company.  As
of December 31, 1998, none of the Series A preferred stock had been issued nor
had the Rights become exercisable.

NOTE 21 - OTHER COMPREHENSIVE INCOME

In April 1998, the company exchanged its Canadian oil and gas assets for common
stock and debentures of Tarragon.  In the third quarter of 1998, the company
sold its interests in Tarragon's common stock and debentures as a result of a
tender-offer for Tarragon common stock by USX-Marathon.  During the year, these
transactions along with other equity affiliate transactions impacted other
comprehensive income as follows:

<TABLE>
<CAPTION>
Millions of dollars
--------------------------------------------------------------------------------------------------------------------
<S>                                                                                                        <C>
Accumulated unrealized translation adjustment losses at December 31, 1997                                      $ (18)
      Adjustment for gain on exchange                                                                              7
      Adjustment for gain on sale                                                                                  5
      Unrealized translation adjustments                                                                         (19)
                                                                                                               -----
Accumulated unrealized translation adjustment losses at December 31, 1998                                      $ (25)
--------------------------------------------------------------------------------------------------------------------
</TABLE>

There were no income tax effects related to unrealized translation adjustments.

NOTE 22 - STOCK-BASED COMPENSATION PLANS

Under the company's Special Stock Option Plan of 1996, the Unocal Stock Option
Plan, the Management Incentive Programs of 1998, 1991 and 1985, and the
Directors' Restricted Stock Units Plan, non-qualified stock options, restricted
stock, performance shares and other common stock-based awards are granted to
executives, directors and certain employees to provide incentives and rewards to
strengthen their commitment to maximizing the profitability of the company and
increasing shareholder value.  The 1998 Management Incentive Program authorized
up to 8.25 million shares of common stock for stock options, restricted stock
and performance share awards.  The Unocal Stock Option Plan, the Special Stock
Option Plan of 1996, the 1991 and 1985 programs authorized up to 2 million, 1.1
million, 11 million and 9 million shares of common stock, respectively for stock
options, restricted stock and performance share awards.  The Directors' Plan
authorized the issuance of up to 300,000 shares of common stock.

Stock options generally have a maximum term of ten years and generally vest over
a three-year period at a rate of 50 percent the first year and 25 percent per
year in each of the two succeeding years.  Under the Performance Stock Option
Plan included in the Management Incentive Program of 1998, three million
performance stock options were awarded to eight senior executives at $51.01 per
share.  These options vest in March 2001, subject to certain additional vesting
requirements.  These performance stock options 

                                       69
<PAGE>
 
were granted in combination with approximately 1.6 million limited stock 
appreciation rights at the price of $38.69 per share, which become fully vested 
and payable following certain change in control events as defined in the 
Performance Stock Option Plan.

The option price may not be less than the fair market value of the common stock 
on the date the option is granted.  Restrictions may be imposed for a period of 
five years on certain shares acquired through the exercise of options granted 
after 1990 under the Management Incentive Programs of 1985, 1991, and 1998.  
Generally, restricted stock awards are based on the average closing price of the
common stock for the last 30 trading days of the year prior to the grant date or
on the average price of the common stock on the trading day that the stock is 
awarded.  Restricted shares are not delivered until the end of the restricted 
period, which does not exceed ten years.  Performance share awards have 
four-year terms and are generally peid out 50 percent in shares of common stock 
and 50 percent in cash.  The amount of the payout is based on the return of the 
company's common stock relative to the total average return on the common stocks
of a peer group of companies subject to further downward adjustments by the 
Management Development and Compensation Committee.

A summary of the company's stock plans for the last three years is presented
below:

<TABLE>
<CAPTION>
                                                                                            Weighted                 Weighted
                                                                                         Average Option            Average Grant
                                                                  Number of              Exercise Price           Date Fair Value
                                                               Options/Shares              Per Share                 Per Share
------------------------------------------------------------------------------------------------------------------------------------

<S>                                                              <C>                       <C>                      <C>
Options outstanding at January 1, 1996                                4,473,235                       $26                       $ -
Options granted during year                                           2,011,983                        33                        33
Options exercised during year                                        (1,328,954)                       24                         -
Options canceled/forfeited during year                                  (47,060)                       30                         -
                                                                  -------------
Options outstanding at December 31, 1996                              5,109,204                        29                         -
Options exercisable at December 31, 1996                              2,747,611                        27                         -
Restricted stock awarded during year                                    152,169                         -                        33
Performance shares awarded during year                                  306,713                         -                        33
------------------------------------------------------------------------------------------------------------------------------------

Options outstanding at January 1, 1997                                5,109,204                       $29                       $ -
Options granted during year                                             872,720                        39                        39
Options exercised during year                                          (605,430)                       28                         -
Options canceled/forfeited during year                                 (454,466)                       31                         -
                                                                   ------------
Options outstanding at December 31, 1997                              4,922,028                        31                         -
Options exercisable at December 31, 1997                              3,370,712                        29                         -
Restricted stock awarded during year                                    642,187                         -                        38
Performance shares awarded during year                                  197,505                         -                        40
------------------------------------------------------------------------------------------------------------------------------------

Options outstanding at January 1, 1998                                4,922,028                       $31                       $ -
Options granted during year                                           4,754,518                        46                        46
Options exercised during year                                          (214,343)                       27                         -
Options canceled/forfeited during year                                 (187,281)                       37                         -
                                                                   ------------
Options outstanding at December 31, 1998                              9,274,922                        39                         -
Options exercisable at December 31, 1998                              4,310,814                        31                         -
Restricted stock awarded during year                                    110,334                         -                        38
Performance shares awarded during year                                  215,177                         -                        39
------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

Under the Management Incentive Program of 1998, the Unocal Stock Option Plan,
and the Directors' Restricted Stock Units Plan, there were 5,157,652 shares,
1,855,503 shares, and 159,598 shares respectively, available at year-end 1998
for stock option grants as well as other awards.  No additional grants may be
awarded under the Management Incentive Program of 1985 or the Special Stock
Option Plan of 1996.  No additional grants may be awarded under the Management
Incentive Program of 1991, except for shares to be issued for existing elections
by employees to defer all or a portion of their 1998 cash awards into restricted
stock, which will be issued in 1999.  The balance of shares under the program is
1,234,450 shares.  The company expects to issue less than 100,000 shares for the
1998 awards.

                                       70
<PAGE>
 
Significant option groups outstanding at December 31, 1998 and related weighted
average price and life information follows:

<TABLE>
<CAPTION>
                                                                                           
                       Options Outstanding                                                               Options  Exercisable
------------------------------------------------------------------------------                  ------------------------------------

 
                                                Weighted            Weighted                                               Weighted
                            Number              Average              Average                            Number              Average
    Range of             Outstanding           Remaining            Exercise                         Exercisable           Exercise
 Exercise prices         at 12/31/98          Life (years)            Price                          at 12/31/98             Price
------------------------------------------------------------------------------                  ------------------------------------

<S>                     <C>                  <C>                   <C>                                  <C>                   <C>
 
     $21 - $24                 610,243                 1.8                 $22                            610,243                $22

     $26 - $29               1,583,235                 5.2                 $28                          1,583,235                $28

     $30 - $33               1,630,565                 7.8                 $32                          1,291,973                $32

     $34 - $38                 127,374                 9.4                 $35                             20,091                $36

     $39 - $45               2,323,505                 8.8                 $39                            805,272                $39

     $46 - $51               3,000,000                 9.2                 $51                                  -                  -

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

</TABLE>


The fair value of options at date of grant was estimated using the Black-Scholes
model with the following weighted-average assumptions:

<TABLE>
<CAPTION>
                                                                                    1998               1997               1996
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>                <C>                <C>
 Expected life (years)                                                                    4                  4                  4
 Interest rate                                                                          5.2%               6.4%               6.1%
 Volatility                                                                            34.7%              28.1%              23.8%
 Dividend yield                                                                         2.2%               2.0%               2.4%
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

The company applies APB Opinion No. 25 and related interpretations in accounting
for stock-based compensation.  Stock-based compensation expense recognized in
the company's consolidated earnings statement was $42 million in 1998, $32
million in 1997, and $36 million in 1996.  These amounts include expenses
related to the company's various cash incentive plans that are paid to certain
employees based upon the return of the company's common stock relative to the
average return on the common stock of a peer group of companies.  Had the
company recorded compensation expense using the accounting method recommended by
SFAS No. 123, net income and earnings per share would have been reduced to the
pro-forma amounts indicated below:

<TABLE>
<CAPTION>
Millions of dollars except per share amounts                                       1998           1997             1996
--------------------------------------------------------------------------------------------------------------------------
Net earnings
<S>                                                                              <C>            <C>             <C>
    As reported                                                                      $ 130          $ 581           $   36
    Pro forma                                                                          118            575               32
 Net basic earnings (loss) per share
    As reported                                                                      $0.54          $2.34           $(0.15)
    Pro forma                                                                         0.49           2.32            (0.16)
--------------------------------------------------------------------------------------------------------------------------
</TABLE>


NOTE 23 - FINANCIAL INSTRUMENTS

The company does not hold or issue financial instruments for trading purposes
other than those that are hydrocarbon based.

Notional amounts are not included on the consolidated balance sheet and
generally exceed the future cash requirements relating to the instruments.

The counterparties to the company's financial instruments include regulated
exchanges, international and domestic financial institutions and other
industrial companies.  All of the counterparties to the company's financial
instruments must pass certain credit requirements deemed sufficient by
management before trading physical commodities or financial instruments with the
company.  Even though the company may be exposed to losses in the event of non-
performance by these counterparties, it does not anticipate that 

                                       71
<PAGE>
 
such losses will be realized. In the opinion of management, the off-balance-
sheet credit risk associated with these instruments is immaterial.

Interest rate contracts - The company enters into interest rate swap contracts
to manage its debt with the objective of minimizing the company's borrowing
costs.  Net payments or receipts under the contracts are recorded in interest
expense on a current basis.  The related amounts payable to, or receivable from,
the counterparties are included in interest payable on the consolidated balance
sheet.  The company had no interest rate swaps outstanding at year-end 1998.

The company may also enter into interest rate option contracts to protect its
interest rate positions, depending on market conditions.  At December 31, 1998,
the company had an interest rate option outstanding which effectively capped a
portion of the company's effective borrowing rate for a period of ten years.
This option was designed to cap the U.S. Treasury interest rate component for an
expected $200 million, ten-year debt issuance.  The fair value of the option at
December 31, 1998 was not material.

Foreign currency contracts - Unocal enters into various foreign currency
contracts such as forwards, swaps, and option contracts to manage its exposures
to adverse impacts of foreign currency fluctuations under debt and other
obligations.  Foreign currency gains or losses on the outstanding contracts
essentially offset the foreign currency gains or losses of the underlying
obligations.

During 1986, the company entered into a currency swap agreement to hedge foreign
currency exchange exposures related to the interest and principal payments on
the company's Deutsche Mark bonds due in 1998.  In May 1998, the company retired
the Deutsche Mark bonds and the related swap agreement.  The company also had
two currency swap agreements outstanding on borrowings of its Canadian
subsidiary, with notional amounts totaling $250 million at year-end 1997.  In
1998, the borrowings were repaid and the swap agreements were terminated.

At December 31, 1998, the company had 13 forward foreign currency exchange
contracts outstanding to purchase Thai baht and Canadian dollars.  The contracts
are designed to hedge the company's exposures for estimated income tax payments
and other foreign currency denominated obligations due to be paid in 1999.  Ten
of the contracts require the company to purchase 3,946 million Thai baht in
exchange for $101 million.  The fair value of the Thai baht contracts at
December 31, 1998 was approximately $107 million.  The other three contracts
call for the company to purchase 82 million Canadian dollars for $53 million.
The fair value of the Canadian dollar contracts at December 31, 1998
approximated the notional amount.  Fair value was derived by comparing the
contract rates to the forward rates in effect at year-end 1998.

