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

                                      
                                  FORM 10-K/A      
                                    
                                AMENDMENT NO. 1      

         X    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
       -----                                                      
              SECURITIES EXCHANGE ACT OF 1934
              For the fiscal year ended December 31, 1996
                                        -----------------

                         Commission file number 1-8483
                              UNOCAL CORPORATION
            (Exact name of registrant as specified in its charter)

          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)

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

          Securities registered pursuant to Section 12(b) of the Act:

      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

       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 voting stock held by non-affiliates of the
registrant as of March 17, 1997 (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 $9,785 million.

     Shares of Common Stock outstanding as of March 17, 1997:  250,086,778

                      DOCUMENTS INCORPORATED BY REFERENCE

   Portions of the registrant's definitive Proxy Statement for its 1997 Annual
Meeting of Stockholders (to be filed with the Securities and Exchange Commission
on or about April 21, 1997) are incorporated by reference into Part III.
<PAGE>
 
                                    PART II

         

 ITEM 6 - SELECTED FINANCIAL DATA - see page 75.

                                       18
<PAGE>
 
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
 
INDEX TO CONSOLIDATED FINANCIAL
 STATEMENTS AND FINANCIAL STATEMENT
 SCHEDULES
 
                                                             Page
                                                             -----
                                                      
<S>                                                          <C>
Report on Management's Responsibilities                         35
                                                      
Report of Independent Accountants                               36
                                                      
Financial Statements                                  
  Consolidated Earnings                                         37
  Consolidated Balance Sheet                                    38
  Consolidated Cash Flows                                       39
  Consolidated Stockholders' Equity                             40
  Notes to Consolidated Financial Statements                 41-66
                                                      
Supplemental Information:                             
  Oil and Gas Financial Data                                 67-69
  Oil and Gas Reserve Data                                   69-71
  Present Value of Future Net Cash Flow               
   Related to Proved Oil and Gas Reserves                    71-73 
  Selected Quarterly Financial Data                             74
  Selected Financial Data                                       75
                                                      
Supporting Financial Statement Schedule               
 covered by the Foregoing Report of Independent    
 Accountants:                                         
                                                       
  Schedule II  -  Valuation and Qualifying Accounts               
    and Reserves                                                80  
 
</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 statements or notes thereto.

                                       34
<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 Coopers & Lybrand L.L.P.  Management has made available to Coopers & Lybrand
L.L.P. all the company's financial records and related data, minutes of the
company's executive and management committee meetings and directors' meetings
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 assessed its internal control systems in relation to criteria for
effective internal control over financial reporting following the Treadway
Commission's Committee of Sponsoring Organizations "Internal Control -
Integrated Framework."  Based on this assessment, Unocal believes that, as of
December 31, 1996, its systems of internal controls over financial reporting met
those criteria.

  Unocal's Accounting, Auditing and Ethics 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, Auditing and
Ethics 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.    Neal E. Schmale           Charles S. McDowell
Chief Executive Officer  President            Chief Financial Officer   Vice President and Comptroller
 
</TABLE>

                               February 14, 1997

                                       35
<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, 1996 and 1995, and the
related consolidated statements of earnings, cash flows and stockholders' equity
for each of the three years in the period ended December 31, 1996 and the
related financial statement schedule.  These financial statements are the
responsibility of Unocal Corporation's management.  Our responsibility is to
express an opinion on these financial statements 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 37 through 68 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, 1996 and 1995 and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, 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.

  As discussed in Note 2 to the consolidated financial statements, Unocal
Corporation and its subsidiaries changed their method of accounting for the
impairment of long-lived assets and long-lived assets to be disposed of in 1995
and for recognizing the reduction in value of its producing oil and gas
properties in 1994.




Coopers & Lybrand L.L.P.
February 14, 1997
Los Angeles, California

                                       36
<PAGE>
 
<TABLE>    
<CAPTION>

CONSOLIDATED EARNINGS                                                                UNOCAL CORPORATION

                                                                                    Years ended December 31
                                                                       ----------------------------------------------
Dollars in millions except per share amounts                                 1996              1995              1994
----------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>               <C>               <C>
Revenues
Sales and operating revenues                                             $5,101            $4,111            $4,118
Interest, dividends and miscellaneous income                                 49                86                74
Equity in earnings of affiliated companies                                  106                77                83
Gain (loss) on sales of assets                                               72               115                (3)
---------------------------------------------------------------------------------------------------------------------
      Total revenues                                                      5,328             4,389             4,272
Costs and Other Deductions
Crude oil and product purchases                                           1,502               979             1,064
Operating expense                                                         1,386             1,302             1,366
Selling, administrative and general expense                                 151               151               194
Depreciation, depletion and amortization                                    914               911               811
Dry hole costs                                                              139                61                84
Exploration expense                                                         117               139               116
Interest expense                                                            279               291               275
Property and other operating taxes                                           72                80                91
Distribution on convertible preferred securities                             10                -                 -
---------------------------------------------------------------------------------------------------------------------
      Total costs and other deductions                                    4,570             3,914             4,001
---------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before income taxes                     758               475               271
Income taxes                                                                302               226               161
---------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before
   cumulative effect of accounting change                                   456               249               110
Discontinued Operations
   Earnings from operations (net of tax)                                     71                11                14
   Loss on disposal (net of tax)                                           (491)               -                 -
---------------------------------------------------------------------------------------------------------------------
      Earnings (loss) from discontinued operations                         (420)               11                14
Cumulative effect of accounting change                                       -                 -               (277)
---------------------------------------------------------------------------------------------------------------------
Net earnings (loss)                                                      $   36            $  260            $ (153)
Dividends on preferred stock                                                 18                36                36
Non-cash charge related to exchange of preferred stock                       54                -                 -
---------------------------------------------------------------------------------------------------------------------
      Net earnings (loss) applicable to common stock                     $  (36)           $  224            $ (189)
                                                                         ======== =======  ======== =======  ========

Earnings (loss) per share of common stock assuming no dilution:
      Continuing operations                                              $ 1.54            $ 0.87            $ 0.30
      Discontinued operations                                             (1.69)             0.04              0.06
      Cumulative effect of accounting change                                 -                 -              (1.14)
                                                                         --------------------------------------------
   Net earnings (loss) per share                                         $(0.15)           $  0.91           $ (0.78)
                                                                         ======== =======  ======== =======  ========
</TABLE>      

See Notes to Consolidated Financial Statements.

                                       37
<PAGE>
 
<TABLE>
<CAPTION>

CONSOLIDATED BALANCE SHEET                                                                 UNOCAL CORPORATION
                                                                                                   At December 31
Millions of dollars                                                                           1996                    1995
---------------------------------------------------------------------------------------------------------------------------
Assets
<S>                                                                                     <C>                     <C>
Current assets
   Cash and cash equivalents                                                                $217                     $94
   Accounts and notes receivable                                                           1,027                     920
   Net assets of discontinued operations                                                   1,774                      -
   Inventories                                                                               125                     360
   Deferred income taxes                                                                      57                     169
   Other current assets                                                                       28                      33
-------------------------------------------------------------------------------------------------------------------------
      Total current assets                                                                 3,228                   1,576
Investments and long-term receivables                                                      1,206                   1,101
Properties - net                                                                           4,590                   7,109
Deferred income taxes                                                                         21                      25
Other assets                                                                                  78                      80
-------------------------------------------------------------------------------------------------------------------------
      Total assets                                                                        $9,123                  $9,891
-------------------------------------------------------------------------------------------------------------------------

Liabilities and Stockholders' Equity
Current liabilities
   Accounts payable                                                                       $1,012                    $804
   Taxes payable                                                                             231                     193
   Current portion of long-term debt and capital lease obligations                           118                       8
   Interest payable                                                                           70                      92
   Other current liabilities                                                                 191                     219
--------------------------------------------------------------------------------------------------------------------------
      Total current liabilities                                                            1,622                   1,316
Long-term debt and capital lease obligations                                               2,940                   3,698
Deferred income taxes                                                                        348                     722
Accrued abandonment, restoration and environmental liabilities                               677                     607
Other deferred credits and liabilities                                                       739                     618

Company-obligated mandatorily redeemable convertible preferred
   securities of a subsidiary trust holding solely 6-1/4% convertible
   junior subordinated debentures of Unocal                                                  522                       -


Preferred stock ($0.10 par value; stated at liquidation value of $50 per share)
   Shares authorized:  100,000,000                                                             -                     513
   Shares outstanding: 10,250,000 in 1995
Common stock ($1 par value)
   Shares authorized:  750,000,000
   Shares outstanding:  250,671,266 in 1996 and 247,310,376 in 1995                          251                     247
Capital in excess of par value                                                               412                     319
Foreign currency translation adjustment                                                      (13)                    (10)
Unearned portion of restricted stock issued                                                  (14)                    (13)
Retained earnings                                                                          1,639                   1,874
--------------------------------------------------------------------------------------------------------------------------
         Total stockholders' equity                                                        2,275                   2,930
--------------------------------------------------------------------------------------------------------------------------
            Total liabilities and stockholders' equity                                    $9,123                  $9,891
--------------------------------------------------------------------------------------------------------------------------

The company follows the successful efforts method of accounting for its oil and gas activities.

See Notes to the Consolidated Financial Statements.

</TABLE>

                                       38
<PAGE>
 
<TABLE>
<CAPTION>

CONSOLIDATED CASH FLOWS                                                            UNOCAL CORPORATION
                                                                                    Years ended December 31
                                                                      ----------------------------------------------
Millions of dollars                                                       1996              1995              1994
--------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>               <C>               <C>
Cash Flows from Operating Activities
Net earnings (loss)                                                     $   36            $  260              (153)
Adjustment to reconcile net earnings (loss) to
   net cash provided by operating activities
      Loss on disposal of discontinued operations (before-tax)             743                -                 -
      Cumulative effect of accounting change                                -                 -                277
      Depreciation, depletion and amortization                           1,059             1,022               947
      Dry hole costs                                                       139                61                84
      Deferred income taxes                                               (332)                9              (118)
      (Gain) loss on sales of assets (before-tax)                          (77)             (117)                2
      Other                                                                113                -                217
      Working capital and other changes related to operations
         Accounts and notes receivable                                    (130)               (5)               91
         Inventories                                                        10               (16)              (10)
         Accounts payable                                                  208               115               (49)
         Taxes payable                                                      38               (33)               18
         Other                                                            (123)              (19)               (7)
--------------------------------------------------------------------------------------------------------------------
            Net cash provided by operating activities                    1,684             1,277             1,299

Cash Flows from Investing Activities
   Capital expenditures (includes dry hole costs)                       (1,398)           (1,459)           (1,272)
   Proceeds from sales of assets                                           609               204               156
--------------------------------------------------------------------------------------------------------------------
            Net cash used in investing activities                         (789)           (1,255)           (1,116)

Cash Flows from Financing Activities
   Proceeds from issuance of common stock                                   33                55                54
   Long-term borrowings                                                    375               844               732
   Reduction of long-term debt and capital lease obligations              (943)             (734)             (788)
   Dividends paid on preferred stock                                       (27)              (36)              (36)
   Dividends paid on common stock                                         (199)             (197)             (193)
   Other                                                                   (11)               (8)               (9)
--------------------------------------------------------------------------------------------------------------------
         Net cash used in financing activities                            (772)              (76)             (240)

Increase (decrease) in cash and cash equivalents                           123               (54)              (57)
Cash and cash equivalents at beginning of year                              94               148               205
--------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                $  217            $   94            $  148
--------------------------------------------------------------------------------------------------------------------

Supplemental disclosure of cash flow information:
   Cash paid during the period for:
      Interest (net of amount capitalized)                              $  276            $  268            $  263
      Income taxes (net of refunds)                                     $  332            $  228            $  174

See Notes to the Consolidated Financial Statements.

</TABLE>

                                       39
<PAGE>
 
<TABLE>
<CAPTION>

CONSOLIDATED STOCKHOLDERS' EQUITY                                                              UNOCAL CORPORATION

Dollars in millions except per share amounts                                             1996              1995              1994
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>                <C>               <C>
Preferred Stock
   Balance at beginning of year                                                        $  513            $  513            $  513
   Exchange of preferred stock for convertible preferred securities                      (468)               -                 -
   Conversion of preferred stock to common stock                                          (45)               -                 -
-----------------------------------------------------------------------------------------------------------------------------------
      Balance at end of year                                                               -                513               513
Common Stock
   Balance at beginning of year                                                           247               244               241
   Issuance of common stock                                                                 4                 3                 3
-----------------------------------------------------------------------------------------------------------------------------------
      Balance at end of year                                                              251               247               244
Capital in Excess of Par Value
   Balance at beginning of year                                                           319               237               163
   Issuance of common stock                                                                93                82                74
-----------------------------------------------------------------------------------------------------------------------------------
      Balance at end of year                                                              412               319               237
Foreign Currency Translation Adjustment
   Balance at beginning of year                                                           (10)              (13)               (5)
   Current year adjustment                                                                 (3)                3                (8)
-----------------------------------------------------------------------------------------------------------------------------------
      Balance at end of year                                                              (13)              (10)              (13)
Unearned Portion of Restricted Stock Issued
   Balance at beginning of year                                                           (13)              (13)              (13)
   Issuance of restricted stock                                                            (5)               (3)               (4)
   Current year amortization                                                                4                 3                 4
-----------------------------------------------------------------------------------------------------------------------------------
      Balance at end of year                                                              (14)              (13)              (13)
Retained Earnings
   Balance at beginning of year                                                         1,874             1,847             2,230
   Net earnings (loss) for year                                                            36               260              (153)
   Cash dividends declared
       Preferred stock ($1.75 per share in 1996, $3.50 per
         share in 1995 and in 1994)                                                       (18)              (36)              (36)
       Common stock ($.80 per share)                                                     (199)             (197)             (194)
   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                                                                  1,639             1,874             1,847
-----------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity                                                             $2,275            $2,930            $2,815
-----------------------------------------------------------------------------------------------------------------------------------

See Notes to the Consolidated Financial Statements.

