UNION PACIFIC CORP, 10-K405, 1999-03-25

UNION PACIFIC CORP
10-K405, 1999-03-25
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 (NO FEE REQUIRED)
For the fiscal year ended December 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[ ] SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _________ to _________

Commission file number 1-6075

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. [X].

___________________________________

As of February 26, 1999 the aggregate market value of the registrant's
Common Stock held by non-affiliates (using the New York Stock Exchange closing
price) was approximately $10,973,121,951.

The number of shares outstanding of the registrant's Common Stock as of
February 26, 1999 was 247,579,048.

Portions of the following documents are incorporated by reference into this
Report: (1) registrant's Annual Report to Shareholders for the year ended
December 31, 1998 (Parts I, II and IV); and (2) registrant's definitive Proxy
Statement for the annual meeting of stockholders to be held on April 16, 1999
(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, the Corporation or the Company),
incorporated in Utah in 1969, consists of two major transportation segments,
rail and trucking, operating principally in the United States.

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) (collectively the Railroad). The Railroad is a Class I railroad
that operates the largest rail system in the United States. The Corporation
finalized the integration of CNW in 1996 and expects to complete the integration
of the operations of Southern Pacific over the next three years.

The Corporation's other major line of business is truck transportation.
Overnite Transportation Company (Overnite or OTC), a major interstate trucking
company specializing in less-than-truckload (LTL) shipments, serves all 50
states and portions of Canada and Mexico through 165 service centers located
throughout the United States.

CORPORATE REORGANIZATION

In 1998, UPC continued implementing its strategy of refocusing on its core rail
transportation business. The implementation of this strategy began with the 1994
sale of USPCI, Inc., the Corporation's waste-management business. Since then,
the Corporation disposed of its oil and gas operations, sold its logistics
business and attempted to sell its trucking operations. At the same time, the
Corporation invested heavily in rail assets creating the largest rail system in
the United States. The Corporation's rail investments included the 1995 purchase
of CNW the nation's eighth largest railroad, the 1996 acquisition of Southern
Pacific the country's sixth largest railroad, and the 1997 investment in the
Pacific-North and Chihuahua Pacific lines in Mexico.

Key strategic transactions in 1998, 1997 and 1996 were as follows:

OVERNITE DIVESTITURE - In May 1998, the Corporation's Board of Directors
approved a formal plan to divest UPC's investment in Overnite through an initial
public offering (IPO). UPC recorded a $262 million after-tax loss from
discontinued operations in the second quarter of 1998 to provide for the
expected loss from the sale of Overnite (see Note 1 to the Corporation's
consolidated financial statements, which are incorporated by reference in Item 8
of this Report on Form 10-K (the financial statements)). During the second half
of 1998, UPC attempted to sell Overnite. However, market conditions deteriorated
in the third quarter of 1998 to the point that UPC decided not to consummate the
IPO. UPC also pursued a sale of OTC to strategic buyers. Based upon market
conditions, a divestiture of OTC within the one-year time frame prescribed by
generally accepted accounting principles (GAAP) for classification

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as discontinued operations was no longer reasonably assured. As a result, in the
fourth quarter of 1998, the Corporation reclassified Overnite's results to
continuing operations and reversed the $262 million loss from discontinued
operations. In the fourth quarter of 1998, the Corporation also recorded a $547
million pre-and after-tax charge to reflect an impairment of Overnite's goodwill
that was recorded in continuing operations. Previously reported results for the
second and third quarters of 1998 have been restated to reflect Overnite's
earnings in continuing operations.

SKYWAY - In November 1998, the Corporation completed the sale of Skyway Freight
Systems, Inc. (Skyway), a wholly-owned subsidiary. Skyway provided contract
logistics and supply chain management services. The proceeds were used to repay
outstanding debt. The sale of Skyway generated a net, after-tax loss of $50
million, of which $40 million was recognized in the fourth quarter of 1997 (see
Notes 3 and 13 to the consolidated financial statements).

MEXICAN RAILWAY CONCESSION - During 1997, the Corporation's rail subsidiary,
UPRR, 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 on the equity method. The
consortium assumed operational control of both lines in 1998. In January 1999,
the Corporation signed a letter of intent to acquire an additional 13% ownership
interest.

SOUTHERN PACIFIC - UPC consummated the acquisition of Southern Pacific in
September 1996. SP was acquired for $4.1 billion (60% of the outstanding
Southern Pacific common shares were converted into UPC common stock, and the
remaining 40% of the outstanding shares were acquired for 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. During 1998, UPC continued its integration of SP's rail operations. This
process is expected to be completed over the next three years (see Note 2 to the
consolidated financial statements).

RESOURCES - In July 1995, the Corporation's Board of Directors approved a formal
plan to divest UPC's natural resources business, Union Pacific Resources Group
Inc. (Resources), through an IPO by Resources, followed by a pro-rata
distribution of 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 in September 1996, the Corporation's Board of
Directors declared a special dividend consisting of the shares of Resources
common stock owned by UPC. Resources' results have been reported as discontinued
operations in the Corporation's 1996 financial statements.

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SERVICE ISSUES

The Corporation's results in 1998 continued to be adversely affected by the
congestion on the Railroad's system that began in the third quarter of 1997.
However, the Railroad's service recovery efforts resulted in significant
improvements in operating and financial results beginning in the latter half of
the year.

