<PAGE>   1
 
================================================================================
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                             ---------------------
                                      1996
 
                                   FORM 10-K
                             ---------------------
(MARK ONE)
 
      [X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
 
                                       OR
 
      [ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
               SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
 
           FOR THE TRANSITION PERIOD FROM             TO
 
                         COMMISSION FILE NUMBER 1-13108
 
                             VASTAR RESOURCES, INC.
             (Exact name of registrant as specified in its charter)
                             ---------------------
 
<TABLE>
<S>                                                 <C>
                     DELAWARE                                           95-4446177
   (State or other jurisdiction of incorporation           (I.R.S. Employer Identification No.)
                 or organization)
 
               15375 MEMORIAL DRIVE
                  HOUSTON, TEXAS                                           77079
     (Address of principal executive offices)                           (Zip Code)
</TABLE>
 
                                 (281) 584-6000
              (Registrant's telephone number, including area code)
                             ---------------------
          Securities registered pursuant to Section 12(b) of the Act:
 
<TABLE>
<CAPTION>
                TITLE OF EACH CLASS                      NAME OF EACH EXCHANGE ON WHICH REGISTERED
                -------------------                      -----------------------------------------
<C>                                                 <C>
      Common Stock, Par Value $.01 Per Share                      New York Stock Exchange
</TABLE>
 
       Securities registered pursuant to Section 12 (g) of the Act: NONE
 
     INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.  YES  X   NO ____
 
     INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K.
-----
 
     The aggregate market value of the Registrant's voting stock held by
non-affiliates on March 3, 1997, based on the closing price on the New York
Stock Exchange composite tape on that date of $29, was $500,555,950.
 
     As of March 3, 1997, there were 97,260,551 shares of Common Stock
outstanding.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
     Portions of the Registrant's definitive proxy statement for the 1997 Annual
Meeting of Stockholders to be held on May 21, 1997, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1996, are
incorporated by reference into Part III.
================================================================================
<PAGE>   2
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
  ITEM                                                                    PAGE
  ----                                                                    ----
<S>         <C>                                                           <C>
                                    PART I
1. and 2.   Business and Properties.....................................    1
            General Development of Business.............................    1
            Producing Properties and Exploitation Assets................    1
            Exploration.................................................    4
            Historical Results..........................................    5
            Reserve Replacement.........................................    6
            Proved Reserves.............................................    6
            Marketing...................................................    7
            Risk Management.............................................    8
            Competition.................................................    8
            Seasonality.................................................    8
            Regulation..................................................    9
            Section 29 Tax Credits......................................   10
            Human Resources.............................................   10
            Safe-Harbor Cautionary Statement............................   11
3.          Legal Proceedings...........................................   13
4.          Submission of Matters to a Vote of Security Holders.........   14
            Executive Officers of the Registrant........................   14
                                   PART II
5.          Market for Registrant's Common Equity and Related
            Stockholder Matters.........................................   16
6.          Selected Financial Data.....................................   16
7.          Management's Discussion and Analysis of Financial Condition
            and Results of Operations...................................   17
8.          Financial Statements and Supplementary Data.................   24
9.          Changes in and Disagreements With Accountants on Accounting
            and Financial Disclosure....................................   49
                                   PART III
10.         Directors and Executive Officers of the Registrant..........   49
11.         Executive Compensation......................................   49
12.         Security Ownership of Certain Beneficial Owners and
            Management..................................................   49
13.         Certain Relationships and Related Transactions..............   49
                                   PART IV
14.         Exhibits, Financial Statement Schedules and Reports on Form
            8-K.........................................................   50
</TABLE>
<PAGE>   3
 
                                     PART I
 
ITEMS 1. AND 2. BUSINESS AND PROPERTIES.
 
GENERAL DEVELOPMENT OF BUSINESS
 
     Vastar Resources, Inc. ("Vastar" or the "Company") was incorporated in
Delaware in September 1993 and is one of the nation's leading independent
(non-integrated) exploration, production and marketing companies. Vastar's
operations are concentrated in four premier producing regions of the United
States -- the Gulf of Mexico, Gulf Coast, San Juan Basin, and
Mid-Continent -- and its market presence extends nationwide.
 
     The Company's business strategy is to create shareholder value through low
cost leadership, growth from internal sources, value-added marketing and
financial flexibility. In the implementation of its strategy, Vastar primarily
draws from its inventory of internally generated prospects in order to find and
develop reserves utilizing, where appropriate, cost-effective advances in
technology to reduce the risks associated with gas and oil exploration and
development. The Company is strategically focused in four principal producing
areas that are further described below under "Producing Properties and
Exploitation Assets." As of December 31, 1996, the Company had proved reserves
of approximately 2,916 Bcfe*. The Company's capital program for 1996 was $567.2
million. Vastar treats all of its exploration, production and marketing
operations as one business segment.
 
     Atlantic Richfield Company ("ARCO") owns 80,000,001 shares or 82.3 percent
of Vastar's outstanding Common Stock. For additional information relating to
certain relationships between the Company and ARCO, including potential
conflicts of interest, see Note 4 of the Notes to Consolidated Financial
Statements and Item 13 of this Form 10-K.
 
PRODUCING PROPERTIES AND EXPLOITATION ASSETS
 
     The Company's four principal producing areas are offshore in the Gulf of
Mexico, the Gulf Coast (south Texas, southeast Texas and south Louisiana), the
San Juan/Rockies (northwest New Mexico, southwest Colorado and Wyoming) and the
Mid-Continent (northeast Texas, Oklahoma, northern Louisiana, Arkansas and
Kansas).
 
<TABLE>
<CAPTION>
                                        DECEMBER 31, 1996                     1996
                                            RESERVES                   AVERAGE PRODUCTION
                                   ---------------------------   -------------------------------
                                    GAS     LIQUIDS     TOTAL      GAS      LIQUIDS      TOTAL
                                   (BCF*)   (MMBBL*)   (BCFE*)   (MMCFD*)   (MBBLD)    (MMCFED*)
                                   ------   --------   -------   --------   --------   ---------
<S>                                <C>      <C>        <C>       <C>        <C>        <C>
Gulf of Mexico...................    648      70.6      1,072      337        33.5         538
Gulf Coast.......................    157      26.5        316       95         8.5         146
San Juan/Rockies.................    751       0.4        753      240         0.3         242
Mid-Continent....................    668      17.8        775      200         6.5         239
                                   -----     -----      -----      ---        ----       -----
          Total..................  2,224     115.3      2,916      872        48.8       1,165
</TABLE>
 
---------------
 
* As used herein, the terms "Bcf," "MMcf" and "Mcf" mean billion, million and
  thousand cubic feet, respectively; the terms "Bcfd," "MMcfd" and "Mcfd" mean
  billion, million and thousand cubic feet per day, respectively; the terms
  "Bcfe," "MMcfe" and "Mcfe" mean billion, million and thousand cubic feet
  equivalent, respectively; the terms "MMBbl" and "MBbl" mean million and
  thousand barrels, respectively; the term "Bbl" means barrel; the terms
  "MMBbld" and "MBbld" mean million and thousand barrels per day, respectively;
  the term "MMcfed" means million cubic feet equivalent per day; the term
  "MMBtu" means million British thermal units; and the term "Boe" means barrel
  of oil equivalent. In calculating Mcf and Bbl equivalents, one Bbl is equal to
  six Mcf.
 
                                        1
<PAGE>   4
 
<TABLE>
<CAPTION>
                                                              1996     1995     1994
                                                              -----    -----    -----
<S>                                                           <C>      <C>      <C>
Natural Gas Production (MMcfd*)
  Gulf of Mexico............................................    337      328      330
  Gulf Coast................................................     95      106      106
  San Juan/Rockies..........................................    240      188      155
  Mid-Continent.............................................    200      188      191
                                                              -----    -----    -----
          Total.............................................    872      810      782
Liquids Production (MBbld*).................................   48.8     45.3     43.5
Total Production (MMcfed*)..................................  1,165    1,082    1,043
</TABLE>
 
     The Company's average prices of natural gas, crude oil and natural gas
liquids and average costs per unit for the years ended December 31, 1996, 1995
and 1994 were as follows:
 
<TABLE>
<CAPTION>
                                                            YEARS ENDED DECEMBER 31,
                                                           --------------------------
                                                            1996      1995      1994
                                                           ------    ------    ------
<S>                                                        <C>       <C>       <C>
Average sales price per Mcf of natural gas...............  $ 2.34    $ 1.63    $ 1.91
Average wellhead price per Mcf of natural gas............  $ 1.81    $ 1.38    $ 1.84
Average realized price per Bbl of crude oil..............  $21.49    $18.43    $16.49
Average realized price per Bbl of natural gas liquids....  $15.01    $11.39    $11.15
Average production cost per Mcfe(1)......................  $ 0.42    $ 0.41    $ 0.45
Average selling, general and administrative expenses per
  Mcfe...................................................  $ 0.14    $ 0.13    $ 0.15
</TABLE>
 
---------------
 
(1) Includes operating expenses and taxes other than income taxes.
 
     The average sales price per Mcf of natural gas is determined by dividing
total gas sales revenue by total gas sales volume. Average realized price per
Bbl of crude oil and natural gas liquids, as applicable, is determined by
dividing total sales revenue, less purchase cost and transportation expense, by
production volume. Average wellhead price per Mcf of natural gas is determined
by dividing total sales revenues, less purchase cost, transportation expense and
aggregate gas marketing margin, by production volume. See Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.
 
  Gulf of Mexico
 
     Through its predecessors, the Company has been involved in exploration and
exploitation of properties in the Gulf of Mexico since the 1950s. In general,
Vastar's properties in the Gulf of Mexico are characterized by prolific
reservoirs with high production rates, which therefore tend to deplete more
rapidly than the Company's onshore properties.
 
     In 1996, the Company purchased an additional 29.5 percent working interest
in the West Cameron 66 field for $35.0 million, bringing Vastar's total interest
in the field to approximately 75 percent and adding proved reserves net to
Vastar of 41 Bcfe. The transaction also increased Vastar's ownership in the
Gibbstown and Grand Chenier gas separation stations.
 
     The Company's current production portfolio in the Gulf of Mexico includes
24 key fields operated by Vastar and 12 operated by others. The Company also has
an ownership interest in four gas processing plants,
 
                                        2
<PAGE>   5
 
which process gas produced primarily from the Gulf of Mexico. The Company's
assets in the Gulf of Mexico represented 37 percent of the Company's total
reserves as of December 31, 1996. Approximately 70 percent of the Company's
total 1996 capital program was invested in this region.
 
  Gulf Coast
 
     The Company's properties in the Gulf Coast area include 12 key fields. The
Company also has an ownership interest in three gas processing plants in
southeast Texas and south Louisiana and approximately 0.9 million net acres of
mineral fee acreage located primarily in southeast Texas. Most of the Company's
properties in this area have been producing gas since the 1940s and 1950s and
are relatively mature.
 
     The Company operates approximately 75 percent of its production in the Gulf
Coast area. The Company's assets in the Gulf Coast area represented 11 percent
of the Company's reserves as of December 31, 1996. Approximately nine percent of
the Company's total 1996 capital program was invested in this region.
 
  San Juan/Rockies
 
     The San Juan Basin, located in southwestern Colorado and northwestern New
Mexico, is one of the largest gas basins in the United States in terms of proved
reserves. Development of the Company's properties in the San Juan Basin's
Fruitland coal seam began in the late 1980s. The Company's production from the
coal seam fields, specifically the Ignacio Blanco Fruitland field (located in
southwestern Colorado) and Basin Fruitland field (northwestern New Mexico), is
long-lived. Vastar also has significant remaining reserves in the conventional
reservoirs in the San Juan Basin, which are also long-lived. The Company also
has minor production in the Powder River Basin in Wyoming. The Company's assets
in the San Juan/Rockies area represented 26 percent of the Company's reserves as
of December 31, 1996. Approximately seven percent of the Company's total 1996
capital program was invested in this region.
 
     Most of the Company's Fruitland coal formation production in the San Juan
Basin qualifies for Internal Revenue Code Section 29 coal seam tax credits
against regular federal income tax, which are available through 2002. During
1996, the Company generated Section 29 tax credits for all production, including
production from the Fruitland coal formation, of approximately $85.0 million.
See "Section 29 Tax Credits."
 
  Mid-Continent
 
     The Company's properties in the Mid-Continent region include 21 key fields
located primarily in the Hugoton, Arkoma and Ardmore basins, and the Arklatex
areas. These properties are characterized by relatively long-lived production,
shallow decline rates and low lease operating costs. In addition, the Company
has an ownership interest in two gas processing plants in this region.
 
     In September 1996, the Company added to its Mid-Continent portfolio by
purchasing additional property in the Spider and Logansport fields in DeSoto
Parish, Louisiana for $12.3 million, which the Company estimates added
approximately 15.2 Bcfe of proved developed reserves. The Company's assets in
the Mid-Continent area represented 26 percent of the Company's reserves as of
December 31, 1996. Approximately 14 percent of the Company's total 1996 capital
program was invested in this region.
 
                                        3
<PAGE>   6
 
EXPLORATION
 
  Exploration Assets
 
     The Company holds approximately 3.8 million net acres located primarily in
its core areas. At December 31, 1996, this land position included 2.7 million
net undeveloped acres, including mineral fee acreage totaling 1.1 million net
undeveloped acres. This land position provides the resource base for the
Company's exploration prospects.
 
     The following table summarizes the Company's acreage position as of
December 31, 1996.
 
<TABLE>
<CAPTION>
                                                  DEVELOPED ACREAGE     UNDEVELOPED ACREAGE
                                                  ------------------    --------------------
                                                  GROSS        NET       GROSS         NET
                                                  ------      ------    -------      -------
                                                                (IN THOUSANDS)
<S>                                               <C>         <C>       <C>          <C>
Gulf of Mexico..................................     375         224      1,078          805
Arkansas........................................      17           8         91           49
Colorado........................................      49          45          3            2
Kansas..........................................     102          79         61           36
Louisiana.......................................      96          67        105           69
Mississippi.....................................      19           4         66           20
Montana.........................................      --          --        217          120
New Mexico......................................      64          35         18            8
Oklahoma........................................     252         169        251          117
Texas...........................................     665         377      1,612        1,133
Wyoming.........................................      18          11        378          305
Other...........................................       2           2        182           73
                                                   -----       -----      -----        -----
          Total.................................   1,659       1,021      4,062        2,737
                                                   =====       =====      =====        =====
</TABLE>
 
     Approximately ten percent of Vastar's undeveloped net acreage as of
December 31, 1996 will expire in each of the next five years.
 
     The Company was active in offshore lease sales in 1996, purchasing
approximately 305,000 net acres for approximately $48.0 million; much of this
acreage is in water deeper than 200 meters. At December 31, 1996, the Company's
Gulf of Mexico holdings were slightly over one million net acres, including a
deepwater position of approximately 176,000 net acres.
 
     As a corollary to its 1996 offshore lease sale activity, in September 1996,
the Company entered into a contract with Diamond Offshore Drilling Company for
the major upgrade and operation of Diamond Offshore's semisubmersible drilling
rig, Ocean Victory, for a three-year deepwater drilling program in the Gulf of
Mexico, commencing in late 1997. See Note 11 of the Notes to Consolidated
Financial Statements.
 
     As of December 31, 1996, the Company owned or had rights to 3-D seismic
data covering approximately 1,926 blocks offshore and 1,590 square miles onshore
and 1.6 million miles of 2-D seismic data covering its producing properties and
unexplored acreage in its portfolio and other acreage.
 
  1996 Activity
 
     During 1996, 71 gross (46 net) exploratory wells were decisioned, resulting
in 27 gross (17 net) discoveries. Five of the discovery wells provided follow-up
opportunities which the Company expects to pursue in 1997.
 
                                        4
<PAGE>   7
 
HISTORICAL RESULTS
 
     Vastar's exploration and development drilling activity (including
recompletions) since 1994 is set forth in the following table.
 
<TABLE>
<CAPTION>
                                                   1996          1995          1994
                                                -----------   -----------   -----------
                                                GROSS   NET   GROSS   NET   GROSS   NET
                                                -----   ---   -----   ---   -----   ---
<S>                                             <C>     <C>   <C>     <C>   <C>     <C>
Exploratory Wells
  Productive..................................    27     17     21     15     17     11
  Dry.........................................    44     29     40     26     43     25
                                                 ---    ---    ---    ---    ---    ---
          Total...............................    71     46     61     41     60     36
Development Wells
  Productive..................................   260    156    208    133    140     89
  Dry.........................................    29     25     28     23     12     11
                                                 ---    ---    ---    ---    ---    ---
          Total...............................   289    181    236    156    152    100
</TABLE>
 
     The following table sets forth the approximate number of wells in progress
of drilling, evaluation and testing, and suspended as of December 31, 1996.
 
<TABLE>
<CAPTION>
                                                           DEVELOPMENT     EXPLORATORY
                                                              WELLS           WELLS
                                                           ------------    ------------
                                                           GROSS    NET    GROSS    NET
                                                           -----    ---    -----    ---
<S>                                                        <C>      <C>    <C>      <C>
Drilling.................................................   14       9       6       4
Evaluation and testing...................................    1       1      --      --
Suspended................................................    3       2       2       1
</TABLE>
 
     The following table sets forth the number of productive gas and oil wells
in which the Company owned an interest as of December 31, 1996.
 
<TABLE>
<CAPTION>
                                                         COMPANY        TOTAL PRODUCTIVE
                                                      OPERATED WELLS        WELLS(1)
                                                      --------------    ----------------
                                                      GROSS     NET     GROSS      NET
                                                      -----    -----    ------    ------
<S>                                                   <C>      <C>      <C>       <C>
Gas.................................................  1,249    1,043     2,529     1,261
Oil.................................................    577      508     1,455       709
                                                      -----    -----     -----     -----
          Total(1)..................................  1,826    1,551     3,984     1,970
                                                      =====    =====     =====     =====
</TABLE>
 
---------------
 
(1) Includes approximately 268 gross (98 operated by Vastar) and 136 net (84
    operated by Vastar) multiple completions.
 
                                        5
<PAGE>   8
 
RESERVE REPLACEMENT
 
     Producing gas and oil reservoirs are, in general, characterized by
declining production rates. As a result of these decline trends, the Company
must find and develop or acquire new reserves to offset the natural field
decline. In 1996, the Company increased proved reserves from a beginning of the
year balance of approximately 2,725 Bcfe to an end of year balance of
approximately 2,916 Bcfe. See Consolidated Financial Statements -- Supplemental
Information -- Oil & Gas Producing Activities.
 
     The following table sets forth the Company's historical proved acquisition,
finding and development costs and proved reserve additions since 1994.
 
<TABLE>
<CAPTION>
                                                               1996      1995      1994
                                                              ------    ------    ------
<S>                                                           <C>       <C>       <C>
Finding and Development Costs (Millions of Dollars)
Unproved property acquisition costs.........................  $ 68.3    $ 18.1    $ 27.4
Exploration costs...........................................   213.5     171.8     132.1
Development costs...........................................   256.8     226.0     201.3
                                                              ------    ------    ------
          Total finding and development costs...............   538.6     415.9     360.8
Proved property acquisition costs...........................    51.0      51.8       3.5
                                                              ------    ------    ------
          Total reserve replacement costs...................  $589.6    $467.7    $364.3
                                                              ======    ======    ======
Proved Reserve Additions (Bcfe)
Extensions and discoveries..................................     342       379       296
Revisions...................................................     132       108       100
Improved recovery...........................................      29         9         7
                                                              ------    ------    ------
          Total reserve additions, excluding purchases of
            minerals in place...............................     503       496       403
Purchases of minerals in place..............................     129        87        15
                                                              ------    ------    ------
          Total reserve additions...........................     632       583       418
                                                              ======    ======    ======
Finding and development costs (per Mcfe)....................  $ 1.07    $ 0.84    $ 0.90
Reserve replacement costs (per Mcfe)........................  $ 0.93    $ 0.80    $ 0.87
</TABLE>
 
PROVED RESERVES
 
     The following table sets forth estimated net proved gas and oil reserves of
the Company as of December 31, 1996. Unless otherwise noted, all information in
this report on Form 10-K relating to gas and oil reserves is based upon
estimates prepared by the Company and is net to the Company's interest.
 
<TABLE>
<CAPTION>
                                                                 PROVED RESERVES
                                                        ---------------------------------
                                                        DEVELOPED    UNDEVELOPED    TOTAL
                                                        ---------    -----------    -----
<S>                                                     <C>          <C>            <C>
Natural gas (Bcf).....................................    1,801          423        2,224
Petroleum liquids (MMBbl).............................     87.9         27.4        115.3
Total proved reserves (Bcfe)*.........................    2,329          587        2,916
</TABLE>
 
---------------
 
* In calculating Mcf and Bbl equivalents, one Bbl is equal to six Mcf.
 
     Proved gas and oil reserve quantities are based on estimates prepared by
the Company's engineers in accordance with guidelines established by the
Securities and Exchange Commission (the "SEC") and approximately 60 percent were
reviewed by Ryder Scott Company Petroleum Engineers ("Ryder Scott"), independent
petroleum engineers. A copy of the review letter by Ryder Scott has been filed
as an exhibit to this report on Form 10-K.
 