Other commodity-based contracts - The company generally uses hydrocarbon futures
contracts, swaps and options with maturities of 24 months or less to mitigate
the impact of fluctuations in prices of crude oil and natural gas.  Realized and
unrealized changes in the market values of futures contracts used for general
risk management purposes are recorded currently in sales and operating revenues
of the underlying class of commodity.  The company may also enter into swaps,
options and other contracts to hedge contractual delivery commitments and future
crude oil and natural gas production against price exposure.  In certain cases,
the company enters into longer-term derivative instruments, such as swap
contracts, to hedge its exposure to long-term fixed price commitments.  Realized
and unrealized changes in the market values of the contracts related to the
hedges are deferred until the hedged transactions are recognized.

At December 31, 1998, the company had $86 million of futures contracts
outstanding to purchase 7,040 thousand barrels of crude oil and $9 million of
futures contracts outstanding to sell 855 thousand barrels of crude oil.  The
purchase contracts primarily offset the fixed price risk associated with the
company's pre-paid crude oil sale delivery obligations (see note 24).  The fair
value of the purchase contracts at year-end 1998 was approximately $90 million.
The fair value of the sale contracts at year-end 1998 approximated the notional
amounts.  Natural gas futures contracts outstanding at December 31, 1998 were
immaterial.  The fair values of the contracts are based on quoted market prices
at December 31, 1998.  At December 31, 1997, the company had $31 million of
futures contracts outstanding for the purchase of 1,580 thousand barrels of
crude oil and $2 million of futures contracts outstanding for the purchase of
900 million 

                                       72
<PAGE>
 
cubic feet of natural gas. Differences between the contract notional amounts and
the fair values of the contracts, based on quoted market prices, were
immaterial.

As of December 31, 1998 and 1997, the carrying amounts of certain financial
instruments employed by the company, including cash, cash equivalents, and trade
receivables and payables were representative of fair values because of the
short-term maturity of those instruments.

The estimated fair value of the company's long-term debt was $2,674 million and
$2,284 million at year- end 1998 and 1997, respectively.  Fair value was based
on the discounted amounts of future cash outflows using the rates offered to the
company for debt with similar remaining maturities.

The estimated fair values of Unocal Capital Trust's 6 1/4 percent convertible
preferred securities were $511 million and $519 million at year-end 1998 and
1997, respectively.  Fair value was based on the trading prices of the preferred
securities on December 31, 1998 and 1997.

Concentrations of credit risks - Financial instruments that potentially subject
the company to concentrations of credit risks primarily consists of temporary
cash investments and trade receivables.  The company places its temporary cash
investments with high credit quality financial institutions and, by policy,
limits the amount of credit exposure to any one financial institution.  The
concentration of trade receivable credit risk is generally limited due to the
company's customers being spread across industries in several countries.  The
company's management has established certain credit requirements that its
customers must meet before sales credit is extended.  The company monitors the
financial condition of its customers to help ensure collections and to minimize
losses.

The majority of the company's trade receivables balance at December 31, 1998 is
attributable to the sale of crude oil and natural gas produced by the company or
purchased by the company for resale.  The company has receivable concentrations
for its crude oil and natural gas sales in certain Asian countries that are
subject to currency fluctuations and other factors affecting the region.  No
individual crude oil and natural gas customer made up ten percent or more of the
company's consolidated trade receivable balance outstanding at December 31,
1998.

The company had gross geothermal and power trade receivables of approximately
$100 million, or 12 percent of its consolidated trade receivable balance,
outstanding from various Indonesian entities at December 31, 1998.  The company
is receiving partial payments for some of these receivables on a timely basis.
Agreements provide for a portion of the outstanding receivables to be paid over
the next several years.  The company is working closely with the Indonesian
government to resolve this issue.

NOTE 24 - ADVANCE SALE OF CRUDE OIL

In December 1998, Unocal entered into a pre-paid crude oil sales contract to
deliver 8.5 million barrels of crude oil in 1999. The delivery period runs from
January 1999 through November 1999. In exchange for the crude oil to be
provided, Unocal received an advance payment of approximately $100 million in
December 1998. The company did not dedicate a portion of its oil reserves to the
contract and it has the option to satisfy contract delivery requirements with
crude oil purchased from third parties. Accordingly, the obligation associated
with the future delivery of the crude oil has been recorded as deferred revenue
and will be amortized into revenue as scheduled deliveries of crude oil are made
through out 1999. The obligation is included in other current liabilities on the
consolidated balance sheet.

                                       73
<PAGE>
 
NOTE 25 - SUMMARIZED FINANCIAL DATA OF UNION OIL

Unocal Corporation is the parent of Union Oil Company of California.  Virtually
all operations are conducted by Union Oil and its subsidiaries.

Summarized financial information for Union Oil and its consolidated subsidiaries
is presented below:
<TABLE>
<CAPTION>
 
                                                                                               Years Ended December 31
                                                                                                                      
Millions of dollars                                                                  1998                1997                1996
------------------------------------------------------------------------------------------------------------------------------------

<S>                                                                               <C>                <C>                 <C>
Total revenues                                                                         $5,479             $6,064             $5,328
Total costs and other deductions, including income taxes                                5,327              5,377              4,860
------------------------------------------------------------------------------------------------------------------------------------

Earnings from continuing operations before discontinued
   operations and extraordinary item                                                   $  152             $  687              $ 468
Discontinued operations
   Earnings from operations (net of taxes)                                                  -                  -                 71
   Loss on disposal (net of taxes)                                                          -                (50)              (491)

Extraordinary item - early extinguishment of debt (net of  taxes)                           -                (38)                 -
------------------------------------------------------------------------------------------------------------------------------------

Net earnings                                                                           $  152             $  599              $  48
------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

<TABLE>
<CAPTION>
                                                                                                  At December 31
Millions of dollars                                                                          1998                 1997
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>                  <C>
 
Current assets                                                                                 $1,388               $1,576
Noncurrent assets                                                                               6,583                6,053
Current liabilities                                                                             1,374                1,124
Noncurrent liabilities                                                                          3,852                3,534
Shareholder's equity                                                                            2,745                2,971
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

NOTE - 26 SEGMENT AND GEOGRAPHIC DATA

The company's reportable segments are as follows:

                      Exploration and Production Segment
                                        
The company's Spirit Energy 76 business unit is responsible for oil and gas
operations in the Lower 48 United States.  The Other United States category
consists primarily of Alaska oil and gas operations.  A substantial portion of
crude oil and natural gas produced in the United States is sold to the company's
Global Trade segment.  The remainder is sold to third parties or, in the case of
the company's Alaska natural gas production, used in the company's agricultural
products operations.

The company's International Operations includes the company's international
exploration and production activities and the exploration activities performed
by the company's New Ventures group.  The company is currently engaged in oil
and gas production activities in nine foreign countries: Thailand, Indonesia,
Canada, The Netherlands, Azerbaijan, Yemen, Myanmar, the Democratic Republic of
Congo and Bangladesh.  In 1998, approximately $561 million, or 11 percent, of
the company's total external sales and operating revenues were attributable to
the Petroleum Authority of Thailand.  Crude oil is primarily sold to third
parties at spot market prices.

                             Global Trade Segment
                                        
This segment conducts most of the company's worldwide crude oil, condensate, and
natural gas trading and marketing activities and is responsible for the
company's commodity-specific risk management activities.  Global Trade also may
purchase crude oil, condensate and natural gas from the company's joint venture
partners, royalty owners and other unaffiliated oil and gas producers for
resale.  In January 1999, the Pipelines business unit was transferred to the
company's Global Trade segment.

                                       74
<PAGE>
 
                    Geothermal and Power Operations Segment
                                        
The Geothermal and Power Operations segment supplies geothermal steam for power
generation, with operations in California, the Philippines and Indonesia. The
segment's current activities also include operating power plants in Indonesia
and an interest in the construction of a gas-fired power plant in Thailand.

                         Diversified Business Segment
                                        
The Agricultural Products business unit manufactures and markets nitrogen-based
products for wholesale agricultural and industrial markets supplying the western
United States and the Pacific Rim.  The Carbon and Minerals business unit
produces and markets petroleum coke, graphites and specialty minerals.  The
Pipelines business unit principally includes the company's equity interests in
affiliated pipeline companies.  The Other category primarily included the
company's equity interest in the UNO-VEN partnership, prior to its restructuring
in May 1997.

                           Corporate and Unallocated
                                        
Corporate and Unallocated includes all unallocated corporate administrative and
general items, miscellaneous operations including real estate, and non-
exploration and production activities of the New Ventures group, such as the new
project development of common carrier pipelines, liquefied petroleum gas plants
and electrical power generating plants.  Financial data for businesses that were
sold or being phased-out, particularly for prior years, are also included in the
Corporate and Unallocated segment.

The following tables presents the company's financial data by business segments
and geographic areas of operations.  Intersegment revenues in business segment
data are primarily sales from the exploration and production segment to the
Global Trade segment.  Intersegment sales prices approximate market prices.
Geographic revenues primarily represent sales of crude oil and natural gas
produced within the countries or regions shown.

                                       75
<PAGE>
 
SEGMENT DATA

<TABLE>
<CAPTION>
 
1998 Segment Information                         Exploration & Production              Global    Geothermal       Diversified
Millions of dollars                           United States        International       Trade      & Power           Business
                                              -------------        -------------                 Operations
                                            Spirit              Far                                          Agricultural   Carbon &
                                          Energy 76    Other    East      Other                                Products     Minerals
                                          ------------------------------------------------------------------------------------------
<S>                                        <C>        <C>        <C>          <C>        <C>       <C>         <C>           <C>
External sales & operating revenues         $  106   $   110    $   723     $   161    $3,057      $ 168       $  376       $  207
 Other revenue (loss)                           30         1        (24)        179         -         47            1           32
Inter-segment revenues                         918        74        250          11         1          -            -            -
                                            ----------------------------------------------------------------------------------------
Total                                        1,054       185        949         351     3,058        215          377          239

Income (loss) from equity affiliates            (2)        -         (4)          1         -         10            -           26
Depreciation, depletion & amortization         410        71        212          68         1         21           18           44
Dry hole expense                               121         -         42          21         -          -            -            -
 
Operating profit (loss) before income taxes  
  and minority interest in earnings              -         9        443          53        33         77           44          (28)
    Income taxes (benefit)                       -         3        248          12        12         25            7          (19)
    Minority interest in earnings                2         -          -           -         -          -            -            5
                                            ----------------------------------------------------------------------------------------
Net earnings (loss)                             (2)        6        195          41        21         52           37          (14)
 
Capital expenditures                           767        43        472         290         2         26            8           42
Assets                                       2,094       329      1,848         641       317        598          305          419
Investment in equity affiliates                  6         -        197          22        (3)        23            -           47
                                            ----------------------------------------------------------------------------------------
<CAPTION> 
                                            Diversified                    Corporate & Unallocated                           Totals
                                          Business (cont.)
                                                             Administrative Net Interest  Environmental   New
                                         Pipelines     Other  & General       Expense     & Litigation  Ventures  Other (a)

                                         -------------------------------------------------------------------------------------------
<S>                                      <C>           <C>       <C>         <C>           <C>          <C>       <C>        <C> 
External sales & operating revenues         $   40     $   -     $    -      $    -        $    -       $    -    $   55     $5,003
 Other revenue (loss)                           68         -          -          33             -           (1)      110        476
Inter-segment revenues                           9         -          -           -             -            -    (1,263)         -
                                         -------------------------------------------------------------------------------------------
Total                                          117         -          -          33             -           (1)   (1,098)     5,479
                                                                                                                                  
Income from equity affiliates                   63         -          -           -             -            -         2         96
Depreciation, depletion & amortization          10         -          6           -             -            -         6        867
Dry hole expense                                 -         -          -           -             -            -         -        184
                                                                                                                                   
Operating profit (loss) before income taxes                                                                                        
  and minority interest in earnings             81         -       (114)       (144)         (161)         (33)       52        312
    Income taxes (benefit)                      14         -        (35)        (31)          (59)         (11)        9        175
    Minority interest in earnings                -         -          -           -             -            -         -          7
                                         ------------------------------------------------------------------------------------------
Net earnings (loss)                             67         -         (79)      (113)         (102)         (22)       43        130
                                                                                                                                   
Capital expenditures                            28         -           -          -             -            1        25      1,704
Assets                                         298         -           -          -             -            -     1,103      7,952
Investment in equity affiliates                183         -           -          -             -            -         4        479
                                         ------------------------------------------------------------------------------------------ 
</TABLE> 

(a) Includes eliminations and consolidation adjustments.

