<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D.C. 20549-1004

                                    FORM 10-Q

(Mark One)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934

                  For the quarterly period ended June 30, 1998

                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934


                         Commission file number 1-13916

                       UNION PACIFIC RESOURCES GROUP INC.
             (Exact name of registrant as specified in its charter)

                 UTAH                                    13-2647483
   (State or other jurisdiction of          (I.R.S. Employer Identification No.)
    incorporation or organization)

                      801 CHERRY STREET, FORT WORTH, TEXAS
                    (Address of principal executive offices)

                                      76102
                                   (Zip Code)

                                 (817) 877-6000
              (Registrant's telephone number, including area code)


         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

YES  X    NO
   -----    -----

         As of July 31, 1998, there were 251,110,657 shares of the registrant's
common stock outstanding.

<PAGE>   2

                       UNION PACIFIC RESOURCES GROUP INC.
                                      INDEX

<TABLE>
<CAPTION>
                                             PART I. FINANCIAL INFORMATION
                                                                                                        Page Number
                                                                                                        -----------
<S>                                                                                                     <C>
ITEM 1:  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

         CONDENSED CONSOLIDATED STATEMENTS OF INCOME - For the Three
          Months and Six Months Ended June 30,1998 and 1997........................................         2

         CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION -
           At June 30, 1998 and December 31, 1997..................................................       3 - 4

 .        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - For the
          Six Months Ended June 30, 1998 and 1997..................................................         5

         NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS......................................      6 - 11

         REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS..................................................        12


ITEM 2:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
          OF OPERATIONS............................................................................      13 - 27

ITEM 3:  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................      27 - 29



                                             PART II.  OTHER INFORMATION


ITEM 1:  LEGAL PROCEEDINGS.........................................................................        30

ITEM 4:  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................................        30

ITEM 5:  OTHER INFORMATION.........................................................................      30 - 31

ITEM 6:  EXHIBITS AND REPORTS ON FORM 8-K..........................................................        31

SIGNATURE..........................................................................................        32
</TABLE>


                                     - 1 -

<PAGE>   3

                       UNION PACIFIC RESOURCES GROUP INC.
                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
        For the Three Months and Six Months Ended June 30, 1998 and 1997
                      (Millions, except per share amounts)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                        Three Months Ended             Six Months Ended
                                                             June 30,                      June 30,
                                                     ------------------------      ------------------------
                                                        1998           1997           1998           1997
                                                     ---------      ---------      ---------      ---------
<S>                                                  <C>            <C>            <C>            <C>
Operating revenues:
    Oil and gas operations:
       Exploration and Production .................  $   440.8      $   304.6      $   802.8      $   674.6
       Gathering, processing and marketing ........      119.7           89.7          215.9          214.4
       Other oil and gas revenues .................       24.0           18.6           24.7           23.2
                                                     ---------      ---------      ---------      ---------
          Total oil and gas operations ............      584.5          412.9        1,043.4          912.2
    Minerals ......................................       36.6           31.7           76.7           64.1
                                                     ---------      ---------      ---------      ---------
           Total operating revenues ...............      621.1          444.6        1,120.1          976.3
                                                     ---------      ---------      ---------      ---------

Operating expenses:
    Production ....................................      129.7           71.8          223.0          144.9
    Exploration, including exploratory dry holes ..       94.5           49.2          150.6           92.0
    Gathering, processing and marketing ...........       68.7           52.7          128.6          129.3
    Minerals ......................................        0.6            1.2            1.3            2.5
    Depreciation, depletion and amortization ......      283.6          134.8          474.7          267.8
    General and administrative ....................       25.1           19.9           45.7           38.4
                                                     ---------      ---------      ---------      ---------
              Total operating expenses ............      602.2          329.6        1,023.9          674.9
                                                     ---------      ---------      ---------      ---------

Operating income ..................................       18.9          115.0           96.2          301.4
Other income (expense) - net ......................       14.0            3.9           15.4            0.9
Interest expense ..................................      (78.3)         (11.0)        (117.5)         (21.7)
                                                     ---------      ---------      ---------      ---------
Income (loss) before income taxes .................      (45.4)         107.9           (5.9)         280.6
Income taxes ......................................       28.1          (33.5)          19.8          (89.0)
                                                     ---------      ---------      ---------      ---------

Net income (loss) .................................  $   (17.3)     $    74.4      $    13.9      $   191.6
                                                     =========      =========      =========      =========

Other comprehensive income, net of tax:
    Foreign currency translation adjustments ......      (40.6)           0.5          (37.0)          (0.8)
                                                     ---------      ---------      ---------      ---------
Comprehensive income (loss) .......................  $   (57.9)     $    74.9      $   (23.1)     $   190.8
                                                     =========      =========      =========      =========

Earnings (loss) per share - basic .................  $   (0.07)     $    0.30      $    0.06      $    0.77
Earnings (loss) per share - diluted ...............  $   (0.07)     $    0.30      $    0.06      $    0.76

Weighted average shares outstanding - diluted .....      247.6          251.0          248.2          251.0
Cash dividends per share ..........................  $    0.05      $    0.05      $    0.10      $    0.10
</TABLE>

 See the notes to the condensed consolidated financial statements (unaudited).



                                     - 2 -
<PAGE>   4

                       UNION PACIFIC RESOURCES GROUP INC.

             CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
                     At June 30, 1998 and December 31, 1997
                              (Millions of dollars)

<TABLE>
<CAPTION>
                                                              June 30,     December 31,
                                                                1998           1997
                                                             ---------     -----------
                                                            (Unaudited)
<S>                                                          <C>           <C>
ASSETS

Current assets:
    Cash and temporary investments .....................     $   105.2      $    70.6
    Accounts receivable - net ..........................         444.5          385.4
    Inventories ........................................          91.5           53.1
    Other current assets ...............................          43.7           67.7
                                                             ---------      ---------
          Total current assets .........................         684.9          576.8
                                                             ---------      ---------

Properties (successful efforts method): (Note 4)
    Cost ...............................................      13,007.5        7,414.4
    Accumulated depreciation, depletion and amortization      (4,146.7)      (3,749.0)
                                                             ---------      ---------
          Total properties - net .......................       8,860.8        3,665.4

Intangible and other assets ............................         320.7          230.0
                                                             ---------      ---------

Total assets ...........................................     $ 9,866.4      $ 4,472.2
                                                             =========      =========
</TABLE>






 See the notes to the condensed consolidated financial statements (unaudited).



                                     - 3 -
<PAGE>   5

                       UNION PACIFIC RESOURCES GROUP INC.

             CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
                     At June 30, 1998 and December 31, 1997
                              (Millions of dollars)

<TABLE>
<CAPTION>
                                                                  June 30,      December 31,
                                                                    1998            1997
                                                                 ----------     ------------
                                                                (Unaudited)
<S>                                                              <C>            <C>
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
     Accounts payable ......................................     $    541.3      $    426.7
     Advance payment (Note 6) ..............................          250.0              --
     Accrued taxes payable .................................           68.4            59.3
     Other current liabilities .............................          127.6            71.7
                                                                 ----------      ----------
          Total current liabilities ........................          987.3           557.7
                                                                 ----------      ----------

Long-term debt (Note 4) ....................................        4,751.9         1,230.6
Deferred income taxes ......................................        1,930.4           552.9
Other long-term liabilities (Note 7) .......................          498.6           370.3

Shareholders' equity:
     Common stock, no par value;
       Authorized shares--400,000,000
       Issued shares--254,274,102 and 254,268,200 ..........             --              --
     Paid-in surplus .......................................          991.4           991.2
     Unearned employee stock ownership plan ................          (98.8)         (102.0)
     Retained earnings .....................................          946.5           957.4
     Unearned compensation .................................           (8.2)          (11.8)
     Accumulated other comprehensive income:
         Deferred foreign exchange adjustment ..............          (54.3)          (17.3)
         Minimum pension contra equity .....................           (1.0)           (1.0)
     Treasury stock, at cost:
         Shares--3,220,148 and 2,379,625 ...................          (77.4)          (55.8)
                                                                 ----------      ----------
          Total shareholders' equity .......................        1,698.2         1,760.7
                                                                 ----------      ----------

Total liabilities and shareholders' equity .................     $  9,866.4      $  4,472.2
                                                                 ==========      ==========
</TABLE>








 See the notes to the condensed consolidated financial statements (unaudited).



                                     - 4 -
<PAGE>   6

                       UNION PACIFIC RESOURCES GROUP INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                 For the Six Months Ended June 30, 1998 and 1997
                              (Millions of dollars)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                             1998          1997
                                                           --------      --------
<S>                                                        <C>           <C>     
Cash flows provided by operations:
    Net income .......................................     $   13.9      $  191.6
    Non-cash charges to income:
       Depreciation, depletion and amortization ......        474.7         267.8
       Deferred income taxes .........................        (42.1)         45.9
       Other non-cash charges - net ..................         66.5          42.8
    Changes in current assets and liabilities ........        220.5          24.0
                                                           --------      --------
          Cash provided by operations ................        733.5         572.1
                                                           --------      --------

Cash flows from investing activities:
    Capital and exploratory expenditures .............       (928.6)       (643.1)
    Acquisition of Norcen (Note 4) ...................     (2,634.3)           --
    Proceeds from sales of assets ....................         50.3           4.9
    Proceeds from sales of investments ...............         48.4            --
    Proceeds from settlement of contract .............         70.3            --
    Other investing activities - net .................           --          (6.4)
                                                           --------      --------
          Cash used by investing activities ..........     (3,393.9)       (644.6)
                                                           --------      --------

Cash flows from financing activities:
    Dividends paid ...................................        (24.8)        (25.0)
    Debt financing ...................................      2,488.5           1.9
    Purchase of treasury stock .......................        (21.6)         (0.8)
    Other financings - net (Note 6) ..................        252.9          20.2
                                                           --------      --------
          Cash provided (used) by financing activities      2,695.0          (3.7)
                                                           --------      --------

Net change in cash and temporary investments .........         34.6         (76.2)
Cash at beginning of period ..........................         70.6         118.9
                                                           --------      --------
Cash at end of period ................................     $  105.2      $   42.7
                                                           ========      ========
</TABLE>









See the notes to the condensed consolidated financial statements (unaudited).