     The reserve data set forth in this report on Form 10-K represent estimates
only. There are numerous uncertainties inherent in estimating quantities of
proved gas and oil reserves and in projecting future rates of production and
timing of development expenditures, including many factors beyond the control of
the Company. Reservoir engineering is a subjective process of estimating
underground accumulations of gas and
 
                                        6
<PAGE>   9
 
oil that cannot be measured in an exact way. The accuracy of any reserve
estimate is a function of the quality of available data and of engineering and
geological interpretation and judgment. As a result, estimates made by different
engineers often vary. In addition, the results of drilling, testing and
production subsequent to the date of an estimate may justify revision of such
estimates, and such revisions may be material. Accordingly, reserve estimates
are generally different from the quantities of gas and oil that are ultimately
recovered.
 
     See Consolidated Financial Statements -- Supplemental Information -- Oil &
Gas Producing Activities.
 
MARKETING
 
     The Company sells substantially all its natural gas production to its
wholly-owned subsidiary, Vastar Gas Marketing, Inc. ("Vastar Gas"). The
Company's position as one of the largest domestic gas producers provides the
base for Vastar Gas' marketing and trading activities. Vastar Gas is one of the
largest gas marketers in the United States with marketed volumes averaging 2.9
Bcfd in 1996. The key strategies which produced these results were (1) pursuing
term sales agreements with local distribution companies, electric utilities and
industrial users who were willing to pay amounts in addition to a commodity
value for wholesale aggregation services, (2) providing gas asset management
services to this same customer base to optimize usage of transportation and
storage assets and (3) buying and selling natural gas, based on information
obtained from Vastar Gas' wholesale customer base, to take advantage of market
opportunities.
 
     During 1996, an average of 2.0 Bcfd was sold under 30-day spot contracts.
The remaining 0.9 Bcfd in gas sales were sold under contacts greater than 30
days, with the exception of a small volume sold through direct wellhead and gas
plant contracts.
 
     Vastar Gas' most significant source of gas supply is the natural gas
production controlled by Vastar, including proprietary production, royalty gas,
call rights on third-party gas and gas obtained through joint operating
agreements. This gas is sold to Vastar Gas at floating, market-related prices.
In 1996, Vastar Gas obtained an average of approximately 1.0 Bcfd of gas from
these sources. For the remainder of its gas supply requirements, Vastar Gas
purchased gas from third parties, including producers and other gas marketing
companies. Most of these purchases were 30-day spot transactions. In 1996, such
third-party purchases averaged approximately 1.9 Bcfd. Vastar Gas obtains 30-day
spot gas primarily in support of its trading activities, to minimize
transportation costs and to facilitate management of its long-term commitments.
 
     Natural gas sales averaged 2.9 Bcfd in 1996 up from 2.1 Bcfd in 1995. The
average sales price for natural gas was $2.34 per Mcf, an increase of 44 percent
over 1995, due to higher commodity market prices.
 
     Vastar Gas has various longer-term natural gas sales contracts under which
it has contracted to deliver an aggregate of 460 MMcfd in 1997. These
obligations decline to less than 103 MMcfd by the year 2003. The majority of
these contracts are either index-based and present little or no price risk or
are reservoir-dedicated and present no obligation to deliver if production from
the dedicated reservoir ceases. Natural gas production controlled by Vastar,
including proprietary production, royalty gas, call rights on third-party gas
and gas obtained through joint operating agreements, is expected to exceed these
delivery commitments. There have been no instances in the last three years in
which Vastar Gas was unable to meet any significant natural gas delivery
commitment. In 1996, Vastar Gas had additional longer-term contracts with
certain cogeneration facilities pursuant to which it delivered an average of 81
MMcfd. These contracts had an average contract term of approximately 19 years,
for which an average of 13 years remain. In 1996, the average price of gas sold
under these contracts was approximately $2.49 per Mcf.
 
     The Company also markets its proprietary crude oil production. Crude oil
sales averaged 101 MBbld in 1996. The average price realized for crude oil was
$21.49 per Bbl, an increase of 17 percent over 1995. The majority of this
increase reflects stronger commodity prices as compared to 1995. In connection
with the marketing of its crude oil production, the Company exchanges barrels of
crude oil as an alternative to physical transportation of the Company's crude
oil production and to achieve other efficiencies. In accounting for these
transactions, the exchanged barrels represent the majority of the difference
between Vastar's proprietary crude oil production and its total crude oil sales
volumes.
 
                                        7
<PAGE>   10
 
     With regard to the Company's natural gas liquids ("NGLs") production, until
April 1996, Vastar had a month-to-month sales contract with ARCO for the sale of
substantially all of Vastar's proprietary NGL production. Under this contract,
the pricing for the NGLs production generally reflected standard industry terms
for similar contracts and was intended to approximate the net price Vastar would
obtain if it marketed its NGLs on a term basis to end users. Consistent with the
Company's crude oil marketing strategy, the Company began marketing its own
natural gas liquids on April 1, 1996. NGL sales averaged 15 MBbld in 1996. The
average price realized for NGLs was $15.01 per Bbl, an increase of 32 percent
over 1995. The majority of this increase reflects stronger commodity prices as
compared to 1995.
 
     In 1995, Vastar Power Marketing, Inc., a subsidiary of the Company,
obtained a FERC power marketing certificate. This positioned the Company to
offer a wider array of products and services to its customers. In 1996, Vastar
Power began marketing electricity to a small number of customers and expects to
continue such marketing activity as opportunities become available. The power
marketing business presents unique risks and opportunities that are inherently
different from the Company's hydrocarbon marketing businesses.
 
RISK MANAGEMENT
 
     From time to time, the Company uses various hedging arrangements,
predominantly natural gas and crude oil price swaps, to manage the Company's
exposure to price risk from its natural gas and petroleum liquids production.
These hedging arrangements have the effect of locking in for specified periods
(at predetermined prices or ranges of prices) the prices the Company will
receive for the volumes to which the hedge relates. As a result, while these
hedging arrangements are structured to reduce the Company's exposure to
decreases in price associated with the hedged commodity, they can also limit the
benefit the Company might otherwise have received from any price increases
associated with the hedged commodity.
 
     Vastar Gas also uses certain financial instruments, such as natural gas
price swaps and futures, to manage its fixed-price purchase and sale
commitments, as well as to provide fixed-price commitments as a service to its
customers and suppliers. Although Vastar Gas generally attempts to balance its
fixed-price physical and financial purchase and sales contracts in terms of
contract volumes and timing of delivery obligations, net open positions may
exist from time to time. Vastar Gas has established specific limits relative to
these net open positions and has established internal controls to monitor such
positions against established limits. The limits require that Vastar Gas' net
open position not exceed the volume of production controlled by the Company.
However, to the extent that Vastar Gas has an open position, the Company may be
exposed to risk from fluctuating market prices. For additional information
relating to risk management, see Item 7 -- Management's Discussion and Analysis
of Financial Condition and Results of Operations and Note 16 of the Notes to
Consolidated Financial Statements.
 
COMPETITION
 
     Competition in the oil and gas industry is intense in the lower 48 states.
The Company actively competes for the acquisition of reserves and exploration
leases, licenses and concessions, sometimes against companies with greater
financial and other resources. To the extent the Company's financial resources
are less than those of its competitors, the Company may be disadvantaged in
effectively competing for certain reserves, leases, licenses and concessions.
From time to time, the level of industry activity may result in a tight supply
of labor or equipment required to operate and develop such properties. In
marketing its production, the Company competes with other producers and
marketers on such factors as deliverability, price, contract terms and quality
of service. The Company believes that the location of its properties, its
exploration, drilling and production expertise and the experience of its
management generally enable it to compete effectively.
 
SEASONALITY
 
     Historically, demand for natural gas has been seasonal in nature, with peak
demand and typically higher prices occurring during the colder winter months.
 
                                        8
<PAGE>   11
 
REGULATION
 
     The Company's ability to produce and market its gas and oil production is
affected and restrained by a number of factors, including federal and state
regulation of natural gas and oil production, state limits on allowable rates of
production by well or proration unit, the amount of natural gas and oil
available for sale, the availability of adequate pipeline and other
transportation and processing facilities and the marketing of competitive fuels.
 
     In April 1992, the Federal Energy Regulatory Commission ("FERC"), which
regulates natural gas transportation, issued Order No. 636, an order designed to
restructure the interstate natural gas transportation and marketing system and
remove various barriers and practices that have historically limited
non-pipeline natural gas sellers, including producers and marketing companies,
such as the Company and Vastar Gas, from effectively competing with interstate
pipelines. To date, Order No. 636 has not had any material adverse effect on the
Company. However, because the ultimate restructuring requirements that emerge
from the lengthy administrative and judicial review process may be significantly
different from those currently in effect, and because implementation of the
restructuring may vary by pipeline, it is not possible to predict what, if any,
effect the ultimate restructuring resulting from Order No. 636 will have on the
Company. Additional proceedings that might affect the natural gas industry are
pending before the FERC and the courts. The natural gas industry historically
has been very heavily regulated; therefore, there is no assurance that the less
stringent regulatory approach recently pursued by the FERC and Congress will
continue.
 
     In 1996, approximately half of the Company's production was located on
federal or Indian oil and gas leases, which are administered by various agencies
of the Department of Interior, such as the Minerals Management Service, the
Bureau of Land Management and the Bureau of Indian Affairs. Such leases are
often issued through competitive bidding, contain relatively standardized terms
and require compliance with detailed regulations and orders. Prior to commencing
drilling, lessees must obtain permits and approvals from the applicable federal
agency (as well as from other federal agencies such as the Coast Guard, Army
Corps of Engineers and the Environmental Protection Agency). These agencies have
promulgated regulations which require production facilities to meet stringent
engineering, construction and environmental specifications and which govern the
plugging and abandonment of wells and the removal of production facilities.
 
     The various states in which the Company operates regulate drilling and
operating activities (by requiring, among other things, drilling permits, bonds
and operations reports) and environmental and conservation matters (including
unitization and pooling of oil and gas properties and the establishment of
maximum production rates). Some states prorate production to the market demand
for oil and gas and such proration rules or orders may be detrimental to the
Company's profitability when such rules or orders prevent the Company from
producing quantities sufficient to meet its market opportunities. Some counties
and municipalities also regulate drilling and production operations.
 
     The Company's operations are also subject to extensive federal, state and
local laws and regulations relating to the generation, storage, handling,
emission, transportation and discharge of materials into the environment.
Permits are required for the operation of various facilities of the Company, and
these permits are subject to revocation, modification and renewal by issuing
authorities. Governmental authorities have the power to enforce compliance with
their regulations, and violations are subject to fines, injunctions or both. It
is possible that increasingly strict requirements will be imposed by
environmental laws and enforcement policies thereunder. It is not anticipated
that the Company will be required in the near future to expend amounts that are
material in relation to its total capital expenditures program by reason of
environmental laws and regulations, but inasmuch as such laws and regulations
are frequently changed, the Company is unable to predict the ultimate cost of
such compliance. The Company's domestic competitors are generally subject to the
same environmental, health and safety laws and regulations, and the Company
believes that its circumstances and potential expenditures are comparable to
those faced by its major domestic competitors. However, future
environmentally-related capital expenditure requirements, liabilities and costs
could be a major factor affecting the Company's future income and cash flow.
 
                                        9
<PAGE>   12
 
SECTION 29 TAX CREDITS
 
     Federal tax law provides an income tax credit against regular federal
income tax liability with respect to sales of the Company's production of
certain fuels produced from nonconventional sources (including natural gas from
coal seams and tight sands formations), subject to a number of limitations
("Section 29 Tax Credits"). Fuels qualifying for the credit must be produced
from wells drilled after December 31, 1979, and before January 1, 1993, and must
be sold before January 1, 2003. The basic credit, which is approximately $0.52
per MMBtu of natural gas, is phased out as the price of oil exceeds $23.50 per
barrel in 1979 dollars (adjusted for inflation), with complete phaseout if such
price exceeds $29.50 per barrel in 1979 dollars (similarly adjusted). Under this
formula, the commencement of phaseout would be triggered if the average price
for oil rose above approximately $45 per barrel in current dollars. The credit
for natural gas from coal seams is adjusted for inflation and is expected to be
approximately $1.02 per MMBtu for 1996. The credit for tight sands gas is not
adjustable and remained approximately $0.52 per MMBtu in 1996.
 
     The natural gas production from wells drilled on certain of the Company's
properties, primarily in the San Juan Basin, qualifies for the Section 29 Tax
Credit. The Company generated approximately $85.0 million of Section 29 Tax
Credits in 1996, approximately 90 percent of which was attributable to
production of natural gas from coal seams.
 
     The Company and its subsidiaries join with ARCO and its domestic
subsidiaries in filing a consolidated federal income tax return. The Company and
ARCO have entered into a tax sharing agreement (the "Tax Sharing Agreement"),
effective October 1, 1993, as amended effective June 1, 1995, relating to these
taxes. Under the Tax Sharing Agreement, the Company is able to use its Section
29 Tax Credits to reduce its federal income tax payments to ARCO (but, except as
stated below, not below zero) (i) to the extent that such credits would reduce
its liability on a stand-alone tax basis or (ii) if such credits would be
statutorily limited on a stand-alone tax basis, then to the extent that such
credits are used by the ARCO Tax Group (as defined in the Tax Sharing
Agreement). In addition, the Company is allowed to use its Section 29 Tax
Credits to reduce its federal income tax payments to ARCO below zero and receive
cash refunds from ARCO if the conditions described in (ii) above are met and if
such credits are generated by production from properties acquired by the Company
in the ordinary course of business on or after June 1, 1995; provided, however,
that the Company's ability to reduce its liability below zero and generate cash
refunds from ARCO is limited to a maximum of $9 million in 1995 and $15 million
per year thereafter.
 
     Under certain limitations of the current agreement, credits that cannot be
used by the Company on a current year basis are carried forward, and used to
reduce future federal income tax payments to ARCO in any subsequent year in
which the Company and ARCO join in filing a consolidated federal income tax
return.
 
     Subsequent to year end, ARCO and Vastar have agreed in principle to a
second amendment to the Tax Sharing Agreement. This amendment will remove
certain limitations under the original agreement and generally will allow Vastar
to receive payment for all Section 29 Tax Credits in the year generated. In
return the Company has agreed to a 3.25 percent reduction in the value of the
credits generated from properties acquired by the Company before June 1, 1995.
ARCO and Vastar have also agreed to apply the same reduction to the $61.4
million of Section 29 Tax Credits carried forward as of December 31, 1996 in
exchange for immediate payment upon execution of the second amendment.
 
HUMAN RESOURCES
 
     The Company had 1,054 employees as of December 31, 1996. The Company
believes its relationships with its employees are satisfactory. Employees
covered by collective bargaining agreements total 156 and are with the following
unions: Oil, Chemical and Atomic Workers International Union (52 employees); and
the Atlantic Independent Union (104 employees).
 
                                       10
<PAGE>   13
 
                      CAUTIONARY STATEMENT FOR PURPOSES OF
              THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
 
SAFE HARBOR CAUTIONARY STATEMENT
 
     Vastar desires to take advantage of the "safe harbor" provisions contained
in Section 27A of the Securities Act of 1933, as amended (the "1933 Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "1934 Act"),
and is including this statement herein in order to do so.
 
     From time to time, the Company's management or persons acting on the
Company's behalf may wish to make, either orally or in writing, forward-looking
statements (which may come within the meaning of Section 27A of the 1933 Act and
Section 21E of the 1934 Act), to inform existing and potential security holders
regarding various matters including, without limitation, projections regarding
future income, oil and gas production, production and sales volumes of the
Company's products, oil and gas reserves and the replacement thereof, capital
spending, as well as predictions as to the timing and success of specific
projects. Such forward-looking statements are generally accompanied by words
such as "estimate," "project," "predict," "believes," "expect," "anticipate,"
"goal" or other words that convey the uncertainty of future events or outcomes.
Forward-looking statements by their nature are subject to certain risks,
uncertainties and assumptions and will be influenced by various factors. Should
one or more of these forecasts or underlying assumptions prove incorrect, actual
results could vary materially. The factors below are believed to be important
factors (but not necessarily all the important factors) that could cause actual
results to differ materially from those expressed in any forward-looking
statement made by or on behalf of the Company. Unpredictable or unknown factors
not discussed herein could also have material adverse effects on actual results
of matters which are the subject of forward-looking statements. The Company does
not intend to update these cautionary statements.
 
  Volatility and Level of Hydrocarbon Commodity Prices
 
     The Company's projections as to the level of future earnings are based on
various assumptions as to the future prices of natural gas, NGLs and crude oil.
These price assumptions are used for planning purposes and the Company expects
they will change over time. Any substantial or extended decline in the actual
prices of natural gas, NGLs and/or crude oil could have a material adverse
effect on (i) the Company's financial position and results of operations
(including reduced cash flow and borrowing capacity), (ii) quantities of natural
gas, NGLs and crude oil reserves that may be economically produced and (iii) the
quantity of estimated proved reserves that may be attributed to the Company's
properties. These prices historically have been volatile and may vary based on
factors affecting commodities markets generally, changes in market demand and
fluctuations in political, regulatory and economic climates in one or more
regions throughout the world.
 
  Production Rates and Reserve Replacement
 
     Projecting future rates of gas and oil production is inherently imprecise.
Producing gas and oil reservoirs generally have declining production rates.
Production rates depend on a number of factors, including geological,
geophysical and engineering factors, weather, production curtailments or
restrictions, prices for natural gas, NGLs and crude oil, market demand and the
political, economic and regulatory climate.
 
     Another major factor affecting production rates is the Company's ability to
replace depleting reservoirs with new reserves through exploration success or
acquisitions. Exploration success is impossible to predict, particularly over
the short term, where results can vary widely year to year; moreover, the
ability to replace reserves over an extended period depends not only on the
total volumes found, but on the cost of finding and developing such reserves.
Depending on the general price environment for natural gas, NGLs and crude oil,
the Company's finding and development costs may not justify the use of resources
to explore for and develop such reserves. Acquisitions that yield cost-effective
and successful exploration or exploitation opportunities require assessment of
numerous factors, many of which are beyond the Company's control. There can be
no assurance that the Company's acquisition of property interests will be
successful and, if unsuccessful, that
 
                                       11
<PAGE>   14
 
such failure will not have an adverse effect on the Company's future results of
operations and financial condition. There can be no assurances as to the level
or timing of success, if any, that the Company will be able to achieve in
finding and developing or acquiring additional reserves.
 
  Reserve Estimates
 
     Proved gas and oil reserve quantities are based on estimates prepared by
the Company's engineers in accordance with guidelines established by the SEC.
The reserve data disclosed by the Company, either orally or in writing,
represent estimates only. There are numerous uncertainties inherent in
estimating quantities of proved gas and oil reserves and in projecting future
rates of production and timing of development expenditures, including many
factors beyond the control of the producer. Reservoir engineering is a
subjective process of estimating underground accumulations of gas and oil that
cannot be measured in an exact way. The accuracy of any reserve estimate is a
function of the quality of available data and of engineering and geological
interpretation and judgment. As a result, estimates made by different engineers
often vary. In addition, results of drilling, testing and production subsequent
to the date of an estimate may justify revision of such estimates, and any such
revision may be material. Accordingly, reserve estimates are generally different
from the quantities of gas and oil that are ultimately recovered.
 
  Laws and Regulation
 
     The Company's forward-looking statements are generally based upon the
assumption of a stable legal and regulatory environment. The Company's ability
to economically produce and market its gas and oil production is affected and
could possibly be restrained by a number of legal and regulatory factors,
including, but not limited to, federal and state laws and regulation of natural
gas and oil production, federal and state tax laws and regulations, state limits
on allowable rates of production by well or proration unit, as well as by laws
and regulations which may affect the amount of natural gas and oil available for
sale, the availability of adequate pipeline and other transportation and
processing facilities and the marketing of competitive fuels.
 
     The Company's operations are also subject to extensive federal, state and
local laws and regulations relating to the generation, storage, handling,
emission, transportation and discharge of materials into the environment. It is
possible that increasingly strict requirements will be imposed by environmental
laws and enforcement policies thereunder. The Company's forward-looking
statements are generally based upon the expectation that it will not be required
in the near future to expend amounts that are material in relation to its total
capital expenditures program by reason of environmental laws and regulations.
However, inasmuch as such laws and regulations are frequently changed, the
Company is unable to predict the ultimate cost of such compliance.
 
  Drilling and Operating Risks
 
     The Company's drilling operations are subject to various risks common to
the industry, including cratering, explosions, fires and uncontrollable flows of
oil, gas or well fluids. In addition, approximately half of the Company's
operations are currently offshore and subject to the additional hazards of
marine operations, such as capsizing, collision and damage or loss from severe
weather. The Company's drilling operations involve numerous risks, including the
risk that no commercially productive natural gas or oil reserves will be
encountered. The cost of drilling, completing and operating wells is often
uncertain, and drilling operations may be curtailed, delayed or canceled as a
result of a variety of factors including drilling conditions, pressure or
irregularities in formations, equipment failures or accidents and adverse
weather conditions.
 
  Competition
 
     The Company's forward-looking statements are generally based upon a stable
competitive environment. However, competition in the oil and gas industry is
intense. The Company actively competes for reserve acquisitions and exploration
leases, licenses and concessions, as well as in the gathering and marketing of
natural gas, NGLs and crude oil, sometimes against companies with greater
financial and other resources. The Company's competitors include the major oil
companies, independent oil and gas concerns, individual
 
                                       12
<PAGE>   15
 
producers, natural gas, NGLs and crude oil marketers and major pipeline
companies, as well as participants in other industries supplying energy and fuel
to industrial, commercial and individual consumers. To the extent the Company's
exploration and exploitation budget is lower than that of certain of its
competitors, the Company may be disadvantaged in effectively competing for
certain reserves, leases, licenses and concessions. From time to time, the level
of industry activity may result in a tight supply of labor or equipment required
to operate and develop oil and gas properties. For example, competition for
drilling rigs is keen in the Gulf of Mexico. Recently, the Company began to
experience increases in drilling rig rental rates due to the tight rig market in
the Gulf of Mexico. The availability of drilling rigs as well as the level of
drilling rig rates will have an effect on the Company's ability to achieve
success in its exploration and production activities.
 