</TABLE>

                                       40
<PAGE>
 
                  NOTES TO 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 subsidiary, Union Oil Company of California (Union Oil) and its
consolidated subsidiaries, 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 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,
refined 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.  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 the write down of 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.
 

                                       41
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MAINTENANCE AND REPAIRS

  Expenditures for maintenance and repairs are expensed.  In general,
improvements are charged to the respective property accounts and such accounts
are relieved of the original cost of property replaced.

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 in which
current or deferred tax liabilities or assets are recorded in accordance with
enacted tax laws and rates.  Under this method, the amount of deferred tax
liabilities or assets at the end of each period is 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.  See Note 10 for the principal temporary differences and unused tax
credits.

FOREIGN CURRENCY TRANSLATION

  Foreign exchange gains and losses 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 foreign operations, except Canada, 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

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

  Liabilities related to environmental assessment 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.

 See Notes 18 and 19.

                                       42
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FINANCIAL INSTRUMENTS

  The company has only limited involvement with derivative financial instruments
and does not use them for trading purposes.  They are used to manage well-
defined interest rate, foreign currency exchange rate and commodity price risks.
Gains and losses arising from currency swap agreements are recognized in income
and offset the foreign exchange gains and losses on the underlying transactions.
Gains and losses arising from commodity future contracts are deferred and
included in the basis of the underlying transactions.  Income or expense
associated with interest rate swap agreements is recognized on the accrual basis
over the life of the swap agreement as a component of interest income or
interest expense.

 See Note 17.

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",
encourages, but does not require 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 will
comply with the required disclosures under SFAS No. 123 (see Note 22).

OTHER
    
  Earnings per share of common stock assuming no dilution are based on net
earnings less preferred stock dividend requirements and the non-cash charge
related to the exchange of preferred stock, divided by the weighted average
shares of common stock outstanding during each period. The computation of fully
diluted earnings per share assumes the dilutive effect of common stock
equivalents and conversion of Unocal's convertible preferred stock and the
outstanding convertible preferred securities of a subsidiary trust (see Note
20). When the computation of fully diluted earnings per share is antidilutive
for any given period presented, the amounts reported for assuming no dilution
and assuming full dilution are the same.      

  Interest is capitalized on major construction and development projects as part
of the costs of the assets.

  Certain items in prior year financial statements have been reclassified to
conform to the 1996 presentation.

NOTE 2 - ACCOUNTING CHANGES

  Effective in the fourth quarter of 1995, the company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of."  The accounting standard set guidelines to be used for determining
and measuring impairment of certain assets.  As a result, the company recorded a
charge to earnings of $87 million pre-tax ($53 million after-tax tax or $0.22
per common share) in the fourth quarter of 1995. This charge was principally due
to the write down of several oil and gas producing properties where downward
revisions in reserve estimates indicated that future net cash flows would be
insufficient to fully recover the carrying value of these properties.  The
carrying values were written down to estimated future discounted cash flows or
fully written down in the case of negative future cash flows.  The charge was
recorded to depreciation, depletion and amortization expense and reflected the
reduction in value of various properties located in the United States ($44
million), the Netherlands ($37 million) and Canada ($6 million).

  Effective January 1, 1994, the company changed its accounting policy for
recognizing the reduction in value of its producing oil and gas properties and
commenced to evaluate properties for impairment on a field-by-field basis
instead of a country-by-country basis which was previously used.  The cumulative
effect of the accounting change resulted in a charge to earnings of $447 million
pre-tax ($277 million after-tax tax or $1.14 per common share) in the first
quarter of 1994.  The charge reflected the reduction in value of certain oil and
gas properties in the U.S. from which the estimated undiscounted future cash
flows were less than the current net book values of the properties.  As a result
of the property write downs, the company's depreciation and depletion expense in
1994 was reduced by approximately $61 million ($38 million after-tax).

                                       43
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3 - DISCONTINUED OPERATIONS

  In the fourth quarter of 1996, the company entered into a definitive agreement
with Tosco Corporation for the sale of substantially all of its West Coast
petroleum refining, marketing and transportation assets, which are operated by
the company's 76 Products Company business unit.  The sale is valued at
approximately $2 billion, which includes $1.4 billion for refining, marketing
and transportation fixed assets, approximately $400 million for inventories, and
up to $250 million in possible participation payments which are contingent upon
increased gasoline margins in the next seven years.  With the exception of
inventories, the sale excludes all other working capital. Terms of the agreement
call for cash payment or cash plus up to $400 million of Tosco stock.  See
Management's Discussion and Analysis under Item 7 on pages 32 through 33 for
additional information.

  The results for the refining, marketing and transportation operations to be
sold have been classified as discontinued operations for all periods presented
in the Consolidated Earnings Statement.  The assets have been reclassified in
the Consolidated Balance Sheet as of December 31, 1996 from their historical
classifications to separately reflect them as net assets of discontinued
operations.  The Consolidated Balance Sheet for the prior period has not been
restated.  Cash flows related to discontinued operations have not been
segregated in the Consolidated Statement of Cash Flows.  Consequently, amounts
on the Consolidated Earnings Statement may not agree with certain captions on
the Consolidated Statement of Cash Flows.

  The summarized results of discontinued operations and related effect per
common share are as follows:

<TABLE>
<CAPTION>                                                                                    Years ended December 31
                                                                                ----------------------------------------------
Dollars in millions except per share amounts                                       1996              1995              1994
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>               <C>               <C>
Revenues                                                                          $4,271            $4,036            $3,693
Total costs and other deductions                                                   4,156             4,048             3,670
                                                                                ----------------------------------------------
Earnings (loss) from operations before                                          
   income taxes                                                                      115               (12)               23
Income tax (benefit)                                                                  44               (23)                9
                                                                                ----------------------------------------------
Earnings from operations                                                              71                11                14
                                                                                
Loss on disposal before income taxes                                                (792)                -                 -
Income tax (benefit)                                                                (301)                -                 -
                                                                                ----------------------------------------------
   Loss on disposal (a)                                                             (491)                -                 -
      Total earnings (loss)                                                       $ (420)           $   11            $   14
                                                                                ----------------------------------------------
                                                                                
Earnings (loss) per common share:                                               
   Earnings from operations                                                       $ 0.28            $ 0.04            $ 0.06
   Loss on disposal                                                                (1.97)                -                 -
                                                                                ----------------------------------------------
      Total earnings (loss)                                                       $(1.69)           $ 0.04            $ 0.06
                                                                                ----------------------------------------------

(a) 1996 includes the following estimated losses during the phase-out period:
        November 17, 1996 - December 31, 1996  $30 (net of income tax benefit of $18)
        January 1, 1997 - March 31, 1997       $42 (net of income tax benefit of $25)
</TABLE> 

                                       44
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Detailed below are the net assets of discontinued operations as shown on the
Consolidated Balance Sheet:

<TABLE>
<CAPTION>


Millions of Dollars
-----------------------------------------------
<S>                                      <C> 
Inventories                              $  225
Properties - net                          2,162
Other assets                                133
Provision for loss on sale                 (746)
-----------------------------------------------
Net assets of discontinued operations    $1,774
-----------------------------------------------

</TABLE>

NOTE 4 - RESTRUCTURING COSTS

  During the fourth quarter of 1994, as a result of an overhead study, the
company began a two-year program to reduce its 1,540-person corporate staff by
630 positions and to eliminate another 126 positions in the operating groups.  A
pre-tax charge of $25 million was recorded in administrative and general expense
for net costs associated with the staff reductions.  This charge included $34
million of estimated benefits to be paid to former employees over a period of
time.  Partially offsetting this charge was an estimated credit of $9 million
for reduced pension obligations.  At December 31, 1996, approximately 667
employees had been terminated as a result of the program.  The program is
complete and all termination benefits have been paid.

NOTE 5 - WRITE DOWNS OF ASSETS

  During 1996, in accordance with SFAS No. 121, the company recorded pre-tax
charges to earnings for asset write downs of $52 million for certain domestic
oil and gas properties and $23 million for domestic geothermal properties.  The
charges were recorded after evaluation of recent events that indicated future
net cash flows would be insufficient to fully recover the carrying values of
these properties.  Carrying values were written down to estimated future
discounted cash flows or completely written down in the case of negative
estimated future cash flows.  The charges were recorded to depreciation,
depletion and amortization expense.

  During the fourth quarter of 1995, the company adopted SFAS No. 121 and
recorded a pre-tax charge to earnings of $87 million for the write down of
several oil and gas producing properties.  Prior to the adoption of SFAS No. 121
in the second quarter of 1995, the company recorded a pre-tax charge of $13
million to write down the carrying values of certain domestic oil and gas
properties and $5 million for miscellaneous asset write downs.

  During 1994, the company recorded a pre-tax charge of $25 million to write
down the carrying value of the Guadalupe oil field due to the shut down of the
field for environmental reasons.  The company also closed certain facilities
used in refining and marketing operations and research activities, which
resulted in write-downs of $39 million.  Due to project modifications, the
company wrote off $7 million in 1994 for costs related to the reformulated fuels
program at the company's Los Angeles Refinery.

NOTE 6 - DISPOSITIONS OF ASSETS

  Proceeds received from asset sales during 1996 were $609 million with a
recorded pre-tax gain of $77 million. The total proceeds from the sale of oil
and gas properties included $472 million from the sale of California oil and gas
properties with a pre-tax gain of $109 million.  Proceeds of $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 North Sea with a recorded 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.

                                       45
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                        
  During 1995, the company received total proceeds from sales of assets of $204
million and recorded a pre-tax gain of $117 million.  Of the total proceeds,
$134 million was from the sale of oil and gas properties with a pre-tax gain of
$52 million.  In addition, the company recorded a pre-tax gain of $26 million on
proceeds of $32 million from the sale of its Process, Technology and Licensing
business.

  In 1994, asset sales generated total proceeds of $156 million with a pre-tax
loss of $2 million.  Of the total proceeds, $118 million was from the sale of
oil and gas properties.

NOTE 7 - CASH FLOW INFORMATION

  The company considers cash equivalents to be all highly liquid investments
purchased with a maturity of three months or less.  All income taxes paid are
included in determining cash flows from operating activities.  As a result,
income taxes paid on taxable income from sales of assets are not included in
cash flows from investing activities.

  The 1996 and 1995 cash flow statements excluded $19 million and $30 million,
respectively, in transactions primarily related to the purchase of Unocal common
stock by the trustee of the Unocal Savings Plan (the "Plan") from Unocal.  The
trustee used the company's matching contributions to the Plan, which were
expensed in the company's consolidated earnings statements, to purchase the
shares.  In the consolidated cash flow statements, the issuance of Unocal common
stock and the matching contribution expense were treated as non-cash
transactions since the resulting effect on cash flow was zero.

  The exchange of preferred stock to convertible preferred securities and the
conversion of preferred stock to common stock, as described in Note 20, are non-
cash transactions and therefore, are excluded from the 1996 cash flow statement.

NOTE 8 - OTHER FINANCIAL INFORMATION

 Consolidated earnings for the periods ending December 31 included the
following:

<TABLE>
<CAPTION>

Millions of Dollars                        1996                1995            1994
-----------------------------------------------------------------------------------
<S>                                  <C>                   <C>             <C>
Total interest costs                      $294                 $326            $305
Less capitalized interest                   15                   35              30
-----------------------------------------------------------------------------------
        Interest expense                  $279                 $291            $275
Maintenance and repair costs              $218                 $250            $253
-----------------------------------------------------------------------------------
</TABLE> 

The consolidated balance sheet at December 31 includes the following:

<TABLE> 
<CAPTION> 

Millions of Dollars                                           1996            1995
----------------------------------------------------------------------------------
<S>                                                        <C>            <C> 
Other deferred credits and liabilities:
   Postretirement medical benefits obligation                 $207            $214
   Reserve for litigation and other claims                     369             262
   Other employee benefits                                      85              50
   Other                                                        78              92
-----------------------------------------------------------------------------------
      Total                                                   $739            $618
-----------------------------------------------------------------------------------
Allowances for doubtful accounts and notes receivable         $ 35            $ 28
Allowances for investments and long-term receivables          $ 13            $ 15
-----------------------------------------------------------------------------------

</TABLE>

                                       46
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9 - PROPERTY AND OTHER OPERATING TAXES

<TABLE>
<CAPTION>

Millions of Dollars                            1996   1995   1994
---------------------------------------------------- ------ ------
<S>                                           <C>    <C>    <C>
Real and personal property taxes                $30    $41    $44
Severance and other taxes on production          41     38     38
Other taxes and duties                            1      1      9
---------------------------------------------------- ------ ------
   Total                                        $72    $80    $91
---------------------------------------------------- ------ ------
</TABLE>

  In addition, social security and unemployment insurance taxes, which are
charged to earnings and included with salaries and wages, totaled $44 million in
1996, $45 million in 1995 and $44 million in 1994.