                                     - 5 -
<PAGE>   7

                       UNION PACIFIC RESOURCES GROUP INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

1.   RESPONSIBILITIES FOR FINANCIAL STATEMENTS

     The condensed consolidated financial statements of Union Pacific Resources
     Group Inc. and subsidiaries (the "Company") have been prepared by
     management and are unaudited. Such unaudited interim financial statements
     reflect all adjustments (including normal recurring adjustments) that are,
     in the opinion of management, necessary for a fair presentation of the
     financial position and operating results of the Company for the interim
     periods; however, such condensed statements do not include all of the
     information and footnotes required by generally accepted accounting
     principles to be included in a full set of financial statements. The report
     of Arthur Andersen LLP commenting on their review accompanies the condensed
     consolidated financial statements and is included in Part I, Item 1 in this
     report. The Condensed Consolidated Statement of Financial Position at
     December 31, 1997 is derived from audited financial statements. The
     condensed consolidated financial statements should be read in conjunction
     with the consolidated financial statements and notes thereto contained in
     the Company's Annual Report on Form 10-K for the year ended December 31,
     1997 and the pro forma combined financial statements contained in the
     Company's Current Report on Form 8-K/A filed on May 6, 1998. The results of
     operations for the six months ended June 30, 1998 are not necessarily
     indicative of the results for the full year ending December 31, 1998.

     The preparation of financial statements in conformity with generally
     accepted accounting principles requires management to make estimates and
     assumptions that affect the reported amounts of certain assets and
     liabilities, disclosure of contingent assets and liabilities at the date of
     the financial statements, and the reported amounts of revenues and expenses
     for each reporting period. Management believes its estimates and
     assumptions are reasonable; however, such estimates and assumptions are
     subject to a number of risks and uncertainties which may cause actual
     results to differ materially from the Company's estimates and assumptions.

2.   NEW ACCOUNTING STANDARDS

     In February 1998, the Financial Accounting Standards Board ("FASB") issued
     Statement of Financial Accounting Standards ("SFAS") No. 132, "Employers'
     Disclosures about Pensions and Other Postretirement Benefits," which is
     effective for fiscal years beginning after December 15, 1997. This
     statement revises employers' disclosure requirements relating to pension
     and other postretirement benefit plans. It standardizes the disclosure
     requirements to the extent practicable and requires additional information
     on changes in the benefit obligations and fair values of plan assets. The
     Company plans to adopt SFAS No. 132 for the year ending December 31, 1998.

     In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
     Instruments and Hedging Activities," which is effective for all quarters of
     fiscal years beginning after June 15, 1999. This statement requires that
     all derivatives be recognized on the balance sheet, measured at fair value.
     If certain conditions are met, a derivative may be specifically designated
     as a hedge and be eligible for special accounting treatment. For
     derivatives not designated as hedges, gains or losses are recognized in
     earnings in the period of change. However, the special accounting treatment
     afforded hedge



                                     - 6 -
<PAGE>   8

     transactions may delay the recognition of a portion of the gain or loss on
     the derivative, which would later be recorded concurrent with the gain or
     loss on the item being hedged. The impact of the statement on the Company
     will depend upon price volatility and the level of open derivative
     positions at the end of a reporting period. The Company plans to adopt SFAS
     No. 133 in the first quarter of 2000.

3.   BUSINESS SEGMENT INFORMATION

     The following table presents summarized segment information for the Company
     pursuant to SFAS No. 131.

<TABLE>
<CAPTION>
                                                        Six Months Ended June 30,
                                                        ------------------------
                                                           1998          1997
                                                        ----------    ----------
                                                          (Millions of dollars)
<S>                                                      <C>           <C>
Revenues:
     Exploration and production ....................     $  827.5      $  697.8
     Gathering, processing and marketing ...........        215.9         214.4
     Minerals ......................................         76.7          64.1
                                                         --------      --------
          Total ....................................     $1,120.1      $  976.3
                                                         ========      ========

Operating income:
     Exploration and production ....................     $   16.2      $  226.9
     Gathering, processing and marketing ...........         53.0          54.0
     Minerals ......................................         75.4          60.6
     Corporate(a)  .................................        (48.4)        (40.1)
                                                         --------      --------
          Total ....................................     $   96.2      $  301.4
                                                         ========      ========
</TABLE>

<TABLE>
<CAPTION>
                                                            At June 30,    At December 31,
                                                                1998             1997
                                                           ------------    --------------
                                                                (Millions of dollars)
<S>                                                        <C>             <C>
Fixed assets (net of DD&A):
     Exploration and production ......................     $    7,899.5     $    2,695.7
     Gathering, processing and marketing .............            820.2            843.4
     Minerals ........................................             23.7             23.6
     Corporate .......................................            117.4            102.7
                                                           ------------     ------------
          Total ......................................     $    8,860.8     $    3,665.4
                                                           ============     ============
</TABLE>

     (a) Operating income for the Corporate segment consists of general and
administrative expense.

4.   ACQUISITION OF NORCEN

     On January 25, 1998, the Company and Union Pacific Resources Inc., an
     Alberta corporation and a wholly-owned subsidiary of the Company ("UPRI"),
     entered into a pre-acquisition agreement ("Pre-acquisition Agreement") with
     Norcen Energy Resources Limited ("Norcen"). Under the Pre-acquisition
     Agreement, the Company and UPRI agreed to make an offer (the "tender
     offer") for up to 100 percent of the common shares of Norcen, subject to
     certain conditions. On March 3, 1998, the Company announced the closing of
     the tender offer. In total, 95.5 percent of the outstanding common shares
     of Norcen were tendered at a purchase price of US $13.65 per share.



                                     - 7 -
<PAGE>   9

     On March 5, 1998, UPRI completed the compulsory acquisition of the
     remaining common shares outstanding which were not tendered. (The closing
     of the tender offer and completion of the compulsory acquisition is
     referred to as the "Norcen Acquisition.") The aggregate purchase price for
     the Norcen Acquisition, including non-recurring transaction costs of $28.1
     million, was $2.634 billion.

     Norcen operations primarily consisted of oil and gas exploration and
     development operations in western Canada, the Gulf of Mexico, Guatemala and
     Venezuela.

     The Company funded the purchase price of the Norcen Acquisition through the
     issuance of commercial paper, supported by the Company's U.S. $2.7 billion
     364 Day Competitive Advance/Revolving Credit Agreement dated March 2, 1998.
     In accordance with Accounting Principles Board Opinion No. 16, "Business
     Combinations," the Norcen Acquisition was accounted for as a purchase
     effective March 3, 1998.

     The following table represents the revised preliminary allocation of the
     total purchase price of the assets acquired and liabilities assumed, based
     upon their fair values on the date of the Norcen Acquisition. Any
     additional adjustments to the allocation of the purchase price are not
     anticipated to be material to the Condensed Consolidated Financial
     Statements of the Company.

<TABLE>
<CAPTION>
                                                                     (Millions of dollars)
<S>                                                                      <C>       
     Working capital..............................................       $    112.3
     Property, plant and equipment................................          4,923.4
     Other assets.................................................            227.4
     Long-term debt...............................................         (1,011.9)
     Other non-current liabilities, including deferred taxes......         (1,616.9)
                                                                           --------
          Total purchase price....................................        $ 2,634.3
                                                                          =========
</TABLE>

     The following table presents unaudited pro forma condensed consolidated
     statements of operations of the Company for the six months ended June 30,
     1998 and 1997, as though the Norcen Acquisition had occurred on January 1,
     1997. Certain adjustments were made to the financial information to conform
     to the accounting policies and financial statement presentation of the
     Company.

<TABLE>
<CAPTION>
                                                     Six Months Ended June 30,
                                                    --------------------------
                                                       1998            1997
                                                    ----------      ----------
                                        (Millions of dollars, except per share amounts)
<S>                                                 <C>             <C>       
     Revenues .................................     $  1,220.4      $  1,290.7
     Costs and expenses .......................        1,155.0         1,036.8
                                                    ----------      ----------
     Operating income .........................           65.4           253.9
     Interest expense .........................         (151.9)         (117.1)
     Other income (expense) - net .............            4.3             0.9
                                                    ----------      ----------
     Income (loss) before income taxes ........          (82.2)          137.7
     Income tax benefit (expense) .............           47.6           (40.9)
                                                    ----------      ----------
     Net income (loss) ........................     $    (34.6)     $     96.8
                                                    ==========      ==========

     Earnings (loss) per share - basic ........     $    (0.14)     $     0.39
     Earnings (loss) per share - diluted ......          (0.14)           0.39
</TABLE>

     The unaudited pro forma condensed consolidated information presented above
     is not necessarily indicative of the results of operations or the financial
     position which would have occurred had the Norcen



                                     - 8 -
<PAGE>   10

     Acquisition been consummated on January 1, 1997, nor is it necessarily
     indicative of future results of operations of the Company.

     NORCEN SUMMARIZED FINANCIAL INFORMATION

     Shortly after the Norcen Acquisition, Norcen was amalgamated with UPRI (the
     "Amalgamation"). Prior to the Amalgamation, UPRI's operations primarily
     consisted of oil and gas operations in western Canada. After the
     Amalgamation, certain non-Canadian international assets have been or will
     soon be distributed or contributed from UPRI to affiliates of the Company.

     As a result of the Amalgamation, UPRI succeeded to and assumed the
     obligations of Norcen, including the public debt obligations of Norcen (the
     "Debt Securities"). The Debt Securities include 7 3/8% Debentures due May
     15, 2006, in the aggregate principal amount of $250 million, 7.8%
     Debentures due July 2, 2008, in the aggregate principal amount of $150
     million and 6.8% Debentures due July 2, 2002, in the aggregate principal
     amount of $250 million, each of which have been fully and unconditionally
     guaranteed by the Company.

     The following table presents summarized financial information for UPRI (as
     successor to Norcen) as of and for the two months ended February 28, 1998
     and four months ended June 30, 1998. This summarized financial information
     is being provided pursuant to Section G of Topic 1 of Staff Accounting
     Bulletin No. 53 - "Financial Statement Requirements in Filings Involving 
     the Guarantee of Securities by a Parent." The Company will continue to
     provide such summarized financial information for UPRI for as long as the
     Debt Securities remain outstanding and guaranteed by the Company.
        
