UNION PACIFIC CORP, 10-K, 1998-03-18

UNION PACIFIC CORP
10-K, 1998-03-18
RAILROADS, LINE-HAUL OPERATING

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------

FORM 10-K

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[X] SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1997

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 1-6075

UNION PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)

Utah 13-2626465
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

1717 MAIN STREET
SUITE 5900 75201-4605
DALLAS, TX (Zip Code)
(Address of principal executive offices)

Registrant's telephone number, including area code (214) 743-5600

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

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

Name of each exchange on
Title of each class which registered
- ---------------------------------------- -----------------------------
Common Stock (Par Value $2.50 per share) New York Stock Exchange, Inc.

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

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. [_____].

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

As of February 28, 1998 the aggregate market value of the registrant's
Common Stock held by non-affiliates (using the New York Stock Exchange closing
price) was approximately $12,644,079,279.

The number of shares outstanding of the registrant's Common Stock as of
February 28, 1998 was 247,292,769.

Portions of the following documents are incorporated by reference into
this Report: (1) registrant's Annual Report to Stockholders for the year ended
December 31, 1997 (Parts I, II and IV); and (2) registrant's definitive Proxy
Statement for the annual meeting of stockholders to be held on April 17, 1998
(Part III).

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PART I

ITEM 1. BUSINESS AND ITEM 2. PROPERTIES

DISCUSSION OF SIGNIFICANT EVENTS AND OPERATIONS

Union Pacific Corporation (UPC or the Corporation), incorporated in Utah
in 1969, operates through subsidiaries primarily in the areas of rail
transportation and trucking. The Corporation's rail transportation operations
principally consist of Union Pacific Railroad Company (UPRR or the Railroad)
(including Missouri Pacific Railroad Company (MPRR), which was merged with UPRR
on January 1, 1997, the Denver and Rio Grande Railroad Company (DRGW) and SPCSL
Corp. (SPCSL), which were merged into UPRR on June 30, 1997, St. Louis
Southwestern Railway Company (SSW), which was merged into UPRR on September 30,
1997, and Southern Pacific Transportation Company (SPT), which was merged with
UPRR on February 1, 1998). SPT, DRGW, SPCSL and SSW were the principal rail
subsidiaries of Southern Pacific Rail Corporation (Southern Pacific or SP), the
acquisition of which was completed in September 1996. The Corporation's trucking
operations principally consist of Overnite Transportation Company (Overnite).

Over the past three years, UPC completed several strategic transactions
that refocused the Corporation's business objectives on its core transportation
operation, including the Southern Pacific acquisition (see "Corporate
Reorganization" below). In addition, during the latter part of the year, the
Railroad experienced unexpected traffic congestion and service problems
throughout the system (see "1997 Congestion and Service Issues" below).

CORPORATE REORGANIZATION

CHICAGO AND NORTH WESTERN TRANSPORTATION COMPANY (CNW) - In April 1995,
UPC acquired the remaining 71.6% of CNW's outstanding common stock not
previously owned by UPC for $1.2 billion. The acquisition of CNW was accounted
for as a purchase, and CNW's financial results were consolidated with UPC,
beginning in May 1995.

NATURAL RESOURCES DIVESTITURE - In July 1995, UPC's Board of Directors
approved a formal plan to dispose of its oil, gas and mining business through an
initial public offering (IPO) of 17% of the common stock of Union Pacific
Resources Group Inc. (Resources), followed by a distribution of UPC's remaining
interest in Resources to the Corporation's stockholders on a tax-free, pro-rata
basis (the Spin-Off). In October 1995, Resources completed the IPO, and, after
UPC's receipt of a favorable Internal Revenue Service ruling as to the tax-free
nature of the Spin-Off, UPC completed its divestiture of Resources in October
1996.

SOUTHERN PACIFIC ACQUISITION - In September 1995, UPC acquired 25% of
Southern Pacific, and, in September 1996, it acquired the remaining 75% after
receipt of a favorable decision from the Surface Transportation Board of the
U.S. Department of Transportation (STB) regarding the Corporation's acquisition
of SP. The aggregate Southern Pacific purchase price was $4.1 billion (comprised
of $2.5 billion in UPC common stock and $1.6 billion in cash). The acquisition
of Southern Pacific was accounted for as a purchase, and Southern Pacific's
results were fully consolidated with the Corporation's results beginning in
October 1996.

MEXICAN RAILWAY CONCESSION - During 1997, UPRR and a consortium of
partners were granted a 50-year concession for the Pacific-North and Chihuahua
Pacific rail lines in Mexico and a 25% stake in the Mexico City Terminal Company
at an aggregate

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price of $525 million. The Railroad holds a 13% ownership share in the
consortium and has accounted for its interest by the equity method. The
consortium assumed operational control of both lines in February 1998.

INTEGRATION OF SOUTHERN PACIFIC

The Corporation expects to complete the full integration of the
operations of UPRR and the Southern Pacific rail subsidiaries during 1999. The
Corporation believes that the full implementation of the merger will result in
shorter routes, faster transit times, better on-time performance, expanded
single-line service and more efficient traffic flow. Some of the key on-going
elements of integration are (i) the institution of directional running on
parallel tracks in certain corridors to improve average train velocity and allow
more traffic to be handled efficiently, (ii) the negotiation and implementation
of "hub-and-spoke" labor agreements to allow more efficient use of train crews,
(iii) the integration of the computer systems of both companies to improve
overall operations and service and (iv) merger-related capital spending to
expand capacity and improve service, now estimated to approximate $400 million.

1997 CONGESTION AND SERVICE ISSUES

CONGESTION - In the third quarter of 1997, congestion in and around
Houston and the coastal areas of Texas and Louisiana (the Gulf Coast region)
began to have a material adverse effect on UPRR's operations and earnings.
System congestion started in the Gulf Coast region and spread throughout the
system as UPRR shifted resources to help mitigate the need for locomotives due
to slower average train velocity. The congestion was brought on by, among other
things, crew shortages and restricted track access caused by necessary track
maintenance on former Southern Pacific lines, increased demand, washouts due to
severe weather, derailments and congestion at Texas/Mexico gateways. Traffic
slowed further as railyards in the Gulf Coast region filled, slowing access into
and out of the yards and forcing trains to be held on sidings.

SERVICE RECOVERY PLAN - To restore service to acceptable levels, UPRR
announced on October 1, 1997, that it was implementing a Service Recovery Plan
(the Plan). The Plan focuses on reducing the number of cars on the system and
restoring system velocity, which, in turn, results in more reliable service to
customers. Key elements of the Plan include:

o Power: Bringing more locomotives into the Gulf Coast region
through acquisitions, leasing from other railroads and moving
locomotives from selected areas of the UPRR system;

o People: Engaging in an extensive hiring program, allocating
additional managers and operating personnel and revising
operating plans to relieve congested terminals and remove trains
from congested lines; and

o Cooperation: Working with customers and other railroads to
curtail additional congestion and to provide alternative
transportation.

RECENT ACTIONS UNDER THE PLAN - Implementation of the Plan has resulted
in improvement in the overall operation of the Railroad and has generally
eliminated congestion problems outside the Gulf Coast region (although weather
problems have

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caused intermittent periods of congestion, primarily in the Midwest). However,
significant congestion has continued in the Gulf Coast region, which has been
aggravated recently by several severe storms and congestion caused by
operational problems on Mexican railroad lines south of Laredo, Texas. UPRR has
implemented (i) Transportation Control System (TCS) in the southeast portion of
UPRR's system, which includes the Gulf Coast region, where the cutover to TCS
occurred on December 1, 1997, (ii) directional running from Dexter Junction,
Missouri on the north, across Arkansas, western Louisiana and eastern Texas to
the Houston and San Antonio areas on the south, beginning on February 1, 1998
and (iii) the "hub-and-spoke" labor agreements in Texas and Arkansas. Although
the Corporation believes that the full implementation of these changes is
essential to achieving significant long-term benefits, their implementation
also contributed to the persistence of congestion in the affected Gulf Coast
region during late 1997 and early 1998.

In order to address the congestion problem and to realize the benefits
to UPRR and its customers of the merger implementation steps outlined above,
UPRR has recently initiated certain actions under the Plan:

o Power: Arranging for the deployment of approximately 200
locomotives in the Gulf Coast region through selective
redeployment and short-term leases and loans from other
railroads to reduce congestion in yards and remove trains from
sidings.

o People: Continuing its hiring program and redeploying personnel
to (i) improve management of certain major terminals, (ii)
update TCS information in congested areas to improve operational
reliability and (iii) identify empty cars and expedite them to
shipper facilities for loading to reduce the number of cars in
yards and on sidings.

o Cooperation: Working with UPRR's connecting railroads to
expedite the interchange of traffic and entering into
arrangements with competitors to share tracks and coordinate
dispatching. For example, the recent agreement between UPRR and
The Burlington Northern and Sante Fe Railway Company ("BNSF"),
which, among other things, grants certain trackage rights to
UPRR in the Houston area and provides for joint dispatching of
various lines in the Houston area and between Houston and New
Orleans.

UPRR believes that the steps it is taking to continue the integration of
Southern Pacific and to implement the Plan will alleviate the congestion and
service issues affecting UPRR and that substantial operational improvement will
begin to occur in the near term. UPRR is also prepared to take additional
action, including transferring business to other carriers and arranging a
temporary pause in shipments with selected customers to allow UPRR to clear the
system, if such actions become necessary. However, UPRR does not believe that
such actions are necessary at this time.

In conjunction with the Plan, UPRR is engaged in a comprehensive
examination of its long-term capital spending program in the areas affected by
congestion. The study focuses on further upgrading UPRR's operations
infrastructure in order to keep pace with business growth primarily driven by
current and anticipated chemical plant expansion along the Gulf Coast as well as
intermodal, automotive, industrial products, grain and Mexico business. The
scope of the examination includes all terminal operations, yards, industrial
complexes, joint operations, connecting routes and Mexican gateways in the El
Paso-New Orleans corridor. UPRR currently plans to spend more than $570 million
on capital projects in Texas and Louisiana in

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1998 and 1999. Management remains committed to capital spending to continue
capacity expansion on its main lines and in its yards, upgrade and augment
equipment to meet customer needs and develop and implement new technology.

FINANCIAL IMPACT OF CONGESTION - The cost of the congestion-related
problems in 1997 was approximately $450 million, after tax, which reflected the
combined effects of lost business, higher costs associated with system
congestion, and costs associated with implementation of the Plan, alternate
transportation and customer claims. Although progress has been made in improving
service, the Railroad expects these problems to have an adverse impact on 1998
results, and on February 26, 1998, the Corporation announced that the problems
would likely result in a loss during the first quarter of 1998. In addition, as
a result of recent operating losses at UPRR and in order to fund its capital
program, the Corporation has incurred substantial incremental debt since
December 31, 1997, and the Corporation expects to incur significant additional
debt during the remainder of 1998. The timing of the Corporation's return to
profitability will be determined by how rapidly it is able to eliminate
congestion in the Gulf Coast region and return to normal operations.

CONTINUING OPERATIONS

RAIL TRANSPORTATION - The Railroad is the largest railroad in the United
States (measured in both track miles and freight revenue), operating nearly
35,000 route miles linking Pacific Coast and Gulf Coast ports to the Midwest and
eastern U.S. gateways and providing several north/south corridors to key Mexican
gateways. The Railroad serves the western two-thirds of the country and
cooperates with other carriers in the handling of freight to and from the
Atlantic seaboard, the Pacific Coast, the Southeast, the Southwest, Canada and
Mexico. Export and import traffic is moved through Gulf Coast and Pacific Coast
ports and across the Mexican and Canadian borders(primarily through interline
connections). The Corporation completed the integration of CNW in 1996 and
expects to complete the integration of the operations of Southern Pacific during
1999. Major categories of freight hauled by the Railroad are agricultural
products, automotive, chemicals, energy (primarily coal), industrial products
and intermodal. In 1997, energy was the largest commodity hauled, representing
36.1% of the Railroad's revenue ton-miles and 19.7% of the Railroad's commodity
revenue. Percentages of revenue ton-miles and commodity revenue for other
commodities hauled by the Railroad are presented on page 49 of the 1997 Annual
Report to Stockholders (Annual Report) and are incorporated herein by reference.

In its rail transportation business, the Railroad is subject to price
and service competition from other railroads, motor carriers and barge
operators. The vast majority of the Railroad's freight is hauled in corridors
served by competing railroads and motor carriers. Motor carrier competition has
been strengthened by longer combination vehicles that are allowed in a number of
states in which the Railroad operates. Because of the Railroad's proximity to
major inland and Gulf Coast waterways, barge competition can be particularly
pronounced for grain and bulk commodities in certain markets.

Approximately 90% of the Railroad's 52,000 employees are represented by
rail unions. Under the conditions imposed by the STB in connection with the
Southern Pacific acquisition, labor agreements between the Railroad and the
unions must be negotiated before the UPRR and Southern Pacific rail systems can
be fully integrated. The Corporation has reached agreement with a number of
unions and expects the remaining agreements to be finalized in 1998.

A separate Annual Report on Form 10-K for the year ended December 31,
1997, will be filed by UPRR and will contain additional information concerning
that company.

TRUCKING - The Corporation's other major line of business is truck

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transportation. Overnite, a major interstate trucking company specializing in
less-than-truckload (LTL) shipments, serves all 50 states and portions of Canada
and Mexico through 164 service centers located throughout the United States.
Overnite transports a variety of products, including machinery, tobacco,
textiles, plastics, electronics and paper products. Overnite experiences intense
service and price competition from both regional and national motor carriers.

As one of the nation's largest LTL trucking companies, Overnite is
periodically targeted by major labor organization efforts instituted by the
International Brotherhood of Teamsters (Teamsters) at many of its service
centers. Since year-end 1994, 59 of Overnite's 164 service centers have received
petitions for union elections. Where elections have been held, 35 Overnite
service centers voted against representation. The employees of three service
centers that previously voted for union representation filed petitions with the
National Labor Relations Board (NLRB) to decertify the Teamsters as their union
bargaining representative. Nineteen service centers, representing approximately
12% of Overnite's nationwide workforce, voted for union representation, and the
Teamsters have been certified as the bargaining representative for such
employees without challenge by Overnite. Five other service centers,
representing another 5% of Overnite's nationwide workforce, either voted for
union representation or it is unclear how such employees have voted, and such
elections are currently being challenged by Overnite before the NLRB or the
Federal courts. Overnite has begun negotiations with the Teamsters at the
service centers where the Teamsters have been certified as the bargaining
representative.

During 1997 and 1996, Overnite continued to benefit from several
initiatives implemented in 1996 which were aimed at better matching its
operations to the current trucking industry environment. These actions included
workforce reductions, service center consolidations, centralization of the
linehaul management process and pricing initiatives targeting Overnite's lowest
margin customers.

DIVESTITURES

SKYWAY - In January 1998, the Corporation announced its intention to
sell its investment in Skyway Freight Systems, Inc., a wholly-owned subsidiary
engaged in contract logistics and supply chain management by the end of the
year. In connection with the planned sale, the Corporation recognized a $40
million after tax loss in the fourth quarter of 1997.

OTHER INFORMATION

Additional information for UPC's principal businesses is presented on
pages 4 through 17, 37, 38, 49 and 50 of the Annual Report and such information
(excluding photographs on pages 4 through 17, none of which supplements the text
and which are not otherwise required to be disclosed herein) is incorporated
herein by reference. Information on the UP-SP merger on page 4 and 5 of the
Annual Report, as well as information on business segments on page 31 and a map
of the Corporation's operations on pages 52 and 53 of the Annual Report are also
incorporated herein by reference.

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GOVERNMENTAL REGULATION

Union Pacific's operations are currently subject to a variety of
Federal, state and local regulation. The most significant areas of regulation
are described below. See also "Item 3. Legal Proceedings".

The operations of the Railroad and Overnite are subject to the
regulatory jurisdiction of the STB, other Federal agencies and various state
agencies. The STB has jurisdiction over rates charged on certain regulated rail
traffic; freight car compensation; transfer, extension or abandonment of rail
lines; and acquisition of control of rail and motor carriers by rail common
carriers. Other Federal agencies have jurisdiction over safety, movement of
hazardous materials, movement and disposal of hazardous waste and equipment
standards. Various state and local agencies have jurisdiction over disposal of
hazardous wastes and seek to regulate movement of hazardous materials.

ENVIRONMENTAL REGULATION

Subsidiaries of UPC are subject to various environmental statutes and
regulations, including the Resource Conservation and Recovery Act (RCRA), the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
(CERCLA), and the Clean Air Act (CAA).

RCRA applies to hazardous waste generators and transporters, as well as
to persons engaged in treatment and disposal of hazardous waste, and specifies
standards for storage areas, treatment units and land disposal units. All
generators of hazardous waste are required to label shipments in accordance with
detailed regulations and to prepare a detailed manifest identifying the material
and stating its destination before waste can be released for offsite transport.
The transporter must deliver the hazardous waste in accordance with the manifest
and only to a treatment, storage or disposal facility qualified for RCRA interim
status or having a final RCRA permit.

Environmental Protection Agency (EPA) regulations under RCRA have
established a comprehensive system for the management of hazardous waste. These
regulations identify a wide range of industrial by-products and residues as
hazardous waste, and specify requirements for "cradle-to-grave" management of
such waste from the time of generation through the time of disposal and beyond.
States that have adopted hazardous waste management programs with standards at
least as stringent as those promulgated by the EPA may be authorized by the EPA
to administer all or part of RCRA on behalf of the EPA.

CERCLA was designed to establish a strategy for cleaning up facilities
at which hazardous waste or other hazardous substances have created actual or
potential environmental hazards. The EPA has designated certain facilities as
requiring cleanup or further assessment. Among other things, CERCLA authorizes
the Federal government either to clean up such facilities itself or to order
persons responsible for the situation to do so. The act created a multi-billion
dollar fund to be used by the Federal government to pay for such cleanup
efforts. In the event the Federal government pays for such clean-up, it will
seek reimbursement from private parties upon which CERCLA imposes liability.

CERCLA imposes strict liability on the owners and operators of
facilities in which hazardous waste and other hazardous substances are deposited
or from which they are released or are likely to be released into the
environment. It also imposes strict liability on the generators of such waste,
and the transporters of

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the waste who select the disposal or treatment sites. Liability may include
cleanup costs incurred by third persons and damage to publicly-owned natural
resources. UPC's subsidiaries are subject to potential liability under CERCLA as
generators of hazardous waste and as transporters. Some states have enacted, and
other states are considering enacting, legislation similar to CERCLA. Certain
provisions of these acts are more stringent than CERCLA. States that have passed
such legislation are currently active in designating more facilities as
requiring cleanup and further assessment.

The operations of the Corporation's subsidiaries are subject to the
requirements of the CAA. The 1990 amendments to the CAA include a provision
under Title V requiring that certain facilities obtain operating permits. EPA
regulations require all states to develop Federally-approvable permit programs.
Affected facilities must submit air operating permit applications to the
respective states within one year of the EPA's approval of the state programs.
Certain UPC railroad facilities may be required to obtain such permits. In
addition, in December 1997, the EPA issued final regulations which require that
most locomotives purchased or remanufactured after 1999 or 2000 meet certain
stringent emissions criteria. While the cost of meeting these requirements may
be significant, expenditures are not expected to have a material adverse affect
on the Corporation's financial condition or results of operations.

The operations of UPC's subsidiaries are also subject to other laws
protecting the environment, including permit requirements for wastewater
discharges pursuant to the National Pollutant Discharge Elimination System and
storm-water runoff regulations under the Federal Water Pollution Control Act.

CAUTIONARY INFORMATION

Certain information included in this report contains, and other
materials filed or to be filed by the Corporation with the Securities and
Exchange Commission (as well as information included in oral statements or other
written statements made or to be made by the Corporation) contain or will
contain, forward-looking statements within the meaning of the Securities Act of
1933, as amended, and the Securities Exchange Act of 1934, as amended. Such
forward- looking information may include, without limitation, statements that
the Corporation does not expect that lawsuits, environmental costs, commitments,
contingent liabilities, labor negotiations, claims or other matters will have a
material adverse effect on its consolidated financial condition, results of
operations or liquidity and other similar expressions concerning matters that
are not historical facts, and projections or predictions as to the Corporation's
financial or operational results. Such forward-looking information is or will be
based on information available at that time and is or will be subject to risks
and uncertainties that could cause actual results to differ materially from
those expressed in the statements. Important factors that could cause such
differences include, but are not limited to, whether the Railroad is fully
successful in overcoming its congestion-related problems and implementing the
Plan and other financial and operational initiatives, industry competition and
regulatory developments, natural events such as floods and earthquakes, the
effects of adverse general economic conditions, fuel prices, labor strikes, the
impact of year 2000 systems problems, and the ultimate outcome of shipper claims
related to congestion, environmental investigations or proceedings and other
types of claims and litigation.

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ITEM 3. LEGAL PROCEEDINGS

SOUTHERN PACIFIC ACQUISITION

As previously reported, various appeals have been filed with respect to the
STB's August 12, 1996 decision (the "Decision") approving the acquisition of
control of Southern Pacific by the Corporation. All of the appeals have been
consolidated in the U.S. Court of Appeals for the District of Columbia Circuit.
On April 23, 1997, the City of Wichita and Sedgwick County, Kansas, moved to
withdraw their petition for review, and the Court granted their motion on April
30, 1997. On August 11, 1997, the Court established a briefing schedule under
which briefs for petitioners and supporting intervenors were due on October 10,
1997; the brief for respondents was due December 9, 1997; briefs for intervenors
supporting respondents were due December 30, 1997; and reply briefs were due
January 20, 1998. On August 18, 1997, Geneva Steel Company moved to withdraw its
petitions for review, and the Court granted its motion on September 8, 1997. On
October 3, 1997, the Corporation and its affiliates moved to dismiss their
petitions for review and the Court granted their motion on October 7, 1997. On
October 6, 1997, Kansas City Southern Railway Company ("KCS") moved to dismiss
its petitions for review; on October 7, 1997, Texas Mexican Railway Company
("Tex Mex") moved to dismiss its petition for review; and on October 10, 1997,
the United Transportation Union-General Committee of Adjustment (GO 401) moved
to dismiss its petition for review. The Court granted these motions on October
22, 1997. The Corporation believes that it is unlikely that the disposition of
the remaining appeals will have a material impact on its results of operations.

On May 7, 1997, the STB served a decision commencing the first annual
proceeding to implement the oversight condition it had imposed in the Decision.
The Corporation and its affiliates, and the Burlington Northern and Santa Fe
Railway Company ("BNSF"), filed reports required by the STB on July 1, 1997.
BNSF and other parties filed comments on August 1, 1997. The Corporation and its
affiliates, and others, filed replies on August 20, 1997. On October 27, 1997,
the STB served a decision containing its findings and recommendations based on
the record compiled in the first oversight proceeding. The STB concluded that
the merger, as conditioned, had thus far not caused any substantial competitive
harm, and it rejected various requested adjustments to the merger conditions.
The STB ordered the Corporation and BNSF to continue to report quarterly on
merger implementation, and to provide a comprehensive summary presentation in
the progress reports due on July 1, 1998. The STB order requires interested
parties to file comments concerning the next annual oversight proceeding on
August 14, 1998, and replies are due September 1, 1998 (See also Rail Service
Proceedings below).

SHIPPER CLAIMS

Certain customers have submitted claims or stated their intention to
submit claims to UPRR for damages related to the delay of shipments as a result
of congestion problems (described above under "Item 1. Business and Item 2.
Properties - Discussion of Significant Events and Operations - 1997 Congestion
and Service Issues), and certain customers have filed lawsuits seeking relief
related to such delays. The nature of the damages sought by claimants includes,
but is not limited to contractual liquidated damages, freight loss or damage,
alternative

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transportation charges, additional production costs, lost business and lost
profits. In addition, some customers have asserted that they have the right to
cancel contracts as a result of alleged material breaches of such contracts by
UPRR. The Corporation does not believe that such claims will have a material
adverse effect on its consolidated financial condition or operating results.

RAIL SERVICE PROCEEDINGS

On October 2, 1997, the STB initiated a proceeding to investigate rail
service problems in the western United States. On October 31, 1997, the STB
issued an emergency service order that, among other things, (i) allows Texas
Mexican Railway Company ("Tex Mex") and, following a subsequent expansion of the
order, BNSF to divert some traffic from UPRR in order to reduce congestion on
UPRR's lines in Houston, Texas, (ii) directs UPRR to suspend rail transportation
service contract obligations of certain shippers at Houston that wish to route
shipments over the Tex Mex system instead of UPRR during the period of the
service order and (iii) requires UPRR to report to the STB weekly regarding
service statistics. The emergency order was extended and expanded in certain
respects on December 4, 1997 and again on February 25, 1998, when the STB,
citing the gravity of UPRR's congestion problems and characterizing them as "not
yet close to being resolved", extended the duration of the emergency service
order until August 2, 1998, the maximum period allowable under law for the
original order, and ordered UPRR to augment its reporting on service issues and
proposed infrastructure improvements for the Houston, Texas area.

In the rail service proceedings, the STB rejected proposals by various
parties for additional emergency measures. For example, the Railroad Commission
of Texas (the "RTC") submitted proposals to the STB under which UPRR would be
required, among other things, to transfer certain lines in the Gulf Coast region
to Tex Mex or a Houston terminal railroad. On February 17, 1998, the STB served
an order declining to reconsider its denial of the RTC's proposals. Tex Mex and
KCS have filed a petition for similar relief in the UP/SP merger oversight
proceeding, and the Corporation and UPRR have opposed that petition as being
unsupported by any evidence and without merit.

KCS and Tex Mex have also filed petitions with the STB challenging
actions taken by UPRR and BNSF to rationalize the operations of the Houston Belt
& Terminal Railway Company ("HBT"), of which UPRR and BNSF each owns 50%. UPRR,
BNSF and HBT have opposed those petitions.

If continued implementation of financial and operational
initiatives undertaken by the Corporation ultimately proves unsuccessful in
alleviating the congestion and related service problems experienced by UPRR,
certain parties may request the STB to order UPRR to take additional actions
including, among other things, further diversions of traffic or the transfer of
certain UPRR rail lines or other facilities to other railroads. While the
Corporation believes that it is unlikely, there can be no assurance that one or
more of such proposals, or proposals seeking similar relief might not be
approved in some form, particularly if UPRR is not successful in resolving its
congestion problems in the Gulf Coast region within a reasonable period. In
addition, if the congestion problems persist the STB may institute a new
proceeding at the end of the current one in light of developments concerning
UPRR's operations in 1998.

BOTTLENECK PROCEEDINGS

As previously reported, on August 27, 1996, the STB initiated a
proceeding asking for arguments and evidence on the issue of whether it should
modify its existing regulations regarding the prescription of, and challenge to,
rates for rail service involving a segment that it served by only one railroad
between an interchange point and an exclusively-served shipper facility (i.e., a
bottleneck segment). The STB proceeding also referred to pending motions to
dismiss three individual complaint proceedings filed by shippers challenging a
class rate charged for the movement of coal, two of which named UPRR and SPT as
a party thereto. Neither complaint proceeding individually involved a
significant exposure for reparations. However, if existing regulation of
bottleneck movements were changed, future revenue from such movements, including
those covered by the complaint proceedings, could be substantially reduced. On
December 31, 1996, the STB served a decision which generally reaffirmed earlier
rulings regarding a rail carrier's obligation to

-9-
<PAGE> 11

provide rates for bottleneck segments and assured the right of rail carriers to
differentially price traffic. It also dismissed the two complaint proceedings in
which UPRR and SPT were defendants. On April 30, 1997, the STB served a decision
generally declining to reconsider its December 31, 1996 decision, but clarifying
that in certain circumstances a "bottleneck" destination carrier that does not
serve the origin for a traffic movement may be required to provide a
separately-challengeable common carrier rate for the "bottleneck" portion of the
movement. The STB decisions are pending on appeal before the Eighth Circuit
Court of Appeals.

