<PAGE>   1
 
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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
 
                             ---------------------
 
                                   FORM 10-Q
 
                             ---------------------
 
            [X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
 
               FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
 
                                       OR
 
            [ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
 
                         COMMISSION FILE NUMBER 1-14521
 
                                  CONOCO INC.
             (Exact Name of Registrant as Specified in Its Charter)
 
<TABLE>
<S>                                            <C>
                   DELAWARE                                      51-0370352
       (State or Other Jurisdiction of                        (I.R.S. Employer
        Incorporation or Organization)                      Identification No.)
</TABLE>
 
                          600 NORTH DAIRY ASHFORD ROAD
                              HOUSTON, TEXAS 77079
                    (Address of Principal Executive Offices)
                                 (281) 293-1000
                        (Registrant's Telephone Number)
 
                             ---------------------
 
     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 [ ]  No [X]
 
     191,456,427 shares of Class A Common Stock, $0.01 par value, and
436,543,573 shares of Class B, Common Stock, $0.01 par value, were outstanding
as of November 11, 1998.
 
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<PAGE>   2
 
                                     CONOCO
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                               PAGE(S)
                                                               -------
<S>                                                            <C>
Part I Financial Information
  Item 1. Financial Statements
       Combined Statement of Income.........................      1
       Combined Balance Sheet...............................      2
       Combined Statement of Cash Flows.....................      3
       Notes to Combined Financial Statements...............      4
       Pro Forma Combined Statements of Income..............      8
       Pro Forma Combined Balance Sheet.....................      9
       Notes to Pro Forma Combined Financial Statements.....     10
  Item 2. Management's Discussion and Analysis of Financial
     Condition and Results of Operations
       (a) Financial Condition..............................     13
       (b) Results of Operations............................     16
  Item 3. Quantitative and Qualitative Disclosures About
     Market Risk............................................     21
Part II Other Information
  Item 1. Legal Proceedings.................................     24
  Item 2. Changes in Securities and Use of Proceeds.........     24
  Item 5. Other Information
       (a) Disclosure Regarding Forward-Looking
        Information.........................................     25
       (b) Subsequent Event.................................     26
  Item 6. Exhibits and Reports on Form 8-K..................     26
Signature...................................................     27
Exhibit Index...............................................     28
</TABLE>
<PAGE>   3
 
                                     PART I
 
                             FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
                                     CONOCO
 
                  COMBINED STATEMENT OF INCOME (NOTES 1 AND 2)
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                         THREE MONTHS
                                                             ENDED              NINE MONTHS ENDED
                                                         SEPTEMBER 30             SEPTEMBER 30
                                                        ---------------   -----------------------------
                                                         1998     1997    1998 (NOTE 3)   1997 (NOTE 3)
                                                        ------   ------   -------------   -------------
                                                                (IN MILLIONS, EXCEPT PER SHARE)
<S>                                                     <C>      <C>      <C>             <C>
Revenues
  Sales and Other Operating Revenues*.................  $5,916   $6,671      $17,264         $19,146
  Other Income........................................     113       28          251             153
                                                        ------   ------      -------         -------
          Total Revenues..............................   6,029    6,699       17,515          19,299
                                                        ------   ------      -------         -------
Cost and Expenses
  Cost of Goods Sold and Other Operating Expenses.....   3,624    4,321       10,378          11,988
  Selling, General and Administrative Expenses........     151      180          521             535
  Exploration Expenses................................      59      128          235             320
  Depreciation, Depletion and Amortization............     257      246          762             762
  Taxes Other Than on Income*.........................   1,529    1,395        4,425           4,064
  Interest and Debt Expense...........................     107        7          108              31
                                                        ------   ------      -------         -------
          Total Cost and Expenses.....................   5,727    6,277       16,429          17,700
                                                        ------   ------      -------         -------
Income Before Income Taxes............................     302      422        1,086           1,599
Provision for Income Taxes............................     119      133          373             723
                                                        ------   ------      -------         -------
Net Income............................................  $  183   $  289      $   713         $   876
                                                        ======   ======      =======         =======
Pro Forma Earnings Per Share (Note 4)
  Basic...............................................  $ 0.29   $ 0.46      $  1.14         $  1.39
  Diluted.............................................  $ 0.29   $ 0.45      $  1.12         $  1.38
Pro Forma Weighted Average Shares Outstanding (Note 4)
  Basic...............................................     628      628          628             628
  Diluted.............................................     637      637          637             637
*Includes petroleum excise taxes......................  $1,489   $1,353      $ 4,295         $ 3,930
</TABLE>
 
                   See Notes to Combined Financial Statements
 
                                        1
<PAGE>   4
 
                                     CONOCO
 
                     COMBINED BALANCE SHEET (NOTES 1 AND 2)
                                  (UNAUDITED)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                              SEPTEMBER 30   DECEMBER 31
                                                                  1998          1997
                                                              ------------   -----------
                                                                (DOLLARS IN MILLIONS)
<S>                                                           <C>            <C>
Current Assets
  Cash and Cash Equivalents.................................    $    406      $  1,147
  Marketable Securities.....................................          90             7
  Accounts and Notes Receivable.............................       1,186         1,497
  Notes Receivable -- Related Parties.......................         126           490
  Inventories (Note 5)......................................       1,000           830
  Prepaid Expenses..........................................         347           236
                                                                --------      --------
          Total Current Assets..............................       3,155         4,207
                                                                --------      --------
Property, Plant and Equipment...............................      22,012        21,229
Less: Accumulated Depreciation, Depletion and
  Amortization..............................................     (10,660)      (10,401)
                                                                --------      --------
Net Property, Plant and Equipment...........................      11,352        10,828
                                                                --------      --------
Investment in Affiliates....................................       1,342         1,085
Long-Term Notes Receivable -- Related Parties...............          --           450
Other Assets................................................         527           492
                                                                --------      --------
          Total.............................................    $ 16,376      $ 17,062
                                                                ========      ========
 
LIABILITIES AND OWNER'S NET INVESTMENT AND
  ACCUMULATED OTHER COMPREHENSIVE LOSS
 
Current Liabilities
  Accounts Payable..........................................    $  1,434      $  1,090
  Short-Term Borrowings -- Related Parties..................         366           644
  Other Short-Term Borrowings and Capital Lease
     Obligations............................................          51            72
  Income Taxes..............................................         203           545
  Other Accrued Liabilities.................................       1,061         1,289
                                                                --------      --------
          Total Current Liabilities.........................       3,115         3,640
Long-Term Borrowings -- Related Parties.....................         922         1,450
Long-Term Borrowings -- Other Related Party.................       7,500            --
Other Long-Term Borrowings and Capital Lease Obligations....         105           106
Deferred Income Taxes.......................................       1,926         1,739
Other Liabilities and Deferred Credits......................       1,954         1,922
                                                                --------      --------
          Total Liabilities.................................      15,522         8,857
                                                                --------      --------
Commitments and Contingent Liabilities (Note 7)
Minority Interests..........................................         309           309
Owner's Net Investment......................................         714         8,087
Accumulated Other Comprehensive Loss........................        (169)         (191)
                                                                --------      --------
          Total Owner's Net Investment and Accumulated Other
            Comprehensive Loss..............................         545         7,896
                                                                --------      --------
          Total.............................................    $ 16,376      $ 17,062
                                                                ========      ========
</TABLE>
 
                   See Notes to Combined Financial Statements
 
                                        2
<PAGE>   5
 
                                     CONOCO
 
                COMBINED STATEMENT OF CASH FLOWS (NOTES 1 AND 2)
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                NINE MONTHS ENDED
                                                                  SEPTEMBER 30
                                                              ---------------------
                                                                1998        1997
                                                              ---------   ---------
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>         <C>
Cash Provided by Operations
  Net Income................................................   $   713     $   876
  Adjustments to Reconcile Net Income to Cash Provided by
     Operations:
     Depreciation, Depletion and Amortization...............       762         762
     Dry Hole Costs and Impairment of Unproved Properties...        79         111
     Deferred Income Taxes..................................       164          85
     Income Applicable to Minority Interest.................        16          19
     Other Noncash Charges and Credits -- Net...............      (110)        (47)
                                                               -------     -------
     Cash Provided by Operations -- Before Changes in
      Operating Assets and Liabilities......................     1,624       1,806
     Decrease (Increase) in Operating Assets:
       Accounts and Notes Receivable........................       163         (45)
       Inventories..........................................      (155)       (119)
       Other Operating Assets...............................      (107)       (153)
     Increase (Decrease) in Operating Liabilities:
       Accounts Payable and Other Operating Liabilities.....       115         164
       Accrued Interest and Income Taxes....................      (376)       (112)
                                                               -------     -------
       Cash Provided by Operations..........................     1,264       1,541
                                                               -------     -------
Investment Activities
  Purchase of Property, Plant and Equipment.................    (1,412)     (2,051)
  Investment in Affiliates..................................      (315)       (241)
  Proceeds from Sales of Assets and Subsidiaries............       389         171
  Net Decrease (Increase) in Short-Term Financial
     Instruments............................................       (76)        (42)
                                                               -------     -------
     Cash Used for Investment Activities....................    (1,414)     (2,163)
                                                               -------     -------
Financing Activities
  Short-Term Borrowings -- Receipts.........................        --           3
                            -- Payments.....................       (18)         (3)
  Other Long-Term Borrowings -- Receipts....................        --          20
                                  -- Payments...............        (3)         (1)
  Transactions with Related Parties:
     Notes Receivable -- Receipts...........................       114         326
                        -- Payments.........................        --          --
     Borrowings -- Receipts.................................       927         376
                 -- Payments................................    (1,739)       (327)
     Net Contribution From Owner............................       113         348
  Increase (Decrease) in Minority Interests.................       (16)        (15)
                                                               -------     -------
     Cash Provided by (Used for) Financing Activities.......      (622)        727
                                                               -------     -------
Effect of Exchange Rate Changes on Cash.....................        31         (41)
                                                               -------     -------
Increase (Decrease) in Cash and Cash Equivalents............      (741)         64
Cash and Cash Equivalents at Beginning of Year..............     1,147         846
                                                               -------     -------
Cash and Cash Equivalents at September 30...................   $   406     $   910
                                                               =======     =======
 
Supplemental Schedule of Noncash Financing Activities:
  Dividends Paid to Owner (Note 2)..........................   $(8,200)    $    --
  Promissory Note Payable -- DuPont (Note 2)................     7,500          --
  Notes Receivable -- DuPont (Note 2).......................       700          --
                                                               -------     -------
       Total Noncash Financing Activities...................   $    --     $    --
                                                               =======     =======
</TABLE>
 
                   See Notes to Combined Financial Statements
 
                                        3
<PAGE>   6
 
                     NOTES TO COMBINED FINANCIAL STATEMENTS
                                  (UNAUDITED)
                    (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
 
1. BASIS OF PRESENTATION
 
     The initial public offerings (the "Offerings") of the Class A Common Stock
of Conoco Inc., a subsidiary of E. I. DuPont de Nemours and Company ("DuPont"),
commenced on October 21, 1998. Conoco's Class A Common Stock began trading on
the New York Stock Exchange on October 22, 1998. The Offerings consisted of
191,456,427 shares of Class A Common Stock of Conoco Inc. issued at a price of
$23 per share, and represented DuPont's first step in the planned divestiture of
its entire petroleum business. Through its ownership of 100% of the Company's
Class B Common Stock (436,543,573 shares), DuPont owns approximately 70% of the
Company's Common Stock representing approximately 92% of the combined voting
power of all classes of voting stock of the Company. Holders of Class A Common
Stock are entitled to one vote per share and holders of the Class B Common Stock
are entitled to five votes per share on each matter submitted to a vote of
stockholders.
 