<TABLE>
<CAPTION>
                                                               Two Months Ended      Four Months Ended
                                                            February 28, 1998(1)      June 30, 1998(2)
                                                            ---------------------    -----------------
Summarized Statement of Income Information:                 (Millions of dollars)   (Millions of dollars)
<S>                                                         <C>                    <C>           
  Operating revenues ..................................     $        104.0         $        170.4
  Operating income (loss) .............................                4.0                  (68.0)
  Net (loss) ..........................................              (30.0)(3)              (40.8)

Summarized Statement of Financial Position Information:
  Current assets ......................................              275.6                  134.5
  Non-current assets ..................................            2,456.2                3,947.2
  Current liabilities .................................              182.6                  196.7
  Non-current liabilities and equity ..................            2,549.2                3,885.0
</TABLE>

---------------------------------
     (1) Results for UPRI as of and for the two months ended February 28, 1998.
     Results have not been restated in accordance with U.S. generally accepted
     accounting principles ("GAAP") and reflect the full cost method for
     accounting for oil and gas operations.

     (2) Results for UPRI as of and for the four months ended June 30, 1998
     include adjustments to reflect U.S. GAAP and the successful efforts method
     of accounting. Adjustments to reflect the application of the purchase
     method of accounting for the Norcen Acquisition are included effective
     March 3, 1998.

     (3) Net loss includes $40 million in costs incurred by UPRI in connection
     with the Norcen Acquisition which were not reimbursed by the Company.



                                     - 9 -
<PAGE>   11

5.   PLANNED DIVESTITURES

     On April 20, 1998, the Company announced that its Board of Directors had
     authorized management to proceed with a deleveraging program with a focus
     toward reducing the Company's debt to total capitalization ratio and
     obtaining a strong investment grade credit rating within 18 months. This
     program includes the Company's plans to sell approximately $600 million of
     producing properties. The Company expects to complete these sales before
     the end of 1998. All of the properties identified for sale in the aggregate
     represent less than ten percent of the Company's reserves, cash flows and
     production volumes.

     In connection with this deleveraging program, the Board of Directors also
     provided conditional approval to management to pursue potential
     monetization of the Company's gathering, processing and marketing ("GPM")
     business. On July 2, 1998, a Confidential Descriptive Memorandum ("CDM")
     for UPFuels, in which the Company's GPM business is concentrated, was
     distributed to prospective buyers. This CDM solicits offers and provides
     the impetus for further discussions relating to the monetization of the
     Company's GPM business. The Company has received numerous and wide-ranging
     proposals and is in the process of reviewing such proposals. Certain of the
     prospective buyers were invited to further review documents and other
     information relating to the Company's GPM business. Such reviews will
     commence in the third quarter of 1998. It is the intention of management of
     the Company to consummate the monetization transaction as soon as
     practicable.

6.   ADVANCE PAYMENT/FORWARD SALE

     In June 1998, Union Pacific Fuels, Inc. ("UPFI") entered into a forward
     sale transaction. Under the terms of the forward sale agreement, UPFI
     received $250.0 million in cash and is required to deliver 567.3 BBtu of
     gas per day to the purchaser beginning in October 1998 and continuing
     through March 1999. The Company has recorded the obligation associated
     with this transaction as an advanced payment, a current liability. This
     liability will be amortized to income as the gas is delivered over the term
     of the contract. In addition, UPFI has entered into a gas price swap to
     hedge exposure to price risk associated with this transaction (see
     Quantitative and Qualitative Disclosures about Market Risk in Part I, Item
     3 of this report).

7.   COMMITMENTS AND CONTINGENCIES

     The Company is subject to federal, state, provincial and local
     environmental laws and regulations and currently is participating in the
     investigation and remediation of a number of sites. Where the remediation
     costs can reasonably be determined, and where such remediation is probable,
     the Company has recorded a liability. Management does not expect future
     environmental obligations to have a material impact on the results of
     operations, financial condition or cash flows of the Company.

     In the last ten years, the Company has disposed of significant pipeline,
     refining and producing property assets. In disposition agreements in
     connection therewith, the Company has made certain representations and
     warranties relating to the assets sold and provided certain indemnities
     with respect to liabilities associated with such assets. The Company has
     been advised of possible claims which may be asserted by the purchasers of
     certain disposed assets for alleged breaches of such representations and
     warranties



                                     - 10 -
<PAGE>   12

     and under certain indemnities. Certain claims related to compliance with
     environmental laws remain pending. In addition, some of the
     representations, warranties and indemnities related to some of the disposed
     assets continue to survive under such disposition agreements. Further
     claims may be made against the Company under such disposition agreements or
     otherwise. While no assurance can be given as to the ultimate outcome of
     these claims, the Company does not expect these matters to have a
     materially adverse effect on its results of operations, financial condition
     or cash flows.

     The Company is a defendant in a number of other lawsuits and is involved in
     governmental proceedings arising in the ordinary course of business in
     addition to those described above. The Company also has entered into
     commitments and provided guarantees for specific financial and contractual
     obligations of its subsidiaries and affiliates. The Company does not expect
     these lawsuits, commitments or guarantees to have a materially adverse
     effect on its results of operations, financial condition or cash flows.



                                     - 11 -
<PAGE>   13

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Board of Directors and Shareholders of
Union Pacific Resources Group Inc.
Fort Worth, Texas

We have reviewed the accompanying condensed consolidated statement of financial
position of Union Pacific Resources Group Inc. (a Utah corporation) and
subsidiaries as of June 30, 1998, and the related condensed consolidated
statements of income for the three month and six month periods then ended and
the condensed consolidated statement of cash flows for the six months then
ended. These financial statements are the responsibility of the Company's
management.

We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.






ARTHUR ANDERSEN LLP
Fort Worth, Texas

July 27, 1998



                                     - 12 -
<PAGE>   14

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

     In the second quarter of 1998, the Company reorganized its exploration and
production business units into five core geographic areas in the United States
and four core areas for international operations. The core areas in the United
States comprise (1) the Austin Chalk trend in Texas and Louisiana, unchanged
from the previous structure, (2) the East/West Texas business unit representing
the combination of the former East Texas and West Texas business units, (3) the
Western Region business unit consisting of the Land Grant Area in Colorado,
Wyoming and Utah, as well as additional properties in Kansas, (4) the Gulf Coast
Onshore business unit covering the onshore coastal plain of Texas and Louisiana,
and (5) the Offshore business unit, which manages the Company's Gulf of Mexico
operations. International core areas are (1) Canada, (2) Guatemala, (3)
Venezuela, and (4) Other International.

                              RESULTS OF OPERATIONS

              QUARTER ENDED JUNE 30, 1998 COMPARED TO JUNE 30, 1997

SUMMARY FINANCIAL DATA

<TABLE>
<CAPTION>
                                                  Three Months Ended June 30,
                                                  ---------------------------
                                                      1998          1997
                                                  ------------  -------------
                                                     (Millions of dollars)
<S>                                                 <C>           <C>     
            Total operating revenues .............  $  621.1      $  444.6
            Total operating expenses .............     602.2         329.6
            Operating income .....................      18.9         115.0
            Net income (loss) ....................     (17.3)         74.4
            Earnings (loss) per share - diluted...     (0.07)         0.30
</TABLE>

     The Company recorded a net loss of $17.3 million for the second quarter of
1998, a $91.7 million decline from net income of $74.4 million for the second
quarter of last year. Earnings per share also declined to a loss of $0.07 per
share this year compared to earnings of $0.30 per share in 1997. The earnings
decline was primarily caused by a $109.4 million decrease in operating income
from exploration and production operations and a $67.3 million increase in
interest costs principally relating to higher debt balances resulting from the
Norcen Acquisition. Offsetting benefits were provided by pretax gains of $30.0
million on the settlement of a gas supply agreement and $11.0 million on the
closure of a foreign currency position, as well as a $6.0 million improvement in
minerals operating income.

     Operating income decreased by $96.1 million (84%) to $18.9 million for the
quarter. Exploration and production operating income declined $109.4 million to
a loss of $25.0 million, reflecting lower prices for all products and increased
operating and exploration costs, partially offset by higher volumes and a $26.0
million gain on the sale of properties located in the Denver-Julesburg basin of
the Western Region (the "DJ basin properties"). Gathering, processing and
marketing operating income increased $13.2 million largely due to a $30.0
million gain on the settlement of a gas supply agreement, offset by tighter
margins at gas plants and higher facilities operating costs caused by 1997
expansions. Minerals operating income improved $6.0 million as a result of an
amended coal supply contract. General and administrative costs increased $5.9
million, principally caused by the Norcen Acquisition.



                                     - 13 -
<PAGE>   15

SUMMARY OF SEGMENT FINANCIAL DATA

<TABLE>
<CAPTION>
                                                 Three Months Ended June 30,
                                                 --------------------------
                                                    1998            1997
                                                 ----------      ----------
                                                    (Millions of dollars)
<S>                                              <C>             <C>       
Segment operating income:
   Exploration and production ..............     $    (25.0)     $     84.4
   Gathering, processing and marketing .....           34.5            21.3
   Minerals ................................           36.0            30.0
   Corporate/general and administrative ....          (26.6)          (20.7)
                                                 ----------      ----------
      Total ................................     $     18.9      $    115.0
                                                 ==========      ==========
</TABLE>

EXPLORATION AND PRODUCTION OPERATIONS


<TABLE>
<CAPTION>
                                                    Three Months Ended June 30,
                                                    --------------------------
                                                        1998            1997
                                                    ----------      ----------
                                                      (Millions of dollars)
<S>                                                 <C>             <C>       
Operating revenues ............................     $    464.8      $    323.2
Operating expenses:
   Production .................................          129.7            71.8
   Exploration ................................           94.5            49.2
   Depreciation, depletion and amortization ...          265.6           117.8
                                                    ----------      ----------
   Total operating expenses ...................          489.8           238.8
                                                    ----------      ----------
Operating income ..............................     $    (25.0)     $     84.4
                                                    ==========      ==========
</TABLE>

OPERATING REVENUES

     Producing property revenues for the second quarter of 1998 increased by
$141.6 million (44%) to $464.8 million. Production volume increases of 1,172.0
MMcfed (72%) added $219.7 million to revenues; however, average product price
declines of $0.33 per Mcfe (16%) reduced revenues by $84.5 million. Other
revenues were $5.4 million higher than last year as the $26.0 million gain on
sale of the DJ basin properties was offset by the absence of the $12.0 million
partial reduction of the Columbia Gas Transmission Company bankruptcy settlement
reserve recorded in 1997.