RAIL ACCESS AND COMPETITION

By order served February 20, 1998, the STB indicated that, in response
to a Congressional request, it was commencing a review of rail access and
competition issues and would hold a hearing in April 1998 concerning those
issues. In previous proceedings, the STB and its predecessor, the Interstate
Commerce Commission, have rejected various proposals for "open access" or
changes in the regulation of rates and routes allegedly aimed at increasing rail
competition, concluding that such proposals are outside the statutory authority
of the agency. The railroads have presented evidence in those proceedings that
such measures would in fact diminish competition, and would seriously harm the
industry's ability to sustain necessary investments and earn an adequate return.
UPRR does not believe the STB is likely to change its previous interpretations
of present law. However, should Congress adopt "open access" measures such as
universal trackage rights to allow multiple railroads to serve shipper
facilities that are presently served by one railroad or purportedly
competition-enhancing changes in rate and route regulation, the adverse effect
on UPRR and other railroads could be material.

FEDERAL RAILROAD ADMINISTRATION REVIEW

UPRR suffered a number of severe accidents in 1997, although most safety
measures for the year improved significantly, with reportable injuries, lost
work days and grade crossing accidents all declining in excess of 20%. As a
result of these accidents in 1997, the Federal Railroad Administration ("FRA")
reviewed UPRR's operations and concluded that safety problems at UPRR were the
result of, among other things, a loss of focus on safety, personnel shortages
and crew management problems. The FRA made several recommendations, including
creating a joint committee comprised of UPRR management, labor and the FRA to
review and monitor all aspects of safety, adding an executive position for
safety reporting directly to the UPRR President, creating a safety hotline,
re-evaluating all existing training programs, and increasing the monitoring of
train crew performance, crew fatigue and crew scheduling. All such FRA proposals
have been implemented by UPRR. UPRR has also implemented a guaranteed time-off
program for train and engine employees. On February 25, 1998, the FRA released a
report stating that it was encouraged by UPRR's initial progress but requiring
UPRR to submit written safety action plans and indicating that it would
continue to monitor UPRR's operations through site-specific inspections. The FRA
has announced its intention to impose fines totaling $131,000 as a result of its
review.

SHAREHOLDER LITIGATION

The Corporation and certain of its officers and directors are currently
defendants in two purported class action securities lawsuits, and certain
current and former directors of the Corporation are currently defendants in a
purported derivative action filed on behalf of the Corporation. The class action
suits allege, among other things, that management failed to disclose properly
UPRR's

-10-
<PAGE> 12

service and safety problems and thereby issued materially false and misleading
statements concerning the merger with Southern Pacific and the safe, efficient
operation of UPRR's rail network. The derivative action alleges, among other
things, that the named current and former directors breached their fiduciary
duties to the Corporation by approving the mergers of Southern Pacific and CNW
into the Corporation without ensuring that the Corporation or UPRR had adequate
systems in place to integrate effectively those companies into the operations of
the Corporation and UPRR. These lawsuits were filed in late 1997 in the Federal
District Court for the Northern District of Texas and seek to recover
unspecified amounts of damages. The Corporation believes that these claims are
without merit and intends to defend them vigorously.

LABOR MATTERS

The General Counsel of the National Labor Relations Board ("NLRB") is
seeking a bargaining order remedy in 15 cases involving Overnite where a
Teamsters local union lost a representation election. These cases are pending
before an NLRB administrative law judge. A bargaining order remedy would require
Overnite to recognize and bargain with the union as if the union had won instead
of lost the election and would be warranted only if the following findings are
made: (1) the petitioning Teamsters local had obtained valid authorization cards
from a majority of the employees in an appropriate unit; (2) Overnite committed
serious unfair labor practices; and (3) those unfair labor practices would
preclude the holding of a fair election despite the application of less drastic
remedies. Under NLRB case law, a bargaining order remedy would attach
retrospectively to the date when, after a union with a showing of majority
support demanded recognition, Overnite embarked on an unlawful course of
conduct. In the event of such a retroactive effective bargaining order, Overnite
would face back pay liability for losses in employee earnings due to unilateral
changes in terms or conditions of employment, such as layoffs, reduced hours of
work or less remunerative work assignments. Overnite believes it has substantial
defenses to these cases and intends to aggressively defend them.

ENVIRONMENTAL MATTERS

The Environmental Protection Agency ("EPA") has brought a civil action
against certain subsidiaries of Southern Pacific which have been merged into
UPRR, in the U.S. District Court for the District of Colorado alleging violation
of the Clean Water Act and the Oil Pollution Act. The complaint identifies seven
incidents involving the alleged release of hazardous substances into the waters
of the United States and seeks civil penalties of $25,000 per day and
unspecified injunctive relief to prevent future violations. The incidents are
all related to derailments dating back to 1992 and include six incidents in
which the alleged releases were from ruptured locomotive fuel tanks and one
incident in 1996 involving an alleged release of sulfuric acid near the
Tennessee Pass.

In July 1995, the Butte County (Oroville, California) District Attorney
advised that a civil penalty action would be filed against UPRR for violations
resulting from a derailment and spill of diesel fuel into the Feather River in
Peo, California on April 14, 1995. In late July, the California Regional Water
Quality Control Board also filed a separate penalty action seeking $40,000 for
the same incident. This latter action was settled for $40,000. In 1996, the
District Attorney and California Department of Fish and Game asserted claims for
natural resource damages and penalties which could exceed $100,000.

-11-
<PAGE> 13

The Corporation and its affiliates have received notices from the EPA
and state environmental agencies alleging that they are or may be liable under
certain Federal or state environmental laws for remediation costs at various
sites throughout the United States, including sites which are on the Superfund
National Priorities List or state superfund lists. Although specific claims have
been made by the EPA and state regulators with respect to some of these sites,
the ultimate impact of these proceedings and suits by third parties cannot be
predicted at this time because of the number of potentially responsible parties
involved, the degree of contamination by various wastes, the scarcity and
quality of volumetric data related to many of the sites and/or the speculative
nature of remediation costs. Nevertheless, at many of the superfund sites, the
Corporation believes it will have little or no exposure because no liability
should be imposed under applicable law, one or more other financially able
parties generated all or most of the contamination, or a settlement of the
Corporation's exposure has been reached although regulatory proceedings at the
sites involved have not been formally terminated. Additional information on the
Corporation's potential environmental costs is set forth under Note 12 to the
Corporation's financial statements.

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

Not applicable.

-12-
<PAGE> 14
EXECUTIVE OFFICERS OF THE REGISTRANT AND
PRINCIPAL EXECUTIVE OFFICERS OF SUBSIDIARIES

<TABLE>
<CAPTION>
BUSINESS
EXPERIENCE
DURING PAST
NAME POSITION AGE FIVE YEARS
---- -------- --- -----------
<S> <C> <C> <C>

Richard K. Davidson ....... Chairman, President and 56 (1)
Chief Executive Officer of
UPC and Chairman and Chief
Executive Officer of the
Railroad

L. White Matthews, III .... Executive Vice President - 52 Current
Finance Position

L. Merill Bryan, Jr. ...... Senior Vice President, 54 (2)
Information Technologies

Barbara W. Schaefer ....... Senior Vice President, 44 (3)
Human Resources

Carl W. von Bernuth ....... Senior Vice President, 54 Current
General Counsel and Corporate Position
Secretary

Charles R. Eisele ......... Vice President - Strategic 48 (4)
Planning

John B. Gremillion, Jr. ... Vice President - Taxes 51 Current
Position

Robert M. Knight, Jr. ..... Vice President - Quality and 40 (5)
Administration

Mary E. McAuliffe ......... Vice President - External 52 Current
Relations Position

Joseph E. O'Connor, Jr. ... Vice President and Controller 41 (6)

Gary F. Schuster .......... Vice President - Corporate 56 Current
Relations Position
</TABLE>

-2-
<PAGE> 15
<TABLE>
<S> <C> <C> <C>
Gary M. Stuart ............ Vice President and Treasurer 58 Current
Position

Jerry R. Davis............. President and Chief Operating 60 (7)
Officer of the Railroad

R. Bradley King ........... Executive Vice President - 50 (8)
Operations of the Railroad

John J. Koraleski ......... Executive Vice President - 48 (9)
Finance of the Railroad

James A. Shattuck ......... Executive Vice President - 58 (10)
Marketing and Sales of the
Railroad

Dennis J. Duffy ........... Senior Vice President - 47 (11)
Safety Assurance and Compliance
Process of the Railroad

Leo H. Suggs............... Chairman and Chief Executive 59 (12)
Officer of Overnite

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

-3-
<PAGE> 16
EXECUTIVE OFFICERS OF THE REGISTRANT AND
PRINCIPAL EXECUTIVE OFFICERS OF SUBSIDIARIES (CONTINUED)

(1) Mr. Davidson was elected Chairman and Chief Executive Officer
effective January 1, 1997. He became President of UPC effective May
1994 and was also Chief Operating Officer of UPC from November 1995 to
December 1996. He was President and Chief Executive Officer of the
Railroad from September 1991 until August 1995, Chairman of the
Railroad until November 1996 and Chairman and Chief Executive Officer
of the Railroad since November 1996.

(2) Mr. Bryan was elected to his current position effective May 1997 and
continues to serve as President and Chief Executive Officer of Union
Pacific Technologies, Inc.

(3) Ms. Schaefer was elected to her current position effective April 1997.
From April 1994 to April 1997, she was Vice President - Human
Resources of the Railroad. Prior thereto, she was Director of
Compensation and Human Resources Information Systems of UPC.

(4) Mr. Eisele was elected to his current position effective September
1997. He was Vice President - Purchasing for the Railroad from April
1994 to September 1997. Prior thereto, he was Vice President - Human
Resources for the Railroad.

(5) Mr. Knight was elected to his current position effective April 1997.
From August 1995 to April 1997 he was Director of Compensation and
Human Resources Information Systems of UPC. From March 1994 to August
1995 he was Assistant Treasurer - Banking and Cash Management of UPC.
Prior thereto, he was Executive Assistant to Vice President - Finance
of the Railroad.

(6) Mr. O'Connor was elected to his current position effective October
1996. He was Director - Strategic Planning of UPC from November 1995
to October 1996 and Director - Planning of UPC from April 1994 to
November 1995. Prior thereto, he was Manager - Planning of UPC.

(7) Mr. Davis was elected to his current position in November 1996. From
September 1996 to November 1996, he served as President - SP Rail
Operations. From February 1995 to September 1996, he served as
President and Chief Executive Officer of Southern Pacific Rail
Corporation. From January 1992 to February 1995, Mr. Davis served as
Executive Vice President and Chief Operating Officer of CSX
Transportation, Inc.(CSXT).

-4-
<PAGE> 17
(8) Mr. King was elected to his current position effective October 1997.
He was Vice President - Transportation of the Railroad from November
1995 to October 1997. From July 1993 to November 1995, he was Vice
President - Risk Management of the Railroad. Prior thereto, he was
Senior Assistant Vice President - Train Management of the Railroad.

(9) Mr. Koraleski was elected to his current position effective September
1997. From May 1996 to September 1997, he was Executive Vice
President - Finance and Administration of the Railroad. Prior
thereto, he was Executive Vice President - Finance and Information
Technologies of the Railroad.

(10) Mr. Shattuck was elected to his current position effective May 1993.
From January 1993 to May 1993 he was Senior Vice President - Marketing
of the Railroad. Prior thereto, he was Senior Vice President -
Marketing and Sales of the Railroad.

(11) Mr. Duffy was elected to his current position effective October 1997.
He was Senior Vice President - Customer Service and Planning of the
Railroad from November 1995 to October 1997. From May 1995 to
November 1995 he was Vice President - Quality and Network Planning of
the Railroad. He was Vice President - Quality of the Railroad from
January 1995 to May 1995. Prior thereto, he was Assistant Vice
President - Quality of the Railroad.

(12) Mr. Suggs was elected to his current position in April 1996. From
January 1993 to April 1996, he was President and Chief Executive
Officer of Preston Trucking Company, Inc. Prior thereto, Mr. Suggs
served as Senior Vice President of Corporate Development of Yellow
Corporation.

-5-
<PAGE> 18
PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

Information as to the markets in which UPC's Common Stock is
traded, the quarterly high and low prices for such stock, the dividends
declared with respect to the Common Stock during the last two years, and the
approximate number of stockholders of record at January 31, 1998 is set forth
under Selected Quarterly Data and Stockholders and Dividends on page 49 of the
Annual Report. Information as to restrictions on the payment of dividends with
respect to the Corporation's Common Stock is set forth in Note 7 to Financial
Statements on pages 43 of the Annual Report. Such information is incorporated
herein by reference.

ITEM 6. SELECTED FINANCIAL DATA

Selected Financial Data for the Corporation for each of the last
10 years is set forth under the Ten-Year Financial Summary on page 51 of the
Annual Report. All such information is incorporated herein by reference.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Information as to UPC's results of operations, cash flows,
liquidity and capital resources, and other matters is set forth in the
Financial Review on pages 18 through 29 of the Annual Report, and is
incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Corporation's consolidated financial statements, accounting
policy disclosures, Notes to Financial Statements, business segment information
and Independent Auditors' Report are presented on pages 30 through 48 of the
Annual Report. Selected quarterly financial data are set forth under Selected
Quarterly Data on page 49 of the Annual Report. All such information is
incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

-6-
<PAGE> 19
PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(a) Directors of Registrant.

Information as to the names, ages, positions and offices with UPC, terms
of office, periods of service, business experience during the past five years
and certain other directorships held by each director or person nominated to
become a director of UPC is set forth in the Directors segments of the Proxy
Statement and is incorporated herein by reference.

(b) Executive Officers of Registrant.

Information concerning the executive officers of UPC and its
subsidiaries is presented in Part I of this Report under Executive Officers of
the Registrant and Principal Executive Officers of Subsidiaries.

Information concerning compliance with Section 16(a) of the Securities
Exchange Act of 1934 is set forth in the Compliance with Section 16(a) of the
Securities Exchange Act segment of the Proxy Statement and is incorporated
herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Information concerning remuneration received by UPC's executive officers
and directors is presented in the Compensation of Directors, Compensation
Committee Interlocks and Insider Participation, Report on Executive
Compensation, Summary Compensation Table, Option/SAR Grants Table, Option/SAR
Exercises and Year-End Value Table, Defined Benefit Plans and Five-Year
Performance Comparison segments of the Proxy Statement and is incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information as to the number of shares of UPC's equity securities
beneficially owned as of February 6, 1998 by each of its directors and nominees
for director, its five most highly compensated executive officers and its
directors and executive officers as a group is set forth in the Directors and
Security Ownership of Management segments of the Proxy Statement and is
incorporated herein by reference.

-7-
<PAGE> 20
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information on related transactions is set forth in the Certain
Relationships and Related Transactions and Compensation Committee Interlocks
and Insider Participation segments of the Proxy Statement and is incorporated
herein by reference.

PART IV

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

(a) (1) and (2) Financial Statements and Schedules

The financial statements, accounting policy disclosures, Notes to
Financial Statements and Independent Auditors' Report on pages 30
through 48, inclusive, of the Annual Report are incorporated herein
by reference.

No schedules are required to be filed because of the absence of
conditions under which they would be required or because the required
information is set forth in the financial statements referred to
above.

(3) Exhibits

Items 10(j) through 10(w) below constitute management contracts and
executive compensation arrangements required to be filed as exhibits
to this report.

3(a) Revised Articles of Incorporation of UPC, as amended
through April 25, 1996, are incorporated herein by
reference to Exhibit 3 to the Corporation's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1996.

3(b) By-Laws of UPC, as amended effective as of September
26, 1996, are incorporated herein by reference to
Exhibit 3 to the Corporation's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996.

-8-
<PAGE> 21
4 Pursuant to various indentures and other agreements,
UPC has issued long-term debt; however, no such
agreement has securities or obligations covered
thereby which exceed 10% of the Corporation's total
consolidated assets. UPC agrees to furnish the
Commission with a copy of any such indenture or
agreement upon request by the Commission.

10(a) Amended and Restated Anschutz Shareholders Agreement,
dated as of July 12, 1996, among UPC, UPRR,
The Anschutz Corporation ("TAC"), Anschutz Foundation
(the "Foundation"), and Mr. Philip F. Anschutz ("Mr.
Anschutz"), is incorporated herein by reference to
Annex D to the Joint Proxy Statement/Prospectus
included in Post-Effective Amendment No. 2 to UPC's
Registration Statement on Form S-4 (No. 33-64707).

10(b) Amended and Restated MSLEF Shareholder Agreement,
dated as of July 12, 1996, between UPC and The Morgan
Stanley Leveraged Equity Fund II, L.P., is
incorporated herein by reference to Annex E to the
Joint Proxy Statement/Prospectus included in
Post-Effective Amendment No. 2 to UPC's Registration
Statement on Form S-4 (No. 33-64707).

10(c) Amended and Restated Parent Shareholders Agreement,
dated as of July 12, 1996, among UPC, UP Merger and
SP is incorporated herein by reference to Annex F to
the Joint Proxy Statement/Prospectus included in
Post-Effective Amendment No. 2 to UPC's Registration
Statement on Form S-4 (No. 33-64707).

10(d) Amended and Restated Anschutz/Spinco Shareholders
Agreement, dated as of July 12, 1996, among Union
Pacific Resources Group Inc. ("Resources"), TAC, the
Foundation and Mr. Anschutz is incorporated herein by
reference to Annex G to the Joint Proxy
Statement/Prospectus included in Post-Effective
Amendment No. 2 to UPC's Registration Statement on
Form S-4 (No. 33-64707).

10(e) Amended and Restated Registration Rights Agreement,
dated as of July 12, 1996, among UPC, TAC, and the
Foundation is incorporated herein by reference to
Annex H to the Joint Proxy Statement/Prospectus
included in Post-Effective Amendment No. 2 to UPC's
Registration Statement on Form S-4 (No. 33-64707).

10(f) Amended and Restated Registration Rights Agreement,
dated as of July 12, 1996, among Resources, TAC, and
the Foundation

-9-
<PAGE> 22
is incorporated herein by reference to Annex I to the
Joint Proxy Statement/Prospectus included in
Post-Effective Amendment No. 2 to UPC's Registration
Statement on Form S-4 (No. 33-64707).

10(g) Amended and Restated Registration Rights Agreement,
dated as of July 12, 1996, among UPC, UP Holding, UP
Merger and SP is incorporated herein by reference to
Annex J to the Joint Proxy Statement/Prospectus
included in Post-Effective Amendment No. 2 to UPC's
Registration Statement on Form S-4 (No. 33-64707).

10(h) Agreement, dated September 25, 1995, among UPC, UPRR,
MPRR and SP, Southern Pacific Transportation Company
(SPT), The Denver & Rio Grande Western Railroad
Company (D&RGW), St. Louis Southwestern Railway
Company (SLSRC) and SPCSL Corp. (SPCSL), on the one
hand, and Burlington Northern Railroad Company (BN)
and The Atchison, Topeka and Santa Fe Railway Company
(Santa Fe), on the other hand, is incorporated by
reference to Exhibit 10.11 to UPC's Registration
Statement on Form S-4 (No. 33-64707).

10(i) Supplemental Agreement, dated November 18, 1995,
between UPC, UPRR, MPRR and SP, SPT, D&RGW, SLSRC and
SPCSL, on the one hand, and BN and Santa Fe, on the
other hand, is incorporated herein by reference to
Exhibit 10.12 to UPC's Registration Statement on Form
S-4 (No. 33-64707).

10(j) The Executive Incentive Plan of UPC, amended April
27, 1995, is incorporated herein by reference to
Exhibit 10(a) to the Corporation's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1995.

10(k) The Supplemental Pension Plan for Officers and
Managers of UPC and Affiliates, as amended and
restated, is incorporated herein by reference to
Exhibit 10(d) to the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1993.

10(l) Employment Agreement, dated as of February 20, 1995,
between SP and Jerry R. Davis, is incorporated by
reference to Exhibit 10.12 to SP's Annual Report on
Form 10-K for the year ended December 31, 1994.

10(m) Letter Agreement, dated August 30, 1996, between UPC
and Jerry R. Davis, is incorporated by reference to
Exhibit 10(b) to the Corporation's Quarterly Report
on Form 10-Q for the quarter ended September 30,
1996.

-10-
<PAGE> 23
10(n) The 1988 Stock Option and Restricted Stock Plan of
UPC, as amended as of February 1, 1992, is
incorporated herein by reference to Exhibit 10(d) to
the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1991.

10(o) The 1992 Restricted Stock Plan for Non-Employee
Directors of UPC, as amended as of January 28, 1993,
is incorporated herein by reference to Exhibit 10(a)
to the Corporation's Current Report on Form 8-K filed
March 16, 1993.

10(p) The 1993 Stock Option and Retention Stock Plan of
UPC, as amended November 20, 1997.

10(q) Amendments to the 1988 Stock Option and Retention
Stock Plan, adopted April 24, 1997, are incorporated
herein by reference to Exhibit 10 to the
Corporation's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997.

10(r) The 1988 Stock Option and Restricted Stock Plan of
UPC, as amended November 20, 1997.

10(s) The Pension Plan for Non-Employee Directors of UPC,
as amended January 25, 1996 is incorporated herein by
reference to Exhibit 10(w) to the Corporation's
Annual Report on Form 10-K for the year ended
December 31, 1995.

10(t) The Executive Life Insurance Plan of UPC, as amended
October, 1997.

10(u) The UPC Stock Unit Grant and Deferred Compensation
Plan for the Board of Directors, as amended January
25, 1996 is incorporated herein by reference to
Exhibit 10(y) to the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1995.

10(v) Charitable Contribution Plan for Non-Employee
Directors of UPC is incorporated herein by reference
to Exhibit 10(z) to the Corporation's Annual Report
on Form 10-K for the year ended December 31, 1995.

-11-
<PAGE> 24
10(w) Written Description of Other Executive Compensation
Arrangements of UPC is incorporated herein by
reference to Exhibit 10(o) to the Corporation's
Annual Report on Form 10-K for the year ended
December 31, 1992.

(11) Computation of earnings per share.

(12) Computation of ratio of earnings to fixed charges.

(13) Pages 4 through 53, inclusive, of UPC's Annual Report
to Stockholders for the year ended December 31, 1997,
but excluding photographs set forth on pages 4
through 17, none of which supplements the text and
which are not otherwise required to be disclosed in
this Annual Report on Form 10-K.

(21) List of the Corporation's significant subsidiaries
and their respective states of incorporation.

(23) Independent Auditors' Consent.

(24) Powers of attorney executed by the directors of UPC.

(27) Financial Data Schedule.

(99) (a) Financial Statements for the Fiscal Year
ended December 31, 1997 required by Form 11-K
for the UPC Thrift Plan - to be filed by
amendment.

(99) (b) Financial Statements for the Fiscal Year
ended December 31, 1997 required by Form 11-K
for the Union Pacific Fruit Express Company
Agreement Employee 401(k) Retirement Thrift
Plan - to be filed by amendment.

(99) (c) Financial Statements for the Fiscal Year
ended December 31, 1997 required by Form 11-K
for the Skyway Retirement Savings Plan - to
be filed by amendment.

(99) (d) Financial Statements for the Fiscal Year
ended December 31, 1997 required by Form 11-K
for the Union Pacific Agreement Employee
401(k) Retirement Thrift Plan - to be filed
by amendment.

(99) (e) Financial Statements for the Fiscal Year
ended December 31, 1997 required by Form 11-K
for the Chicago and North Western Railway
Company Profit Sharing and Retirement Savings
Program - to be filed by amendment.

-12-
<PAGE> 25
(99) (f) Financial Statements for the Fiscal Year
ended December 31, 1997 required by Form 11-K
for the Southern Pacific Rail Corporation
Thrift Plan - to be filed by amendment.

(b) Reports on Form 8-K

On October 10, 1997, the Corporation filed a Current Report on Form
8-K describing Union Pacific Railroad Company's congestion, safety
issues and the Service Recovery Plan.

On November 17, 1997, the Corporation filed a Current Report on Form
8-K describing Union Pacific Railroad Company's service situation
and the financial impact of that situation.

-13-
<PAGE> 26
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, on this 17th day of
March, 1998.

UNION PACIFIC CORPORATION

By /s/ Richard K. Davidson
------------------------------
(Richard K. Davidson, Chairman,
President and Chief Executive
Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below, on this 17th day of March, 1998, by the
following persons on behalf of the registrant and in the capacities indicated.

PRINCIPAL EXECUTIVE OFFICER
AND DIRECTOR:

/s/ Richard K. Davidson
-------------------------------
(Richard K. Davidson, Chairman,
President, Chief Executive
Officer and Director)

PRINCIPAL FINANCIAL OFFICER
AND DIRECTOR:

/s/ L. White Matthews, III
-------------------------------
(L. White Matthews, III,
Executive Vice President -
Finance and Director)

PRINCIPAL ACCOUNTING OFFICER:

/s/ Joseph E. O'Connor, Jr.
-------------------------------
(Joseph E. O'Connor, Jr.,
Vice President and Controller)

-14-
<PAGE> 27
SIGNATURES - (Continued)

<TABLE>
<S> <C>
DIRECTORS:

Philip F. Anschutz* Judith Richards Hope*

Robert P. Bauman* Richard J. Mahoney*

Richard B. Cheney* John R. Meyer*

E. Virgil Conway* Thomas A. Reynolds, Jr.*

Spencer F. Eccles* James D. Robinson, III*

Elbridge T. Gerry, Jr.* Robert W. Roth*

William H. Gray, III* Richard D. Simmons*

* By /s/ Thomas E. Whitaker
--------------------------------------
(Thomas E. Whitaker, Attorney-in-fact)
</TABLE>

-15-
<PAGE> 28
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3(a) Revised Articles of Incorporation of UPC, as amended
through April 25, 1996, are incorporated herein by
reference to Exhibit 3 to the Corporation's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1996.

<PAGE> 29
4 Pursuant to various indentures and other agreements,
UPC has issued long-term debt; however, no such
agreement has securities or obligations covered
thereby which exceed 10% of the Corporation's total
consolidated assets. UPC agrees to furnish the
Commission with a copy of any such indenture or
agreement upon request by the Commission.

10(f) Amended and Restated Registration Rights Agreement,
dated as of July 12, 1996, among Resources, TAC, and
the Foundation

<PAGE> 30
is incorporated herein by reference to Annex I to the
Joint Proxy Statement/Prospectus included in
Post-Effective Amendment No. 2 to UPC's Registration
Statement on Form S-4 (No. 33-64707).

<PAGE> 31
10(n) The 1988 Stock Option and Restricted Stock Plan of
UPC, as amended as of February 1, 1992, is
incorporated herein by reference to Exhibit 10(d) to
the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1991.