 NOTE 10 - INCOME TAXES

  Unocal files a consolidated federal income tax return that includes
essentially all U.S. subsidiaries.  The components of pre-tax earnings and the
provision for income taxes are as follows:

<TABLE>
<CAPTION>

Millions of Dollars                                                1996     1995    1994
-------------------------------------------------------------------------------------------
<S>                                                              <C>      <C>     <C>
Earnings (loss) from continuing operations before income
   taxes and cumulative effect of accounting changes
      United States                                                $195     $ 81   $(186)
      Foreign                                                      $563     $394   $ 457
-------------------------------------------------------------------------------------------
            Total                                                  $758     $475   $ 271
Income Taxes
   Current
      Federal                                                      $ 76     $  3   $  14
      State                                                        $ 30     $  4   $  16
      Foreign                                                      $277     $187   $ 245
-------------------------------------------------------------------------------------------
            Total                                                  $383     $194   $ 275
 Deferred
      Federal                                                      $(70)    $ 14   $(117)
      State                                                        $(13)    $  6   $  (7)
      Foreign                                                      $  2     $ 12   $  10
-------------------------------------------------------------------------------------------
            Total                                                  $(81)    $ 32   $(114)
-------------------------------------------------------------------------------------------
               Total income taxes                                  $302     $226   $ 161
-------------------------------------------------------------------------------------------

</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                                                           1996     1995    1994
----------------------------------------------------------------------------------------------------
<S>                                                                        <C>      <C>     <C>
Federal statutory rate                                                          35%      35%     35%

Taxes on book earnings computed at statutory rate                             $265     $166    $ 95
Foreign taxes in excess of statutory rate                                       82       59      75
Dividend exclusion                                                             (15)     (15)    (13)
Statutory rate in excess of taxes on gain from sales of assets                 (24)       -       -
Other                                                                           (6)      16       4
---------------------------------------------------------------------------------------------------
            Total                                                             $302     $226    $161
---------------------------------------------------------------------------------------------------
</TABLE>

                                       47
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  The significant components of deferred income tax assets and liabilities
included in the Consolidated Balance Sheet at December 31, 1996 and 1995 are as
follows:

<TABLE>
<CAPTION>

Millions of Dollars                                         1996        1995
------------------------------------------------------------------------------
<S>                                                     <C>       <C>
Deferred tax assets (liabilities):
   Depreciation and intangible drilling costs              $(883)    $(1,129)
   Pension assets                                           (154)       (145)
   Investments in affiliates                                 (71)        (80)
   Other deferred tax liabilities                           (213)       (216)
   Federal alternative minimum tax credits                   191         142
   Litigation/environmental costs                            161         108
   Depletion                                                 139         169
   Exploratory costs                                         155         140
   Future abandonment costs                                  141         133
   Postretirement benefit costs                               78          81
   1995 federal net operating loss carryforward                -          94
   Other deferred tax assets                                 186         175
----------------------------------------------------------------------------
      Total                                                $(270)    $  (528)
---------------------------------------------------------------------------- 
</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.  Such undistributed earnings for tax purposes, excluding
previously taxed earnings, are estimated at $1 billion as of December 31, 1996.

  At year-end 1996, the company had approximately $100 million of unused foreign
tax credits with various expiration dates through the year 2002.  No deferred
tax asset for these foreign tax credits is recognized for financial statement
purposes.  The company had approximately $15 million of federal business tax
credit carryforwards that will expire between the years 2003 and 2010.

  The federal alternative minimum tax credits are available to offset future
U.S. federal income taxes on an indefinite basis.

NOTE 11 - INVENTORIES

<TABLE>
<CAPTION>

Millions of Dollars                  1996     1995
---------------------------------------------------
<S>                              <C>      <C>
Crude oil and condensate            $  5     $  6
Refined products                       7        7
Agricultural products                 41       40
Minerals                              21       30
Supplies, merchandise and other       51       50
---------------------------------------------------
      Total                         $125     $133
---------------------------------------------------
</TABLE>

  The inventory amounts above exclude $225 million and $227 million for 1996 and
1995, respectively, for discontinued operations.

  The current replacement cost of inventories exceeded the LIFO inventory value
included above by $18 million and $17 million at December 31, 1996 and 1995,
respectively.

  Petroleum refining, marketing and transportation inventories at December 31,
1996 have been included in net assets of discontinued operations.  The current
replacement cost of these inventories exceeded the LIFO inventory value by $148
million.

                                       48
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 12 - PROPERTIES AND CAPITAL LEASES

  Investments in owned and capitalized leased properties at December 31, 1996
and 1995 are set forth below.  Total accumulated depreciation, depletion and
amortization for continuing operations was $9,502 million and $10,179 million at
December 31, 1996 and 1995, respectively.

<TABLE>
<CAPTION>
                                                1996                 1995
                                         -------------------- ----------------------
Millions of Dollars                       Gross       Net      Gross       Net
------------------------------------------------------------- ----------------------
<S>                                      <C>        <C>       <C>        <C>
Owned properties (at cost)
   Petroleum operations:
      Exploration
         United States                     $    80    $   32    $   113     $   45
         Far East                               30        20        119         71
         Other Foreign                          57        19         54         19
      Production
         United States                       6,779     2,218      7,994      2,676
         Far East                            3,745     1,314      2,977        870
         Other Foreign                       1,058        78      1,376        365
------------------------------------------------------------- ----------------------
         Total                              11,749     3,681     12,633      4,046
   Geothermal Operations                       763       307        995        382
   Diversified Business Group
      Agricultural Products                    659       212        650        221
      Carbon & Minerals                        173        71        140         45
      Pipelines                                332       103        330         99
   Corporate and unallocated                   402       215        465        254
------------------------------------------------------------- ----------------------
      Total owned properties                14,078     4,589     15,213      5,047
Capitalized leased properties                   14         1         17          4
------------------------------------------------------------- ----------------------
         Total continuing operations        14,092     4,590     15,230      5,051
Discontinued operations                          -         -      3,310      2,058
------------------------------------------------------------- ----------------------
            Total                          $14,092    $4,590    $18,540     $7,109
------------------------------------------------------------- ----------------------
</TABLE>

  Net property, plant and equipment of $2,162 million ($3,520 million gross) for
discontinued operations at December 31, 1996 has been reflected in the net
assets of discontinued operations (see Note 3).

NOTE 13 - RETIREMENT PLANS

  The company and its subsidiaries have several non-contributory retirement
plans covering substantially all employees.  Plan benefits are primarily based
on years of service and employees' compensation near retirement.  All U.S. plans
are administered by corporate trustees.  There was no company contribution to
the principal U.S. plan during the years 1994 through 1996 as plan assets
substantially exceeded the pension obligations.  At year-end 1996, plan assets
principally consisted of equity securities, U.S. government and agency issues,
corporate bonds and cash.

  Employees of certain foreign subsidiaries of the company are covered by
separate plans.  Total obligations for all foreign plans are not material.

                                       49
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 Pension costs for the funded U.S. plans include the following components:

<TABLE>
<CAPTION>

Millions of Dollars                                                                    1996    1995    1994
-------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>     <C>     <C>
Service cost - benefits earned during the year                                         $  29   $  21   $  24
Interest cost on projected benefit obligation                                             53      52      49
Actual return on plan assets                                                            (143)   (225)      9
Net amortization and deferral                                                             29     129    (109)
Net (gain) loss from partial settlement of obligation and curtailment of operations       13      (7)     (4)
-------------------------------------------------------------------------------------------------------------
Net pension income                                                                     $ (19)  $ (30)  $ (31)
-------------------------------------------------------------------------------------------------------------

</TABLE>
 
  Net loss from partial settlement of obligation and curtailment of operations
for 1996 includes a loss of $15 million associated with discontinued operations
(see Note 3).

  The following table sets forth the plans' funded status and amounts recognized
in the Consolidated Balance Sheet at December 31, 1996 and 1995:

<TABLE>
<CAPTION>

Millions of Dollars                                          1996      1995
-------------------------------------------------------------------------------
<S>                                                        <C>      <C>
Plan assets at fair value                                   $1,116      $1,053
-------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
    Vested benefits                                            668         636
    Nonvested benefits                                          15          24
-------------------------------------------------------------------------------
Accumulated benefit obligation                                 683         660
Effect of projected future salary increases                     75          78
-------------------------------------------------------------------------------
Projected benefit obligation                                   758         738
-------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation          358         315
Unrecognized net loss                                           75         115
Unrecognized net assets                                        (40)        (63)
Unrecognized prior service cost                                 17          24
-------------------------------------------------------------------------------
   Prepaid pension cost                                     $  410      $  391
-------------------------------------------------------------------------------
</TABLE>

  The assumed rates used to measure the projected benefit obligation and the
expected earnings on plan assets were as follows:

<TABLE>
<CAPTION>
                                                  1996    1995     1994
                                                -----------------------
<S>                                             <C>    <C>     <C>
Weighted-average discount rate                   7.25%   7.25%    8.50%
Increase in future compensation levels           4.00%   4.00%    5.00%
Expected long-term return on plan assets         9.50%   9.50%    9.75%
</TABLE>

  The amount of benefits which can be covered by the funded plans described
above are limited by the Employee Retirement Income Security Act of 1974 and the
Internal Revenue Code.  Therefore, the company has a supplemental retirement
plan designed to maintain benefits for all employees at the plan formula level.
The amounts expensed for this plan were $2 million, $5 million and $5 million in
1996, 1995 and 1994, respectively.  The accumulated obligation recognized in the
Consolidated Balance Sheet at December 31, 1996 was $20 million.

  The company has established a grantor trust to provide funding for the
benefits payable under the supplemental retirement plan.  Total assets held in
the trust at December 31, 1996 and 1995 amounted to $16 million and $14 million,
respectively.

                                       50
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 14 - POSTRETIREMENT AND POSTEMPLOYMENT BENEFIT PLANS

  The company's medical plan provides health care benefits for eligible
employees and retired employees.  Employees may become eligible for
postretirement benefits if they reach the normal retirement age while working
for the company.  The plan is contributory and the benefits are subject to
deductibles and co-payments.

  The following table sets forth the postretirement benefit obligation
recognized in the Consolidated Balance Sheet at December 31, 1996 and 1995:

<TABLE>
<CAPTION>

Millions of Dollars                                        1996    1995
-----------------------------------------------------------------------
<S>                                                     <C>     <C>
Accumulated postretirement benefit obligations:
   Retirees                                               $130    $134
   Fully eligible active employees                          20      23
   Other active employees                                   50      52
-----------------------------------------------------------------------
      Total                                                200     209
Unrecognized gain and prior service cost                    24       4
-----------------------------------------------------------------------
      Accrued postretirement benefit cost                 $224    $213
-----------------------------------------------------------------------

</TABLE>

 Net periodic postretirement benefits cost is comprised of the following
components:

<TABLE>
<CAPTION>

Millions of Dollars         1996            1995            1994
-----------------------------------------------------------------
<S>                         <C>             <C>             <C>
Service cost                $ 7             $ 4             $ 6
Interest cost                15              15              15
-----------------------------------------------------------------
      Total                 $22             $19             $21
-----------------------------------------------------------------
</TABLE>

  The accumulated postretirement benefit obligation at December 31, 1996 was
determined using a discount rate of 7.25 percent.  The health care cost trend
rates used in measuring the 1996 benefit obligations were 6.0 percent for under
age 65 and 5.8 percent for age 65 and over, gradually decreasing to 5.0 percent
by the year 2001 and remaining at that level thereafter.  The rates are subject
to change in the future.  The health care cost trend rate assumption has a
significant effect on the amounts reported.  For example, an increase in the
assumed health care cost trend rate of one percentage point in each year would
increase the accumulated postretirement benefit obligation as of December 31,
1996 by $23 million and net periodic benefits cost by $3 million.

  The company also provides benefits such as workers' compensation and disabled
employees' medical care to former or inactive employees after employment but
before retirement.  The accumulated postemployment benefit obligation was $20
million as of December 31, 1996 and $16 million as of December 31, 1995.

  The reduction in projected postretirement benefit plan cost associated with
discontinued operations was $17.5 million and was reflected in loss on disposal
in the December 31, 1996 Consolidated Earnings Statement (see Note 3).

                                       51
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 15 - LONG-TERM DEBT AND CREDIT AGREEMENTS

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

<TABLE>
<CAPTION>

Millions of Dollars                                              1996              1995
---------------------------------------------------------------------------------------
<S>                                                        <C>               <C>
Bonds and debentures
   9-1/4% Debentures due 2003                                 $  250            $  250
   9-1/8% Debentures due 2006                                    200               200
   6-1/8% to 7-7/8% Industrial Development Revenue
      Bonds due 1998 to 2008                                      23                71
   Swiss Franc Bonds due 1996 (5.25%)                              -               175
   Deutsche Mark Bonds due 1998 (6.125%)                         162               175
Notes
   Commercial paper  (6.68%) (a)                                  64               650
   Medium-term notes due 1997 to 2015 (8.11%) (a)              1,067             1,075
   Bank Credit Agreement  (5.78%) (a)                            250               105
   Revolving credit facilities (5.95%) (a)                       180               130
   9-3/4% Notes due 2000                                         250               250
   8-3/4% Notes due 2001                                         200               200
   6-3/8% Notes due 2004                                         200               200
   7-1/5%  Notes due 2005                                        200               200
Other miscellaneous debt                                           9                15
---------------------------------------------------------------------------------------
      Total                                                    3,055             3,696
      Less current portion of long-term debt                     115                 4
---------------------------------------------------------------------------------------
      Total long-term debt                                    $2,940            $3,692
---------------------------------------------------------------------------------------
(a)  Weighted average interest rate at December 31, 1996

</TABLE>

  The amounts of long-term debt maturing in 1998, 1999, 2000 and 2001 are $374
million, $167 million, $759 million and $267 million, respectively.

  During 1996, the company reduced long-term debt $641 million from the year-end
1995 level, primarily with the proceeds from the sale of its California oil and
gas producing properties.