<TABLE>
<CAPTION>
                                                                           Three Months Ended June 30,
                                                                 -----------------------------------------------
                                                                   1998         1997         1998         1997
                                                                 --------     --------     --------     --------
                                                                   (without hedging)          (with hedging)
<S>                                                              <C>          <C>          <C>          <C>     
      Average price realizations - exploration and production:
         Natural gas (per Mcf) .............................     $   1.85     $   1.80     $   1.80     $   1.85
         Natural gas liquids (per Bbl) .....................         7.74        10.13         7.74        10.12
         Crude oil (per Bbl) ...............................        10.10        18.10        10.27        18.12
         Average (per Mcfe) ................................         1.74         2.03         1.73         2.06
</TABLE>

<TABLE>
<CAPTION>
                                                            Three Months Ended June 30,
                                                            ---------------------------
                                                                1998           1997
                                                            -----------     -----------
<S>                                                         <C>             <C>
      Production volumes - exploration and production:
         Natural gas (MMcfd) ...........................        1,593.2        1,128.0
         Natural gas liquids (MBbld) ...................           38.9           31.4
         Crude oil (MBbld) .............................          162.2           51.9
         Total (MMcfed) ................................        2,799.8        1,627.8
</TABLE>



                                     - 14 -
<PAGE>   16

     Exploration and production volumes of 2,799.8 MMcfed were 1,172.0 MMcfed
higher than last year, with increases in all business units. Expanded
international operations contributed volume growth of 927.7 MMcfed, and volumes
for Gulf Coast Onshore increased 30% (27.9 MMcfed) over 1997 second quarter
results. Other volume increases included East/West Texas by 9% (25.1 MMcfed),
Austin Chalk by 5% (31.1 MMcfed) and Western Region by 4% (20.4 MMcfed).
Offshore volumes improved 73% or 142.5 MMcfed, including 135.7 MMcfed from
properties added in the Norcen Acquisition.

     Natural gas volumes increased 465.2 MMcfd (41%) to 1,593.2 MMcfd,
principally reflecting volumes provided by Norcen Acquisition properties, which
contributed 466.3 MMcfd. Western Region volumes were up 37.0 MMcfd due to
development drilling at Whitney Canyon and higher volumes from the Brady Field.
Gulf Coast Onshore was up 23.0 MMcfd due to continued drilling success in Roleta
and from properties acquired in 1997. East/West Texas improved gas volumes by
18.4 MMcfd as a result of development drilling on recently acquired properties.
Offsetting these improvements were declines of 76.5 MMcfd in the Austin Chalk,
mostly because of the strong performance of a deep Washington County well in
1997.

     Natural gas liquids volumes increased 7.5 MBbld (24%) to 38.9 MBbld.
Production improvements included 4.5 MBbld in the Austin Chalk from the start-up
of the Masters Creek plant, 3.6 MBbld from acquired Canada properties and 1.5
MBbld from East/West Texas due to improved recoveries at the East Texas plant
and improvements in the gathering infrastructure. These increases were partially
offset by volume reductions of 2.3 MBbld in the Western Region, reflecting
plants in ethane rejection.

     Crude oil volumes of 162.2 MBbld were 110.3 MBbld higher than the second
quarter of last year reflecting 97.7 MBbld from properties added in the Norcen
Acquisition and 13.4 MBbld from the Austin Chalk. Canada production improved by
44.1 MBbld for the quarter, while production from Guatemala and Venezuela were
25.8 MBbld and 19.3 MBbld, respectively. Improvements in the Austin Chalk were
caused by first quarter 1998 discoveries in Louisiana.

OPERATING EXPENSES

     Production expenses increased $57.9 million to $129.7 million. Production
costs on a per unit basis were $0.51 per Mcfe, up from $0.49 per Mcfe last year.
Total lease operating expenses rose $52.0 million, with activity on Norcen
Acquisition properties causing $45.5 million of the increase. Other increases in
lease operating costs reflect expanded activity in the Louisiana section of the
Austin Chalk, where new wells have higher water content and require compression
at the wellhead, as well as additional compression added to existing wells in
Gulf Coast Onshore. Production overhead costs were $4.8 million higher than 1997
from increased personnel costs and from legal costs associated with a patent
infringement lawsuit.

     Exploration expenses rose $45.3 million over the second quarter of last
year. The increase was caused by higher surrendered lease costs of $22.9
million, primarily in East/West Texas ($10.9 million) from the Cotton Valley
Reef prospect and acquired properties, and in Gulf Coast Onshore ($4.8 million)
reflecting increased leasing activity. Dry hole expense increased $16.3 million
relating to drilling programs on properties added in the Norcen Acquisition
($17.1 million) and Offshore operations ($10.8 million). Geological and
geophysical costs increased $11.0 million, relating to activity on Norcen
Acquisition properties ($9.3 million) and Gulf Coast Onshore ($1.5 million).
Delay rentals decreased $6.1 million from last year.



                                     - 15 -
<PAGE>   17

     Depreciation, depletion, and amortization ("DD&A") increased by $147.8
million, or $0.25 per Mcfe on a per unit basis, to $1.04 per Mcfe. DD&A expense
relating to properties added in the Norcen Acquisition was $127.3 million, or
$1.30 per Mcfe. Higher volumes created an $84.7 million increase in DD&A costs
over the second quarter of last year, while a higher unit of production rate
resulted in a $59.1 million increase. In addition, write-offs caused by
depletion of two Offshore fields added $4.0 million to DD&A for the second
quarter of 1998.

GATHERING, PROCESSING AND MARKETING OPERATIONS

<TABLE>
<CAPTION>
                                                        Three Months Ended June 30,
                                                        ---------------------------
                                                            1998           1997
                                                        -----------     -----------
                                                           (Millions of dollars)
<S>                                                      <C>            <C>       
      Operating revenues ...........................     $    119.7     $     89.7
      Gas purchases ................................           35.8           24.8
                                                         ----------     ----------
         Operating margin ..........................           83.9           64.9
      Operating expenses:
         Operating costs ...........................           32.9           27.9
         Depreciation, depletion and amortization ..           16.5           15.7
                                                         ----------     ----------
           Total operating expenses ................           49.4           43.6
                                                         ----------     ----------
      Operating income .............................     $     34.5     $     21.3
                                                         ==========     ==========
</TABLE>

OPERATING MARGINS

     Gathering, processing and marketing margins increased by $19.0 million
(29%), with a $30.0 million gain on the settlement of a gas supply contract
offset by tighter margins at the Company's gas plants.

     Gathering margins increased by $1.6 million caused by higher volumes at
Panola pipeline ($1.0 million) and benefits from new pipelines and gathering
systems that were not operating in the second quarter of 1997. Partially
offsetting these increases were lower throughput at the Ferguson Burleson
pipeline and the absence of Frontier pipeline, which was sold in July 1997.

     Processing margins declined by $10.0 million with tighter margins caused by
lower product prices, which declined $0.23 per Mcfe (13%), combined with
opposing higher purchase prices for gas feedstock. Partially offsetting the
tighter margins were contributions from assets acquired in the third quarter of
1997 in the purchase of Highlands Gas Corporation ("Highlands") ($2.1 million)
and the Masters Creek plant start-up ($1.8 million). Total processing volumes
were up 12.2 MMcfed (5%) to 264.6 MMcfed.

<TABLE>
<CAPTION>
                                                       Three Months Ended June 30,
                                                       ---------------------------
                                                          1998           1997
                                                       ----------     -----------
<S>                                                    <C>            <C>
      Sales volumes - plants:
         Natural gas (MMcfd) .....................           17.8           20.0
         Natural gas liquids (MBbld) .............           41.1           38.7
         Total (MMcfed) ..........................          264.6          252.4

      Average product price realizations - plants:
         Natural gas (per Mcf) ...................     $     1.95     $     1.76
         Natural gas liquids (per Bbl) ...........           8.73          10.26
         Average (per Mcfe) ......................           1.49           1.72
</TABLE>



                                     - 16 -
<PAGE>   18

     Plant natural gas liquids volume increased by 2.4 MBbld (6%) to 41.1 MBbld
as a result of the addition of the Highlands plants (5.6 MBbld), the expansion
at the Patrick Draw plant and the start-up of the Masters Creek plant. Lower
inlets at other Austin Chalk plants, ethane rejection at the Emigrant Trail
plant and declines at the East Texas plant partly offset these improvements.
Plant natural gas volumes decreased by 2.2 MMcfd to 17.8 MMcfd due to lower
volumes at the Brookeland plant, partially offset by the addition of Masters
Creek and Highlands volumes.

     Marketing operating margins increased by $27.3 million, primarily from the
$30.0 million gas supply agreement settlement. In addition, higher marketed
volumes contributed $3.7 million to marketing margins, while lower per unit
realizations reduced margins by $6.4 million. Gas margins declined $2.3 million
and crude oil margins decreased $4.0 million, as higher volumes for both
products could not be overcome by the impact of lower per unit realizations.
Natural gas liquids margins increased $3.6 million with contributions from both
higher volumes and higher realizations compared to 1997.

OPERATING EXPENSES

     Gathering and processing expenses increased by $4.3 million, primarily
reflecting costs at acquired, expanded or constructed operations and an expanded
support staff. Countering these increases were reductions in East Texas plant
costs reflecting the absence of the 1997 plant turnaround and lower expenses at
Ferguson Burleson pipeline reflecting reduced volumes.

     Marketing operating expenses were unfavorable $0.7 million primarily from
higher personnel costs relating to the expansion of operations that began in
1997.

     DD&A increased by $0.8 million with the addition of the Highlands assets
($2.5 million), Masters Creek plant ($1.7 million) and Blacklake pipeline ($0.5
million). Offsetting declines occurred at Ferguson Burleson pipeline ($1.3
million), and at the Brookeland plant ($1.1 million) and the East Texas plant
($0.5 million) reflecting the revision of estimated asset lives.

MINERALS OPERATIONS

OPERATING INCOME
<TABLE>
<CAPTION>
                                                          1998           1997
                                                       ----------     ----------
                                                          (Millions of dollars)
<S>                                                    <C>            <C>       
         Coal ....................................     $     27.5     $     20.6
         Soda ash ................................            6.6            9.1
         Other ...................................            1.9            0.3
                                                       ----------     ----------
             Total ...............................     $     36.0     $     30.0
                                                       ==========     ==========
</TABLE>

     Minerals operating income increased by $6.0 million primarily from $7.5
million in higher equity income from Black Butte Coal Company ("Black Butte") as
a result of the 1997 amendment of a coal supply contract that accelerated coal
shipments. Also contributing to the increase was a $2.0 million pretax gain on
property sales. Partly offsetting these items were audit adjustments of $2.2
million to results for the Company's soda ash joint venture. Coal royalties were
down $0.5 million from lower volumes because the mining operation has shifted to
Federal sections. Soda ash royalties were down $0.4 million from lower volumes.