10(p) The 1993 Stock Option and Retention Stock Plan of
UPC, as amended November 20, 1997.

10(r) The 1988 Stock Option and Restricted Stock Plan of
UPC, as amended November 20, 1997.

10(t) The Executive Life Insurance Plan of UPC, as amended
October, 1997.

<PAGE> 32
10(w) Written Description of Other Executive Compensation
Arrangements of UPC is incorporated herein by
reference to Exhibit 10(o) to the Corporation's
Annual Report on Form 10-K for the year ended
December 31, 1992.

(11) Computation of earnings per share.

(12) Computation of ratio of earnings to fixed charges.

(21) List of the Corporation's significant subsidiaries
and their respective states of incorporation.

(23) Independent Auditors' Consent.

(24) Powers of attorney executed by the directors of UPC.

(27) Financial Data Schedule.

(99) (a) Financial Statements for the Fiscal Year
ended December 31, 1997 required by Form 11-K
for the UPC Thrift Plan - to be filed by
amendment.

(99) (c) Financial Statements for the Fiscal Year
ended December 31, 1997 required by Form 11-K
for the Skyway Retirement Savings Plan - to
be filed by amendment.

(99) (d) Financial Statements for the Fiscal Year
ended December 31, 1997 required by Form 11-K
for the Union Pacific Agreement Employee
401(k) Retirement Thrift Plan - to be filed
by amendment.

<PAGE> 33
(99) (f) Financial Statements for the Fiscal Year
ended December 31, 1997 required by Form 11-K
for the Southern Pacific Rail Corporation
Thrift Plan - to be filed by amendment.

<PAGE> 1
EXHIBIT 10(p)

===============================================================================

1993

STOCK OPTION AND RETENTION STOCK PLAN

UNION PACIFIC CORPORATION

(Effective April 16, 1993 -
As Amended September 30, 1993,
July 28, 1994, April 24, 1997
and November 20, 1997)

===============================================================================

<PAGE> 2

1993 STOCK OPTION AND RETENTION STOCK PLAN
OF UNION PACIFIC CORPORATION

1. PURPOSE

The purpose of the 1993 Stock Option and Retention Stock Plan of Union
Pacific Corporation is to promote and closely align the interests of employees
of Union Pacific Corporation and its shareholders by providing stock based
compensation. The Plan is intended to strengthen Union Pacific Corporation's
ability to reward performance which enhances long term shareholder value; to
increase employee stock ownership through performance based compensation plans;
and to strengthen the company's ability to attract and retain an outstanding
employee and executive team.

2. DEFINITIONS

The following terms shall have the following meanings:

"Act" means the Securities Exchange Act of 1934, as amended.

"Approved Leave of Absence" means a leave of absence of definite length
approved by the Senior Vice President - Human Resources of the Company, or by
any other officer of the Company to whom the Committee delegates such authority.

"Award" means an award of Retention Shares pursuant to the Plan.

"Beneficiary" means any person or persons designated in writing by a
Participant to the Committee on a form prescribed by it for that purpose, which
designation shall be revocable at any time by the Participant prior to his or
her death, provided that, in the absence of such a designation or the failure of
the person or persons so designated to survive the Participant, "Beneficiary"
shall mean such Participant's estate; and further provided that no designation
of Beneficiary shall be effective unless it is received by the Company before
the Participant's death.

"Board" means the Board of Directors of the Company.

"Code" means the Internal Revenue Code of 1986, as amended, or the
corresponding provisions of any successor statute.

"Committee" means the Committee designated by the Board to administer
the Plan pursuant to Section 3.

"Common Stock" means the Common Stock, par value $2.50 per share, of
the Company.

"Company" means Union Pacific Corporation, a Utah corporation,
or any successor corporation.

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<PAGE> 3

"Option" means each non-qualified stock option, incentive stock option
and stock appreciation right granted under the Plan.

"Optionee" means any employee of the Company or a Subsidiary (including
directors who are also such employees) who is granted an Option under the Plan.

"Participant" means any employee of the Company or a Subsidiary
(including directors who are also such employees) who is granted an Award under
the Plan.

"Plan" means this 1993 Stock Option and Retention Stock Plan, as
amended from time to time.

"Retention Shares" means shares of Common Stock subject to an Award
granted under the Plan.

"Restriction Period" means the period defined in Section 9(a).

"Subsidiary" means any corporation of which the Company owns directly
or indirectly at least a majority of the outstanding shares of voting stock.

"Vesting Condition" means any condition to the vesting of Retention
Shares established by the Committee pursuant to Section 9.

3. ADMINISTRATION

The Plan shall be administered by the Committee which shall be
comprised of not less than three members of the Board, none of whom shall be
employees of the Company or any Subsidiary. The Committee shall (i) grant
Options to Optionees and make Awards of Retention Shares to Participants, and
(ii) determine the terms and conditions of such Options and Awards of Retention
Shares, all in accordance with the provisions of the Plan. The Committee shall
have full authority to construe and interpret the Plan, to establish, amend and
rescind rules and regulations relating to the Plan, to administer the Plan, and
to take all such steps and make all such determinations in connection with the
Plan and Options and Awards granted thereunder as it may deem necessary or
advisable. Each Option and grant of Retention Shares shall, if required by the
Committee, be evidenced by an agreement to be executed by the Company and the
Optionee or Participant, respectively, and contain provisions not inconsistent
with the Plan. All determinations of the Committee shall be by a majority of its
members and shall be evidenced by resolution, written consent or other
appropriate action, and the Committee's determinations shall be final. Each
member of the Committee, while serving as such, shall be considered to be acting
in his or her capacity as a director of the Company.

- 2 -
<PAGE> 4

4. ELIGIBILITY

To be eligible for selection by the Committee to participate in the
Plan an individual must be an employee of the Company or a Subsidiary. Directors
who are not full-time salaried employees shall not be eligible. In granting
Options or Awards of Retention Shares to eligible employees, the Committee shall
take into account the duties of the respective employees, their present and
potential contributions to the success of the Company or a Subsidiary, and such
other factors as the Committee shall deem relevant in connection with
accomplishing the purpose of the Plan.

5. STOCK SUBJECT TO THE PLAN

Subject to the provisions of Section 11 hereof, the maximum number and
kind of shares as to which Options or Retention Shares may at any time be
granted under the Plan are 16 million shares of Common Stock. Shares of Common
Stock subject to Options or Awards under the Plan may be either authorized but
unissued shares or shares previously issued and reacquired by the Company. Upon
the expiration, termination or cancellation (in whole or in part) of unexercised
Options, shares of Common Stock subject thereto shall again be available for
option or grant as Retention Shares under the Plan. Shares of Common Stock
covered by an Option, or portion thereof, which is surrendered upon the exercise
of a stock appreciation right, shall thereafter be unavailable for option or
grant as Retention Shares under the Plan. Upon the forfeiture (in whole or in
part) of a grant of Retention Shares, the shares of Common Stock subject to such
forfeiture shall again be available for option or grant as Retention Shares
under the Plan if no dividends have been paid on the forfeited shares, and
otherwise shall be unavailable for such an option or grant.

6. TERMS AND CONDITIONS OF NON-QUALIFIED OPTIONS

All non-qualified options under the Plan shall be granted subject to
the following terms and conditions:

(a) Option Price. The option price per share with respect to each
option shall be determined by the Committee but shall not be less than 100% of
the fair market value of the Common Stock on the date the option is granted,
such fair market value to be determined in accordance with the procedures to be
established by the Committee.

(b) Duration of Options. Options shall be exercisable at such time or
times and under such conditions as set forth in the written agreement evidencing
such option, but in no event shall any option be exercisable subsequent to the
tenth anniversary of the date on which the option is granted.

- 3 -
<PAGE> 5

(c) Exercise of Option. Except as provided in Section 6(h), 6(i) or
8(c), the shares of Common Stock covered by an option may not be purchased prior
to the first anniversary of the date on which the option is granted (unless the
Committee shall determine otherwise), or such longer period or periods, and
subject to such conditions, as the Committee may determine, but thereafter may
be purchased at one time or in such installments over the balance of the option
period as may be provided in the option. Any shares not purchased on the
applicable installment date may, unless the Committee shall have determined
otherwise, be purchased thereafter at any time prior to the final expiration of
the option. To the extent that the right to purchase shares has accrued
thereunder, options may be exercised from time to time by notice to the Company
stating the number of shares with respect to which the option is being
exercised.

(d) Payment. Shares of Common Stock purchased under options shall, at
the time of purchase, be paid for in full. All, or any portion, of the option
exercise price may, at the discretion of the Committee, be paid by the surrender
to the Company, at the time of exercise, of shares of previously acquired Common
Stock owned by the Optionee, to the extent that such payment does not require
the surrender of a fractional share of such previously acquired Common Stock. In
addition, to the extent permitted by the Committee, the option exercise price
may be paid by authorizing the Company to withhold Common Stock otherwise
issuable on exercise of the option. Such shares previously acquired or shares
withheld to pay the option exercise price shall be valued at fair market value
on the date the option is exercised in accordance with the procedures to be
established by the Committee. A holder of an option shall have none of the
rights of a stockholder until the shares of Common Stock are issued to him or
her. If an amount is payable by an Optionee to the Company or a Subsidiary under
applicable withholding tax laws in connection with the exercise of non-qualified
options, the Committee may, in its discretion and subject to such rules as it
may adopt, permit the Optionee to make such payment, in whole or in part, by
electing to authorize the Company to withhold or accept shares of Common Stock
having a fair market value equal to the amount to be paid under such withholding
tax laws.

(e) Restrictions. The Committee shall determine, with respect to each
option, the nature and extent of the restrictions, if any, to be imposed on the
shares of Common Stock which may be purchased thereunder including restrictions
on the transferability of such shares acquired through the exercise of such
option. Without limiting the generality of the foregoing, the Committee may
impose conditions restricting absolutely or conditionally the transferability of
shares acquired through the exercise of options for such periods, and subject to
such conditions, including continued employment of the Optionee by the Company
or a Subsidiary, as the Committee may determine.

- 4 -
<PAGE> 6

(f) Purchase for Investment. The Committee shall have the right to
require that each Optionee or other person who shall exercise an option under
the Plan represent and agree that any shares of Common Stock purchased pursuant
to such option will be purchased for investment and not with a view to the
distribution or resale thereof or that such shares will not be sold except in
accordance with such restrictions or limitations as may be set forth in the
written agreement granting such option.

(g) Non-Transferability of Options. During an Optionee's lifetime, the
option may be exercised only by the Optionee. Options shall not be transferable,
except for exercise by the Optionee's legal representatives or heirs.

(h) Termination of Employment. Upon the termination of an Optionee's
employment, for any reason other than death, the option shall be exercisable
only as to those shares of Common Stock which were then subject to the exercise
of such option, provided that (i) in the case of disability as described below,
any holding period required by Section 6(c) shall automatically be deemed to be
satisfied and (ii) the Committee may determine that particular limitations and
restrictions under the Plan shall not apply, and such option shall expire
according to the following schedule (unless the Committee shall provide for
shorter periods at the time the option is granted):

(i) Retirement. Option shall expire, unless exercised, five
(5) years after the Optionee's retirement from the Company or any
Subsidiary under the provisions of the Company's or a Subsidiary's
pension plan.

(ii) Disability. Option shall expire, unless exercised, five
(5) years after the date the Optionee is eligible to receive disability
benefits under the provisions of the Company's or a Subsidiary's
long-term disability plan.

(iii) Gross Misconduct. Option shall expire upon receipt by
the Optionee of the notice of termination if he or she is terminated
for deliberate, willful or gross misconduct as determined by the
Company.

(iv) All Other Terminations. Option shall expire, unless
exercised, three (3) months after the date of such termination;
provided, the Committee may provide for a longer exercise period, not
to exceed three (3) years from the date of such termination or, if
later, three years from the date the option becomes exercisable but not
more than five years after the date of such termination.

(i) Death of Optionee. Upon the death of an Optionee during his or her
period of employment, the option shall be exercisable only as to those shares of
Common Stock which were subject to the exercise of such option at the time of
his or her death, provided

- 5 -
<PAGE> 7

that (i) any holding period required by Section 6(c) shall automatically be
deemed to be satisfied and (ii) the Committee may determine that particular
limitations and restrictions under the Plan shall not apply, and such option
shall expire, unless exercised by the Optionee's legal representatives or heirs,
five (5) years after the date of death (unless the Committee shall provide for a
shorter period at the time the option is granted).

(j) Deferral. The Committee may permit an Optionee to elect to defer
receipt of all or part of the Common Stock issuable upon the exercise of an
option, pursuant to rules and regulations adopted by the Committee. The
Committee may permit the payment of cash in lieu of Common Stock upon payment of
the deferred amount.

In no event, however, shall any option be exercisable pursuant to Sections 6(h)
or (i) subsequent to the tenth anniversary of the date on which it is granted.

7. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS

(a) General. The Committee may also grant a stock appreciation right in
connection with a non-qualified option, either at the time of grant or by
amendment. Such stock appreciation right shall cover the same shares covered by
such option (or such lesser number of shares of Common Stock as the Committee
may determine) and shall, except for the provisions of Section 6(d) hereof, be
subject to the same terms and conditions as the related non-qualified option.

(b) Exercise and Payment. Each stock appreciation right shall entitle
the Optionee to surrender to the Company unexercised the related option, or any
portion thereof, and to receive from the Company in exchange therefor an amount
equal to the excess of the fair market value of one share of Common Stock over
the option price per share times the number of shares covered by the option, or
portion thereof, which is surrendered. Payment shall be made in shares of Common
Stock valued at fair market value, or in cash, or partly in shares and partly in
cash, all as shall be determined by the Committee. The fair market value shall
be the value determined in accordance with procedures established by the
Committee. Stock appreciation rights may be exercised from time to time upon
actual receipt by the Company of written notice stating the number of shares of
Common Stock with respect to which the stock appreciation right is being
exercised, provided that if a stock appreciation right expires unexercised, it
shall be deemed exercised on the expiration date if any amount would be payable
with respect thereto. No fractional shares shall be issued but instead cash
shall be paid for a fraction or, if the Committee should so determine, the
number of shares shall be rounded downward to the next whole share. If an amount
is payable by an Optionee to the Company or a Subsidiary under applicable
withholding tax laws in connection with the exercise of stock appreciation
rights, the Committee may, in its discretion and subject to such rules as it

- 6 -
<PAGE> 8

may adopt, permit the Optionee to make such payment, in whole or in part, by
electing to authorize the Company to withhold or accept shares of Common Stock
having a fair market value equal to the amount to be paid under such withholding
tax laws.

(c) Restrictions. The obligation of the Company to satisfy any stock
appreciation right exercised by an Optionee subject to Section 16 of the Act
shall be conditioned upon the prior receipt by the Company of an opinion of
counsel to the Company that any such satisfaction will not create an obligation
on the part of such Optionee pursuant to Section 16(b) of the Act to reimburse
the Company for any statutory profit which might be held to result from such
satisfaction.

8. TERMS AND CONDITIONS OF INCENTIVE STOCK OPTIONS.

(a) General. The Committee may also grant incentive stock options as
defined under section 422 of the Code. All incentive stock options issued under
the Plan shall, except for the provisions of Sections 6(h) and (i) and Section 7
hereof, be subject to the same terms and conditions as the non-qualified options
granted under the Plan. In addition, incentive stock options shall be subject to
the conditions of Sections 8(b),(c),(d) and (e).

(b) Limitation of Exercise. The aggregate fair market value (determined
as of the date the incentive stock option is granted) of the shares of stock
with respect to which incentive stock options are exercisable for the first time
by such Optionee during any calendar year, under this Plan or any other stock
option plans adopted by the Company, its Subsidiaries or any predecessor
companies thereof, shall not exceed $100,000. If any incentive stock options
become exercisable in any year in excess of the $100,000 limitation, options
representing such excess shall become non-qualified options exercisable pursuant
to the terms of Section 6 hereof and shall not be exercisable as incentive stock
options.

(c) Termination of Employment. Upon the termination of an Optionee's
employment, for any reason other than death, his or her incentive stock option
shall be exercisable only as to those shares of Common Stock which were then
subject to the exercise of such option provided that (i) in the case of
disability as described below, any holding period required by Section 6(c) shall
automatically be deemed to be satisfied and (ii) the Committee may determine
that particular limitations and restrictions under the Plan shall not apply, and
such option shall expire as an incentive stock option (but shall become a
non-qualified option exercisable pursuant to the terms of Section 6 hereof less
the period already elapsed under such Section), according to the following
schedule (unless the Committee shall provide for shorter periods at the time the
incentive stock option is granted):

(i) Retirement. An incentive stock option shall expire, unless
exercised, three (3) months after the

- 7 -
<PAGE> 9

Optionee's retirement from the Company or any Subsidiary under the
provisions of the Company's or a Subsidiary's pension plan.

(ii) Disability. In the case of an Optionee who is disabled
within the meaning of section 22(e)(3) of the Code, an incentive stock
option shall expire, unless exercised, one (1) year after the earlier
of the date the Optionee terminates employment or the date the Optionee
is eligible to receive disability benefits under the provisions of the
Company's or a Subsidiary's long-term disability plan.

(iii) Gross Misconduct. An incentive stock option shall expire
upon receipt by the Optionee of the notice of termination if he or she
is terminated for deliberate, willful or gross misconduct as determined
by the Company.

(iv) All Other Terminations. An incentive stock option shall
expire, unless exercised, three (3) months after the date of such
termination.

In the case of incentive stock options granted after April 24, 1997,
the Committee may extend the period during which an incentive stock option may
be exercised as a non-qualified stock option to up to three (3) years from the
date of a termination not due to retirement, disability or gross misconduct or,
if later, three (3) years from the date the option becomes exercisable but not
more than five years after the date of such a termination.

(d) Death of Optionee. Upon the death of an Optionee during his or her
period of employment, the incentive stock option shall be exercisable as an
incentive stock option only as to those shares of Common Stock which were
subject to the exercise of such option at the time of death, provided that (i)
any holding period required by Section 6(c) shall automatically be deemed to be
satisfied, and (ii) the Committee may determine that particular limitations and
restrictions under the Plan shall not apply, and such option shall expire,
unless exercised by the Optionee's legal representatives or heirs, five (5)
years after the date of death (unless the Committee shall provide for a shorter
period at the time the option is granted).

(e) Leave of Absence. A leave of absence, whether or not an Approved
Leave of Absence, shall be deemed a termination of employment for purposes of
Section 8.

In no event, however, shall any incentive stock option be exercisable pursuant
to Sections 8(c) or (d) subsequent to the tenth anniversary of the date on which
it was granted.

9. TERMS AND CONDITIONS OF AWARDS OF RETENTION STOCK

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<PAGE> 10

(a) General. Retention Shares may be granted only to reward the
attainment of individual, Company or Subsidiary goals, or to attract or retain
officers or other employees of the Company or any Subsidiary, and shall be
granted subject to the attainment of performance goals unless the Committee
shall determine otherwise. With respect to each grant of Retention Shares under
the Plan, the Committee shall determine the period or periods, including any
conditions for determining such period or periods, during which the restrictions
set forth in Section 9(b) shall apply, provided that in no event, other than as
provided in Section 9(c) or in the next sentence, shall such restrictions
terminate prior to 3 years after the date of grant (the "Restriction Period"),
and may also specify any other terms or conditions to the right of the
Participant to receive such Retention Shares ("Vesting Conditions"). The
Committee may determine in its sole discretion to waive any or all of such
restrictions prior to end of the Restriction Period or the satisfaction of any
Vesting Condition. Subject to Section 9(c) and any such Vesting Condition, a
grant of Retention Shares shall be effective for the Restriction Period and may
not be revoked.

(b) Restrictions. At the time of grant of Retention Shares to a
Participant, a certificate representing the number of shares of Common Stock
granted shall be registered in the Participant's name but shall be held by the
Company for his or her account. The Participant shall have the entire beneficial
ownership interest in, and all rights and privileges of a stockholder as to,
such Retention Shares, including the right to vote such Retention Shares and,
unless the Committee shall determine otherwise, the right to receive dividends
thereon, subject to the following: (i) subject to Section 9(c), the Participant
shall not be entitled to delivery of the stock certificate until the expiration
of the Restriction Period and the satisfaction of any Vesting Conditions; (ii)
none of the Retention Shares may be sold, transferred, assigned, pledged, or
otherwise encumbered or disposed of during the Restriction Period or prior to
the satisfaction of any Vesting Conditions; and (iii) all of the Retention
Shares shall be forfeited and all rights of the Participant to such Retention
Shares shall terminate without further obligation on the part of the Company
unless the Participant remains in the continuous employment of the Company or a
Subsidiary for the entire Restriction Period, except as provided by Sections
9(a) and 9(c), and any applicable Vesting Conditions have been satisfied. Any
shares of Common Stock or other securities or property received as a result of a
transaction listed in Section 11 shall be subject to the same restrictions as
such Retention Shares unless the Committee shall determine otherwise.

(i) Disability and Retirement. Unless the Committee shall
determine otherwise at the time of grant of Retention Shares, if (A) a
Participant ceases to be an employee of the Company or a Subsidiary
prior to the end of a Restriction Period, by reason of disability under
the provisions of the

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<PAGE> 11

Company's or a Subsidiary's long-term disability plan or retirement
under the provisions of the Company's or a Subsidiary's pension plan
either (i) at age 65 or (ii) prior to age 65 at the request of the
Company or a Subsidiary, and (B) all Vesting Conditions have been
satisfied, the Retention Shares granted to such Participant shall
immediately vest and all restrictions applicable to such shares shall
lapse. A certificate for such shares shall be delivered to the
Participant in accordance with the provisions of Section 9(d).

(ii) Death. Unless the Committee shall determine otherwise at
the time of grant of Retention Shares, if (A) a Participant ceases to
be an employee of the Company or a Subsidiary prior to the end of a
Restriction Period by reason of death, and (B) all Vesting Conditions
have been satisfied, the Retention Shares granted to such Participant
shall immediately vest in his or her Beneficiary, and all restrictions
applicable to such shares shall lapse. A certificate for such shares
shall be delivered to the Participant's Beneficiary in accordance with
the provisions of Section 9(d).

(iii) All Other Terminations. If a Participant ceases to be an
employee of the Company or a Subsidiary prior to the end of a
Restriction Period for any reason other than death, disability or
retirement as provided in Section 9(c)(i) and (ii), the Participant
shall immediately forfeit all Retention Shares then subject to the
restrictions of Section 9(b) in accordance with the provisions thereof,
except that the Committee may, if it finds that the circumstances in
the particular case so warrant, allow a Participant whose employment
has so terminated to retain any or all of the Retention Shares then
subject to the restrictions of Section 9(b) and all restrictions
applicable to such retained shares shall lapse. A certificate for such
retained shares shall be delivered to the Participant in accordance
with the provisions of Section 9(d).

(iv) Vesting Conditions Unless the Committee shall determine
otherwise at the time of grant of Retention Shares, if a Participant
ceases to be an employee of the Company for any reason prior to the
satisfaction of any Vesting Conditions, the Participant shall
immediately forfeit all Retention Shares then subject to the
restrictions of Section 9(b) in accordance with the provisions thereof,
except that the Committee may, if it finds that the circumstances in
the particular case so warrant, allow a Participant whose employment
has so terminated to retain any or all of the Retention Shares then
subject to the restrictions of Section 9(b) and all restrictions
applicable to such retained shares shall lapse. A certificate for such
retained shares shall be delivered to the Participant in accordance
with the provisions of Section 9(d).

- 10 -
<PAGE> 12

(d) Payment of Retention Shares. At the end of the Restriction Period
and after all Vesting Conditions have been satisfied, or at such earlier time as
provided for in Section 9(c) or as the Committee, in its sole discretion, may
otherwise determine, all restrictions applicable to the Retention Shares shall
lapse, and a stock certificate for a number of shares of Common Stock equal to
the number of Retention Shares, free of all restrictions, shall be delivered to
the Participant or his or her Beneficiary, as the case may be. If an amount is
payable by a Participant to the Company or a Subsidiary under applicable
withholding tax laws in connection with the lapse of such restrictions, the
Committee, in its sole discretion, may permit the Participant to make such
payment, in whole or in part, by authorizing the Company to transfer to the
Company Retention Shares otherwise deliverable to the Participant having a fair
market value equal to the amount to be paid under such withholding tax laws.

(e) Deferral. The Committee may permit a Participant to elect to defer
receipt of all or part of any Retention Shares that would otherwise be
delivered, pursuant to rules and regulations adopted by the Committee. The
Committee may permit the payment of cash in lieu of Common Stock upon payment of
the deferred amount.

10. REGULATORY APPROVALS AND LISTING

The Company shall not be required to issue to an Optionee, Participant
or a Beneficiary, as the case may be, any certificate for any shares of Common
Stock upon exercise of an option or for any Retention Shares granted under the
Plan prior to (i) the obtaining of any approval from any governmental agency
which the Company, in its sole discretion, shall determine to be necessary or
advisable, (ii) the admission of such shares to listing on any stock exchange on
which the Common Stock may then be listed, and (iii) the completion of any
registration or other qualification of such shares under any state or federal
law or rulings or regulations of any governmental body which the Company, in its
sole discretion, shall determine to be necessary or advisable.

11. ADJUSTMENT IN EVENT OF CHANGES IN CAPITALIZATION

In the event of a recapitalization, stock split, stock dividend,
combination or exchange of shares, merger, consolidation, rights offering,
separation, spin-off, reorganization or liquidation, or any other change in the
corporate structure or shares of the Company, the Board, upon recommendation of
the Committee, may make such equitable adjustments as it may deem appropriate in
the number and kind of shares authorized by the Plan, in the option price of
outstanding Options, and in the number and kind of shares or other securities or
property subject to Options or covered by outstanding Awards.

12. TERM OF THE PLAN

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<PAGE> 13

No Options or Retention Shares shall be granted pursuant to the Plan
after April 16, 2003, but grants of Options and Retention Shares theretofore
granted may extend beyond that date and the terms and conditions of the Plan
shall continue to apply thereto.

13. TERMINATION OR AMENDMENT OF THE PLAN

The Board may at any time terminate the Plan with respect to any shares
of Common Stock not at that time subject to outstanding Options or Awards, and
may from time to time alter or amend the Plan or any part thereof (including,
but without limiting the generality of the foregoing, any amendment deemed
necessary to ensure that the Company may obtain any approval referred to in
Section 10 or to ensure that the grant of Options or Awards, the exercise of
Options or payment of Retention Shares or any other provision or the Plan
complies with Section 16(b) of the Act), provided that no change with respect to
any Options or Retention Shares theretofore granted may be made which would
impair the rights of an Optionee or Participant without the consent of such
Optionee or Participant and, further, that without the approval of stockholders,
no alteration or amendment may be made which would (i) increase the maximum
number of shares of Common Stock subject to the Plan as set forth in Section 5
(except by operation of Section 11), (ii) extend the term of the Plan or (iii)
change the class of eligible persons who may receive Options or Awards of
Retention Shares under the Plan.