  In addition, the company's new borrowings during 1996 consisted of:  $100
million in medium-term notes with interest rates ranging from 5.94% to 6.23% and
maturity dates ranging from 2003 to 2006 and $50 million under a $250 million
revolving credit facility.  The proceeds were used principally to retire Swiss
Franc Bonds.  In December 1996, the company repurchased approximately $100
million in medium-term notes with proceeds from commercial paper.

  During 1996, the company was party to revolving credit facilities with
syndicates of major international banks, in order to provide support for its
working capital requirements for overseas operations.  The company borrowed an
additional $50 million under a $250 million revolving credit facility that was
established in 1993 for the purpose of funding its oil and gas development
program in Thailand.  This revolving credit facility terminates December 15,
2000. During 1996, the company terminated its $45 million revolving credit
facility for operations in the Netherlands and $25 million revolving credit
facility with a Canadian bank.  The entire committed amounts on these facilities
were unborrowed at the time of termination.  Borrowings under these credit
facilities bear interest at different margins above London Interbank Offered
Rates (LIBOR) and the agreements call for facility fees on either the total or
undrawn commitment.

  The Bank Credit Agreement provides a revolving credit of $1.2 billion through
June 2000 at interest rates based on LIBOR and requires a facility fee on the
total commitments.  Of the total, $250 million had been borrowed at December 31,
1996.  This agreement is available for general corporate purposes, including the
support of commercial paper. The $200 million 364-day credit facility
established in 1995, which has a March 1997 maturity

                                       52
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

date and annual renewal requirement, was undrawn at year-end 1996.  The company
has other undrawn letters of credit for approximately $128 million.  The
majority are maintained for operational needs.

  The Bank Credit Agreement and certain of the other revolving credit facilities
described above provide for the termination of the commitments and require the
prepayment of all outstanding borrowings in the event (a) any person or group
becomes the beneficial owner of more than 30 percent of the then outstanding
voting stock of Unocal, otherwise than in a transaction having the approval of
the Board of Directors of Unocal (the Board), at least a majority of which are
continuing directors (as defined therein), or (b) continuing directors shall
cease to constitute at least a majority of the Board.

NOTE 16 - LEASE RENTAL OBLIGATIONS

  Future minimum rental payments for operating leases having initial or
remaining noncancelable lease terms in excess of one year, excluding those
related to discontinued operations, are as follows:

<TABLE>
<CAPTION>

Millions of Dollars
--------------------------------------------------
<S>                                       <C>
1997                                         $ 48
1998                                           43
1999                                           32
2000                                           31
2001                                           25
Balance                                       104
--------------------------------------------------
   Total minimum lease payment               $283
--------------------------------------------------
</TABLE>

  Net operating rental expense included in consolidated earnings, excluding
those related to discontinued operations, is as follows:

<TABLE>
<CAPTION>

Millions of Dollars                                                1996            1995            1994
-------------------------------------------------------------------------------------------------------
<S>                                                            <C>             <C>             <C>
Fixed rentals                                                      $73             $79             $80
Contingent rentals (based primarily on sales and usage)             11              12              14
Sublease rental income                                              (3)             (2)             (3)
-------------------------------------------------------------------------------------------------------
   Net expense                                                     $81             $89             $91
-------------------------------------------------------------------------------------------------------
</TABLE>

NOTE 17 - FINANCIAL INSTRUMENTS

  Unocal does not hold or issue financial instruments for trading purposes.

  Notional amounts are not included in the Consolidated Balance Sheet and
generally exceed the future cash requirements relating to the instruments.

  The counterparties to the company's financial instruments are regulated
exchanges or major international financial institutions with high credit
ratings.  Even though the company may be exposed to losses in the event of non-
performance by these counterparties, it does not anticipate that such losses
will be realized.  In the opinion of management, the off-balance-sheet risk
associated with these instruments is minimal and immaterial.

 FOREIGN CURRENCY FORWARD AND SWAP CONTRACTS

  Unocal enters into various foreign currency forward and swap 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.

                                       53
<PAGE>
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  During 1986, the company entered into two currency swap agreements to hedge
foreign currency exchange exposures related to the interest and principal
payments on the company's Swiss Franc bonds due in 1996 and Deutsche Mark bonds
due in 1998.  During 1996, the company retired at maturity the $110 million
Swiss Franc bond issue and the corresponding $55 million currency swap
agreement.  The Deutsche Mark swap has the same maturity as the related
underlying debt.  At year-end 1996 and 1995, the aggregate notional principal
amount of the Deutsche Mark swap agreement was $110 million.  At year-end 1996,
this currency swap agreement had a fair value of approximately $52 million,
based on dealer quotes, which is included in long-term receivables on the
Consolidated Balance Sheet.

  In addition, the company had two currency swap agreements outstanding on
borrowings of its Canadian subsidiary, with notional amounts totaling $250
million at year-end 1996.  The agreements, entered into by the subsidiary, have
the effect of changing the subsidiary's U.S. dollar denominated borrowings into
its functional Canadian currency.  The objective of these agreements is to limit
the subsidiary's exposure to currency exchange gains and losses.  The parent
company also has two currency swap agreements to offset the subsidiary's
currency swaps with the objective of maintaining the underlying debt in U.S.
dollars for reporting in the consolidated financial statements.  The maturities
of the agreements range from 1999 to 2000, which generally correspond to the
related debt obligations.  The net fair value of the currency swap agreements at
year-end 1996 and 1995, based on dealer quotes, was approximately zero.

  In December 1996, the company closed out its currency forward contracts which
were used to hedge a series of known obligations denominated in Pounds Sterling
and due during the period from January 1997 to July 2000.  These contracts were
closed-out at a realized gain of $3.1 million.

INTEREST RATE SWAPS

  The company enters into interest rate swap agreements to manage its debt with
the objective of minimizing the company's borrowing costs.  Net payments or
receipts under the agreements 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.

  In 1994, the company entered into a three-year interest rate swap with a
notional amount of $25 million.  This swap was entered into to hedge $25 million
in medium-term notes.  The company pays interest at a floating rate based on
LIBOR and receives interest at a fixed rate of 6.7 percent.  At year-end 1996
and 1995, the floating interest rates were 5.7 percent and 5.8 percent,
respectively.  At year-end 1996 and 1995, the interest rate swap agreements had
aggregate fair values of approximately $0.1 million in assets and $12 million in
liabilities, respectively, based on quoted market prices of comparable
instruments.

OTHER

  The company uses commodity futures contracts with maturities of one year or
less to hedge the impact of fluctuations in prices of crude oil and natural gas.
Realized and unrealized changes in the market value of futures contracts are
deferred until the hedged transaction is recognized.  Notification to the Board
of Directors is required if the company hedges more than 15 percent of its
production of oil and gas, refined products, and of crude oil purchased for
refinery supply.

  At December 31, 1996, contracts covering 508 thousand barrels of crude oil and
5.64 billion cubic feet of natural gas with notional amounts totaling $13
million for crude oil and $15 million for natural gas were outstanding.  At
December 31, 1995, the company had outstanding contracts covering 225 thousand
barrels of crude oil and 1.02 billion cubic feet of natural gas with notional
amounts totaling $4 million for crude oil and $2 million for natural gas.  The
fair values of the contracts, based on quoted market prices, were insignificant
at year-end 1996 and 1995.

  As of December 31, 1996 and 1995, the carrying amounts of certain financial
instruments employed by the company, including cash, cash equivalents, and trade
receivables and payables are representative of fair value because of the short-
term maturity of these instruments.

                                       54
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  The estimated fair value of the company's long-term debt was $3,184 million
and $3,983 million at year-end 1996 and 1995, respectively.  The fair values of
debt instruments were based on the discounted amount of future cash outflows
using the rates offered to the company for debt with similar remaining
maturities.

  The estimated fair value of Unocal Capital Trust's 6-1/4 percent convertible
preferred securities at year-end 1996 was $591 million.  The fair value of the
preferred securities was based on the trading price of the preferred securities
on December 31, 1996.

CONCENTRATIONS OF CREDIT RISK

  Financial instruments that potentially subject the company to concentrations
of credit risk consist primarily 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.  Concentrations of credit risk with
respect to trade receivables are limited because there are a large number of
customers in the company's customer base spread across many industries and
geographic areas.  As of December 31, 1996 and 1995, the company had no
significant concentrations of credit risk.

NOTE 18 - ACCRUED ABANDONMENT, RESTORATION AND ENVIRONMENTAL LIABILITIES

  At December 31, 1996, the company had accrued $500 million for the estimated
future costs to abandon and remove wells and production facilities.  The total
costs for abandonments are predominately accrued for on a units-of-production
basis and are estimated to be approximately $675 million.  This estimate was
derived in large part from abandonment cost studies performed by an outside firm
and is used to calculate the amount to be amortized.

  At December 31, 1996, the company's reserve for environmental remediation
obligations totaled $250 million, of which $73 million was included in other
current liabilities.  The reserve includes estimated probable future costs of
$27 million for federal Superfund and comparable state-managed multiparty
disposal sites; $26 million for formerly-operated sites for which the company
has remediation obligations; $60 million for sites related to businesses or
operations that have been sold with contractual remediation or indemnification
obligations; $77 million for company-owned or controlled sites where facilities
have been closed or operations shut down; and $60 million for active sites owned
and/or controlled by the company and utilized in its present operations.

NOTE 19 - CONTINGENT LIABILITIES

  The company has certain 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.

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 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, if
liability is 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

                                       55
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

contamination, the imprecise and conflicting engineering evaluations and
estimates of proper cleanup 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, and the fact that the company is
usually just one of a number of companies identified as a PRP.

  As disclosed in Note 18, at year-end 1996 the company had accrued $250 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 additional remediation costs aggregating approximately $160
million.

  Between August 22 and September 6, 1994, a chemical known as "Catacarb" was
released into the environment at the company's San Francisco Refinery near
Rodeo, California.  Persons in the surrounding area have claimed that they were
exposed to the chemical in varying degrees.  Since September 22, 1994, fifty-
three lawsuits have been filed by or on behalf of all persons, alleged to be
several thousand, claiming that they or their property were adversely affected
by the releases.  Fifty-one of the lawsuits have been consolidated in the
Superior Court for Contra Costa County.  The First Amended Model Complaint in
this consolidated action, filed February 1, 1995, on behalf of individual
plaintiffs and purported classes of plaintiffs, alleges personal injury,
emotional distress and increased risk of future illness on behalf of the named
plaintiffs and all persons present in and around or downwind from the San
Francisco refinery, and property damage and loss or diminution of property value
on behalf of all owners of real and personal property in the vicinity of the
Refinery, resulting from the release of Catacarb by the Refinery.  Certain
individual plaintiffs allege injury from alleged subsequent releases at the
Refinery of hydrogen sulfide and other chemicals.  The Model Complaint seeks
compensatory and punitive damages in unspecified amounts, equitable relief
including the creation of a fund for medical monitoring and treatment of
plaintiffs and members of the purported classes, statutory penalties and other
relief.  The company has reached agreement with plaintiffs to certify a
mandatory non-opt out punitive damages class.  Plaintiffs have withdrawn their
class claims for personal injury and property damage.  In early November 1996,
the trial court issued an order declining to certify a medical monitoring class.

TAX MATTERS

  In December 1994, the company received a Notice of Proposed Deficiency from
the Internal Revenue Service (IRS) related to the years 1985 through 1987.  In
February 1995, the company filed a protest of the proposed tax deficiency with
the Appeals section of the IRS.  Discussions with the Appeals Officer are
ongoing, but it appears that two substantial issues may proceed to litigation.
In an effort to resolve these issues without litigation, in October 1996, the
company and the IRS entered into an Agreement to Mediate.  While the parties
have selected a mediator, no date for the mediation has been set.

  The most significant issue relates to an IRS challenge of a $341 million
deduction taken by the company in its 1985 tax return for amounts paid under a
settlement agreement with Mesa Petroleum, T. Boone Pickens and Drexel Burnham
Lambert, Incorporated, and certain others which ended a hostile takeover attempt
by that group.  The IRS contends that the deduction is not allowable because the
payment was related solely to the purchase of the company's common stock.
Although the company did purchase shares under the settlement agreement, it
properly reflected the purchase in its records at the fair market value of the
shares purchased.  The deduction at issue relates to that portion of the payment
made under the settlement agreement that exceeded the value of the shares
purchased.  The company intends to vigorously dispute the IRS' assertions.  If
the IRS was ultimately to prevail, the company would owe $157 million of tax for
1985 plus tax deductible interest estimated at $307 million as of December 31,
1996.   As noted above, the company is working with the IRS to resolve this
matter without litigation.  Should that effort fail, final resolution of this
matter is likely to be several years away as the matter is not yet before a
court.

  The second issue relates to an IRS challenge of a continued deferral of
intercompany gains which arose from sales of property between subsidiaries in
1982 and 1983.  The IRS contends that the $201 million balance of deferred gain
must be recognized in the company's taxable income for 1985 when the
subsidiaries contributed the property to a wholly-owned master limited
partnership.  The company intends to vigorously dispute the IRS'

                                       56
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

assertions.  If the IRS was ultimately to prevail, the company would owe $92
million in tax for 1985, but would receive credits or refunds for offsetting
deductions in later years.  For 1986 and 1987 the credits or refunds would total
$35 million. In addition to tax, the company would owe tax deductible interest
estimated at $125 million as of December 31, 1996.  As noted above, the company
is working with the IRS to resolve this matter without litigation.  Should that
effort fail, final resolution of this matter is likely to be several years away
as the matter is not yet before a court.