                                     - 17 -
<PAGE>   19

GENERAL AND ADMINISTRATIVE AND OTHER

     General and administrative expenses increased $5.9 million to $26.6 million
principally reflecting the inclusion of $5.2 million relating to the Company's
expanded international operations. On a per unit basis, general and
administrative expenses decreased by $0.03 per Mcfe to $0.09 per Mcfe.

     Other income was $10.1 million favorable to 1997, primarily relating to a
gain on the foreign exchange contract entered into in connection with the Norcen
Acquisition ($11.0 million) and gains on the close-out of Norcen interest rate
swaps and crude oil positions ($2.3 million). These gains were partially offset
by the loss on sale of the remaining Superior Propane investment ($1.4 million)
and fees for the short-term forward sale arrangement ($0.8 million).

     Interest expense for the quarter increased $67.3 million over last year to
$78.3 million for the quarter. The increase reflects the borrowings made in
connection with the Norcen Acquisition and the funding of the Company's capital
expenditure program.

     Income taxes declined $61.6 million from the second quarter of 1997 to a
benefit of $28.1 million. This change primarily resulted from a pretax loss
caused by lower prices and higher exploration and DD&A costs arising from the
Norcen Acquisition. The effective tax rate was 61.9% in the second quarter of
1998 (including $4.1 million of Section 29 credits) compared to 31.1% in 1997
(including $4.7 million of Section 29 credits). Excluding the Section 29
credits, the effective tax rates for 1998 and 1997 were 52.9% and 35.5%,
respectively.

            SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO JUNE 30, 1997

SUMMARY FINANCIAL DATA

<TABLE>
<CAPTION>
                                                        Six Months Ended June 30,
                                                        -------------------------
                                                           1998           1997
                                                        ---------      ----------
                                                          (Millions of dollars)
<S>                                                     <C>            <C>      
       Total operating revenues ..................      $ 1,120.1      $   976.3
       Total operating expenses ..................        1,023.9          674.9
       Operating income ..........................           96.2          301.4
       Net income ................................           13.9          191.6
       Earnings per share - diluted ..............           0.06           0.76
</TABLE>

     Net income of $13.9 million or $0.06 per share for year-to-date 1998 was
down $177.7 million (93%) from earnings of $191.6 million or $0.76 per share in
1997. The net income decline includes the impacts of a sharp decline in
producing property operating income and $95.8 million of higher interest costs.
Benefits to net income were provided by the $30.0 million gain on the gas supply
contract settlement, the $26.0 million gain on the sale of the DJ basin
properties, and the $11.0 million gain on the foreign currency position, as well
as strong operating income from the minerals business.

     Operating income decreased by $205.2 million (68%) to $96.2 million for the
first six months of 1998. Exploration and production operating income declined
$210.7 million to $16.2 million, with lower prices for all products and
increased operating, exploration and DD&A costs, which offset higher volumes and
the gain on sale of the DJ basin properties. Gathering, processing and marketing
operating income decreased $1.0



                                     - 18 -
<PAGE>   20

million as tighter margins at gas plants offset the settlement on the gas supply
agreement. Minerals operating income improved $14.8 million, reflecting the
effects of the amended coal supply agreement. General and administrative costs
increased $8.3 million, principally from administrative costs of expanded
international operations.

SUMMARY OF SEGMENT FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                  Six Months Ended June 30,
                                                                  -------------------------
                                                                    1998            1997
                                                                 ----------      ----------
                                                                    (Millions of dollars)
<S>                                                              <C>             <C>
        Segment operating income:
           Exploration and production ......................     $     16.2      $    226.9
           Gathering, processing and marketing .............           53.0            54.0
           Minerals ........................................           75.4            60.6
           Corporate/general and administrative ............          (48.4)          (40.1)
                                                                 ----------      ----------
              Total ........................................     $     96.2      $    301.4
                                                                 ==========      ==========
</TABLE>

EXPLORATION AND PRODUCTION OPERATIONS

<TABLE>
<CAPTION>
                                                   Six Months Ended June 30,
                                                   -------------------------
                                                      1998           1997
                                                   ----------     ----------
                                                     (Millions of dollars)
<S>                                                <C>            <C>       
Operating revenues ............................    $    827.5     $    697.8
Operating expenses:
   Production .................................         223.0          144.9
   Exploration ................................         150.6           92.0
   Depreciation, depletion and amortization ...         437.7          234.0
                                                   ----------     ----------
   Total operating expenses ...................         811.3          470.9
                                                   ----------     ----------
Operating income ..............................    $     16.2     $    226.9
                                                   ==========     ==========
</TABLE>

OPERATING REVENUES

     Producing property revenues increased by $129.7 million (19%). Volume
increases of 807.8 MMcfed (50%) added $336.3 million to revenues; however,
product price declines of $0.48 per Mcfe (21%) reduced revenues by $208.1
million. Other revenues were up $1.5 million principally from the gain on sale
of the DJ basin properties offset by the absence of the 1997 partial reduction
of the Columbia Gas Transmission Company bankruptcy settlement reserve ($12.0
million) and lower gains on other 1998 property sales compared to last year.

<TABLE>
<CAPTION>
                                                                              Six Months Ended June 30,
                                                                   -----------------------------------------------
                                                                     1998         1997         1998         1997
                                                                   --------     --------     --------     --------
                                                                      (without hedging)         (with hedging)
<S>                                                                <C>          <C>          <C>          <C>
      Average price realizations - exploration and production:
         Natural gas (per Mcf) ...............................     $   1.85     $   2.17     $   1.88     $   2.13
         Natural gas liquids (per Bbl) .......................         8.43        11.66         8.43        11.64
         Crude oil (per Bbl) .................................        10.91        19.45        11.04        18.81
         Average (per Mcfe) ..................................         1.80         2.35         1.82         2.30
</TABLE>



                                     - 19 -
<PAGE>   21

<TABLE>
<CAPTION>
                                                          Six Months Ended June 30,
                                                          -------------------------
                                                             1998        1997
                                                          ---------     ----------
<S>                                                       <C>           <C>
      Production volumes - exploration and production:
         Natural gas (MMcfd) ..........................     1,433.1     1,123.1
         Natural gas liquids (MBbld) ..................        35.2        31.1
         Crude oil (MBbld) ............................       130.6        51.7
         Total (MMcfed) ...............................     2,427.7     1,619.9
</TABLE>

     Exploration and production volumes improved 807.8 MMcfed to 2,427.7 MMcfed
for the first six months of 1998. International volumes were 629.0 MMcfed higher
than last year, primarily from the Norcen Acquisition. Other increases included
Gulf Coast Onshore (31.8 MMcfed), East/West Texas (24.8 MMcfed) and Austin Chalk
(22.8 MMcfed). Offshore volumes improved 107.1 MMcfed, including 92.3 MMcfed
from properties added in the Norcen Acquisition.

     Natural gas volumes increased 310.0 MMcfd (28%), principally reflecting
Norcen Acquisition properties that contributed 310.7 MMcfd. Gulf Coast Onshore
was 26.9 MMcfd higher from continued drilling success in the Roleta field and
volumes from acquired properties. East/West Texas improved 20.9 MMcfd from
development drilling on recently acquired properties. Partially offsetting these
improvements were 79.3 MMcfd of Austin Chalk declines largely caused by the
strong performance in Washington County in 1997.

     Natural gas liquids volumes increased 4.1 MBbld (13%). Production
improvements included 4.6 MBbld in the Austin Chalk from the start-up of the
Masters Creek gas plant and 2.3 MBbld from acquired Canada properties. These
increases were partially offset by 4.4 MBbld of lower volumes from the Western
Region, reflecting plants in ethane rejection.

     Crude oil volumes were 78.9 MBbld higher in 1998 primarily reflecting 66.9
MBbld from properties added in the Norcen Acquisition and a 12.4 MBbld
improvement from the Austin Chalk. Canada production was 30.2 MBbld higher for
the period, while production from Guatemala and Venezuela were 18.2 MBbld and
12.8 MBbld, respectively. Improvements in the Austin Chalk reflect high growth
from first quarter 1998 discoveries in Louisiana.

OPERATING EXPENSES

     Production expenses were up $78.1 million, with production costs on a per
unit basis of $0.51 per Mcfe, up from $0.49 per Mcfe last year. Total lease
operating expenses were up $72.4 million with $58.7 million attributable to
Norcen Acquisition properties and the remainder reflecting higher compression
and salt water disposal costs in the Austin Chalk and Gulf Coast Onshore.
Production overhead costs were up $7.0 million due to increased personnel costs
and from legal costs relating to a patent infringement lawsuit.

     Exploration expenses increased $58.6 million over year-to-date last year,
with activity relating to properties added in the Norcen Acquisition
contributing $40.2 million. Other increases were primarily the result of higher
surrendered lease costs ($21.9 million), relating to the Cotton Valley Reef and
other acquired properties in East/West Texas ($16.1 million) and increased
leasing activity in Gulf Coast Onshore ($6.2 million). Delay rentals were down
$5.1 million from last year.

     DD&A increased by $203.7 million, or $0.20 per Mcfe on a per unit basis to
$1.00 per Mcfe. DD&A expense relating to properties added in the Norcen
Acquisition was $171.8 million, or $1.31 per Mcfe. Higher



                                     - 20 -
<PAGE>   22

volumes caused $116.6 million of the total increase in DD&A, while higher unit
of production rates added $83.1 million. In addition, the 1998 write-off of two
Offshore fields contributed $4.0 million to the increase.