                                       76
<PAGE>
 
SEGMENT DATA (Continued)


<TABLE>
<CAPTION>
 
1997 Segment Information                               
                                                  Exploration & Production        Global     Geothermal           Diversified
Millions of dollars                             United States    International      Trade       & Power             Business
                                                -------------    -------------                Operations
                                               Spirit            Far                                       Agricultural    Carbon &
                                              Energy 76  Other   East       Other                            Products      Minerals
                                             ---------------------------------------------------------------------------------------

<S>                                          <C>        <C>     <C>        <C>      <C>        <C>          <C>            <C>
External sales & operating revenues           $  138     $  136  $   798    $  229   $ 3,427    $ 121        $   439        $  371
 Other revenue (loss)                             11          -      (13)       (3)        -       (4)             -           167
Inter-segment revenues                         1,279        138      356        30        25        -              -             -
                                             ---------------------------------------------------------------------------------------
Total                                          1,428        274    1,141       256     3,452       117           439            538
 
Income (loss) from equity affiliates               -          -        -         1         -        (7)            -             47
Depreciation, depletion & amortization           468         53      303        69         -        20            18             12
Dry hole expense                                  29          -       69         1         -        11             -              -
 
Operating profit (loss) before income taxes
  and minority interest in earnings              305         96      503       (33)       27        31            83            109 
    Income taxes (benefit)                       114         36      111        12        11         5            29             33 
    Minority interest in earnings                  5          -        -         -         -         -             -              4
                                             ---------------------------------------------------------------------------------------
After-tax operating profit (loss)                186         60      392       (45)       16        26            54             72
    Discontinued operations (net)                  -          -        -         -         -         -             -              -
    Early extinguishment of debt (net)             -          -        -         -         -         -             -              -
                                             ---------------------------------------------------------------------------------------
Net earnings (loss)                              186         60      392       (45)       16        26            54             72
 
Capital expenditures                             331         36      609       192         -       102            18             30
Assets                                         1,878        388    1,534       658       357       511           316            376
Investment in equity affiliates                    -          -      155        12        (4)        5             -             51
                                             ---------------------------------------------------------------------------------------
<CAPTION> 
                                             ---------------------------------------------------------------------------------------

                                                Diversified                          Corporate & Unallocated                  Totals
                                             Business (cont.)

                                                              Administrative  Net Interest   Environmental   New
                                             Pipelines  Other   & General       Expense      & Litigation  Ventures  Other (a)
                                             ---------------------------------------------------------------------------------------
<S>                                          <C>        <C>      <C>           <C>          <C>            <C>       <C>     <C> 
External sales & operating revenues           $   33     $  58    $    -        $   -        $    -        $  -      $   31  $5,781
 Other revenue (loss)                             60         -         -           42             -           -          23     283
Inter-segment revenues                            14         -         -            -             -           -      (1,842)      -
                                             ---------------------------------------------------------------------------------------
Total                                            107        58         -           42             -           -      (1,788)  6,064
 
Income from equity affiliates                     58        53         -            -             -           -           2     154
Depreciation, depletion & amortization             7         -         -            -             -           -          12     962
Dry hole expense                                   -         -         -            -             -           -           -     110
 
Operating profit (loss) before income taxes
  and minority interest in earnings               70        45      (121)        (133)         (146)        (49)         (7)    780
    Income taxes (benefit)                        11         7       (40)         (27)          (55)        (16)       (129)    102
    Minority interest in earnings                  -         -         -            -             -           -           -       9
                                             ---------------------------------------------------------------------------------------
After-tax operating profit (loss)                 59        38       (81)        (106)          (91)        (33)        122     669
    Discontinued operations (net)                  -         -         -            -             -           -         (50)    (50)
    Early extinguishment of debt (net)             -         -         -            -             -           -         (38)    (38)
                                             ---------------------------------------------------------------------------------------
Net earnings (loss)                               59        38       (81)        (106)          (91)        (33)         34     581
 
Capital expenditures                              11         -         -            -             -           -          49   1,378
Assets                                           308         -         -            -             -           -       1,204   7,530
Investment in equity affiliates                  192         -         -            -             -           -           2     413
                                      ----------------------------------------------------------------------------------------------

</TABLE>  
 
(a) Includes eliminations and consolidation adjustments.
                                        

                                       77
<PAGE>
 
SEGMENT DATA (Continued)


<TABLE>
<CAPTION>
 
                                                   --------------------------------------------------------
1996 Segment Information                                               Exploration &  Production   
Millions of dollars                                          United States                International                   
                                                             --------------               -------------                  
                                                         Spirit                        Far                        
                                                        Energy 76        Other         East           Other      
                                                   --------------------------------------------------------
<S>                                                 <C>                 <C>         <C>               <C>         
External sales & operating revenues                        $   79        $ 12        $  618           $ 258
 Other revenue (loss)                                           1         107            (2)             39
Inter-segment revenues                                      1,380         475           341              25
                                                   --------------------------------------------------------
Total                                                       1,460         594           957             322
                                                                                                           
Income (loss) from equity affiliates                            -           -             -               1
Depreciation, depletion & amortization                        398         128           208              69
Dry hole expense                                               62           5            50              14
                                                                                                           
Operating profit (loss) before income taxes                                                                
  and minority interest in earnings                           449         197           469              74
    Income taxes (benefit)                                    173          75           232              (3)
    Minority interest in earnings                               2           -             -               -
                                                   --------------------------------------------------------
After-tax operating profit (loss)                             274         122           237              77
    Discontinued operations (net)                               -           -             -               -
Net earnings (loss)                                           274         122           237              77
                                                   --------------------------------------------------------
                                                                                                           
Capital expenditures                                          371       47              407             102
Assets                                                      1,998      416            1,257             495
Investment in equity affiliates                                 -        -               76              10
                                                   -------------------------------------------------------- 
</TABLE> 

<TABLE> 
<CAPTION> 
                                              
                                                   -------------------------------------------------------- 
                                                     Global       Geothermal            Diversified               
                                                     Trade          & Power              Business             
                                                                  Operations                                     
                                                                                 Agricultural    Carbon &                          
                                                                                  Products       Minerals                           

                                                   ------------------------------------------------------
<S>                                                 <C>             <C>          <C>            <C> 
External sales & operating revenues                 $3,176          $133         $   519        $  265
 Other revenue                                           -           (88)              -            28                             
Inter-segment revenues                                  64             -               -             -                             
                                                   ------------------------------------------------------ 
Total                                                3,240            45             519           293                             
                                                                                                                                   
Income from equity affiliates                            -            (2)             27            24                             
Depreciation, depletion & amortization                   -            49              21             7                             
Dry hole expense                                         -             8               -             -                             
                                                                                                                                   
Operating profit (loss) before income taxes                                                                                        
  and minority interest in earnings                     26           (76)            152            59                             
    Income taxes (benefit)                              10           (21)             54            12                             
    Minority interest in earnings                        -             -               -             -                             
                                                   ------------------------------------------------------ 
                                                                                                                                   
After-tax operating profit (loss)                       16           (55)             98            47                             
    Discontinued operations (net)                        -             -               -             -                             
Net earnings (loss)                                     16           (55)             98            47                             
                                                   ------------------------------------------------------  
                                                                                                                                    

Capital expenditures                                     -           114              12            16                              

Assets                                                 356           439             302           265                              

Investment in equity affiliates                         (2)           10             196            93                              

                                                   ------------------------------------------------------  
</TABLE> 

<TABLE> 
<CAPTION> 
                                                 ---------------------------------------------------------------------- 
                                                     Diversified                    Corporate & Unallocated        
                                                   Business (cont.)                                                      
                                                                          Administrative   Net Interest   Environmental  
                                                 Pipelines     Other        & General        Expense      & Litigation   
                                                 ---------------------------------------------------------------------- 
<S>                                              <C>           <C>         <C>                <C>            <C> 
External sales & operating revenues              $   33        $  -        $    -             $   -          $    -      
 Other revenue                                       73          27             -                23               -      
Inter-segment revenues                               14           -             -                 -               -      
                                                 ---------------------------------------------------------------------- 
Total                                               120          27             -                23               -      
                                                                                                                         
Income from equity affiliates                        56           -             -                 -               -      
Depreciation, depletion & amortization                7           -             -                 -               -      
Dry hole expense                                      -           -             -                 -               -      
                                                                                                                         
Operating profit (loss) before income taxes                                                                              
  and minority interest in earnings                  86          22          (157)             (256)           (230)     
    Income taxes (benefit)                           17           8           (58)              (81)            (87)     
    Minority interest in earnings                     -           -             -                 -               -      
                                                 ----------------------------------------------------------------------
After-tax operating profit (loss)                    69          14           (99)             (175)           (143)     
    Discontinued operations (net)                     -           -             -                 -               -      
                                                 ---------------------------------------------------------------------- 
Net earnings (loss)                                 69           14           (99)             (175)           (143)     
                                                                                                                         
Capital expenditures                                54            -             -                 -               -      
Assets                                              314         196             -                 -               -      
Investment in equity affiliates                     195           -             -                 -               -      
                                                 ---------------------------------------------------------------------- 
</TABLE>
 
<TABLE> 
<CAPTION> 

                                                     ------------------------------------ 
                                                       Corporate & Unallocated     Totals                     
                                                                                         
                                                       New                               
                                                     Ventures      Other (a)       
                                                     ------------------------------------ 
<S>                                                  <C>          <C>             <C>   
                                                                                                     
External sales & operating revenues                  $  -         $     8         $ 5,101            
 Other revenue                                          -              19             227            
Inter-segment revenues                                  -          (2,299)              -            
                                                     ------------------------------------            
Total                                                   -          (2,272)          5,328            
                                                                                                     
Income from equity affiliates                           -               -             106            
Depreciation, depletion & amortization                  -              27             914            
Dry hole expense                                        -               -             139            
                                                                                                     
Operating profit (loss) before income taxes                                                          
  and minority interest in earnings                   (36)            (19)            760            
    Income taxes (benefit)                            (13)            (16)            302            
    Minority interest in earnings                       -               -               2            
                                                     ------------------------------------            
After-tax operating profit (loss)                     (23)             (3)            456            
    Discontinued operations (net)                       -            (420)           (420)           
                                                     ------------------------------------            
Net earnings (loss)                                   (23)           (423)             36            
                                                                                                     
Capital expenditures                                    -              51           1,174            
Assets                                                  -           1,311           7,349            
Investment in equity affiliates                         -               -             578             
                                                     ------------------------------------   
</TABLE> 

 (a) Includes eliminations and consolidation adjustments.