  The total amount of tax and interest that the company would be required to pay
if the IRS was ultimately to prevail on both of the issues described in the two
preceding paragraphs is substantially less than the sum of the amounts.  As a
result of the interplay of these issues, application of foreign tax credits and
overpayments related to other issues, the total amount of tax and interest is
estimated at $400 million as of December 31, 1996.

  The company believes it has adequately provided in its accounts for items and
issues not yet resolved.  In the opinion of management, a successful outcome of
the litigation is reasonably likely.  However, substantial adverse decisions
could have a material effect on the company's financial condition, operating
results and liquidity in a given quarter and year when such matters are
resolved.

OTHER MATTERS

  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 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 20 - TRUST CONVERTIBLE PREFERRED SECURITIES

  On September 11, 1996 Unocal exchanged 10,437,873 new 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 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.

  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 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.

                                       57
<PAGE>
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  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 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.

  On September 11, 1996, 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 October 11, 1996 redemption date.

NOTE 21 - CAPITAL STOCK

 COMMON STOCK

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------
Authorized - 750,000,000
$1.00 Par value per share

Thousands of Shares                      1996              1995              1994
------------------------------------------------------------------------------------
<S>                                   <C>               <C>               <C>
Outstanding at beginning of year       247,310           244,199           241,324
Issuance of common stock                 3,361             3,111             2,875
------------------------------------------------------------------------------------
Outstanding at end of year             250,671           247,310           244,199
------------------------------------------------------------------------------------

</TABLE>

  At December 31, 1996, there were approximately 12.3 million shares reserved
for the conversion of preferred securities, 14.8 million shares for the
company's employee benefit plans and Directors' Restricted Stock Plan and 4.7
million shares for the company's Dividend Reinvestment and Common Stock Purchase
Plan.

 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.  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 20).

  Prior to the exchange and conversion, the preferred stock accrued annual
dividends of $3.50 per share.  The dividends were cumulative and payable
quarterly in arrears, when and as declared by Unocal's Board of Directors.
Holders of the preferred stock had no voting rights, however, there were certain
exceptions including the right to elect two additional directors if the
equivalent of six quarterly dividends payable on the preferred stock were
missed.

 STOCKHOLDER RIGHTS PLAN

  In January 1990, the Board 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.

  The Board 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

                                       58
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.
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, 1996, none of the Series A preferred stock had been issued nor had
the Rights become exercisable.

NOTE 22 - STOCK-BASED COMPENSATION PLANS

  Under the company's Special Stock Option Plan of 1996, Long-Term Incentive
Plans of 1991 and 1985, and the Directors' Restricted Stock 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 enhance the profitability of the company and increase
shareholder value.  The 1996, 1991 and 1985 plans authorized up to 1.1 million,
11 million and 4.5 million shares of common stock, respectively for stock
options, restricted stock and performance share awards.  The directors' plan
authorizes the issuance of up to 300,000 shares of common stock.  Stock options
granted have a maximum life of ten years and vest over a three-year period at a
rate of 50% the first year and 25% per year for the two succeeding years. The
option price will not be less than the fair market value of the company's 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.

  Generally, restricted stock awards are based on the average closing price of
the company's common stock for the last 30 trading days of the year prior to the
grant date.  Restricted shares are not delivered until the end of the restricted
period which does not exceed ten years.  Performance share awards have a four-
year term and are paid out 50 percent in shares of common stock and 50 percent
in cash.  The awards are paid out based on the return of the company's common
stock relative to the average return on the common stock of a peer group of
companies.

A summary of the company's stock plans as of December 31, 1994, 1995 and 1996,
and changes during the years ending on those dates 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, 1994                            3,477,880              $25         $   -
Options granted during year                                         819,628              26              26
Options exercised during year                                      (133,455)             20              -
Options canceled/forfeited during year                             (119,836)             28              -
Options expired during year                                              -               -               -
                                                        ---------------------
Options Outstanding at December 31, 1994                          4,044,217              25              -
Options Exercisable at December 31, 1994                          2,906,236              25              -
Restricted stock awarded during year                                178,418              -               26
Performance shares awarded during year                              295,692              -               26
-------------------------------------------------------------------------------------------------------------
</TABLE> 

                                       59
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<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, 1995                                      4,044,217              25              -
Options granted during year                                                   856,189              28              28
Options exercised during year                                                (272,817)             21              -
Options canceled/forfeited during year                                       (145,710)             29              -
Options expired during year                                                    (8,644)             24              -
                                                                       -----------------
Options Outstanding at December 31, 1995                                    4,473,235              26              -
Options Exercisable at December 31, 1995                                    3,296,294              25              -
Restricted stock awarded during year                                          141,339              -               29
Performance shares awarded during year                                        303,449              -               29
-----------------------------------------------------------------------------------------------------------------------
Options Outstanding at January 1, 1996                                      4,473,235              26              -
Options granted during year                                                 2,107,112              33              33
Options exercised during year                                              (1,328,954)             24              -
Options canceled/forfeited during year                                        (47,060)             30              -
Options expired during year                                                        -               -               -
                                                                       -----------------
Options Outstanding at December 31, 1996                                    5,204,333              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
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

  Under the Plans of 1996, 1991 and the Directors' Plan, there were 19,901
shares, 4,195,976 shares and 225,605 shares, respectively, available at year-end
1996 for stock option awards as well as other awards.  No additional grants may
be awarded under the 1985 Plan.

  Significant option groups outstanding at December 31, 1996 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 12/31/96         Life (years)     Price          at 12/31/96          Price
-------------------------------------------------------------------------------------------------
<S>             <C>                  <C>             <C>             <C>                 <C>
    $21 - $24       841,674             3.9              $22            841,674              $22
    $26 - $29     1,936,419             7.3              $28          1,338,730              $28
    $30 - $33     2,426,240             9.0              $33            567,207              $31
-------------------------------------------------------------------------------------------------

</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>

                          1996            1995            1994
---------------------------------------------------------------
<S>                    <C>             <C>             <C>
Expected life (years)      4               4               4
Interest rate              6.1%            6.9%            6.1%
Volatility                23.8%           20.9%           23.7%
Dividend yield             2.4%            2.8%            3.0%
---------------------------------------------------------------

</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 $36 million in
1996, $18 million in 1995 and $14 million in 1994.  Had the company recorded
compensation

                                       60
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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             1996            1995            1994
--------------------------------------------------------------------------
<S>                               <C>             <C>             <C>
Net earnings (loss)
   As reported                      $  36           $ 260           $(153)
   Pro forma                           32             257            (156)
Net earnings (loss) per share
   As reported                     ($0.15)          $0.91          ($0.78)
   Pro forma                        (0.16)           0.90           (0.79)
--------------------------------------------------------------------------
</TABLE>      

NOTE 23 - 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>

                                                                      For Years Ended
Millions of Dollars                                                    1996               1995               1994
-----------------------------------------------------------------------------------------------------------------
<S>                                                              <C>                <C>                <C>          
Total revenues                                                     $5,328             $4,389             $4,272
Total costs and other deductions, including income taxes            4,860              4,138              4,161
-----------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before cumulative
   effect of accounting change                                     $  468             $  251             $  111
Discontinued operations
   Earnings from operations (net of taxes)                             71                 11                 14
   Loss on disposal (net of taxes)                                   (491)                -                  -
Cumulative effect of accounting change                                 -                  -                (277)
-----------------------------------------------------------------------------------------------------------------
Net earnings (loss)                                                $   48             $  262              ($152)
-----------------------------------------------------------------------------------------------------------------


                                                                                             At December 31
Millions of Dollars                                                                     1996               1995
-----------------------------------------------------------------------------------------------------------------
Current assets                                                                        $3,228             $1,576
Noncurrent assets                                                                      5,905              8,328
Current liabilities                                                                    1,622              1,309
Noncurrent liabilities                                                                 4,704              5,645
Shareholder's equity                                                                   2,807              2,950
------------------------------------------------------------------------------------------------------------------

</TABLE>

NOTE 24 - INVESTMENTS IN AFFILIATES

  Investments in affiliated companies accounted for by the equity method were
$578 million, $386 million and $369 million at December 31, 1996, 1995 and 1994,
respectively.  Dividends or cash distributions received from these affiliates
were $89 million, $88 million and $84 million for the same years, respectively.
These affiliated companies are primarily engaged in pipeline ventures, refining
and marketing operations, and the manufacture of needle coke.

  The excess of the company's investments in Colonial Pipeline Company and West
Texas Gulf Pipeline Company over its shares in the related underlying equity in
net assets is being amortized on a straight-line basis over a period of 40
years.  The remaining unamortized balance at December 31, 1996 was $103 million.

                                       61
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  The company has a 50 percent interest in The UNO-VEN Company (UNO-VEN), a
refining and marketing partnership in the midwestern United States.  The
company's share of the underlying equity in the net assets of UNO-VEN over the
carrying value of its investment is being amortized on a straight-line basis
over a period of 25 years.  The remaining unamortized balance at December 31,
1996 was $54 million.  In 1996, the company executed a letter of intent to
restructure UNO-VEN.

  Summarized financial information for these equity investees, excluding
investees of discontinued operations, is shown below.

<TABLE>
<CAPTION>

                                    1996                 1995                 1994
                            --------------------------------------------------------------
                                        Unocal's             Unocal's             Unocal's
Millions of Dollars           Total      Share      Total    Share       Total    Share
------------------------------------------------------------------------------------------
<S>                         <C>        <C>        <C>        <C>       <C>        <C>

Revenues                      $2,786     $1,155     $2,350     $947      $2,060     $825
Costs and other
   deductions                  2,440      1,049      2,057      870       1,780      742
Net earnings                     346        106        293       77         280       83
------------------------------------------------------------------------------------------
Current assets                $  792     $  334     $  612     $244      $  419     $177
Noncurrent assets              2,546        800      1,846      568       1,861      576
Current liabilities              711        266        568      212         381      152
Noncurrent liabilities         1,228        366      1,012      273       1,038      291
Net equity                     1,399        502        878      327         861      310
------------------------------------------------------------------------------------------

</TABLE>


NOTE 25 - SALE OF ACCOUNTS RECEIVABLE

  On December 15, 1995, the company entered into an agreement to sell, on a
revolving basis, an undivided interest in a defined pool of the company's trade
receivables.  As collections reduce the amount of receivables included in the
pool, the company sells new receivables to bring the amount sold up to the $200
million maximum permitted by the agreement.  Under the terms of the agreement,
the company retains the risk of credit loss and the collection and
administrative responsibilities for the receivables sold.

  The $200 million proceeds from the sale were used to reduce borrowings and are
reflected as a reduction of accounts receivable in the Consolidated Balance
Sheet and as operating cash flows in the Consolidated Statement of Cash Flows.
The cost of the program was $12 million in 1996 and $1 million in 1995.  The
costs of the program were included in operating expense in the Consolidated
Earnings Statement.


NOTE 26 - SEGMENT AND GEOGRAPHIC DATA

  The company's continuing operations include exploration and production,
geothermal, agricultural products and carbon and minerals.  Exploration and
production involves the exploration for, and the production, sale and marketing
of crude oil and natural gas.  Geothermal involves the exploration for, and the
production and sale of, geothermal resources and the construction and eventual
operation of electrical generating plants served by the resources.  Agricultural
Products involves the manufacture, transportation and marketing of nitrogen-
based products for agricultural and industrial uses.  Carbon and Minerals
involves the production and marketing of petroleum coke, graphites, solvents and
specialty minerals.

  Unocal has domestic oil and gas operations in the Louisiana/Gulf, Alaska and
Central U.S. regions.  In April 1996, the company sold essentially all of its
California oil and gas producing properties.  Most of the company's crude oil
produced in the United States is sold to third parties.  A substantial portion
of the natural gas produced domestically is sold to third parties under
contracts having terms of less than two years.  The remainder is sold to third
parties in the spot market or is used in the company's agricultural products
operations.

                                       62
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  Unocal has oil and gas production in six foreign countries: Thailand,
Indonesia, Canada, the Netherlands, the United Kingdom and Zaire.  The company
sells most of its foreign natural gas production to third parties under long-
term contracts. The crude oil and condensate produced overseas are primarily
sold to third parties at spot market prices.

  The Geothermal Operations segment supplies geothermal steam for power
generation, with major operations in California, the Philippines and Indonesia.
This segments' current activities include constructing power plants in Indonesia
to capitalize on market-to-resource opportunities.

  Agricultural Products manufactures and markets nitrogen-based products for
wholesale agricultural and industrial markets supplying the western United
States and the Pacific Rim.  Carbon and Minerals produces and markets petroleum
coke, graphites, solvents and specialty minerals.  Pipelines principally
includes the company's equity interests in affiliated pipeline companies.  Other
includes the company's equity interest in UNO-VEN.

  The Corporate and Unallocated category includes the New Ventures group which
pursues foreign energy business development projects.  Examples of ongoing New
Ventures project investments are common carrier pipelines, liquefied petroleum
gas plants and power generation plants. The main areas of interest for
development opportunities currently include Azerbaijan, Myanmar, Turkmenistan,
Pakistan, China, Vietnam, Latin America and Bangladesh.  Corporate also includes
all unallocated corporate items and miscellaneous operations.  In addition, this
category, particularly for prior years, includes the financial data related to
businesses that were sold or being phased-out.