GATHERING, PROCESSING AND MARKETING OPERATIONS

<TABLE>
<CAPTION>
                                                                 Six Months Ended June 30,
                                                                 -------------------------
                                                                     1998           1997
                                                                 ----------     ----------
                                                                   (Millions of dollars)
<S>                                                              <C>            <C>
      Operating revenues ...................................     $    215.9     $    214.4
      Gas purchases ........................................           63.1           75.0
                                                                 ----------     ----------
         Operating margin ..................................          152.8          139.4
      Operating expenses:
         Operating costs ...................................           65.5           54.3
         Depreciation, depletion and amortization ..........           34.3           31.1
                                                                 ----------     ----------
           Total operating expenses ........................           99.8           85.4
                                                                 ----------     ----------
      Operating income .....................................     $     53.0     $     54.0
                                                                 ==========     ==========
</TABLE>

OPERATING MARGINS

     Gathering, processing, and marketing margins increased by $13.4 million
(10%) as the $30 million gain on the gas supply agreement settlement was offset
by tighter plant margins.

     Gathering margins decreased by $1.0 million principally reflecting lower
throughput at the Ferguson Burleson pipeline, partly offset by higher volumes at
Panola pipeline and benefits from pipelines and gathering systems acquired or
placed in service since the second quarter of last year.

     Processing margins decreased by $16.7 million with tighter margins caused
by lower product prices, which were down $0.47 per Mcfe (23%). Providing some
offset to the tighter margins were contributions from the Masters Creek plant
start-up ($4.2 million) and acquired Highlands plants ($4.2 million).

<TABLE>
<CAPTION>
                                                                 Six Months Ended June 30,
                                                                 -------------------------
                                                                    1998           1997
                                                                 ----------     ----------
<S>                                                              <C>            <C>
      Sales volumes - plants:
         Natural gas (MMcfd) ...............................           21.6           20.7
         Natural gas liquids (MBbld) .......................           42.4           40.1
         Total (MMcfed) ....................................          275.9          261.6
</TABLE>

<TABLE>
<CAPTION>
                                                                 Six Months Ended June 30,
                                                                 -------------------------
                                                                    1998           1997
                                                                 ----------     ----------
<S>                                                              <C>            <C>       
      Average product price realizations - plants:
         Natural gas (per Mcf) .............................     $     2.02     $     2.30
         Natural gas liquids (per Bbl) .....................           9.29          12.25
         Average (per Mcfe) ................................           1.59           2.06
</TABLE>



                                     - 21 -
<PAGE>   23

     Plant natural gas liquids volume increased by 2.3 MBbld primarily as a
result of the addition of the Highlands plants. Plant natural gas volumes
increased by 0.9 MMcfd over the first six months of last year.

     Marketing operating margins increased by $30.9 million as the gain from the
gas supply agreement settlement ($30.0 million) and higher marketed volumes
($6.6 million) were partly offset by lower per unit realizations ($5.7 million).
Margins for gas and natural gas liquids improved $3.4 million and $6.3 million,
respectively, caused by benefits from both higher per unit realizations and
higher marketed volumes. Crude oil margins decreased by $8.8 million,
principally resulting from higher lease purchase costs.

OPERATING EXPENSES

     Gathering and processing expenses increased by $8.8 million primarily
reflecting costs at acquired, expanded or constructed operations, as well as
increases in support staff. Offsetting these increases was the absence of the
1997 plant turnaround at the East Texas plant.

     Marketing operating expenses were unfavorable $2.3 million as a result of
higher personnel costs relating to the expansion of operations that began in
1997.

     DD&A increased by $3.2 million with the addition of the Highlands assets
($4.9 million), Masters Creek plant ($3.1 million) and the Blacklake pipeline
($1.1 million). Offsetting declines occurred at Ferguson Burleson pipeline ($2.3
million) and at the Brookeland plant ($2.0 million) reflecting the revision of
estimated asset lives.

MINERALS OPERATIONS

<TABLE>
<CAPTION>
OPERATING INCOME                                1998           1997
                                             ----------     ----------
                                                (Millions of dollars)
<S>                                          <C>            <C>       
         Coal ..........................     $     57.4     $     41.1
         Soda ash ......................           16.4           19.1
         Other .........................            1.6            0.4
                                             ----------     ----------
             Total .....................     $     75.4     $     60.6
                                             ==========     ==========
</TABLE>

     Minerals operating income increased by $14.8 million (24%), principally the
result of $15.8 million of higher equity income from Black Butte reflecting the
amendment of a coal supply contract. Also contributing to the increase was the
$2.0 million pretax gain on a property sale. However, the period also included a
negative audit adjustment of $2.2 million to results for the Company's soda ash
joint venture.

GENERAL AND ADMINISTRATIVE AND OTHER

     General and administrative expenses increased $8.3 million (21%) to $48.4
million, principally reflecting $8.2 million relating to expanded international
operations. On a per unit basis, general and administrative expenses decreased
by $0.02 per Mcfe to $0.09 per Mcfe.

     Other income was $14.5 million favorable to 1997 primarily as a result of
the $11.0 million gain on the foreign exchange position and the gain on the
close-out of acquired interest rate swaps and crude oil positions. These gains
were partially offset by the loss on sale of the remaining Superior Propane
investment



                                     - 22 -
<PAGE>   24

and fees for the short-term forward sale arrangement. Interest expense increased
$95.8 million over last year to $117.5 million. This increase reflects the
borrowings made in connection with the Norcen Acquisition and capital spending
programs.

     Income taxes declined $108.8 million for the first six months of 1998
compared to last year to a benefit of $19.8 million. This decline is primarily
the result of a pretax loss. Included in 1998 are $8.2 million of Section 29
credits compared to $9.4 million of Section 29 credits in the first six months
of 1997.


                         LIQUIDITY AND CAPITAL RESOURCES

     The Company's primary source of cash during the first six months of 1998
was cash provided by operations, debt financing, sales of assets and other cash
generating strategies. Cash outflows for the first six months of 1998 include
the purchase price for Norcen, capital and exploratory expenditures and the
first quarter repurchase of common stock by the Company.

     Cash provided by operations for the first six months of 1998 increased
$161.4 million (28%) compared to the same period of 1997. The increase was
primarily the result of cash generating transactions that provided $149.3
million in 1998 (discussed later in this section). Other than these one-time
items, cash flow from operations improved $12.1 million as the benefit of
significantly higher volumes was offset by lower sales prices for the Company's
oil and gas products and by higher interest expense associated with higher debt
levels.

     Cash used in investing activities for the first six months of 1998
increased $2.75 billion over last year. This rise reflects the $2.6 billion
purchase price for Norcen and a $285.5 million increase in other capital and
exploratory expenditures. These increases were partly offset by $169 million
provided by asset sales and settlements.

     Capital and exploratory expenditures for the first six months of 1998,
excluding the Norcen Acquisition, were $928.6 million, up 44% over last year.
Expenditure categories are as follows:

<TABLE>
<CAPTION>
                                                                 Six Months Ended June 30,
                                                                 -------------------------
                                                                    1998           1997
                                                                 ----------     ----------
                                                                   (Millions of dollars)
<S>                                                              <C>            <C>
      Capital and exploratory expenditures:
         Exploration and production ........................     $    828.1     $    555.1
         Gathering, processing and marketing ...............           78.1           80.2
         Minerals and other ................................           22.4            7.8
                                                                 ----------     ----------
              Total ........................................     $    928.6     $    643.1
                                                                 ==========     ==========
</TABLE>

     Exploration and production capital spending for the first six months of
1998 increased by $273.0 million (49%) over last year, reflecting increases in
development drilling ($180.7 million) and production facilities and equipment
($68.5 million). Development drilling increases were concentrated in the Austin
Chalk, Canada and other international areas, while production facility capital
reflects spending on properties added in the Norcen Acquisition to support
production operations. Property purchases of slightly more than $110 million
occurred in each period.

     During the first six months of 1998, the Company completed asset sales and
other cash generating transactions. Included in cash from operating activities
are the factoring of an acquired note receivable relating to Norcen's 1997
partial sale of Superior Propane ($85.4 million) and the closure of certain
commodity and foreign currency financial contracts also acquired in the Norcen
Acquisition ($63.9 million). Cash used in investing activities includes
proceeds from the sale of the DJ basin properties ($41.0 million), the sale of
the remaining investment in Superior Propane ($48.4 million) and proceeds from
settlements of gas supply contracts ($70.3 million). Lastly, the Company
entered into a forward sale agreement that provided $250.0 million, which is
included in cash provided (used) by financing activities (see Note 6 to the
Condensed Consolidated Financial Statements).


                                     - 23 -
<PAGE>   25
     On April 20, 1998, the Company announced that its Board of Directors had
authorized management to proceed with a deleveraging program with a focus toward
reducing the Company's debt to total capitalization ratio and obtaining a strong
investment grade credit rating within 18 months. This program includes the
Company's plans to sell approximately $600 million of producing properties. The
Company expects to complete these sales before the end of 1998. All of the
properties identified for sale in the aggregate represent less than ten percent
of the Company's reserves, cash flows and production volumes.

     In connection with this deleveraging program, the Board of Directors also
provided conditional approval to management to pursue potential monetization of
the Company's gathering, processing and marketing ("GPM") business. On July 2,
1998, a Confidential Descriptive Memorandum ("CDM") for UPFuels, in which the
Company's GPM business is concentrated, was distributed to prospective buyers.
This CDM solicits offers and provides the impetus for further discussions
relating to the monetization of the Company's GPM business. The Company has
received numerous and wide-ranging proposals and is in the process of reviewing
such proposals. Certain of the prospective buyers were invited to further review
documents and other information relating to the Company's GPM business. Such
reviews will commence in the third quarter of 1998. It is the intention of
management of the Company to consummate the monetization transaction as soon as
practicable.