     In marketing its production, the Company competes with other producers and
marketers on such factors as price, product availability, contract terms and
quality of service. In making projections with respect to natural gas, NGLs and
crude oil marketing, the Company assumes no material decrease in the
availability of natural gas, NGLs and crude oil for purchase.
 
ITEM 3. LEGAL PROCEEDINGS.
 
     1. Vastar, as successor in interest to ARCO, is a defendant in a lawsuit
that has been restyled Laura Lyon, et al. v. Amoco, et al., Case No. 93-CV-130,
in the District Court for LaPlata County (Durango), Colorado, and which was
originally filed in May 1993. Vastar is one of seven defendants in this case in
which the plaintiffs have alleged widespread methane gas contamination. On June
17, 1994, the trial court granted Vastar's motion to dismiss Vastar from the
litigation on the grounds, inter alia, that the court lacked subject-matter
jurisdiction over the claims asserted against Vastar. The plaintiffs filed
notice of appeal to the Colorado Court of Appeals and on February 22, 1996, the
Court affirmed the trial court's order dismissing the litigation. The plaintiffs
applied for a writ of certiorari to the Colorado Supreme Court and on August 28,
1996, the plaintiffs withdrew their application. The Colorado Court of Appeals
has remanded the case to the trial court for the determination of attorney's
fees due to Vastar and the other defendants from the plaintiffs. Vastar has been
named as a defendant in six additional lawsuits brought by individuals in United
States District Court for the District of Colorado. Vastar has filed motions to
dismiss the remaining lawsuits on the grounds that the court lacks
subject-matter jurisdiction or, in the alternative, to stay the proceedings
under the tribal exhaustion doctrine. On December 18, 1995, the United States
District Court granted Vastar's motion to stay and the remaining six plaintiffs
have filed a Notice of Appeal to the United States Court of Appeals for the
Tenth Circuit. The Tenth Circuit has dismissed the plaintiffs' appeal on the
basis that the order to stay entered by the District Court was not final and
therefore non-appealable.
 
     2. On October 11, 1995, Vastar met with the United States Environmental
Protection Agency, Region VIII ("EPA" or the "Agency"), to apprise the Agency of
certain results obtained from Vastar's internal self-evaluation and audit
program. These results concern issues associated with the Prevention of
Significant Deterioration ("PSD") permit program under the federal Clean Air Act
at Vastar's Ignacio Blanco Fruitland ("IBF") coal degasification operations.
These operations are located on the Southern Ute Indian Reservation in LaPlata
County in southwestern Colorado. Through its self-evaluation and audit program,
Vastar determined that a PSD permit may be required for the operation of certain
of its natural gas compression facilities associated with its IBF operations due
to unanticipated levels of carbon monoxide emissions.
 
     Under federal law, the EPA has the power to seek injunctive relief and
civil penalties for violations of the federal Clean Air Act. Liability for
failure to obtain a PSD permit under the Clean Air Act can be imposed without
regard to willfulness or negligence. The Company sought the benefits of the
EPA's "Voluntary Environmental Self-Policing and Self-Disclosure Interim Policy
Statement" ("Interim Policy Statement"), which management believed would allow
the Company to substantially reduce or avoid any punitive penalties, although
the EPA would still be entitled to recover any economic benefit associated with
noncompliance. On October 27, 1995, the Company made a written submittal to the
EPA pursuant to the Interim Policy Statement. In January 1997, the U.S.
Department of Justice, acting on behalf of the EPA, and the Company agreed to
settle the matter. Under the terms of the settlement, Vastar agreed to pay a
$137,949 civil penalty. This amount represents Vastar's economic benefit of
noncompliance, as the settlement reflected Vastar's avoidance of punitive
penalties under the Interim Policy Statement. In addition, ARCO, the previous
owner of
 
                                       13
<PAGE>   16
 
the natural gas compression facilities, agreed to pay a $519,463 civil penalty.
Under the terms of the settlement, the finalization of which is subject to
certain minor conditions precedent, neither Vastar nor ARCO admitted liability
with respect to the matter. A stipulation of settlement between the United
States and ARCO has been entered in the United States District Court for the
District of Colorado and the $519,463 ARCO civil penalty has been paid. In
connection with the October 1993 conveyance of the IBF facilities from ARCO to
Vastar, Vastar agreed to indemnify ARCO against certain claims or liabilities to
which ARCO could be subject relating to ARCO's historical ownership and
operation of the facilities. Pursuant to such agreement, Vastar has paid the
ARCO civil penalty.
 
     3. Vastar and its subsidiaries are involved in a number of other lawsuits,
all of which have arisen in the ordinary course of business in operating
Vastar's properties or the former ARCO Oil and Gas Company division and Vastar
Gas business affairs. Further, pursuant to the Cross-Indemnification Agreement
dated as of October 1, 1993, between Vastar and ARCO, Vastar has assumed any and
all liabilities incurred before or after the effective date of that certain
General Conveyance and Assumption Agreement, dated October 8, 1993, as modified
as of December 13, 1993, and December 22, 1993, between Vastar and ARCO that are
associated with the ownership or operation of the Subject Properties as defined
therein, except for certain scheduled litigation and other liabilities.
 
     The Company does not believe that any ultimate liability resulting from any
of the claims and suits described or referred to in paragraphs 1 through 3 above
will have a material adverse effect on the financial position or results of
operation of the Company.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
     No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
 
                      EXECUTIVE OFFICERS OF THE REGISTRANT
 
     Set forth below is certain information about the executive officers (as
such term is defined in Rule 3b-7 promulgated under the Securities Exchange Act
of 1934, as amended) of the Company as of March 1, 1997.
 
<TABLE>
<CAPTION>
    NAME, AGE AND PRESENT                     BUSINESS EXPERIENCE DURING PAST
  POSITION WITH THE COMPANY            FIVE YEARS AND PERIOD SERVED AS OFFICER(A)(B)
  -------------------------            ---------------------------------------------
<S>                             <C>
Michael E. Wiley, 46..........  Mr. Wiley was elected Chairman of the Board in December 1996
  Chairman of the Board,        and has been a Director and the President of the Company
  President, Chief Executive    since September 1993 and Chief Executive Officer of the
  Officer and Director          Company since January 1994. He held the position of Senior
                                Vice President of ARCO from June 1993 to June 1994. He held
                                the position of President of ARCO Oil and Gas Company from
                                June to October 1993. Previously, from 1991 to June 1993, he
                                was a Vice President of ARCO and Manager of ARCO Exploration
                                and Production Technology. From 1989 to 1991, he was Vice
                                President of ARCO Oil and Gas Company's Southern District.
                                Mr. Wiley joined ARCO in 1972.
 
Charles D. Davidson, 47.......  Mr. Davidson has been Senior Vice President of the Company
  Senior Vice President         since September 1993 and a Director of the Company since
  and Director                  March 1994. He previously held the position of Senior Vice
                                President of the Eastern District for ARCO Oil and Gas
                                Company from December 1992 to October 1993. From 1988 to
                                December 1992, he held various positions with ARCO Alaska,
                                Inc. Mr. Davidson joined ARCO in 1972.
 
William A. Lang, 48...........  Mr. Lang was elected Senior Vice President in January 1997.
  Senior Vice President         He has been Vice President of the Company from March 1994
                                until January 1997 and President of Vastar Gas Marketing,
                                Inc. (formerly ARCO Natural Gas Marketing, Inc.) since April
                                1992. Prior to joining ARCO in 1992, Mr. Lang was Director
                                of Marketing and Transportation Services for Tenneco Gas
                                from 1986 to 1992.
</TABLE>
 
                                       14
<PAGE>   17
<TABLE>
<CAPTION>
    NAME, AGE AND PRESENT                     BUSINESS EXPERIENCE DURING PAST
  POSITION WITH THE COMPANY            FIVE YEARS AND PERIOD SERVED AS OFFICER(A)(B)
  -------------------------            ---------------------------------------------
<S>                             <C>
Steven J. Shapiro, 44.........  Mr. Shapiro has been Senior Vice President and Chief
  Senior Vice President, Chief  Financial Officer of the Company since December 1993 and a
  Financial Officer and         Director of the Company since January 1994. He was Treasurer
Director                        of the Company from January 1994 until December 1995. He was
                                the President of ARCO Coal Australia Inc. from October 1991
                                to December 1993. Previously, he held the position of Vice
                                President of Planning of ARCO from 1990 to October 1991.
                                From 1988 to 1990, he was Assistant Treasurer for ARCO
                                serving in both Los Angeles and London. Mr. Shapiro joined
                                ARCO in 1977.
 
Albert D. Hoppe, 52...........  Mr. Hoppe has been Vice President and General Counsel since
  Vice President, General       May 1, 1994 and Secretary of the Company since May 25, 1994.
  Counsel and Secretary         He served as the General Attorney for the ARCO Coal Company
                                from June 1992 through April 1994. Previously, from 1976
                                until 1992, he held various positions in the ARCO legal
                                department. Prior to joining ARCO in 1976, he was an
                                Assistant United States Attorney in Kansas City, Missouri.
 
Joseph P. McCoy, 45...........  Mr. McCoy has been Vice President and Controller of the
  Vice President and            Company since June 1994 and was designated Principal
Controller                      Accounting Officer, effective July 1, 1994. He held the
                                position of Vice President of Finance, Planning and Control
                                of ARCO Alaska, Inc. from November 1989 to May 1994.
                                Previously, he was Assistant Controller of ARCO from
                                February 1987 to November 1989. From 1984 to 1987, Mr. McCoy
                                served as Controller of ARCO Coal Company and then as
                                Controller of ARCO Transportation Company. Mr. McCoy joined
                                ARCO in 1974.
Robert P. Strode, 40..........  Mr. Strode was elected Vice President in February 1997. He
  Vice President                held the position of Managing Director, Exploration, ARCO
                                British Limited from January 1996 to February 1997. From
                                June 1994 to January 1996, he was Vice President,
                                Exploration and Land, ARCO Alaska, Inc. From September 1993
                                to June 1994, he was North Alaska Exploration Manager, ARCO
                                Alaska, Inc. From 1991 to September 1993, he was Manager,
                                Exploration-Offshore, for ARCO Oil and Gas Company and, from
                                1986 to 1991, he was District Geophysicist, both onshore and
                                offshore, of ARCO Oil and Gas Company. Mr. Strode joined
                                ARCO in 1979.
</TABLE>
 
---------------
 
(a) ARCO division names used in the descriptions of business experience of
    executive officers of the Company are the names which were in effect at the
    time such officers held such positions. In some instances these ARCO
    divisions have been combined or reorganized and, accordingly, activities
    thereof are presently conducted under different division names.
 
(b) The By-Laws of the Company provide that each officer shall hold office until
    the officer's successor is elected or appointed and qualified or until the
    officer's death, resignation or removal by the Board of Directors.
 
                                       15
<PAGE>   18
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
 
<TABLE>
<CAPTION>
                                        1996                            1995
                            ----------------------------    ----------------------------
                            1STQ    2NDQ    3RDQ    4THQ    1STQ    2NDQ    3RDQ    4THQ
                            ----    ----    ----    ----    ----    ----    ----    ----
<S>                         <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>
Common Stock:
  Market Price per share
     High.................  $33 3/8 $38     $38 3/4 $40 3/8 $27 3/4 $33     $32 1/2 $31 7/8
     Low..................  $28     $32 1/2 $31 1/2 $32 1/4 $21 7/8 $26 1/2 $27 5/8 $26 1/2
</TABLE>
 
     The principal market in which shares of Vastar common stock, $0.01 par
value ("Common Stock"), are traded is the New York Stock Exchange (ticker
symbol: VRI). Prices in the foregoing table are from the New York Stock Exchange
composite tape.
 
     As of March 3, 1997, the approximate number of holders of record of Common
Stock was 88 and the high price per share was $29 1/4 and the low price per
share was $29.
 
     The Company has paid regular quarterly cash dividends as follows:
 
<TABLE>
<CAPTION>
                                           1STQ      2NDQ      3RDQ      4THQ
                                          ------    ------    ------    ------
<S>                                       <C>       <C>       <C>       <C>
1995....................................  $0.075    $0.075    $0.075    $0.075
1996....................................  $0.075    $0.075    $0.075    $0.075
</TABLE>
 
     The declaration and payment of dividends are at the discretion of the Board
of Directors of the Company and the amount thereof will depend on the Company's
results of operations, financial condition, contractual restrictions, cash
requirements, future prospects and other factors deemed relevant by the Board of
Directors. In addition, the agreement relating to the Company's $1.1 billion
bank credit facility (the "Credit Agreement") contains financial and other
covenants, including covenants that may, under certain circumstances, have the
effect of limiting the Company's ability to pay dividends. The Credit Agreement
has been filed with the Securities and Exchange Commission, which filings have
been incorporated by reference as an exhibit to this report on Form 10-K.
 
ITEM 6. SELECTED FINANCIAL DATA.
 
     The selected financial data set forth below for the Company for the five
years ended December 31, 1996 should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto included elsewhere in
this report on Form 10-K.
 
<TABLE>
<CAPTION>
                                                 1996      1995      1994      1993      1992
                                                -------   -------   -------   -------   -------
                                                (MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS
                                                                  AND RATIOS)
<S>                                             <C>       <C>       <C>       <C>       <C>
Net sales and other operating revenues........   $  946    $  703    $  790    $  779    $  742
Total expenses (excluding income taxes).......      754       683       663       666       737
Net income(1).................................      220       103       149       117        32
Earned per share(2)...........................     2.26      1.06        --        --        --
Cash dividends per common share...............     0.30      0.30     0.075        --        --
Total assets..................................    1,939     1,552     1,604     1,360     1,366
Special dividends to ARCO(3)..................       --        --        70     1,305        --
Long-term debt................................      778       759     1,050     1,250        --
Ratio of earnings to fixed charges(4).........     5.07      1.99      3.32        --        --
</TABLE>
 
---------------
 
(1) Includes, for 1996 a $9.4 million and for 1995, a $23.1 million pre-tax
    charge for impairment of oil and gas properties. Additionally, 1995 includes
    the receipt of a $21.0 million pre-tax settlement in connection with the
    termination of a disputed long-term acreage-dedicated gas sales contract.
 
                                       16
<PAGE>   19
 
(2) Earned per share amounts prior to the year ended December 31, 1995, have
    been omitted because Vastar was a wholly-owned subsidiary of ARCO until June
    27, 1994.
 
(3) Prior to October 1, 1993, there were no special dividends to ARCO because
    all cash receipts of Vastar were submitted to ARCO and cash disbursements
    were funded by ARCO.
 
(4) The ratios were computed by dividing earnings by fixed charges. For this
    purpose, earnings include income before income taxes and fixed charges.
    Fixed charges include interest, amortization of debt expenses and the
    estimated interest component of rentals. Prior to the inception of the
    Company on October 1, 1993, the determination of fixed charges is not
    applicable in that the Company had no incurred debt. The Company's ratio of
    earnings to fixed charges for the three months ended December 31, 1993 was
    1.22.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
 
     The following information should be read in connection with the information
contained in the Company's Consolidated Financial Statements and the Notes
thereto.
 
GENERAL
 
     Vastar was formed out of the reorganization of ARCO's lower 48 exploration
and production operations, when ARCO transferred to Vastar certain producing
properties, developed and undeveloped acreage, related liabilities and working
capital.
 
     Sales and production volumes and price statistics for the specified periods
were as follows:
 
<TABLE>
<CAPTION>
                                                           FOR THE YEARS ENDED DECEMBER 31,
                                                           --------------------------------
                                                             1996        1995        1994
                                                           --------    --------    --------
<S>                                                        <C>         <C>         <C>
Natural Gas
  Sales (MMcfd)..........................................     2,940       2,140       2,024
  Average production (MMcfd).............................       872         810         782
  Average sales price (per Mcf)..........................    $ 2.34      $ 1.63      $ 1.91
  Average wellhead price (per Mcf).......................    $ 1.81      $ 1.38      $ 1.84
Crude Oil
  Sales (MBbld)..........................................     101.2       102.1        32.7
  Average production (MBbld).............................      34.2        32.7        32.7
  Average realized price (per Bbl).......................    $21.49      $18.43      $16.49
NGLs
  Average production (MBbld).............................      14.6        12.6        10.8
  Average realized price (per Bbl).......................    $15.01      $11.39      $11.15
</TABLE>
 
                                       17
<PAGE>   20
 
     The following table sets forth the statements of income for the years ended
December 31, 1996, 1995 and 1994. These statements of income are derived from
the audited Consolidated Financial Statements included herein.
 
<TABLE>
<CAPTION>
                                                      FOR THE YEARS ENDED DECEMBER 31,
                                                      ---------------------------------
                                                        1996         1995        1994
                                                      ---------    --------    --------
                                                            (MILLIONS OF DOLLARS)
<S>                                                   <C>          <C>         <C>
REVENUES
Natural gas
  Sales.............................................  $ 2,514.5    $1,273.0    $1,416.6
  Purchases.........................................   (1,860.5)     (805.0)     (831.3)
  Delivery expense..................................      (57.0)      (38.0)      (36.1)
                                                      ---------    --------    --------
     Net sales......................................      597.0       430.0       549.2
Crude oil
  Sales.............................................      777.3       656.4       196.7
  Purchases.........................................     (503.9)     (429.8)       (2.0)
  Delivery expense..................................       (4.4)       (6.3)         --
                                                      ---------    --------    --------
     Net sales......................................      269.0       220.3       194.7
NGLs and other
  Sales.............................................       90.0        64.0        46.6
  Purchases/other...................................      (10.2)      (11.6)       (0.2)
                                                      ---------    --------    --------
     Net sales......................................       79.8        52.4        46.4
                                                      ---------    --------    --------
Net sales and other operating revenues..............      945.8       702.7       790.3
Other revenues......................................       20.8        36.8        26.2
                                                      ---------    --------    --------
     Net revenues...................................      966.6       739.5       816.5
EXPENSES
Operating expenses..................................      136.1       127.9       134.4
Exploration expenses................................      186.4       151.2       138.7
Selling, general and administrative expenses........       62.0        51.2        55.9
Taxes other than income taxes.......................       41.2        32.7        36.8
Depreciation, depletion and amortization............      275.9       263.3       230.8
Interest............................................       52.3        57.0        66.3
                                                      ---------    --------    --------
     Total expenses.................................      753.9       683.3       662.9
                                                      ---------    --------    --------
Income before income taxes..........................      212.7        56.2       153.6
Income tax provision (benefit)......................       (7.3)      (46.4)        4.3
                                                      ---------    --------    --------
     Net income.....................................  $   220.0    $  102.6    $  149.3
                                                      =========    ========    ========
</TABLE>
 
RESULTS OF OPERATIONS
 
  YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
 
     Net income for 1996 of $220.0 million more than doubled when compared to
1995. The earnings increase primarily reflected higher commodity prices and
production volumes, partially offset by higher production and exploration costs.
 
     Net sales and other operating revenues increased by $243.1 million to
$945.8 million for 1996, primarily as a result of higher prices and sales
volumes for natural gas, crude oil and NGLs.
 
     Natural gas sales increased 98 percent to $2,514.5 million during 1996. The
higher revenues were a result of higher trading activity levels and an increase
in commodity prices. Reflected in natural gas revenues for 1996 was the
unfavorable impact of $55.1 million pre-tax or $0.05 per Mcf sold, related to
the Company's natural gas price hedging activities.
 
                                       18
<PAGE>   21
 
     Natural gas purchases increased in 1996 by $1,055.5 million from 1995 to
$1,860.5 million. This increase was a result of the combined effect of a 56
percent increase in natural gas purchased volumes, which rose to an average of
approximately 2.1 Bcfd to support the higher trading activity levels, and a 48
percent increase in the cost of gas purchased, which was driven by higher
commodity prices.
 
     Natural gas production for 1996 averaged 872 MMcfd, up eight percent from
the previous year. Contributing to the increase were the continuing growth of
San Juan Basin production, the January 1996 start-up of the High Island 177
extension discovery and ongoing exploitation successes throughout Vastar's core
areas. These improvements more than offset natural field declines during 1996.
 
     Crude oil sales in 1996 were $777.3 million, an increase of 18 percent from
the prior year primarily, as a result of higher commodity prices.
 
     Crude oil production was 34.2 MBbld in 1996, an increase of five percent
from 1995. The increase reflected higher production primarily from the South
Pass 60 and West Delta 106/107 fields, partially offset by natural field
declines.
 
     Natural gas liquids and other sales were $90.0 million for 1996, reflecting
a 41 percent increase over the prior year. This increase resulted from a
combination of higher NGL prices and a 16 percent increase in production
volumes. The increase in production volumes, reflected a higher ownership in an
onshore gas plant and increased processing volumes.
 
     Other revenues of $20.8 million decreased $16.0 million in 1996 as compared
to 1995. The 1996 other revenues were generated primarily from leasing
undeveloped mineral fee acreage in East Texas. The 1995 other revenues were
generated primarily from the receipt of a $21.0 million payment in settlement
upon the termination of a disputed long-term acreage-dedicated gas sales
contract.
 