<TABLE>
<CAPTION>

Millions of Dollars                                   1996              1995              1994              1993              1992
----------------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>               <C>               <C>               <C>               <C>
Revenues:                                       
   Exploration and Production                   
      United States                               $3,168            $2,477            $2,501            $2,703            $2,824
      Foreign                                      1,664             1,345             1,258             1,146             1,365
   Geothermal Operations                              45               133               139               142               134
   Diversified Business Group                   
      Agricultural Products                          530               509               378               331               324
      Carbon and Minerals                            293               271               241               220               220
      Pipelines                                      120               120                92                90                84
      Other                                           27                16                30                26                32
   Corporate and Unallocated                          66                86               138               592             1,907
   Intersegment Eliminations                        (585)             (568)             (505)             (520)             (643)
----------------------------------------------------------------------------------------------------------------------------------
      Total revenues from continuing operations    5,328             4,389             4,272             4,730             6,247
Discontinued operations (a)                        4,271             4,036             3,693             3,614             3,814
----------------------------------------------------------------------------------------------------------------------------------
      Total                                       $9,599            $8,425            $7,965            $8,344           $10,061
----------------------------------------------------------------------------------------------------------------------------------
(a)  1996 excludes $609 million for November 17, 1996 - December 31, 1996 which was included in loss on disposal
      in the Consolidated Earnings Statement.
</TABLE> 

                                       63
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>

Millions of Dollars                                  1996            1995            1994            1993            1992
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>             <C>             <C>             <C>             <C>        
Earnings:                                          
   Exploration and Production                      
      United States                                  $669            $386            $289            $376            $346
      Foreign                                         546             330             407             390             377
   Geothermal Operations                              (76)             47              57              51              34
   Diversified Business Group                      
      Agricultural Products                           152             113              43              27              24
      Carbon and Minerals                              59              72              62              45              21
      Pipelines                                        86              82              70              67              64
      Other                                            22              15              29              26              32
   Corporate and Unallocated                       
      Administrative and general expense             (126)           (127)           (137)            (98)           (102)
      Net interest expense                           (256)           (257)           (255)           (279)           (356)
      Environmental and litigation expense           (230)           (148)           (293)           (130)            (98)
      New Ventures                                    (36)             -               -               -               -
      Other                                           (52)            (38)             (1)             10             (37)
---------------------------------------------------------------------------------------------------------------------------
Pre-tax earnings from continuing operations before 
   cumulative effect of accounting changes            758             475             271             485             305
Income taxes                                         (302)           (226)           (161)           (213)           (137)
---------------------------------------------------------------------------------------------------------------------------
         Earnings from continuing operations          456             249             110             272             168
Discontinued operations                              (420)             11              14              71              28
Cumulative effect of accounting changes                -               -             (277)           (130)             24
---------------------------------------------------------------------------------------------------------------------------
      Net earnings (loss)                             $36            $260           ($153)           $213            $220
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>


Millions of Dollars                              1996              1995              1994              1993              1992
-----------------------------------------------------------------------------------------------------------------------------
Assets:                                    
<S>                                        <C>               <C>               <C>               <C>               <C>
   Exploration and Production              
      United States (a)                      $2,731            $3,071            $3,214            $3,815            $3,774
      Foreign                                 1,791             1,648             1,509             1,528             1,563
   Geothermal Operations                        439               481               456               436               461
   Diversified Business Group              
      Agricultural Products                     302               309               284               281               292
      Carbon and Minerals                       265               229               204               201               211
      Pipelines                                 314               261               262               264               270
      Other                                     196               174               158               144               132
   Corporate and Unallocated                  1,311             1,114               928             1,005             1,210
-----------------------------------------------------------------------------------------------------------------------------
      Total assets of continuing operations   7,349             7,287             7,015             7,674             7,913
   Discontinued operations (b)                1,774             2,604             2,322             2,032             1,979
-----------------------------------------------------------------------------------------------------------------------------
      Total                                  $9,123            $9,891            $9,337            $9,706            $9,892
-----------------------------------------------------------------------------------------------------------------------------

(a)  The decline in 1996 is principally due to the sale of California oil and gas producing properties.
      The decline in 1994 is principally due to the write-down of impaired producing oil and gas
         properties (See Note 2).
(b)  1996 reflects net assets of discontinued operations (see Note 3).

</TABLE> 

                                       64
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>

Millions of Dollars                                          1996            1995            1994            1993          1992
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>             <C>             <C>             <C>             <C>
Capital expenditures:                                                                                                  
   Exploration and Production                                                                                          
      United States                                         $  418          $  497          $  486          $  562          $364
      Foreign                                                  509             353             310             330           275
   Geothermal Operations                                       114              51              35              48            33
   Diversified Business Group                                                                                          
      Agricultural Products                                     12              55               8               8            54
      Carbon and Minerals                                       16              12               8               4             7
      Pipelines                                                 54               5               5               4             4
   Corporate and Unallocated                                    51              64              53              62            28
--------------------------------------------------------------------------------------------------------------------------------
      Total capital expenditures for continuing operations   1,174           1,037             905           1,018           765
Discontinued operations                                        224             422             367             231           194
--------------------------------------------------------------------------------------------------------------------------------
      Total                                                 $1,398          $1,459          $1,272          $1,249          $959
--------------------------------------------------------------------------------------------------------------------------------
</TABLE> 

<TABLE>
<CAPTION>

Millions of Dollars                                    1996              1995             1994            1993            1992
------------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>               <C>               <C>             <C>             <C>
Depreciation, depletion and amortization:           
   Exploration and Production                       
      United States                                   $  526            $  537            $475            $507            $538
      Foreign                                            277               290             240             245             211
   Geothermal Operations                                  49                28              28              49              45
   Diversified Business Group                       
      Agricultural Products                               21                28              20              18              17
      Carbon and Minerals                                  7                 6               6               6              12
      Pipelines                                            7                 6               6               7               7
   Corporate and Unallocated                              27                16              36              24              39
------------------------------------------------------------------------------------------------------------------------------
      Total depreciation, depletion and amortization
         of continuing operations                        914               911             811             856             869
Discontinued operations                                  145               111             136             107              95
------------------------------------------------------------------------------------------------------------------------------
      Total                                           $1,059            $1,022            $947            $963            $964
------------------------------------------------------------------------------------------------------------------------------
</TABLE> 

GEOGRAPHIC AREAS OF OPERATIONS

<TABLE>
<CAPTION>

Millions of Dollars                                    1996            1995            1994            1993            1992
------------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>             <C>             <C>             <C>             <C>
Revenues:                                                                                                       
United States                                         $3,260          $2,840          $2,792          $2,897          $2,883
Foreign                                                2,002           1,463           1,342           1,241           1,457
Corporate and Unallocated                                 66              86             138             592           1,907
------------------------------------------------------------------------------------------------------------------------------
      Total revenues from continuing operations        5,328           4,389           4,272           4,730           6,247
Discontinued operations (a)                            4,271           4,036           3,693           3,614           3,814
------------------------------------------------------------------------------------------------------------------------------
      Total                                           $9,599          $8,425          $7,965          $8,344         $10,061
------------------------------------------------------------------------------------------------------------------------------
(a)  1996 excludes $609 million for November 17, 1996 - December 31, 1996 which was included in loss on disposal
      in the Consolidated Earnings Statement.
</TABLE>

                                       65
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>

Millions of Dollars                                   1996            1995            1994            1993            1992
----------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>             <C>             <C>             <C>             <C>
Earnings:                                           
United States                                        $ 859           $ 651           $ 663           $ 604           $ 493
Foreign                                                563             394             457             422             425
Corporate and Unallocated                             (664)           (570)           (849)           (541)           (613)
----------------------------------------------------------------------------------------------------------------------------
   Pretax earnings from continuing operations before
     cumulative effective of accounting change         758             475             271             485             305
Income taxes                                          (302)           (226)           (161)           (213)           (137)
Discontinued operations                               (420)             11              14              71              28
Cumulative effect of accounting change                  -               -             (277)           (130)             24
--------------------------------------------------------------------------------------------------------------------------
         Net earnings (loss)                         $  36           $ 260           $(153)          $ 213           $ 220
--------------------------------------------------------------------------------------------------------------------------
</TABLE> 

<TABLE>
<CAPTION>


Millions of Dollars                            1996              1995              1994              1993              1992
----------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>               <C>               <C>               <C>               <C>
Assets:                                     
United States                                 $3,816            $4,245            $4,343            $4,942            $4,955
Foreign                                        2,222             1,928             1,744             1,727             1,748
Corporate and Unallocated                      1,311             1,114               928             1,005             1,210
----------------------------------------------------------------------------------------------------------------------------
      Total assets for continuing operations   7,349             7,287             7,015             7,674             7,913
Discontinued operations (a)                    1,774             2,604             2,322             2,032             1,979
----------------------------------------------------------------------------------------------------------------------------
         Total                                $9,123            $9,891            $9,337            $9,706            $9,892
----------------------------------------------------------------------------------------------------------------------------
(a) 1996 reflects net assets of discontinued operations (see Note 3).

</TABLE> 

                                       66
<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 net of royalty payments, net profits interests
and marketing related 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 and interest costs.

<TABLE>
<CAPTION>

                                           United           Far           Other
Dollars in millions                        States          East           Foreign           Total
--------------------------------------------------------------------------------------------------
<S>                                       <C>             <C>             <C>             <C>
Year 1996                                 
Sales                                     
   To public                              $  545            $617            $213            $1,375
   Intercompany                            1,065             326              21             1,412
Other revenues                               133               1              51               185
--------------------------------------------------------------------------------------------------
      Total                                1,743             944             285             2,972
Production costs                             300             127              81               508
Exploration expenses                          93              91              58               242
Depreciation, depletion and amortization     526             208              69               803
Other operating expenses                     155              46               3               204
--------------------------------------------------------------------------------------------------
     Net                                     669             472              74             1,215
     Income tax (benefit)                    257             233              (3)              487
--------------------------------------------------------------------------------------------------
         Results of operations            $  412            $239            $ 77            $  728
Year 1995                                 
Sales                                     
   To public                              $  580            $514            $176            $1,270
   Intercompany                              772             249              18             1,039
Other revenues                               164               5              29               198
--------------------------------------------------------------------------------------------------
      Total                                1,516             768             223             2,507
Production costs                             394             102              79               575
Exploration expenses                          75              64              54               193
Depreciation, depletion and amortization     537             192              98               827
Other operating expenses                     124              46              26               196
--------------------------------------------------------------------------------------------------
     Net                                     386             364             (34)              716
     Income tax (benefit)                    146             170             (21)              295
--------------------------------------------------------------------------------------------------
         Results of operations            $  240            $194            $(13)           $  421

</TABLE>

                                       67
<PAGE>
 
SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES
(continued)

<TABLE>
<CAPTION>


                                         United           Far           Other
Dollars in millions                      States          East           Foreign           Total
--------------------------------------------------------------------------------------------------
<S>                                     <C>             <C>             <C>             <C>
Year 1994                               
Sales                                   
   To public                            $  639            $495            $198            $1,332
   Intercompany                            749             263              14             1,026
Other revenues                              17              -               41                58
--------------------------------------------------------------------------------------------------
      Total                              1,405             758             253             2,416
Production costs                           420             108              76               604
Exploration expenses                        69              67              56               192
Depreciation, depletion and amortization   476             165              75               716
Other operating expenses                   151              39              18               208
--------------------------------------------------------------------------------------------------
     Net                                   289             379              28               696
      Income taxes                         109             194              15               318
--------------------------------------------------------------------------------------------------
         Results of operations          $  180            $185            $ 13            $  378

</TABLE>

COSTS INCURRED

  Costs incurred in oil and gas property acquisition, exploration and
development activities, either capitalized or charged to expense, are shown
below.  Data for the company's capitalized costs related to petroleum
exploration and production activities are presented in Note 12.

<TABLE>
<CAPTION>

                                           United           Far           Other
Dollars in millions                        States          East           Foreign         Total
--------------------------------------------------------------------------------------------------
<S>                                       <C>             <C>             <C>             <C>
1996
Property acquisition
   Proved                                   $  9            $  -            $  7            $ 16
   Unproved                                   15               2              14              31
Exploration                                  128             106              54             288
Development                                  322             366             100             788
--------------------------------------------------------------------------------------------------
1995
Property acquisition
   Proved                                   $  7            $  -            $  6            $ 13
   Unproved                                   13               2               5              20
Exploration                                  138             117              62             317
Development                                  383             181              91             655
--------------------------------------------------------------------------------------------------
1994
Property acquisition
   Proved                                   $  5            $  -            $  -            $  5
   Unproved                                    4               -               7              11
Exploration                                  115              94              58             267
Development                                  398             189              62             649
--------------------------------------------------------------------------------------------------

</TABLE>

                                       68
<PAGE>
 
SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES
(continued)

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.  The average production costs per barrel
presented below 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 energy
content of the wet gas.

<TABLE>
<CAPTION>

                                                        United             Far            Other
                                                        States            East           Foreign                 Total
------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>               <C>               <C>                   <C>
1996                                    
Average sales price:                    
   Crude oil and condensate - per barrel               $19.21            $19.17            $19.20                $19.20
   Natural gas - per mcf (a)                             2.30              2.28              1.85                  2.27
   Natural gas liquids - per barrel                     15.62             13.48             14.12                 15.09
Average production costs per barrel (b)                  2.97              1.78              5.76                  2.73
------------------------------------------------------------------------------------------------------------------------
1995                                    
Average sales price:                    
   Crude oil and condensate - per barrel               $15.03            $16.09            $15.69                $15.40
   Natural gas - per mcf (a)                             1.56              2.04              1.39                  1.72
   Natural gas liquids - per barrel                     11.57             12.99              9.02                 11.73
Average production costs per barrel (b)                  3.49              1.50              5.40                  2.94
------------------------------------------------------------------------------------------------------------------------
1994                                    
Average sales price:                    
   Crude oil and condensate - per barrel               $13.06            $14.55            $14.36                $13.63
   Natural gas - per mcf (a)                             1.78              2.01              1.76                  1.86
   Natural gas liquids - per barrel                     11.38              8.32              8.31                 10.60
Average production costs per barrel (b)                  3.60              1.54              5.15                  3.00
------------------------------------------------------------------------------------------------------------------------

(a) Average natural gas price per mcf excluding Alaska:
                                                             1996                 $2.45
                                                             1995                 $1.57
                                                             1994                 $1.83

(b)  Includes host country shares of production in Indonesia and Zaire.
</TABLE> 

OIL AND GAS RESERVE DATA (UNAUDITED)

  Estimates of physical quantities of oil and gas reserves, determined by
company engineers, for the years 1996, 1995 and 1994 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. Proved reserve quantities
exclude royalties owned by others, however, foreign reserves held under certain
production-sharing agreements, principally with 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 affect
would be a reduction of reserves attributable to the company.  The reserve
quantities also include barrels of oil which the company is contractually
obligated to sell at prices substantially below market.