     In connection with the Offerings, the Company and DuPont gave certain
current employees of the Company the option, subject to specific country tax and
legal requirements, to participate in a program ("Option Program") involving the
cancellation of all or part of their options to purchase DuPont common stock or
SARs with respect to DuPont common stock and the issuance by the Company upon
such cancellation of comparable options to acquire Class A Common Stock, or SARs
with respect to Class A Common Stock. The program was deemed a change in the
terms of certain awards granted to Conoco employees. As a result, the Company
will incur a non-cash charge to compensation expense in the fourth quarter of
1998 of $183 after-tax.
 
     Throughout the period covered by the Combined Financial Statements,
operations were conducted by Conoco Inc. and subsidiaries of Conoco Inc. These
operations are collectively referred to herein as the Company or "Conoco". The
accompanying Combined Financial Statements are presented on a carve-out basis
and include the historical operations of entities owned by Conoco and operations
transferred to Conoco by DuPont. In this context, no direct ownership
relationship existed among all the various units comprising Conoco; accordingly,
DuPont and its subsidiaries' net investment in Conoco ("Owner's Net Investment")
is shown in lieu of Stockholder's Equity in the Combined Financial Statements.
The Combined Financial Statements included herein have been prepared from
DuPont's historical accounting records.
 
     These Combined Financial Statements are unaudited, but reflect all
adjustments that, in the opinion of management, are necessary to provide a fair
presentation of the financial position, results of operations and cash flows for
the dates and periods covered. All such adjustments are of a normal recurring
nature. Interim period results are not necessarily indicative of results of
operations or cash flows for a full-year period. These statements should be read
in conjunction with the Audited Combined Financial Statements for the year ended
December 31, 1997 as presented in Conoco's Registration on Form S-1
(Registration No. 333-60119) as filed with the Securities and Exchange
Commission ("Form S-1".)
 
2. RELATED PARTY TRANSACTIONS
 
     The Combined Financial Statements include significant transactions with
DuPont involving services (such as cash management, other financial services,
purchasing, legal, computer and corporate aviation) that were provided between
Conoco and centralized DuPont organizations. The costs of services have been
directly charged or allocated between Conoco and DuPont using methods management
believes are reasonable. Such charges and allocations are not necessarily
indicative of what would have been incurred if Conoco had been a separate
entity. Amounts charged and allocated to Conoco for these services were $36 and
$31 for the third quarter of 1998 and 1997 and $108 and $94 for the first nine
months of 1998 and 1997, respectively, and are principally included in Selling,
General and Administrative Expenses. Conoco provided DuPont services such as
computer, legal and purchasing, as well as certain technical and plant operating
services, which amounted to $12 and $15 for the third quarter of 1998 and 1997
and $37 and $46 in the first nine months of 1998 and
 
                                        4
<PAGE>   7
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
                                  (UNAUDITED)
                    (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
 
1997, respectively. These charges to DuPont were treated as reductions of Cost
of Goods Sold and Other Operating Expenses and Selling, General and
Administrative Expenses.
 
     Interest expense charged by DuPont was $117 and $31 for the third quarter
of 1998 and 1997 and $172 and $96 for the first nine months of 1998 and 1997,
respectively, and reflects market-based interest rates. A portion of historical
related party interest cost and other interest expense of $12 and $25 for the
third quarter of 1998 and 1997 and $69 and $69 in the first nine months of 1998
and 1997, respectively, was capitalized as costs associated with major
construction projects. Interest income from DuPont was $12 and $1 for the third
quarter of 1998 and 1997 and $45 and $7 for the first nine months of 1998 and
1997, respectively, and also reflects market-based interest rates.
 
     Sales and Other Operating Revenues include sales of products from Conoco to
DuPont, principally natural gas and gas liquids to supply several DuPont plant
sites. These sales totaled $108 and $89 in the third quarter of 1998 and 1997
and $317 and $320 for the first nine months of 1998 and 1997, respectively. Also
included are revenues from insurance premiums charged to DuPont for property and
casualty coverage outside the United States. These revenues totaled $4 and $5 in
the third quarter of 1998 and 1997 and $14 and $16 for the first nine months of
1998 and 1997, respectively. Purchases of products from DuPont during these
periods were not material. These intercompany arrangements between DuPont and
Conoco, excluding insurance coverage provided to DuPont, will continue after the
Offerings under transition service agreements or other long-term agreements. It
is not anticipated that a change, if any, in these costs and revenues would have
a material effect on the Company's results of operations or combined financial
position.
 
     Accounts and Notes Receivable include amounts due from DuPont of $32 and
$79 at September 30, 1998, and December 31, 1997, respectively, representing
current month balances of transactions between Conoco and DuPont, mainly product
sales and net interest on borrowings. Accounts Payable include amounts due
DuPont of $108 and $4 at September 30, 1998, and December 31, 1997,
respectively.
 
     Amounts representing notes receivable or borrowings from DuPont, including
its subsidiary organizations, are identified for related parties and presented
separately in the Combined Balance Sheet. The current portion of Notes
Receivable represents the accumulation of a variety of cash transfers and
operating transactions with DuPont. These balances are generally
interest-bearing and represent net amounts of cash transferred for funding and
cash management purposes and amounts charged between the companies for certain
product and service purchases and asset transfers. The long-term portion of
Notes Receivable and amounts shown for Short-Term and Long-Term Borrowings
represent borrowings between Conoco and DuPont with established due dates at
market-based interest rates, except for certain short-term non-interest bearing
borrowings due DuPont of $492 that existed at December 31, 1997.
 
     In July 1998, a dividend was declared and paid by the Company in the form
of a promissory note (the "Note") to DuPont in the aggregate principal amount of
$7,500 bearing interest at a rate of 6.0125 percent per annum. The Note has a
maturity date of January 2, 2000. The Note may be voluntarily prepaid without
penalty or premium. The Note also provides for mandatory prepayments in the
event cash proceeds are realized by the Company from the incurrence of
indebtedness or the issuance of equity securities by the Company or its
subsidiaries. The Note includes certain covenants and customary events of
default, including failure to pay interest when due, certain events of
bankruptcy of the Company and change of control. The consent of DuPont is also
required prior to the Company entering into certain transactions. In September
1998, the Company declared a dividend of $700 representing a reduction of notes
receivable from DuPont.
 
                                        5
<PAGE>   8
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
                                  (UNAUDITED)
                    (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
 
3. SPECIAL ITEMS
 
     Net income for the first nine months of 1998 included a gain of $23 from
the sale of certain Upstream North Sea properties and a $31 tax benefit from the
sale of an international Upstream subsidiary, partly offset by a $28 charge for
U. S. Downstream litigation. Net income for the first nine months of 1997
included a gain of $24 from the sale of certain Upstream U. S. properties, a
gain of $30 from the sale of certain Upstream North Sea properties, a $23 charge
for U. S. Downstream litigation, and a $30 tax benefit for Upstream and
Downstream from a change in the U.K. tax rate.
 
4. EARNINGS PER SHARE
 
     The Company's historical capital structure is not indicative of its
prospective structure since no direct ownership relationship existed among all
the various units comprising Conoco. Accordingly, historical earnings per share
have been presented on a pro forma basis in the Combined Financial Statements.
 
     Unaudited pro forma basic earnings per share includes the shares of both
the Class A and Class B Common Stock deemed to be outstanding as of the date of
the Offerings. Unaudited pro forma diluted earnings per share includes the
dilutive effect of the 8.6 million shares of Conoco Class A Common Stock
issuable upon exercise of Conoco stock options, after applying the treasury
stock method, which will be issued upon cancellation of outstanding DuPont stock
options, using the weighted-average exercise price of $62.97 per share of the
outstanding options and the initial public offering price of $23 per share. In
accordance with SEC Staff Accounting Bulletin No. 98, pro forma basic and
diluted earnings per share have been presented.
 
5. INVENTORIES
 
<TABLE>
<CAPTION>
                                                              SEPTEMBER 30   DECEMBER 31
                                                                  1998          1997
                                                              ------------   -----------
<S>                                                           <C>            <C>
Crude oil and petroleum products............................     $  845         $675
Other merchandise...........................................         25           25
Materials and supplies......................................        130          130
                                                                 ------         ----
                                                                 $1,000         $830
                                                                 ======         ====
</TABLE>
 
6. COMPREHENSIVE INCOME
 
     The following sets forth the Company's comprehensive income for the periods
shown:
 
<TABLE>
<CAPTION>
                                                          THREE MONTHS    NINE MONTHS
                                                              ENDED          ENDED
                                                          SEPTEMBER 30    SEPTEMBER 30
                                                          -------------   ------------
                                                          1998    1997    1998   1997
                                                          -----   -----   ----   -----
<S>                                                       <C>     <C>     <C>    <C>
Net Income..............................................  $183    $289    $713   $ 876
Other Comprehensive Income (Loss):
  Foreign Currency Translation Adjustment...............    49     (26)     22    (139)
  Minimum Pension Liability Adjustment..................    --      --      --      --
                                                          ----    ----    ----   -----
Comprehensive Income....................................  $232    $263    $735   $ 737
                                                          ====    ====    ====   =====
</TABLE>
 
7. COMMITMENTS AND CONTINGENT LIABILITIES
 
     The Company has various purchase commitments for materials, supplies and
items of permanent investment incident to the ordinary conduct of business. In
the aggregate, such commitments are not at prices in excess of current market.
In addition, at September 30, 1998, the Company has international obligations to
 
                                        6
<PAGE>   9
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
                                  (UNAUDITED)
                    (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
 
purchase, over periods up to twenty years, natural gas at prices that were in
excess of current market prices. No material annual loss is expected from these
long-term commitments, partially as a result of long-term sales contracts.
 