     Exploration expenses were $186.4 million compared to $151.2 million for
1995. The $35.2 million increase was primarily related to higher seismic data
purchases and dry hole costs associated with the increased exploration
activities in 1996. During 1996, the Company's expenditures for seismic data
increased 63 percent to $45.0 million as a result of tripling its onshore
seismic database and increasing its offshore seismic database by 70 percent. Of
the $45.0 million, 26 percent was attributable to investments required to
establish a presence in the Deepwater Gulf of Mexico play.
 
     Selling, general and administrative costs increased by $10.8 million to
$62.0 million in 1996. This increase was primarily a result of the expansion of
Vastar's marketing services.
 
     Taxes other than income taxes increased $8.5 million during 1996 primarily
as a result of higher revenues.
 
     Depreciation, depletion and amortization increased in 1996 to $275.9
million compared to $263.3 million in 1995 primarily due to increased volumes.
Included in these costs was a $9.4 million and a $23.1 million non-cash pre-tax
charge for 1996 and 1995, respectively, for the impairment of the Company's oil
and gas properties and facilities.
 
     The income tax benefit of $7.3 million in 1996 reflected higher pre-tax
earnings and higher Section 29 Tax Credits as compared to 1995. The Company
recognized $85.0 million and $67.0 million for 1996 and 1995, respectively, of
Section 29 Tax Credits for non-conventional fuels. The increase in tax credits
in 1996 was largely the result of increasing San Juan coalbed methane
production.
 
  YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
 
     Net income for 1995 was $102.6 million compared to $149.3 million in 1994.
This decrease primarily reflects the unfavorable impact of lower natural gas
prices realized in 1995.
 
     Natural gas sales decreased $143.6 million in 1995, primarily as a result
of a $0.28 per Mcf decrease in average sales prices from $1.91 in 1994 to $1.63
in 1995. Included in the 1994 average sales price were hedging gains of $0.06
per Mcf sold. This decrease was partially offset by a six percent increase in
sales volumes to over 2.1 Bcfd reflective of increased production and stepped-up
trading activity by Vastar Gas.
 
                                       19
<PAGE>   22
 
     Natural gas purchases decreased by $26.3 million, or three percent, from
1994 levels, notwithstanding a seven percent increase in natural gas purchase
volumes to an average of approximately 1.3 Bcfd necessary to meet higher sales
levels. The impact of increased purchase volumes was more than offset by a nine
percent decrease in the cost of gas purchased.
 
     Natural gas production increased 28 MMcfd to 810 MMcfd in 1995. Offshore
natural gas production remained relatively constant at 328 MMcfd during 1995,
compared to 330 MMcfd during 1994. Field declines were offset by increased
production from the Mustang Island 805 field, the fourth quarter 1994 start-up
of South Marsh Island 33 and the 1995 start-up of Mustang Island 789. Onshore
production increased 30 MMcfd to 482 MMcfd. This increase was primarily due to
increased coalbed methane gas production in the San Juan Basin, reflecting
continued de-watering of the coal seams and further projects to debottleneck and
expand gas gathering and compression facilities.
 
     Crude oil sales increased $459.8 million and 69.4 MBbld, over three times
1994 levels. Crude oil purchases were $429.8 million in 1995, up from $2.0
million in 1994, reflecting an increase in purchase volumes of 69.1 MBbld. These
increases primarily reflect the Company's exchange barrel transactions which
occurred for the first time in 1995 as a result of the Company's decision to
begin in-house marketing of its crude oil in January 1995. The purchase and sale
of exchange barrels, when available, are used as an alternative to physical
transportation of the Company's crude oil production.
 
     Crude oil production was flat year to year and averaged 32.7 MBbld in 1995.
Production from the start-up of the West Delta 106/107 and South Marsh Island 33
fields offset the effects of natural field decline.
 
     The net revenue contribution from these crude oil production and marketing
activities was $220.3 million, up 13 percent from 1994, resulting in an average
realized price for the Company's crude oil production of $18.43 per barrel in
1995, a 12 percent increase over 1994. These increases reflect not only stronger
crude oil commodity prices as compared to 1994, but also the premium generated
by value-added services from crude oil marketing activities.
 
     NGLs increased $17.4 million, primarily as a result of increased production
volumes and higher prices. NGLs purchases increased to $11.6 million from $0.2
million in 1994, reflecting the recognition of the purchase and resale of
royalty and joint owners share of NGLs volumes which were purchased directly by
ARCO in 1994 and prior periods.
 
     NGLs production was 12.6 MBbld in 1995, an increase of 17 percent over the
prior year. The higher volumes resulted from increased NGLs processing in order
to capitalize on the favorable NGLs/natural gas price differentials that the
industry experienced in 1995.
 
     Other revenues increased $10.6 million to $36.8 million during 1995. This
increase was due to the $21.0 million received in settlement upon the
termination of a disputed long-term acreage-dedicated gas sales contract,
partially offset by a decrease in interest income as a result of reduced cash
balances in 1995.
 
     Exploration expenses increased $12.5 million in 1995. This increase is
primarily due to increased seismic data gathering activity and higher dry hole
costs associated with the increased exploration budget for 1995. These increased
expenses were partially offset by lower undeveloped leasehold amortization
resulting from a longer life expectancy of the leasehold base.
 
     Depreciation, depletion and amortization increased $9.4 million from 1995
to 1994, primarily due to higher production volumes.
 
     In the fourth quarter of 1995, Vastar adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." As a result, the Company
recognized a non-cash pre-tax charge related to its oil and gas properties of
$23.1 million.
 
     The decrease in interest expense is due to the reduction in long-term debt
from $1.05 billion at December 31, 1994, to a balance of $759.4 million at
December 31, 1995, partially offset by interest rate increases.
 
                                       20
<PAGE>   23
 
     The tax benefit of $46.4 million during 1995 and the tax provision of $4.3
million in 1994 include $67.0 million and $52.0 million, respectively, of
Internal Revenue Code Section 29 tax credits for non-conventional fuels. During
1995, Vastar received a reimbursement of $12.6 million from ARCO for estimated
federal income tax payments made in 1994.
 
RISK MANAGEMENT
 
     From time to time, the Company uses various hedging arrangements,
predominantly natural gas and crude oil price swaps, to manage the Company's
exposure to price risk from its natural gas and petroleum liquids production.
These hedging arrangements have the effect of locking in for specified periods
(at predetermined prices or ranges of prices) the prices that the Company will
receive for the volumes to which the hedge relates. As a result, while these
hedging arrangements are structured to reduce the Company's exposure to
decreases in price associated with the hedged commodity, they can also limit the
benefit the Company might otherwise have received from any price increases
associated with the hedged commodity.
 
     Vastar Gas also uses certain financial instruments, such as natural gas
price swaps and futures contracts, to manage its fixed-price purchase and sale
commitments, as well as to provide fixed-price commitments as a service to its
customers and suppliers. Although Vastar Gas generally attempts to balance its
fixed-price physical and financial purchase and sales contracts in terms of
contract volumes and timing of delivery obligations, net open positions may
exist from time to time. Vastar Gas has established specific limits relative to
these net open positions and has established internal controls to monitor such
positions against established limits. The limits require that Vastar Gas' net
open position not exceed the volume of production controlled by the Company.
However, to the extent that Vastar Gas has an open position, the Company may be
exposed to risk from fluctuating market prices.
 
     Natural gas spot prices fluctuated between $1.69 per Mcf and $12.50 per Mcf
(Henry Hub) and crude oil prices fluctuated between $17.45 per Bbl and $28.10
per Bbl (NYMEX-WTI-at-Cushing) in 1996. The Company realized approximately $37.1
million and $5.6 million of pre-tax losses in 1996 and 1995, respectively, as a
result of the various hedging transactions for natural gas and crude oil. Since
these transactions were considered to be hedges on production, these losses are
included in sales and other operating revenues and are reflected in the average
sales price of the particular products.
 
     As of December 31, 1996, the Company had entered into a series of natural
gas swap agreements covering an average of approximately 125 MMcfd of its
natural gas production from January 1, 1997 to December 31, 1997, and
approximately 150 MMcfd of its natural gas production for the period January 1,
1998 through December 31, 1998. These swap agreements serve as a hedge which
secures sales prices averaging approximately $1.92 per Mcf for 1997 and $2.07
per Mcf for 1998. In addition, the Company has entered into various gas price
collar agreements covering an average of 133 MMcfd of its January 1, 1997
through March 31, 1997 production and 50 MMcfd of its April 1, 1997 through
December 31, 1997 production. These agreements have a floor which will allow the
Company to receive no less than an average of $2.37 per Mcf and a ceiling which
will allow the Company to receive no more than an average of $2.75 per Mcf on
the related first quarter 1997 production and no less than an average of $2.07
per Mcf and no more than an average of $2.33 per Mcf on the related second to
fourth quarter 1997 production. The Company has also entered into a series of
production-location specific natural gas swaps covering an average of
approximately 115 MMcfd of its January 1, 1997 through March 31, 1997 production
and 85 MMcfd of its April 1, 1997 through December 31, 1997 production. These
swap agreements serve as a hedge which secures sales prices averaging
approximately $2.15 per Mcf during the first quarter of 1997 and $1.82 per Mcf
during the period April 1, 1977 through December 31, 1997.
 
     As of December 31, 1996, the Company has entered into oil price collar
agreements covering 15 MBbld of its January through June 1997 crude oil
production. These agreements have a floor which will allow the Company to
receive no less than an average of $20.50 per barrel on the related production
and a ceiling which will allow the Company to receive no more than an average of
$24.25 per barrel (each on a WTI at Cushing basis).
 
                                       21
<PAGE>   24
 
     Based on forward price quotes from brokers and NYMEX forward prices as of
December 31, 1996, the deferred pre-tax loss to the Company for the hedged
transactions for 1997 and 1998 would be $28.7 million for natural gas and $0.9
million for crude oil. The actual gains or losses realized by the Company from
such hedges may vary significantly from the foregoing amounts due to the
fluctuation of prices in the commodity markets.
 
     Since December 31, 1996, the Company has entered into additional natural
gas swap agreements. These agreements cover an average of 25 MMcfd of the
Company's San Juan Basin natural gas production for the period April 1, 1997
through October 31, 1997 and an average of 30 MMcfd of the Company's production
for the period April 1, 1998 through September 30, 1998. These swap agreements
serve to secure an average price of $1.80 per Mcf and $2.18 per Mcf for the 1997
and 1998 periods, respectively.
 
     Since December 31, 1996, the Company has executed a gas price collar
covering 30 MMcfd of its natural gas production for the period April 1, 1998
through October 31, 1998. This agreement secures a price in which the Company
will receive no less than $1.95 per Mcf and no more than $2.21 per Mcf for the
subject gas during this time period.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     During 1996, cash flow from operations was $533.3 million, compared to
$463.7 million in 1995. The increase was primarily the result of higher net
income, partially offset by increased working capital levels.
 
     Working capital was $55.4 million at December 31, 1996 and $(6.1) million
at December 31, 1995. The increase in working capital was primarily a result of
increased account receivables driven by higher prices and volumes in 1996.
 
     Net cash used in investing activities was $506.7 million in 1996, a 24
percent increase over 1995, primarily as a result of increased property
acquisitions. Property acquisitions in 1996 included $35.0 million for the
acquisition of additional working interest in the West Cameron 66 field, $25.7
million for deepwater leases and $12.3 million for the purchase of additional
property in the Spider and Logansport fields. In addition, exploration and
development drilling investment increased due to a 21 percent increase in the
number of gross exploration and development wells (including recompletions)
drilled.
 
     Additions to oil and gas properties and equipment (including dry hole
costs) in 1996 totaled $522.2 million.
 
     CAPITAL SPENDING SUMMARY
 
<TABLE>
<CAPTION>
                                                              FOR THE YEARS ENDED
                                                           --------------------------
                                                            1996      1995      1994
                                                           ------    ------    ------
                                                                   (MILLIONS)
<S>                                                        <C>       <C>       <C>
Exploratory drilling.....................................  $138.1    $116.7     $94.6
Development drilling.....................................   202.9     183.9     154.8
Property acquisitions....................................   119.3      69.9      30.9
Other additions..........................................    61.9      43.9      46.3
                                                           ------    ------    ------
          Total additions to property, plant and
            equipment....................................   522.2     414.4     326.6
Seismic..................................................    45.0      27.6       9.3
                                                           ------    ------    ------
          Total capital program..........................  $567.2    $442.0    $335.9
                                                           ======    ======    ======
</TABLE>
 
     The Company's 1997 planned total capital spending program is $585.0
million. Future capital expenditures remain subject to business conditions
affecting the industry, particularly changes in prices and demand for natural
gas and crude oil. The Company believes it can currently fund the 1997 capital
spending program as well as continue current production rates at recent market
prices. The Company will continue to monitor prices and evaluate options should
prices decline. It is expected that future cash requirements for capital
 
                                       22
<PAGE>   25
 
expenditures, dividends and debt payments will come from operating activities,
existing cash balances and future financings.
 
     Cash flow used in financing activities was $10.0 million in 1996,
reflecting the payment of cash dividends, partially offset by a slight increase
in the Company's long-term debt. In 1995, cash flow used in financing was $319.9
million reflecting the paydown of long-term debt (net of new borrowings) and the
payment of dividends.
 
     In the fourth quarter of 1996, the Company established a $1.1 Billion
Commercial Paper Program for the private placement to accredited investors of up
to $1.1 billion (outstanding at any one time) of unsecured notes with maturities
of up to 270 days from date of issue (the "Notes"). In the Commercial Paper
Placement Agency Agreements relating to the program, the Company has agreed to
maintain credit lines sufficient to support payment of the Notes. The proceeds
from the Commercial Paper Program were used to pay down the debt incurred under
the Revolving Credit Facility. At December 31, 1996, the Company had $554.0
million of commercial paper notes outstanding under the program. The effective
rate of commercial paper borrowing during 1996 averaged 5.6 percent (6.0 percent
at December 31, 1996). At December 31, 1996 the Company had a $1.1 billion line
of credit available under the Revolving Credit Facility and no debt outstanding
under this facility. The effective rate of this borrowing during 1996 averaged
5.8 percent.
 
     In the second quarter of 1995, the Company established a $250 million
Medium-Term Note Program. In November 1996, the Company issued $75 million of
6.95 percent unsecured Notes, due November 2006. The net proceeds were used to
pay down a portion of the debt incurred under the Company's Commercial Paper
Program and other general obligations of the Company.
 
     In February 1997, the Company issued $75 million of 6.96 percent unsecured
Notes, due February 2007 pursuant to the Medium-Term Note Program. The net
proceeds were used to pay down debt incurred under the Company's Commercial
Paper Program and other general obligations of the Company.
 
     In September 1996, the Company entered into a contract for the major
upgrade and operation of a semisubmersible drilling rig for a three-year deep
water drilling program in the Gulf of Mexico, commencing late 1997. This
contract along with other contracts for support equipment are anticipated to
cost approximately $160 million over the term of the contract.
 
ENVIRONMENTAL MATTERS
 
     At December 31, 1996, $145.5 million had been accrued for the total
estimated cost, net of salvage value, of plugging and abandoning wells,
dismantling platforms and facilities as required by contract, regulation or law,
and the estimated costs of restoration and reclamation of land associated with
such facilities. This accrual for dismantlement and restoration costs includes a
component for compliance with environmental laws and regulations. The
environmentally related costs included in the dismantlement and restoration
accrual are for the abandonment and dismantlement of both onshore and offshore
well sites. These costs include the removal of contaminants and the restoration
of the site. See Note 8 of Notes to Consolidated Financial Statements.
 
     During 1996, 1995 and 1994, the Company did not incur any significant
charges to income for environmental remediation costs and made no related
payments. At December 31, 1996, the Company did not have a separate
environmental remediation reserve for Superfund or similar clean-up sites. See
Note 2 of Notes to Consolidated Financial Statements regarding Dismantlement,
Restoration and Reclamation Costs.
 
     On the basis of management's best assessment of the ultimate amount and
timing of the contingencies associated with environmental matters, any expenses
or judgments related to such matters are not expected to have a material adverse
effect on the Company's financial condition, results of operations or cash
flows.
 
                                       23
<PAGE>   26
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
CONSOLIDATED FINANCIAL STATEMENTS
  Report of Independent Accountants.........................    25
  Consolidated Statement of Income for Each of the Three
     Years in the Period Ended December 31, 1996............    26
  Consolidated Balance Sheet as of December 31, 1996 and
     1995...................................................    27
  Consolidated Statement of Cash Flows for Each of the Three
     Years in the Period Ended December 31, 1996............    28
  Consolidated Statement of Stockholders' Equity (Deficit)
     for Each of the Three Years in the Period Ended
     December 31, 1996......................................    29
  Notes to Consolidated Financial Statements................    30
  Supplemental Information -- Oil & Gas Producing Activities
     (Unaudited)............................................    46
</TABLE>
 
                                       24
<PAGE>   27
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Stockholders and Board of Directors of
Vastar Resources, Inc.:
 
     We have audited the accompanying consolidated balance sheet of Vastar
Resources, Inc. as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity (deficit) and cash flows for each of
the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Vastar
Resources, Inc. as of December 31, 1996 and 1995, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
 
     As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for the impairment of long-lived assets
in 1995.
 
                                            /s/ COOPERS & LYBRAND L.L.P.

                                            COOPERS & LYBRAND L.L.P.
 
Houston, Texas
February 12, 1997
 
                                       25
<PAGE>   28
 
                             VASTAR RESOURCES, INC.
 
                        CONSOLIDATED STATEMENT OF INCOME
 
<TABLE>
<CAPTION>
                                                              FOR THE YEAR ENDED DECEMBER 31,
                                                              --------------------------------
                                                                1996        1995        1994
                                                              --------    --------    --------
                                                              (MILLIONS OF DOLLARS, EXCEPT PER
                                                                       SHARE AMOUNTS)
<S>                                                           <C>         <C>         <C>
REVENUES
Net sales and other operating revenues......................    $945.8      $702.7      $790.3
Other revenues..............................................      20.8        36.8        26.2
                                                                ------      ------      ------
          Net revenues......................................     966.6       739.5       816.5
                                                                ------      ------      ------
EXPENSES
Operating expenses..........................................     136.1       127.9       134.4
Exploration expenses........................................     186.4       151.2       138.7
Selling, general and administrative expenses................      62.0        51.2        55.9
Taxes other than income taxes...............................      41.2        32.7        36.8
Depreciation, depletion and amortization....................     275.9       263.3       230.8
Interest....................................................      52.3        57.0        66.3
                                                                ------      ------      ------
          Total expenses....................................     753.9       683.3       662.9
                                                                ------      ------      ------
Income before income taxes..................................     212.7        56.2       153.6
Income tax provision (benefit)..............................      (7.3)      (46.4)        4.3
                                                                ------      ------      ------
          Net income........................................    $220.0      $102.6      $149.3
                                                                ======      ======      ======
Earned per share............................................    $ 2.26      $ 1.06
                                                                ======      ======
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       26
<PAGE>   29
 
                             VASTAR RESOURCES, INC.
 
                           CONSOLIDATED BALANCE SHEET
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              ----------------------
                                                                1996         1995
                                                              ---------    ---------
                                                              (MILLIONS OF DOLLARS)
<S>                                                           <C>          <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................   $   21.9     $    5.3
  Accounts receivable:
     Trade..................................................      470.4        257.7
     Related parties........................................       27.1         27.6
  Inventories...............................................       12.5          9.3
  Prepaid expenses and other................................       74.6         55.7
                                                               --------     --------
          Total current assets..............................      606.5        355.6
Oil and gas properties and equipment, net...................    1,332.6      1,196.3
                                                               --------     --------
          Total assets......................................   $1,939.1     $1,551.9
                                                               ========     ========
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................   $  469.6     $  292.9
  Accrued liabilities.......................................       81.5         68.8
                                                               --------     --------
          Total current liabilities.........................      551.1        361.7
Long-term debt..............................................      778.4        759.4
Deferred liabilities and credits............................      214.0        220.2
Deferred income taxes.......................................      102.2        108.2
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common Stock, $0.01 par value: authorized, 110,000,000
  shares; issued and outstanding, 97,260,551 shares at
  December 31, 1996 and 97,250,001 at December 31, 1995.....        1.0          1.0
Capital in excess of par value of stock.....................      454.1        453.9
Accumulated deficit.........................................     (161.7)      (352.5)
                                                               --------     --------
          Total stockholders' equity........................      293.4        102.4
                                                               --------     --------
          Total liabilities and stockholders' equity........   $1,939.1     $1,551.9
                                                               ========     ========
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       27
<PAGE>   30
 
                             VASTAR RESOURCES, INC.
 