14. LEAVE OF ABSENCE

Unless the Committee shall determine otherwise, a leave of absence
other than an Approved Leave of Absence shall be deemed a termination of
employment for purposes of the Plan. An Approved Leave of Absence shall not be
deemed a termination of employment for purposes of the Plan (except for purposes
of Section 8), but the period of such Leave of Absence shall not be counted
toward satisfaction of any Restriction Period or any holding period described in
Section 6(c).

15. GENERAL PROVISIONS

(a) Neither the Plan nor the grant of any Option or Award nor any
action by the Company, any Subsidiary or the Committee shall be held or
construed to confer upon any person any right to be continued in the employ of
the Company or a Subsidiary. The Company and each Subsidiary expressly reserve
the right to discharge, without liability but subject to his or her rights under
the Plan, any Optionee or Participant whenever in the sole discretion of the
Company or a Subsidiary, as the case may be, its interest may so require.

(b) All questions pertaining to the construction, regulation, validity
and effect of the Plan shall be determined in accordance

- 12 -
<PAGE> 14

with the laws of the State of Utah, without regard to conflict of laws
doctrine.

16. EFFECTIVE DATE

The Plan shall become effective upon approval of the stockholders of
the Company.

- 13 -

<PAGE> 1
EXHIBIT 10(r)

1988

STOCK OPTION AND RESTRICTED STOCK PLAN

UNION PACIFIC CORPORATION

(Effective April 15, 1988 -
As Amended September 26, 1991, February 1, 1992,
April 24, 1997 and November 20, 1997)
<PAGE> 2
1988 STOCK OPTION AND RESTRICTED STOCK PLAN
OF UNION PACIFIC CORPORATION

1. PURPOSE.

The purpose of the 1988 Stock Option and Restricted Stock Plan of
Union Pacific Corporation (the "Plan") is to promote the interests of Union
Pacific Corporation (the "Company") and its shareholders by strengthening its
ability to attract and retain officers and key employees in the employ of the
Company or of any subsidiary of the Company by furnishing additional incentives
whereby such present and future officers and key employees may be encouraged to
acquire, or to increase their acquisition of, the Company's common stock, thus
maintaining their personal interest in the Company's continued success and
progress. The Plan provides for the grant of non-qualified stock options,
incentive stock options, stock appreciation rights and shares of Company common
stock restricted in accordance with the provisions of Section 8 below
("Restricted Shares"), all in accordance with the terms and conditions set
forth below. Unless otherwise required by the context, the term "option" shall
refer to non-qualified options, incentive stock options and stock appreciation
rights.

2. ADMINISTRATION.

The Plan shall be administered by a Stock Option Committee (the
"Committee"), to be designated by the Board of Directors of the Company and to
be comprised of not less than three members of the Board of Directors who are
not eligible to participate under the Plan. Members of the Committee shall be
appointed from time to time by the Board of Directors for such terms as it
shall determine, and may be removed by the Board at any time with or without
cause. The Committee shall have complete authority to construe and interpret
the Plan, to establish, amend and rescind appropriate rules and regulations
relating to the Plan, to select persons eligible to participate in the Plan, to
grant options and Restricted Shares thereunder, to administer the Plan, to make
recommendations to the Board, and to take all such steps and make all such
determinations in connection with the Plan and the options and Restricted
Shares granted thereunder as it may deem necessary or advisable. All
determinations of the Committee shall be by a majority of its members, and its
determinations shall be final. Each member of the Committee, while serving as
such, shall be considered to be acting in his capacity as a Director of the
Company. Each eligible employee (as defined below) to whom an option or
Restricted Shares is granted is hereinafter referred to as the "Optionee" or
the "Participant", respectively. The granting of an option or Restricted
Shares pursuant to the Plan shall take place when the Committee by resolution,
written consent or other appropriate action determines to grant such an option
to an Optionee at a particular price or such Restricted Shares to a
Participant. Each Option or
<PAGE> 3
- 2 -

grant of Restricted Shares shall, if required by the Committee, be evidenced by
a written agreement to be duly executed and delivered by or on behalf of the
Company and the Optionee or Participant, respectively, and contain provisions
not inconsistent with the Plan.

3. ELIGIBILITY.

To be eligible for selection by the Committee to participate in the
Plan an individual must be an officer or key employee of the Company, or of any
subsidiary of the Company, as of the date on which the Committee grants to such
individual an option or Restricted Shares (hereinafter collectively referred to
as "eligible employees"). Those Directors who are not full-time salaried
officers or employees shall not be eligible. Subject to the provisions of this
Plan, options or Restricted Shares may be granted to eligible employees in such
number and at such times during the term of this Plan as the Committee shall
determine, the Committee taking into account the duties of the respective
employees, their present and potential contributions to the success of the
Company, and such other factors as the Committee shall deem relevant in
connection with accomplishing the purpose of the Plan.

4. STOCK SUBJECT TO THE PLAN.

Subject to the provisions of Section 10 hereof, the maximum number and
kind of shares as to which options or Restricted Shares may at any time be
granted under the Plan are 8,400,000 shares of common stock of the Company of
the par value of $2.50 per share ("Common Stock") of which shares no more than
400,000 shares of Common Stock may be issued as grants of Restricted Shares
under the Plan. Shares of Common Stock subject to options or granted as
Restricted Shares under the Plan may, in the discretion of the Board of
Directors of the Company, be either authorized but unissued shares or shares
previously issued and reacquired by the Company. Upon the expiration,
termination or cancellation (in whole or in part) of unexercised options,
shares of Common Stock subject thereto shall again be available for option or
grant as Restricted Shares under the Plan. Shares of Common Stock covered by
an option, or portion thereof, which is surrendered upon the exercise of a
stock appreciation right, shall thereafter be unavailable for option or grant
as Restricted Shares under the Plan. Upon the forfeiture (in whole or in part)
of a grant of Restricted Shares, the shares of Common Stock subject to such
forfeiture shall again be available for option or grant as Restricted Shares
under the Plan.
<PAGE> 4
- 3 -

5. TERMS AND CONDITIONS OF NON-QUALIFIED OPTIONS.

All non-qualified options under the Plan shall be granted subject to
the following terms and conditions:

(a) Option Price. The option price per share with
respect to each option shall be determined by the Committee but shall
not be less than 100% of the fair market value of the Common Stock on
the date the option is granted, such fair market value to be
determined in accordance with the procedures to be established by the
Committee.

(b) Duration of Options. Options shall be exercisable at
such times and under such conditions as set forth in the written
agreement evidencing such option, but in no event shall any option be
exercisable subsequent to the tenth anniversary of the date on which
the option is granted.

(c) Exercise of Option. The shares of Common Stock
covered by an option may not be purchased prior to the first
anniversary of the date on which the option is granted (unless the
Committee shall determine otherwise), or such longer period as the
Committee may determine in a particular case, but thereafter may be
purchased at one time or in such installments over the balance of the
option period as may be provided in the option. Any shares not
purchased on the applicable installment date may be purchased
thereafter at any time prior to the final expiration of the option.
To the extent that the right to purchase shares has accrued
thereunder, options may be exercised from time to time by notice to
the Company stating the number of shares with respect to which the
option is being exercised.

(d) Payment. Shares of Common Stock purchased under
options shall, at the time of purchase, be paid for in full. All, or
any portion, of the option exercise price may, at the discretion of
the Committee, be paid by the surrender to the Company, at the time of
exercise, of shares of previously acquired Common Stock owned by the
Optionee, to the extent that such payment does not require the
surrender of a fractional share of such previously acquired Common
Stock. In addition, to the extent permitted by the Committee, the
option exercise price may be paid by authorizing the Company to
withhold Common Stock otherwise issuable upon exercise of the option.
Such shares previously acquired or shares withheld to pay the option
exercise price shall be valued at fair market value on the date the
option is exercised in accordance with the procedures to be
established by the Committee. No shares shall be issued or delivered
until full payment therefor has been made. A holder of an option
shall have none of the rights of a stockholder until the shares of
Common Stock are issued to him. If an amount is payable by an
Optionee to the Company under applicable income tax laws in connection
with the exercise of non-qualified options, the Committee may, in its
discretion and
<PAGE> 5
- 4 -

subject to such rules as it may adopt, permit the Optionee to make
such payment, in whole or in part, by electing to authorize the
Company to withhold or accept shares of Common Stock having a fair
market value equal to the amount to be paid under such income tax
laws.

(e) Restrictions. The Committee shall determine, with
respect to each option, the nature and extent of the restrictions, if
any, to be imposed on the shares of Common Stock which may be
purchased thereunder including restrictions on the transferability of
such shares acquired through the exercise of such option. Without
limiting the generality of the foregoing, the Committee may impose
conditions restricting absolutely the transferability of shares
acquired through the exercise of options for such periods as the
Committee may determine and, further, that in the event the Optionee's
employment by the Company or a subsidiary terminates during the period
in which such shares are non-transferable, the Optionee shall be
required to sell such shares back to the Company at such price as the
Committee may specify in the option.

(f) Purchase for Investment. The Committee shall have
the right to require that each Optionee or other person who shall
exercise an option under the Plan, and each person into whose name
shares of Common Stock shall be issued, pursuant to the exercise of an
option, jointly with that of any Optionee, represent and agree that
any and all shares of Common Stock of the Company purchased pursuant
to such option will be purchased for investment and not with a view to
the distribution or resale thereof or that such shares will not be
sold except in accordance with such restrictions or limitations as may
be set forth in the written agreement granting such option; provided,
however, that the foregoing provisions of this subparagraph (f) shall
be inoperative during any period of time when the Company has obtained
all necessary or advisable approvals from any governmental agency and
has completed all necessary or advisable registrations or other
qualification of shares of Common Stock as to which options may from
time to time be granted, all as contemplated by Section 9 hereof.

(g) Non-Transferability of Options. During an Optionee's
lifetime, the option may be exercised only by him. Options shall not
be transferable, except for exercise by the Optionee's legal
representatives or beneficiaries.

(h) Termination of Employment. Upon the termination of
an Optionee's employment, for any reason other than death, his option
shall be exercisable only as to those shares of Common Stock which
were then subject to the exercise of such option (unless the Committee
shall determine in a specific case that particular limitations and
restrictions under the Plan shall not apply) and such option shall
expire according to the following schedule:
<PAGE> 6
- 5 -

(i) Retirement. Option shall expire, unless
exercised, five (5) years after the Optionee's retirement from
the Company or any subsidiary of the Company under the
provisions of the Company's or a subsidiary's pension plans.

(ii) Disability. Option shall expire, unless
exercised, five (5) years after the date the Optionee is
eligible to receive disability benefits under the provisions
of the Company's or a subsidiary's long-term disability plan.

(iii) Gross Misconduct. Option shall expire upon
receipt by Optionee of the notice of termination if he is
terminated for deliberate, willful or gross misconduct as
determined by the Company.

(iv) All Other Terminations. Option shall ex-
pire, unless exercised, three (3) months after the date of
such termination; provided, the Committee may provide for a
longer exercise period, not to exceed three (3) years from the
date of such termination or, if later, three years from the
date the option becomes exercisable but not more than five
years after the date of such termination.

(i) Death of Optionee. Upon the death of an Optionee
during his period of employment, his option shall be exercisable only
as to those shares of Common Stock which were subject to the exercise
of such option at the time of his death (unless the Committee shall
determine in a specific case that particular limitations and
restrictions under the Plan shall not apply) and such option shall
expire, unless exercised by his legal representatives or
beneficiaries, five (5) years after the date of his death.

(j) The Committee may permit an Optionee to elect to
defer receipt of all or part of the Common Stock issuable upon the
exercise of an option, pursuant to rules and regulations adopted by
the Committee. The Committee may permit the payment of cash in lieu
of Common Stock upon payment of the deferred amount.

In no event, however, shall any option be exercisable pursuant to Sections 5(h)
and (i) subsequent to the tenth anniversary of the date on which it is granted.

6. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS.

by such option (or such lesser number of shares of Common Stock as the
Committee may determine) and shall, except for the provisions of
Section 5(d) hereof, be subject to the same terms and conditions as
the related non-qualified option.

(b) Exercise and Payment. Each stock appreciation right
shall entitle the Optionee to surrender to the Company unexercised the
related option, or any portion thereof, and to receive from the
Company in exchange therefor an amount equal to the excess of the fair
market value of one share of Common Stock over the option price per
share times the number of shares covered by the option, or portion
thereof, which is surrendered. Payment shall be made in shares of
Common Stock valued at fair market value, or in cash, or partly in
shares and partly in cash, all as shall be determined by the
Committee. The fair market value shall be the value determined in
accordance with procedures established by the Committee. Stock
appreciation rights may be exercised from time to time upon actual
receipt by the Company of written notice stating the number of shares
of Common Stock with respect to which the stock appreciation right is
being exercised. No fractional shares shall be issued but instead
cash shall be paid for a fraction or, if the Committee should so
determine, the number of shares shall be rounded downward to the next
whole share. If an amount is payable by an Optionee to the Company
under applicable income tax laws in connection with exercises of stock
appreciation rights, the Committee may, in its discretion and subject
to such rules as it may adopt, permit the Optionee to make such
payment, in whole or in part, by electing to authorize the Company to
withhold or accept shares of Common Stock having a fair market value
equal to the amount to be paid under such income tax laws.

(c) Restrictions. The obligation of the Company to
satisfy any stock appreciation right exercised by an Optionee subject
to Section 16 of the Securities Exchange Act of 1934, as amended,
shall be conditioned upon the prior receipt by the Company of an
opinion of counsel to the Company that any such satisfaction will not
create an obligation on the part of such Optionee pursuant to Section
16(b) of such Act to reimburse the Company for any statutory profit
which might be held to result from such satisfaction.

7. TERMS AND CONDITIONS OF INCENTIVE STOCK OPTIONS.

(a) General. The Committee may also grant incentive
stock options as defined under section 422A of the Internal Revenue
Code of 1986, as amended (the "Code"). All incentive stock options
issued under the Plan shall, except for the provisions of Sections
5(h) and (i) and Section 6 hereof, be subject to the same terms and
conditions as the non-qualified options granted under the Plan
provided that the
<PAGE> 8
- 7 -

third sentence of Section 5(d) shall not apply to incentive stock
options granted prior to February 1, 1992. In addition, incentive
stock options shall be subject to the conditions of Sections 7(b), (c)
and (d).

(c) Termination of Employment. Upon the termination of
an Optionee's employment, for any reason other than death, his
incentive stock option shall be exercisable only as to those shares of
Common Stock which were then subject to the exercise of such option
(unless the Committee shall determine in a specific case that
particular limitations and restrictions under the Plan shall not
apply), and such option shall expire as an incentive stock option (but
shall remain a non-qualified option exercisable pursuant to the terms
of Section 5 hereof less the time period already elapsed under such
Section), according to the following schedule:

(i) Retirement. An incentive stock option
shall expire, unless exercised, three (3) months after the
Optionee's retirement from the Company or any Subsidiary of
the Company under the provisions of the Company's or a
subsidiary's pension plans.

(ii) Disability. In the case of an Optionee who
is disabled within the meaning of section 22(e)(3) of the
Code, an incentive stock option shall expire, unless
exercised, twelve (12) months after the date the Optionee
terminates employment or the date the Optionee is eligible to
receive disability benefits under the provisions of the
Company's or a subsidiary's long-term disability plan,
whichever is earlier.

(iii) Gross Misconduct. An incentive stock
option shall expire upon receipt by an Optionee of the notice
of termination if he is terminated for deliberate, willful or
gross misconduct as determined by the Company.

(iv) All Other Terminations. An incentive stock
option shall expire, unless exercised, three (3) months after
the date of such termination.

In the case of incentive stock options granted after April 24,
1997, the Committee may extend the period during which an incentive
stock option may be exercised as a non-
<PAGE> 9
- 8 -

qualified stock option to up to three (3) years from the date of a
termination not due to retirement, disability or gross misconduct or,
if later, three (3) years from the date the option becomes exercisable
but not more than five years after the date of such a termination.

(d) Death of Optionee. Upon the death of an Optionee
during his period of employment, his incentive stock option shall be
exercisable as an incentive stock option only as to those shares of
Common Stock which were subject to the exercise of such option at the
time of his death (unless the Committee shall determine in a specific
case that particular limitations and restrictions under the Plan shall
not apply), and such option shall expire, unless exercised by his
legal representatives or beneficiaries, five (5) years after the date
of his death.

In no event, however, shall any incentive stock option be exercisable pursuant
to Sections 7(c) and (d) subsequent to the tenth anniversary of the date on
which it was granted.

8. TERMS AND CONDITIONS OF RESTRICTED SHARES.

(a) General. With respect to each grant of Restricted
Shares under the Plan, the Committee, in its sole discretion, shall
determine the period during which the restrictions set forth in
Section 8(b) shall apply to such Restricted Shares (the "Restricted
Period"). The Restricted Period shall not be less than 36 nor more
than 60 consecutive months commencing with the first day of the month
in which the Restricted Shares are granted. Subject to the provisions
of Section 8(c), a grant of Restricted Shares shall be effective for
the Restricted Period and may not be revoked. Approved leaves of
absence of one year or less shall not be deemed terminations or
interruptions in continuous service under this Section 8. Leaves of
absence of more than one year will be deemed to be terminations under
this Section unless the Committee determines otherwise.

(b) Restrictions. At the time of grant of Restricted
Shares to a Participant, a certificate representing the number of
shares of Common Stock granted shall be registered in his name but
shall be held by the Company for the account of the Participant. The
Participant shall have the entire beneficial ownership interest in,
and all rights and privileges of a stockholder as to, such Restricted
Shares, including the right to receive dividends and the right to vote
such Restricted Shares, subject to the following restrictions: (i)
subject to Section 8(c) hereof, the Participant shall not be entitled
to delivery of the stock certificate until the expiration of the
Restricted Period; (ii) none of the Restricted Shares may be sold,
transferred, assigned, pledged, or otherwise encumbered or disposed of
during the Restricted Period; and (iii) all of the Restricted Shares
<PAGE> 10
- 9 -

shall be forfeited and all rights of the Participant to such
Restricted Shares shall terminate without further obligation on the
part of the Company unless the Participant remains in the continuous
employment of the Company or a Subsidiary for the entire Restricted
Period in relation to which such Restricted Shares were granted,
except as provided by Section 8(c) hereof. Any shares of Common Stock
received as a result of a transaction listed in Section 10 hereof
shall be subject to the same restrictions as such Restricted Shares
unless the Committee shall determine otherwise.

(i) Disability and Retirement. If a
Participant ceases to be an employee of the Company or a
subsidiary prior to the end of a Restricted Period by reason
of disability (as defined in Section 5(h)(ii) hereof) or
retirement (as defined in Section 5(h)(i) hereof), the number
of Restricted Shares granted to such Participant for such
Restricted Period shall be reduced in proportion to the
Restricted Period (determined on a monthly basis) remaining
after the Participant ceases to be an employee and all
restrictions on such reduced number of shares shall lapse. A
certificate for such shares shall be delivered to the
Participant in accordance with the provisions of Section 8(d)
hereof. The Committee may, if it deems appropriate, direct
that the Participant receive a greater number of shares of
Common Stock free of all restrictions but not exceeding the
number of Restricted Shares then subject to the restrictions
of Section 8(b).

(ii) Death. If a Participant ceases to be an
employee prior to the end of a Restricted Period by reason of
death, the Restricted Shares granted to such participant shall
immediately vest in his beneficiary or estate and all
restrictions applicable to such shares shall lapse. A
certificate for such shares shall be delivered to the
Participant's beneficiary or estate in accordance with the
provisions of Section 8(d) hereof.

(iii) All Other Terminations. If a Participant
ceases to be an employee prior to the end of a Restricted
Period for any reason other than death, disability or
retirement, the Participant shall immediately forfeit all
Restricted Shares then subject to the restrictions of Section
8(b) hereof in accordance with the provisions thereof, except
that the Committee may, if it finds that the circumstances in
the particular case so warrant, allow a participant whose
employment has so terminated to retain any or all of the
Restricted Shares then subject to the restrictions of Section
8(b) and all restrictions applicable to such retained shares
shall lapse. A certificate for such retained shares shall be
delivered to the Participant in accordance with the provisions
of Section 8(d) hereof.
<PAGE> 11
- 10 -

(d) Payment of Restricted Shares. At the end of the
Restricted Period or at such earlier time as provided for in Section
8(c) hereof or as the Committee may determine, all restrictions
applicable to the Restricted Shares shall lapse and a stock
certificate for a number of shares of Common Stock equal to the number
of Restricted Shares, free of all restrictions, shall be delivered to
the Participant or his beneficiary or estate, as the case may be. The
Company shall not be required to deliver any fractional share of
Common Stock but shall pay, in lieu thereof, the fair market value
(measured as of the date the restrictions lapse) of such fractional
share to the Participant or his beneficiary or estate, as the case may
be. If an amount is payable by a Participant to the Company under
applicable income tax laws in connection with the lapse of such
restrictions, the Committee may, in its discretion and subject to such
rules as it may adopt, permit the Participant to make such payment, in
whole or in part, by electing to authorize the Company to transfer to
the Company Restricted Shares otherwise deliverable to the Participant
having a fair market value equal to the amount to be paid under such
income tax laws.

9. REGULATORY APPROVALS AND LISTING.

The Company shall not be required to issue any certificate or
certificates for shares of Common Stock upon the exercise of an option or a
stock appreciation right or the vesting of Restricted Shares granted under the
Plan prior to (i) the obtaining of any approval from any governmental agency
which the Company shall, in its sole discretion, determine to be necessary or
advisable, (ii) the admission of such shares to listing on any stock exchange
on which the Common Stock may then be listed, and (iii) the completion of any
registration or other qualification of such shares under any state or Federal
law or rulings or regulations of any governmental body which the Company shall,
in its sole discretion, determine to be necessary or advisable.

10. ADJUSTMENT IN EVENT OF CHANGES IN CAPITALIZATION.

In the event of a recapitalization, stock split, stock dividend,
combination or exchange of shares, merger, consolidation, rights offering,
separation, reorganization or liquidation, or any other change in the corporate
structure or shares of the Company, the Board of Directors of the Company, upon
recommendation of the Committee, may make such equitable adjustments, designed
to protect against dilution, as it may deem appropriate in the number and kind
of shares authorized by the Plan thereby and in the option price and, with
respect to grants of Restricted Shares, in the number and kind of shares
covered thereby.
<PAGE> 12
- 11 -

11. TERM OF PLAN.

No non-qualified option, incentive stock option, stock appreciation
right or Restricted Shares shall be granted pursuant to this Plan after April
14, 1998, but non-qualified options, incentive stock options, stock
appreciation rights and grants of Restricted Shares theretofore granted may
extend beyond that date and the terms and conditions of this Plan shall
continue to apply thereto and to shares of Common Stock acquired upon exercise
of such options or stock appreciation rights.

12. TERMINATION OR AMENDMENT OF THE PLAN.

The Board of Directors may at any time terminate the Plan with respect
to any shares of the Company not at the time subject to option or the
provisions of Section 8, and may from time to time alter or amend the Plan or
any part thereof (including, but without limiting the generality of the
foregoing, any amendment deemed necessary to ensure that the Company may obtain
any regulatory approval, referred to in clause (i) of Section 9 hereof),
provided that no change in any option or Restricted Shares theretofore granted
may be made which would impair the rights of an Optionee or a Participant,
respectively, without the consent of such Optionee or Participant and, further,
that without the approval of stockholders, no alteration or amendment may be
made which would (i) increase the maximum number of shares of Common Stock
subject to the Plan as set forth in Section 4 (except by operation of Section
10), (ii) extend the term of the Plan or extend the term of options granted
thereunder to beyond the tenth anniversary of the date of grant, (iii) reduce
the option price at which options may be granted, or (iv) change the class of
eligible employees who may receive options or Restricted Shares under the Plan.

13. EFFECTIVE DATE OF PLAN.

The Plan shall become effective April 15, 1988 upon approval of the
shareholders of the Company.

<PAGE> 1
EXHIBIT 10(t)

EXECUTIVE LIFE INSURANCE PLAN OF UPC

PLAN DESCRIPTION AND CENSUS INFORMATION

<TABLE>
<S> <C>
Eligibility Employees who are Salary Grade 24 and above; are on
the payroll as of December 31 of the year in which
they become eligible, and are employed by one of the
following Union Pacific Operating Companies:

- Union Pacific Corporation
- Union Pacific Railroad
- Union Pacific Technologies

Effective Date January 1

Plan Year January 1 - December 31

Core Group Benefit $50,000 which remains in effect until retirement
Under Flex Plan

Optional Group Benefit Employees can also purchase up to six times base
Under Flex Plan salary under the Union Pacific Flexible Benefits
Plan.

Post-Retirement Group None
Benefit Under Flex Plan

Executive Life Insurance PRE-RETIREMENT: The death benefit is two times salary.
Plan Death Benefit The targeted death benefit may or may not be equal to
2 times salary of those executives entering the plan
over 62 years of age.

POST-RETIREMENT: The target death benefit is one half
of final salary at retirement. The actual death
benefit may vary based on:

- The performance of the contract;

- The continuous participation in the program by the
Executive;

- Any loans or withdrawals taken by the executive
against the assets of the contract;

- The contractual limits of the contract; and

- Failure to pass any evidence of insurability.

- -------------------------------------------------------------------------------
October, 1997
</TABLE>

<PAGE> 2
Section 1
Plan Description

COST TO EXECUTIVE Union Pacific, at its discretion, will grant a
bonus to each Executive covered under the Plan in
an amount equal to or less than the annual
premium for the Executive's benefit. To
participate in the plan, the Executive must
authorize Union Pacific to pay that amount
directly to Connecticut General in December of
each year. Since that bonus will be considered
compensation, the Executive will be notified of
the amount, and the appropriate Federal
withholding and other payroll taxes will be
deducted from the Executive's December
compensation or any cash payment made under the
Union Pacific Executive Compensation Plan for the
Executive.

INSURANCE POLICY The Executive will receive an individual universal
life policy issued by Connecticut General Life
Insurance Company. This policy is Form Number
LN502 and has been approved by the Pennsylvania
Department of Insurance.

POLICY OWNER The executive will be the sole Owner of the policy
and will be able to exercise all policy rights
including the rights to borrow or surrender the
policy.

If the Executive surrenders this policy, takes
loans, or withdrawals or discontinues
participation in this program while he is an
employee, future bonuses will be frozen at the
prior year level.

If the Executive reenters the Plan, an actuarial
adjustment will be made to future bonuses and
evidence of insurability will be required. If the
Executive wishes to transfer Ownership of the
policy to another person or entity, refer to
Section 6, Ongoing Business Forms.

BENEFICIARY The Executive (or the policy Owner if different)
has the right to name the beneficiary of the
proceeds (see Section 6, Ongoing Business Forms).

SALARY INCREASES Assuming continued participation in the Plan, each
year before an Executive retires, the death
benefit will be increased on the next plan
anniversary based on the increase in the
Executive's salary as of August 16 of the prior
year.

4
<PAGE> 3
Section 1
Plan Description

EVIDENCE OF INSURABILITY No evidence of insurability will be
required for an Executive meeting the
following criteria:

o Actively-at-Work (for initial coverage
and annual increases)

o Under age 61 as of the Plan anniversary
with basic initial benefit up to
$1 million.

o Future annual increases in death benefit
equal to annual salary increase up to a
maximum 10% per plan year.

o One time promotion increase up to
$100,000 (promotions must be certified by
Union Pacific)

In all other circumstances, medical
information may be required. In addition, when
all insurance coverage in force on an
Executive reaches Connecticut General's
retention limit (currently $3 million),
evidence of insurability may be required for
ANY increase in coverage even if it is within
the limits described above.