     As of June 30, 1998 and December 31, 1997, the total capitalization of the
Company was as follows:

<TABLE>
<CAPTION>
                                                                  June 30,      December 31,
                                                                    1998            1997
                                                                 ----------     ------------
                                                                    (Millions of dollars)
<S>                                                              <C>             <C>
Long-term debt:
      Commercial paper and other, net ......................     $  2,498.3      $    663.1
      Notes and debentures .................................        2,225.0           550.0
      Tax exempt revenue bonds .............................           20.1            20.1
      (Discount) premium on notes and debentures - net .....            8.5            (2.6)
                                                                 ----------      ----------
         Total long-term debt ..............................        4,751.9         1,230.6
Shareholders' equity .......................................        1,698.2         1,760.7
                                                                 ----------      ----------
      Total capitalization .................................     $  6,450.1      $  2,991.3
                                                                 ==========      ==========
      Debt to total capitalization .........................           73.7%           41.1%
</TABLE>

     During the first quarter of 1998, in connection with the Norcen
Acquisition, the Company issued commercial paper supported by its $2.7 billion
364 Day Competitive Advance/Revolving Credit Agreement (the "Norcen Acquisition
Facility") and also assumed the net debt of Norcen, aggregating approximately
$1.0 billion. The Norcen Acquisition Facility includes a mandatory prepayment
provision and a series of "prepayment events." The mandatory prepayment
provision requires that $1.35 billion be repaid prior to March 1999. In
addition, seventy-five percent of the net proceeds resulting from any prepayment
event must be applied to reduce the indebtedness under the Norcen Acquisition
Facility. Prepayment events include sales of assets in excess of $10 million as
well as debt and equity issuances. As of June 30, 1998, through debt issuances
and asset sales, $900 million had been applied towards fulfilling the mandatory
prepayment requirements. In addition, the covenants in the Company's other
credit agreements were modified. The Company's $600 million and $300 million
revolving credit agreements were amended to provide that debt should not exceed
seventy-five percent of the total of the Company's debt and shareholders' equity
(sixty-five percent after September 30, 1999). Additionally, EBITDAX (the sum of
operating income, depreciation, depletion and amortization, and exploration
expenses) of the Company's principal subsidiaries (as defined



                                     - 24 -


<PAGE>   26

in the agreements) is required to be at least eighty percent of the Company's
consolidated EBITDAX. The modifications also placed other restrictions on the
Company regarding the creation of liens, incurrance of additional indebtedness,
transactions with affiliates, sales of stock of Union Pacific Resources Company
(a wholly-owned subsidiary of the Company) and certain mergers, consolidations
and asset sales. The Norcen credit agreements have been guaranteed by the
Company and have also been modified to include, as an additional event of
default, any event of default occurring under the Norcen Acquisition Facility.

     Excluding commercial paper, the Company has no debt maturing in the next
four years. All debt of the Company has been classified as long-term reflecting
the Company's intent and ability to maintain any short-term borrowings on a
long-term basis either through the issuance of additional commercial paper or
debt securities. In the second quarter of 1998, the Company issued $1.025
billion of notes and debentures, with interest rates ranging from 6.5% to 7.15%
and maturities from 2005 through 2028. The proceeds from this issuance were
primarily used to repay a portion of the Norcen Acquisition Facility.

     As of June 30, 1998, the Company's debt to total capitalization ratio was
73.7%. The Company has initiated a deleveraging program directed toward reducing
its debt to total capitalization ratio. In addition to the proposed asset sales
and certain of the cash generating strategies noted above, the Company has taken
steps to reduce its capital spending to approximate its anticipated cash flow
for the year 1998. Capital spending plans have declined from an original range
(before the Norcen Acquisition) of $1.5 to $1.8 billion to the $1.3 billion
current projection. In response to the weakness of crude oil and natural gas
liquids prices, higher debt service requirements and its desire to reduce its
debt to total capitalization ratio, the Company has lowered its capital spending
below its historical annual spending levels. After completion of the
deleveraging program and with improvement of commodity prices, the Company
anticipates expansion of its capital spending programs. The Company's debt to
total capitalization ratio is expected to continue to decline from reductions in
capital and other spending and as sales proceeds from the deleveraging program
are used to pay down debt balances.

     In the first quarter of 1998, the Company purchased $21.6 million of its
common stock. The Company paid a $0.05 per share quarterly cash dividend ($12.4
million) on its outstanding common stock in each of April and July 1998, and on
July 14 declared a $0.05 per share dividend to be paid on October 1, 1998.

        The extent and timing of capital spending may be affected by changes in
business and operating conditions as well as by the timing and availability of
suitable investment opportunities. For example, the Company has spent over
seventy percent of its projected 1998 capital budget in the first half of the
year. As a result, the capital spending rate will decrease in the remaining
months of 1998, resulting in decreased drilling activity. Capital spending for
1998 has and will be funded primarily through cash provided by operations as
well as certain cash generating strategies that occurred in the first half of
the year. Capital spending is expected to be focused on drilling, lease
acquisitions, and selected property acquisitions. Drilling is expected to be
concentrated in the Gulf of Mexico, Austin Chalk, western Canada and Guatemala.
The Company expects to increase its total annual sales volumes in 1998 by more
than 50% over 1997, while increasing its hydrocarbon reserves. The sales volume
growth over 1997 is expected to be achieved primarily as a result of the Norcen
Acquisition. The volume growth through the remainder of 1998 will be impacted by
the deleveraging program and is expected to remain near second quarter levels.



                                     - 25 -
<PAGE>   27
     Prices for oil and natural gas have declined during 1998 as a result of
several contributing factors, including, but not limited to, high production
levels from members of the Organization of Petroleum Exporting Countries and
other countries, mild weather conditions and the economic declines in several
Asian markets. These price declines have had a negative near-term impact on the
cash flows from the Company's production activities. If the weak prices continue
and if the Company determines that such decline has longer-term negative
implications, the Company will revise its long-term price forecasts utilized in
its periodic evaluations of potential asset impairments. Such evaluations may
require the Company to record a non-cash charge to earnings and write-down the
book value of certain producing properties.


                           FORWARD LOOKING INFORMATION


     Certain information included in this quarterly report and other materials
filed by the Company with the Securities and Exchange Commission contain
projections and other forward looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended. Such forward looking statements may be or
may concern, among other things, capital expenditures, drilling activity,
acquisitions and dispositions, development activities, cost savings efforts,
production activities and volumes, hydrocarbon reserves, hydrocarbon prices,
hedging activities and the results thereof, liquidity, regulatory matters and
competition. Such forward looking statements generally are accompanied by words
such as "estimate," "expect," "predict," "anticipate," "goal," "should,"
"assume," "believe" or other words that convey the uncertainty of future events
or outcomes.

     Such forward looking information is based upon management's current plans,
expectations, estimates and assumptions and is subject to a number of risks and
uncertainties that could significantly affect current plans, anticipated
actions, the timing of such actions and the Company's financial condition and
results of operations. As a consequence, actual results may differ materially
from expectations, estimates or assumptions expressed in or implied by any
forward looking statements made by or on behalf of the Company. The risks and
uncertainties include generally the volatility of hydrocarbon prices and
hydrocarbon-based financial derivative prices; basis risk and counterparty
credit risk in executing hydrocarbon price risk management activities; economic,
political, judicial and regulatory developments; competition in the oil and gas
industry as well as competition from other sources of energy; the economics of
producing certain reserves; demand and supply of oil and gas; the ability to
find or acquire and develop reserves of natural gas and crude oil; and the
actions of customers and competitors. Additionally, unpredictable or unknown
factors not discussed herein could have material adverse effects on actual
results related to matters which are the subject of forward looking information.
The Company does not intend to update these cautionary statements.

     With respect to expected capital expenditures and drilling activity,
additional factors such as the extent of the Company's success in acquiring oil
and gas properties and in identifying prospects for drilling, the availability
of acquisition opportunities which meet the Company's objectives as well as
competition for such opportunities, exploration and operating risks, the success
of management's cost reduction efforts and deleveraging program and the
availability of technology may affect the amount and timing of such capital
expenditures and drilling activity. With respect to expected growth in
production and sales volumes and estimated reserve quantities, factors such as
the extent of the Company's success in finding, developing and producing
reserves, the timing of capital spending, acquisition and deleveraging programs,
uncertainties inherent in estimating reserve quantities and the availability of
technology may affect such production volumes and reserve estimates.

     With respect to liquidity, factors such as the state of domestic capital
markets, credit availability from banks or other lenders and the Company's
results of operations may affect management's plans or ability to incur
additional indebtedness. With respect to cash flow, factors such as changes in
oil and gas prices, the Company's success in acquiring or divesting producing
properties or other assets, environmental matters and other contingencies,
hedging activities, the Company's credit rating and debt levels, and the state
of domestic capital markets may affect the Company's ability to generate
expected cash flows. With respect to contingencies, factors such as changes in
environmental and other governmental regulation, and uncertainties with respect
to legal matters may affect the Company's expectations regarding the potential
impact of contingencies on the operating results or financial condition of the
Company. Certain factors, such as



                                     - 26 -
<PAGE>   28

changes in oil and gas prices and underlying demand and the extent of the
Company's success in exploiting its current reserves and acquiring or finding
additional reserves may have pervasive effects on many aspects of the Company's
business in addition to those outlined above.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company has established policies and procedures for managing risk
within its organization. These policies and procedures incorporate internal
controls and are governed by a risk management committee. The level of risk
assumed by the Company is based on its objectives and earnings, and its capacity
to manage risk. Limits are established for each major category of risk, with
exposures monitored and managed by Company management and reviewed by the risk
management committee.

COMMODITY PRICE RISK - NON-TRADING ACTIVITIES

     The Company uses derivative financial instruments for non-trading purposes
in the normal course of business to manage and reduce risks associated with
contractual commitments, price volatility, and other market variables. These
instruments are generally put in place to limit risk of adverse price movements;
however, when this is done, these same instruments may also limit future gains
from favorable price movements. Such risk management activities are generally
accomplished pursuant to exchange-traded futures and over-the-counter swaps and
options.

     Recognition of realized gains/losses and option premium payments/receipts
in the Condensed Consolidated Statements of Income is deferred until the
underlying physical product is purchased or sold. Unrealized gains/losses on
derivative financial instruments are not recorded. Margin deposits, deferred
gains/losses on derivative financial instruments and net premiums are included
in other current assets or liabilities in the Condensed Consolidated Statements
of Financial Position. The cash flow impact of derivative and other financial
instruments is reflected as cash flows from operations in the Condensed
Consolidated Statements of Cash Flows. At June 30, 1998, the Company had margin
deposits of $8.8 million.

     The following table summarizes the Company's open positions as of June 30,
1998, which hedge the Company's future oil and gas production from oil and gas
activities.