                      CONSOLIDATED STATEMENT OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                  FOR THE YEARS ENDED
                                                                     DECEMBER 31,
                                                              ---------------------------
                                                               1996      1995      1994
                                                              -------   -------   -------
                                                                 (MILLIONS OF DOLLARS)
<S>                                                           <C>       <C>       <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................................  $ 220.0   $ 102.6   $ 149.3
Adjustments to reconcile net income to net cash provided by
  operating activities:
  Depreciation, depletion and amortization..................    275.9     263.3     230.8
  Net change in deferred taxes..............................     (6.0)    (36.8)    (11.8)
  Dry hole expense and undeveloped leasehold amortization...    109.6      96.0      99.7
  Gain on asset sales.......................................    (13.1)     (4.3)     (2.2)
  Net change in accounts receivable, inventories and
     accounts payable.......................................    (38.7)     52.1     (31.2)
  Other.....................................................    (14.4)     (9.2)    (13.3)
                                                              -------   -------   -------
     Net cash provided by operating activities..............    533.3     463.7     421.3
                                                              -------   -------   -------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to oil and gas properties and equipment, including
  dry hole costs............................................   (522.2)   (414.4)   (326.6)
Proceeds from oil and gas properties and equipment sales....     15.5       9.8       5.1
Other.......................................................       --      (2.5)     (6.9)
                                                              -------   -------   -------
     Net cash used by investing activities..................   (506.7)   (407.1)   (328.4)
                                                              -------   -------   -------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock....................................      0.2        --     453.0
Proceeds from long-term debt................................    629.0     159.3        --
Repayment of long-term debt.................................   (610.0)   (450.0)   (200.0)
Dividends...................................................    (29.2)    (29.2)     (7.3)
Special dividends paid to ARCO..............................       --        --    (125.0)
                                                              -------   -------   -------
     Net cash provided (used) by financing activities.......    (10.0)   (319.9)    120.7
                                                              -------   -------   -------
Net increase (decrease) in cash and cash equivalents........     16.6    (263.3)    213.6
Cash and cash equivalents at beginning of year..............      5.3     268.6      55.0
                                                              -------   -------   -------
Cash and cash equivalents at end of year....................  $  21.9   $   5.3   $ 268.6
                                                              =======   =======   =======
Supplemental cash flow information:
  Cash paid for interest....................................  $  50.9   $  56.0   $  63.2
                                                              =======   =======   =======
  Cash paid (received) for income taxes.....................  $  (3.7)  $ (11.1)  $  19.0
                                                              =======   =======   =======
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       28
<PAGE>   31
 
                             VASTAR RESOURCES, INC.
 
            CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
 
<TABLE>
<CAPTION>
                                                   COMMON                 ADDITIONAL
                                                STOCK SHARES    COMMON     PAID-IN      ACCUMULATED
                                                   ISSUED       STOCK      CAPITAL        DEFICIT
                                                ------------    ------    ----------    -----------
                                                                       (MILLIONS OF DOLLARS)
<S>                                             <C>             <C>       <C>           <C>
Balance, December 31, 1993....................          100      $ --       $   --        $(497.1)
  Retroactive effect of stock split, May
     1994.....................................   79,999,901       0.8           --           (0.8)
  Dividend to ARCO, paid June 1994............           --        --           --          (70.0)
  Initial public offering, July 5, 1994.......   17,250,000       0.2        452.8             --
  Stock option plans..........................           --        --          1.1             --
  Cash dividends declared ($0.075 per
     share)...................................           --        --           --           (7.3)
  Net income..................................           --        --           --          149.3
                                                 ----------      ----       ------        -------
Balance, December 31, 1994....................   97,250,001       1.0        453.9         (425.9)
  Cash dividends declared ($0.30 per share)...           --        --           --          (29.2)
  Net income..................................           --        --           --          102.6
                                                 ----------      ----       ------        -------
Balance, December 31, 1995....................   97,250,001       1.0        453.9         (352.5)
  Exercise of stock options...................       10,550        --          0.2             --
  Cash dividends declared ($0.30 per share)...           --        --           --          (29.2)
  Net income..................................           --        --           --          220.0
                                                 ----------      ----       ------        -------
Balance, December 31, 1996....................   97,260,551      $1.0       $454.1        $(161.7)
                                                 ==========      ====       ======        =======
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       29
<PAGE>   32
 
                             VASTAR RESOURCES, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. FORMATION OF THE COMPANY AND BASIS OF PRESENTATION
 
     Vastar Resources, Inc. ("Vastar" or the "Company") is one of the largest
independent (non-integrated) oil and gas companies in the United States. The
Company is engaged in the exploration, development, production and marketing of
natural gas, crude oil and natural gas liquids. The Company's four principal
producing areas are offshore in the Gulf of Mexico, the Gulf Coast (south Texas,
southeast Texas and south Louisiana), the San Juan/Rockies (northwest New
Mexico, southwest Colorado and Wyoming) and the Mid-Continent (northeast Texas,
Oklahoma, northern Louisiana, Arkansas and Kansas). Vastar markets energy
products in the lower 48 states.
 
     Effective October 1, 1993, Atlantic Richfield Company ("ARCO") conveyed
beneficial title to certain producing properties located in the Gulf of Mexico,
Texas, Louisiana, Oklahoma, Kansas, New Mexico, Colorado and Arkansas, together
with certain developed and undeveloped acreage (collectively, the "Properties")
to Vastar, its wholly-owned subsidiary, at the time of the conveyance. ARCO also
conveyed to the Company all of the outstanding stock of each of the following
subsidiaries of ARCO: Vastar Gas Marketing, Inc. (formerly ARCO Natural Gas
Marketing, Inc.), F&H Pipeline Company, Grant Gathering Company and Wilburton
Hub, Inc. For financial reporting purposes, the Properties and the capital stock
of the subsidiaries were recorded at ARCO's historical cost. On December 7,
1993, Vastar borrowed $1.25 billion from a group of banks and paid a special
dividend to ARCO in the same amount. In the second quarter of 1994, the Company
paid $125 million in additional special cash dividends to ARCO.
 
     ARCO owns 80,000,001 shares (82.3 percent) of the outstanding common stock
of the Company, and as of May 19, 1994, the Company and ARCO entered into an
agreement granting ARCO certain rights as a stockholder of the Company. In order
to allow ARCO to continue to include the Company as part of its "affiliated
group" for federal income tax purposes, ARCO has been granted, pursuant to such
agreement, the cumulative, continuing right to purchase from the Company at the
then-current market price, such number of shares of common stock or preferred
stock, or both, as may be necessary to preserve that status.
 
     On July 5, 1994, the Company completed an initial public offering (the
"Offering") of 17,250,000 shares (17.7 percent of its outstanding common stock
after the Offering) of its common stock. The Company received proceeds of
approximately $453 million for such shares, net of the underwriting discount of
approximately $26 million and expenses of $4 million.
 
     The accompanying financial statements include revenues and expenses
attributable to the accounts of Vastar and its majority-owned subsidiaries. All
significant intercompany transactions have been eliminated.
 
     In addition, they include the allocation from ARCO of direct and indirect
corporate administrative costs attributable to Vastar prior to the Offering. The
methods by which such amounts are attributed and allocated are deemed reasonable
by management.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  Cash Equivalents
 
     Cash equivalents consist of highly liquid investments, such as time
deposits, certificates of deposit and marketable securities other than equity
securities with original maturities of three months or less. Cash equivalents
are stated at cost, which approximates market value.
 
  Oil and Gas Properties
 
     Oil and gas properties are accounted for using the successful efforts
method. Under this method, all development costs and acquisition costs of proved
properties are capitalized and amortized on a units-of-production basis over the
remaining life of proved developed reserves and proved reserves, respectively.
Costs of drilling exploratory wells are initially capitalized, but charged to
expense if and when a well is determined to
 
                                       30
<PAGE>   33
 
                             VASTAR RESOURCES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
be unsuccessful. Oil and gas unproved property costs are capitalized and
amortized on a composite basis, considering past success experience and average
property life.
 
     Effective October 1, 1995, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121").
Prior to the adoption of SFAS No. 121, the total amount of unamortized
capitalized cost was limited to the aggregated undiscounted value of future net
revenues, based on current prices and cost. SFAS No. 121 requires that
long-lived assets held and used by a company, including oil and gas properties
accounted for under the successful efforts method of accounting, be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company determines
whether an impairment has occurred by estimating the undiscounted expected
future net cash flows of its oil and gas properties at a field level and
compares such cash flows to the carrying amount of the oil and gas properties to
determine if the carrying amount is recoverable. For those oil and gas
properties for which the carrying amount exceeds the undiscounted estimated
future cash flows, an impairment is determined to exist. The carrying amount of
such properties is adjusted to their estimated net fair value based on relevant
market information or discounted cash flows. The Company recognized a non-cash
charge of $9.4 million and $23.1 million related to the impairment oil and gas
properties during 1996 and 1995, respectively, which is included depreciation,
depletion and amortization expense.
 
     Costs of retired, sold or abandoned properties that constitute a part of an
amortization base are charged or credited, net of proceeds, to the accumulated
depreciation, depletion and amortization reserve. Gains or losses from the
disposal of other properties are recognized currently. Expenditures for
maintenance, repairs and minor renewals necessary to maintain properties in
operating condition are expensed as incurred. Major replacements and renewals
are capitalized. All properties are stated at cost.
 
  Inventories
 
     Inventories are comprised principally of materials and supplies, and are
stated at the lower of cost (determined on an average basis) or market. Product
inventories are stated at the lower of current market value or cost and
represent approximately 30 percent of total year-end inventory. Cost is
determined under the last-in, first-out (LIFO) method.
 
  Dismantlement, Restoration and Reclamation Costs
 
     The estimated costs, net of salvage value, of dismantling facilities or
projects with limited lives or facilities that are required to be dismantled by
contract, regulation or law, and the estimated costs of restoration and
reclamation of land associated with such projects, are accrued on a
unit-of-production basis during operations and classified as a deferred
liability. Such costs are included in depreciation, depletion and amortization
charges in the current period.
 
     In October 1996, the Accounting Standards Executive Committee issued
Statement of Position 96-1, "Environmental Remediation Liabilities" ("SOP
96-1"). The provisions of SOP 96-1 must be adopted for fiscal years beginning
after December 15, 1996. The provisions include standards affecting the
measurement, recognition and disclosure of environmental remediation
liabilities. The Company has not yet completed evaluating the impact, if any, of
the provisions of SOP 96-1.
 
  Income Taxes
 
     Vastar's results of operations are included in the consolidated U.S.
federal income tax return of ARCO. Federal and state income tax expense is
computed on a stand-alone basis pursuant to a tax sharing agreement with ARCO.
The agreement allows Vastar to recognize the tax benefits related to certain tax
credits (non-conventional fuels and enhanced oil recovery credits) that have
been utilized by ARCO in the consolidated
 
                                       31
<PAGE>   34
 
                             VASTAR RESOURCES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
return, even when such credits would not otherwise be currently utilized by
Vastar on a stand-alone basis. This agreement limits the amount of tax credits
Vastar may use to reduce its current federal income tax liability. Under certain
conditions, Vastar may reduce its tax liability to less than zero and receive a
refund from ARCO. Subject to certain limitations, tax credits generated in
excess of this amount are carried forward and used to reduce Vastar's current
federal tax liability in subsequent years in which the Company and ARCO join in
filing a consolidated federal income tax return. Such tax credits carried
forward, which have no expiration date, are reflected as deferred tax assets and
are a component of Vastar's net deferred tax liability as of December 31, 1996
and 1995. Under the current agreement, these credits carried forward would not
be realizable by Vastar if ARCO and Vastar were to deconsolidate for tax
purposes. (See Note 9 and Note 18.)
 
     State tax expense is computed using the applicable average tax rates for
both unitary and nonunitary state filings. State franchise taxes are also
calculated on a stand-alone basis.
 
  Revenue Recognition
 
     Revenue is normally recognized from jointly-owned properties as oil and gas
is produced and sold for Vastar's account. An overlift (i.e., when Vastar sells
gas in excess of its entitlement) is recorded as a liability if it is
significant in quantity and the remaining underground reserves are not
sufficient to satisfy the deficiency. Underlifts (i.e., when Vastar sells less
gas than its entitlement) are recorded only when contracts specify that lifting
imbalances be settled in cash. Overlifts and underlifts to be settled in cash
are recorded as adjustments to revenue. The recorded lifting imbalances at
December 31, 1996 and 1995, were insignificant.
 
  Hedging and Related Activities
 
     The Company enters into natural gas and crude oil price swap agreements in
order to manage price risk and such agreements are accounted for as hedges.
Gains and losses resulting from these transactions are deferred and included in
other assets or accrued liabilities, as appropriate, until realized in the
Company's Consolidated Statement of Income as the physical production required
by the contracts is delivered. Realized hedging gains and losses are included in
net sales and other operating revenues.
 
     The Company enters into interest rate swaps primarily as a hedge against
interest exposure on variable rate debt. The differences to be paid or received
on swaps designated as hedges are included in interest expense as the payments
are made or received.
 
  Stock-based Compensation
 
     Employee stock options are accounted for under the intrinsic-value-based
method prescribed by Accounting Principles Board Opinion No. 25.
 
  Concentration of Credit Risk
 
     The Company performs ongoing credit evaluations of its customers and
generally does not require collateral on its credit sales. Any amounts
anticipated as uncollectible are charged to income and credited to a valuation
account. The amounts included in the allowance for uncollectible accounts at
December 31, 1996, 1995 and 1994 were insignificant.
 
  Use of Estimates
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
                                       32
<PAGE>   35
 
                             VASTAR RESOURCES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Reclassifications
 
     Certain previously reported amounts have been restated to conform to
classifications adopted in 1996.
 
3. NET SALES AND OTHER OPERATING REVENUES
 
     Net sales and other operating revenues were as follows for the years ended
December 31:
 
<TABLE>
<CAPTION>
                                                       1996         1995         1994
                                                     ---------    ---------    --------
                                                           (MILLIONS OF DOLLARS)
<S>                                                  <C>          <C>          <C>
Sales and other operating revenues:
  Unrelated parties(1).............................  $ 3,111.3    $ 1,636.1    $1,385.6
  Related parties(2)...............................      270.5        357.3       274.3
                                                     ---------    ---------    --------
          Total....................................    3,381.8      1,993.4     1,659.9
Less:
  Purchases(1)(3)..................................   (2,372.6)    (1,246.4)     (833.5)
  Delivery expense.................................      (63.4)       (44.3)      (36.1)
                                                     ---------    ---------    --------
Net sales and other operating revenues.............  $   945.8    $   702.7    $  790.3
                                                     =========    =========    ========
</TABLE>
 
---------------
 
(1) Includes NGLs sales and purchase volumes related to NGLs marketing
    activities which began in the second quarter of 1996. Includes crude oil
    sales and purchase volumes related to crude oil marketing activities, which
    began in the first quarter of 1995.
 
(2) Average lifting costs associated with these sales were $102.3 million,
    $160.3 million and $136.4 million in 1996, 1995 and 1994, respectively.
 
(3) Includes purchases from related parties at a cost of $23.8 million, $46.4
    million and $43.0 million in 1996, 1995 and 1994, respectively.
 
4. RELATED PARTY TRANSACTIONS AND COST ALLOCATIONS
 
     Effective October 1, 1993, the Company and ARCO (including ARCO
subsidiaries) entered into a series of agreements which, among other things,
included natural gas and crude oil purchase and sale agreements, an accounting
and land administration services agreement, a technical services agreement and a
corporate services agreement. These agreements were developed in connection with
the establishment of the Company by ARCO, and, therefore, were not the result of
arm's-length negotiations between independent parties.
 
     The purchase and sale agreements include the sales of substantially all of
ARCO's lower 48 proprietary natural gas production from its ARCO Permian Unit to
the Company and the sales of substantially all of Vastar's proprietary crude oil
and NGLs to ARCO at agreed-upon prices approximating current market values. The
contract relating to natural gas terminated as of April 1, 1995. The contract
relating to crude oil terminated as of January 1, 1995, when the Company began
to directly market its crude oil. However, Vastar has continued to market crude
oil to ARCO on a month-to-month basis at agreed-upon prices approximating
current market values. The contract relating to NGLs terminated as of March 31,
1996, when the Company began to directly market its NGLs. However, Vastar has
continued to market NGLs to ARCO on a month-to-month basis at agreed-upon prices
approximating current market values. The accounting and land administration
services agreement included accounting, internal control, royalty
administration, land administration and the computer services associated with
these activities. This agreement terminated as of January 1, 1995. The technical
services agreement includes a variety of oil and gas technical services and
information technology services. The provisions for information technology under
this agreement terminated on October 31, 1995, while the remaining portion of
the agreement is for an indefinite term. Under the corporate services agreement,
ARCO provides the Company various financial, legal, insurance, internal audit
and other
 
                                       33
<PAGE>   36
 
                             VASTAR RESOURCES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
administrative services and the Company provides ARCO with certain financial and
other services as agreed. This agreement provides for an indefinite term.
Charges under each of these service agreements are determined based on usage or
other methods that management believes to be reasonable.
 
     An analysis of net settlements for the years ended December 31, 1996, 1995
and 1994 were as follows:
 
<TABLE>
<CAPTION>
                                           1996      1995      1994
                                          ------    ------    ------
                                            (MILLIONS OF DOLLARS)
<S>                                       <C>       <C>       <C>
Sales to ARCO and affiliates............  $270.5    $357.3    $274.3
Purchases from ARCO.....................   (23.8)    (46.4)    (43.0)
Administrative fees (allocations).......   (14.1)    (14.9)    (16.0)
Tax settlements.........................     4.8      11.7     (19.3)
                                          ------    ------    ------
          Net received..................  $237.4    $307.7    $196.0
                                          ======    ======    ======
</TABLE>
 
5. OIL AND GAS PROPERTIES AND EQUIPMENT
 
     Oil and gas properties and equipment, at cost, and related accumulated
depreciation, depletion and amortization were as follows at December 31:
 
<TABLE>
<CAPTION>
                                            1996        1995
                                          --------    --------
                                              (MILLIONS OF
                                                DOLLARS)
<S>                                       <C>         <C>
Proved properties.......................  $4,320.8    $3,963.3
Unproved properties.....................     151.7       104.0
General plant...........................     177.5       165.6
                                          --------    --------
          Total oil and gas properties
            and equipment...............   4,650.0     4,232.9
Less accumulated depreciation, depletion
  and amortization......................   3,317.4     3,036.6
                                          --------    --------
          Net...........................  $1,332.6    $1,196.3
                                          ========    ========
</TABLE>
 
     Expenses for maintenance and repairs were $35.9 million, $30.8 million and
$31.0 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
 
6. ACCRUED LIABILITIES
 
     Accrued liabilities were as follows at December 31:
 
<TABLE>
<CAPTION>
                                          1996       1995
                                          -----      -----
                                            (MILLIONS OF
                                              DOLLARS)
<S>                                       <C>        <C>
Hedging payable.........................  $29.6      $29.1
Property and production taxes...........   13.4        8.6
Unrealized hedging gains................    8.7        7.0
Payroll liabilities.....................    7.5        7.6
Interest................................    8.0        7.1
Other...................................   14.3        9.4
                                          -----      -----
          Total.........................  $81.5      $68.8
                                          =====      =====
</TABLE>
 
                                       34
<PAGE>   37
 
                             VASTAR RESOURCES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
7. LONG-TERM DEBT
 
     Long-term debt at December 31, 1996 and 1995 comprised the following:
 
<TABLE>
<CAPTION>
                                           1996      1995
                                          ------    ------
                                            (MILLIONS OF
                                              DOLLARS)
<S>                                       <C>       <C>
8.75% Notes, due in 2005................  $149.4    $149.4
6.95% Notes, due in 2006................    75.0        --
Commercial Paper........................   554.0        --
Variable-rate revolving credit
  agreement.............................      --     610.0
                                          ------    ------
          Total.........................  $778.4    $759.4
                                          ======    ======
</TABLE>
 
     In December 1993, Vastar borrowed $1.25 billion under an unsecured,
revolving credit agreement. The facility was renegotiated in the second quarter
of 1995 and again in the first quarter of 1996. As of December 31, 1996,
commitments under this facility, as amended to date, totaled $1.1 billion and
the commitment expires March 29, 2001. The effective rate of this borrowing
during 1996 averaged 5.8 percent. The agreement contains certain covenants, the
most restrictive of which (i) require Vastar to maintain minimum levels of
tangible stockholders' equity and maintain certain financial ratios and (ii)
restrict the Company's ability to encumber its assets. At December 31, 1996, the
Company had a $1.1 billion line of credit available under the revolving credit
facility and no debt outstanding under this facility.
 
     On November 14, 1994, the Company filed a registration statement with the
Securities and Exchange Commission covering the issuance of up to $500 million
of debt securities. These securities may be offered from time to time on terms
to be determined at the time of the sale. As of December 31, 1995, $150 million
8.75 percent unsecured notes, due in 2005, had been issued pursuant to this
registration statement. In the second quarter of 1995, the Company established a
$250 Million Medium-Term Note Program pursuant to this registration statement.
In November 1996, the Company issued $75 million of 6.95 percent unsecured
Notes, due November 2006, pursuant to the Medium-Term Note Program. The net
proceeds were used to pay down a portion of the debt incurred under the
Company's Commercial Paper Program and general obligations of the Company. In
February 1997, the Company issued $75 million of 6.96 percent unsecured Notes,
due February 2007 pursuant to the Medium-Term Note Program. The net proceeds
were used to pay down debt incurred under the Company's Commercial Paper
Program.
 
     In October 1996, the Company established a $1.1 Billion Commercial Paper
Program for the private placement to accredited investors of up to $1.1 billion
(outstanding at any one time) of unsecured notes with maturities of up to 270
days from the date of issue (the "Notes"). In the Commercial Paper Placement
Agency Agreements relating to the program, the Company has agreed to maintain
credit lines sufficient to support payment of the Notes. The proceeds from the
Commercial Paper Program were used to pay down the debt incurred under the
Revolving Credit Facility. At December 31, 1996, the Company had $554.0 million
of commercial paper notes outstanding under the program. The effective rate of
commercial paper borrowing during 1996 averaged 5.6 percent (6.0 percent at
December 31, 1996).
 
     The estimated fair value of total long-term debt at December 31, 1996 and
1995 was $792.9 million and $783.6 million, respectively. The fair value of
Vastar's long-term debt was based on quoted market prices.
 