TERMINATION OF PARTICIPATION If an Executive voluntarily surrenders the
WHILE ACTIVELY EMPLOYED policy or terminates participation in the
Plan, future participation in the Plan will be
subject to evidence of insurability.

TERMINATION OF EMPLOYMENT An Executive terminating employment with
Union Pacific may keep the policy in force,
modify it, or terminate it. Future premiums
may be required to keep the policy in force
and will be the responsibility of the
Executive. Premiums must be paid directly to
Connecticut General Life Insurance Company on
an annual basis.

After termination of an Executive's employment
with Union Pacific, increases in death benefit
will no longer be available without evidence
of insurability.

<PAGE> 4
AFTER RETIREMENT The retired Executive retains the policy
after retirement. At the time of retirement
UPC will use the current interest rate to
illustrate and fund the death benefit amount
according to the post-retirement benefit
described above. In the event the retiring
participant chooses to carry insurance above
the level provided by Union Pacific and at
any time up to age 62 causes the policy to
lapse for any reason, Union Pacific shall be
notified and further contributions on behalf
of the participant shall cease. If the
retired executive surrenders this policy,
future bonus payments will cease.

ADDITIONAL INSURANCE Connecticut General's Corporate Universal
Life policy is not available to the general
public. However, Executives participating
in the Executive Life Insurance Program
may apply for additional coverage,
subject to evidence of insurability. Any
additional coverage will be provided under a
separate policy, and the premiums will be
paid by the Executive. Anyone interested in
applying for additional coverage should
contact Jonathan Kraiza at Connecticut
General.

DEFINITION OF TERMS SALARY: For purposes of determining the
death benefit under this program, base
salary will be defined as the Executive's
salary on August 16 of the prior calendar
year as defined under the Union Pacific
Flexible Benefits Plan.

ANNUAL PREMIUM: For participants entering
the Executive Life Insurance Program prior
to age 62, the annual premium will be an
amount determined by Connecticut General to
be sufficient to realize the target death
benefit. For participants entering the
Executive Life Insurance Program on or after
age 62, the annual premium will be
determined as if the participant was one day
less than age 62. This annual premium may or
may not be sufficient to realize the target
death benefit of two times salary.

AGE: Age will be determined according to the
age at the Executive's nearest birthday on
the effective date of coverage.

ACTIVELY-AT-WORK: Actively-at-Work is
defined as "performing all duties of the
position on a full-time basis for not less
than 35 hours per week and not absent from
work due to accident, illness, or other
condition for more than any three days of
the 90 days prior to first becoming eligible
to participate in the Executive Life
Insurance Program.

<PAGE> 1
EXHIBIT 11

UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
COMPUTATION OF EARNINGS PER SHARE

FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(In Thousands, Except Per Share Amounts)

<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Weighted-average number of shares
outstanding (a) . . . . . . . . . . . . . . . . . . . . . . . . . . 245,737 216,685 204,930

Average shares issuable on exercise of
stock options . . . . . . . . . . . . . . . . . . . . . . . . . . 2,382 1,345 636
-------- -------- --------

Weighted-average number of shares used
in computation of earnings per share . . . . . . . . . . . . . . . 248,119 218,030 205,566
======== ======== ========

Income from continuing operations . . . . . . . . . . . . . . . . . . $432,207 $732,860 $619,289

Income from discontinued operations (b) . . . . . . . . . . . . . . . - 170,673 326,542
-------- -------- --------

Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $432,207 $903,533 $945,831
======== ======== ========

Earnings per share:

Basic:
Income from continuing operations . . . . . . . . . . . . . . . . $ 1.76 $ 3.38 $ 3.02
Income from discontinued operations (b) . . . . . . . . . . . . . - 0.79 1.60
-------- -------- --------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.76 $ 4.17 $ 4.62
======== ======== ========

Diluted:
Income from continuing operations. . . . . . . . . . . . . . . . $ 1.74 $ 3.36 $ 3.01
Income from discontinued operations (b). . . . . . . . . . . . . - 0.78 1.59
-------- -------- --------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.74 $ 4.14 $ 4.60
======== ======== ========
</TABLE>

(a) In connection with the Corporation's acquisition of Southern Pacific, on
September 11, 1996, UPC issued 38.1 million shares of its common stock in
exchange for 60% of SP's shares. See Note 2 to the Financial Statements.

(b) All computations reflect Resources as discontinued operations (See Note 3
to the Financial Statements).

<PAGE> 1
EXHIBIT 12

UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
RATIO OF EARNINGS TO FIXED CHARGES (a)
(Thousands of Dollars, Except for Ratio)

<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings from continuing
operations (b/c) $ 432,207 $ 732,860 $ 619,289 $ 568,631 $ 411,775

Undistributed equity earnings (39,885) (50,235) (23,893) (43,663) (32,426)
---------- ---------- ---------- ---------- ----------
Total 392,322 682,625 595,396 524,968 379,349
---------- ---------- ---------- ---------- ----------

Income taxes (c) 243,455 380,560 313,590 329,586 317,913
---------- ---------- ---------- ---------- ----------

Fixed charges:
Interest expense including
amortization of debt discount 604,835 500,580 450,182 347,188 311,698

Portion of rentals representing
an interest factor 166,190 135,615 65,258 41,975 33,224
---------- ---------- ---------- ---------- ----------

Total 771,025 636,195 515,440 389,163 344,922
---------- ---------- ---------- ---------- ----------
Earnings available for
fixed charges $1,406,802 $1,699,380 $1,424,426 $1,243,717 $1,042,184
========== ========== ========== ========== ==========
Fixed charges - as above $ 771,025 $ 636,195 $ 515,440 $ 389,163 $ 344,922

Interest capitalized -- -- -- -- 224
---------- ---------- ---------- ---------- ----------

Total $ 771,025 $ 636,195 $ 515,440 $ 389,163 $ 345,146
========== ========== ========== ========== ==========
Ratio of earnings to
fixed charges 1.8 2.7 2.8 3.2 3.0
========== ========== ========== ========== ==========
</TABLE>

(a) All information presented reflects Resources as discontinued operations
(See Note 3 to the Financial Statements).
(b) Amount for 1993 is before a cumulative effect adjustment for changes in
accounting principles for income taxes, postretirement benefits other than
pensions and revenue recognition. The net after-tax adjustment related to
these items was $116 million.
(c) In 1993, income from continuing operations and income taxes included the
one-time impact on deferred income taxes from the adoption of the Omnibus
Budget Reconciliation Act of 1993, which reduced income from continuing
operations and increased income taxes by $56 million.

<PAGE> 1
EXHIBIT 13

Pages 4 through 53, inclusive, of Union Pacific's Annual Report to Stockholders
for the year ended December 31, 1997, but excluding photographs set forth on
pages 4 through 17, none of which supplements the text and which are not
otherwise required to be disclosed in this Annual Report on Form 10-K.

AN UPDATE ON
- -------------------------------------
THE MERGER

Shorter routes, faster transit times, better on-time performance, expanded
single-line service, more efficient traffic flows and specialized use of
parallel routes were some of the many improvements and benefits Union Pacific
outlined when it first announced the historic merger with Southern Pacific.
Nearly 18 months after the merger was approved, the Railroad is beginning to
realize some of those benefits as it works its way through the congestion
issues. The information below and on the facing page provides a snapshot of key
merger activities for 1997.

COMPUTER SYSTEMS

From the outset, the efficient transfer of car and equipment information to
Union Pacific's Transportation Control System (TCS) was identified as a
keystone in providing customers with merger-enhanced service and operating
efficiencies. These cutovers were given top priority, with scheduling
accelerated to complete three of them by the end of 1997: the Denver and Rio
Grande Western territory; the Cotton Belt, running from St. Louis through
Texas; and the highly complex SP-East line that extends from New Mexico east
through the Texas-Louisiana Gulf Coast. The final cutover is set for this
spring and will link operations along the West Coast's Interstate 5 Corridor
with the remainder of the Sunset Route, which runs from Los Angeles through
Houston to New Orleans.

CAPITAL INVESTMENTS

In 1997, the Railroad's $2.0 billion capital program - including almost $500
million of merger-related investments-focused on boosting freight car quality,
increasing the locomotive fleet, expanding rail and yard capacity and improving
overall system quality.

HUB-AND-SPOKE

To achieve greater flexibility in moving trains and to provide maximum manpower
utilization, the Railroad and its labor unions initiated the hub-and-spoke
concept on certain areas of the rail system during the latter part of the
year. With hub-and-spoke, a major terminal is designated an operational "hub
of the region, and lines leading in and out of that hub are the "spokes."
Train crews can work any of those runs and return to a permanent home terminal
at the hub. (For further details see page 10.)

(One photograph, not incorporated by reference - see prefacing comment on
Exhibit 13 Cover Page.)

4 Merger Update
<PAGE> 2

Map Description - Page 5

One page white map of Continental United States, starting at the eastern border
of Illinois and continuing westward, on a light grey background.

Symbols and colored lines marking the location of capital investment projects,
Transportation Control System cutover dates and location of operational hubs
created by hub-and-spoke labor agreements are indicated on the map as follows:

Capital Investment projects:
Roseville, California Yard
Livonia, Louisiana Classification Yard
Marion, Arkansas Intermodal Facility
Kansas Pacific Route

Transportation Control System cutover dates:
Denver and Rio Grande Western Territory - May 1, 1997
The Cotton Belt - August 1, 1997
Southern Pacific-East Line - December 1, 1997
Interstate 5 Corridor - May 1, 1998

Operational hubs created by hub-and-spoke labor agreements:
Roseville, California
Salt Lake City, Utah
Denver, Colorado
Salina, Kansas
Little Rock/Pine Bluff, Arkansas
Longview, Texas
Houston, Texas

Other towns and track lines indicated on the map are for reference purposes.
<PAGE> 3

[PHOTO]

(One photograph, not incorporated by reference - see prefacing comment on
Exhibit 13 Cover Page.)
<PAGE> 4
UNION PACIFIC RAILROAD

Heading into 1997, Union Pacific Railroad was singularly focused on the
implementation of its historic merger with Southern Pacific, one that we believe
will bring about new levels of operational and customer service and significant
gains in quality and productivity. But unexpected crew shortages and track
maintenance on SP lines, increased demand, derailments, severe weather
conditions and congestion in the major Texas/Mexico gateways prior to
privatization of the Mexican railroad system caused significant congestion in
the latter part of the year, and had an adverse impact on the Railroad's 1997
financial and operating results.

Union Pacific Railroad, including the full-year effects of the SP merger,
realized net income of $620 million, compared to last year's $871 million, on a
pro forma basis. Carloadings declined approximately 4 percent compared to 1996.

Our service interruptions also negatively affected the Railroad's operating
ratio, which increased to 87.4, compared to 83.5 last year, on a pro forma
basis. As the many efficiencies created by the implementation of the SP merger
begin to take hold, however, the Railroad expects to improve service and
customer satisfaction, as well as lower its operating ratio.

COMMODITY RESULTS FOR 1997

The overall decline in carloadings reflected the congestion the Railroad
experienced in the latter part of the year. However, the Railroad's traffic
volume and revenue in autos increased slightly in 1997, and there was a
continued increase in carloads in and out of Mexico. The Railroad also completed
construction projects for 1998 business from Ford's new vehicle mixing center in
Kansas City, including building facilities in San Antonio and Amarillo, Texas
and Santa Rosa, California.

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenues (millions) $9,981 $7,680 $6,326
- --------------------------------------------------------------------------------
Operating Income (millions) $1,253 $1,602 $1,384
- --------------------------------------------------------------------------------
Carloadings (thousands) 8,453 6,632 5,568
- --------------------------------------------------------------------------------
Operating Ratio (%) 87.4 79.1 78.1
- --------------------------------------------------------------------------------
</TABLE>

(One photograph, not incorporated by reference- see prefacing comment on
Exhibit 13 Cover Page.)

Review of Operations 7
<PAGE> 5
THE RAILROAD CONTINUES TO HIRE EMPLOYEES, EXPAND ITS LOCOMOTIVE FLEET AND INVEST
CAPITAL TO ENHANCE OPERATIONS.

Volume fell slightly in the petrochemical business, led by declines in
liquid and dry chemicals, LP gas, petroleum and phosphate rock. A 5 percent
increase in plastics, joined by a 4 percent gain in fertilizer and a 2 percent
increase in soda ash, provided a partial offset.

Through the SP merger, the Railroad is positioned to offer intermodal
customers improved delivery schedules and service on critical routes, including
northern California to Chicago and Los Angeles to Kansas City. The Railroad also
has picked up a significant amount of electronics business in and out of Mexico
and from southern California ports. For the year, intermodal business was
essentially unchanged.

The Railroad made a number of business investments in 1997 to improve
service and delivery capabilities with its grain customers -- upgrading
facilities, advancing rail car technology, improving tracks and expanding
computer systems. These steps, coupled with the development of business
partnerships with customers, are aimed at putting the Railroad in a much
stronger position to serve its customers and overcoming the 9 percent drop in
grain business from last year's level.

Coal tonnage in 1997 was relatively flat compared to last year, while on
average, nearly 24 trains a day came out of the Powder River Basin, with
additional trains originating from Colorado and Utah. To make its hauls more
efficient, the Railroad is now running more than 30 percent of its coal trains
with distributed power, which allows longer trains by using evenly distributed
locomotive placement. It is also pursuing an aggressive capital campaign to
increase capacity along major coal corridors.

BUSINESS WITH MEXICO

Revenues from Mexican traffic were off slightly compared to last year, due
mostly to a decline in agricultural shipments. However, volume in the
automotive, energy, industrial products and intermodal segments increased, and
despite service delays, the Railroad had record border crossings at Laredo,
Texas. The Railroad was also part of a consortium with Grupo Mexico and Grupo
ICA that won a 50-year concession to operate the Pacific-North Railway line of
Mexico. The partners in the consortium have established a stand-alone Mexican
corporation to manage and operate this railroad.

(One photograph, not incorporated by reference- see prefacing comment on
Exhibit 13 Cover Page.)

8 Review of Operations
<PAGE> 6
(One photograph, not incorporated by reference- see prefacing comment on
Exhibit 13 Cover Page.)

EXPEDITED SERVICE

With the implementation of the merger, the Railroad was able to begin providing
intermodal customers with expedited service in key corridors. Following are
three examples of that service:

* Midwest-California: restructured intermodal service connecting Chicago, St.
Louis and Kansas City with northern California. Service started March 1997.

* Interstate 5 Corridor: first-ever dedicated intermodal trains between Los
Angeles and Seattle, providing third-morning deliveries in both cities.
Service began June 1997.

* Sunset Route: entirely redesigned Southern Pacific's intermodal services
connecting Memphis, New Orleans, Houston and San Antonio with El Paso,
Tucson, Phoenix and southern California. Service begins June 1998.

Review of Operations 9
<PAGE> 7
THE RAILROAD, ALONG WITH ITS LABOR UNIONS AND FEDERAL OFFICIALS, INSTITUTED A
NEW SYSTEM TO A MONITOR SAFETY PROGRESS.

LABOR AGREEMENTS

This past year, members of the operating unions around the Railroad system
ratified unique hub-and-spoke agreements, replacing multiple seniority districts
and multiple collective bargaining pacts. The hub-and-spoke concept allows
engineers, conductors and brakemen to operate trains on all tracks in and out of
major rail centers, whereas traditional labor agreements only allow train crew
members to operate over one line in and out of major rail centers. Currently,
agreements have been ratified at seven locations: Salt Lake City, Denver,
Salina, Houston, Longview, North Little Rock/Pine Bluff and Roseville. These
agreements promise to increase flexibility in train crew assignments and will
help the Railroad provide merger-related service improvements to its customers.
The remainder of the agreements are expected to be finalized in 1998.

SEVERE DIFFICULTIES THROUGHOUT THE SYSTEM

The Railroad's operations and revenues suffered as a result of system-wide
congestion in the latter part of the year. To address the congestion problems,
on October 1 the Railroad presented its Service Recovery Plan to the federal
government's Surface Transportation Board (STB).

(One photograph, not incorporated by reference- see prefacing comment on
Exhibit 13 Cover Page.)

10 Review of Operations
<PAGE> 8
(One photograph, not incorporated by reference- see prefacing comment on
Exhibit 13 Cover Page.)

The Railroad is currently focusing on lowering car inventory, reducing
congestion, increasing terminal flow and accelerating mainline velocity. Key
steps aimed at meeting these goals include:

* hiring of nearly 3,500 new employees, including 1,000 train and engine
service employees;

* forging historic union agreements that will allow critical hub-and-spoke
operations across the network;

* implementing UPRR's Transportation Control System across the 35,000-mile
system;

* instituting directional running on lines radiating from Houston;

* adding new locomotives; and

* rerouting trains around congested yards by using smaller satellite
facilities for switching.

The STB held two hearings during the latter part of 1997 to assess progress
of the Railroad's Plan. An Emergency Service Order issued by the STB allows it
to monitor the Railroad's improvements.

The Railroad also has joined with its unions and the Federal Railroad
Administration in implementing the Safety Assurance and Compliance Program that
is designed to address such fundamental operating issues as crew management,
employee fatigue and training. The initiatives grew out of several serious
accidents last year. Unfortunately, these accidents overshadowed the fact that
the number of reportable injuries, grade crossing accidents and train
derailments were all reduced substantially over the last five years.

Review of Operations 11
<PAGE> 9
WITH THE HELP OF A FOCUSED TEAM OF EMPLOYEES, OVERNITE IMPROVED CUSTOMER SERVICE
LEVELS AND RAISED ON-TIME DELIVERY TO 96 PERCENT.

(One photograph, not incorporated by reference- see prefacing comment on
Exhibit 13 Cover Page.)

Review of Operations 12
<PAGE> 10

OVERNITE TRANSPORTATION

In 1997, Overnite Transportation completed a dramatic turnaround, recording net
income of $24 million before goodwill, compared to a net loss of $23 million
before goodwill in 1996. Its operating ratio also improved to 96.8 from 105.0
last year.

FOCUSED EMPLOYEE INVOLVEMENT

Overnite restored its position as a leader in the less-than-truckload (LTL)
industry by aggressively engaging its 12,000 employees in four critical areas of
the business: service quality, cost control, profitable revenue growth and yield
improvement.

A company-wide program focused on raising service levels and delivering
shipments to customers on time and damage free. Overnite also instituted
management development sessions, upgraded the sales force and intensified its
training, and created revenue enhancement teams.

To generate more usable data, Overnite introduced a sophisticated tracking
system that improved its ability to gather and analyze sales and operating
information on each of its more than 100,000 customers, and produce up-to-date
profitability status reports of each service center. The Company also placed a
shipment tracking system, its Rate EDGE pricing system and other key tools on
its website to provide customers with fast, convenient information.

OPERATIONAL CHANGES

In a bold move, Overnite tightened transit times on the majority of its shipping
lanes -- over 13,000 routes -- through its Lane Enhancement Action Plan (LEAP),
making its number of one- and two-day service routes unsurpassed in the
industry. Overnite then launched Quantum LEAP, which uses sleeper teams to
provide three- and four-day service to and from the West Coast from the Midwest
and the East Coast.

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenues (millions) $ 946 $ 961 $ 976
- --------------------------------------------------------------------------------
Operating Income (Loss)(millions) $ 10 $ (68) $ (49)
- --------------------------------------------------------------------------------
Operating Ratio (%)[a] 96.8 105.0 103.0
- --------------------------------------------------------------------------------
</TABLE>
[a] Excludes goodwill amortization.

(One photograph, not incorporated by reference- see prefacing comment on
Exhibit 13 Cover Page.)

Review of Operations 13
<PAGE> 11

At the same time, Overnite significantly improved its on-time delivery --
consistently maintaining a 96 percent level throughout the year -- and reduced
freight damage and shortage claims by 25 percent.

BUSINESS SEGMENTS

In 1997, Overnite focused on growing profitable revenue on two fronts. Through
the growth of its small business segment, Overnite was able to strengthen its
customer base. Sales promotions, employee training, the development of an inside
sales department and driver-customer contact all contributed to a 29 percent
revenue growth in this sector.

Overnite's philosophy with large customers was to build steady, long-term
growth and create working partnerships. To that end, Overnite instituted a yield
improvement strategy, which shares vital cost-related information with
customers; dedicated additional personnel to these major accounts, in some cases
putting them directly on site; and started a Customer Advisory Council that
meets periodically to discuss service quality levels and new ideas for improving
business operations.

With these actions, the Company was able to increase customer satisfaction,
reduce costs through improved shipment planning, and in many cases improve
profitability without raising rates.

EXPANSION

Overnite also increased its traffic in 1997 by introducing or expanding
ancillary high-yield businesses, such as Cross Border and International
Services, Trade Show and Guaranteed Transportation Solutions. These segments
provide Overnite higher margin revenue and complement its existing network of
lanes and service centers.

Renewed profitability allowed Overnite to expand for the first time in
three years, as 11 service points were added in Texas, providing direct service
to more than 95 percent of the state.

(One photograph, not incorporated by reference- see prefacing comment on
Exhibit 13 Cover Page.)

14 Review of Operations
<PAGE> 12

THROUGH THE GROWTH OF ITS SMALL BUSINESS SEGMENT, OVERNIGHT STRENGTHENED ITS
CUSTOMER BASE; WITH LARGE CUSTOMERS, CREATING WORKING PARTNERSHIPS WAS A KEY TO
SUCCESS.

(One photograph, not incorporated by reference- see prefacing comment on
Exhibit 13 Cover Page.)

Review of Operations 15
<PAGE> 13

UNION PACIFIC TECHNOLOGIES

In 1997 -- for the 10th consecutive year -- Union Pacific Technologies continued
its track record of delivering sophisticated products and services to the Union
Pacific companies and expanding its role in the commercial marketplace.

INTERNAL BUSINESS

The key focus for Technologies is its ongoing support of the Union
Pacific-Southern Pacific merger. Working with the Railroad's Information
Technologies Department, UP Tech implemented three regional cutovers of the
Transportation Control System (TCS) on the SP system, with completion of the
fourth scheduled for this spring.

At the same time, Technologies has been updating TCS to be Year 2000
compliant, which is scheduled for completion by the fourth quarter of 1998.
Major work has begun on network optimization tools that the Company believes,
when linked to TCS, will improve the Railroad's ability to manage business
volumes, service schedules and resources effectively.

UP Tech has been contributing to Overnite's successes by providing key
staff and technical support for new financial and human resources systems.
Technologies also is involved in the development of software to provide improved
linehaul operations.

(One photograph, not incorporated by reference- see prefacing comment on
Exhibit 13 Cover Page.)

16 Review of Operations
<PAGE> 14

COMMERCIAL BUSINESS

Technologies has begun the process of implementing the Transportation Control
System (TCS) on the English, Welsh, and Scottish Railway (EWS) in the United
Kingdom. This multi-year effort represents UP Tech's first major European
venture and will help the EWS consolidate customer service operations, schedule
and track the movement of cars, and exchange information more easily with its
customers.

Expanding its role in Mexico, UP Tech is providing a Spanish version of TCS
to the first two concessionaires of the Mexican Railway privatization effort,
while still supporting the state-owned Ferrocarriles Nacionales de Mexico.

Technologies has also been making significant investments in TCS,
standardizing all versions for domestic and international customers, which will
vastly improve its ability to bring new products to market. In addition, work is
under way to improve the user interaction with graphic display and new decision
support capabilities.

Shipment Management Services, which tracks both rail and truck shipments
against predetermined schedules, has continued to grow as more customers have
recognized the value of accurate information in support of the supply chain
management process. Technologies is introducing Internet access to shipment
information this spring.

THIS YEAR UNION PACIFIC TECHNOLOGIES IMPLEMENTED THREE TRANSPORTATION CONTROL
SYSTEM CUTOVERS ON THE SOUTHERN PACIFIC RAIL NETWORK AND EXPANDED ITS COMMERCIAL
BUSINESS.

(One photograph, not incorporated by reference- see prefacing comment on
Exhibit 13 Cover Page.)

Review of Operations 17
<PAGE> 15
FINANCIAL REVIEW

CONSOLIDATED RESULTS OF OPERATIONS

This review and the accompanying charts should be read with the financial
statements, notes and supplementary information.

CORPORATE REORGANIZATION

Over the past three years, Union Pacific Corporation (UPC or the Corporation)
completed several strategic transactions that refocused the Corporation on its
core transportation operations.

CHICAGO AND NORTH WESTERN TRANSPORTATION COMPANY (CNW) - In April 1995, UPC
acquired the remaining 71.6% of CNW's outstanding common stock not previously
owned by UPC for $1.2 billion. The acquisition of CNW was accounted for as a
purchase and CNW's financial results were consolidated with UPC beginning in May
1995.

NATURAL RESOURCES DIVESTITURE - In July 1995, UPC's Board of Directors approved
a formal plan to dispose of its oil, gas and mining business by an initial
public offering (IPO) of 17% of the common stock of Union Pacific Resources
Group Inc. (Resources) followed by a distribution of UPC's remaining interest in
Resources to the Corporation's stockholders on a tax-free, pro-rata basis (the
Spin-Off) (see Note 3 to the Financial Statements). In October 1995, Resources
completed the IPO, and after UPC's receipt of a favorable Internal Revenue
Service ruling as to the tax-free nature of the Spin-Off in September 1996, UPC
completed its divestiture of Resources. The Corporation's share of Resources'
financial results through September 1996 are presented as discontinued
operations in the Corporation's consolidated financial statements.

SOUTHERN PACIFIC RAIL CORPORATION (SOUTHERN PACIFIC OR SP) ACQUISITION - In
September 1995, UPC acquired 25% of Southern Pacific, and in September 1996, it
acquired the remaining 75% after receipt of a favorable decision from the
Surface Transportation Board of the U.S. Department of Transportation (STB) on
the Corporation's acquisition of SP. The aggregate Southern Pacific purchase
price was $4.1 billion ($2.5 billion in UPC common stock and $1.6 billion in
cash). The acquisition of Southern Pacific was accounted for as a purchase. The
statement of consolidated income includes equity income equal to 25% of Southern
Pacific's net income through September 10, 1996, reflecting UPC's ownership of
Southern Pacific during such period and 100% of Southern Pacific's net income
thereafter. Southern Pacific's results were fully consolidated with the
Corporation's results effective October 1, 1996 (see Note 2 to the Financial
Statements).

As a result of the SP acquisition, UPC now operates the largest rail system
in the United States, with nearly 35,000 route miles linking Pacific Coast and
Gulf Coast ports to the Midwest and eastern U.S. gateways and providing several
North/South corridors to key Mexican gateways.

MEXICAN RAILWAY CONCESSION - During 1997, the Corporation's major subsidiary,
Union Pacific Railroad Company (UPRR and collectively with SP's rail operations,
the Railroad), and a consortium of partners were granted a 50-year concession to
operate the Pacific-North and Chihuahua Pacific lines in Mexico and a 25% stake
in the Mexico City Terminal Company at a price of $525 million. The Railroad
holds a 13% ownership share and has accounted for its interest by the equity
method. The consortium expects to assume operational control of both lines in
early 1998.