     The Company is subject to various lawsuits and claims involving a variety
of matters including, along with other oil companies, actions challenging oil
and gas royalty and severance tax payments based on posted prices, and claims
for damages resulting from leaking underground storage tanks. As a result of the
Separation Agreement with DuPont, the Company has also assumed responsibility
for current and future claims related to certain discontinued chemicals and
agricultural chemicals businesses operated by the Company in the past. In
general, the effect on future financial results is not subject to reasonable
estimation because considerable uncertainty exists. The Company believes the
ultimate liabilities resulting from such lawsuits and claims may be material to
results of operations in the period in which they are recognized but will not
materially affect the combined financial position of the Company.
 
     The Company is also subject to contingencies pursuant to environmental laws
and regulations that in the future may require the Company to take further
action to correct the effects on the environment of prior disposal practices or
releases of petroleum substances by the Company or other parties. The Company
has accrued for certain environmental remediation activities consistent with the
policy set forth in Note 2 to the Combined Financial Statements presented in
Conoco's Form S-1. The Company has assumed environmental remediation liabilities
from DuPont related to certain discontinued chemicals and agricultural chemicals
businesses operated by the Company in the past that are included in the
environmental accrual. At September 30, 1998, such accrual amounted to $135 and,
in management's opinion, was appropriate based on existing facts and
circumstances. Under adverse changes in circumstances, potential liability may
exceed amounts accrued. In the event future monitoring and remediation
expenditures are in excess of amounts accrued, they may be significant to
results of operations in the period recognized but management does not
anticipate they will have a material adverse effect on the combined financial
position of the Company.
 
     The Company has indirectly guaranteed various debt obligations under
agreements with certain affiliated and other companies to provide specified
minimum revenues from shipments or purchases of products. At September 30, 1998,
these indirect guarantees totaled $19, and the Company or DuPont, on behalf of
the Company, had directly guaranteed $1,319 of the obligations of certain
affiliated companies and others. The Company, as of August 1, 1998, terminated
the multiparty account banking agreement which provided for the indirect
guarantee of bank account overdrafts of certain European DuPont subsidiaries.
The Company now has a new multiparty banking agreement that provides for the
indirect guarantee of bank account overdrafts for itself and its subsidiaries.
No material loss is anticipated by reason of such agreements and guarantees.
 
                                        7
<PAGE>   10
 
                                     CONOCO
 
                     PRO FORMA COMBINED STATEMENT OF INCOME
                      NINE MONTHS ENDED SEPTEMBER 30, 1998
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                         PRO FORMA                 OFFERINGS     PRO FORMA
                                             HISTORIC   ADJUSTMENTS   PRO FORMA   ADJUSTMENTS   AS ADJUSTED
                                             --------   -----------   ---------   -----------   -----------
                                                            (IN MILLIONS, EXCEPT PER SHARE)
<S>                                          <C>        <C>           <C>         <C>           <C>
Revenues...................................  $17,515       $ (45)(a)   $17,461       $  (6)(j)    $17,455
                                                              (9)(b)
Cost of Goods Sold and Other Operating
  Expenses.................................   10,378          --        10,378          --         10,378
Selling, General and Administrative
  Expenses.................................      521          --           521          --            521
Exploration Expenses.......................      235          --           235          --            235
Depreciation, Depletion and Amortization...      762          --           762          --            762
Taxes Other Than on Income.................    4,425          --         4,425          --          4,425
Interest and Debt Expense..................      108         224(a)        332        (178)(k)        154
                                             -------       -----       -------       -----        -------
Income Before Income Taxes.................    1,086        (278)          808         172            980
Provision for Income Taxes.................      373         (53)(c)       320          50(k)         370
                                             -------       -----       -------       -----        -------
Net Income.................................  $   713       $(225)      $   488       $ 122        $   610
                                             =======       =====       =======       =====        =======
Pro Forma Earnings Per Share:
  Basic....................................                                                          0.97
  Diluted..................................                                                          0.96
Pro Forma Weighted Average Shares
  Outstanding:
  Basic....................................                                                           628
  Diluted..................................                                                           637
</TABLE>
 
                     PRO FORMA COMBINED STATEMENT OF INCOME
                      NINE MONTHS ENDED SEPTEMBER 30, 1997
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                         PRO FORMA                 OFFERINGS     PRO FORMA
                                             HISTORIC   ADJUSTMENTS   PRO FORMA   ADJUSTMENTS   AS ADJUSTED
                                             --------   -----------   ---------   -----------   -----------
                                                            (IN MILLIONS, EXCEPT PER SHARE)
<S>                                          <C>        <C>           <C>         <C>           <C>
Revenues...................................  $19,299       $  (7)(a)   $19,263       $ (46)(j)    $19,217
                                                             (29)(b)
Cost of Goods Sold and Other Operating
  Expenses.................................   11,988          --        11,988          --         11,988
Selling, General and Administrative
  Expenses.................................      535          --           535          --            535
Exploration Expenses.......................      320          --           320          --            320
Depreciation, Depletion and Amortization...      762          --           762          --            762
Taxes Other Than on Income.................    4,064          --         4,064          --          4,064
Interest and Debt Expense..................       31         300(a)        331        (178)(k)        153
                                             -------       -----       -------       -----        -------
Income Before Income Taxes.................    1,599        (336)        1,263         132          1,395
Provision for Income Taxes.................      723        (114)(c)       609          31(k)         640
                                             -------       -----       -------       -----        -------
Net Income.................................  $   876       $(222)      $   654       $ 101        $   755
                                             =======       =====       =======       =====        =======
Pro Forma Earnings Per Share:
  Basic....................................                                                          1.20
  Diluted..................................                                                          1.19
Pro Forma Weighted Average Shares
  Outstanding:
  Basic....................................                                                           628
  Diluted..................................                                                           637
</TABLE>
 
                                        8
<PAGE>   11
 
                                     CONOCO
 
                        PRO FORMA COMBINED BALANCE SHEET
                               SEPTEMBER 30, 1998
                                  (UNAUDITED)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                                              PRO FORMA
                                                       PRO FORMA       PRO       OFFERINGS       AS
                                           HISTORIC   ADJUSTMENTS     FORMA     ADJUSTMENTS   ADJUSTED
                                           --------   -----------   ---------   -----------   ---------
                                                              (DOLLARS IN MILLIONS)
<S>                                        <C>        <C>           <C>         <C>           <C>
Cash and Cash Equivalents................  $   406       $(20)(d)    $   386      $4,228(e)    $   135
                                                                                  (4,046)(f)
                                                                                     126(h)
                                                                                    (559)(i)
Restricted Cash..........................       --         --             --         559(i)        559
Marketable Securities....................       90         --             90          --            90
Accounts and Notes Receivable............    1,186         --          1,186          --         1,186
Notes Receivable -- Related Parties......      126         --            126        (126)(h)        --
Inventories..............................    1,000         --          1,000          --         1,000
Prepaid Expenses.........................      347         --            347          --           347
                                           -------       ----        -------      ------       -------
          Total Current Assets...........    3,155        (20)         3,135         182         3,317
Net Property, Plant and Equipment........   11,352         --         11,352          --        11,352
Investment in Affiliates.................    1,342         --          1,342          --         1,342
Other Assets.............................      527        (14)(d)        513          --           513
                                           -------       ----        -------      ------       -------
          Total Assets...................  $16,376       $(34)       $16,342      $  182       $16,524
                                           =======       ====        =======      ======       =======
 
                                LIABILITIES AND OWNER'S NET INVESTMENT
 
Accounts Payable.........................  $ 1,434       $ --        $ 1,434      $ (104)(f)   $ 1,330
Short-Term Borrowings -- Related
  Parties................................      366         --            366        (366)(f)        --
Other Short-Term Borrowings and Capital
  Lease Obligations......................       51         --             51          --            51
Income Taxes.............................      203         --            203          --           203
Other Accrued Liabilities................    1,061         --          1,061          --         1,061
                                           -------       ----        -------      ------       -------
          Total Current Liabilities......    3,115         --          3,115        (470)        2,645
                                           -------       ----        -------      ------       -------
Long-Term Borrowings -- Related
  Parties................................      922         --            922        (922)(f)         7
                                                                                       7(g)
Long-Term Borrowings -- Other Related
  Party..................................    7,500         --          7,500      (2,654)(f)     4,846
Other Long-Term Borrowings and Capital
  Lease Obligations......................      105         --            105          --           105
Deferred Income Taxes....................    1,926                     1,926          --         1,926
Other Liabilities and Deferred Credits...    1,954         --          1,954          --         1,954
                                           -------       ----        -------      ------       -------
          Total Liabilities..............   15,522                    15,522      (4,039)       11,483
                                           -------       ----        -------      ------       -------
Minority Interests.......................      309         --            309          --           309
Total Owner's Net Investment and
  Accumulated Other Comprehensive Loss...      545        (34)(d)        511       4,228(e)      4,732
                                                                                      (7)(g)
                                           -------       ----        -------      ------       -------
          Total Liabilities and Owner's
            Net Investment...............  $16,376       $(34)       $16,342      $  182       $16,524
                                           =======       ====        =======      ======       =======
</TABLE>
 
              See Notes to Pro Forma Combined Financial Statements
 
                                        9
<PAGE>   12
 
                                     CONOCO
 
                NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
                                  (UNAUDITED)
                    (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
 
1. BASIS OF PRESENTATION
 
     The unaudited Pro Forma Combined Statements of Income of the Company for
the nine months ended September 30, 1998 and September 30, 1997 and the
unaudited Pro Forma Combined Balance Sheet as of September 30, 1998
(collectively the "Pro Forma Combined Financial Statements") have been prepared
from Combined Financial Statements presented elsewhere in this Form 10-Q. The
Pro Forma Combined Financial Statements are based on numerous assumptions and
include the adjustments explained in Note 2 below. The unaudited Pro Forma
Combined Statements of Income have been prepared as if the Offerings, Separation
and Transactions (as defined below) had occurred as of the beginning of the
period presented. The unaudited Pro Forma Combined Balance Sheet has been
prepared as if the Offerings, Separation and Transactions had occurred as of
September 30, 1998. As used herein, (i) the term "Separation" refers to the
creation of a separate company composed of the oil and gas business and
operations, and the associated assets and liabilities of such businesses and
operations, previously owned by DuPont, all of which currently comprise the
Company, and (ii) the term "Separation Agreement" refers to the Restructuring,
Transfer and Separation Agreement between the Company and DuPont, which provides
for, among other things, the principal transactions required to effect the
Separation and the Offerings, including the transfer to the Company of oil and
gas assets, the division between DuPont and the Company of certain liabilities,
and certain other agreements governing the relationship between DuPont and the
Company following the Separation and the Offerings.
 