     Vastar periodically enters into interest rate swap agreements with the
objective of managing interest rate risk by converting the interest rate on
variable rate debt to a fixed rate. As of December 31, 1996, Vastar had no
outstanding interest rate swaps. The financial impact of the swaps settled in
1996 was immaterial.
 
                                       35
<PAGE>   38
 
                             VASTAR RESOURCES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
8. DEFERRED LIABILITIES AND CREDITS
 
     Deferred liabilities and credits were as follows at December 31:
 
<TABLE>
<CAPTION>
                                            1996         1995
                                          ---------    ---------
                                          (MILLIONS OF DOLLARS)
<S>                                       <C>          <C>
Dismantlement and restoration...........     $145.5       $153.0
Pension and postretirement benefits.....       18.9         15.0
Self insurance..........................       12.5         12.5
Severance, sales and use taxes..........       11.9         12.1
Other...................................       25.2         27.6
                                             ------       ------
          Total.........................     $214.0       $220.2
                                             ======       ======
</TABLE>
 
     The Company accrues amounts for the dismantling of facilities and plugging
and abandonment of wells on a unit-of-production basis. The Company accrued
expenses of approximately $2.0 million, $8.7 million and $20.1 million and paid
approximately $10.1 million, $7.7 million and $9.5 million in costs in 1996,
1995 and 1994, respectively, to plug and abandon wells, dismantle fields,
facilities or projects and restore, reclaim and rehabilitate the land associated
with those projects.
 
9. TAXES
 
     The components of the income tax provision (benefit) were comprised of the
following for the years ended December 31:
 
<TABLE>
<CAPTION>
                                           1996      1995      1994
                                          ------    ------    ------
                                            (MILLIONS OF DOLLARS)
<S>                                       <C>       <C>       <C>
Federal:
  Current...............................  $ (3.7)   $ (7.6)   $ 13.5
  Deferred..............................    (7.3)    (40.6)    (14.6)
                                          ------    ------    ------
          Total federal.................   (11.0)    (48.2)     (1.1)
                                          ------    ------    ------
State:
  Current...............................     2.4      (2.0)      4.0
  Deferred..............................     1.3       3.8       1.4
                                          ------    ------    ------
          Total state...................     3.7       1.8       5.4
                                          ------    ------    ------
Income tax provision (benefit)..........  $ (7.3)   $(46.4)   $  4.3
                                          ======    ======    ======
</TABLE>
 
     Reconciliation of income tax expense with tax at the federal statutory rate
is as follows for the years ended December 31:
 
<TABLE>
<CAPTION>
                                           1996      1995      1994
                                          ------    ------    ------
                                            (MILLIONS OF DOLLARS)
<S>                                       <C>       <C>       <C>
Income before income taxes..............  $212.7    $ 56.2    $153.6
                                          ======    ======    ======
Tax at statutory rate...................    74.4      19.7      53.8
Increase (reduction) in taxes resulting
  from:
  State income taxes (net of federal
     effect)............................     2.5       1.3       3.5
  Tax credits and other.................   (84.2)    (67.4)    (53.0)
                                          ------    ------    ------
Income tax provision (benefit)..........  $ (7.3)   $(46.4)   $  4.3
                                          ======    ======    ======
</TABLE>
 
                                       36
<PAGE>   39
 
                             VASTAR RESOURCES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The major components of the net deferred tax liability at December 31, 1996
and 1995, were as follows:
 
<TABLE>
<CAPTION>
                                            1996         1995
                                          ---------    ---------
                                          (MILLIONS OF DOLLARS)
<S>                                       <C>          <C>
Depreciation, depletion and
  amortization..........................     $239.1       $236.4
Other...................................         --           --
                                             ------       ------
          Total deferred tax
            liabilities.................      239.1        236.4
                                             ------       ------
Tax credits carried forward (1).........       68.6         58.3
Dismantlement and restoration...........       48.9         51.5
Self insurance..........................        4.4          4.4
Pension and postretirement benefits.....        6.4          5.3
Other...................................        8.6          8.7
                                             ------       ------
          Total deferred tax assets.....      136.9        128.2
                                             ------       ------
          Net deferred income tax
            liability...................     $102.2       $108.2
                                             ======       ======
</TABLE>
 
---------------
 
     (1) See Note 18 relating to an amendment of the Tax Sharing Agreement.
 
     Taxes other than income taxes were comprised of the following for the years
ended December 31:
 
<TABLE>
<CAPTION>
                                                              1996     1995     1994
                                                              -----    -----    -----
                                                               (MILLIONS OF DOLLARS)
<S>                                                           <C>      <C>      <C>
Production/severance........................................  $26.6    $16.6    $20.6
Property....................................................    9.7     10.5     11.1
Payroll and other...........................................    4.9      5.6      5.1
                                                              -----    -----    -----
          Total.............................................  $41.2    $32.7    $36.8
                                                              =====    =====    =====
</TABLE>
 
10. STOCKHOLDERS' EQUITY
 
  Stock Split
 
     On May 19, 1994, the Company filed its Restated Certificate of
Incorporation, which authorized the issuance of 100,000,000 shares of Common
Stock. The Company declared an 800,000.01-for-one stock split of the Company's
Common Stock in the form of a stock dividend payable on May 19, 1994, to ARCO.
The par value was changed from $100 per share to $0.01 per share. The stock
split resulted in the issuance of 79,999,901 additional shares of Common Stock.
The issuance resulted in an increase of $790,000 in the stockholders' deficit
and the Common Stock, representing the par value of the shares issued.
 
  Additional Shares of Common Stock Authorized
 
     At the Annual Meeting of Stockholders held on May 15, 1996, stockholders
voted to amend the Company's Restated Certificate of Incorporation to authorize
an additional 10 million shares of Common Stock. After adoption of the
amendment, the Company had 110 million shares of Common Stock authorized to be
issued, of which 97,260,551 shares were issued and outstanding as of December
31, 1996.
 
  Dividends
 
     As of December 31, 1993, the Company accrued an additional dividend of $55
million, which was paid to ARCO in equal increments on April 18, 1994 and May
16, 1994. On March 31, 1994, the Company accrued a dividend of $70 million,
which was paid to ARCO on June 1, 1994.
 
     During 1996 and 1995, the Company paid quarterly cash dividends on its
Common Stock of $.075 per share totaling $0.30 per share, or $29.2 million, each
year.
 
                                       37
<PAGE>   40
 
                             VASTAR RESOURCES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
11. COMMITMENTS AND CONTINGENCIES
 
     The Company and its subsidiaries are involved in a number of lawsuits, all
of which have arisen in the ordinary course of the Company's business. The
Company believes that any ultimate liability resulting from any of these suits
will not have a material adverse effect on its financial position or results of
operations.
 
     The operations and financial position of Vastar continue to be affected
from time to time in varying degrees by domestic and foreign political
developments as well as legislation and regulations pertaining to restrictions
on oil and gas production, imports and exports, natural gas regulation, tax
increases, environmental regulations and cancellation of contract rights. Both
the likelihood of such occurrences and their overall effect on the Company vary
greatly and are not predictable. These uncertainties are part of a number of
items that Vastar has taken and will continue to take into account in
periodically establishing accounting reserves.
 
     Vastar and ARCO have agreements whereby Vastar has agreed to indemnify ARCO
against certain claims or liabilities to which ARCO could be subject relating to
ARCO's historical ownership and operation of the Properties, including
liabilities under laws relating to the protection of the environment and the
workplace and liabilities arising out of certain litigation. ARCO has agreed to
indemnify Vastar with respect to other claims and liabilities and other
litigation matters not related to Vastar's business or properties as reflected
in its consolidated financial statements.
 
     In September 1996, the Company entered into a contract with Diamond
Offshore Drilling Company for the major upgrade and operation of a
semisubmersible drilling rig for a three-year deepwater drilling program in the
Gulf of Mexico, commencing late 1997. Before any reimbursement from potential
partners, costs incurred with respect to this contract along with other
contracts for committed support equipment are expected to be $12.3 million,
$54.0 million, $54.0 million and $41.7 million for the years 1997, 1998, 1999
and 2000, respectively.
 
12. EXPLORATION EXPENSE
 
     Exploration expense for the years ended December 31, 1996, 1995 and 1994,
was as follows:
 
<TABLE>
<CAPTION>
                                                            1996      1995      1994
                                                           ------    ------    ------
                                                             (MILLIONS OF DOLLARS)
<S>                                                        <C>       <C>       <C>
Dry hole costs...........................................  $ 82.6    $ 69.0    $ 61.9
Geological and geophysical...............................    45.0      27.6       9.3
Undeveloped leasehold amortization.......................    27.0      27.0      37.8
Staff....................................................    25.9      24.2      26.5
Lease rentals............................................     5.9       3.4       3.2
                                                           ------    ------    ------
          Total..........................................  $186.4    $151.2    $138.7
                                                           ======    ======    ======
</TABLE>
 
13. EARNED PER SHARE
 
     Earned per share is computed based on the average number of common shares
outstanding during the period, which was 97,255,970 for the year ended December
31, 1996 and 97,250,001 for the year ended December 31, 1995. Earned per share
amounts have been omitted from the consolidated statement of income for the year
ended December 31, 1994 because Vastar was a wholly-owned subsidiary of ARCO
until June 27, 1994. The dilutive effect of common stock equivalents was not
material. See Notes 1 and 17.
 
                                       38
<PAGE>   41
 
                             VASTAR RESOURCES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
14. RETIREMENT PLANS
 
     Essentially all employees are covered by defined benefit pension plans
sponsored by Vastar. The benefits are based on years of service and the
employee's compensation, primarily during the last three years of service.
Vastar's funding policy is to make annual contributions as required by
applicable regulations. Vastar accrues pension costs based on an actuarial
valuation for each plan, and funds qualified benefit plans through contributions
to trust funds kept apart from Vastar funds. Nonqualified benefit plans are not
funded.
 
     The following table sets forth the plans' funded status and the amounts
recognized in Vastar's balance sheet at December 31:
 
<TABLE>
<CAPTION>
                                                                ASSETS       ACCUMULATED
                                                                EXCEED        BENEFITS
                                                              ACCUMULATED      EXCEED
                                                               BENEFITS        ASSETS
                                                              -----------    -----------
                                                                (MILLIONS OF DOLLARS)
<S>                                                           <C>            <C>
1996
Actuarial present value of benefit obligations:
  Vested benefit obligation.................................     $30.7          $ 1.6
                                                                 =====          =====
  Accumulated benefit obligation............................     $33.2          $ 1.6
                                                                 =====          =====
  Projected benefit obligation..............................     $55.4          $(5.4)
Plan assets at fair value, primarily stocks and bonds.......      57.2             --
                                                                 -----          -----
Projected benefit obligation less than (in excess of) plan
  assets....................................................       1.8           (5.4)
Unrecognized net gain (loss)................................      (1.2)           2.8
Prior service cost not yet recognized in net periodic
  pension cost..............................................       2.4            0.2
Remaining unrecognized asset from January 1, 1986...........      (5.4)            --
                                                                 -----          -----
Pension liability recognized in the consolidated balance
  sheet.....................................................     $(2.4)         $(2.4)
                                                                 =====          =====
1995
Actuarial present value of benefit obligations:
  Vested benefit obligation.................................     $26.2          $ 0.9
                                                                 =====          =====
  Accumulated benefit obligation............................     $28.7          $ 0.9
                                                                 =====          =====
  Projected benefit obligation..............................     $49.8          $ 4.6
Plan assets at fair value, primarily stocks and bonds.......      48.9             --
                                                                 -----          -----
Projected benefit obligation in excess of plan assets.......      (0.9)          (4.6)
Unrecognized net loss.......................................       3.1            2.8
Prior service cost not yet recognized in net periodic
  pension cost..............................................       2.6            0.3
Remaining unrecognized asset from January 1, 1986...........      (5.8)            --
                                                                 -----          -----
Pension liability recognized in the consolidated balance
  sheet.....................................................     $(1.0)         $(1.5)
                                                                 =====          =====
</TABLE>
 
     Components of net pension cost for Vastar are as follows for the years
ended December 31:
 
<TABLE>
<CAPTION>
                                                              1996     1995     1994
                                                              -----    -----    -----
                                                               (MILLIONS OF DOLLARS)
<S>                                                           <C>      <C>      <C>
Service cost -- benefits earned during the period...........  $ 4.0    $ 2.9    $ 3.4
Interest cost on projected benefit obligation...............    3.9      3.1      3.2
Actual return on plan assets................................   (8.9)    (9.4)    (0.6)
Net amortization and deferral...............................    4.0      5.3     (3.5)
                                                              -----    -----    -----
          Net pension cost..................................  $ 3.0    $ 1.9    $ 2.5
                                                              =====    =====    =====
</TABLE>
 
                                       39
<PAGE>   42
 
                             VASTAR RESOURCES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The assumptions used in determining the pension costs and pension liability
shown above were as follows at December 31:
 
<TABLE>
<CAPTION>
                                                             1996     1995     1994
                                                             -----    -----    -----
<S>                                                          <C>      <C>      <C>
Discount rate..............................................  7.30%    7.25%    8.25%
Rate of salary progression.................................   5.0%     5.0%     5.0%
Long-term rate of return on assets.........................  10.5%    10.5%    10.5%
</TABLE>
 
15. POSTRETIREMENT BENEFITS
 
     Vastar sponsors defined postretirement benefit plans to provide
postretirement benefits other than pensions to substantially all employees who
retire with Vastar having rendered the required years of service, along with
their spouses and eligible dependents. Health care benefits are provided
primarily through comprehensive indemnity plans. Currently, Vastar pays
approximately 80 percent of the cost of such plans, but generally has the right
to modify the plans at any time. Life insurance benefits are based primarily on
the employee's final compensation and are also partially paid for by retiree
contributions, which vary based on coverage chosen by the retiree. Vastar's
current policy is to fund the cost of postretirement health care and life
insurance plans on a pay-as-you-go basis.
 
     The following table sets forth Vastar's other postretirement benefit
liability as of December 31:
 
<TABLE>
<CAPTION>
                                                            HEALTH      LIFE
                                                             CARE     INSURANCE    TOTAL
                                                            ------    ---------    -----
                                                               (MILLIONS OF DOLLARS)
<S>                                                         <C>       <C>          <C>
1996
Accumulated postretirement benefit obligation:
  Retirees................................................  $ 0.6       $0.1       $ 0.7
  Employees fully eligible................................    0.9        0.2         1.1
  Other active participants...............................    8.9        1.9        10.8
                                                            -----       ----       -----
          Total...........................................   10.4        2.2        12.6
Unrecognized gain.........................................    1.0        0.5         1.5
                                                            -----       ----       -----
Accrued postretirement benefit obligation recognized in
  the consolidated balance sheet..........................  $11.4       $2.7       $14.1
                                                            =====       ====       =====
1995
Accumulated postretirement benefit obligation:
  Retirees................................................  $  --       $ --       $  --
  Employees fully eligible................................    0.7        0.2         0.9
  Other active participants...............................    7.9        1.7         9.6
                                                            -----       ----       -----
          Total...........................................    8.6        1.9        10.5
Unrecognized gain.........................................    1.5        0.5         2.0
                                                            -----       ----       -----
Accrued postretirement benefit obligation recognized in
  the consolidated balance sheet..........................  $10.1       $2.4       $12.5
                                                            =====       ====       =====
</TABLE>
 
                                       40
<PAGE>   43
 
                             VASTAR RESOURCES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Net annual postretirement benefit costs for each of the years ended
December 31, 1996, 1995 and 1994 included the following components:
 
<TABLE>
<CAPTION>
                                                            HEALTH      LIFE
                                                             CARE     INSURANCE    TOTAL
                                                            ------    ---------    -----
                                                               (MILLIONS OF DOLLARS)
<S>                                                         <C>       <C>          <C>
1996
Service cost -- benefits earned during the period.........  $ 0.7       $0.2       $ 0.9
Interest cost on accumulated postretirement benefit
  obligation..............................................    0.7        0.1         0.8
                                                            -----       ----       -----
Net postretirement benefit cost...........................  $ 1.4       $0.3       $ 1.7
                                                            =====       ====       =====
1995
Service cost -- benefits earned during the period.........  $ 0.5       $0.1       $ 0.6
Interest cost on accumulated postretirement benefit
  obligation..............................................    0.5        0.1         0.6
Net amortization..........................................   (0.2)        --        (0.2)
                                                            -----       ----       -----
Net postretirement benefit cost...........................  $ 0.8       $0.2       $ 1.0
                                                            =====       ====       =====
1994
Service cost -- benefits earned during the period.........  $ 0.9       $0.2       $ 1.1
Interest cost on accumulated postretirement benefit
  obligation..............................................    0.7        0.1         0.8
Net amortization..........................................    0.1         --         0.1
                                                            -----       ----       -----
Net postretirement benefit cost...........................  $ 1.7       $0.3       $ 2.0
                                                            =====       ====       =====
</TABLE>
 
     The significant assumptions used in determining postretirement benefit cost
and the accumulated postretirement benefit obligation were as follows at
December 31:
 
<TABLE>
<CAPTION>
                                                             1996     1995     1994
                                                             -----    -----    -----
<S>                                                          <C>      <C>      <C>
Discount rate..............................................  7.25%    7.25%    8.25%
Rate of salary progression.................................   5.0%     5.0%     5.0%
</TABLE>
 
     The weighted average annual assumed rate of increase in the per capita cost
of covered benefits (i.e., health care trend rate) for the health plans is nine
percent for 1995 and 1996, seven percent for 1997 to 2001 and five percent
thereafter. The assumed trend rate was ten percent for the years 1994 to 1996;
eight percent for 1997 to 2001; and six percent thereafter. The effect of a one
percentage point increase in the assumed health care cost trend rate would
increase the accumulated postretirement benefit obligation as of December 31,
1996 by approximately $2.7 million, and the aggregate of the service and
interest cost components of net annual postretirement benefit cost by less than
$0.4 million.
 
16. FINANCIAL INSTRUMENTS
 
     The Company uses various hedging arrangements, predominantly natural gas
and crude oil price swaps, to manage the exposure to price risk on future
natural gas and crude oil transactions.
 
     The fair value of hedging instruments and derivatives was estimated by
obtaining price quotes from brokers. Fair value of these instruments at December
31, 1996 and 1995, approximated carrying value.
 
     As of December 31, 1996, the Company had entered into a series of natural
gas swap agreements covering an average of approximately 125 MMcfd of its
natural gas production from January 1, 1997 to December 31, 1997, and
approximately 150 MMcfd of its natural gas production for the period January 1,
1998 through December 31, 1998. These swap agreements serve as a hedge which
secures sales prices averaging approximately $1.92 per Mcf for 1997 and $2.07
per Mcf for 1998. In addition, the Company has entered into various gas price
collar agreements covering an average of 133 MMcfd of its January 1, 1997
 
                                       41
<PAGE>   44
 
                             VASTAR RESOURCES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
through March 31, 1997 production and 50 MMcfd of its April 1, 1997 through
December 31, 1997 production. These agreements have a floor which will allow the
Company to receive no less than an average of $2.37 per Mcf and a ceiling which
will allow the Company to receive no more than an average of $2.75 per Mcf on
the related first quarter 1997 production and no less than an average of $2.07
per Mcf and no more than an average of $2.33 per Mcf on the related second to
fourth quarter 1997 production. The Company has also entered into a series of
production-location specific natural gas swaps covering an average of
approximately 115 MMcfd of its January 1, 1997 through March 31, 1997 natural
gas production and 85 MMcfd of its April 1, 1997 through December 31, 1997
natural gas production. These swap agreements serve as a hedge which secures
sales prices averaging approximately $2.15 per Mcf during the first quarter 1997
and $1.82 per Mcf during the period April 1, 1977 through December 31, 1997.
 
     As of December 31, 1996, the Company has entered into oil price collar
agreements covering 15 MBbld of its January through June 1997 crude oil
production. These agreements have a floor which will allow the Company to
receive no less than an average of $20.50 per barrel on the related production
and a ceiling which will allow the Company to receive no more than an average of
$24.25 per barrel (each on a WTI at Cushing basis).
 
     Based on the forward price quotes from brokers and NYMEX forward prices as
of December 31, 1996, the loss to the company for the two years 1997 and 1998
would be $28.7 million for its natural gas hedges and $0.9 million for its crude
oil hedges. The actual gains or losses realized by the Company from such hedges
may vary significantly from the foregoing amounts due to the volatility of the
commodity markets.
 
     Since December 31, 1996, the Company has entered into additional natural
gas swap agreements. These agreements cover an average of 25 MMcfd of its San
Juan Basin natural gas production for the period April 1, 1997 through October
31, 1997 and an average of 30 MMcfd of the Company's production for the period
April 1, 1998 through September 30, 1998. These swap agreements serve to secure
an average price of $1.80 per Mcf and $2.18 per Mcf for the 1997 and 1998
periods, respectively.
 
     Also since December 31, 1996, the Company has executed a gas price collar
covering 30 MMcfd of its natural gas production for the period April 1, 1998
through October 31, 1998. This agreement secures a price in which the Company
will receive no less than $1.95 per Mcf and no more than $2.21 per Mcf for the
subject gas during this time period.
 
     The counterparties to these transactions are principally major financial
institutions and major oil and gas and other industrial companies; Vastar does
not anticipate nonperformance by the counterparties. The Company monitors the
credit worthiness of the counterparties.
 
     During 1995, the Company entered into a series of commodity swaps covering
an average of 290 MMcfd of its natural gas production from January 1, 1996 to
December 31, 1996 whereby the Company received a delivered price of $1.85 per
Mcf. As a result of this hedging activity, the Company realized a pre-tax loss
of approximately $55.1 million during 1996.
 