1997 YEAR IN REVIEW

The Corporation began 1997 with the primary goal of integrating Southern
Pacific's rail operations with those of UPRR. Although operational difficulties
began in the third quarter, the integration is expected to be substantially
complete in 1999.

In the third quarter, congestion began to adversely impact operations and
earnings. System congestion started in the Gulf Coast area and spread throughout
the system as the Railroad shifted resources to help

18 Financial Review
<PAGE> 16
STOCK PRICE
PER SHARE AT YEAR-END
UNION PACIFIC CORPORATION

Dollars

[CHART]
<TABLE>
<CAPTION>
93 94 95 96* 97
- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
$62.63 $45.38 $66.00 $84.69 $62.63
</TABLE>

* Year-end value of Resources shares distributed in the Spin-Off

BOOK VALUE
UNION PACIFIC CORPORATION

Dollars Per Share

[CHART]
<TABLE>
<CAPTION>
93 94 95 96 97
- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
23.81 24.92 30.96 33.35 33.30
</TABLE>

mitigate the problem in the Gulf Coast. Factors leading to the congestion
included, among other things, crew shortages and necessary track maintenance on
SP lines, increased demand, washouts due to severe weather, derailments and
congestion in the major Texas/Mexico gateways prior to privatization of the
Mexican railroad system.

To restore service to acceptable levels, the Railroad implemented a Service
Recovery Plan (the Plan). The Plan focuses on reducing the number of cars on the
system and restoring system velocity, which, in turn, results in more reliable
service to customers. The cost of the congestion-related problems in 1997 was
approximately $450 million, after tax, which reflected the combined effects of
lost business, higher costs associated with congestion, costs associated with
implementation of the Plan, alternate transportation and customer claims.
Although progress has been made in improving service and recovering lost
business, the Railroad expects some adverse impact of these problems in 1998
financial results.

Overnite Transportation Company (Overnite), the Corporation's interstate
trucking company specializing in less-than-truckload (LTL) shipments, returned
to profitability in 1997, having successfully realigned its operations to be
more competitive in the current trucking industry environment. Net income for
1997 was $24 million (excluding goodwill amortization).

Also in 1997, UPC adopted a plan to sell its investment in Skyway Freight
Systems, Inc. (Skyway), a wholly-owned subsidiary engaged in contract logistics
and supply chain management. In connection with the planned sale, UPC recognized
a $40 million after tax loss.

1997 COMPARED TO 1996

CONSOLIDATED RESULTS

The Corporation reported net income of $432 million ($1.76 per basic share and
$1.74 per diluted share) in 1997 compared to $904 million ($4.17 per basic share
and $4.14 per diluted share) in 1996, which included Resources as discontinued
operations.

RESULTS OF CONTINUING OPERATIONS

CONSOLIDATED - In 1997, the Corporation reported income from continuing
operations of $432 million ($1.76 per basic share and $1.74 per diluted share),
compared to 1996 results of $733 million ($3.38 per basic share and $3.36 per
diluted share). This decline in earnings is the result of congestion and
related service issues that arose in the third quarter.

Operating revenues increased $2.29 billion (26%) to $11.08 billion in 1997,
reflecting increased volumes at the Railroad (the result of the full-year effect
of the Southern Pacific merger, which was offset by declines resulting from
congestion and related service problems and slightly lower volumes at Overnite.

Operating expenses increased $2.57 billion (35%) to $9.83 billion in 1997,
primarily the result of the addition of Southern Pacific's operations,
congestion costs at the Railroad and inflation. These factors resulted in
increases in salaries, wages and employee benefits ($906 million); equipment and
other rents ($454 million); fuel and utility costs ($252 million); purchased
services ($202 million); and materials and supplies ($91 million). Depreciation
charges rose $281 million, primarily due to the addition of SP and UPC's
continued reinvestment in its equipment and rail infrastructure. Other costs
increased $387 million, primarily related to the service and congestion issues
($138 million); personal injury costs ($78 million); other taxes ($43 million);
repair and maintenance expenses ($27 million); and casualty costs ($18 million).

Financial Review 19
<PAGE> 17

CARLOADINGS
UNION PACIFIC RAILROAD

Thousands
<TABLE>
<CAPTION>
93 94 95 96 96 97
- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
4,619 4,991 5,568 8,814* 6,632 8,453
</TABLE>

* Carloadings on a pro forma basis

COMMODITY
REVENUE DIVERSITY
UNION PACIFIC RAILROAD

[PIE CHART]

<TABLE>
<S> <C>
Energy 19.7%
Chemical 17.8%
Automotive 9.8%
Agriculture 14.6%
Intermodal 17.8%
Industrial Products 20.3%
</TABLE>

Consolidated operating income declined $280 million (18%) to $1.25 billion
in 1997, the result of a $349 million decrease at the Railroad, partially offset
by improved results at Overnite. Other income declined $45 million, primarily
attributable to the loss recognized in connection with the Corporation's
investment in Skyway. Interest expense increased $104 million, the result of
higher debt levels associated with the Southern Pacific acquisition. Income from
continuing operations as a percentage of operating revenues declined to 3.9%
from 8.3% in 1996. Return on average common stockholders' equity dropped to 5.3%
in 1997 from 12.4% a year ago, reflecting the impact of the service and
congestion issues.

RAILROAD - The following discussion is based upon pro forma 1996 results which
assumes the SP acquisition occurred on January 1, 1996:

The Railroad earned $620 million in 1997 compared to $871 million a year
ago. This decline in earnings is the result of the service and congestion issues
that arose in the third quarter.

Operating revenues were 1% lower in 1997. Average commodity revenue per car
increased 3% resulting from improved traffic mix, but carloadings declined 4%.
Offsetting increases and decreases in commodity revenues occurred in some areas,
as noted below:

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
COMMODITY REVENUE % Change Versus
Millions of Dollars 1997 Pro Forma 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Automotive....................... $ 953 1.9
Agricultural..................... 1,419 (4.9)
Intermodal....................... 1,728 0.9
Chemicals........................ 1,728 (2.2)
Energy........................... 1,913 0.9
Industrial....................... 1,972 (2.0)
------ ----
Total........................... $9,713 (1.1)
- --------------------------------------------------------------------------------
</TABLE>

Operating income declined $418 million (25%) to $1.25 billion in 1997,
while the operating ratio increased from 83.5 to 87.4 in 1997.

Revenue Summary (Pro Forma) - Carloadings for the year were down 4% from 1996
loads. Declines were principally caused by traffic congestion and related
service problems, implementation of the Service Recovery Plan and the first
quarter 1997 sale of the Duck Creek North line. Overall, average revenue per car
(ARC) was up $35 to $1,149 for the year, as a result of improved traffic mix.

Agricultural Products - Carloadings fell 9% and related commodity revenue fell
$73 million (5%) to $1.42 billion. These decreases reflected a reduction in base
business carloadings in most lines of business, the result of slow cycle times
on wheat and corn shuttles as well as congestion problems and related equipment
shortages. Strong worldwide wheat competition in the first half of 1997 hurt
wheat exports and contributed to a 13% decline in wheat carloadings. Meals and
oils reported a 5% increase in volume, the result of strong export markets in
Mexico. Average commodity revenue per car rose 4% resulting from more
longer-haul export traffic and higher rates from maintaining a car inventory
available for grain customers.

Automotive - Commodity revenue grew 1.9% to $953 million as carloadings
increased 3% on continued auto industry sales growth. Strong import and domestic
demand caused finished vehicle carloadings to increase 3%, in spite of
industry-wide equipment shortages and unscheduled auto plant shutdowns. Auto
parts volumes grew by 2%, as strong Mexico volumes exceeded congestion-related
diversions of traffic. Average commodity revenue per car declined $10 or 1%.

Chemicals - Carloadings were flat while commodity revenue fell 2% to $1.73
billion in 1997. Strong market demand could not be met due to the system
congestion and equipment shortages. This resulted in some diversion of business
to alternate transportation modes and competitors. Average commodity revenue per
car fell $32 or 2%, due to strong competitive pressures and a shift in the
business mix (increased short-haul business of low-ARC products).

20 Financial Review
<PAGE> 18
TONNAGE BY CATEGORY
OVERNITE TRANSPORTATION

[PIE CHART]

<TABLE>
<S> <C>
Less-Than-Truckload 93.4%
Truckload 6.6%
</TABLE>

REVENUE PER
HUNDREDWEIGHT
OVERNITE TRANSPORTATION

Dollars

[CHART]

Energy - Commodity revenue (primarily coal) was essentially flat at $1.91
billion in 1997, while carloadings fell 2%. Average commodity revenue per car
increased 3%, driven by higher-rated business and an improved business mix.
Volume decreases reflected the impact of congestion on the ability of the
Railroad to meet both domestic and foreign utilities' demand for low-sulfur,
Powder River Basin (PRB) coal. Severe weather, derailments in key corridors and
congestion had a significant impact on PRB train cycles in 1997. During the
worst of the congestion, daily trains out of the PRB averaged only 21 trains per
day versus 25 trains per day prior to the congestion and 24 trains per day in
1996.

Industrial Products - Carloadings decreased 15% and commodity revenue declined
2% to $1.97 billion. Volume decreases primarily reflected the impact of
congestion and the first quarter 1997 sale of the Duck Creek North line. The
largest decline was seen in metallic minerals (55%), due to reduced iron ore
shipments associated with the Duck Creek North line and smaller decreases in
most other industrial product lines. Average commodity revenue per car grew 16%,
reflecting a longer average length of haul due to the above-mentioned line sale.

Intermodal - Commodity revenue was flat at $1.73 billion, as traffic also
remained essentially unchanged. Strong market demand and new business
opportunities were offset by congestion issues later in the year, including the
temporary suspension of business in specific areas as part of the Service
Recovery Plan, industry-wide equipment shortages and related diversions to truck
and other railroads. Average commodity revenue per car remained flat compared to
1996.

Expense Summary (Pro Forma) - Operating expenses rose $286 million (3%) to $8.73
billion in 1997, primarily from congestion costs and inflation, offset somewhat
by merger benefits and cost containment programs. Salaries, wages and employee
benefits increased $50 million, the result of higher recrew rates due to
congestion in the latter part of 1997, one-time merger severance payments and
wage inflation from new national labor agreements. This was offset by reduced
volumes and staff levels from merger-related severance and productivity and
other gains. Equipment and other rent expense increased $139 million from
longer congestion-related car cycle times and incremental costs associated with
providing grain cars, more operating leases and price increases, which were
somewhat offset by reduced volumes and merger efficiencies. Fuel and utility
costs rose $3 million, the result of a slight increase in fuel prices (net of
fuel hedging), slightly offset by a reduced fuel consumption rate and lower
volumes. Depreciation charges rose $72 million, primarily reflecting the
Railroad's continued reinvestment in its equipment and rail infrastructure.
Other miscellaneous costs increased $40 million, primarily reflecting
congestion costs including alternate transportation and customer claims, as
well as one-time merger costs. These were somewhat offset by spending
reductions and merger benefits.

Other Income and Expense Summary (Pro Forma)- Other income and expense, net,
improved $48 million to $301 million, primarily the result of refinancing
activities, lower interest rates and higher asset sales - including real estate,
rail line and other assets.

TRUCKING - Throughout 1997, Overnite continued to benefit from several strategic
initiatives implemented in 1996 to better compete in the current trucking
industry environment. Actions taken included workforce reductions, service
center consolidations, centralization of the linehaul management process and
pricing initiatives targeting Overnite's lowest margin customers. As a result,
Overnite reported a net income of $4 million in 1997 compared to a net loss of
$43 million in 1996. Results for both periods included goodwill amortization of
$20 million.

Overnite's operating revenues decreased $15 million (2%) to $946 million as
a 13% decrease in volumes more than offset a similar increase in average

Financial Review 21
<PAGE> 19

REVENUES PER EMPLOYEE
UNION PACIFIC CORPORATION

$ Thousands

prices resulting from Overnite's pricing initiatives. Lower volumes were driven
by a 10% decrease in LTL tonnage and a 38% decrease in truckload tonnage.

Operating expenses decreased $93 million to $936 million. Salaries, wages and
employee benefit costs decreased $51 million, reflecting improved productivity,
workforce reductions and lower volumes, partially offset by wage and benefit
inflation. A shift from the use of intermodal rail service to contract linehaul
carriers in 1997 caused a $16 million decrease in purchased services. Fuel and
utility costs declined $10 million, driven by a 7% decrease in fuel prices, a
13% volume-related reduction in fuel consumption and improved fuel economy
resulting from an upgraded fleet. Overnite reported 1997 operating income of $10
million, compared to an operating loss of $68 million in 1996, while Overnite's
operating ratio (including goodwill amortization) decreased to 98.9 in 1997 from
107.0 in 1996.

CORPORATE SERVICES AND OTHER OPERATIONS - Expenses related to Corporate services
and other operations (consisting of corporate expenses, third-party interest
charges, intercompany interest allocations, other income and income taxes
related to the Corporation's holding company operations and the results of other
operating units) increased $28 million to $192 million in 1997. This increase
largely reflects the relocation of the corporate offices to Texas and the loss
recognized in connection with the planned sale of Skyway, offset by income
realized in connection with UPC's sale of three aircraft. Other operating units
reported a net operating loss of $1 million in 1997, no change from the
operating loss of $1 million reported in 1996.

1996 COMPARED TO 1995

CONSOLIDATED RESULTS

The Corporation reported net income of $904 million ($4.17 per basic share and
$4.14 per diluted share) in 1996 compared to $946 million ($4.62 per basic share
and $4.60 per diluted share) in 1995.

RESULTS OF CONTINUING OPERATIONS

CONSOLIDATED - In 1996, the Corporation reported income from continuing
operations of $733 million ($3.38 per basic share and $3.36 per diluted share),
compared to 1995 results of $619 million ($3.02 per basic share and $3.01 per
diluted share). This earnings improvement resulted primarily from continued
strong financial performance at the Railroad.

Operating revenues increased $1.30 billion (17%) to $8.79 billion in 1996,
reflecting increased volumes at the Railroad (the result of increased base
business, the addition of Southern Pacific volumes from October 1, 1996 and the
full-year effect of the CNW acquisition), slightly offset by lower volumes at
Overnite.

Operating expenses increased $1.11 billion (18%) to $7.25 billion in 1996.
The addition of Southern Pacific's fourth quarter 1996 operations, a full year
of CNW operations, base rail volume growth and inflation were the primary
factors causing increases in salaries, wages and employee benefits ($434
million); equipment and other rents ($190 million); materials and supplies ($92
million); purchased services ($81 million); casualty accruals ($48 million); and
other taxes ($16 million). Fuel and utility costs rose $216 million (38%), the
result of increased volumes at the Railroad and a 14% increase in fuel prices.
Depreciation charges rose $120 million, primarily due to the addition of
Southern Pacific and CNW properties and UPC's continued reinvestment in its
equipment and rail infrastructure. Repair and maintenance expenses decreased $66
million, reflecting the Railroad's more efficient maintenance practices,
improved equipment utilization and increased credits related to repairs of other
railroads' freight cars. Insurance costs decreased $17 million, principally
reflecting the refund of premiums associated with the liquidation of an
insurance company investment, slightly offset by Southern Pacific insurance
costs.

Consolidated operating income advanced $192 million (14%) to $1.53 billion
in 1996, the result of a $218 million improvement at the Railroad, partially
offset by weaker results at UPC's other businesses.

22 Financial Review
<PAGE> 20
REVENUE TON-MILES
PER EMPLOYEE
UNION PACIFIC RAILROAD

$ Millions

Other income rose $41 million, principally reflecting higher gains on property
sales. Interest expense increased $51 million, the result of higher debt levels
associated with the CNW and Southern Pacific acquisitions, partially offset by
the favorable impact of the Resources' IPO dividend and debt refinancing
activities. Income from continuing operations as a percentage of operating
revenues remained unchanged from 1995 at 8.3%. Return on average common
stockholders' equity declined to 12.4% in 1996 from 16.5% a year ago, reflecting
the additional stock issued in connection with the Southern Pacific acquisition.

RAILROAD - The Railroad earned $940 million in 1996 compared to $867 million in
1995. Earnings improvements reflected base volume growth, the full-year effect
of the CNW acquisition and the addition of Southern Pacific's fourth quarter
1996 operations. Earnings from these acquisitions more than offset the
incremental interest costs incurred in 1996 associated with related acquisition
financings.

Operating revenues grew $1.35 billion (21%) to $7.68 billion in 1996. This
increase primarily relates to a $1.31 billion (22%) increase in commodity
revenue, reflecting the addition of Southern Pacific and CNW volumes, base
business growth and a 2% increase in average commodity revenue per car,
resulting from a longer average length of haul. Carloadings grew 19% (over one
million cars), detailed as follows:

Agricultural Products - Carloadings rose 13% and commodity revenue increased
$138 million (13%) to $1.22 billion. These increases reflect the addition of CNW
carloadings offset by a reduction in base business carloadings, the result of
low U.S. corn inventories, reduced export demand and the absence of a record
1995 grain harvest. Average commodity revenue per car was unchanged from 1995.

Automotive - Commodity revenue rose 20% to $767 million as carloadings increased
20% on continued auto industry sales growth and the addition of Southern Pacific
volumes. Finished autos and auto parts carloadings rose 16% and 28%,
respectively, reflecting strong Mexico business. Average commodity revenue per
car was unchanged from 1995.

Chemicals - Carloadings advanced 14% and commodity revenue increased $169
million (14%) to $1.34 billion, principally from the addition of Southern
Pacific volumes and increased base business sparked by growth in domestic
fertilizer shipments and a rise in automotive industry plastics demand. Average
commodity revenue per car was unchanged from 1995.

Energy - Commodity revenue (primarily coal) rose 26% to $1.63 billion in 1996,
driven by a 13% increase in carloadings and a 12% increase in average commodity
revenue per car. Volume increases reflected demand from both domestic and
foreign utilities for low-sulfur, Powder River Basin coal and the addition of
Southern Pacific volumes. The Railroad averaged 24 longer and heavier trains per
day out of the Powder River Basin in 1996 compared to 23 trains per day in 1995.
Average commodity revenue per car improvements resulted from a longer average
length of haul related to the CNW integration.

Industrial Products - Carloadings increased 26% and commodity revenue rose $287
million (28%) to $1.33 billion, principally resulting from the addition of
Southern Pacific and CNW volumes. Average commodity revenue per car grew 2%,
reflecting a longer average length of haul.

Intermodal - Commodity revenue rose 29% to $1.14 billion as a 26% increase in
carloadings - the result of new business, the addition of Southern Pacific and
CNW volumes and strengthening domestic intermodal demand - combined with a 2%
customer-mix-related increase in average commodity revenue per car.

Operating expenses rose $1.14 billion (23%) to $6.08 billion in 1996. The
addition of Southern Pacific's fourth quarter 1996 operations, a full year of
CNW operations, base rail volume growth and inflation were the primary factors
causing increases in

Financial Review 23
<PAGE> 21

salaries, wages and employee benefits ($438 million); equipment and other rents
($188 million); materials and supplies ($92 million); purchased services ($79
million); casualty accruals ($53 million); and other taxes ($20 million). Fuel
and utility costs rose $211 million, the result of increased volumes and a 13%
increase in fuel prices (net of fuel hedging), slightly offset by an improved
fuel consumption rate. Depreciation charges rose $118 million, primarily
reflecting the addition of Southern Pacific and CNW properties and the
Railroad's continued reinvestment in its equipment and rail infrastructure.
Repair and maintenance expenses decreased $67 million, resulting from more
efficient maintenance practices, improved equipment utilization and increased
credits related to repairs of other railroads' freight cars. Insurance costs
decreased $16 million, principally due to the refund of premiums associated with
the liquidation of an insurance company investment, slightly offset by Southern
Pacific insurance costs.

Operating income improved $218 million (16%) to $1.60 billion in 1996,
while the operating ratio increased to 79.1 in 1996 from 78.1 last year. On a
pro forma basis, including Southern Pacific and CNW for a full year in both
periods, the operating ratio would have improved to 83.5 in 1996 from 84.2 in
1995. Interest expense increased $149 million, principally from higher debt
levels associated with Southern Pacific and CNW acquisition financings. Other
income increased $38 million, the result of increased real estate sales
activity.

TRUCKING - During 1996, Overnite implemented several strategic initiatives aimed
at better matching its operations to the current trucking industry environment.
Actions taken included workforce reductions, service center consolidations,
centralization of the linehaul management process and pricing initiatives
targeting Overnite's lowest margin customers. Nonetheless, aggressive pricing
from regional LTL and truckload carriers continued to impact Overnite's
operating results. For these reasons, Overnite reported a net loss of $43
million in 1996 compared to a net loss of $30 million in 1995. Results for both
periods included goodwill amortization of $20 million.

Overnite's operating revenues decreased $15 million (2%) to $961 million as
a 6% decrease in volumes more than offset a 4% increase in average prices
resulting from Overnite's pricing initiatives. Lower volumes resulted from a 3%
decrease in LTL tonnage and a 29% decrease in truckload volumes.

Operating expenses increased $4 million to $1.03 billion. Salaries, wages
and employee benefit costs decreased $8 million, reflecting workforce reductions
and lower volumes, partially offset by wage and benefit inflation and a $3
million workforce reduction charge. The use of intermodal rail service and
contract linehaul carriers in the first half of 1996 caused a $7 million
increase in purchased services. Fuel costs rose $5 million, driven by a 24%
increase in fuel prices that was partially offset by a 7% volume-related
reduction in fuel consumption. Overnite's operating loss grew $19 million to $68
million in 1996, while Overnite's operating ratio (including goodwill
amortization) increased to 107.0 in 1996 from 105.0 in 1995.

CORPORATE SERVICES AND OTHER OPERATIONS - Expenses related to Corporate services
and other operations (consisting of corporate expenses, third-party interest
charges, intercompany interest allocations, other income and income taxes
related to the Corporation's holding company operations, and the results of
other operating units) decreased $54 million to $164 million in 1996. This
decrease largely reflects lower Corporate interest costs resulting from the
utilization of Resources' IPO dividend to reduce debt levels. Other operating
units generated an operating loss of $1 million in 1996 compared to operating
income of $6 million in 1995.

RESULTS OF DISCONTINUED OPERATIONS

Resources reported net income of $207 million through September 26, 1996 (the
record date for the Spin-Off), compared to $351 million for the full year of
1995. As a result of Resources' October 1995 IPO

24 Financial Review
<PAGE> 22

CASH FROM CONTINUING
OPERATIONS
UNION PACIFIC CORPORATION

$ Millions

CAPITAL INVESTMENTS
UNION PACIFIC CORPORATION

$ Millions

and the subsequent Spin-Off, UPC recognized $171 million (approximately 83%) of
Resources' net income through September 1996 in discontinued operations. The
Corporation's 1995 results included 100% of Resources' net income to the date of
the IPO and approximately 83% of Resources' net income thereafter in
discontinued operations. These percentages reflected the Corporation's ownership
of Resources during the indicated periods.

Resources' 1996 results benefitted from higher hydrocarbon sales volumes
and prices, offset by a volume-related increase in exploration and production
costs, additional general and administrative expenses related to operating
Resources as a stand-alone company and higher interest charges resulting from
debt incurred in connection with Resources' IPO dividend to UPC.

CASH FLOWS, LIQUIDITY AND
FINANCIAL RESOURCES

In 1997, cash from continuing operations was $1.60 billion, compared to $1.66
billion in 1996. This $60 million decrease primarily reflects lower earnings and
additional merger-related spending partially offset by a higher proportion of
non-cash expenses included in net income.

Cash used in investing activities was $1.77 billion in 1997 compared to
$1.09 billion in 1996. This increase primarily reflects higher capital
expenditures ($741 million), reflecting the capital spending requirements
resulting from the Southern Pacific acquisition.

Cash provided by financing activities was $71 million in 1997 compared to
cash used by financing activities of $602 million in 1996. This change resulted
from increased debt levels as a result of the fourth quarter losses at the
Railroad. The ratio of debt to capital employed increased to 50.9% at December
31, 1997 compared to 49.4% a year ago. In the event congestion and related
service problems continue to impact earnings, the Corporation's cost of
borrowing may be adversely affected.

In December 1996, the Corporation completed the registration of $1 billion
of securities for public issuance. Issuances under the registration statement
are expected to occur during 1998 and 1999, and will be used for general
corporate purposes, including repayment of borrowings, working capital
requirements and capital expenditures.

At year-end 1997, the Corporation had $2.8 billion of outstanding credit
facilities expiring in 2001, of which $0.9 billion was available for use.

OTHER MATTERS

FEDERAL RAILROAD ADMINISTRATION (FRA) REVIEW - The Railroad suffered a number of
severe accidents in 1997. As a result of these incidents, the FRA reviewed the
Railroad's operations and made several recommendations, including creating a
joint committee of Railroad management, labor and the FRA to review and monitor
all aspects of safety, adding an executive position for safety reporting
directly to the President of the Railroad, creating a safety hotline (direct to
the Railroad's President), re-evaluating all existing training programs and
increasing the monitoring of train crew performance, crew fatigue and crew
scheduling. All such FRA proposals have been implemented by the Railroad. The
Railroad has also implemented a guaranteed time-off program for train and engine
employees.

The Railroad has established extensive safety initiatives focused on
improving safety in the workplace. Over the past five years, these initiatives
have significantly reduced the number of reportable injuries, lost work days and
grade crossing accidents.

STB PROCEEDINGS - In October 1997, the STB instituted a proceeding to
investigate rail service problems in the West. As a result of this proceeding,
UPRR regularly reports to the STB concerning the recent service problems and the
Service Recovery Plan. In late

Financial Review 25
<PAGE> 23

LOCOMOTIVES AT YEAR-END
UNION PACIFIC RAILROAD

Locomotives

October, the STB issued an emergency service order, which imposed several
temporary measures designed, among other things, to allow the Texas Mexican
Railway Company (Tex Mex) to divert some traffic from UPRR in order to reduce
congestion on UPRR lines in Houston, Texas. The STB also directed UPRR to
suspend rail transportation service contract obligations of all shippers at
Houston that wish to route shipments over the Tex Mex instead of UPRR during the
period of the service order. On December 3, 1997, the STB opted to extend the
emergency service order until March 15, 1998 and expanded the order in certain
other respects. Unless UPRR is successful in recovering from the congestion and
related service problems, certain parties may request the STB to order UPRR to
take additional actions, including, among other things, further diversions of
traffic or the transfer of certain UPRR rail lines or other facilities to other
railroads.

PERSONAL INJURY - Over the past 10 years, work-related injuries have declined by
more than 10% annually, reflecting aggressive safety and training programs. In
addition, after several years of rising costs, the average settlement cost per
claim in 1997 has declined. Annual expenses for the Railroad's injury-related
events were $328 million in 1997 (which includes a full year of Southern
Pacific), $251 million in 1996 and $222 million in 1995. Compensation for
work-related accidents is governed by the Federal Employers' Liability Act
(FELA). Under FELA, damages are assessed based on a finding of fault through
litigation or on out-of-court settlements. The Railroad offers a comprehensive
variety of services and rehabilitation programs for employees who are injured at
work.