                                       69
<PAGE>
 
SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES
(continued)

  Natural gas reserves are reported on a wet-gas basis, which include natural
gas liquids reserves.  For informational purposes, natural gas liquids reserves
in the U.S. were 65, 83 and 91 million barrels at December 31, 1996, 1995 and
1994, respectively.  They are derived from the natural gas reserves by applying
a national average shrinkage factor obtained from the Department of Energy
published statistics.  Foreign natural gas liquids reserves were insignificant
for the above periods.

<TABLE>
<CAPTION>

Estimated Proved Reserves of Crude Oil and Condensate    United           Far           Other
Millions of Barrels                                      States          East           Foreign         Total
----------------------------------------------------------------------------------------------------------------
<S>                                                     <C>             <C>             <C>             <C>
Developed and Undeveloped as of December 31, 1993 (a)      483             169             112             764
   Revisions of estimates                                   (7)              6               3               2
   Improved recovery                                         2              -               -                2
   Discoveries and extensions                                9              28               7              44
   Sales                                                   (18)             -               (2)            (20)
   Production                                              (50)            (32)            (13)            (95)
----------------------------------------------------------------------------------------------------------------
As of December 31, 1994 (a)                                419             171             107             697
   Revisions of estimates                                    9               8             (11)              6
   Improved recovery                                        19              -               -               19
   Discoveries and extensions                                4              21               7              32
   Purchases                                                -               -               20              20
   Sales                                                   (18)             -               (1)            (19)
   Production                                              (46)            (31)            (11)            (88)
----------------------------------------------------------------------------------------------------------------
As of December 31, 1995 (a)                                387             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                                                  (116)             -               -             (116)
   Production                                              (35)            (31)            (10)            (76)
----------------------------------------------------------------------------------------------------------------
As of December 31, 1996 (a)                                236             166             111             513
----------------------------------------------------------------------------------------------------------------
Proved Developed Reserves
   December 31, 1993                                       360              98              78             536
   December 31, 1994                                       318             103              69             490
   December 31, 1995                                       298              96              64             458
   December 31, 1996                                       184              96              51             331

(a) Includes hosts countries' shares at:
       December 31, 1993 of:                                -               54               2              56
       December 31, 1994 of:                                -               60               9              69
       December 31, 1995 of:                                -               63               8              71
       December 31, 1996 of:                                -               64               6              70
</TABLE> 

                                       70
<PAGE>
 
SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES
(continued)

<TABLE>
<CAPTION>

Estimated Proved Reserves of Natural Gas                United           Far           Other
Billions of Cubic Feet                                  States          East           Foreign         Total
---------------------------------------------------------------------------------------------------------------
<S>                                                    <C>             <C>             <C>             <C>
Developed and Undeveloped as of December 31, 1993 (a)   3,727           2,669             236           6,632
   Revisions of estimates                                   3              (2)            (16)            (15)
   Discoveries and extensions                             282             624              88             994
   Purchases                                              117    (b)       -               -              117
   Sales                                                 (128)   (c)       -               (3)           (131)
   Production                                            (421)           (243)            (22)           (686)
---------------------------------------------------------------------------------------------------------------
As of December 31, 1994 (a)                             3,580           3,048             283           6,911
   Revisions of estimates                                 (55)             40             (20)            (35)
   Discoveries and extensions                             209             408              -              617
   Purchases                                               -               -                7               7
   Sales                                                  (54)             -               -              (54)
   Production                                            (419)           (241)            (21)           (681)
---------------------------------------------------------------------------------------------------------------
As of December 31, 1995 (a)                             3,261           3,255             249           6,765
   Revisions of estimates                                (164)           (150)            (62)           (376)
   Discoveries and extensions                              67           1,213              17           1,297
   Purchases                                               20              -               -               20
   Sales                                                 (198)             -              (13)           (211)
   Production                                            (411)           (261)            (28)           (700)
---------------------------------------------------------------------------------------------------------------
As of December 31, 1996 (a)                             2,575           4,057             163           6,795
---------------------------------------------------------------------------------------------------------------
Proved Developed Reserves                              
   December 31, 1993                                    2,520           1,601             147           4,268
   December 31, 1994                                    2,437           1,768             127           4,332
   December 31, 1995                                    2,194           1,807             188           4,189
   December 31, 1996                                    1,829           1,715             148           3,692

(a) Includes host countries' shares at:                
       December 31, 1993 of:                               -              369              -              369
       December 31, 1994 of:                               -              386              -              386
       December 31, 1995 of:                               -              457              -              457
       December 31, 1996 of:                               -              530              -              530
(b)  Includes 115 billion cubic feet due to property exchanges.
(c)  Includes 105 billion cubic feet due to property exchanges.

</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 1996, 1995 and 1994 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

                                       71
<PAGE>
 
SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES
(continued)

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 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>


                                                              United             Far            Other
Millions of dollars                                           States            East           Foreign             Total
---------------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>               <C>               <C>               <C>
1996
Revenues (a)                                                $14,005           $10,695            $2,424           $27,124
Production costs                                              3,311             2,913               921             7,145
Development costs (b)                                         1,164             1,523               261             2,948
Income tax expense                                            3,258             2,432               361             6,051
---------------------------------------------------------------------------------------------------------------------------
Future net cash flow                                          6,272             3,827               881            10,980
10% annual discount                                           2,227             1,665               342             4,234
---------------------------------------------------------------------------------------------------------------------------
Present value of future net cash flows                      $ 4,045           $ 2,162            $  539           $ 6,746
---------------------------------------------------------------------------------------------------------------------------

1995
Revenues (a)                                                $12,395           $ 7,617            $1,939           $21,951
Production costs                                              4,532             1,423             1,013             6,968
Development costs (b)                                         1,696             1,025               253             2,974
Income tax expense                                            1,824             2,176               298             4,298
---------------------------------------------------------------------------------------------------------------------------
Future net cash flow                                          4,343             2,993               375             7,711
10% annual discount                                           1,496             1,129               117             2,742
---------------------------------------------------------------------------------------------------------------------------
Present value of future net cash flows                      $ 2,847           $ 1,864              $258            $4,969
---------------------------------------------------------------------------------------------------------------------------

1994
Revenues (a)                                                $11,291           $ 6,610            $1,798           $19,699
Production costs                                              4,829             1,321               890             7,040
Development costs (b)                                         1,835             1,122               217             3,174
Income tax expense                                            1,189             1,729               290             3,208
---------------------------------------------------------------------------------------------------------------------------
Future net cash flow                                          3,438             2,438               401             6,277
10% annual discount                                           1,141               858               128             2,127
---------------------------------------------------------------------------------------------------------------------------
Present value of future net cash flows                      $ 2,297           $ 1,580              $273            $4,150
---------------------------------------------------------------------------------------------------------------------------

(a)  Average prices at year end used in this calculation are as follows:
       Crude oil per barrel
                              1996                           $22.27            $22.55            $19.89
                              1995                            15.44             17.14             15.20
                              1994                            13.26             16.84             14.81
       Natural gas per mcf
                              1996                           $ 3.42            $ 2.58            $ 2.14
                              1995                             1.98              2.18              1.58
                              1994                             1.62              1.88              1.28

(b)  Includes dismantlement and abandonment costs.
</TABLE> 

                                       72
<PAGE>
 
SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITIES
(continued)

<TABLE>
<CAPTION>

Millions of dollars                                                1996              1995             1994
----------------------------------------------------------------------------------------------------------
<S>                                                          <C>               <C>               <C>
Present value at beginning of year                            $ 4,969           $ 4,150           $ 4,417
Discoveries and extensions, net of estimated future costs       1,005               743               602
Net purchases and sales of proved reserves (a)                   (128)              (51)              (22)
Revisions to prior estimates:                                
   Prices net of estimated changes in production costs          4,518             2,321                83
   Future development costs                                      (317)             (516)             (164)
   Quantity estimates                                            (755)              (58)              (88)
   Production schedules and other                                (511)             (548)               39
Accretion of discount                                             617               636               543
Development costs related to beginning of year reserves           663               635               646
Sales of oil and gas, net of production costs of $508 million
in 1996, $575 million in 1995 and $604 million in 1994         (2,281)           (1,734)           (1,754)
Net change in income taxes                                     (1,034)             (609)             (152)
----------------------------------------------------------------------------------------------------------
Present value at end of year                                  $ 6,746           $ 4,969           $ 4,150
----------------------------------------------------------------------------------------------------------

(a)  Purchases of reserves were valued at $64 million, $23 million and $26 million in 1996, 1995 and 1994,
     respectively.  Sales of reserves, including the sale of future production, were valued at $192 million,
     $74 million and $48 million for the same years, respectively.
</TABLE> 

                                       73
<PAGE>
 
QUARTERLY FINANCIAL AND MARKET PRICE DATA (UNAUDITED)

<TABLE>     
<CAPTION>
                                                                                                   1996 Quarters
                                                                               -----------------------------------------------------

Dollars in millions except per share amounts                                       1st           2nd           3rd            4th
------------------------------------------------------------------------------------------------------------------------------------

<S>                                                                            <C>           <C>           <C>            <C>
Total revenues (a)                                                               $1,201        $1,405        $1,337         $1,385
Total costs and other deductions, including income taxes (b)                      1,070         1,217         1,203          1,382
------------------------------------------------------------------------------------------------------------------------------------

After-tax earnings from continuing operations                                       131           188           134              3
Discontinued operations                                                                                                 
   Earnings (loss) from operations                                                   (7)           50            37             (9)
   Loss on disposal  (c)                                                             -             -             -          $ (491)
------------------------------------------------------------------------------------------------------------------------------------

      Net earnings (loss)                                                        $  124        $  238        $  171         $ (497)

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

Earnings per share of common stock assuming no dilution: (d)                                                            
------------------------------------------------------------------------------------------------------------------------------------

      Continuing operations (e)                                                  $ 0.50        $ 0.72        $ 0.32         $ 0.01
      Discontinued operations                                                    $(0.03)       $ 0.20        $ 0.15         $(1.99)
------------------------------------------------------------------------------------------------------------------------------------

     Net earnings (loss) per share of common stock assuming no dilution          $ 0.47        $ 0.92        $ 0.47         $(1.98)
------------------------------------------------------------------------------------------------------------------------------------

Earnings per share of common stock assuming full dilution: (d)                                                          
------------------------------------------------------------------------------------------------------------------------------------

      Continuing operations (e)                                                  $ 0.46        $ 0.67        $ 0.31         $ 0.01
      Discontinued operations                                                    $(0.03)       $ 0.19        $ 0.14         $(1.99)
------------------------------------------------------------------------------------------------------------------------------------

      Net earnings (loss) per share of common stock assuming full dilution (f)   $ 0.43        $ 0.86        $ 0.45         $(1.98)
------------------------------------------------------------------------------------------------------------------------------------

Gross margin (g)                                                                 $  159        $  187        $   42         $   81
------------------------------------------------------------------------------------------------------------------------------------


(a)  Includes sales and operating revenue from continuing operations of          $1,143        $1,261        $1,264         $1,433
(b)  Includes special items of                                                   $   16        $   57        $   51         $  171
(c)  Fourth quarter loss on disposal includes a $42 million estimated loss for the phase-out period January 1, 1997 - March 31, 
     1997.
(d)  Due to the conversion of Unocal's $3.50 Convertible Preferred Stock into Unocal common stock in the fourth quarter
     of 1996, the earnings per share amounts by quarter are not additive.
(e)  Third quarter amount reflects $54 million non-cash charge related to exchange of preferred stock.
(f)  There was no dilutive effect in the calculation of fourth quarter earnings per share.
(g)  Gross margin equals sales and operating revenues less crude oil and product purchases, operating and selling
     expenses, depreciation, depletion and amortization, dry hole costs, exploration expense, and other operating taxes.