                                       78
<PAGE>
 
GEOGRAPHIC INFORMATION

<TABLE>
<CAPTION>
                                         
 1998 Geographic Disclosures                 ------------------------------------------------------  
Millions of dollars                           United States   Thailand   Indonesia   Other Far East  
                                             ------------------------------------------------------  
<S>                                           <C>               <C>        <C>                <C>              
Sales and operating revenues                        $ 3,359     $  614      $  531            $ 158  
Long lived assets:                                                                                   
   Gross                                              8,823      2,537       1,928              491  
   Net                                                2,792        982         582              186  
                                             ------------------------------------------------------  
</TABLE> 

<TABLE> 
<CAPTION> 
                                                                                     
                                            ---------------------------------------- 
 1998 Geographic Disclosures                       Other       Corporate &           
Millions of dollars                            International   Unallocated    Total  
                                            ---------------------------------------- 
<S>                                            <C>             <C>           <C>     
Sales and operating revenues                          $  287          $ 54   $ 5,003 
Long lived assets:                                                                   
      Gross                                            1,271           419    15,469 
      Net                                                535           199     5,276 
                                            ----------------------------------------  
</TABLE> 

<TABLE> 
<CAPTION> 
                                                                                            
 1997 Geographic Disclosures                 ------------------------------------------------------ 
Millions of dollars                           United States   Thailand   Indonesia   Other Far East  
                                             ------------------------------------------------------  
<S>                                           <C>               <C>        <C>                <C>               
Sales and operating revenues                        $ 3,736     $  701      $  679            $ 157  
Long lived assets:                                                                                   
   Gross                                              8,429      2,390       1,685              360  
   Net                                                2,622        944         412              111  
                                             ------------------------------------------------------  
</TABLE> 

<TABLE> 
<CAPTION> 

                                            ---------------------------------------- 
 1997 Geographic Disclosures                       Other       Corporate &          
Millions of dollars                            International   Unallocated    Total 
                                            ----------------------------------------
<S>                                         <C>                <C>           <C>                                      
Sales and operating revenues                          $  476          $ 32   $ 5,781
Long lived assets:                                                                  
   Gross                                               1,419           429    14,712
   Net                                                   522           205     4,816
                                            ---------------------------------------- 
</TABLE> 


<TABLE> 
<CAPTION> 
                                                                                           
 1996 Geographic Disclosures                 ------------------------------------------------------  
Millions of dollars                           United States   Thailand   Indonesia   Other Far East  
                                             ------------------------------------------------------  
<S>                                           <C>               <C>         <C>               <C>               
Sales and operating revenues                        $ 3,160     $  574      $  612            $ 162  
Long lived assets:                                                                                   
   Gross                                              8,271      2,174       1,467              286  
   Net                                                2,716        896         322               47  
                                             ------------------------------------------------------  
</TABLE> 

<TABLE> 
<CAPTION> 

                                            ---------------------------------------- 
1996 Geographic Disclosures                        Other       Corporate &     
Millions of dollars                            International   Unallocated    Total 
                                            ----------------------------------------
<S>                                         <C>                <C>           <C>    
Sales and operating revenues                          $  585          $  8   $ 5,101
Long lived assets:                                                                  
      Gross                                            1,491           403    14,092
      Net                                                394           215     4,590
                                            ----------------------------------------
</TABLE> 

NOTE 27 - SUBSEQUENT EVENTS

On January 26, 1999, Unocal and Calpine Corporation signed an asset purchase
agreement for the sale of the company's interests in a geothermal steam venture
at The Geysers in Northern California.  Under the terms of the agreement, the
company will receive approximately $101 million from the sale of the properties.
The sale is expected to close by the end of the first quarter 1999.

On February 18, 1999, the company issued $350 million of 30 year, 7  1/2 percent
debentures under its $1.439 billion universal shelf registration statement.
Proceeds from this issuance are being used to retire a portion of long-term bank
debt as it matures and for general corporate purposes.  After issuance of the
debentures, the total amount available for future issuance of medium term notes,
other debt and/or equity securities under the company's universal shelf
registration statement was approximately $1.089 billion.

On March 10, 1999, the company signed a letter of intent to exchange most of its
Rocky Mountain oil and gas assets for cash and common shares of a domestic oil
and gas exploration and production company.  Under the terms of the agreement,
the company will receive approximately 5.8 million common shares of Tom Brown,
Inc. and $5 million in cash in exchange for most of its Rocky Mountain oil and
gas properties.  The exchange is valued at approximately $76 million and is
expected to close in the second quarter of 1999.

                                       79
<PAGE>
 
QUARTERLY FINANCIAL DATA (Unaudited)

<TABLE>
<CAPTION>
                                                                                                                
                                                                                         1998 Quarters
                                                                    ----------------------------------------------------
Millions of dollars except per share amounts                             1st             2nd           3rd           4th
------------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>          <C>           <C>           <C>
Total revenues                                                          $1,207        $1,397        $1,394        $1,481
Total costs and other deductions, including income taxes                 1,189         1,292         1,358         1,510
------------------------------------------------------------------------------------------------------------------------
      Net earnings (loss) (a)                                           $   18        $  105        $   36        $  (29)
------------------------------------------------------------------------------------------------------------------------
    Basic earnings (loss) per share of common stock (b)                 $ 0.07        $ 0.43        $ 0.15        $(0.12)
------------------------------------------------------------------------------------------------------------------------ 
    Diluted earnings (loss) per share of common stock (b)               $ 0.07        $ 0.43        $ 0.15        $(0.12)
------------------------------------------------------------------------------------------------------------------------ 
Net sales and operating revenues                                        $1,171        $1,226        $1,286        $1,320
------------------------------------------------------------------------------------------------------------------------
Gross margin (c)                                                        $  110        $   43        $   23        $ (137)
------------------------------------------------------------------------------------------------------------------------
(a)  Includes after-tax  special items  increase/(decrease) of          $   54        $  (43)       $  (32)       $   57

(b)  Due to changes in the number of weighted average common shares outstanding each quarter, the earnings per share amounts by
     quarter may not be additive.

(c)  Gross margin equals sales and operating revenues less crude oil, natural gas and product purchases, operating and selling
     expenses, depreciation, depletion and amortization, dry hole costs, exploration, and other operating taxes.
</TABLE> 

<TABLE> 
<CAPTION> 
 
                                                                                         1997 Quarters
                                                                    -----------------------------------------------------------
Millions of dollars except per share amounts                             1st             2nd           3rd           4th
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>           <C>           <C>           <C> 
Total revenues                                                          $1,456        $1,654        $1,397        $1,557
Total costs and other deductions, including income taxes                 1,268         1,498         1,220         1,409
-------------------------------------------------------------------------------------------------------------------------------
After-tax earnings from continuing operations                              188           156           177           148
Loss on disposal of discontinued operations                                (44)          -             -              (6)
Extraordinary charge - extinguishment of debt (net of tax)                 -             (38)          -             -
-------------------------------------------------------------------------------------------------------------------------------
   Net earnings (a)                                                     $  144        $  118        $  177        $  142
-------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share of common stock (b)
   Continuing operations                                                  0.75          0.62          0.71          0.60
   Discontinued operations                                               (0.18)          -             -           (0.02)
   Extraordinary item                                                      -           (0.15)          -             -
-------------------------------------------------------------------------------------------------------------------------------
    Basic earnings per share of common stock                            $ 0.57        $ 0.47        $ 0.71        $ 0.58
-------------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share of common of stock (b)
   Continuing operations                                                  0.73          0.61          0.70          0.59
   Discontinued operations                                               (0.17)          -             -           (0.02)
   Extraordinary item                                                      -           (0.14)          -             -
-------------------------------------------------------------------------------------------------------------------------------
   Diluted earnings  per share of                                       $ 0.56        $ 0.47        $ 0.70        $ 0.57
-------------------------------------------------------------------------------------------------------------------------------
Net sales and operating revenues                                        $1,408        $1,494        $1,370        $1,509
-------------------------------------------------------------------------------------------------------------------------------
Gross margin (c)                                                        $  378        $  166        $   41        $  199
-------------------------------------------------------------------------------------------------------------------------------
(a)  Includes after-tax  special items  increase/(decrease) of          $   46        $  (21)       $  (83)       $   (8)

(b)  Due to changes in the number of weighted average common shares outstanding each quarter, the earnings per share amounts by
     quarter may not be additive.

(c)  Gross margin equals sales and operating revenues less crude oil, natural gas and product purchases, operating and selling
     expenses, depreciation, depletion and amortization, dry hole costs, exploration, and other operating taxes.
</TABLE>

                                       80
<PAGE>
 
SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES

Results of Operations - Results of operations of oil and gas exploration and
production activities are shown below.  Sales revenues are shown net of
purchases.  Other revenues primarily include gains or losses on sales of oil and
gas properties and miscellaneous rental income.

Production costs include lifting costs and taxes other than income.  Exploration
expenses consist of geological and geophysical costs, leasehold rentals and dry
hole costs.  Other operating expenses primarily include administrative and
general expense.  Income tax expense is based on the tax effects arising from
the operations.  Results of operations do not include general corporate
overhead, interest costs, or Global Trade activities.

<TABLE>
<CAPTION>
                                                          Spirit        Other         Far           Other
Millions of dollars                                       Energy 76     U.S.          East      International    Total
-------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>            <C>        <C>          <C>                 <C>
Year 1998
Sales
   To public                                              $   67       $ 93          $  709        $113        $  982    
   Intercompany                                              737         73             246          14         1,070    
Other revenues                                                52         11              (6)        177           234     
-------------------------------------------------------------------------------------------------------------------------
      Total                                                  856        177             949         304         2,286    
Production costs                                             187         82             123          66           458    
Exploration expenses                                         196          2             101          77           376    
Depreciation, depletion and amortization                     410         71             212          68           761    
Other operating expenses                                      63         13              70          40           186     
-------------------------------------------------------------------------------------------------------------------------
     Pre-tax results of operations                             -          9             443          53           505    
     Income tax                                                -          3             248          12           263     
-------------------------------------------------------------------------------------------------------------------------
Results of operations                                     $    -       $  6          $  195        $ 41        $  242     
-------------------------------------------------------------------------------------------------------------------------
Year 1997
Sales
   To public                                              $  114       $111          $  773        $187        $1,185     
   Intercompany                                              996        138             347          24         1,505     
Other revenues                                                21          6               5           8            40     
-------------------------------------------------------------------------------------------------------------------------
      Total                                                1,131        255           1,125         219         2,730     
Production costs                                             193         93             130          74           490     
Exploration expenses                                          88          1             142          52           283     
Depreciation, depletion and amortization                     468         53             303          69           893     
Other operating expenses                                      77         12              47          57           193     
-------------------------------------------------------------------------------------------------------------------------
     Pre-tax results of operations                           305         96             503         (33)          871     
     Income tax                                              114         36             111          12           273     
-------------------------------------------------------------------------------------------------------------------------
Results of operations                                     $  191       $ 60          $  392        $(45)       $  598     
-------------------------------------------------------------------------------------------------------------------------
Year 1996
Sales
   To public                                              $  125       $161          $  615        $213        $1,114     
   Intercompany                                            1,089        201             326          21         1,637     
Other revenues                                                24        109               -          51           184     
-------------------------------------------------------------------------------------------------------------------------
      Total                                                1,238        471             941         285         2,935     
Production costs                                             178        122             127          81           508     
Exploration expenses                                          88          5              91          58           242     
Depreciation, depletion and amortization                     398        128             208          69           803     
Other operating expenses                                     125         19              46           3           193     
-------------------------------------------------------------------------------------------------------------------------
     Pre-tax results of operations                           449        197             469          74         1,189     
     Income tax (benefit)                                    173         75             232          (3)          477     
-------------------------------------------------------------------------------------------------------------------------
Results of operations                                     $  276       $122          $  237        $ 77        $  712     
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       81
<PAGE>
 
Costs Incurred - Costs incurred in oil and gas property acquisition, exploration
and development activities, both capitalized and charged to expense, are shown
below.  Data for the company's capitalized costs related to oil and gas
exploration and production activities are presented in note 13.