<TABLE>
<CAPTION>
                                                                             WEIGHTED       FAIR      UNRECOGNIZED
                                      CONTRACT                             AVG. PRICES     VALUE       GAIN(LOSS)
 PRODUCT          TYPE               TIME PERIOD             VOLUME          PER MCF     (MILLIONS)    (MILLIONS)
 -------          ----               -----------             ------          -------     ----------    ----------
<S>         <C>               <C>                           <C>            <C>           <C>           <C>
Gas         Puts purchased    Aug - Oct 1998                1.2 Bcfd         $ 1.90        $ 4.9         $ (2.7)
Gas         Net calls sold    Aug - Oct 1998                 63 MMcfd          2.57          0.8           (0.3)
Gas         Fixed price       Aug 1998 - Jun 2008          59.9 Bcf            3.00         17.0           17.0
Gas         Fixed price       Aug 1998 - Jun 2011         278.4 Bcf            2.93         67.8           67.8
Oil         Futures/swaps     Jan 1999 - Dec 2000             2 Mbd           11.58         (0.6)          (0.6)
Oil         Puts purchased    Aug - Dec 1998                 66 Mbd           14.83          5.3           (0.3)
Oil         Calls sold        Aug - Dec 1998                  1 Mbd           21.00          0.2            0.1
Oil         Fixed price       Aug - Dec 1998                 14 Mbd            8.90         (2.1)          (2.1)
                                                                                           -----         ------
                                                                                           $93.3         $ 78.9
                                                                                           =====         ======
</TABLE>



                                     - 27 -
<PAGE>   29

     In connection with purchase accounting adjustments relating to the Norcen
Acquisition, an asset was recorded on the balance sheet for $106.3 million
representing the fair value of acquired futures contracts and fixed price
positions. The value of this asset will be amortized over the contract terms.
Excluding the $68.7 million unamortized value of the asset remaining at June 30,
1998, the Company's unrecognized gain at June 30, 1998 was $11.1 million.

     UPFI enters into financial contracts in conjunction with transportation,
storage and customer service programs. The following table summarizes UPFI's
open positions as of June 30, 1998.

<TABLE>
<CAPTION>
                                                                             WEIGHTED       FAIR      UNRECOGNIZED
                                      CONTRACT                             AVG. PRICES     VALUE       GAIN(LOSS)
 PRODUCT          TYPE               TIME PERIOD             VOLUME          PER MCF     (MILLIONS)    (MILLIONS)
 -------          ----               -----------             ------          -------     ----------    ----------
<S>         <C>                 <C>                         <C>              <C>          <C>          <C>
Gas         Futures/swaps
            purchased           Aug 1998 - Dec 2001         186.7 Bcf        $ 2.43        $ 21.1        $ 21.1
Gas         Futures/swaps
            sold                Aug 1998 - Dec 2001          58.8 Bcf          2.25          (7.6)         (7.6)
                                                                                           ------        ------
                                                                                           $ 13.5        $ 13.5
                                                                                           ======        ======
</TABLE>

     Additionally, the Company had previously sold near-term futures contacts
and swaps for August through December 1998 with respect to notional natural gas
volumes of 47 MMcfd. Subsequently, these positions were offset by purchasing
corresponding volumes through futures contracts and swaps for the same delivery
periods. The unrecognized gain at June 30, 1998 relating to these transactions
was $0.3 million.

     Unrecognized mark-to-market gains and losses were determined based on
current market prices, as quoted by recognized dealers, assuming round lot
transactions and using a mid-market convention without regard to market
liquidity.

TRADING ACTIVITIES

     UPR Energy Services Inc., a wholly-owned subsidiary of the Company,
periodically enters into financial contracts in conjunction with market making
or trading activities with the objective of achieving profits through successful
anticipation of movements in commodity prices and changes in other market
variables.

     Market-making positions are marked-to-market and gains and losses are
immediately included as revenue in the Condensed Consolidated Statement of
Income. In addition, the fair value of unsettled positions is immediately
included in the Condensed Consolidated Statement of Financial Position as a
current asset or current liability. The average fair value of market-making
position during both the second quarter and year-to-date 1998 was a loss of less
than $0.1 million. The net pretax loss relating to these activities for the
second quarter and the six months ended June 30, 1998 was $0.2 million.

     The following table summarizes UPR Energy Services Inc. open positions as
of June 30, 1998:



                                     - 28 -
<PAGE>   30

<TABLE>
<CAPTION>
                                                                             Weighted       Fair
                                      Contract                             Avg. Prices     Value
 Product          Type               Time Period             Volume          Per Mcf     (Millions)
----------- ----------------- -------------------------- ---------------- -------------- -----------
<S>         <C>               <C>                        <C>              <C>            <C>
Gas         Futures/swaps
            purchased         Jul 1998 - Mar 1999           8.1 Bcf           $ 2.36        $ 0.7
Gas         Futures/swaps
            sold              Jul 1998 - Oct 1999           7.4 Bcf             2.28         (0.6)
Oil         Futures/swaps
            purchased         Jul 1998 - Jun 1999           964 Mb             16.58         (0.5)
Oil         Futures/swaps
            sold              Jul 1998 - Jun 1999           961 Mb             16.44          0.2
                                                                                            -----
                                                                                            $(0.2)
                                                                                            =====
</TABLE>

INTEREST RATE SWAPS

     The Company periodically enters into rate swaps and contracts to hedge
certain interest rate transactions. As of June 30, 1998, the Company had no
interest rate swap positions open.

FOREIGN CURRENCY CONTRACTS

     The Company periodically enters into foreign currency contracts to hedge
specific currency exposures from commercial transactions. As a result of the
Norcen Acquisition, the Company acquired foreign currency forward exchange
contracts with a $348 million notional amount and maturities between March 1998
and December 1999, for which a $15.5 million deferred liability was recorded on
the Condensed Consolidated Statement of Financial Position representing the fair
value of these contracts. This deferred liability will be amortized over the
contract terms. The unrecognized loss on such contracts at June 30, 1998,
excluding the $12.8 million remaining unamortized deferred liability recorded in
purchase accounting, was $34.3 million.

CREDIT RISK

     Credit risk is the risk of loss as a result of nonperformance by
counterparties pursuant to the terms of their contractual obligations. Because
the loss can occur at some point in the future, a potential exposure is added to
the current replacement value to arrive at a total expected credit exposure. The
Company has established methodologies to establish limits, monitor and report
creditworthiness and concentrations of credit to reduce credit risk. At June 30,
1998, the Company's largest credit risk associated with any single counterparty,
represented by the net fair value of open contracts, was $0.7 million.



                                     - 29 -
<PAGE>   31

PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

GENERAL

The Company is a defendant in a number of lawsuits and is involved in
governmental proceedings arising in the ordinary course of business, including,
but not limited to, royalty claims, contract claims, personal injury claims and
environmental claims. While management of the Company cannot predict the outcome
of such litigation and other proceedings, management does not expect these
matters to have a materially adverse effect on the consolidated results of
operations, financial condition or cash flows of the Company. Refer to the
Company's Annual Report on Form 10-K for additional information regarding such
proceedings.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On May 20, 1998, the Annual Meeting of the Shareholders of the Company was held
in Fort Worth, Texas, for the purpose of electing a Board of Directors and
voting on the proposals described below. There were no solicitations in the
opposition to management's nominees for director as listed in the proxy
statement.

Each of the directors nominated by the Board (which number constitutes the
entire Board of the Company) and listed in proxy statement was elected with the
votes as follows:

<TABLE>
<CAPTION>
   Nominees                           Shares For         Shares Withheld
   --------                           ----------         ---------------
<S>                                   <C>                   <C>      
H. Jesse Arnelle                      224,305,295           2,067,738
Lynne V. Cheney                       224,346,506           2,026,527
Preston M. Geren III                  224,354,849           2,018,184
Lawrence M. Jones                     224,318,235           2,054,798
Drew Lewis                            224,061,335           2,311,698
Claudine B. Malone                    224,290,377           2,082,656
Jack L. Messman                       224,324,951           2,048,082
John W. Poduska, Sr., Ph.D            224,369,009           2,004,025
Michael E. Rossi                      224,299,256           2,073,777
Samuel K. Skinner                     224,353,603           2,019,430
James R. Thompson                     224,309,277           2,063,756
</TABLE>

ITEM 5.   OTHER INFORMATION

Shareholder Proposals

On May 21, 1998, the SEC adopted changes to the Rule 14a-4, which governs a
company's use of its discretionary proxy voting authority with respect to
shareholder proposals where the shareholder has not sought inclusion of the
proposal in the Company's proxy statement.

The Company has an advance notice provision relating to shareholder proposals.
Such provision provides that shareholder proposals be submitted to the Secretary
of the Company not less than sixty days nor more than ninety days prior to the
anniversary date of the immediately preceding annual meeting of shareholders. As
such, shareholder proposals for inclusion in the proxy and form of proxy
relating to the 1999 Annual



                                     - 30 -
<PAGE>   32

Meeting of Shareholders of the Company must be received no sooner than February
19, 1999, and no later than March 19, 1999.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  EXHIBITS

11   Computation of earnings per share

12   Computation of ratio of earnings to fixed charges

15   Awareness letter of Arthur Andersen LLP dated August 14, 1998

27   Financial data schedule

(b)  REPORTS ON FORM 8-K

On May 6, 1998, the Company filed a Current Report on Form 8-K/A. This Current
Report included financial statements and supplemental information for Norcen for
the period ending December 31, 1997. Additionally it included an unaudited pro
forma balance sheet as of December 31, 1997, to give effect to the Norcen
Acquisition as if the acquisition had occurred on December 31, 1997. The Current
Report also included an unaudited pro forma condensed consolidated statement of
operations for the year ended December 31, 1997, to give effect to the Norcen
Acquisition, as if the acquisition and certain events had occurred on January 1,
1997.

On May 6, 1998, the Company filed a Current Report on Form 8-K containing a copy
of three press releases issued by the Company on April 20, 1998 and April 27,
1998. Two of the press releases relate to the Company's deleveraging program.
The third press release announced the Company's first quarter 1998 results of
operations.

On May 13, 1998, the Company filed a Current Report on Form 8-K containing
information and documents relating to the Company's issuance of $1.025 billion
of notes and debentures.



                                     - 31 -
<PAGE>   33

SIGNATURE


Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



Dated: August 14, 1998




                                        UNION PACIFIC RESOURCES GROUP INC.
                                        (Registrant)


                                        /s/ Morris B. Smith
                                        ----------------------------------------
                                        Morris B. Smith,
                                        Vice President and Chief Financial
                                        Officer (Chief Financial Officer and
                                        Duly Authorized Officer)

<PAGE>   34



                       UNION PACIFIC RESOURCES GROUP INC.

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit No.                        Description
-----------                        -----------
<S>                 <C>
    11              Computation of earnings per share

    12              Computation of ratio of earnings to fixed charges

    15              Awareness letter of Arthur Andersen LLP dated August 14, 1998

    27              Financial data schedule
</TABLE>