     The Pro Forma Combined Financial Statements do not purport to represent
what the results of operations or financial position of the Company would
actually have been if the Offerings and Transactions had in fact occurred on
such dates or to project the results of operations or financial position of the
Company for any future date or period. These statements should be read in
conjunction with, and are qualified by reference to the Combined Financial
Statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Form 10-Q.
 
     In July 1998, a dividend of $7,500 was declared and paid in the form of a
promissory note by the Company to DuPont. In September 1998, the Company
declared a dividend of $700 representing a reduction of notes receivable from
DuPont. Prior to or concurrently with the consummation of the Offerings, the
following transactions occurred as provided for in the Separation Agreement: (a)
to structure the Company on a stand-alone basis, certain subsidiaries and assets
and liabilities were transferred between DuPont and Conoco; (b) intercompany
loans in existence prior to the Offerings were settled to the extent specified;
(c) the Company delivered a promissory note to DuPont as settlement for DuPont
stock options held by Conoco employees and other employee benefits related
liabilities; (d) the Company used the net proceeds of the Offerings to repay a
portion of indebtedness owed to DuPont; and (e) DuPont and Conoco entered into
certain agreements with respect to employee benefit arrangements, information
management, the provision of interim services, financing arrangements, tax
sharing, environmental liabilities and various commercial arrangements. The
transactions described above, excluding the Offerings, are referred to herein
collectively as the "Transactions."
 
     The pro forma adjustments are based upon currently available information
and contain certain estimates and assumptions. Should DuPont's ownership
interest fall below 50 percent, pro forma Selling, General and Administrative
expenses and guarantee and letter of credit fees would increase by approximately
$15 to $20 on a full year basis. In addition, certain changes are scheduled to
be made in services historically provided to DuPont by the Company. These
changes primarily include ceasing to provide insurance coverage to DuPont which
historically has been provided through a Company-owned captive insurance company
and entering into new contractual commitments related to fees charged by Conoco
for services provided to DuPont such as research and development and securing
supplies of natural gas for various DuPont facilities. The effect of these
scheduled changes are not expected to be material to the Company's results of
operations and are not reflected in the Pro Forma Combined Financial Statements.
 
                                       10
<PAGE>   13
        NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
                                  (UNAUDITED)
                    (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
 
     In connection with the Offerings, the Company and DuPont gave certain
current employees of the Company the option, subject to specific country tax and
legal requirements, to participate in the Option Program, which involves the
cancellation of all or part of their options to purchase DuPont common stock or
SARs with respect to DuPont common stock and the issuance by the Company upon
such cancellation of comparable Class A Common Stock options, or SARs with
respect to Class A Common Stock. The Option Program was deemed a change in the
terms of certain awards granted to Conoco employees. As a result, the Company
will incur a non-cash charge to compensation expense in the fourth quarter of
1998 of $183 after-tax. Since the cancellation and issuance is a one-time event
occurring after the Offerings, the charge is not reflected in the Pro Forma
Combined Financial Statements. Approximately 81 percent of all outstanding
DuPont stock options and SARs held by Conoco employees were voluntarily canceled
in the Option Program.
 
     Management believes the estimates and assumptions provide a reasonable
basis for presenting the significant effects of the Offerings and Transactions
as contemplated in the Separation Agreement, and that the pro forma adjustments
give appropriate effect to these estimates and assumptions and are properly
applied in the Pro Forma Combined Financial Statements.
 
2. PRO FORMA ADJUSTMENTS
 
  Unaudited Pro Forma Combined Statements of Income
 
     (a) Reflects a decrease in interest income due to settlement of Notes
Receivable -- Related Parties and incremental interest expense resulting from
the Company's new debt structure. The incremental interest expense was
calculated by multiplying the Long-Term Borrowings -- Related Parties ($922),
and Short-Term Borrowings -- Related Parties ($366) and the new Long-Term
Borrowings -- Other Related Party ($7,500) by an annual interest rate of 6.0125
percent on those borrowings and subtracting the historical related party
interest cost of $172 and $96 for the nine months ended September 30, 1998 and
1997, respectively. The historical related party interest cost is net of
capitalized interest of $69 in both periods.
 
<TABLE>
<CAPTION>
                                                                    NINE MONTHS ENDED
                                                                      SEPTEMBER 30,
                                                              -----------------------------
                                                                  1998            1997
                                                              -------------   -------------
<S>                                                           <C>             <C>
Decrease to Interest Income.................................       (45)             (7)
Increase to Interest and Debt Expense.......................       224             300
</TABLE>
 
     (b) Reflects the impact of changes in currency exchange rates on certain
intercompany loans denominated in foreign currencies purchased by the Company
from DuPont as part of the restructuring and settlement of notes prior to the
Offerings provided for in the Separation Agreement. These loans are to Western
European petroleum operations for which the local currency has been designated
as the functional currency.
 
     (c) Reflects the impact of the Pro Forma Adjustments (primarily increased
interest expense resulting from the Company's new debt structure) and a separate
return income tax calculation method on the Provision for Income Taxes. The
historic tax provision was calculated on a loss benefit method (See Note 2 to
the Combined Financial Statements in Conoco's Form S-1). In accordance with SEC
Staff Accounting Bulletin No. 55, the Pro Forma Provision for Income Taxes is
calculated using a separate return method. The Pro Forma Combined Statements of
Income for the nine months ended September 30, 1998 and September 30, 1997
reflect an increase of $12 and a reduction of $19 respectively, in the Pro Forma
Provision for Income Taxes, due to the change to the separate return method of
presentation. The increase for the period ended September 30, 1998 is
attributable to a reduction in tax benefits resulting from the transfer of
international exploration subsidiaries from one tax jurisdiction to another,
partially offset by utilization of additional foreign credits against the
provision of U.S. taxes. The reduction for the period ended September 30, 1997
is attributable to the utilization of additional foreign tax credits against the
provision for
 
                                       11
<PAGE>   14
        NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
                                  (UNAUDITED)
                    (DOLLARS IN MILLIONS, EXCEPT PER SHARE)
 
U.S. taxes and an increase in tax benefits resulting from the transfer of
international exploration subsidiaries from one tax jurisdiction to another. See
also "Arrangements Between the Company and DuPont -- Tax Sharing Agreement" in
Conoco's Form S-1.
 
  Unaudited Pro Forma Combined Balance Sheet as of September 30, 1998
 
     (d) The Company's Insurance Subsidiaries will refund prepaid insurance
premiums of approximately $14 to DuPont. Additionally, an estimated $20 will be
used to acquire certain other assets from DuPont in connection with the
Offerings. As these assets are held under common control, they are accounted for
at their historical book value. As a result, their acquisition at estimated fair
value has been reflected as a charge to Owner's Net Investment. Any deferred tax
assets related to these acquisitions have been fully reserved.
 
  Offering Adjustments
 
     (e) Represents the receipt by Conoco of $4,228 in proceeds from the
Offerings (consisting of the sale of 191.5 million shares at $23 per share, net
of underwriting discounts and commissions of $176).
 
     (f) Represents the use of net proceeds to repay the indebtedness to DuPont
as described in "Part II, Item 2. Changes in Securities and Use of Proceeds."
 
     (g) The Separation Agreement provides that a subsidiary of the Company
leave a portion of the Long-Term Borrowings -- Related Parties outstanding equal
to the sum of: (i) an agreed level of future appreciation of DuPont stock
options or SARs held by active Conoco employees who do not participate in the
Option Program; (ii) an amount calculated to result in an approximately equal
sharing between the Company and DuPont of the after-tax cost that would result
from an assumed exercise of all DuPont stock options and SARs held by active
Conoco employees outstanding immediately prior to the Offerings (including those
to be cancelled upon issuance of Company stock options and SARs), based on the
appreciated value of the options at the time of the Offerings; and (iii) $10.4
in consideration for estimated other employee benefits related liabilities
assumed by DuPont for employees transferring between the two companies. Based on
the value at the date of the Offerings and approximately 81 percent of all
outstanding DuPont stock options and SARs being voluntarily cancelled in the
Option Program, the principal amount to remain outstanding is $7.
 
     (h) Reflects the collection of the remaining balance in Notes
Receivable -- Related Parties.
 
     (i) Represents a reclassification for restricted cash related to the excess
of net proceeds of $559 to be used to repay borrowings due DuPont incurred
subsequent to September 30, 1998. As provided in the Separation Agreement, the
Company will have cash and cash equivalents and marketable securities of $225
and Long-Term Borrowings -- Other Related Party of $4,846.
 
     (j) Reflects the impact of changes in currency exchange rates on certain
intercompany loans denominated in foreign currencies purchased by the Company
from DuPont after the Offerings. These loans are to Western European petroleum
operations for which the local currency has been designated as the functional
currency.
 
     (k) Represents the reduction of interest expense and the associated
increase in income taxes resulting from the payment to DuPont of the borrowings
described in (f) and the tax impact of the adjustment described in (j) above.
 
3. EARNINGS PER SHARE
 
     Unaudited pro forma basic earnings per share includes both the shares of
Class A and Class B Common Stock deemed to be outstanding as of the date of the
Offerings. Pro forma diluted earnings per share includes the dilutive effect of
the 8.6 million shares of Class A Common Stock issuable upon exercise of Company
stock options, after applying the treasury stock method, which will be issued in
the Option Program upon cancellation of outstanding DuPont stock options, using
the weighted-average per share exercise price of $62.97 of the outstanding
options and the $23 price per share of the Offerings. In accordance with SEC
Staff Accounting Bulletin No. 98, pro forma basic and diluted earnings per share
have been presented.
 
                                       12
<PAGE>   15
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
(a) FINANCIAL CONDITION
 
LIQUIDITY AND CAPITAL RESOURCES
 
CASH PROVIDED BY OPERATIONS
 
     Cash provided by operations in the first nine months of 1998 of $1,264
million was a decrease of $277 million versus the first nine months of 1997.
Cash provided by operations before changes in operating assets and liabilities
decreased $182 million compared to the first nine months of 1997, primarily due
to lower net realized crude oil and natural gas prices partially offset by
higher natural gas volumes and Downstream refining volumes. Negative changes to
net operating assets and liabilities of $95 million were due to higher tax
payments attributable to 1997 asset sales, a decrease in accounts payable
largely offset by a decrease in accounts receivable due to lower crude oil
prices and the timing of payments on other operating liabilities.
 