<TABLE>
<CAPTION>
                                                   Spirit            Other            Far                Other
Millions of dollars                               Energy 76          U.S.             East            International         Total
------------------------------------------------------------------------------------------------------------------------------------

<S>                                               <C>               <C>              <C>                  <C>               <C>
1998
Property acquisition
   Proved                                            $ 53           $ -              $  -                 $ 10              $ 63
   Unproved                                           223             -                 4                   49               276
Exploration                                           358             3               205                   98               664
Development                                           207            42               351                  116               716
Costs incurred of equity affiliates (a)                 -             -                27                   20                47
------------------------------------------------------------------------------------------------------------------------------------

1997                                                                                                                            
Property acquisition                                                                                                            
   Proved                                            $  4           $ -              $  -                 $ (1)             $  3
   Unproved                                            61             -                17                    1                79
Exploration                                           182             7               186                   67               442
Development                                           144            30               399                  200               773
Costs incurred of equity affiliates (a)                 -             -                83                    -                83
------------------------------------------------------------------------------------------------------------------------------------

1996                                                                                                                            
Property acquisition                                                                                                            
   Proved                                            $  6           $ 3              $  -                 $  7              $ 16
   Unproved                                            15             -                 2                   14                31
Exploration                                           123             5               102                   44               274
Development                                           278            43               297                   81               699
Costs incurred of equity affiliates (a)                 -             -                66                    -                66
------------------------------------------------------------------------------------------------------------------------------------

(a) Represents Unocal's share of  costs incurred of investees accounted for by the equity method.
</TABLE>

                                       82
<PAGE>
 
Average Sales Price and Production Costs per Unit (Unaudited) - The average
sales price is based on sales revenues and volumes attributable to net working
interest production.  Where intersegment sales occur, intersegment sales prices
approximate market prices.  The average production costs per barrel are based on
equivalent petroleum barrels, including natural gas converted at a ratio of 6.0
mcf to one barrel of oil, which represents the approximate energy content of the
wet gas.

<TABLE>
<CAPTION>
                                                  Spirit           Other               Far                 Other              
                                                 Energy 76         U.S.               East            International         Total
--------------------------------------------------------------------------------------------------------------------------------- 
<S>                                              <C>             <C>                <C>               <C>                  <C>
1998
Average sales price: (a)
   Crude oil and condensate - per barrel          $12.41         $ 9.35             $12.55               $10.73            $11.67
   Natural gas - per mcf                            2.07           1.33               2.06                 2.29              2.01
   Natural gas liquids - per barrel                 8.63          10.21              10.05                 7.78              8.97
Average production costs per barrel (b)             2.91           4.40               1.52                 4.75              2.57
---------------------------------------------------------------------------------------------------------------------------------
1997                                                                                                                             
Average sales price: (a)                                                                                                         
   Crude oil and condensate - per barrel          $18.47         $15.25             $18.52               $17.39            $17.71
   Natural gas - per mcf                            2.51           1.41               2.30                 2.25              2.33
   Natural gas liquids - per barrel                13.53          15.67              16.20                13.35             14.28
Average production costs per barrel (b)             2.81           4.75               1.58                 5.62              2.66
--------------------------------------------------------------------------------------------------------------------------------- 
1996                                                                                                                             
Average sales price: (a)                                                                                                         
   Crude oil and condensate - per barrel          $19.96         $16.83             $19.17               $19.20            $18.82
   Natural gas - per mcf                            2.43           1.40               2.28                 1.85              2.26
   Natural gas liquids - per barrel                15.41          19.41              13.48                14.12             15.09
Average production costs per barrel (b)             2.39           4.69               1.78                 5.76              2.73
--------------------------------------------------------------------------------------------------------------------------------- 
</TABLE>
(a)  Excludes Global Trade margins.
(b)  Includes host country shares of production in Indonesia, Yemen and the 
     Democratic Republic of Congo.


Oil and Gas Reserve Data (Unaudited) - Estimates of physical quantities of oil
and gas reserves, determined by company engineers, for the years 1998, 1997 and
1996 are shown below.  As defined by the Securities and Exchange Commission,
proved oil and gas reserves are the estimated quantities of crude oil, natural
gas and natural gas liquids that geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions.  Accordingly, these
estimates do not include probable or possible reserves.  Estimated oil and gas
reserves are based on available reservoir data and are subject to future
revision.  Significant portions of the company's undeveloped reserves,
principally in offshore areas, require the installation or completion of related
infrastructure facilities such as platforms, pipelines, and the drilling of
development wells.  Proved reserve quantities exclude royalty interests owned by
others; however, foreign reserves held under certain production-sharing
contracts, principally in Indonesia, are reported on a gross basis.  The gross
basis includes the company's net working interest and host country's interest.
These estimated quantities are subject to fluctuations in the price of oil.  If
oil prices increase, reserve quantities attributable to recovery of operating
costs decline.  This reduction would be partially offset by an increase in the
company's net equity share.  However, the overall effect would be a reduction of
reserves attributable to the company.  The reserve quantities also include
barrels of oil that the company is contractually obligated to sell in Indonesia
at prices substantially below market.

Natural gas reserves are reported on a wet gas basis, which includes natural gas
liquids.  For informational purposes, natural gas liquids reserves in the U.S.
are estimated to be 49, 54 and 65 million barrels at December 31, 1998, 1997 and
1996, respectively.  They are derived from the natural gas reserves by applying
a national average shrinkage factor obtained from the Department of Energy
published statistics.  International natural gas liquids reserves were
insignificant for the above periods.

                                       83
<PAGE>
 
Estimated Proved Reserves of Crude Oil and Condensate

<TABLE> 
<CAPTION> 
 
                                                          Spirit      Other     Far        Other
Millions of barrels                                      Energy 76     U.S.    East    International    Worldwide
-----------------------------------------------------------------------------------------------------------------
<S>                                                      <C>          <C>      <C>     <C>              <C>
As of December 31, 1995 (a)                                161          226     169              111          667
   Revisions of estimates                                   (7)           -      (3)             (10)         (20)
   Improved recovery                                         -            1       1                2            4
   Discoveries and extensions                                6            -      30               16           52
   Purchases                                                 -            -       -                2            2
   Sales                                                    (1)        (115)      -                -         (116)
   Production                                              (19)         (16)    (31)             (10)         (76)
-----------------------------------------------------------------------------------------------------------------
As of December 31, 1996 (a)                                140           96     166              111          513
   Revisions of estimates                                  (10)          (6)     (3)              (7)         (26)
   Improved recovery                                         2            2       -                -            4
   Discoveries and extensions                               11            2      29               71          113
   Purchases                                                 -            -       -                2            2
   Sales                                                     -            -       -               (1)          (1)
   Production                                              (17)         (11)    (34)             (10)         (72)
-----------------------------------------------------------------------------------------------------------------
As of December 31, 1997 (a)                                126           83     158              166          533
   Revisions of estimates                                   (7)         (14)      -               12           (9)
   Improved recovery                                         4            -       1                1            6
   Discoveries and extensions                               13            5      60                3           81
   Purchases                                                 7            -       -                -            7
   Sales                                                    (6)           -       -              (13)         (19)
   Production                                              (16)         (11)    (29)             (11)         (67)
-----------------------------------------------------------------------------------------------------------------
As of December 31, 1998 (a)                                121           63     190              158          532
Proved Developed Reserves                                          
   December 31, 1995                                       120          178      96               64          458
   December 31, 1996                                       109           75      96               51          331
   December 31, 1997                                        97           63      91               63          314
   December 31, 1998                                        90           47      81               56          274
 
(a) Includes hosts countries' shares at:
       December 31, 1995 of:                                 -            -      63                8           71
       December 31, 1996 of:                                 -            -      64                6           70
       December 31, 1997 of:                                 -            -      52                7           59
       December 31, 1998 of:                                 -            -      47                5           52
</TABLE>

                                       84
<PAGE>
 
Estimated Proved Reserves of Natural Gas

<TABLE> 
<CAPTION> 
 
                                              Spirit            Other              Far                   Other
Billions of cubic feet                       Energy 76          U.S.               East              International       Worldwide
----------------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>               <C>                <C>                <C>                 <C> 
As of December 31, 1995 (a)                  2,522             739                3,255                   249              6,765  
   Revisions of estimates                     (151)            (13)                (150)                  (62)              (376) 
   Discoveries and extensions                   67               -                1,213                    17              1,297  
   Purchases                                    20               -                    -                     -                 20  
   Sales                                       (41)           (157)                   -                   (13)              (211) 
   Production                                 (347)            (64)                (261)                  (28)              (700) 
----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1996 (a)                  2,070             505                4,057                   163              6,795  
   Revisions of estimates                     (151)             (2)                  92                     4                (57) 
   Improved Recovery                             1               -                    4                     -                  5  
   Discoveries and extensions                  102               -                  351                     6                459  
   Purchases                                    29               1                    -                    91                121  
   Sales                                       (52)              -                    -                     -                (52) 
   Production                                 (322)            (61)                (315)                  (23)              (721)  
----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1997 (a)                  1,677             443                4,189                   241              6,550    
   Revisions of estimates                       25             (21)                 (71)                    1                (66)   
   Improved Recovery                            11               7                    -                     2                 20    
   Discoveries and extensions                  191               3                  159                    84                437    
   Purchases                                    52               -                    -                     -                 52    
   Sales                                       (90)              -                    -                   (91)              (181)   
   Production                                 (299)            (58)                (322)                  (11)              (690)   
----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1998 (a)                  1,567             374                3,955                   226              6,122  
                                                                                                                                  
Proved Developed Reserves                                                                                                         
   December 31, 1995                         1,721             473                1,807                   188              4,189  
   December 31, 1996                         1,540             289                1,715                   148              3,692  
   December 31, 1997                         1,251             243                2,002                   149              3,645  
   December 31, 1998                         1,215             211                2,394                   152              3,972  
 
(a) Includes host countries' shares at:
       December 31, 1995 of:                     -               -                  457                     -                457 
       December 31, 1996 of:                     -               -                  530                     -                530 
       December 31, 1997 of:                     -               -                  444                     -                444 
       December 31, 1998 of:                     -               -                  389                     -                389 
</TABLE>
                                                                                
Present Value of Future Net Cash Flow (Unaudited)

The present value of future net cash flows from proved oil and gas reserves for
the years 1998, 1997, and 1996 are presented below.  Revenues are based on
estimated production of proved reserves from existing and planned facilities and
on average prices of oil and gas at year end.  Development and production costs
related to future production are based on year end cost levels and assume
continuation of existing economic conditions.  Income tax expense is computed by
applying the appropriate year end statutory tax rates to pre-tax future cash
flows less recovery of the tax basis of proved properties, and reduced by
applicable tax credits.