     In 1996, 1995 and 1994, the net pre-tax losses and gains relating to the
Company's hedging activities were a $37.1 million loss, $5.6 million loss and
$46.0 million gain, respectively.
 
17. STOCK OPTIONS
 
     Options to purchase shares of Vastar's common stock have been granted to
executives, outside directors and key employees. Generally, the exercise price
of each option is equal to or greater than the fair market value of the
Company's Common Stock, $0.01 par value, at the date of grant and options vest
one year after the date of grant, become exercisable in increments of 25% a year
and expire ten years after the date of grant. However, certain stock options
granted to certain executive officers under Stock Option Conversion Agreements
in connection with the Offering were granted at less than the Offering and/or
were exercisable
 
                                       42
<PAGE>   45
 
                             VASTAR RESOURCES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
upon the closing date of the Offering. In addition, stock options granted to
outside directors vest 30 days after grant and are exercisable six months after
the date of grant. Transactions during 1996, 1995 and 1994 were as follows:
 
<TABLE>
<CAPTION>
                                                                           WEIGHTED
                                                                           AVERAGE
                                                                           EXERCISE
                                                               SHARES       PRICE
                                                              ---------    --------
<S>                                                           <C>          <C>
Balance, January 1, 1994....................................         --         --
  Granted...................................................    773,241     $29.42
  Exercised.................................................         --         --
  Forfeited/Canceled........................................     (5,000)     35.00
                                                              ---------
Balance, December 31, 1994..................................    768,241      29.38
  Granted...................................................    260,550      25.20
  Exercised.................................................         --         --
  Forfeited/Canceled........................................     (1,000)     25.13
                                                              ---------
Balance, December 31, 1995..................................  1,027,791      28.33
  Granted...................................................    360,700      32.42
  Exercised.................................................    (10,550)     20.53
  Forfeited/Canceled........................................    (26,050)     31.93
                                                              ---------
Balance, December 31, 1996..................................  1,351,891     $29.41
                                                              =========
</TABLE>
 
     As of December 31, 1996 and 1995, there were 190,800 and 525,450 of
registered shares available for option, respectively. The weighted average fair
value for options granted in 1996 and 1995 are $13.72 per share and $11.01 per
share, respectively.
 
     A summary of the status of Vastar's fixed stock options as of December 31,
1996 were as follows:
 
<TABLE>
<CAPTION>
                             OPTIONS OUTSTANDING                                        OPTIONS EXERCISABLE
------------------------------------------------------------------------------    -------------------------------
                           NUMBER        WEIGHTED-AVERAGE                           NUMBER
      RANGES OF          OUTSTANDING        REMAINING         WEIGHTED-AVERAGE    EXERCISABLE    WEIGHTED-AVERAGE
   EXERCISE PRICES       AT 12/31/96     CONTRACTUAL LIFE      EXERCISE PRICE     AT 12/31/96     EXERCISE PRICE
---------------------    -----------     ----------------     ----------------    -----------    ----------------
<S>                      <C>             <C>                  <C>                 <C>            <C>
$14.00 to 27.99             320,428         8.0 years              $22.66           137,441           $18.98
$28.00 to 43.99           1,031,463         8.1 years              $31.51           426,660           $30.23
</TABLE>
 
     A summary of the status of Vastar's fixed stock options as of December 31,
1995 were as follows:
 
<TABLE>
<CAPTION>
                             OPTIONS OUTSTANDING                                        OPTIONS EXERCISABLE
------------------------------------------------------------------------------    -------------------------------
                           NUMBER        WEIGHTED-AVERAGE                           NUMBER
      RANGES OF          OUTSTANDING        REMAINING         WEIGHTED-AVERAGE    EXERCISABLE    WEIGHTED-AVERAGE
   EXERCISE PRICES       AT 12/31/95     CONTRACTUAL LIFE      EXERCISE PRICE     AT 12/31/95     EXERCISE PRICE
---------------------    -----------     ----------------     ----------------    -----------    ----------------
<S>                      <C>             <C>                  <C>                 <C>            <C>
$14.00 to 27.99             332,228         8.3 years              $22.58           121,558           $21.61
$28.00 to 43.99             695,563         7.5 years              $31.07           292,091           $28.73
</TABLE>
 
                                       43
<PAGE>   46
 
                             VASTAR RESOURCES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Vastar applies Accounting Principles Board Opinion No. 25, in accounting
for its fixed stock options. Accordingly, no compensation cost for options
granted has been recognized in the financial statements. Had compensation cost
for options been determined consistent with Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation," Vastar's net
income and earned per share for the years ended December 31, 1996 and 1995 would
have been the pro forma amounts indicated below:
 
<TABLE>
<CAPTION>
                                                               1996      1995
                                                              ------    ------
<S>                                                           <C>       <C>
Net income (millions):
  As reported...............................................  $220.0    $102.6
  Pro Forma.................................................  $218.8    $102.1
Earned per share:
  As reported...............................................  $ 2.26    $ 1.06
  Pro Forma.................................................  $ 2.25    $ 1.05
</TABLE>
 
For purposes of determining the pro forma amounts presented above, the fair
value of each option grant is estimated on the American binomial option-pricing
model with the following approximate weighted-average assumptions used for
grants in 1996 and 1995, respectively: dividend yield of .87 percent and .87
percent; expected volatility of 25.6 percent and 22.6 percent; interest rate of
6.2 percent and 7.4 percent; and an expected term of eight years in both years.
 
18. SUBSEQUENT EVENTS
 
     On January 22, 1997, the Board of Directors of the Company declared a cash
dividend of $0.075 per share on its Common Stock to be paid on March 10, 1997,
to stockholders of record as of February 14, 1997.
 
     On January 31, 1997, the Company decisioned exploratory well Ship Shoal 357
which was a dry hole, was drilled at a cost of approximately $14 million to
Vastar and will be included in Vastar's 1997 results of operations. Vastar has a
55 percent interest in the well.
 
     In February 1997, the Company issued $75 million of 6.96 percent unsecured
Notes, due February 2007 pursuant to the Medium-Term Note Program. The proceeds
were used to pay down debt incurred under the Company's Commercial Paper
Program.
 
     Subsequent to the end of the year, ARCO and Vastar have agreed in principle
to a second amendment to the Tax Sharing Agreement. This amendment will remove
certain limitations under the original agreement and generally will allow Vastar
to receive payment for all Section 29 credits in the year generated. In return
the Company has agreed to a 3.25 percent reduction in the value of the credits
generated from properties acquired by the Company before June 1, 1995. ARCO and
Vastar have also agreed to apply the same reduction to the $61.4 million of
Section 29 credits carried forward as of December 31, 1996, in exchange for
immediate payment upon execution of the second amendment.
 
                                       44
<PAGE>   47
 
                             VASTAR RESOURCES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
19. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                1996        1995
                                                              --------    --------
                                                              (MILLIONS OF DOLLARS
                                                                EXCEPT PER SHARE
                                                                    AMOUNTS)
<S>                                                           <C>         <C>
Net revenues
  Quarter ended:
     March 31...............................................    $226.8      $173.3
     June 30................................................     229.7       184.7
     September 30...........................................     226.0       169.3
     December 31(1).........................................     284.1       212.2
                                                                ------      ------
          Total.............................................    $966.6      $739.5
                                                                ======      ======
Income before income taxes
  Quarter ended:
     March 31...............................................    $ 55.6      $ 12.8
     June 30................................................      51.7        10.0
     September 30...........................................      32.9         2.8
     December 31(1)(2)......................................      72.5        30.6
                                                                ------      ------
          Total.............................................    $212.7      $ 56.2
                                                                ======      ======
Net income
  Quarter ended:
     March 31...............................................    $ 55.6      $ 23.7
     June 30................................................      53.7        21.6
     September 30...........................................      41.6        18.9
     December 31............................................      69.1        38.4
                                                                ------      ------
          Total.............................................    $220.0      $102.6
                                                                ======      ======
Earned per share
  Quarter ended:
     March 31...............................................    $ 0.57      $ 0.24
     June 30................................................      0.55        0.22
     September 30...........................................      0.43        0.19
     December 31............................................      0.71        0.39
</TABLE>
 
---------------
 
(1) Includes for 1995 the receipt of a $21.0 million settlement in connection
    with the early termination of a disputed long-term acreage-dedicated gas
    sales contract.
 
(2) Includes for 1996 and 1995 a non-cash charge of $9.4 million and $23.1
    million, respectively, for the impairment of long-lived assets (see Note 2
    of the Notes to Consolidated Financial Statements).
 
                                       45
<PAGE>   48
 
                             VASTAR RESOURCES, INC.
                            SUPPLEMENTAL INFORMATION
                         OIL & GAS PRODUCING ACTIVITIES
                                  (UNAUDITED)
 
     The Securities and Exchange Commission (the "SEC") defines proved oil and
gas reserves as those estimated quantities of crude oil, natural gas, and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved developed oil and gas
reserves are reserves that can be expected to be recovered through existing
wells with existing equipment and operating methods. These estimates of
petroleum reserves do not include probable or possible reserves.
 
     With regard to the Company's reserve estimates for natural gas and natural
gas liquids, the Company owns interests in nine gas processing plants in the
Gulf of Mexico, Gulf Coast and Mid-Continent producing areas. As a result of
this ownership interest, the Company has natural gas processing rights for
proved reserves contractually or economically committed to these plants. These
processing rights stem from a variety of contracts, including wet gas purchase,
BTU keep whole, and processing type agreements, that the Company is a party to
as a plant owner. Natural gas liquid quantities include those volumes allocated
to the Company's leasehold interest (equity) in gas that is processed and those
volumes attributable to the Company's plant ownership resulting from processing
equity and third-party gas. The related shrinkage in natural gas volumes
resulting from processing has been excluded from the natural gas reserve
quantities. Approximately six percent of the Company's total reserves are
attributable to the Company's ownership in gas processing plants.
 
     Proved oil and gas reserve quantities are based on estimates prepared by
the Company's engineers in accordance with guidelines established by the SEC and
approximately 60 percent were reviewed by Ryder Scott Company Petroleum
Engineers, independent petroleum engineers. There are numerous uncertainties
inherent in estimating quantities of proved reserves and projecting future rates
of production and timing of development expenditures. The following reserve data
represents estimates only and should not be construed as being exact. Estimated
net quantities of proved oil and gas reserves of Vastar were as follows:
 
<TABLE>
<CAPTION>
                                                CRUDE AND           NATURAL GAS       NATURAL GAS
                                               CONDENSATE             LIQUIDS          (BILLION
                                            (MILLION BARRELS)    (MILLION BARRELS)    CUBIC FEET)
                                            -----------------    -----------------    -----------
<S>                                         <C>                  <C>                  <C>
January 1, 1994
  Proved reserves.........................        65.4                 26.7              1,986
  Proved developed reserves...............        42.7                 24.9              1,709
December 31, 1994
  Proved reserves.........................        62.2                 32.9              1,982
  Proved developed reserves...............        42.6                 29.5              1,756
December 31, 1995
  Proved reserves.........................        64.0                 43.4              2,081
  Proved developed reserves...............        42.8                 39.5              1,738
December 31, 1996
  Proved reserves.........................        67.5                 47.8              2,224
  Proved developed reserves...............        43.6                 44.3              1,801
</TABLE>
 
                                       46
<PAGE>   49
 
     The changes in proved reserves for each of the three years in the period
ended December 31, 1996, were as follows:
 
<TABLE>
<CAPTION>
                                              CRUDE AND           NATURAL GAS       NATURAL GAS
                                             CONDENSATE             LIQUIDS          (BILLION
                                          (MILLION BARRELS)    (MILLION BARRELS)    CUBIC FEET)
                                          -----------------    -----------------    -----------
<S>                                       <C>                  <C>                  <C>
Reserves at January 1, 1994.............         65.4                26.7              1,986
Revisions of estimates..................         (5.9)                8.5                 86
Improved recovery.......................           --                  --                  7
Purchases of minerals-in-place..........          0.3                  --                 13
Extensions and discoveries..............         14.5                 2.2                195
Production..............................        (12.1)               (4.5)              (275)
Consumed in production..................           --                  --                 (7)
Sales of minerals-in-place..............           --                  --                (23)
                                               ------               -----              -----
Reserves at December 31, 1994...........         62.2                32.9              1,982
Revisions of estimates..................          1.1                 1.9                 91
Improved recovery.......................          0.3                  --                  7
Purchases of minerals-in-place..........           --                 1.7                 77
Extensions and discoveries..............         13.0                11.5                231
Production..............................        (12.0)               (4.6)              (295)
Consumed in production..................           --                  --                 (8)
Sales of minerals-in-place..............         (0.6)                 --                 (4)
                                               ------               -----              -----
Reserves at December 31, 1995...........         64.0                43.4              2,081
Revisions of estimates..................          2.7                 3.5                 95
Improved recovery.......................          0.3                 2.2                 14
Purchases of minerals-in-place..........          1.9                 3.9                 94
Extension and discoveries...............         11.7                 0.7                268
Production..............................        (12.5)               (5.3)              (319)
Consumed in production..................           --                  --                 (6)
Sales of minerals-in-place..............         (0.6)               (0.6)                (3)
                                               ------               -----              -----
Reserves at December 31, 1996...........         67.5                47.8              2,224
                                               ======               =====              =====
</TABLE>
 
     These estimates of petroleum reserves have been made by Vastar engineers
and do not include probable or possible reserves.
 
     Costs, both capitalized and expensed, incurred in oil and gas producing
activities (including operating overhead) were as follows for the years ended
December 31:
 
<TABLE>
<CAPTION>
                                           1996      1995      1994
                                          ------    ------    ------
                                            (MILLIONS OF DOLLARS)
<S>                                       <C>       <C>       <C>
Property acquisition costs:
  Proved................................  $ 51.0    $ 51.8    $  3.5
  Unproved..............................    68.3      18.1      27.4
Exploration costs.......................   213.5     171.8     132.1
Development costs.......................   256.8     226.0     201.3
</TABLE>
 
                                       47
<PAGE>   50
 
     Results of operations for oil and gas producing activities (including
operating overhead) were as follows for the years ended December 31:
 
<TABLE>
<CAPTION>
                                            1996       1995      1994
                                          --------    ------    ------
                                             (MILLIONS OF DOLLARS)
<S>                                       <C>         <C>       <C>
REVENUES
  Sales.................................  $  985.3    $679.9    $727.6
  Other revenues........................      19.9      32.3      12.8
                                          --------    ------    ------
          Total revenues................   1,005.2     712.2     740.4
                                          --------    ------    ------
EXPENSES
  Production costs......................     177.2     160.6     171.2
  Exploration expenses..................     186.4     151.2     138.7
  Depreciation, depletion and
     amortization.......................     275.9     262.7     230.8
  Other operating expenses..............      28.9      17.5      16.6
                                          --------    ------    ------
  Income before income taxes............     336.8     120.2     183.1
  Provision (benefit) for income
     taxes..............................      37.8     (23.0)     15.3
                                          --------    ------    ------
  Results of operations for oil and gas
     producing activities...............  $  299.0    $143.2    $167.8
                                          ========    ======    ======
</TABLE>
 
     The difference between the above results of operations and the amounts
reported in the Consolidated Statement of Income is primarily attributable to
excluding marketing and risk management related activities, general and
administrative expense and interest expense.
 
     The standardized measure of discounted estimated future net cash flows and
changes therein, related to proved oil and gas reserves are as follows as of
December 31:
 
<TABLE>
<CAPTION>
                                                         1996        1995        1994
                                                       --------    --------    --------
                                                            (MILLIONS OF DOLLARS)
<S>                                                    <C>         <C>         <C>
Future cash inflows..................................  $9,859.2    $6,498.8    $4,978.5
Future development and production costs..............   2,295.4     2,013.0     1,999.9
Future income tax expense............................   2,146.2     1,080.7       649.1
                                                       --------    --------    --------
Future net cash flows................................   5,417.6     3,405.1     2,329.5
10% annual discount..................................   1,757.5     1,096.2       807.9
                                                       --------    --------    --------
Standardized measure of discounted estimated future
  net cash flows.....................................  $3,660.1    $2,308.9    $1,521.6
                                                       ========    ========    ========
</TABLE>
 
     Primary changes in the standardized measure of discounted estimated future
net cash flows are as follows:
 
<TABLE>
<CAPTION>
                                                              1996      1995      1994
                                                            --------   -------   -------
                                                               (MILLIONS OF DOLLARS)
<S>                                                         <C>        <C>       <C>
Sales of oil and gas net of production costs..............  $ (808.1)  $(519.3)  $(556.3)
Extensions, discoveries and improved recovery, less
  related costs...........................................     639.3     424.3     225.0
Purchases/Sales...........................................     210.7      90.1      (7.0)
Revisions of estimates of reserves proved in prior years:
  Quantity estimates......................................     227.6     119.1      75.4
  Net changes in price and production costs...............   1,407.7     709.5     (33.0)
Accretion of discount.....................................     298.7     189.9     174.7
Development costs incurred during the period..............     256.8     225.9     201.2
Net change in income taxes................................    (683.3)   (300.7)     49.0
Other.....................................................    (198.2)   (151.5)     71.6
                                                            --------   -------   -------
Net change................................................  $1,351.2   $ 787.3   $ 200.6
                                                            ========   =======   =======
</TABLE>
 
                                       48
<PAGE>   51
 
     Vastar's estimate of future cash inflows was generated by applying year-end
prices to the projected future sale of proved reserves, plus incremental revenue
from long-term contractual arrangements existing at the time. Year-end cash
market natural gas prices for eight trading hubs for the week of December 30,
1996 formed the basis for regional natural gas pricing standards. The year-end
cash market crude oil price for West Texas Intermediate on the last trading day
of 1996 formed the basis for the crude oil price standard. Individual wellhead
prices were generated against these pricing standards using historical
processing and transportation differentials.
 
     Estimated future development and production costs are determined by
estimating the expenditures to be incurred in developing and producing the
proved oil and gas reserves at the end of the year, based on year-end costs and
assuming continuation of existing economic conditions.
 
     Estimated future income tax expense is calculated by applying the year end
statutory tax rate (adjusted for permanent differences and tax credits) to
estimated future pre-tax net cash flow related to proved oil and gas reserves,
less the tax basis of the properties involved.
 
     These estimates are furnished and calculated in accordance with
requirements of the Financial Accounting Standards Board and the SEC. Estimates
of future net cash flows presented do not represent management's assessment of
future profitability or future cash flow to Vastar. Management's investment and
operating decisions are based upon reserve estimates that include proved
reserves prescribed by the SEC as well as probable reserves, and upon different
price and cost assumptions from those used here.
 
     It should be recognized that applying current costs and prices and a ten
percent standard discount rate does not convey absolute value. The discounted
amounts arrived at are only one measure of the value of proved reserves.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
 
     None
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
 
ITEM 11. EXECUTIVE COMPENSATION.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
     Information regarding executive officers of the Company is included in Part
I. For the other information called for by Items 10, 11, 12 and 13, reference is
made to the Company's definitive proxy statement for its Annual Meeting of
Stockholders, to be held on May 21, 1997, which will be filed with the SEC
within 120 days after December 31, 1996, and which is incorporated herein by
reference, except for the material included under the captions "Report of
Compensation Committee" and "Performance Graph."
 