INVESTMENT ACTIVITIES
 
  CAPITAL EXPENDITURES AND INVESTMENTS
 
     The Company's capital expenditure program (including investments in
affiliated companies) promotes the Company's growth-oriented business strategy
by continuing to invest in existing core areas where efficiencies and
profitability can be enhanced and by targeting funds into new high potential
areas where long-term growth opportunities can be realized.
 
<TABLE>
<CAPTION>
                                                                NINE MONTHS ENDED
                                                                   SEPTEMBER 30
                                                              ----------------------
                                                                1998          1997
                                                              --------      --------
                                                              (DOLLARS IN MILLIONS)
<S>                                                           <C>           <C>
Upstream....................................................    1,352         2,040
Downstream..................................................      355           299
Corporate and Other.........................................       10             0
                                                                -----         -----
                                                                1,717         2,339
                                                                =====         =====
United States...............................................      728         1,373
International...............................................      989           966
                                                                -----         -----
                                                                1,717         2,339
                                                                =====         =====
</TABLE>
 
  Upstream
 
     Upstream capital investments totaled $1,352 million in the first nine
months of 1998, down approximately 34 percent from the first nine months of 1997
which included the $929 acquisition of natural gas properties and transportation
assets in the Lobo Trend in South Texas (the "Lobo Acquisition"). The 1997 Lobo
Acquisition added significant reserves and 1,150 miles of natural gas gathering
and transportation pipeline, providing direct access to major Texas intrastate
and interstate pipelines. As a result, the Company is the largest natural gas
producer in the area, and one of the three largest natural gas producers in
Texas.
 
  United States
 
     During the first nine months of 1998, the Company spent $583 million on
capital projects in the United States, a decrease of 55 percent from the first
nine months of 1997 which included the Lobo Acquisition of $929 million.
Expenditures focused on development of the Lobo field, the Ursa field in
deepwater Gulf of Mexico, the acquisition of exploratory acreage, and the
expansion of onshore natural gas operations. The Ursa field development,
operated by Shell, represents a major development project in the Gulf of Mexico.
The project involves installing a new generation tension leg platform in
approximately 3,800 feet of water. First production is scheduled for 1999.
 
                                       13
<PAGE>   16
 
  International
 
     International capital investments totaled $769 million in the first nine
months of 1998, an increase of one percent from the first nine months of 1997.
The Company completed its multi-year development program in the Britannia gas
field in the U.K. North Sea and production began in August 1998. The Britannia
gas field is one of the largest natural gas fields in the U.K. North Sea, and
the Company's proved reserves in the field include 1.1 trillion cubic feet of
natural gas and 52 million barrels of petroleum liquids at December 31, 1997.
Britannia development is an example of the Company's strategy to increase
production and reserves through large, long-lived projects. Other significant
capital investments were made for exploratory drilling and development projects
such as the Petrozuata joint venture in Venezuela, that began production in
August 1998, the Visund field in the Norwegian North Sea and the Viking Phoenix
project in the U.K. North Sea.
 
  Downstream
 
     Downstream capital investments totaled $355 million in the first nine
months of 1998, an increase of 19 percent versus the first nine months of 1997,
primarily reflecting the timing of expenditures in the United States for
continued operations.
 
  United States
 
     During the first nine months of 1998, the Company spent $135 million on
Downstream capital projects in the United States, up 48 percent from the first
nine months of 1997, with the majority of these funds being used to support
continuing operations and optimization of retail marketing operations. The
Company also invested additional funds of $5 for an increased equity interest in
Penreco, a joint venture with Pennzoil that produces and markets highly refined
specialty petroleum products.
 
  International
 
     During the first nine months of 1998, the Company spent $220 million on
Downstream international capital investments, up six percent from the first nine
months of 1997. Expenditures in 1998 focused on strengthening the Company's
retail marketing position in core markets such as Germany, Austria and the
Nordic countries, expanding in targeted retail growth markets in Central and
Eastern Europe, Spain, Turkey, and the Asia Pacific region, and completing the
construction of the Melaka refinery, a joint venture with Petronas and Statoil,
which began operations in the third quarter of 1998.
 
  Corporate and Other
 
     Corporate and Other capital expenditures totaled $10 million in the first
nine months of 1998 associated with new corporate software in accordance with
the Company's accounting policy for capitalization of computer software.
 
  PROCEEDS FROM SALES OF ASSETS AND SUBSIDIARIES
 
     The Company's Investment Activities also include proceeds of $389 million
for the first nine months of 1998, an increase of $218 million over the first
nine months of 1997. The 1998 proceeds included $156 million for various
Downstream assets in the U.S., as well as $91 million from the sale of certain
upstream North Sea properties. These and other proceeds are a result of the
Company's ongoing strategic portfolio upgrading and rationalization efforts.
 
FINANCING ACTIVITIES
 
     The Company's ability to maintain and grow its operating income and cash
flow is dependent upon continued capital spending to replace depleting assets.
The Company believes its future cash flow from operations and its borrowing
capacity should be sufficient to fund its dividends, if any, debt service,
capital expenditures, and working capital requirements.
 
                                       14
<PAGE>   17
 
     Prior to the Separation, the businesses transferred to the Company were
funded through DuPont. Apart from limited recourse project financings related to
various joint ventures, equipment lease facilities and financing of certain
refinery equipment and other smaller financings, the Company has had limited
indebtedness to third parties. For a period, after the Offerings, the Company's
operations will be funded through related party debt with DuPont.
 
     In July 1998, the Company issued a promissory note (the "Note") to DuPont
in the aggregate principal amount of $7,500 million bearing interest at a rate
of 6.0125 percent per annum. The Note has a maturity date of January 2, 2000.
The Note may be voluntarily prepaid without penalty or premium. The Note also
provides for mandatory prepayments in the event cash proceeds are realized by
the Company from the incurrence of indebtedness or the issuance of equity
securities by the Company or its subsidiaries. The Note includes certain
covenants and customary events of default, including failure to pay interest
when due, certain events of bankruptcy of the Company and change of control. The
consent of DuPont is also required prior to the Company entering into certain
transactions.
 
     Total indebtedness owed to DuPont, following application of the net
proceeds of the Offerings and associated cash settlement as described in Part
II, Item 2, was $4,846 million outstanding under the Note and $7 million
outstanding under the $827 million note discussed in the first paragraph of Part
II, Item 2.
 
     On October 27, 1998, the Company and DuPont entered into a Revolving Credit
Agreement under which DuPont will provide the Company with a revolving credit
facility in principal amount of up to $500 million. The term of DuPont's
commitment under this facility will begin upon satisfaction of certain
conditions and continue until the earlier of (i) October 11, 1999 or (ii) (a)
the date on which DuPont's direct or indirect voting power in the Company falls
below 50 percent of the outstanding voting power of the Company or (b) DuPont's
election to terminate its commitment as the result of an unremedied event of
default. Loans under the Revolving Credit Agreement will be subject to mandatory
prepayment to the extent the Company's cash and cash equivalents exceed $325
million or such higher amount as the Company and DuPont may agree. Loans under
this facility will bear interest at a rate equal to 30-day LIBOR plus 0.20
percent per annum and may be voluntarily prepaid without penalty or premium. To
date, the Company has not needed to borrow funds under this credit facility.
 
     The Company is obligated to repay all outstanding debt owed to DuPont at
such time as DuPont's direct or indirect voting power in the Company falls below
50 percent of the outstanding voting power of the Company. The Company intends
to refinance outstanding related party debt owed to DuPont with a combination of
commercial paper, bank debt and public debt in 1999.
 
                                       15
<PAGE>   18
 
(B) RESULTS OF OPERATIONS
 
COMBINED RESULTS
 
     A summary of the Company's Sales and Other Operating Revenues and After-Tax
Operating Income, by business segment, is as follows:
 
<TABLE>
<CAPTION>
                                                    THREE MONTHS        NINE MONTHS
                                                        ENDED              ENDED
                                                    SEPTEMBER 30       SEPTEMBER 30
                                                   ---------------   -----------------
                                                    1998     1997     1998      1997
                                                   ------   ------   -------   -------
                                                          (DOLLARS IN MILLIONS)
<S>                                                <C>      <C>      <C>       <C>
SALES AND OTHER OPERATING REVENUES
  Upstream.......................................  $1,103   $1,141   $ 3,578   $ 3,820
  Downstream.....................................   4,470    5,291    13,004    14,940
  Corporate and Other............................     343      239       682       386
                                                   ------   ------   -------   -------
     Total Sales and Other Operating Revenues....  $5,916   $6,671   $17,264   $19,146
                                                   ======   ======   =======   =======
AFTER TAX OPERATING INCOME
  Upstream.......................................
     United States...............................  $   48   $   55   $   192   $   296
     International...............................      70      134       285       347
                                                   ------   ------   -------   -------
          Total Upstream.........................  $  118   $  189   $   477   $   643
  Downstream.....................................
     United States...............................  $   75   $   69   $   161   $   199
     International...............................      39       54       134       105
                                                   ------   ------   -------   -------
          Total Downstream.......................  $  114   $  123   $   295   $   304
  Corporate and Other............................      (9)     (23)      (48)      (57)
                                                   ------   ------   -------   -------
     Total After-Tax Operating Income............  $  223   $  289   $   724   $   890
  Interest and Other Non-Operating Expenses Net
     of Tax......................................     (40)      --       (11)      (14)
                                                   ------   ------   -------   -------
COMBINED NET INCOME..............................  $  183   $  289   $   713   $   876
                                                   ======   ======   =======   =======
</TABLE>
 
SPECIAL ITEMS
 
     Combined Net Income includes the following Special Items on an after-tax
basis:
 
<TABLE>
<CAPTION>
                                                        THREE MONTHS    NINE MONTHS
                                                           ENDED           ENDED
                                                        SEPTEMBER 30    SEPTEMBER 30
                                                        ------------    ------------
                                                        1998    1997    1998    1997
                                                        ----    ----    ----    ----
                                                           (DOLLARS IN MILLIONS)
<S>                                                     <C>     <C>     <C>     <C>
UPSTREAM
Asset sales...........................................  $--     $ 30    $ 54    $ 54
Tax rate changes......................................   --       19      --      19
                                                        ---     ----    ----    ----
          Total Upstream Special Items................   --     $ 49    $ 54    $ 73
                                                        ===     ====    ====    ====
DOWNSTREAM
Tax rate changes......................................   --       11      --      11
Litigation............................................   --      (23)    (28)    (23)
                                                        ---     ----    ----    ----
          Total Downstream Special Items..............  $--     $(12)   $(28)   $(12)
                                                        ===     ====    ====    ====
TOTAL.................................................  $--     $ 37    $ 26    $ 61
                                                        ===     ====    ====    ====
</TABLE>
 
     Special Items for the first nine months of 1998 reflect a $23 million gain
on the sale of North Sea properties and a $31 million benefit from the sale of
an international subsidiary, partly offset by $28 million charge for litigation
accruals. In the first nine months of 1997, Special Items include a $24 million
gain from the sale of certain U.S. assets, a $30 million gain from the sale of
North Sea properties and $30 million in tax benefits from the U.K. tax rate
change, offset by a $23 million charge for litigation accruals.
 