The company cautions readers that the data on the present value of future net
cash flow of oil and gas reserves are based on many subjective judgments and
assumptions.  Different, but equally valid, assumptions and judgments could lead
to significantly different results.  Additionally, estimates of physical
quantities of oil and gas reserves, future rates of production and related
prices and costs for such production are subject to extensive revisions and a
high degree of variability as a result of economic and political changes.  Any
subsequent price changes will alter the results and the indicated present value
of 

                                       85
<PAGE>
 
oil and gas reserves. It is the opinion of the company that this data can be
highly misleading and may not be indicative of the value of underground oil and
gas reserves.

<TABLE>
<CAPTION>
                                                                Spirit          Other        Far               Other
Millions of dollars                                            Energy 76        U.S.         East          International     Total
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>           <C>           <C>                <C>          <C>
1998
Revenues (a)                                                   $ 4,203       $  802        $7,029             $1,664       $13,698
Production costs                                                 1,545          499         2,731                865         5,640
Development costs (b)                                              698          208         1,614                585         3,105
Income tax expense                                                 536           (2)          768                 68         1,370
----------------------------------------------------------------------------------------------------------------------------------
Future net cash flow                                             1,424           97         1,916                146         3,583 
10% annual discount                                                415           (2)          697                 99         1,209 
----------------------------------------------------------------------------------------------------------------------------------
Present value of future net cash flows                           1,009           99         1,219                 47         2,374
Present value of future net cash flows of equity companies (c)       -            -           202                  -           202
----------------------------------------------------------------------------------------------------------------------------------
Total                                                          $ 1,009       $   99        $1,421             $   47       $ 2,576
----------------------------------------------------------------------------------------------------------------------------------
1997
Revenues (a)                                                   $ 5,849       $1,530        $8,928             $2,748       $19,055
Production costs                                                 2,092          656         2,913                854         6,515
Development costs (b)                                              741          228         1,385                559         2,913
Income tax expense                                                 899          210         1,785                292         3,186
----------------------------------------------------------------------------------------------------------------------------------
Future net cash flow                                             2,117          436         2,845              1,043         6,441
10% annual discount                                                681          118           979                499         2,277
----------------------------------------------------------------------------------------------------------------------------------
Present value of future net cash flows                           1,436          318         1,866                544         4,164
Present value of future net cash flows of equity companies (c)       -            -           254                  -           254
----------------------------------------------------------------------------------------------------------------------------------
Total                                                          $ 1,436       $  318        $2,120             $  544       $ 4,418
----------------------------------------------------------------------------------------------------------------------------------
1996
Revenues (a)                                                   $11,464       $2,541        $9,812             $2,424       $26,241
Production costs                                                 2,445          866         2,549                921         6,781
Development costs (b)                                              808          356         1,389                261         2,814
Income tax expense                                               2,757          501         2,377                361         5,996
----------------------------------------------------------------------------------------------------------------------------------
Future net cash flow                                             5,454          818         3,497                881        10,650
10% annual discount                                              1,966          261         1,453                342         4,022
----------------------------------------------------------------------------------------------------------------------------------
Present value of future net cash flows                           3,488          557         2,044                539         6,628
Present value of future net cash flows of equity companies (c)       -            -           118                  -           118
----------------------------------------------------------------------------------------------------------------------------------
Total                                                          $ 3,488       $  557        $2,162             $  539       $ 6,746
----------------------------------------------------------------------------------------------------------------------------------
(a)  Weighted-average prices used in this calculation are based upon year-end prices
 and are as follows:
       Crude oil per barrel
                                               1998            $  8.31       $ 7.49        $10.53             $ 8.49
                                               1997              16.04        13.05         18.14              13.21
                                               1996              23.81        20.06         22.55              19.89 
       Natural gas per mcf
                                               1998            $  2.10       $ 1.20        $ 1.66             $ 1.58
                                               1997               2.39         1.47          2.22               2.28
                                               1996               3.97         1.35          2.58               2.14
(b)  Includes dismantlement and abandonment costs.
(c)  Represents Unocal's share of investees accounted for on the
 equity method.
</TABLE>



                                        

                                       86
<PAGE>
 
Changes in Present Values of Future Net Cash Flows (Unaudited)

<TABLE>
<CAPTION>
Millions of dollars                                                        1998                     1997                    1996
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>                      <C>                     <C>
Present value at beginning of year                                      $ 4,418                  $ 6,746                 $ 4,969
Discoveries and extensions, net of estimated future costs                   503                      606                   1,005
Net purchases and sales of proved reserves (a)                             (239)                     (16)                   (128)
Revisions to prior estimates:
   Prices net of estimated changes in production costs                   (1,931)                  (2,939)                  4,518
   Future development costs                                                (498)                    (312)                   (317)
   Quantity estimates                                                       (53)                    (204)                   (755)
   Production schedules and other                                          (495)                    (581)                   (549)
Accretion of discount                                                       538                      865                     617
Development costs related to beginning of year reserves                     711                      790                     663
Sales of oil and gas, net of production costs of $458 million
 in 1998, $490 million in 1997 and $508 million in 1996                  (1,594)                  (2,200)                 (2,243)
Net change in income taxes                                                1,216                    1,663                  (1,034)
------------------------------------------------------------------------------------------------------------------------------------

Present value at end of year                                            $ 2,576                  $ 4,418                 $ 6,746
------------------------------------------------------------------------------------------------------------------------------------

(a)  Purchases of reserves were valued at $17 million, $52 million and $64
     million in 1998, 1997 and 1996,
     respectively.  Sales of reserves were valued at $256 million, $68 million and $192 million
     for the same years,
     respectively.
</TABLE>

                                       87
<PAGE>
 
SELECTED FINANCIAL DATA (Unaudited)

<TABLE>
<CAPTION>
Millions of dollars except per share amounts                   1998              1997          1996            1995          1994
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>                <C>               <C>            <C>            <C> 
Revenue Data
Sales
   Crude oil and condensate                                 $  2,208         $  2,707       $  2,495       $  1,964       $  1,996
   Natural gas                                                 1,823            1,857          1,482          1,031          1,109
   Agricultural products                                         375              435            514            486            373
   Geothermal steam                                              166              119            131            120            135
   Natural gas liquids                                            66              105             95             97             96
   Petroleum products                                             32               13             16             84             89
   Minerals                                                       67              106             97             95             79
   Other                                                         143              319            161             58            100
                                                  ----------------------------------------------------------------------------------
      Total sales revenues                                     4,880            5,661          4,991          3,935          3,977
Operating revenues                                               123              120            110            176            141
Other revenues                                                   476              283            227            278            154
------------------------------------------------------------------------------------------------------------------------------------
      Total revenues from continuing operations                5,479            6,064          5,328          4,389          4,272
Discontinued operations (a)                                        -                -          4,271          4,036          3,693
------------------------------------------------------------------------------------------------------------------------------------

Total revenues                                               $  5,479        $  6,064       $  9,599       $  8,425       $  7,965
 
Earnings Data
Earnings from continuing operations                          $    130        $    669       $    456       $    249       $    110
Discontinued operations (net of tax)                                -             (50)          (420)            11             14
Extraordinary item - early extinguishment of debt (net of tax)      -             (38)             -              -              -
Cumulative effect of accounting change (net of tax)                 -               -              -              -           (277)
------------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss)                                          $    130        $    581       $     36       $    260       $   (153)
Basic earnings (loss) per common share:
      Continuing operations                                  $   0.54        $   2.69       $   1.54       $   0.87       $   0.30
      Discontinued operations (net of tax)                          -           (0.20)         (1.69)          0.04           0.06
      Extraordinary item - extinguishment of debt (net of tax)      -           (0.15)             -              -              -
      Cumulative effect of accounting change (net of tax)           -               -              -              -          (1.14)
                                                  ----------------------------------------------------------------------------------
      Net earnings (loss) per share                          $   0.54        $   2.34       $  (0.15)      $   0.91       $  (0.78)
------------------------------------------------------------------------------------------------------------------------------------
Share Data
Cash dividends declared on preferred stock                 $        -        $      -       $     18       $     36       $     36
   Per share                                                        -               -           1.75           3.50           3.50
Cash dividends declared on common stock                           192             199            199            197            194
   Per share                                                     0.80            0.80           0.80           0.80           0.80
Number of common stockholders of record at year end            29,567          31,919         32,924         33,028         37,622
Weighted average common shares - thousands                    241,332         248,190        248,767        246,112        242,640
------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
Current assets (b)                                         $    1,388        $  1,501       $  3,228       $  1,576       $  1,528
Current liabilities (d)                                         1,376           1,160          1,622          1,316          1,257
Working capital                                                    12             341          1,606            260            271
Ratio of current assets to current liabilities                  1.0:1           1.3:1          2.0:1          1.2:1          1.2:1
Total assets                                                    7,952           7,530          9,123          9,891          9,337
Long-term debt                                                  2,558           2,169          2,940          3,692          3,452
Trust convertible preferred securities of subsidiary              522             522            522              -              -
Total stockholders' equity                                      2,202           2,314          2,275          2,930          2,815
   Per common share                                              9.13            9.32           9.14           9.87           9.54
Return on average stockholders' equity and preferred securities:
      Continuing operations                                      4.7%           23.8%          15.9%           8.7%         (5.6)%
      Including discontinued operations and extraordinary item   4.7%           20.6%           1.3%           9.1%         (5.1)%
------------------------------------------------------------------------------------------------------------------------------------
General Data
Salaries, wages and employee benefits (c)                  $      596        $    640       $    806       $    797       $    811
Number of regular employees at year end                         7,880           8,394         11,658         12,509         13,127
------------------------------------------------------------------------------------------------------------------------------------
(a)  1996 excludes $609 million for November 17, 1996 - December 31, 1996 which was included in loss
 on disposal
      in the Consolidated Earnings Statement.
(b)  1996 Includes net assets of discontinued operations (see
 Note 8).
(c)  Employee benefits are net of pension income recognized in accordance with current accounting standards for
 pension costs.
(d) 1998 includes liabilities associated with a pre-paid crude
 oil sale.
</TABLE>

                                       88
<PAGE>
 
OPERATING SUMMARY (Unaudited)

<TABLE>
<CAPTION>
                                                               1998        1997        1996       1995        1994
-------------------------------------------------------------------------------------------------------------------
Oil and Gas
Net exploratory wells completed:
<S>                                                                 <C>         <C>         <C>         <C>        <C>
    Oil                                                          19          10           4         13           7
    Gas                                                          18          12          13         12          13
Net development wells completed:
    Oil                                                         113         118          84        116         129
    Gas                                                         105         118         108         67          77
Net dry holes:
    Exploratory                                                  34          25          30         23          19
    Development                                                  10           7           6          6          10
-------------------------------------------------------------------------------------------------------------------
      Total net wells                                           299         290         245        237         255
Net producible wells at year end (a)                          3,193       3,884       3,640      5,639       6,190
Net undeveloped acreage at year end - thousands of acres:
      United States
          Spirit Energy 76                                    1,664       1,257         711        919       1,118
          Other                                                 215         174         182        299         503
      International
          Far East                                           20,167      14,688      11,929      6,930       6,941
         Other                                                5,014       4,320       5,418      1,834       2,702
-------------------------------------------------------------------------------------------------------------------
         Total                                               27,060      20,439      18,240      9,982      11,264
Net proved reserves at year end:
   Crude oil and condensate - million barrels
      United States                                            184         209         236        387         419
      International                                            348         324         277        280         278
------------------------------------------------------------------------------------------------------------------
         Total                                                 532         533         513        667         697
   Natural gas - billion cubic feet
      United States                                          1,941       2,120       2,575      3,261       3,580
      International                                          4,181       4,430       4,220      3,504       3,331
------------------------------------------------------------------------------------------------------------------
         Total                                               6,122       6,550       6,795      6,765       6,911
Net daily production (b):
   Crude oil and condensate - thousand barrels
      United States
          Spirit Energy 76                                      44          45          52         56          63
          Other                                                 29          31          44         69          74
      International
          Far East                                              80          95          84         85          88
         Other                                                  31          26          27         30          35
------------------------------------------------------------------------------------------------------------------
         Total                                                 184         197         207        240         260
</TABLE>

(a) Beginning in 1993, producible wells exclude suspended wells that are not 
    expected to be producing within a year and wells awaiting abandonment.