                                       49
<PAGE>   52
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
 
     (a) The following documents are filed as part of this report:
 
<TABLE>
<C>                      <S>
1 and 2                  -- Financial Statements and Financial Statement Schedules:
                            These documents are listed in the Index to Consolidated
                            Financial Statements in Item 8 hereof.
</TABLE>
 
3. Exhibits:
 
<TABLE>
<C>                      <S>
         3.1             -- Second Restated Certificate of Incorporation of Vastar
                            Resources, Inc. ("Vastar") filed with the State of
                            Delaware on May 19, 1994 (filed with the Securities and
                            Exchange Commission (the "Commission") on August 7, 1996
                            as Exhibit 3 to Vastar's report on Form 10-Q for the
                            quarterly period ended June 30, 1996 (Commission File No.
                            1-13108) and incorporated herein by reference)
         3.2             -- By-Laws of Vastar (filed with the Commission as Exhibit
                            3.2 to Vastar's report on Form 10-K for the year ended
                            December 31, 1994 (Commission File No. 1-13108) and
                            incorporated herein by reference)
         4.1             -- Form of certificate evidencing Common Stock (filed with
                            the Commission on June 23, 1994 as Exhibit 5 to Amendment
                            No. 4 to Vastar's Registration Statement on Form S-1
                            (Registration No. 33-74536) (Commission File No. 1-13108)
                            and incorporated herein by reference)
         4.2(a)          -- Indenture dated as of January 1, 1995 between Vastar and
                            NationsBank of Texas, N.A. (filed with the Commission as
                            Exhibit 4.2 to Vastar's report on Form 10-K for the year
                            ended December 31, 1994 (Commission File No. 1-13108) and
                            incorporated herein by reference)
         4.2(b)          -- Supplemental Indenture, dated May 18, 1995, by and among
                            Vastar, NationsBank of Texas, N.A., Harris Trust and
                            Savings Bank and Bank of Montreal Trust Company,
                            effective May 25, 1995 (filed with the Commission as
                            Exhibit 4 to Vastar's Current Report on Form 8-K dated
                            May 5, 1995 (Commission File No. 1-13108) and
                            incorporated herein by reference)
        10.1(a)          -- Amendment No. 1 to Credit Agreement, dated as of March
                            29, 1996, among Vastar, the Banks Parties thereto, the
                            Co-Agents listed therein and Morgan Guaranty Trust
                            Company of New York, as Agent (filed with the Commission
                            on May 2, 1996 as Exhibit 10 to Vastar's Quarterly Report
                            on Form 10-Q for the quarterly period ended March 31,
                            1996 (Commission File No. 1-13108) and incorporated
                            herein by reference)
        10.1(b)          -- $800,000,000 Credit Agreement, dated as of May 5, 1995,
                            among Vastar, the Banks Parties thereto, the Co-Agents
                            listed therein and Morgan Guaranty Trust Company of New
                            York, as Agent (filed with the Commission on June 9, 1995
                            as Exhibit 10.3 to Vastar's Current Report on Form 8-K
                            (Commission File No. 1-13108) dated May 5, 1995 and
                            incorporated herein by reference)
        10.2             -- General Conveyance and Assumption Agreement, dated
                            October 8, 1993, modified as of December 13, 1993 and
                            December 22, 1993, between Vastar and Atlantic Richfield
                            Company ("ARCO") (filed with the Commission on January
                            28, 1994 as Exhibit 10.2 to Vastar's Registration
                            Statement on Form S-1 (Registration No. 33-74536)
                            (Commission File No. 1-13108) and incorporated herein by
                            reference)
</TABLE>
 
                                       50
<PAGE>   53

<TABLE>
        <S>              <C>
        10.3             -- Cross-Indemnification Agreement, dated as of October 1,
                            1993, between Vastar and ARCO (filed with the Commission
                            on January 28, 1994 as Exhibit 10.3 to Vastar's
                            Registration Statement on Form S-1 (Registration No.
                            33-74536) (Commission File No. 1-13108) and incorporated
                            herein by reference)
        10.4(a)          -- Tax Sharing Agreement, dated as of October 1, 1993,
                            between Vastar and ARCO (filed with the Commission on
                            January 28, 1994 as Exhibit 10.4 to Vastar's Registration
                            Statement on Form S-1 (Registration No. 33-74536)
                            (Commission File No. 1-13108) and incorporated herein by
                            reference)
        10.4(b)          -- First Amendment to Tax Sharing Agreement, dated as of
                            June 1, 1995, between Vastar, F&H Pipeline Company, Grant
                            Gathering Company, Wilburton Hub, Inc., Vastar Gas
                            Marketing, Inc. and ARCO (filed with the Commission as
                            Exhibit 10 to Vastar's report on Form 10-Q Report for the
                            quarterly period ended June 30, 1995 (File No. 1-13108)
                            and incorporated herein by reference)
        10.5             -- Corporate Services Agreement, dated as of February 22,
                            1994, between Vastar and ARCO (filed with the Commission
                            on March 23, 1994 as Exhibit 10.5 to Amendment No. 1 to
                            Vastar's Registration Statement on Form S-1 (Registration
                            No. 33-74536) (Commission File No. 1-13108) and
                            incorporated herein by reference)
        10.6             -- ARCO Exploration and Production Technology Technical
                            Services Agreement, dated as of October 1, 1993, between
                            Vastar and ARCO (filed with the Commission on January 28,
                            1994 as Exhibit 10.7 to Vastar's Registration Statement
                            on Form S-1 (Registration No. 33-74536) (Commission File
                            No. 1-13108) and incorporated herein by reference)
        10.7             -- Insurance Services Agreement, dated as of March 24, 1994,
                            between Vastar and ARCO (filed with the Commission on May
                            26, 1994 as Exhibit 10.8 to Amendment No. 2 to Vastar's
                            Registration Statement on Form S-1 (Registration No.
                            33-74536) (Commission File No. 1-13108) and incorporated
                            herein by reference)
        10.8             -- Agreement for the Purchase and Sale of Natural Gas
                            Liquids, dated December 21, 1993, between Vastar and ARCO
                            (filed with the Commission on January 28, 1994 as Exhibit
                            10.9 to Vastar's Registration Statement on Form S-1
                            (Registration No. 33-74536) (Commission File No. 1-13108)
                            and incorporated herein by reference)
        10.9             -- Technology Assignment Agreement, dated as of October 1,
                            1993, between Vastar and ARCO (filed with the Commission
                            on January 28, 1994 as Exhibit 10.11 to Vastar's
                            Registration Statement on Form S-1 (Registration No.
                            33-74536) (Commission File No. 1-13108) and incorporated
                            herein by reference)
        10.10            -- Technology Undivided Interest Assignment Agreement, dated
                            as of October 31, 1993, between Vastar and ARCO (filed
                            with the Commission on January 28, 1994 as Exhibit 10.12
                            to Vastar's Registration Statement on Form S-1
                            (Registration No. 33-74536) (Commission File No. 1-13108)
                            and incorporated herein by reference)
        10.11            -- Information Technology License Agreement, dated as of
                            October 1, 1994, between Vastar and ARCO (filed with the
                            Commission on January 28, 1994 as Exhibit 10.13 to
                            Vastar's Registration Statement on Form S-1 (Registration
                            No. 33-74536) (Commission File No. 1-13108) and
                            incorporated herein by reference)
</TABLE>
 
                                       51
<PAGE>   54

<TABLE>
        <S>              <C>
        10.12            -- Intellectual Property License Agreement, dated as of
                            October 1, 1993, between Vastar and ARCO (filed with the
                            Commission on January 28, 1994 as Exhibit 10.14 to
                            Vastar's Registration Statement on Form S-1 (Registration
                            No. 33-74536) (Commission File No. 1-13108) and
                            incorporated herein by reference)
        10.13            -- Third Party Technology Assignment Agreement, dated as of
                            October 1, 1994, between Vastar and ARCO (filed with the
                            Commission on January 28, 1994 as Exhibit 10.15 to
                            Vastar's Registration Statement on Form S-1 (Registration
                            No. 33-74536) (Commission File No. 1-13108) and
                            incorporated herein by reference)
        10.14            -- Share Purchase Option and Business Opportunities
                            Agreement, dated as of May 19, 1994, between Vastar and
                            ARCO (filed with the Commission on June 10, 1994 as
                            Exhibit 10.16 to Amendment No. 3 to Vastar's Registration
                            Statement on Form S-1 (Registration No. 33-74536)
                            (Commission File No. 1-13108) and incorporated herein by
                            reference)
        10.15            -- Form of Company's Indemnity Agreement with officers and
                            directors (filed with the Commission on January 28, 1994
                            as Exhibit 10.17 to Vastar's Registration Statement on
                            Form S-1 (Registration No. 33-74536) (Commission File No.
                            1-13108) and incorporated herein by reference)(2)
        10.16            -- Gas Sales and Purchase Agreement, dated December 15,
                            1993, between Vastar Gas Marketing, Inc. and ARCO
                            Permian, a Unit of ARCO (filed with the Commission on
                            January 28, 1994 as Exhibit 10.18 to Vastar's
                            Registration Statement on Form S-1 (Registration No.
                            33-74536) (Commission File No. 1-13108) and incorporated
                            herein by reference)
        10.17            -- Annual Incentive Plan, as adopted by the Board of
                            Directors of ARCO on November 26, 1984, and effective on
                            that date, as amended through February 28, 1994 (filed
                            with the Commission as Exhibit 10.6 to ARCO's report on
                            Form 10-K for the year ended December 31, 1994 (File No.
                            1-1196) and incorporated herein by reference)
        10.18            -- Amendment No. 1 to the ARCO Executive Supplementary
                            Savings Plan II, as amended and effective on January 1,
                            1989 (filed with the Commission as Exhibit 10.6(b) to
                            ARCO's report on Form 10-K for the year ended December
                            31, 1989 (File No. 1-1196) and incorporated herein by
                            reference)
        10.19            -- ARCO Executive Supplementary Savings Plan II, as amended,
                            restated and effective on July 1, 1988 (filed with the
                            Commission as Exhibit 10.6 to ARCO's report on Form 10-K
                            for the year ended December 31, 1988 (File No. 1-1196)
                            and incorporated herein by reference)
        10.20            -- ARCO's 1985 Executive Long-Term Incentive Plan, as
                            adopted by the Board of Directors of ARCO on May 28,
                            1985, and as effective on that date, as amended through
                            February 28, 1994 (filed with the Commission as Exhibit
                            10.7 to ARCO's report on Form 10-K for the year ended
                            December 31, 1994 (File No. 1-1196) and incorporated
                            herein by reference)
        10.21            -- ARCO Supplementary Executive Retirement Plan, as adopted
                            by the Board of Directors of ARCO on March 26, 1990 and
                            effective on October 1, 1990 (filed with the Commission
                            as Exhibit 10.2 to ARCO's report on Form 10-K for the
                            year ended December 31, 1990 (File No. 1-1196)
                            incorporated herein by reference)
        10.22            -- Amendment No. 1 to the ARCO Supplementary Executive
                            Retirement Plan, as effective March 22, 1993 (filed with
                            the Commission as Exhibit 10 to ARCO's report on Form
                            10-Q for the quarterly period ended June 30, 1993 (File
                            No. 1-1196) and incorporated herein by reference)
</TABLE>
 
                                       52
<PAGE>   55

<TABLE>
        <S>              <C>
        10.23            -- ARCO Executive Deferral Plan, as adopted by the Board of
                            Directors of ARCO on March 26, 1990 and effective on
                            October 1, 1990 (filed with the Commission as Exhibit
                            10.3 to ARCO's report on Form 10-K for the year ended
                            December 31, 1990 (File No. 1-1196) and incorporated
                            herein by reference)
        10.24            -- Amendment No. 1 to the ARCO Executive Deferral Plan, as
                            effective July 27, 1992 (filed with the Commission as
                            Exhibit 10.2(b) to ARCO's report on Form 10-K for the
                            year ended December 31, 1992 (File No. 1-1196), and
                            incorporated herein by reference)
        10.25            -- ARCO Executive Life Insurance Plan -- Summary Plan
                            Description, as in effect January 1, 1994 (filed with the
                            Commission as Exhibit 10.8 to ARCO's report on Form 10-K
                            for the year ended December 31, 1993 (File No. 1-1196)
                            and incorporated herein by reference)
        10.26            -- ARCO Executive Long-Term Disability Plan -- Summary Plan
                            Description, as in effect January 1, 1994 (filed with the
                            Commission as Exhibit 10.9 to ARCO's report on Form 10-K
                            for the year ended December 31, 1993 (File No. 1-1196)
                            and incorporated herein by reference)
        10.27            -- Form of Indemnity Agreement adopted by the Board of
                            Directors of ARCO on January 26, 1987 and executed in
                            February 1987 by ARCO and each of its directors and
                            officers, included in Exhibit A to ARCO's 1987 Proxy
                            Statement (filed with the Commission under File No.
                            1-1196) and incorporated herein by reference)
        10.28            -- ARCO Executive Medical Insurance Plan -- Summary Plan
                            Description, as in effect January 1, 1994 (filed with the
                            Commission as Exhibit 10.3 to ARCO's report on Form 10-K
                            for the year ended December 31, 1993 (File No. 1-1196)
                            and incorporated herein by reference)
        10.29            -- Vastar Policy on Financial Counseling and Individual
                            Income Tax Service, effective January 1, 1994
        10.30            -- ARCO Policy on Financial Counseling and Individual Income
                            Tax Service, as revised and effective January 1, 1994
                            (filed with the Commission as Exhibit 10.5 to ARCO's
                            report on Form 10-K for the year ended December 31, 1994
                            (File No. 1-1196) and incorporated herein by reference)
        10.31            -- Vastar Supplementary Executive Retirement Plan (filed
                            with the Commission as Exhibit 10.34 to Vastar's report
                            on Form 10-K for the year ended December 31, 1994
                            (Commission File No. 1-13108) and incorporated herein by
                            reference)(2)
        10.32            -- Vastar Annual Incentive Plan (filed with the Commission
                            as Exhibit 10.35 to Vastar's report on Form 10-K for the
                            year ended December 31, 1994 (Commission File No.
                            1-13108) and incorporated herein by reference)(2)
        10.33            -- Vastar Executive Long-Term Incentive Plan (filed with the
                            Commission as Exhibit 10.36 to Vastar's report on Form
                            10-K for the year ended December 31, 1994 (Commission
                            File No. 1-13108) and incorporated herein by
                            reference)(2)
        10.34            -- Vastar Executive Deferral Plan (filed with the Commission
                            as Exhibit 10.37 to Vastar's report on Form 10-K for the
                            year ended December 31, 1994 (Commission File No.
                            1-13108) and incorporated herein by reference)(2)
        10.35            -- Vastar Stock Option Plan for Outside Directors (filed
                            with the Commission as Exhibit 10.38 to Vastar's report
                            on Form 10-K for the year ended December 31, 1994
                            (Commission File No. 1-13108) and incorporated herein by
                            reference)(2)
        10.36            -- Vastar Deferral Plan for Outside Directors (filed with
                            the Commission as Exhibit 10.39 to Vastar's report on
                            Form 10-K for the year ended December 31, 1994
                            (Commission File No. 1-13108) and incorporated herein by
                            reference)(2)
</TABLE>
 
                                       53
<PAGE>   56

<TABLE>
        <S>              <C>
        10.37            -- Vastar Executive Life Insurance Plan (filed with the
                            Commission as Exhibit 10.40 to Vastar's report on Form
                            10-K for the year ended December 31, 1994 (Commission
                            File No. 1-13108) and incorporated herein by
                            reference)(2)
        10.38            -- Vastar Executive Long-Term Disability Plan (filed with
                            the Commission as Exhibit 10.41 to Vastar's report on
                            Form 10-K for the year ended December 31, 1994
                            (Commission File No. 1-13108) and incorporated herein by
                            reference)(2)
        10.39            -- Vastar Executive Supplementary Savings Plan (filed with
                            the Commission as Exhibit 10.42 to Vastar's report on
                            Form 10-K for the year ended December 31, 1994
                            (Commission File No. 1-13108) and incorporated herein by
                            reference)(2)
        10.39(a)         -- Amendment No. 1 to Vastar Executive Supplementary Savings
                            Plan, effective as of August 5, 1996(1)
        10.40            -- Conversion Agreement, dated as of May 23, 1994, between
                            Vastar and Michael E. Wiley (filed with the Commission on
                            June 7, 1994 as Exhibit 10.43 to Amendment No. 3 to
                            Vastar's Registration Statement on Form S-1 (Registration
                            No. 33-74536) (Commission File No. 1-13108) and
                            incorporated herein by reference)(2)
        10.41            -- Conversion Agreement, dated as of May 23, 1994, between
                            Vastar and Steven J. Shapiro (filed with the Commission
                            on June 7, 1994 as Exhibit 10.44 to Amendment No. 3 to
                            Vastar's Registration Statement on Form S-1 (Registration
                            No. 33-74536) (Commission File No. 1-13108) and
                            incorporated herein by reference)(2)
        10.42            -- Conversion Agreement, dated as of May 23, 1994, between
                            Vastar and Charles D. Davidson (filed with the Commission
                            on June 7, 1994 as Exhibit 10.45 to Amendment No. 3 to
                            Vastar's Registration Statement on Form S-1 (Registration
                            No. 33-74536) (Commission File No. 1-13108) and
                            incorporated herein by reference)(2)
        10.44            -- Conversion Agreement, dated as of May 23, 1994, between
                            Vastar and Albert D. Hoppe (filed with the Commission on
                            June 7, 1994 as Exhibit 10.47 to Amendment No. 3 to
                            Vastar's Registration Statement on Form S-1 (Registration
                            No. 33-74536) (Commission File No. 1-13108) and
                            incorporated herein by reference)(2)
        10.45            -- Conversion Agreement, dated as of May 23, 1994, between
                            Vastar and Joseph P. McCoy (filed with the Commission as
                            Exhibit 10.48 to Amendment No. 3 to Vastar's Registration
                            Statement on Form S-1 (Registration No. 33-74536)
                            (Commission File No. 1-13108) and incorporated herein by
                            reference)(2)
        10.46            -- Registration Rights Agreement, dated as of May 25, 1994,
                            between ARCO and Vastar (filed with the Commission on
                            June 7, 1994 as Exhibit 10.49 to Amendment No. 3 to
                            Vastar's Registration Statement on Form S-1 (Registration
                            No. 33-74536) (Commission File No. 1-13108) and
                            incorporated herein by reference)
        10.47            -- Vastar Retirement Plan for Outside Directors (filed with
                            the Commission as Exhibit 10.50 to Vastar's report on
                            Form 10-K for the year ended December 31, 1994
                            (Commission File No. 1-13108) and incorporated herein by
                            reference)(2)
        10.48            -- Vastar Executive Medical Insurance Plan Summary Plan
                            Description, effective January 1, 1994 (filed with the
                            Commission as Exhibit 10.51 to Vastar's report on Form
                            10-K for the year ended December 31, 1994 (Commission
                            File No. 1-13108) and incorporated herein by
                            reference)(2)
        10.49            -- Vastar Comprehensive Management Medical Plan Summary Plan
                            Description, effective January 1, 1994 (filed with the
                            Commission as Exhibit 10.52 to Vastar's report on Form
                            10-K for the year ended December 31, 1994 (Commission
                            File No. 1-13108) and incorporated herein by
                            reference)(2)
</TABLE>
 
                                       54
<PAGE>   57

<TABLE>
        <S>              <C>
        10.50            -- Vastar Comprehensive Management Medical Plan, Summary of
                            Material Modifications, effective January 1, 1995 (filed
                            with the Commission as Exhibit 10 to Vastar's report on
                            Form 10-Q for the quarterly period ended June 30, 1996
                            (Commission File No. 1-13108) and incorporated herein by
                            reference)(2)
        12               -- Computation of Ratio of Earnings to Fixed Charges(1)
        21               -- List of Subsidiaries of Vastar (filed with the Commission
                            as Exhibit 21 to Vastar's report on Form 10-K for the
                            year ended December 31, 1995 (Commission File No.
                            1-13108) and incorporated herein by reference)
        23.1             -- Consent of Coopers & Lybrand L.L.P.(1)
        23.2             -- Consent of Ryder Scott Company Petroleum Engineers
        27               -- Financial Data Schedule(1)
        99.1             -- Review Letter of Ryder Scott Company Petroleum
                            Engineers(1)
</TABLE>
 
---------------
 
(1) Filed herewith.
 
(2) Management contract or compensatory plan or arrangement required to be filed
    as an exhibit to this form pursuant to Item 14(c) of Form 10-K.
 
     Copies of exhibits will be furnished upon prepayment of 25 cents per page.
Requests should be addressed to the Corporate Secretary.
 
     (b) Reports on Form 8-K.
 
<TABLE>
<CAPTION>
 DATE OF REPORT      ITEM NO.     FINANCIAL STATEMENTS
 --------------      --------     --------------------
<C>                <C>            <C>
February 18, 1997  Items 5 and 7      None
</TABLE>
 
                                       55
<PAGE>   58
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
 
                                            VASTAR RESOURCES, INC.
                                            (Registrant)
 
                                            By:     /s/ MICHAEL E. WILEY
                                              ----------------------------------
                                                       Michael E. Wiley
                                               Chairman of the Board, President
                                                              and
                                                   Chief Executive Officer
 
                                            Date: March   , 1997
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
                      SIGNATURE                                     TITLE                    DATE
                      ---------                                     -----                    ----
<C>                                                    <S>                              <C>
 
               /s/ JIMMIE D. CALLISON                  Director                         March   , 1997
-----------------------------------------------------
                 Jimmie D. Callison
 
                 /s/ TERRY G. DALLAS                   Director                         March   , 1997
-----------------------------------------------------
                   Terry G. Dallas
 
               /s/ CHARLES D. DAVIDSON                 Senior Vice President and        March   , 1997
-----------------------------------------------------    Director
                 Charles D. Davidson
 
                 /s/ LINDA G. HAVARD                   Director                         March   , 1997
-----------------------------------------------------
                   Linda G. Havard
 
                /s/ MARIE L. KNOWLES                   Director                         March   , 1997
-----------------------------------------------------
                  Marie L. Knowles
 
                /s/ ROBERT C. LEVINE                   Director                         March   , 1997
-----------------------------------------------------
                  Robert C. LeVine
 
                 /s/ JOSEPH P. MCCOY                   Vice President and Controller    March   , 1997
-----------------------------------------------------
                   Joseph P. McCoy
           (principal accounting officer)
 
               /s/ WILLIAM D. SCHULTE                  Director                         March   , 1997
-----------------------------------------------------
                 William D. Schulte
 
                /s/ STEVEN J. SHAPIRO                  Senior Vice President, Chief     March   , 1997
-----------------------------------------------------    Financial Officer and
                  Steven J. Shapiro                      Director
            (principal financial officer)
 
                /s/ MICHAEL E. WILEY                   Chairman of the Board,           March   , 1997
-----------------------------------------------------    President and Chief Executive
                  Michael E. Wiley                       Officer
            (principal executive officer)
</TABLE>
 
                                       56
<PAGE>   59
                               INDEX TO EXHIBITS

<TABLE>
        <S>              <C>
        10.39(a)         -- Amendment No. 1 to Vastar Executive Supplementary Savings
                            Plan, effective as of August 5, 1996(1)
        12               -- Computation of Ratio of Earnings to Fixed Charges(1)
        23.1             -- Consent of Coopers & Lybrand L.L.P.(1)
        23.2             -- Consent of Ryder Scott Company Petroleum Engineers(1)
        27               -- Financial Data Schedule(1)
        99.1             -- Review Letter of Ryder Scott Company Petroleum
                            Engineers(1)
</TABLE>
 
---------------
 
(1) Filed herewith.