                                       16
<PAGE>   19
 
THIRD QUARTER 1998 VERSUS THIRD QUARTER 1997
 
     The Company had third quarter Combined Net Income of $183 million in 1998,
down 37 percent from $289 million in the third quarter of 1997. The Company had
Earnings Before Special Items of $183 million in the third quarter of 1998, down
27 percent from $252 million in the third quarter of 1997. Lower earnings
primarily reflect lower net realized crude oil and natural gas prices and higher
interest and debt expenses related to the $7,500 million promissory note, partly
offset by higher natural gas volumes and lower exploration costs.
 
     Sales and Other Operating Revenues for the third quarter of 1998 were
$5,916 million, down 11 percent from the third quarter of 1997, primarily due to
lower crude oil and natural gas prices. The Company's worldwide net realized
crude oil price was $12.29 per barrel for the quarter, down $5.67 per barrel, or
32 percent, from $17.96 per barrel in the third quarter of 1997 as global excess
oil production continued to outpace the world's demand. Worldwide natural gas
prices averaged $2.08 per thousand cubic feet (mcf) for the quarter, compared
with $2.17 per mcf in the same period in 1997. Worldwide crude oil and
condensate production in the third quarter of 1998 was 292,000 barrels per day
versus 325,000 barrels per day in the third quarter 1997, a 10% decline
primarily attributable to natural production declines and prior year property
dispositions. Worldwide natural gas deliveries in the third quarter of 1998 were
up 14 percent to 1,374 million cubic feet per day from 1,205 million cubic feet
per day in the third quarter of 1997. U.S. natural gas deliveries were up 32
percent as a result of the Lobo Acquisition and related development drilling.
International gas deliveries were down 13 percent from natural production
declines, partly offset by new gas fields increasing production. Worldwide
refined product sales were 1,081,000 barrels per day, down 1 percent versus
1997. Crude oil and refined product buy/sell and natural gas and electric power
resale activities in the third quarter of 1998 totaled $1,384 million, down 13
percent compared to $1,600 million in the third quarter of 1997, primarily due
to lower crude oil prices.
 
     Cost of Goods Sold and Other Operating Expenses for the third quarter of
1998 totaled $3,624 million, a decrease of $697 million, or 16 percent, compared
to $4,321 million in the third quarter of 1997, primarily due to lower feedstock
costs.
 
     Selling, General and Administrative Expenses for the third quarter of 1998
totaled $151 million, a decrease of $29 million, or 16 percent, compared to $180
million in the third quarter of 1997, primarily due to lower overall
compensation expense.
 
     Exploration Expenses for the third quarter of 1998 totaled $59 million, a
decline of $69 million, or 54 percent, compared to $128 million in the third
quarter of 1997, due to lower dry hole costs and lower overhead.
 
     Provision for Income Taxes for the third quarter of 1998 totaled $119
million, down 11 percent compared to $133 million for the third quarter of 1997.
Income taxes are down primarily as a result of lower income in 1998, partially
offset by a larger adjustment in deferred taxes in 1997 reflecting a U.K. tax
rate change.
 
FIRST NINE MONTHS 1998 VERSUS FIRST NINE MONTHS 1997
 
     The Company had first nine months Combined Net Income of $713 million in
1998, down 19 percent from $876 million in the first nine months of 1997. The
Company had Earnings Before Special Items of $687 million in the first nine
months of 1998, down 16 percent from $815 million in the first nine months of
1997. Lower earnings primarily reflect lower net realized crude oil and natural
gas prices, partly offset by increased U.S. natural gas volumes and refinery
inputs.
 
     Sales and Other Operating Revenues for the first nine months of 1998 were
$17,264 million, down 10 percent from the first nine months of 1997, primarily
due to lower crude oil and natural gas prices and a decrease in worldwide
refined product volumes and prices. The Company's worldwide net realized crude
oil price was $12.82 per barrel for the first nine months of 1998, down $5.97
per barrel, or 32 percent, from $18.79 per barrel in the first nine months of
1997 as global excess oil production continued to outpace the world's demand.
Worldwide natural gas prices averaged $2.28 per thousand cubic feet (mcf) for
the first nine months
 
                                       17
<PAGE>   20
 
of 1998, compared with $2.41 per mcf in the same period in 1997. The 1998
worldwide average gas price has improved after a very low realized price in the
first quarter. Worldwide crude oil and condensate production in the first nine
months of 1998 was 309,000 barrels per day versus 334,000 barrels per day in the
same period in 1997, down seven percent, primarily due to natural production
declines and prior year dispositions. Worldwide natural gas production in the
first nine months of 1998 was up 10 percent to 1,330 million cubic feet per day
from 1,208 million cubic feet per day in the first nine months of 1997 as a
result of higher U.S. natural gas production which amounted to 856 million cubic
feet, up 22 percent over the same period in 1997, attributed to the Lobo
Acquisition and related developmental drilling. International volumes were lower
due to natural production declines partly offset by new fields increasing
production. Worldwide refined product sales were 1,016,000 barrels per day, down
two percent versus 1997. Crude oil and refined product buy/sell and natural gas
and electric power resale activities in the first nine months of 1998 totaled
$3,788 million, down seven percent compared to $4,092 million in the first nine
months of 1997, primarily due to lower crude oil prices.
 
     Cost of Goods Sold and Other Operating Expenses for the first nine months
of 1998 totaled $10,378 million, a decrease of $1,610 million, or 13 percent,
compared to $11,988 million in the first nine months of 1997, primarily due to
lower feedstock costs.
 
     Selling, General and Administrative Expenses for the first nine months of
1998 totaled $521 million, a decrease of $14 million, or 3 percent, compared to
$535 million in the first nine months of 1997, primarily due to lower overall
compensation expense partially offset by higher costs in international
Downstream retail marketing expansion activities.
 
     Exploration Expenses for the first nine months of 1998 totaled $235
million, a decline of $85 million, or 27 percent, compared to $320 million in
the first nine months of 1997, due to lower dry hole costs, lower amortization
of non-producing leasehold properties in the United States, and lower overhead
and operating costs, partially reflecting a shift in focus from geoseismic work
to drilling in the current year.
 
     Provision for Income Taxes for the first nine months of 1998 totaled $373
million, down 48 percent compared to $723 million for the first nine months of
1997. Income taxes are down primarily due to lower income in 1998, increased oil
production in countries with lower effective tax rates, and the favorable
resolution of certain tax issues.
 
UPSTREAM SEGMENT RESULTS
 
<TABLE>
<CAPTION>
                                                              THREE MONTHS     NINE MONTHS
                                                                  ENDED           ENDED
                                                              SEPTEMBER 30    SEPTEMBER 30
                                                              -------------   -------------
                                                              1998    1997    1998    1997
                                                              -----   -----   -----   -----
                                                                  (DOLLARS IN MILLIONS)
<S>                                                           <C>     <C>     <C>     <C>
After-Tax Operating Income..................................  $118    $189    $477    $643
Special Items...............................................    --     (49)    (54)    (73)
                                                              ----    ----    ----    ----
Earnings Before Special Items...............................  $118    $140    $423    $570
                                                              ====    ====    ====    ====
</TABLE>
 
THIRD QUARTER 1998 VERSUS THIRD QUARTER 1997
 
     Upstream Earnings Before Special Items were $118 million in the third
quarter of 1998, down 16 percent from $140 million in the third quarter of 1997.
U.S. Upstream Earnings Before Special Items totaled $48 million in the third
quarter of 1998, down 13 percent from $55 million in the comparable period of
1997. Lower U.S. Upstream Earnings were due to lower crude oil and natural gas
prices and lower oil volumes due to prior asset dispositions and crude oil
production declines. These factors more than offset increased natural gas
production and lower exploration expenses. Natural gas volumes were up 32
percent, as production from the South Texas fields acquired in 1997 increased
more than natural gas production declined elsewhere. Outside the United States,
Upstream Earnings Before Special Items were $70 million, down 18 percent, from
 
                                       18
<PAGE>   21
 
$85 million in the comparable period in 1997, primarily attributable to lower
prices for crude oil and natural gas, partly offset by lower exploration costs.
 
FIRST NINE MONTHS 1998 VERSUS FIRST NINE MONTHS 1997
 
     Upstream Earnings Before Special Items were $423 million in the first nine
months of 1998, down 26 percent from $570 million in the first nine months of
1997. U.S. Upstream Earnings Before Special Items totaled $192 million in the
first nine months of 1998, down 29 percent from $272 million in the comparable
period of 1997. Lower U.S. Upstream Earnings were due to lower crude oil and
natural gas prices and lower oil volumes due to prior asset dispositions and
crude oil production declines. These factors more than offset the significant
increased natural gas production and lower exploration expenses. Natural gas
volumes were up 22 percent, as production from the South Texas fields acquired
in 1997 increased more than natural gas production declined elsewhere. Outside
the United States, Upstream Earnings Before Special Items were $231 million,
down 22 percent, from $298 million in the comparable period in 1997 as a result
of lower prices for crude oil and natural gas and lower natural gas volumes,
partly offset by lower exploration cost and lower taxes.
 
DOWNSTREAM SEGMENT RESULTS
 
<TABLE>
<CAPTION>
                                                           THREE MONTHS     NINE MONTHS
                                                               ENDED           ENDED
                                                           SEPTEMBER 30    SEPTEMBER 30
                                                           -------------   -------------
                                                           1998    1997    1998    1997
                                                           -----   -----   -----   -----
                                                               (DOLLARS IN MILLIONS)
<S>                                                        <C>     <C>     <C>     <C>
After-Tax Operating Income...............................  $114    $123    $295    $304
Special Items............................................    --      12      28      12
                                                           ----    ----    ----    ----
Earnings Before Special Items............................  $114    $135    $323    $316
                                                           ====    ====    ====    ====
</TABLE>
 
THIRD QUARTER 1998 VERSUS THIRD QUARTER 1997
 
     Downstream Earnings Before Special Items were $114 million in the third
quarter of 1998, down 16 percent from $135 million in the comparable period in
1997, due to lower refined product margins. U.S. Downstream Earnings Before
Special Items were $75 million in the third quarter of 1998, down 18 percent
from $92 million in the third quarter of 1997, from lower refined product
margins. Downstream Earnings Before Special Items outside the United States were
$39 million in the third quarter of 1998, down nine percent, from $43 million in
the comparable period in 1997, reflecting weaker refining and marketing margins.
 