(b) Natural gas is reported on a wet gas basis: production excludes gas consumed
    on lease. Far East production includes host country share in Indonesia of:

<TABLE> 
<S>                                                             <C>         <C>     <C>        <C>        <C> 
    Crude oil and condensate (thousand barrels)                 10          28      28         30          30
    Natural gas (million cubic feet)                            49          28      27         22          26
</TABLE> 

                                       89
<PAGE>
 
OPERATING SUMMARY (continued)

<TABLE>
<CAPTION>
                                                               1998       1997       1996       1995       1994
-----------------------------------------------------------------------------------------------------------------
Natural gas liquids - thousand barrels
<S>                                                            <C>        <C>        <C>        <C>        <C>
      Leasehold (a)                                             16         15         16         19         17
      Plant                                                      3          3          4          2          5
------------------------------------------------------------------------------------------------------------------
         Total                                                  19         18         20         21         22
Natural gas production available for sale - million cubic
 feet daily
      United States                                            758        813        891        882        873
      International                                            827        820        705        631        656
------------------------------------------------------------------------------------------------------------------
         Total                                               1,585      1,633      1,596      1,513      1,529
Geothermal and Power
Net wells completed:
    Exploratory                                                  3          3          3          4          -
    Development                                                  8          7         16          9          4
------------------------------------------------------------------------------------------------------------------
      Total                                                     11         10         19         13          4
Net producible wells at year end                               287        241        208        260        261
Net undeveloped acreage at year end - thousands of acres       338        384        384        457        457
Net proved reserves at year end: (b)
      Billion kilowatt-hours                                   157        149        155        144        143
      Million equivalent oil barrels                           235        223        232        216        215
Net daily production:
      Million kilowatt-hours                                    21         18         18         16         21
      Thousand equivalent oil barrels                           32         27         26         24         31
------------------------------------------------------------------------------------------------------------------
Agricultural Products Sales - thousand tons
   Ammonia                                                     889        769        708        654        686
   Urea                                                      1,096        975      1,122        997        913
------------------------------------------------------------------------------------------------------------------
(a)  Net of plant retentions.
(b)  Includes reserves underlying a service fee arrangement in the
 Philippines.
</TABLE>


ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE: None

                                       90
<PAGE>
 
                                    PART III

The information required by Items 10 through 12 (except for information
regarding the company's executive officers) is incorporated by reference to
Unocal's Proxy Statement for its 1999 Annual Meeting of Stockholders (the "1999
Proxy Statement") (File No. 1-8483), as indicated below.  The 1999 Proxy
Statement is expected to be filed with the Securities and Exchange Commission on
or about April 12, 1999.

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

See the information regarding Unocal's directors and nominees for election as
directors to appear in the 1999 Proxy Statement under the captions "Election of
Directors" and "Board and Committee Meetings".  Also, see the list of Unocal's
executive officers and related information under the caption "Executive Officers
of the Registrant" in Part I of this report on pages 18 and 19.

See the information to appear in the 1999 Proxy Statement under the caption
"Section 16(a) Beneficial Ownership Reporting Compliance".

ITEM 11 - EXECUTIVE COMPENSATION

See the information regarding executive compensation to appear in the 1999 Proxy
Statement under the captions "Summary Compensation Table," "Option/SAR Grants in
1998," "Aggregated Option/SAR Exercises in 1998 and December 31, 1998 Option/SAR
Values," "Long-Term Incentive Plan - Awards in 1998," "Pension Plan Benefits -
Estimated Annual Retirement Benefits," "Employment Contracts, Termination of
Employment and Change of Control Arrangements" and for information regarding
directors' compensation to appear under the caption "Directors' Compensation."

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

See the information regarding security ownership to appear in the 1999 Proxy
Statement under the captions "Security Ownership of Certain Beneficial Owners"
and "Security Ownership of Management."

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS: Not required.

                                    PART IV

ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

    (a) Financial statements, financial statement schedules and exhibits filed
      as part of this annual report:

          (1) Financial Statements: See the Index to Consolidated Financial
                  Statements and Financial Statement Schedule under Item 8 on
                  page 44 of this report.

          (2) Financial Statement Schedule: See the Index to Consolidated
                  Financial Statements and Financial Statement Schedule under
                  Item 8 on page 44 of this report.

          (3) Exhibits: The Exhibit Index on pages 96 through 98 of this report
                  lists the exhibits that are filed as part of this report and
                  identifies each management contract and compensatory plan or
                  arrangement required to be filed.

                                       91
<PAGE>
 
   (b) Reports filed on Form 8-K:

          During the fourth quarter of 1998:

          (1)  Current Report on Form 8-K dated October 27, 1998, and filed
               October 29, 1998, for the purpose of reporting, under Item 5, the
               company's third quarter and nine-month 1998 earnings and related
               information.

          (2)  Current Report on Form 8-K dated November 11, 1998, and filed
               November 17, 1998, for the purpose of reporting, under Item 5,
               the company's announcement of its intentions to reduce 1998
               capital and expense spending from 1997 levels in response to
               depressed commodity prices.

          (3)  Current Report on Form 8-K dated December 7, 1998, and filed
               December 22, 1998, for the purpose of reporting, under Item 5,
               the election of two additional directors to the company's board
               of directors and related corporate bylaw amendments.

          During the first quarter of 1999 to the date hereof:

          (1)  Current Report on Form 8-K dated January 26, 1999, and filed
               January 27, 1999, for the purpose of reporting, under Item 5, the
               planned sale of the company's Northern California geothermal
               assets to Calpine Corporation.

          (2)  Current Report on Form 8-K dated January 27, 1999, and filed
               January 29, 1999, for the purpose of reporting, under Item 5, the
               company's fourth quarter and full-year 1998 earnings and related
               information.

          (3)  Current Report on Form 8-K dated February 8, 1999 and filed
               February 10, 1999, for the purpose of reporting, under Item 5,
               the company's 1998 crude oil and natural gas reserve data.

          (4)  Current Report on Form 8-K dated and filed March 3, 1999, for the
               purpose of reporting, under Item 5, certain key executive
               appointments.

                                       92
<PAGE>
 
                                   SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

                                         UNOCAL CORPORATION
                                             (Registrant)
Dated:
March 15, 1999                           By:  /s/ TIMOTHY H. LING
--------------                           ------------------------
                                         Timothy H. Ling
                                         Executive Vice President,
                                         North American Energy Operations,
                                         and Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 15, 1999.

<TABLE>
<CAPTION>
            Signature                                                                      Title
----------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>
 
 
 
/s/ ROGER C. BEACH                                                           Chairman of the Board of Directors
----------------------------------                                               and Chief Executive Officer
Roger C. Beach                                                                  
 
 
/s/ JOHN F. IMLE, JR.                                                               Vice Chairman of the
----------------------------------                                                   Board of Directors
John F. Imle, Jr.                                                                    
 
 
/s/ TIMOTHY H. LING                                                              Executive Vice President,
----------------------------------
Timothy H. Ling                                                              North American Energy Operations,
                                                                                and Chief Financial Officer
 
/s/ JOE D. CECIL                                                               Vice President and Comptroller
----------------------------------
Joe D. Cecil
 
 
/s/ JOHN W. AMERMAN                                                                       Director
----------------------------------
John W. Amerman
 
 
/s/ JOHN W. CREIGHTON, JR.                                                                Director
----------------------------------
John W. Creighton, Jr.
 
 
/s/ JAMES W. CROWNOVER                                                                    Director
----------------------------------
James W. Crownover
 
 
/s/ MALCOLM R. CURRIE                                                                     Director
----------------------------------
Malcolm R. Currie
 
</TABLE> 

                                       93
<PAGE>
 
<TABLE>
<CAPTION>
            Signature                                                                      Title
----------------------------------------------------------------------------------------------------------------------
 
<S>                                                                                       <C>    
/s/ FRANK C. HERRINGER                                                                    Director
----------------------------------
Frank C. Herringer
 
 
                                                                                          Director
----------------------------------
Donald B. Rice
 
 
/s/ KEVIN W. SHARER                                                                       Director
----------------------------------
Kevin W. Sharer
 
 
/s/ CHARLES R. WEAVER                                                                     Director
----------------------------------
Charles R. Weaver
 
 
/s/ MARINA V.N. WHITMAN                                                                   Director
----------------------------------
Marina v.N. Whitman
</TABLE>

                                       94
<PAGE>
 
<TABLE>
<CAPTION>
                                         UNOCAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
                                          SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                                       (Millions of dollars)
 
 
 
 
 
                                                                               Additions
                                                                     -----------------------------
                                                                      Charged or       Charged or
                                                    Balance at        (credited)       (credited)       Deductions         Balance
                                                    beginning         to costs &        to other           from            at end
Description                                         of period          expenses         accounts         reserves (a)     of period
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>                 <C>              <C>              <C>               <C> 
YEAR 1998
Amounts deducted from
  applicable assets:
 
Accounts and notes receivable                       $    35             $    53         $    (1)         $    (9)         $    78
Investments and long-term receivables               $    32             $     3         $     -          $    (1)         $    34
 
YEAR 1997
Amounts deducted from
  applicable assets:
 
Accounts and notes receivable                       $    35             $     7         $     1          $    (8)         $    35
Investments and long-term receivables               $    13             $     1         $    31          $   (13)         $    32
 
YEAR 1996
Amounts deducted from
  applicable assets:
 
Accounts and notes receivable                       $    28             $    19         $    (1)         $   (11)         $    35
Investments and long-term receivables               $    15             $    (3)        $     1          $     -          $    13
 
(a) Represents receivables written off, net of recoveries, reinstatement and
 losses sustained.
</TABLE>