ENVIRONMENTAL COSTS - The Corporation generates and transports hazardous and
nonhazardous waste in its current and former operations, and is subject to
Federal, state and local environmental laws and regulations. The Corporation has
identified approximately 350 sites, including close to 60 sites currently on the
Superfund National Priorities List, at which it is or may be liable for
remediation costs associated with alleged contamination or for violations of
environmental requirements. Certain Federal legislation imposes joint and
several liability for the remediation of identified sites; consequently, the
Corporation's ultimate environmental liability may include costs relating to
other parties, in addition to costs relating to its own activities at each site.

A liability of $240 million has been accrued for future costs at all sites
where the Corporation's obligation is probable and where such costs can be
reasonably estimated; however, the ultimate cost could be lower or as much as
25% higher. The liability includes future costs for remediation and restoration
of sites, as well as for ongoing monitoring costs, but excludes any anticipated
recoveries from third parties. Cost estimates were based on information
available for each site, financial viability of other potentially responsible
parties (PRPs), and existing technology, laws and regulations. The Corporation
believes that it has adequately accrued for its ultimate share of costs at sites
subject to joint and several liability. However, the ultimate liability for
remediation is difficult to determine with certainty because of the number of
PRPs involved, site-specific cost sharing arrangements with other PRPs, the
degree of contamination by various wastes, the scarcity and quality of
volumetric data related to many of the sites, and/or the speculative nature of
remediation costs.

Remediation of identified sites previously used in operations, used by
tenants or contaminated by former owners required spending of $46 million in
1997 and $28 million in 1996. The Corporation is also engaged in reducing
emissions, spills and migration of hazardous materials, and spent $7 million and
$10 million in 1997 and 1996, respectively, for control and prevention, a
portion of which has been capitalized. In 1998, the Corporation anticipates
spending $60 million for remediation and $8 million for control and prevention.
In addition, in connection with the integration of UPRR and Southern Pacific
rail systems, UPC may spend up to $20 million in remediation costs related to
the closure of major Southern Pacific shops and facilities in 1998. The majority
of

26 Financial Review
<PAGE> 24
FUEL CONSUMPTION RATE
UNION PACIFIC RAILROAD

Gallons per thousand gross ton-miles

the December 31, 1997 environmental liability is expected to be paid out over
the next five years, funded by cash generated from operations. Future
environmental obligations are not expected to have a material impact on the
results of operations or financial condition of the Corporation.

LABOR MATTERS - Approximately 90% of the Railroad's 52,000 employees are
represented by rail unions. Under the conditions imposed by the STB in
connection with the Southern Pacific acquisition, labor agreements between the
Railroad and the unions must be negotiated before the UPRR and Southern Pacific
rail systems can be fully integrated. To date, the Railroad has successfully
reached agreements with the shopcraft, carmen, clerical and maintenance of way
unions. The negotiations with the operating crafts are proceeding on schedule,
with seven hub-and-spoke agreements having been reached. Under the hub-and spoke
concept, all operating employees in a central "hub" are placed under a single
set of collective bargaining agreements with the ability to work on the "spokes"
running into and out of the hub. The terms of ratified and pending labor
agreements are not expected to have a material adverse effect on the
Corporation's results of operations.

Overnite continues to oppose the efforts of the Teamsters to unionize
Overnite service centers. Since year-end 1994, 59 of Overnite's 164 service
centers have received petitions for union elections. Where elections have been
held, 35 Overnite service centers voted against representation and two elections
remain unresolved. The employees of three service centers that previously voted
for union representation filed petitions with the National Labor Relations Board
(NLRB) to decertify the Teamsters as their union bargaining representative.
Nineteen service centers, representing approximately 12% of Overnite's
nationwide workforce, have voted for union representation, and the Teamsters
have been certified as the bargaining representative for such employees without
challenge by Overnite. Five other service centers, representing another 5% of
Overnite's nationwide workforce, have either voted for union representation or
it is unclear how such employees have voted. Such elections are currently being
challenged by Overnite before the NLRB or the Federal courts. Overnite has begun
negotiations with the Teamsters at the certified service centers.

INFLATION - The cumulative effect of long periods of inflation has significantly
increased asset replacement costs for capital-intensive companies such as the
Railroad and Overnite. As a result, depreciation charges on an
inflation-adjusted basis, assuming that all operating assets are replaced at
current price levels, would be substantially greater than historically reported
amounts.

FINANCIAL INSTRUMENTS - The Corporation uses derivative financial instruments in
limited instances for other than trading purposes to manage risk as it relates
to fuel prices and interest rates. Where the Corporation has fixed interest
rates or fuel prices by using swaps, futures or forward contracts, the
Corporation has mitigated the downside risk of adverse price and rate movements;
however, it has also limited future gains from favorable movements.

Interest Rates - The Corporation manages its overall exposure to fluctuations in
interest rates by adjusting the proportion of fixed and floating rate debt
instruments within its debt portfolio over a given period. Derivatives are used
in limited circumstances as one of the tools to obtain the targeted mix. The mix
of fixed and floating rate debt is largely managed through the issuance of
targeted amounts of each as debt matures or incremental borrowings are required.
The Corporation also obtains additional flexibility in managing interest costs
and the interest rate mix within its debt portfolio by issuing callable fixed
rate debt securities.

Fuel - Over the past three years, fuel costs approximated 10% of the
Corporation's total operating costs. As a result of the significance of fuel
costs and the historical volatility of fuel prices, the Corporation periodically
uses swaps, futures and forward fuel contracts

Financial Review 27
<PAGE> 25
DIVIDENDS DECLARED
UNION PACIFIC CORPORATION

$ Millions

to mitigate the risk of fuel price volatility. The intent of this program is to
protect the Corporation's operating margins and overall profitability from
adverse fuel price changes.

Sensitivity Analysis - UPC had a limited number of interest rate swaps and fuel
hedging contracts in place at year-end 1997 (see Note 4 to the Financial
Statements). If market interest rates changed by 5%, the related change in the
value of interest rate swaps would be less than $2 million. If fuel costs
changed by 10%, the related change in the value of fuel hedging contracts would
not have a significant impact (approximately $28 million) on the Corporation's
operating results.

ACCOUNTING PRONOUNCEMENTS - The American Institute of Certified Public
Accountants issued Statement of Position 96-1, "Environmental Remediation
Liabilities," effective for 1997, which clarifies the accounting for
environmental remediation liabilities. Adoption did not have a significant
impact on UPC's operating results or financial condition.

In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128, "Earnings Per Share," effective for 1997, which replaces
Accounting Principles Board Opinion No. 15, "Earnings Per Share." Basic earnings
per share are calculated on the weighted-average number of common shares
outstanding during each period. Diluted earnings per share includes shares
issuable upon exercise of outstanding stock options. All prior period earnings
per share amounts have been restated in accordance with FASB No. 128.

In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" that will be effective in 1998. The Corporation anticipates minimal
impact from this Statement.

Also in June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" that will be effective in
1998. UPC currently complies with most provisions of this Statement, and any
incremental disclosure required by that Statement is expected to be minimal.

THE OUTLOOK

GENERAL ECONOMIC FACTORS - The Corporation's future results can be affected by
changes in the economic environment and by fluctuations in fuel prices. Several
of the commodities transported by both Overnite and the Railroad come from
industries with cyclical business operations. As a result, prolonged negative
changes in U.S. and global economic conditions can have an adverse effect on the
Corporation's operating results. In addition, operating results at the Railroad
and Overnite can be affected adversely by increases in diesel fuel costs, to the
extent that such costs are not recovered through higher revenues and improved
fuel conservation or mitigated by hedging activity.

1998 CAPITAL SPENDING - The Corporation's 1998 capital expenditures, debt
service requirements and payments related to the integration of Southern
Pacific's rail operations will be funded primarily through cash generated from
operations, additional debt financings and the sale or lease of various
operating and nonoperating properties. The Corporation expects that such sources
will continue to provide sufficient funds to meet cash requirements in the
foreseeable future.

The Corporation expects to increase its level of capital spending to
approximately $2.5 billion in 1998, including over $450 million to integrate the
UPRR and Southern Pacific rail systems. Railroad-related capital expenditures
will be used to continue capacity expansion on its main lines, upgrade and
augment equipment to meet customer needs and develop and implement new
technologies. Overnite will continue to maintain its truck fleet and upgrade
technology.

1998 BUSINESS OUTLOOK - Financial results in 1998 will be affected by the
congestion and related service problems; however, management expects that rail
volumes will improve as the Railroad makes progress in resolving these problems.

The acquisition of Southern Pacific is anticipated to yield significant
annual benefits to operating income, once Southern Pacific's operations have
been fully integrated with UPRR's existing operations. The

28 Financial Review
<PAGE> 26
ASSETS
UNION PACIFIC CORPORATION

$ Millions

Railroad will continue the merger implementation which is expected to be
substantially complete in 1999.

Overnite will continue to streamline its business operations to compete in
the current trucking industry environment. As a result of these efforts, UPC
anticipates that Overnite will continue to improve its financial results during
1998.

YEAR 2000 - In 1995, UPC began modifying its computer systems to process
transactions involving the year 2000 and beyond. Costs to convert these systems,
estimated to total $61 million, are expensed as incurred. At year-end 1997,
approximately 50% of the Corporation's systems have been modified, and the
majority of the remaining systems are expected to be modified by year-end 1998.
During 1999, systems will be tested to assure compliance with year 2000
requirements.

UPC is in the process of contacting entities with whom it exchanges data to
determine the status of their year 2000 modification efforts. In addition, the
Corporation is working with vendors who supply equipment and/or software that
could experience year 2000 problems.

The Corporation believes its systems will be successfully and timely
modified. However, failure to do so or failure on the part of third parties with
whom UPC does business could materially impact operations and financial results
in the year 2000.

CAUTIONARY INFORMATION

Certain information included in this report contains, and other materials filed
or to be filed by the Corporation with the Securities and Exchange Commission
(as well as information included in oral statements or other written statements
made or to be made by the Corporation) contain or will contain, forward-looking
statements within the meaning of the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended. Such forward-looking information
may include, without limitation, statements that the Corporation does not expect
that lawsuits, environmental costs, commitments, contingent liabilities, labor
negotiations or other matters will have a material adverse effect on its
consolidated financial condition, results of operations or liquidity and other
similar expressions concerning matters that are not historical facts, and
projections or predictions as to the Corporation's financial or operational
results. Such forward-looking information is or will be based on information
available at that time and is or will be subject to risks and uncertainties that
could cause actual results to differ materially from those expressed in the
statements. Important factors that could cause such differences include, but are
not limited to, whether the Railroad is fully successful in overcoming its
congestion-related problems and implementing its Service Recovery Plan, industry
competition, regulatory developments, natural events such as floods and
earthquakes, the effects of adverse general economic conditions, fuel prices,
labor strikes, the impact of year 2000 systems problems and the ultimate outcome
of shipper claims related to congestion, environmental investigations or
proceedings and other types of claims and litigation.

Financial Review 29

<PAGE> 27

INDEPENDENT AUDITORS' REPORT

[DELOITTE & TOUCHE LLP LOGO]

Union Pacific Corporation, its Directors and Stockholders:

We have audited the accompanying statement of consolidated financial position of
Union Pacific Corporation and subsidiary companies as of December 31, 1997 and
1996, and the related statements of consolidated income, changes in common
stockholders' equity and consolidated cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Union Pacific Corporation and
subsidiary companies at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.

/s/ DELOITTE & TOUCHE LLP

Dallas, Texas
January 22, 1998

RESPONSIBILITIES FOR FINANCIAL STATEMENTS

The accompanying financial statements, which consolidate the accounts of Union
Pacific Corporation and its subsidiaries, have been prepared in conformity with
generally accepted accounting principles.

The integrity and objectivity of data in these financial statements and
accompanying notes, including estimates and judgments related to matters not
concluded by year-end, are the responsibility of management as is all other
information in this Annual Report. Management devotes ongoing attention to
review and appraisal of its system of internal controls. This system is designed
to provide reasonable assurance, at an appropriate cost, that the Corporation's
assets are protected, that transactions and events are recorded properly and
that financial reports are reliable. The system is augmented by a staff of
corporate traveling auditors supplemented by internal auditors in the subsidiary
operating companies; careful attention to selection and development of qualified
financial personnel; programs to further timely communication and monitoring of
policies, standards and delegated authorities; and evaluation by independent
auditors during their audits of the annual financial statements.

The Audit Committee of the Board of Directors, composed entirely of outside
directors, as identified on page 55, meets regularly with financial management,
the corporate auditors and the independent auditors to review the work of each.
The independent auditors and corporate auditors have free access to the Audit
Committee, without management representatives present, to discuss the results of
their audits and their comments on the adequacy of internal controls and the
quality of financial reporting.

/s/ DICK DAVIDSON

Chairman, President and Chief Executive Officer

/s/ L. WHITE MATTHEWS

Executive Vice President-Finance

/s/ JOSEPH E. O'CONNOR JR.

Vice President and Controller

30 Financial Review
<PAGE> 28
BUSINESS SEGMENTS

UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Millions of Dollars 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES Railroad ................................ $ 9,981 $ 7,680 $ 6,326
Trucking ................................ 946 961 976
Corporate services and other operations.. 152 145 184
--------------------------------------------------------------------------------------------
Total ................................... $ 11,079 $ 8,786 $ 7,486
- ----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME Railroad ................................ $ 1,253 $ 1,602 $ 1,384
(LOSS) Trucking ................................ 10 (68) (49)
Corporate services and other operations.. (10) (1) 6
--------------------------------------------------------------------------------------------
Total ................................... $ 1,253 $ 1,533 $ 1,341
- ----------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM Railroad ................................ $ 620 $ 940 $ 867
CONTINUING OPERATIONS Trucking ................................ 4 (43) (30)
Corporate services and other operations.. (192) (164) (218)
--------------------------------------------------------------------------------------------
Total ................................... $ 432 $ 733 $ 619
- ----------------------------------------------------------------------------------------------------------------------
CASH FROM CONTINUING Railroad ................................ $ 1,759 $ 1,767 $ 1,486
OPERATIONS Trucking ................................ 79 47 37
Corporate services and other operations.. (238) (157) (69)
--------------------------------------------------------------------------------------------
Total ................................... $ 1,600 $ 1,657 $ 1,454
- ----------------------------------------------------------------------------------------------------------------------
ASSETS (AT YEAR-END) Railroad ................................ $ 26,891 $ 26,278 $ 15,694
Trucking ................................ 1,189 1,225 1,270
Corporate services and other operations.. 684 424 2,482
--------------------------------------------------------------------------------------------
Total ................................... $ 28,764 $ 27,927 $ 19,446
- ----------------------------------------------------------------------------------------------------------------------
DEPRECIATION AND Railroad ................................ $ 972 $ 686 $ 568
AMORTIZATION Trucking ................................ 62 65 64
Corporate services and other operations.. 9 11 10
--------------------------------------------------------------------------------------------
Total ................................... $ 1,043 $ 762 $ 642
- ----------------------------------------------------------------------------------------------------------------------
CAPITAL INVESTMENTS Railroad ................................ $ 2,035 $ 1,339 $ 970
Trucking ................................ 40 10 49
Corporate services and other operations.. 26 11 39
--------------------------------------------------------------------------------------------
Total ................................... $ 2,101 $ 1,360 $ 1,058
</TABLE>

This information should be read in conjunction with the accompanying
accounting policies and notes to the financial statements.

Financial Review 31
<PAGE> 29
STATEMENT OF CONSOLIDATED INCOME

UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Millions of Dollars, Except Per Share Amounts 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES Railroad, trucking and other........... $ 11,079 $ 8,786 $ 7,486
-----------------------------------------------------------------------------------------
OPERATING EXPENSES Salaries, wages and employee benefits.. 4,166 3,260 2,826
Equipment and other rents ............. 1,339 885 695
Fuel and utilities (Note 4) ........... 1,042 790 574
Depreciation and amortization ......... 1,043 762 642
Purchased services .................... 743 541 410
Materials and supplies ................ 560 469 377
Other costs ........................... 933 546 621
-----------------------------------------------------------------------------------------
Total ................................. 9,826 7,253 6,145
-----------------------------------------------------------------------------------------
INCOME Operating Income....................... 1,253 1,533 1,341
Other income (Note 13) ................ 137 182 141
Interest expense (Notes 3, 4 and 7) ... (605) (501) (450)
Corporate expenses .................... (109) (101) (99)
-----------------------------------------------------------------------------------------
Income before Income Taxes ............ 676 1,113 933
Income taxes (Note 6) ................. (244) (380) (314)
-----------------------------------------------------------------------------------------
Income from Continuing Operations ..... 432 733 619
Income from Discontinued Operations
(Note 3) ........................... -- 171 327
-----------------------------------------------------------------------------------------
Net Income ............................ $ 432 $ 904 $ 946
- -----------------------------------------------------------------------------------------------------------------------
PER SHARE BASIC
Income from Continuing Operations... $ 1.76 $ 3.38 $ 3.02
Income from Discontinued Operations. -- 0.79 1.60
Net Income ......................... 1.76 4.17 4.62
DILUTED
Income from Continuing Operations... $ 1.74 $ 3.36 $ 3.01
Income from Discontinued Operations. -- 0.78 1.59
Net Income ......................... 1.74 4.14 4.60
Dividends ............................. $ 1.72 $ 1.72 $ 1.72
</TABLE>

The accompanying accounting policies and notes to the financial statements
are an integral part of these statements.

32 Financial Statements
<PAGE> 30
STATEMENT OF CONSOLIDATED FINANCIAL POSITION

UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Millions of Dollars 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
--------------------------------------------------------------------------------------
Current Assets Cash and temporary investments......................... $ 90 $ 191
Accounts receivable (Note 4)........................... 631 507
Inventories............................................ 296 304
Other current assets (Note 6).......................... 398 345
--------------------------------------------------------------------------------------
Total.................................................. 1,415 1,347
--------------------------------------------------------------------------------------
Investments Investments in and advances to affiliated companies.... 443 387
Other investments...................................... 181 226
--------------------------------------------------------------------------------------
Total.................................................. 624 613
--------------------------------------------------------------------------------------
Properties Cost (Notes 2, 5 and 7)................................ 31,514 30,097
Accumulated depreciation (Note 5)...................... (5,537) (5,053)
--------------------------------------------------------------------------------------
Net.................................................... 25,977 25,044
--------------------------------------------------------------------------------------
Other Excess acquisition costs - net......................... 619 700
Other assets .......................................... 129 223
--------------------------------------------------------------------------------------
Total Assets .......................................... $ 28,764 $ 27,927
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------------
Current Liabilities Accounts payable....................................... $ 758 $ 705
Accrued wages and vacation ............................ 421 427
Accrued casualty costs ................................ 333 332
Dividends and interest ................................ 295 293
Income and other taxes................................. 268 250
Debt due within one year (Note 7)...................... 233 127
Other current liabilities (Note 2)..................... 939 922
--------------------------------------------------------------------------------------
Total.................................................. 3,247 3,056
--------------------------------------------------------------------------------------
Other Liabilities Debt due after one year (Notes 2, 3 and 7)............. 8,285 7,900
and Stockholders' Equity Deferred income taxes (Note 6)......................... 6,252 5,939
Accrued casualty costs................................. 695 670
Retiree benefits obligation (Note 9)................... 828 720
Other long-term liabilities (Notes 2 and 12)........... 1,232 1,417
Common stockholders' equity (page 35).................. 8,225 8,225
--------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity............. $ 28,764 $ 27,927
</TABLE>

The accompanying accounting policies and notes to the financial statements
are an integral part of these statements.

Financial Statements 33
<PAGE> 31
STATEMENT OF CONSOLIDATED CASH FLOWS

UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Millions of Dollars 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FROM CONTINUING Net Income ............................................ $ 432 $ 904 $ 946
OPERATIONS Non-cash charges to income:
Depreciation and amortization ...................... 1,043 762 642
Deferred income taxes (Note 6) ..................... 300 166 151
Other - net ........................................ (196) (559) 358
Income from discontinued operations (Note 3) .......... -- (171) (327)
Changes in current assets and liabilities (Note 2)..... 21 555 (316)
----------------------------------------------------------------------------------------------
Cash from Continuing Operations ....................... 1,600 1,657 1,454
----------------------------------------------------------------------------------------------
INVESTING Capital investments ................................... (2,101) (1,360) (1,058)
ACTIVITIES Cash provided by discontinued operations (Note 3)...... -- 41 467
Proceeds from Resources' notes receivable
repayment (Note 3).................................. -- 650 --
Investments and acquisitions (Note 2).................. -- (539) (2,146)
Proceeds from sale of assets and other
investing activities................................ 329 114 168
----------------------------------------------------------------------------------------------
Cash Used in Investing Activities...................... (1,772) (1,094) (2,569)
----------------------------------------------------------------------------------------------
EQUITY AND FINANCING Dividends paid ........................................ (422) (353) (353)
ACTIVITIES Debt repaid ........................................... (572) (2,047) (1,531)
Financings (Notes 2 and 7) ............................ 1,092 1,741 2,275
Proceeds from Resources' stock offering (Note 3)....... -- -- 844
Other - net............................................ (27) 57 (5)
----------------------------------------------------------------------------------------------
Cash Provided by (Used in) Equity and
Financing Activities ............................... 71 (602) 1,230
----------------------------------------------------------------------------------------------
Net Change in Cash and Temporary Investments........... $ (101) $ (39) $ 115
- ------------------------------------------------------------------------------------------------------------------------------
CHANGES IN CURRENT Accounts receivable.................................... $ (124) $ 1 $ 47
ASSETS AND LIABILITIES Inventories............................................ 8 12 19
(Excluding SP Assets and Other current assets................................... (53) 762 (281)
Liabilities Acquired in 1996) Accounts, wages and vacation payable .................. 47 4 80
Debt due within one year............................... 106 (62) (295)
Other current liabilities ............................. 37 (162) 114
----------------------------------------------------------------------------------------------
Total.................................................. $ 21 $ 555 $ (316)
</TABLE>

The accompanying accounting policies and notes to the financial statements
are an integral part of these statements.

34 Financial Statements
<PAGE> 32
STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY

UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Millions of Dollars 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK Common Stock, $2.50 par value
(authorized 500,000,000 shares)
Balance at beginning of year
(274,595,151 shares issued in 1997;
232,317,010 in 1996; 231,837,976 in 1995)... $ 686 $ 581 $ 580
Common stock issued in Southern Pacific
acquisition (38,089,704 shares)(Note 2)..... -- 95 --
Conversions, exercises of stock options
and other (1,452,405 shares in 1997;
4,188,437 in 1996; 479,034 in 1995) ........ 4 10 1
----------------------------------------------------------------------------------------------------
Balance at end of year (276,047,556
shares issued in 1997; 274,595,151
in 1996; 232,317,010 in 1995) .............. 690 686 581
----------------------------------------------------------------------------------------------------
PAID-IN SURPLUS Balance at beginning of year .................. 4,009 2,111 1,428
Common stock issued in Southern Pacific
acquisition (Note 2) ....................... -- 2,381 --
Distribution of investment in
Resources (Note 3).......................... -- (638) --
Issuance of Resources' no par common
stock (Note 3) ............................. -- -- 638
Conversions, exercises of stock options
and other .................................. 57 155 45
----------------------------------------------------------------------------------------------------
Balance at end of year ........................ 4,066 4,009 2,111
----------------------------------------------------------------------------------------------------
RETAINED Balance at beginning of year................... 5,262 5,327 4,734
EARNINGS Net Income .................................... 432 904 946
----------------------------------------------------------------------------------------------------
Total ......................................... 5,694 6,231 5,680
Cash dividends declared ....................... (423) (371) (353)
Distribution of investment in
Resources (Note 3).......................... -- (598) --
----------------------------------------------------------------------------------------------------
Balance at end of year (Note 7)................ 5,271 5,262 5,327
----------------------------------------------------------------------------------------------------
TREASURY STOCK Balance at end of year, at cost
(29,045,938 shares in 1997; 27,935,628
in 1996; 26,737,806 in 1995)................ (1,802) (1,732) (1,655)
----------------------------------------------------------------------------------------------------
Total Common Stockholders' Equity (Note 10) ... $ 8,225 $ 8,225 $ 6,364
</TABLE>

The accompanying accounting policies and notes to the financial statements
are an integral part of these statements.

Financial Statements 35
<PAGE> 33

NOTES TO THE FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Union Pacific
Corporation (the Corporation or UPC) and all of its subsidiaries. Investments
in affiliated companies (20% to 50% owned) are generally accounted for on the
equity method. All material intercompany transactions are eliminated.

CASH AND TEMPORARY INVESTMENTS

Temporary investments are stated at cost that approximates fair value and
consist of investments with original maturities of three months or less.

INVENTORIES

Inventories consist of materials and supplies carried at the lower of cost or
market.

PROPERTY AND DEPRECIATION

Properties are carried at cost. Provisions for depreciation are computed
principally on the straight-line method based on estimated service lives of
depreciable property.

The cost (net of salvage) of depreciable rail property retired or
replaced in the ordinary course of business is charged to accumulated
depreciation. A gain or loss is recognized in other income for all other
property upon disposition.

LONG-LIVED AND INTANGIBLE ASSETS

Amortization of costs in excess of the fair value of net assets of acquired
businesses is generally recorded over 40 years on a straight-line basis. The
Corporation regularly assesses the recoverability of its long-lived and
intangible assets through a review of undiscounted cash flows and fair values
of those assets.

REVENUE RECOGNITION

Transportation revenues are recognized on a percentage-of-completion basis,
while delivery costs are recognized as incurred.

HEDGING TRANSACTIONS

The Corporation periodically hedges fuel purchases and interest rates.
Unrealized gains and losses from swaps, futures and forward contracts are
deferred and recognized as the fuel is consumed. The differential to be paid
or received on interest rate swaps is accrued as interest rates change and
recognized as interest expense over the life of the agreements (see Note 4).

EARNINGS PER SHARE

Earnings per share (EPS) are calculated in accordance with Financial Accounting
Standards Board (FASB) Statement No. 128, "Earnings Per Share" (FASB 128).
Basic earnings per share are calculated on the weighted-average number of
common shares outstanding during each period. Diluted earnings per share
include shares issuable upon exercise of outstanding stock options (see Note
10). All prior period earnings per share amounts have been restated in
accordance with FASB 128.

USE OF ESTIMATES

The consolidated financial statements of the Corporation include estimates and
assumptions regarding certain assets, liabilities, revenues and expenses and
the disclosure of certain contingent assets and liabilities. Actual future
results may differ from such estimates.

CHANGE IN PRESENTATION

Certain prior year amounts have been reclassified to conform to the 1997
financial statement presentation. Union Pacific Resources Group Inc.
(Resources) is classified as a discontinued operation (see Note 3).

36 Notes to the Financial Review
<PAGE> 34
1. NATURE OF OPERATIONS

UPC consists of two major transportation segments, railroad and trucking,
operating principally in the United States.

RAILROAD - The Corporation's largest segment is Union Pacific Railroad Company
(UPRR) (including as of May 1, 1995, Chicago and North Western Transportation
Company (CNW)), and as of October 1, 1996, Southern Pacific Rail Corporation
(Southern Pacific or SP)(see Note 2)(collectively the Railroad). The Railroad
is the largest rail system in the United States, with nearly 35,000 route miles
linking Pacific Coast and Gulf Coast ports to the Midwest and eastern U.S.
gateways and providing several north/south corridors to key Mexican gateways.
The Railroad serves the western two-thirds of the country and maintains
coordinated schedules with other carriers for the handling of freight to and
from the Atlantic Coast, the Pacific Coast, the Southeast, the Southwest,
Canada and Mexico. Export and import traffic is moved through Gulf Coast and
Pacific Coast ports and across the Mexican and (primarily through interline
connections) Canadian borders. The Railroad is subject to price and service
competition from other railroads, motor carriers and barge operators. The
Corporation completed the integration of CNW in 1996 and expects to complete
the integration of the operations of Southern Pacific during 1999.