<CAPTION> 
                                                                                                    1995 Quarters
                                                                             -------------------------------------------------------

Dollars in millions except per share amounts                                       1st            2nd             3rd        4th
------------------------------------------------------------------------------------------------------------------------------------

<S>                                                                            <C>         <C>           <C>          <C>  
Total revenues (a)                                                               $  976        $1,250        $1,002         $1,161
Total costs and other deductions, including income taxes (b)                        884         1,173           955          1,128
------------------------------------------------------------------------------------------------------------------------------------

After-tax earnings from continuing operations                                        92            77            47             33
Discontinued operations                                                                                                    
   Earnings (loss) from operations                                                  (18)            1            12             16
   Loss on disposal                                                                  -             -             -              -
------------------------------------------------------------------------------------------------------------------------------------

      Net earnings (loss)                                                        $   74        $   78        $   59         $   49
------------------------------------------------------------------------------------------------------------------------------------

Earnings per share of common stock assuming no dilution:                                                                   
------------------------------------------------------------------------------------------------------------------------------------

      Continuing operations                                                      $ 0.34        $ 0.28        $ 0.15         $ 0.10
      Discontinued operations                                                    $(0.07)       $   -         $ 0.05         $ 0.06
------------------------------------------------------------------------------------------------------------------------------------

      Net earnings (loss) per share of common stock assuming no dilution         $ 0.27        $ 0.28        $ 0.20         $ 0.16
------------------------------------------------------------------------------------------------------------------------------------

Earnings per share of common stock assuming full dilution:                                                                 
------------------------------------------------------------------------------------------------------------------------------------

      Continuing operations                                                      $ 0.32        $ 0.26        $ 0.14         $ 0.09
      Discontinued operations                                                    $(0.07)       $   -         $ 0.05         $ 0.06
------------------------------------------------------------------------------------------------------------------------------------

      Net earnings (loss) per share of common stock assuming full dilution       $ 0.25        $ 0.26        $ 0.19         $ 0.15
------------------------------------------------------------------------------------------------------------------------------------

Gross margin (c)                                                                 $   69        $   47        $   24         $  (17)
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                           
(a)  Includes sales and operating revenue from continuing operations of          $  899        $1,201        $  934         $1,077
(b)  Includes special items of                                                   $   15        $   50        $    9         $  147
(c)  Gross margin equals sales and operating revenues less crude oil and product purchases, operating and selling expenses,
     depreciation, depletion and amortization, dry hole costs, exploration expense, and other operating taxes.
</TABLE>      

                                       74
<PAGE>
 
SELECTED FINANCIAL DATA

<TABLE>    
<CAPTION>

Dollars in million except per share amounts                        1996           1995           1994           1993          1992
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>            <C>            <C>            <C>           <C>
Sales Revenue Data                                                                                                       
   Crude oil and condensate                                       $2,495         $1,964         $1,996         $1,928       $ 2,270
   Natural gas                                                     1,482          1,031          1,109          1,104         1,033
   Agricultural products                                             514            486            373            319           292
   Geothermal                                                        131            120            135            145           197
   Natural gas liquids                                                95             97             96            101           116
   Petroleum products                                                 16             84             89            458         1,236
   Minerals                                                           97             95             79             62            80
   Consumer excise taxes                                              -              -               5             87           283
   Other                                                             161             58             95            134           427
-----------------------------------------------------------------------------------------------------------------------------------
      Total                                                        4,991          3,935          3,977          4,338         5,934
Operating revenues                                                   110            176            141            137           164
Other revenues                                                       227            278            154            255           149
-----------------------------------------------------------------------------------------------------------------------------------
      Total revenues from continuing operations                    5,328          4,389          4,272          4,730         6,247
Discontinued operations (a)                                        4,271          4,036          3,693          3,614         3,814
                                                                  -----------------------------------------------------------------
Total revenues                                                    $9,599         $8,425         $7,965         $8,344       $10,061
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                         
Earnings Data                                                                                                            
Earnings from continuing operations                               $  456         $  249         $  110         $  272       $   168
Discontinued operations                                             (420)            11             14             71            28
Cumulative effects of accounting change                               -              -            (277)          (130)           24
                                                                  -----------------------------------------------------------------
Net earnings (loss)                                               $   36         $  260         $ (153)        $  213       $   220
Net earnings (loss) per common share:                                                                                    
      Continuing operations                                       $ 1.54         $ 0.87         $ 0.30         $ 0.98       $  0.63
      Discontinued operations                                      (1.69)          0.04           0.06           0.29          0.12
      Cumulative effect of accounting change                          -              -           (1.14)         (0.54)         0.10
-----------------------------------------------------------------------------------------------------------------------------------
      Net earnings (loss) per share                               $(0.15)        $ 0.91         $(0.78)        $ 0.73       $  0.85
-----------------------------------------------------------------------------------------------------------------------------------
Share Data                                                                                                               
Cash dividends declared on preferred stock                        $   18         $   36         $   36         $   36       $    17
   Per share                                                        1.75           3.50           3.50           3.50          1.62
Cash dividends declared on common stock                              199            197            194            181           167
   Per share                                                        0.80           0.80           0.80           0.75          0.70
Number of common stockholders of record at year end               32,924         33,028         37,622         41,682        44,870
Weighted average common shares - thousands                       248,767        246,112        242,640        241,114       238,278
-----------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data                                                                                                       
Current assets     (b)                                            $3,228         $1,576         $1,528         $1,578       $ 1,660
Current liabilities                                                1,622          1,316          1,257          1,196         1,436
Working capital                                                    1,606            260            271            382           224
Ratio of current assets to current liabilities                     2.0:1          1.2:1          1.2:1          1.3:1         1.2:1
Total assets                                                       9,123          9,891          9,337          9,706         9,892
Long-term debt                                                     2,940          3,692          3,452          3,455         3,530
Trust convertible preferred securities                               522             -              -              -             -
Total stockholders' equity                                         2,275          2,930          2,815          3,129         3,131
   Per common share                                                 9.14           9.87           9.54          10.90         10.93
Return on average stockholders' equity and preferred securities:                                                         
      Continuing operations                                         15.9%           8.7%          (5.6)%         4.6%          6.9%

      Including discontinued operations                              1.3%           9.1%          (5.1)%         6.8%          7.9%

-----------------------------------------------------------------------------------------------------------------------------------
General Data                                                                                                             
Salaries, wages and employee benefits (c)                         $  806         $  797         $  811         $  744        $  817
Number of regular employees at year end                           11,658         12,509         13,127         13,613        14,687
-----------------------------------------------------------------------------------------------------------------------------------
(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 3).
(c)  Employee benefits are net of pension income recognized in accordance with current accounting standards for pension costs.
       For years 1996, 1995 and 1994, such benefits also include the accrued postretirement medical benefits cost.
</TABLE>      

                                       75
<PAGE>
 
          

                                    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 Schedules under Item 8 on page 34
          of this report.

      (2) Financial Statement Schedules: See the Index to Consolidated Financial
          Statements and Financial Statement Schedules under Item 8 on page 34
          of this report.

      (3) Exhibits: The Exhibit Index on pages 81 and 82 of this report lists
          the exhibits that are filed as part of this report.

                                       76
<PAGE>
 
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(continued)


 (b) Reports filed on Form 8-K:

     During the fourth quarter of 1996:

     (1) Current Report on Form 8-K dated and filed October 23, 1996, for the
         purpose of reporting, under item 5, third quarter and nine-month 1996
         earnings and related information.

     (2) Current Report on Form 8-K dated and filed November 18, 1996, for the
         purpose of reporting, under Item 5, the signing of a letter of intent
         by the company for the sale of its West Coast refining, marketing and
         transportation assets to Tosco Corporation.

     (3) Current Report on Form 8-K dated and filed December 4, 1996, for the
         purpose of reporting, under Item 5, the company's plans for growth
         through new investments, and for debt repayment and stock repurchase.

     (4) Current Report on Form 8-K dated and filed December 9, 1996, for the
         purpose of reporting, under Item 5, the company's 1997 capital spending
         plan.

     (5) Current Report on Form 8-K dated and filed December 26, 1996, for the
         purpose of reporting, under Item 5, the company's signing of a letter
         of intent to restructure the UNO-VEN Midwest refining and marketing
         partnership.

     (6) Current Report on Form 8-K dated and filed December 27, 1996, for the
         purpose of reporting, under Item 5, the beginning of the company's
         stock repurchase program.

     During the first quarter of 1997 to the date hereof:

     (1) Current Report on Form 8-K dated December 16, 1996, and filed January
         3, 1997, for the purpose of reporting, under item 5, the signing of a
         definitive agreement by the company for the sale of its West Coast
         refining, marketing and transportation assets to Tosco Corporation, and
         filing, as exhibits under Item 7, certain agreements relating to such
         sale.

     (2) Current Report on Form 8-K dated and filed January 23, 1997, for the
         purpose of reporting, under item 5, the company's fourth quarter and
         full-year 1996 earnings and related information.

     (3) Current Report on Form 8-K dated February 3, 1997, and filed February
         7, 1997, for the purpose of reporting, under item 5, the amendment of
         the company's Bylaws, and filing, as an exhibit under Item 7, a copy of
         such Bylaws, as so amended.

     (4) Current Report on Form 8-K dated and filed February 13, 1997 for the
         purpose of reporting, under item 5, the company's crude oil and natural
         gas reserve data.

                                       77
<PAGE>
 
                                   SIGNATURES


    
  Pursuant to the requirements of the Securities Exchange Act of 1934, the 
registrant has duly caused this amendment to the report to be signed on its 
behalf by the undersigned, thereunto duly authorized.      
 
 
                              UNOCAL CORPORATION
                                 (Registrant)
 
     
Date:  May 23, 1997          By: /s/ CHARLES S. MCDOWELL
                               --------------------------------  
                                   (Charles S. McDowell)
                               (Vice President and Comptroller)       
 
 

  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 27, 1997.
 
         

                                       78
<PAGE>
 
               UNOCAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
                SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                             (Millions of Dollars)

<TABLE>  
<CAPTION> 

                                                     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 1996
Amounts deducted from
  applicable assets:

Accounts and notes receivable             $28       $ 19       $ (1)      $(11)      $35
Investments and long-term receivables     $15       $ (3)      $  1       $  -       $13

YEAR 1995
Amounts deducted from
  applicable assets:

Accounts and notes receivable             $15       $ 22       $  -       $ (9)      $28
Investments and long-term receivables     $ 3       $  -       $ 12       $  -       $15

YEAR 1994
Amounts deducted from
  applicable assets:

Accounts and notes receivable             $16       $ 10       $  1       $(12)      $15
Investments and long-term receivables     $ 4       $ (1)      $  -       $  -       $ 3

(a) Represents receivables written off, net of recoveries, reinstatement and losses sustained.

</TABLE> 

                                       80
<PAGE>
 
                               UNOCAL CORPORATION
                                 EXHIBIT INDEX
<TABLE>
<CAPTION>
 
<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                     Form of Stock Purchase and Shareholder
                                Agreement, to be 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                     Form of Environmental Agreement, to be dated as
                                of closing date, by and between Tosco
                                Corporation and Union Oil Company of California
                                (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 though February 3,
                                1997, and currently in effect (incorporated by
                                reference to Exhibit 3.1 to Unocal's Current
                                Report on Form 8-K dated February 3, 1997, and
                                filed February 7, 1997, File No. 1-8483).
------------------------------------------------------------------------------- 
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 Chemical Trust Company of California
                                (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 (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 1 to Unocal's Current
                                Report on Form 8-K dated January 29, 1990, File
                                No. 1-8483).
--------------------------------------------------------------------------------
</TABLE>

The following Exhibits 10.2 through 10.11 are management contracts or
compensatory plans, contracts or arrangements required to be filed by Item 601
(b) (10) (iii) (A) of Regulation S-K.
<TABLE>
<CAPTION>
 
<S>                             <C>
------------------------------------------------------------------------------- 
Exhibit 10.2                    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.
------------------------------------------------------------------------------- 
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                    Supplemental Retirement Plan for Key Management
                                Personnel, as amended and effective January 1,
                                1989 (incorporated by reference to Exhibit 10.3
                                to Unocal's Annual Report on Form 10-K for the
                                year ended December 31, 1990, File No. 1-8483).
------------------------------------------------------------------------------- 
Exhibit 10.6                    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).
</TABLE>

                                       81
<PAGE>
 
                               UNOCAL CORPORATION
                           EXHIBIT INDEX (continued)
<TABLE>    
<CAPTION>
 
<S>                             <C>
------------------------------------------------------------------------------- 
Exhibit 10.7                    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 10.8                    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 10.9                    Form of Indemnity Agreement between Unocal and
                                each of its directors (incorporated by reference
                                to Exhibit A to Unocal's Proxy Statement dated
                                March 20, 1987, for its 1987 Annual Meeting of
                                Stockholders, File No. 1-8483).
-------------------------------------------------------------------------------
Exhibit 10.10                   Employment Agreement, effective July 1, 1995,
                                between Union Oil Company of California and
                                Lawrence M. Higby (incorporated by reference to
                                Exhibit 10 to Unocal's Quarterly Report on Form
                                10-Q for the quarter ended June 30, 1995, File
                                No. 1-8483).
-------------------------------------------------------------------------------
Exhibit 10.11                   Letter dated November 5, 1996, summarizing
                                incentive compensation arrangements for Lawrence
                                M. Higby to be effective upon the sale or other
                                disposition of at least 50 percent of the 76
                                Products Company.
-------------------------------------------------------------------------------
Exhibit 11*                     Statement regarding computation of earnings per
                                common share for the five years ended December
                                31, 1996.
-------------------------------------------------------------------------------
Exhibit 12.1                    Statement regarding computation of ratio of
                                earnings to fixed charges of Unocal  for the
                                five years ended December 31, 1996.
-------------------------------------------------------------------------------
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, 1996.
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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, 1996.
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Exhibit 21                      Subsidiaries of Unocal Corporation.
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Exhibit 23*                     Consent of Coopers & Lybrand L.L.P.
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Exhibit 27                      Financial data schedule for the period ended
                                December 31, 1996 (included only in the copy of
                                this report filed electronically with the
                                Commission).
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Exhibit 99                      Bylaws of Union Oil Company of California, as
                                amended September 30, 1996 and currently in
                                effect (incorporated by reference to Exhibit 99
                                to Unocal's Quarterly Report on Form 10-Q for
                                the quarter ended September 30, 1996, File No.
                                1-8483).
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</TABLE>      
    
*Filed with this amendment      

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