FIRST NINE MONTHS 1998 VERSUS FIRST NINE MONTHS 1997
 
     Downstream Earnings Before Special Items were $323 million for the first
nine months of 1998, up two percent from $316 million in the comparable period
in 1997. U.S. Downstream Earnings Before Special Items were $189 million for the
first nine months of 1998, down 15 percent from $222 million for the first nine
months of 1997, from lower refinery product margins. Downstream Earnings Before
Special Items outside the United States were $134 million for the first nine
months of 1998, up 43 percent from $94 million in the comparable period in 1997,
reflecting higher refinery and marketing volumes that were only partly offset by
slightly lower refining margins.
 
CORPORATE AND OTHER SEGMENT RESULTS
 
<TABLE>
<CAPTION>
                                                           THREE MONTHS     NINE MONTHS
                                                               ENDED           ENDED
                                                           SEPTEMBER 30    SEPTEMBER 30
                                                           -------------   -------------
                                                           1998    1997    1998    1997
                                                           -----   -----   -----   -----
                                                               (DOLLARS IN MILLIONS)
<S>                                                        <C>     <C>     <C>     <C>
After-Tax Operating Income...............................   $(9)   $(23)   $(48)   $(57)
</TABLE>
 
                                       19
<PAGE>   22
 
THIRD QUARTER 1998 VERSUS THIRD QUARTER 1997
 
     Corporate and Other Earnings were a loss of $9 for the third quarter of
1998, improved 61 percent from a loss of $23 for the comparable period in 1997,
resulting from lower administrative costs.
 
FIRST NINE MONTHS 1998 VERSUS FIRST NINE MONTHS 1997
 
     Corporate and Other Earnings were a loss of $48 for the first nine months
of 1998, improved 16 percent from a loss of $57 for the comparable period in
1997, resulting from lower administrative costs.
 
<TABLE>
<CAPTION>
                                                              THREE MONTHS     NINE MONTHS
                                                                  ENDED           ENDED
                                                              SEPTEMBER 30    SEPTEMBER 30
                                                              -------------   -------------
                                                              1998    1997    1998    1997
                                                              -----   -----   -----   -----
                                                                  (DOLLARS IN MILLIONS)
<S>                                                           <C>     <C>     <C>     <C>
INTEREST AND OTHER CORPORATE NON-OPERATING EXPENSES NET OF
  TAX
     Net Interest Income (Expense)..........................  $(53)   $ 14    $(14)   $ 24
     Exchange Gains (Losses)................................    27      12      32      17
     Other Corporate Expenses(1)............................   (14)    (26)    (29)    (55)
                                                              ----    ----    ----    ----
               Total........................................  $(40)   $ --    $(11)   $(14)
                                                              ====    ====    ====    ====
</TABLE>
 
---------------
 
(1) Includes financing costs and other non-operating items.
 
THIRD QUARTER 1998 VERSUS THIRD QUARTER 1997
 
     Non-Operating Expenses for the third quarter of 1998 were $40 million, an
increase of 100% versus the comparable period in 1997, primarily reflecting an
increase in interest expense due to the additional debt in the third quarter of
1998 versus 1997.
 
FIRST NINE MONTHS 1998 VERSUS FIRST NINE MONTHS 1997
 
     Non-Operating Expenses for the first nine months of 1998 were $11 million,
an improvement of $3 million versus $14 million for the same period in 1997. The
improvement is primarily attributable to the lower general corporate expenses
and higher exchange gains, partly offset by increased interest expense related
to the $7,500 million promissory note.
 
TAX MATTERS
 
     As a result of the Separation and the Offerings, the Company will no longer
be able to combine the results of its operations with those of DuPont in
reporting income for U.S. federal income tax purposes and for state and non-U.S.
income tax purposes in certain states and countries. The Company believes this
will not have a material adverse effect on its earnings.
 
YEAR 2000
 
     Historically, certain computerized systems have had two digits rather than
four digits to define the applicable year, which could result in recognizing a
date using "00" as the year 1900 rather than the year 2000. This could result in
major failures or miscalculations and is generally referred to as the "Year 2000
issue."
 
     The Company recognizes that the impact of the Year 2000 issue extends
beyond traditional computer hardware and software to automated plant systems and
instrumentation, as well as to third parties. The Year 2000 issue is being
addressed within the Company by its individual business units, and progress is
reported periodically to management.
 
     The Company has committed resources to conduct risk assessments and to take
corrective action, where required, within each of the following
areas:  information technology, plant systems and external parties. Information
technology includes telecommunications as well as traditional computer software
and hardware in
 
                                       20
<PAGE>   23
 
the mainframe, midrange and desktop environments. Plant systems include all
automation and embedded chips used in plant operations. External parties include
any third party with whom the Company interacts.
 
     In the information technology area, inventory and assessment audits in the
mainframe and midrange environments have been completed with corrective action
scheduled for completion in the fourth quarter of 1998, except for business
application software which is expected to be completed in the fourth quarter of
1999. Inventory and assessment audits of telecommunications have been completed,
with corrective action expected to be completed by the second quarter of 1999.
Finally, inventory and assessment audits in the desktop environment have been
completed, with corrective action expected to be completed in the third quarter
of 1999.
 
     In the plant systems area, 75 percent of the Company's business units have
completed their inventory and assessments audits; the remaining units are
expected to complete this work in the fourth quarter of 1998. The Company is
relying on vendor testing and certification with validation through limited
internal testing and/or industry test results. Downtime for normally scheduled
plant maintenance will be used to conduct testing, with corrective action
expected to be completed in the second quarter of 1999.
 
     With respect to external parties, 80 percent of the Company's business
units have completed their inventory audit of critical external parties. The
remaining business units are expected to have completed this work in the fourth
quarter of 1998. Risk assessment is expected to be completed in the fourth
quarter of 1998, and monitoring of risk in this area will continue into 1999, as
many external parties will not have completed their work.
 
     The total cost of Year 2000 activities is not expected to be material to
the Company's operations, liquidity or capital resources. Costs are being
managed within each business unit. The total estimated cost for the Company's
Year 2000 work is $47 million. 1997 costs were $5 million, and 1998 costs
through September 1998 were $15 million. Costs exclude expenditures for
previously scheduled replacement systems.
 
     Failure to address a Year 2000 issue could result in business interruption
that could materially affect the Company's operations, liquidity or capital
resources. The Company has contingency plans to address other issues such as oil
tanker spills and plant disruption. Typically these contingency plans address
the results of single events while the scope of Year 2000 issues may cause
multiple concurrent events for a longer duration. Development of contingency
plans for multiple concurrent events is expected to be completed by the first
quarter of 1999.
 
     There is still uncertainty around the scope of the Year 2000 issue. At this
time the Company cannot quantify the impact of these potential failures. The
Company's Year 2000 program and contingency plans are being developed to address
issues within the Company's control. The program attempts to minimize, but does
not eliminate, the issues of external parties.
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
MARKET RISKS
 
     The Company operates in the worldwide crude oil, refined product, natural
gas and natural gas liquids markets and is exposed to fluctuations in interest
rates, foreign currency exchange rates and hydrocarbon prices that can affect
revenues and cost of operating, investing and financing. The Company's
management has and intends to use financial and commodity based derivative
contracts to reduce the risk in the Company's overall earnings and cash flow
when the benefits of avoiding disruption of the Company's value creation process
(primarily long-term exploration and capital investment programs) are
anticipated to more than offset the risk management costs involved.
 
     The Company has established a Financial Risk Management Policy Framework
that provides guidelines for entering into contractual arrangements
(derivatives) to manage the Company's commodity price, foreign currency exchange
rate, and interest rate risks. The Conoco Risk Management Committee has ongoing
responsibility for the content of this policy and has principal oversight
responsibility for compliance with the policy framework by ensuring proper
procedures and controls are in place. These procedures establish derivative
control and valuation processes, routine monitoring and reporting requirements
and counterparty
                                       21
<PAGE>   24
 
credit approval procedures. Additionally, the Company's internal audit group
conducts routine reviews of these risk management activities to assess the
adequacy of internal controls, and audit results are reviewed by the Conoco Risk
Management Committee and by operating management.
 
     The counterparties to these contractual arrangements are limited to major
financial institutions and other major companies in the petroleum business.
Although the Company is exposed to credit loss in the event of nonperformance by
these counterparties, this exposure is managed through credit approvals, limits
and monitoring procedures, and limits to the period over which unpaid balances
are allowed to accumulate. The Company has not experienced nonperformance by
counterparties to these contracts and no material loss would be expected from
any such individual nonperformance.
 
  Commodity Price Risk
 
     The Company enters into energy-related futures, forwards, swaps and options
in various markets to balance its physical systems to meet customer needs and to
manage its exposure to price fluctuations on anticipated crude oil, natural gas,
refined product and electric power transactions. These instruments provide a
natural extension of the underlying cash market and are used to physically
acquire a portion of supply requirements and to manage pricing of near term
physical requirements. The commodity futures market has underlying principles of
increased liquidity and longer trading periods than the cash market and is one
method of managing price risk in the petroleum business.
 
     From time to time, management may use derivatives to establish longer-term
positions to hedge the price risk for the Company's equity crude oil and natural
gas production as well as refinery margins.
 
     Under the Company's policy, hedging includes only those transactions that
offset physical positions and reduce overall company exposure to prevailing
market price risk. Trading is defined as any transaction that does not meet the
definition of a hedge and is marked to market on a monthly basis. After-tax
gain/loss from risk trading has not been material.
 