                                       95
<PAGE>
 
                              UNOCAL CORPORATION
                                 EXHIBIT INDEX

<TABLE>
<S>                <C>
------------------------------------------------------------------------------------------------------------------- 
Exhibit 2.1      Sale and Purchase Agreement for 76 Products Company, dated December 14, 1996, between Union Oil
                 Company of California and Tosco Corporation  (without attachments or schedules) (incorporated
                 by reference to Exhibit 2.1 to Unocal's Current Report on Form 8-K dated December 16, 1996, and
                 filed January 3, 1997, File No. 1-8483).
------------------------------------------------------------------------------------------------------------------- 
Exhibit 2.2      Stock Purchase and Shareholder Agreement, dated as of January 15, 1997, by and between Tosco
                 Corporation and Union Oil Company of California, together with form of Supplement No. 1 thereto
                 (incorporated by reference to Exhibit 2.2 to Unocal's Current Report on Form 8-K dated December
                 16, 1996, and filed January 3, 1997, File No. 1-8483).
------------------------------------------------------------------------------------------------------------------- 
Exhibit 2.3      Amendment No. 1 and Supplement, dated as of March 31, 1997, to Stock Purchase and Shareholder
                 Agreement, dated as of January 15, 1997, by and between Tosco Corporation and Union Oil Company
                 of California (incorporated by reference to Exhibit C to Unocal's and Union Oil Company of
                 California's statement on Schedule 13D relating to Tosco Corporation, dated and filed April 10,
                 1997, File No. 1-7910).
------------------------------------------------------------------------------------------------------------------- 
Exhibit 2.4      Environmental Agreement, dated as of March 31, 1997, by and between Union Oil Company of
                 California and Tosco Corporation (without schedules) (incorporated by reference to Exhibit 2.3
                 to Unocal's Current Report on Form 8-K dated December 16, 1996, and filed January 3, 1997, File
                 No. 1-8483).
------------------------------------------------------------------------------------------------------------------- 
Exhibit 3.1      Certificate of Incorporation of Unocal, as amended through July 23, 1992, and currently in
                 effect (incorporated by reference to Exhibit 3.1 to Amendment No. 2 on Form 10-K/A to Unocal's
                 Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-8483).
------------------------------------------------------------------------------------------------------------------- 
Exhibit 3.2      Bylaws of Unocal, as amended through March 3, 1999, and currently in effect.
------------------------------------------------------------------------------------------------------------------- 
Exhibit 3.3      Bylaws of Unocal, as amended to be effective May 24, 1999.
------------------------------------------------------------------------------------------------------------------- 
Exhibit 4.1      Standard Multiple-Series Indenture Provisions, January 1991, dated as of January 2, 1991
                 (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-3 of Union
                 Oil Company of California and Unocal (File Nos. 33-38505 and 33-38505-01)).
-------------------------------------------------------------------------------------------------------------------
Exhibit 4.2      Form of Indenture, dated as of January 30, 1991, among Union Oil Company of California, Unocal
                 and The Bank of New York (incorporated by reference to Exhibit 4.2 to the Registration
                 Statement on Form S-3 of Union Oil Company of California and Unocal (File  Nos. 33-38505 and
                 33-38505-01)).
-------------------------------------------------------------------------------------------------------------------
Exhibit 4.3      Form of Indenture, dated as of February 3, 1995, among Union Oil Company of California, Unocal
                 and Chase Manhattan Bank and Trust Company, National Association, as successor Trustee
                 (incorporated by reference to Exhibit 4.6 to the Registration Statement on Form S-3 of Union
                 Oil Company of California and Unocal (File Nos. 33-54861 and 33-54861-01).
 
                 Other instruments defining the rights of holders of long term debt of Unocal and its
                 subsidiaries are not being filed since the total amount of securities authorized under each of
                 such instruments does not exceed 10 percent of the total assets of Unocal and its subsidiaries
                 on a consolidated basis.  Unocal agrees to furnish a copy of any such instrument to the
                 Securities and Exchange Commission upon request.
-------------------------------------------------------------------------------------------------------------------
Exhibit 10.1     Rights Agreement, dated as of January 29, 1990, between the Unocal and The Chase Manhattan
                 Bank, as successor Rights Agent (incorporated by reference to Exhibit 4.9 to Unocal's
                 Registration Statement on Form S-4 (File Nos. 333-09137 and 333-09137-01).
-------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       96
<PAGE>
 
The following Exhibits 10.2 through 10.23 are management contracts or
compensatory plans, contracts or arrangements required to be filed by Item 14
(c) of Form 10-K and Item 601 (b) (10) (iii) (A) of Regulation S-K.

<TABLE>
<S>                <C>
------------------------------------------------------------------------------------------------------------------- 
Exhibit 10.2       1991 Management Incentive Program (incorporated by reference to Exhibit A to Unocal's Proxy
                   Statement dated March 18, 1991, for its 1991 Annual Meeting of Stockholders, File No. 1-8483).
------------------------------------------------------------------------------------------------------------------- 
Exhibit 10.3       Unocal Revised Incentive Compensation Plan Cash Deferral Program (incorporated by reference to
                   Exhibit 10.3 to Unocal's Annual Report on Form 10-K for the year ended December 31, 1996, File
                   No. 1-8483).
------------------------------------------------------------------------------------------------------------------- 
Exhibit 10.4       Long-Term Incentive Plan of 1985 (incorporated by reference to Unocal's Proxy Statement dated
                   March 24, 1984, for its 1984 Annual Meeting of Stockholders, File No. 1-8483).
------------------------------------------------------------------------------------------------------------------- 
Exhibit 10.5       Amendments to 1985 and 1991 Incentive Plan Awards (incorporated by reference to Exhibit 10 to
                   Unocal's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, File No. 1-8483.)
------------------------------------------------------------------------------------------------------------------- 
Exhibit 10.6       1998 Management Incentive Program, consisting of the Revised Incentive Compensation Plan, the
                   Long-Term Incentive Plan of 1998 and the 1998 Performance Stock Option Plan (incorporated by
                   reference to Exhibit A to Unocal's Proxy Statement dated April 20, 1998, for its 1998 Annual
                   Meeting of Stockholders, File No. 1-8483).
------------------------------------------------------------------------------------------------------------------- 
Exhibit 10.7       Forms of Notice of Grant of Performance Stock Option and Tandem Limited Stock Appreciation
                   Right and Grant Agreement, effective as of March 30, 1998, between Unocal and each of Roger C.
                   Beach, John F. Imle, Jr., Timothy H. Ling, John W. Schanck, Lucius E. (Ed) Scott, Charles R.
                   Williamson and Dennis P.R. Codon (incorporated by reference to Exhibit 10.2 to Unocal's
                   Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, File No. 1-8483).
------------------------------------------------------------------------------------------------------------------- 
Exhibit 10.8       Unocal Supplement Retirement Plan for Key Management Personnel, effective as of January 1, 1998
                   (incorporated by reference to Exhibit 10.3 to Unocal's Quarterly Report on Form 10-Q for the
                   quarter ended June 30, 1998, File No. 1-8483).
------------------------------------------------------------------------------------------------------------------- 
Exhibit 10.9       Unocal Supplemental Savings Plan, effective January 1, 1997 (incorporated by reference to
                   Exhibit 10.6 to Unocal's Annual Report on Form 10-K for the year ended December 31, 1997, File
                   No. 1-8483).
-------------------------------------------------------------------------------------------------------------------
Exhibit 10.10      Other Compensatory Arrangements (incorporated by reference to Exhibit 10.4 to Unocal's Annual
                   Report on Form 10-K for the year ended December 31, 1990, File No. 1-8483).
-------------------------------------------------------------------------------------------------------------------
Exhibit 10.11      Directors' Restricted Stock Plan of 1991 (incorporated by reference to Exhibit B to Unocal's
                   Proxy Statement dated March 18, 1991, for its 1991 Annual Meeting of Stockholders, File No.
                   1-8483).
-------------------------------------------------------------------------------------------------------------------
Exhibit 10.12      Amendments to Directors Restricted Stock Plan, effective February 8, 1996 (incorporated by
                   reference to Exhibit 10.7 to Unocal's Annual Report on Form 10-K for the year ended December
                   31, 1995, File No. 1-8483).
------------------------------------------------------------------------------------------------------------------- 
Exhibit 10.13      Amendments to the Director's Restricted Stock Plan, effective June 1, 1998 (incorporated by
                   reference to Exhibit 10.4 to Unocal's Quarterly Report on Form 10-Q for the quarter ended June
                   30, 1998, File No. 1-8483).
------------------------------------------------------------------------------------------------------------------- 
Exhibit 10.14      Form of Director Indemnity Agreement between Unocal and each of its directors.
------------------------------------------------------------------------------------------------------------------- 
Exhibit 10.15      Form of Director Insurance Agreement between Unocal and each of its directors.
------------------------------------------------------------------------------------------------------------------- 
Exhibit 10.16      Form of Officer Indemnity Agreement between Unocal and each of its officers.
------------------------------------------------------------------------------------------------------------------- 
Exhibit 10.17      Employment Agreement, effective as of July 28, 1998, between Unocal and Roger C. Beach
                   (incorporated by reference to Exhibit 10.5 to Unocal's Quarterly Report on Form 10-Q for the
                   quarter ended June 30, 1998, File No. 1-8483).
------------------------------------------------------------------------------------------------------------------- 
Exhibit 10.18      Employment Agreement, effective as of July 28, 1998, between Unocal and John F. Imle, Jr.
                   (incorporated by reference to Exhibit 10.6 to Unocal's Quarterly Report on Form 10-Q for the
                   quarter ended June 30, 1998, File No. 1-8483).
-------------------------------------------------------------------------------------------------------------------
</TABLE> 

                                       97
<PAGE>
 
<TABLE> 
<S>                 <C> 
------------------------------------------------------------------------------------------------------------------- 
Exhibit 10.19      Change of Control Agreement, effective as of July 28, 1998, between Unocal and Timothy H. Ling
                   (incorporated by reference to Exhibit 10.7 to Unocal's Quarterly Report on Form 10-Q for the
                   quarter ended June 30, 1998, File No. 1-8483).
------------------------------------------------------------------------------------------------------------------- 
Exhibit 10.20      Employment Agreement, effective as of July 28, 1998, between Unocal and John W. Schanck
                   (incorporated by reference to Exhibit 10.9 to Unocal's Quarterly Report on Form 10-Q for the
                   quarter ended June 30, 1998, File No. 1-8483).
------------------------------------------------------------------------------------------------------------------- 
Exhibit 10.21      Employment Agreement, effective as of July 28, 1998, between Unocal and Lucius E. (Ed) Scott
                   (incorporated by reference to Exhibit 10.10 to Unocal's Quarterly Report on Form 10-Q for the
                   quarter ended June 30, 1998, File No. 1-8483).
------------------------------------------------------------------------------------------------------------------- 
Exhibit 10.22      Employment Agreement, effective as of July 28, 1998, between Unocal and Charles R. Williamson
                   (incorporated by reference to Exhibit 10.11 to Unocal's Quarterly Report on Form 10-Q for the
                   quarter ended June 30, 1998, File No. 1-8483).
------------------------------------------------------------------------------------------------------------------- 
Exhibit 10.23      Employment Agreement, effective as of July 28, 1998, between Unocal and Dennis P.R. Codon
                   (incorporated by reference to Exhibit 10.12 to Unocal's Quarterly Report on Form 10-Q for the
                   quarter ended June 30, 1998, File No. 1-8483).
------------------------------------------------------------------------------------------------------------------- 
Exhibit 12.1       Statement regarding computation of ratio of earnings to fixed charges of Unocal for the five
                   years ended December 31, 1998.
------------------------------------------------------------------------------------------------------------------- 
Exhibit 12.2       Statement regarding computation of ratio of earnings to combined fixed charges and preferred
                   stock dividends of Unocal for the five years ended December 31, 1998.
------------------------------------------------------------------------------------------------------------------- 
Exhibit 12.3       Statement regarding computation of ratio of earnings to fixed charges of Union Oil Company of
                   California for the five years ended December 31, 1998.
-------------------------------------------------------------------------------------------------------------------
Exhibit 21         Subsidiaries of Unocal Corporation.
-------------------------------------------------------------------------------------------------------------------
Exhibit 23         Consent of PricewaterhouseCoopers LLP
-------------------------------------------------------------------------------------------------------------------
Exhibit 27         Financial data schedule for the period ended December 31, 1998 (included only in the copy of
                   this report filed electronically with the Commission).
-------------------------------------------------------------------------------------------------------------------
Exhibit 99.1       Restated and Amended Articles of Incorporation of Union Oil Company of California, as amended
                   through October 24, 1996, and currently in effect (incorporated by reference to Exhibit 99.1 to
                   Unocal's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-8483).
-------------------------------------------------------------------------------------------------------------------
Exhibit 99.2       Bylaws of Union Oil Company of California, as amended through March 3, 1999, and currently in
                   effect.
-------------------------------------------------------------------------------------------------------------------
</TABLE>

Copies of exhibits will be furnished upon request.  Requests should be addressed
to the Corporate Secretary.

                                       98