Approximately 90% of the Railroad's 52,000 employees are represented
by rail unions. During 1996, nearly all of UPRR's unionized workforce ratified
five-year national agreements, which include a combination of general wage
increases and lump-sum payments. In addition, the agreements provide for
increased flexibility in work rules. Under the conditions imposed by the
Surface Transportation Board of the U.S. Department of Transportation (STB) in
connection with the Southern Pacific acquisition, labor agreements between the
Railroad and the unions representing SP employees must be negotiated before the
UPRR and Southern Pacific rail systems can be fully integrated. The Corporation
has begun negotiations with these unions and expects the remaining revised
agreements to be ratified in 1998.

During 1997, the Railroad and a consortium of partners were granted a
50-year concession to operate the Pacific-North and Chihuahua Pacific lines in
Mexico, and a 25% stake in the Mexico City Terminal Company at a price of $525
million. The Railroad holds a 13% ownership share and has accounted for its
interest by the equity method. The consortium expects to assume operational
control of both lines in early 1998.

TRUCKING - The Corporation's other major line of business is truck
transportation. Overnite Transportation Company (Overnite), a major interstate
trucking company specializing in less-than-truckload shipments, serves all 50
states and portions of Canada and Mexico through 164 service centers located
throughout the United States. Overnite transports a variety of products,
including machinery, tobacco, textiles, plastics, electronics and paper
products. Overnite experiences intense service and price competition from both
regional and national motor carriers.

As the nation's largest non-union single operating trucking company,
Overnite is periodically targeted by major labor organization efforts
instituted by the International Brotherhood of Teamsters (Teamsters) at many of
its service centers. Since year-end 1994, 59 of Overnite's 164 service centers
have received petitions for union elections. Where elections have been held,
35 Overnite service centers voted against representation and two elections
remain unresolved. The employees of three service centers that previously
voted for union representation filed petitions with the National Labor
Relations Board (NLRB) to decertify the Teamsters as their union bargaining
representative. Nineteen service centers, representing approximately 12% of
Overnite's nationwide workforce, voted for union representation, and the
Teamsters have been certified as the bargaining representative for such
employees without challenge by Overnite. Five other service centers,
representing another 5% of Overnite's nationwide workforce, either voted for
union representation or it is unclear how such employees have voted. Such
elections are currently being challenged by Overnite before the NLRB or the
Federal courts. Overnite has begun negotiations with the Teamsters at the
service centers where the Teamsters have been certified as the bargaining
representative.

Notes to the Financial Statements 37
<PAGE> 35
During 1997 and 1996, Overnite continued to benefit from several
initiatives implemented in 1996 which were aimed at better matching its
operations to the current trucking industry environment. These actions
included workforce reductions, service center consolidations, centralization of
the linehaul management process and pricing initiatives targeting Overnite's
lowest margin customers.

CONSOLIDATED - The Corporation's future results can be affected by, among other
things, system congestion, changes in the economic environment and fluctuations
in fuel prices. Several of the commodities transported by both Overnite and
the Railroad come from industries with cyclical business operations. As a
result, prolonged negative changes in U.S. and global economic conditions can
have an adverse effect on the Corporation's ongoing results. In addition,
operating results at the Railroad and Overnite can be affected adversely by
increases in diesel fuel costs, to the extent that such costs are not recovered
through higher revenues and improved fuel conservation, or mitigated by hedging
activity.

Business Segments on page 31 provides additional financial information
related to the Corporation's operations.

2. ACQUISITIONS

SOUTHERN PACIFIC - UPC consummated the acquisition of Southern Pacific in
September 1996 by acquiring the remaining 75% of Southern Pacific common shares
not previously owned by the Corporation for $25.00 per SP share in cash, 0.4065
shares of the Corporation's common stock per SP share, or a combination
thereof, at the holder's election and subject to proration. As a result of the
initial cash tender offer in 1995 for 25% of Southern Pacific's outstanding
shares and the acquisition of the remaining 75% of Southern Pacific shares, 60%
of the outstanding Southern Pacific shares were converted into 38.1 million
shares of UPC common stock, and the remaining 40% of the outstanding shares
were acquired for $1.56 billion in cash. UPC initially funded the cash portion
of the acquisition with credit facility borrowings, all of which have been
subsequently refinanced with other borrowings.

The acquisition of Southern Pacific has been accounted for using the
purchase method. Results for 1996 include equity income equal to 25% of
Southern Pacific's net income through September 10, 1996, reflecting UPC's
ownership of SP during such period, and 100% of Southern Pacific's net income
thereafter. SP's results have been fully consolidated with the Corporation
effective October 1, 1996. The purchase price was determined as follows and was
based on a market value of the Corporation's common stock at the time the
merger was announced of $65.00 per share.

<TABLE>
<CAPTION>
- --------------------------------------------------------------
Millions of Dollars, Except Per Share Amounts
- --------------------------------------------------------------
<S> <C>
Initial 25% investment in SP on September 15, 1995
including equity income............................. $ 990

Second-step cash purchase (23.4 million shares at
$25.00 per SP share) on September 11, 1996.......... 586

Merger exchange of SP shares (93.7 million SP shares
converted into 38.1 million shares of UPC common
stock at $65.00 per share) on September 11, 1996.... 2,476

Transaction costs..................................... 45
- --------------------------------------------------------------
Purchase price to be allocated........................ $4,097
- --------------------------------------------------------------
</TABLE>

The Southern Pacific purchase price has been allocated as follows:

<TABLE>
<CAPTION>
- --------------------------------------------------
Millions of Dollars
- --------------------------------------------------
<S> <C>
Purchase price to be allocated .. $ 4,097
Pre-tax merger costs:
Current ........................ 532
Long-term ...................... 426
Equity acquired ................. (1,083)
- --------------------------------------------------
Unallocated purchase price ...... $ 3,972
- --------------------------------------------------
Purchase price allocation:
Property and equipment
Land ........................ $ 3,509
Roadway, equipment & other .. 2,522
Debt and preference share
revaluation .................. (200)
Deferred income taxes (including
the effect of merger costs) .. (1,859)
- --------------------------------------------------
Total ........................... $ 3,972
- --------------------------------------------------
</TABLE>

38 Notes to the Financial Statements
<PAGE> 36
In connection with the acquisition and continuing integration of UPRR
and Southern Pacific's rail operations, UPC is in the process of eliminating
5,200 duplicate positions, which are primarily non-train crews. In addition, UPC
is relocating 4,700 positions, merging or disposing of redundant facilities, and
disposing of certain rail lines. The Corporation is also canceling uneconomical
and duplicative SP contracts and has refinanced $621 million of SP's debt
obligations. UPC recognized a $958 million liability in the SP purchase price
allocation for costs associated with SP's portion of these activities.

The components of the $958 million liability are as follows:

<TABLE>
<CAPTION>
- ------------------------------------------------
Millions of Dollars
- ------------------------------------------------
<S> <C>
Labor protection related to legislated and
contractual obligations to
SP union employees................. $ 361
Severance costs...................... 343
Contract cancellation fees .......... 145
Relocation costs .................... 109
- ------------------------------------------------
Total................................ $ 958
- ------------------------------------------------
</TABLE>

Through December 31, 1997, approximately $280 million in merger-related
costs were paid by the Corporation and charged against these reserves,
principally comprised of $153 million and $65 million, respectively, for
severance and relocation payments made to approximately 3,500 Southern Pacific
employees. The Corporation expects that the remaining merger payments will be
made over the course of the next five years as the rail operations of UPRR and
SP are integrated and labor negotiations are completed and implemented.

In addition, the Railroad expects to incur $235 million in
acquisition-related costs through 1999 for severing or relocating UPRR
employees, disposing of certain UPRR facilities, training and equipment
upgrading. These costs will be charged to expense as incurred over the next two
years. Net income for 1997 includes $60 million for acquisition-related
operating costs, net of tax.

The pro forma results presented below have been prepared to reflect the
consummation of the Southern Pacific acquisition and the subsequent pro-rata
distribution of the shares of Resources owned by the Corporation to UPC's
stockholders (see Note 3), as if such events occurred at the beginning of each
period presented. The pro forma results presented below do not reflect synergies
expected to result from the integration of UPRR's and Southern Pacific's rail
operations, and accordingly, do not account for any potential increase in
revenue or operating income, estimated cost savings, or one-time costs
associated with the elimination of UPC's duplicate facilities and relocation or
severance payments to UPC employees. The effects of the foregoing could be
substantial. This unaudited pro forma information is not necessarily indicative
of the results of operations that might have occurred had the Southern Pacific
acquisition and the distribution of Resources shares actually occurred on the
date indicated, or of future results of operations of the resulting entity. Pro
forma results for the year ended December 31, 1995 also reflect the pro forma
effect of UPC's acquisition of CNW as if such transaction had occurred at the
beginning of that period.

<TABLE>
<CAPTION>
- -------------------------------------------------------------
Millions of Dollars, Pro Forma
Except Per Share Amounts 1996 1995
- -------------------------------------------------------------
<S> <C> <C>
Operating Revenues..... $ 11,219 $ 11,031
Operating Income ...... 1,606 1,523
Net Income ............ 664 583
EPS (basic) ........... 2.73 2.40
EPS (diluted) ......... 2.71 2.39
- -------------------------------------------------------------
</TABLE>

CNW - In April 1995, UPC completed the acquisition of the remaining 71.6% of
CNW's outstanding common stock not previously owned by the Corporation for
approximately $1.2 billion, funded by the issuance of additional long-term
debt. The acquisition of CNW has been accounted for as a purchase, and CNW's
financial results were consolidated with the Corporation effective May 1, 1995.

Notes to the Financial Statements 39
<PAGE> 37
3. DIVESTITURES

SKYWAY - In January 1998, the Corporation announced its intention to sell its
investment in Skyway Freight Systems, Inc., a wholly-owned subsidiary engaged
in contract logistics and supply chain management. In connection with the
planned sale, the Corporation recognized a $40 million after tax loss.

RESOURCES - In July 1995, the Corporation's Board of Directors approved a
formal plan to divest UPC's natural resources business through an initial
public offering (IPO) by Resources, followed by a pro-rata distribution of the
Resources shares owned by the Corporation to its stockholders (the Spin-Off).

The IPO of 42.5 million Resources shares at $21.00 per share was
completed in October 1995 and generated net proceeds of $844 million. At that
time, Resources distributed to UPC a dividend of $1.62 billion ($912 million in
cash, $650 million in 8.5% notes due within 90 days of the Spin-Off and a $59
million intercompany balance owed by the Corporation). UPC used the cash
proceeds from the IPO dividend to repay outstanding commercial paper.

In September 1996, after UPC's receipt of a favorable Internal Revenue
Service ruling as to the tax-free nature of the Spin-Off, the Corporation's
Board of Directors declared a special dividend consisting of the shares of
Resources common stock owned by UPC. As a result of the Spin-Off, each of the
Corporation's stockholders received 0.846946 of a share of Resources common
stock for each UPC share of common stock held by such stockholder at the
September 26, 1996 record date for the distribution. In October 1996, Resources
repaid $650 million in notes to UPC, the proceeds of which were used by the
Corporation to repay outstanding commercial paper. The Spin-Off was recorded as
a reduction in paid-in surplus (representing the equity generated by the IPO)
and retained earnings (see Page 35).

Resources' results have been reported as discontinued operations in the
Corporation's consolidated financial statements for 1996 and 1995. UPC's results
reflect 100% of Resources' net income up to the date of the IPO and
approximately 83% of Resources' net income from the date of the IPO to the
Spin-Off. The Corporation's share of Resources' net income was $171 million and
$327 million in 1996 and 1995, respectively. These amounts are net of income
taxes of $82 million and $100 million in 1996 and 1995, respectively. For the
years ended December 31, 1996 and 1995, Resources' operating revenues were $1.83
billion and $1.48 billion, respectively.

4. FINANCIAL INSTRUMENTS

RISK MANAGEMENT

The Corporation and its subsidiaries use derivative financial instruments (in
limited instances and for other than trading purposes) to manage risk as it
relates to fuel prices and interest rates. Where the Corporation has fixed
interest rates or fuel prices through the use of swaps, futures or forward
contracts, the Corporation has mitigated the downside risk of adverse price and
rate movements; however, it has also limited future gains from favorable
movements.

The Corporation addresses market risk related to these instruments by
selecting instruments whose value fluctuations highly correlate with the
underlying item being hedged. Credit risk related to derivative financial
instruments, which is minimal, is managed by requiring high credit standards for
counterparties and periodic settlements. The total risk associated with the
Corporation's counterparties was $61 million at December 31, 1997. The
Corporation has not been required to provide, nor has it received, any
collateral relating to its hedging activity.

The fair market values of the Corporation's derivative financial
instrument positions at December 31, 1997 and 1996 described below were
determined based on current fair market values as quoted by recognized dealers,
or developed based on the present value of expected future cash flows discounted
at the applicable zero coupon U.S. treasury rate and swap spread.

40 Notes to the Financial Statements
<PAGE> 38
INTEREST RATES - The Corporation controls its overall risk of fluctuations in
interest rates by managing the proportion of fixed and floating rate debt
instruments within its debt portfolio over a given period. Derivatives are
used as one of the tools to obtain the targeted mix. The mix of fixed and
floating rate debt is largely managed through the issuance of targeted amounts
of such debt as debt maturities occur or as incremental borrowings are
required. The Corporation also obtains additional flexibility in managing
interest costs and the interest rate mix within its debt portfolio by issuing
callable fixed rate debt securities.

At December 31, 1997, the Corporation had outstanding interest rate
swaps on $255 million of notional principal amount of debt (3% of the total debt
portfolio) with a gross fair market value asset position of $61 million and a
gross fair market value liability position of $23 million. These contracts
mature over the next one to eight years. At December 31, 1996, the Corporation
had outstanding interest rate swaps on $265 million of notional principal amount
of debt (3% of the total debt portfolio) with a gross fair market value asset
position of $31 million and a gross fair market value liability position of $12
million. Interest rate hedging activity increased interest expense by $5 million
in 1997, $3 million in 1996 and $7 million in 1995, raising the weighted-average
borrowing rate by no more than 20 basis points in any year.

FUEL - Over the past three years, fuel costs approximated 10% of the
Corporation's total operating expenses. As a result of the significance of
fuel costs and the historical volatility of fuel prices, the Corporation's
transportation subsidiaries periodically use swaps, futures and forward
contracts to mitigate the impact of fuel price volatility. The intent of this
program is to protect the Corporation's operating margins and overall
profitability from adverse fuel price changes. However, the use of these
contracts also limits the benefit of favorable fuel price changes.

At December 31, 1997, the Railroad and Overnite had hedged 42% and 34%
of their forecasted 1998 fuel consumption, respectively. At December 31, 1996,
neither the Railroad nor Overnite had hedged any of its forecasted 1997 fuel
consumption. In addition, at year-end 1997, the Railroad had outstanding swap
agreements covering its fuel purchases in 1998 of $298 million, with gross and
net liability positions of $13 million. Fuel hedging had no significant effect
on the Railroad's 1997 fuel costs, lowered 1996 fuel costs by $34 million and
had no significant effect on 1995 fuel costs. At year-end 1997, Overnite had
outstanding swap agreements of $10 million, with gross and net liability
positions of $1 million. Fuel hedging had no significant effect on fuel costs
for Overnite for the periods presented.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of the Corporation's long- and short-term debt has been
estimated using quoted market prices or current borrowing rates. At December
31, 1997, the fair value of total debt exceeded the carrying value by
approximately 3%. Of the Corporation's total debt portfolio, approximately
$1.6 billion of fixed rate debt securities contain call provisions that allow
the Corporation to retire the debt instruments prior to final maturity, subject
in certain cases to the payment of premiums.

The carrying value of all other financial instruments approximates fair
value.

SALE OF RECEIVABLES

The Corporation has sold, on a revolving basis, an undivided percentage
ownership interest in a designated pool of accounts receivable. At December 31,
1997 and 1996, accounts receivable are presented net of the $650 million of
receivables sold.

Notes to the Financial Statements 41
<PAGE> 39
5. PROPERTIES

Major property accounts are as follows:

<TABLE>
<CAPTION>
- ---------------------------------------------------
Millions of Dollars 1997 1996
- ---------------------------------------------------
<S> <C> <C>
Railroad:
Road and other.... $23,610 $22,665
Equipment ........ 7,084 6,573
- ---------------------------------------------------
Total Railroad ..... 30,694 29,238
Trucking ........... 750 736
Other .............. 70 123
- ---------------------------------------------------
Total .............. $31,514 $30,097
- ---------------------------------------------------
</TABLE>

Accumulated depreciation accounts are as follows:

<TABLE>
<CAPTION>
- -------------------------------------------------
Millions of Dollars 1997 1996
- -------------------------------------------------
<S> <C> <C>
Railroad:
Road and other ... $2,938 $2,551
Equipment ........ 2,270 2,181
- -------------------------------------------------
Total Railroad ..... 5,208 4,732
Trucking ........... 297 272
Other .............. 32 49
- -------------------------------------------------
Total .............. $5,537 $5,053
- -------------------------------------------------
</TABLE>

6. INCOME TAXES

Components of income tax expense, excluding discontinued operations, are as
follows:

<TABLE>
<CAPTION>
- --------------------------------------------------------------
Millions of Dollars 1997 1996 1995
- --------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal .......... $ (50) $ 200 $ 166
State ............ (6) 14 (3)
- --------------------------------------------------------------
Total current .. (56) 214 163
- --------------------------------------------------------------
Deferred:
Federal .......... 270 149 130
State ............ 30 17 21
- --------------------------------------------------------------
Total Deferred ... 300 166 151
- --------------------------------------------------------------
Total .............. $ 244 $ 380 $ 314
- --------------------------------------------------------------
</TABLE>

Deferred tax liabilities (assets), excluding discontinued operations,
comprise the following:

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
Millions of Dollars 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C>
Net current deferred tax asset ......... $ (127) $ (118)
- ------------------------------------------------------------------------
Excess tax over book depreciation ...... 7,050 6,891
State taxes - net ...................... 504 517
SP merger reserves ..................... (235) (357)
Long-term liabilities .................. (208) (292)
Retirement benefits .................... (307) (288)
Alternative minimum tax ................ (201) (173)
Net operating loss ..................... (528) (560)
Other .................................. 177 201
- ------------------------------------------------------------------------
Net long-term deferred tax liability ... 6,252 5,939
- ------------------------------------------------------------------------
Net deferred tax liability ............. $ 6,125 $ 5,821
- ------------------------------------------------------------------------
</TABLE>

The Corporation has a deferred tax asset reflecting the benefits of
$1.5 billion in Southern Pacific net operating loss carryforwards (NOL), which
expire as follows:

<TABLE>
<CAPTION>
- -------------------------------------------
Millions of Dollars
- -------------------------------------------
<S> <C>
Expiring December 31:
2002 ................ $ 455
2003 ................ 262
2004 ................ 134
2005 ................ 136
2006 ................ 226
2007 ................ --
2008 ................ 202
2009 ................ 94
- -------------------------------------------
Total ......................... $ 1,509
- -------------------------------------------
</TABLE>

The Internal Revenue Code of 1986, as amended, limits a corporation's
ability to utilize its NOLs with certain changes in the ownership of a
corporation's stock. The Corporation does not expect that those limitations will
have an adverse impact on its ability to utilize the NOLs. The Corporation has
analyzed its NOLs and other deferred tax assets and believes a valuation
allowance is not necessary.

42 Notes to the Financial Statements
<PAGE> 40
A reconciliation between statutory and effective tax rates of
continuing operations is as follows:

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory tax rate ...... 35.0% 35.0% 35.0%
State taxes - net ....... 2.3 1.8 1.2
Goodwill amortization ... 1.3 0.7 0.9
Dividend exclusion ...... (1.6) (1.4) (2.3)
Tax settlement .......... (0.9) (2.3) --
Other ................... (0.1) 0.3 (1.1)
- -------------------------------------------------------------------------
Effective tax rate ...... 36.0% 34.1% 33.7%
- -------------------------------------------------------------------------
</TABLE>

Net payments of income taxes were $64 million in 1997, $108 million in 1996 and
$91 million in 1995.

7. DEBT

Total debt is summarized below:

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Millions of Dollars 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Notes and debentures, 3.00% to
10.00% due through 2054 ................... $ 3,929 $ 4,051
Capitalized leases .......................... 1,251 1,137
Equipment obligations, 5.80% to
10.30% due through 2012 ................... 910 1,048
Commercial paper and bid notes, average
of 6.10% in 1997 and 5.82% in 1996 ........ 1,743 899
Term floating rate debt, 5.71% to
6.16% due through 2002 .................... 392 392
Mortgage bonds, 4.25% to 5.00%
due through 2030 .......................... 176 176
Credit facility borrowings, average
of 5.70% in 1996 .......................... -- 175
Tax-exempt financings, 3.99% to
4.27% due through 2026 .................... 168 168
Unamortized discount ........................ (51) (19)
- ------------------------------------------------------------------------------
Total debt .................................. 8,518 8,027
Less current portion ........................ (233) (127)
- ------------------------------------------------------------------------------
Total long-term debt ........................ $ 8,285 $ 7,900
- ------------------------------------------------------------------------------
</TABLE>

Debt maturities for each year, 1998 through 2002, are $233 million,
$426 million, $620 million, $2.4 billion and $612 million, respectively.
Interest payments approximate gross interest expense.

Approximately 24% of all rail equipment and other railroad properties
secures outstanding equipment obligations and mortgage bonds.

The Corporation has $2.8 billion of credit facilities with various
banks designated for general corporate purposes, of which $0.9 billion is unused
at December 31, 1997. These facilities expire in 2001. Commitment fees and
interest rates payable under these facilities are similar to fees and rates
available to comparably rated corporate borrowers.

To the extent the Corporation has long-term credit facilities
available, commercial paper borrowings and other current maturities of long-term
debt of $1.9 billion, which are due within one year, have been classified as
long-term debt maturing in the year 2001. This classification reflects the
Corporation's intent to refinance these short-term borrowings and current
maturities of long-term debt on a long-term basis through the issuance of
additional commercial paper or new long-term financings, or by using currently
available long-term credit facilities if alternative financing is not available.

The Corporation is subject to certain restrictions related to the
payment of cash dividends. The amount of retained earnings available for
dividends under the most restrictive test was $2.7 billion at December 31, 1997.

Notes to the Financial Statements 43
<PAGE> 41
8. LEASES

The Corporation leases certain locomotives, freight cars, trailers and other
property. Future minimum lease payments for capital and operating leases with
initial or remaining non-cancelable lease terms in excess of one year as of
December 31, 1997 are as follows:

<TABLE>
<CAPTION>
- --------------------------------------------------------------
Operating Capital
Millions of Dollars Leases Leases
- --------------------------------------------------------------
<S> <C> <C>
1998 ............................... $ 419 $ 170
1999 ............................... 394 183
2000 ............................... 342 169
2001 ............................... 280 186
2002 ............................... 218 163
Later years ........................ 1,659 1,447
- --------------------------------------------------------------
Total minimum payments ............. $3,312 2,318
- ------------------------------------------------
Amount representing interest ....... (1,067)
- --------------------------------------------------------------
Present value of minimum lease payments $ 1,251
- --------------------------------------------------------------
</TABLE>

Rent expense for operating leases with terms exceeding one month was
$387 million in 1997, $350 million in 1996 and $236 million in 1995. Contingent
rentals and sub-rentals are not significant.

9. RETIREMENT PLANS

The Corporation provides defined benefit pension plan benefits to eligible
non-union employees through qualified and non-qualified (supplemental) pension
plans. Railroad employees are covered by the Railroad Retirement System
(System). Contributions made to the System are expensed as incurred and
amounted to approximately $392 million in 1997, $275 million in 1996 and $200
million in 1995. In addition, retiree medical benefits and life insurance are
provided for eligible non-union employees through unfunded benefit plans.

PENSION BENEFITS

Qualified and non-qualified pension benefits are based on years of service and
the highest compensation during the latest years of employment. The qualified
plans are funded based on the Projected Unit Credit actuarial funding method
and are funded at not less than the minimum funding standards set forth in the
Employee Retirement Income Security Act of 1974, as amended. The Corporation
has settled a portion of the non-qualified unfunded supplemental plan's
accumulated benefit obligation by purchasing annuities.

Pension cost includes the following components:

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
Millions of Dollars 1997 1996 1995
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits
earned during the period ... $ 33 $ 31 $ 28
Interest on projected
benefit obligation ......... 122 89 80
Return on assets:
Actual (gain)loss .......... (271) (163) (181)
Deferred gain (loss) ....... 152 77 111
Net amortization costs ....... 1 6 8
- -----------------------------------------------------------------------
Charge to operations ......... $ 37 $ 40 $ 46
- -----------------------------------------------------------------------
</TABLE>

The projected benefit obligation was determined using a discount rate
of 7.00% and 7.50% in 1997 and 1996, respectively. The estimated rate of salary
increase approximated 5.00% and 5.50% in 1997 and 1996, respectively. The
expected long-term rate of return on plan assets was 8.00% in both years. The
change in assumptions will not significantly affect 1998 pension cost. As of
year-end 1997 and 1996, approximately 32% and 37%, respectively, of the funded
plans' assets were held in fixed-income and short-term securities, with the
remainder in equity securities.

44 Notes to the Financial Statements
<PAGE> 42
The funded status of the Corporation's defined benefit pension plans is
as follows:

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Assets Accumulated
Exceed Benefits
Accumulated Exceed
Benefits Assets (a)
Millions of Dollars 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Plan assets at fair value .................. $ 1,436 $ 1,239 $ 421 $ 395
- -------------------------------------------------------------------------------------------------------------
Actuarial present value
of benefit obligations:
Vested benefits .......................... 1,108 904 501 431
Non-vested benefits ...................... 80 58 6 11
- -------------------------------------------------------------------------------------------------------------
Accumulated benefit
obligation ............................... 1,188 962 507 442
Additional benefits
based on estimated
future salaries .......................... 139 132 16 54
- -------------------------------------------------------------------------------------------------------------
Projected benefit
obligation ............................... 1,327 1,094 523 496
- -------------------------------------------------------------------------------------------------------------
Plan assets (over) under projected benefit
obligation ............................... (109) (145) 102 101
Unamortized net transaction asset
(obligation) ............................. 20 24 (5) (11)
Unrecognized prior service
cost ..................................... (119) (38) 2 (26)
Unrecognized net gain ...................... 415 324 3 2
Minimum liability .......................... -- -- 32 42
- -------------------------------------------------------------------------------------------------------------
Pension liability .......................... $ 207 $ 165 $ 134 $ 108
- -------------------------------------------------------------------------------------------------------------
</TABLE>

(a) Includes the Corporation's non-qualified supplemental pension plan and the
Southern Pacific qualified pension plan in both 1997 and 1996.