     The fair value gain (loss) of outstanding derivative commodity instruments
and the change in fair value that would be expected from a 10 percent adverse
price change are shown in the table below:
 
<TABLE>
<CAPTION>
                                                                            CHANGE IN
                                                                            FAIR VALUE
                                                                               FROM
                                                                           10% ADVERSE
                                                              FAIR VALUE   PRICE CHANGE
                                                              ----------   ------------
                                                                (DOLLARS IN MILLIONS)
<S>                                                           <C>          <C>
AT SEPTEMBER 30, 1998
Crude Oil and Refined Products
  Hedging...................................................      (2)            0
  Trading...................................................      (9)           (4)
                                                                 ---           ---
  Combined..................................................     (11)           (4)
Natural Gas
  Hedging...................................................      10           (26)
  Trading...................................................       1             0
                                                                 ---           ---
  Combined..................................................      11           (26)
 
AT DECEMBER 31, 1997
Crude Oil and Refined Products
  Hedging...................................................      (3)           (8)
  Trading...................................................      (6)          (18)
                                                                 ---           ---
  Combined..................................................      (9)          (26)
Natural Gas
  Hedging...................................................       8            (9)
  Trading...................................................      --            --
                                                                 ---           ---
  Combined..................................................       8            (9)
</TABLE>
 
                                       22
<PAGE>   25
 
     The fair values of the futures contracts are based on quoted market prices
obtained from the New York Mercantile Exchange or the International Petroleum
Exchange of London. The fair values of swaps and other over-the-counter
instruments are estimated based on quoted market prices of comparable contracts
and approximate the gain or loss that would have been realized if the contracts
had been closed out at year end.
 
     All hedge positions offset physical positions exposed to the cash market;
none of these offsetting physical positions is included in the above table.
 
     Price-risk sensitivities were calculated by assuming a 10 percent adverse
change in prices regardless of term or historical relationships between the
contractual price of the instrument and the underlying commodity price. In the
event of an actual 10 percent change in prompt month crude or natural gas
prices, the fair value of the Company's derivative portfolio would typically
change less than that shown in the table due to lower volatility in out-month
prices.
 
  Foreign Currency Exchange Rate Risk
 
     The Company's operations in 40 countries expose it to foreign currency
exchange rate risk. The Company does not comprehensively hedge its exposure to
currency rate changes, although it may choose to selectively hedge certain
working capital balances, firm commitments, cash returns from subsidiaries and
affiliates and/or tax payments. There can be no assurance these efforts will be
successful. Historically, the Company has selectively hedged firm commitments.
At September 30, 1998, the Company had no open foreign currency hedged
positions. Cash balances are maintained principally in U.S. dollars, U.K.
Pounds, Deutsch Marks, Norwegian Kroner and Swedish Kroner.
 
  Risk of Refinancing Debt Owed to DuPont
 
     Upon the occurrence of the intended split-off from DuPont, mandatory
prepayment provisions will be triggered in the promissory notes representing the
debt owed by the Company to DuPont (the aggregate outstanding principal amount
of $4,853 million). As a result, the Company anticipates that it will be
required to refinance debt owed to DuPont within 12 months of the date hereof.
There can be no assurance that the Company will be able to refinance this debt
on terms as favorable as those existing with respect to the debt owed to DuPont.
 
                                       23
<PAGE>   26
 
                                    PART II
 
                               OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
     In August 1998, the Company settled an outstanding RCRA proceeding by
agreeing to pay the EPA $112,500 and the Colorado Department of Public Health
and Environment $72,500 and to perform several Supplemental Environmental
Projects (SEPs) at the refinery at a cost of $337,000.
 
     On March 6, 1996, the Department of Justice filed a complaint in the United
States District Court for the District of Montana against Yellowstone Pipeline
Company ("YPL") and the Conoco Pipe Line Company as a part owner and operator of
YPL. The complaint alleges discharges of oil from a YPL pipeline in January 1993
and seeks civil penalties of up to $25,000 per day for each violation or up to
$1,000 for each barrel of oil discharged. Since the duration of the discharge is
in dispute, the penalty calculation is uncertain although it is expected to
exceed $100,000. The parties are attempting to negotiate a resolution of the
matter, including a supplemental environmental project that would constitute a
substantial part of a settlement with the government.
 
     Conoco has been assessed a monetary penalty in the amount of $298,000 by
the New Mexico Environmental Department, Air Quality Bureau. The demand was made
on June 18, 1998. New Mexico alleges that Conoco failed to obtain a permit under
the CAA and violated certain permit conditions in the existing permits. Conoco
assets affected are the Maljamar Gas Plant and the MCA field. Conoco expects to
obtain settlement by payment of a lesser monetary penalty and performance of a
supplemental environmental project.
 
     The Company is subject to various lawsuits and claims involving a variety
of matters including, along with other oil companies, actions challenging oil
and gas royalty and severance tax payments based on posted prices, and claims
for damages resulting from leaking underground storage tanks. As a result of the
Separation Agreement with DuPont, the Company has also assumed responsibility
for current and future claims related to certain discontinued chemicals and
agricultural chemicals businesses operated by the Company in the past. In
general, the effect on future financial results is not subject to reasonable
estimation because considerable uncertainty exists. The Company believes the
ultimate liabilities resulting from such lawsuits and claims may be material to
results of operations in the period in which they are recognized but will not
materially affect the combined financial position of the Company.
 
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
 
     The net proceeds from the Offerings, after deducting the underwriting
discounts and commissions payable by the Company, were $4,228 million. The
Company used the net proceeds of the Offerings, plus a portion of its cash and
cash equivalents, to repay or purchase a portion of the indebtedness owed by
certain subsidiaries of the Company to DuPont under certain intercompany notes
(the "Intercompany Notes"). The Intercompany Notes consisted of (i) a promissory
note in the principal amount of $7,500 million, due January 2, 2000, and bearing
interest at a rate of 6.0125 percent per annum, (ii) a promissory note in the
principal amount of approximately $827 million, due January 2, 2000, and bearing
interest at a rate equal to the six-month LIBOR plus 0.375 percent per annum (or
5.965 percent per annum in the current period), (iii) several Norwegian Kroner
denominated promissory notes with an aggregate principal amount of approximately
$461 million after conversion to U.S. dollars at September 30, 1998, having
various maturity dates (ranging from October 1998 to January 2000 and having a
remaining weighted average maturity of 8 months as of September 30, 1998) and
bearing interest at a rate equal to the six-month NIBOR plus 0.375 percent per
annum (or 5.565 percent per annum in the current period) and (iv) a promissory
note (the principal amount of which was approximately $204 million at the end of
October 1998) due on demand, and bearing an interest rate during any calendar
month based on the interest rate on DuPont's commercial paper during the
preceding month (or 5.65% in October 1998).
 
                                       24
<PAGE>   27
 
     The net proceeds of the Offerings were applied, first, to pay accrued
interest on the $7,500 million promissory note and then to pay principal on such
promissory note to the extent necessary to reduce the principal amount to $4,846
million; second, to purchase the Kroner denominated notes described in clause
(iii) of the preceding paragraph and pay accrued interest thereon; third, to
repay, $820 million of principal and all accrued interest through October 26,
1998, on the $827 million note referred to in clause (ii) of the preceding
paragraph; and fourth, to repay, in part, the note referred to in clause (iv) of
the preceding paragraph. Since the net proceeds of the Offerings were
insufficient to repay in full the note referred to in clause (iv) of the
preceding paragraph, the Company will use its cash and cash equivalents and
marketable securities in excess of $225 million at the end of October 1998
(excluding $70 million of additional monetary assets held by the Company's
captive insurance company and its subsidiaries and cash and cash equivalents
held by Petrozuata) to repay, in whole or in part, the remaining balance of such
note. To the extent the note referred to in clause (iv) of the preceding
paragraph is not repaid in full according to the previous sentence, the holder
of such note will contribute the remaining balance of such note to the Company.
The $7,500 million promissory note was incurred in payment of a dividend in July
1998. The promissory note with a principal amount of approximately $827 million
was incurred to finance the purchase by the Company of certain loans made by
DuPont to the Company. The purchase loans, as well as the several promissory
notes with an aggregate principal amount of approximately $461 million, were
incurred to finance certain capital expenditures, acquisitions and working
capital. The promissory note referred to in clause (iv) of the preceding
paragraph was incurred to finance working capital needs of the Company.
 
     Following the application of the net proceeds from the Offerings and the
utilization of a portion of the Company's cash and cash equivalents in
connection with the matters discussed in "Arrangements Between the Company and
DuPont -- Intercompany Notes," in Conoco's Form S-1, the Company will have
approximately $225 million in cash and cash equivalents and marketable
securities (excluding $70 million of additional monetary assets held by the
Company's captive insurance company and its subsidiaries and cash and cash
equivalents held by Petrozuata) at the end of October 1998.
 
ITEM 5. OTHER INFORMATION
 
(A) DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
 
     This quarterly report on Form 10-Q contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
which are intended to be covered by the safe harbors created thereby. Words such
as "expects," "intends," "plans," "projects," "believes," "estimates" and
similar expressions are used to identify such forward-looking statements.
Forward-looking statements relating to the Company's operations are based on
management's current expectations, estimates and projections about the Company
and the petroleum industry. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions that are
difficult to predict. Further, certain forward-looking statements are based upon
assumptions as to future events that may not prove to be accurate. Therefore,
actual outcomes and results may differ materially from what is expressed or
forecast in such forward-looking statements.
 
     Factors that could cause actual results or events to differ materially
include, but are not limited to, crude oil and natural gas prices; refining and
marketing margins; potential failure to achieve, and potential delays in
achieving, expected production from existing and future oil and gas development
projects; lack of exploration success; potential disruption or interruption of
the Company's production facilities due to accidents or political events;
international monetary conditions and exchange controls; potential liability for
remedial actions under existing or future environmental regulations; potential
disruption to the Company's operations due to untimely or incomplete resolution
of Year 2000 issues by the Company or other entities; and potential liability
resulting from pending or future litigation. In addition, such statements could
be affected by general domestic and international economic and political
conditions, as well as changes in tax and other laws applicable to the Company's
business.
 
                                       25
<PAGE>   28
 
(B) SUBSEQUENT EVENT
 
     Conoco completed the sale of its gas and oil properties in the Central
Rockies to Coastal Corporation in early November, 1998 for approximately $200
million. The properties sold represented 160 billion cubic feet equivalent of
proved developed gas reserves, seven percent of the Company's total U.S. gas
reserves, and about 200,000 barrels of oil reserves. Also included in the sale
was the Dragon Trail natural gas processing plant near Rangely, Colorado.
 
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
 
(a) Exhibits
 
     The exhibit index filed with this Form 10-Q is on page 28.
 
                                       26
<PAGE>   29
 
                                   SIGNATURE
 
     Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
 
                                            CONOCO INC.
                                            (Registrant)
 
                                            Date:
 
                                            By:     /s/ W. DAVID WELCH
                                              ----------------------------------
                                               (As Duly Authorized Officer and
                                                Principal Accounting Officer)
 
                                       27
<PAGE>   30
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
          3.1            -- Second Amended and Restated Certificate of Incorporation
                            of Conoco Inc.
          3.2            -- By-laws of Conoco Inc. (amended as of October 29, 1998)
         27              -- Financial Data Schedule (only filed electronically)
</TABLE>
 
                                       28