SERVICE RECOVERY - Congestion in and around Houston and the coastal areas of
Texas and Louisiana (the Gulf Coast region) began in the third quarter of 1997.
System congestion started in the Gulf Coast region and spread throughout the
system during the third and fourth quarters of 1997, and continued to adversely
affect the Railroad's operations and financial results in 1998. In response to
its operational difficulties, the Railroad adopted certain measures beginning in
1997 designed to alleviate the congestion problems and improve the efficiency
and flexibility of rail operations. To ease system congestion, the Railroad
focused on reducing the number of cars on the system and restoring system
velocity by hiring additional train and engine employees, accelerating and
expanding locomotive purchases and leases, improving management of train crews,
and using outside carriers for haulage and train switching in congested areas.
In 1998, these efforts were supplemented by the institution of directional
running in parts of the Gulf Coast region, establishment of a joint dispatching
center in Texas, and extensive track maintenance and capacity expansion efforts
in UPRR's Central Corridor and southern tier. While in some cases the Railroad's
actions temporarily slowed service, they have resulted in improved system
velocity. Also in 1998, UPRR instituted several key initiatives including a new
long-term strategy to improve the effectiveness of the organization. This effort
is focused on culture change, business process improvement and decentralization,
each of which is designed to improve customer satisfaction, increase employee
involvement and improve operational efficiency and financial results. The
combination of all of the steps described above (the Service Recovery Process)
has allowed the Railroad to alleviate congestion and improve operations
throughout the UPRR system. However, despite these improvements, the Railroad's
operations and financial results were significantly impacted by congestion in
1998.

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Hurricane Georges, which disrupted operations in New Orleans and other parts of
Louisiana at the end of September, heavy rains that moved from northern Texas
through Oklahoma and into the Kansas City area in early October, heavy rains
that resulted in severe flooding in central and southern Texas later in October,
and heavy rains and flooding across parts of Oklahoma and Kansas in early
November. The Railroad was able to respond quickly to these problems by
rerouting traffic, repairing damages caused by washouts and restoring service
without severe or lengthy disruptions to the Railroad's operations, which
reflected the success of the Railroad's Service Recovery Process in addressing
service and congestion problems. Despite these external difficulties, the
Railroad was able to recoup the financial loss generated in the first half of
1998 and reported net income for the full year of 1998.

OPERATIONS

A description of UPC's two major transportation segments, rail and trucking,
which operate principally in the United States, follows.

RAIL

OPERATIONS - The Railroad is the largest rail system in the United States, with
nearly 34,000 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 Company's main rail
competitor is Burlington Northern Santa Fe Corporation and its rail subsidiary,
The Burlington Northern and Santa Fe Railway Company (BNSF), which manages the
nation's second largest Class I railroad and operates parallel routes in many of
the Company's main traffic corridors. In addition, the Company's operations are
conducted in corridors served by other competing railroads and by motor
carriers. Motor carrier competition is particularly strong for intermodal
traffic. Because of the proximity of the Railroad's routes to major inland and
Gulf Coast waterways, barge competition can be particularly pronounced,
especially for grain and bulk commodities.

Major categories of freight hauled by the Railroad are agricultural
products, automotive, chemicals, energy (primarily coal), industrical products
and intermodal. Percentages of revenue ton-miles and commodity revenue for the
major commodities hauled by the Railroad are presented on page 49 of the 1998
Annual Report to Shareholders (Annual Report) and are incorporated herein by
reference.

EMPLOYEES - Union Pacific Corporation employs approximately 65,000 people.
Approximately 87% of the Railroad's 53,000 employees are represented by rail
unions. During 1996, nearly all of UPRR's unionized workforce ratified five-year

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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 SP 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. The terms
of ratified and pending labor agreements are not expected to have a material
adverse effect on the Corporation's results of operations. The current national
bargaining agreement will end in 2000. The Corporation expects notices for
negotiations to be served in November 1999.

A separate Annual Report on Form 10-K for the year ended December 31,
1998, will be filed by UPRR and will contain additional information concerning
that company.

TRUCKING

OPERATIONS - The Corporation's other major line of business is truck
transportation. Overnite, a major interstate trucking company specializing in
LTL shipments, serves all 50 states and portions of Canada and Mexico through
165 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.

EMPLOYEES - As the nation's largest predominantly 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, OTC has received 89 petitions
for union elections at 66 of its 165 service centers. Twenty-one service
centers, representing approximately 14% of Overnite's nationwide workforce,
voted for union representation, and the Teamsters have been certified and
recognized as the bargaining representative for such employees. Elections
affecting approximately 400 additional employees are unresolved, and there are
no elections currently scheduled. To date, Overnite has not entered into any
collective bargaining agreements with the Teamsters; however, the Company is
engaged in collective bargaining negotiations over union contract demands at the
21 represented locations.

OPERATIONAL INITIATIVES - During 1998, 1997 and 1996, Overnite benefited from
several initiatives 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. OTC has
also benefited from growth in its customer base generated by continuing
improvements in its service levels.

6
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OTHER INFORMATION

Additional information for UPC's principal business segments is presented on
pages 4 through 15, in Note 1 to the consolidated financial statements on pages
36 through 39, and on pages 49 and 50 of the Annual Report, and such information
(excluding photographs on pages 4 through 15, none of which supplements the text
and which are not otherwise required to be disclosed herein) is incorporated
herein by reference. The map of the Corporation's operations on pages 52 and 53
of the Annual Report is also incorporated herein by reference.

GOVERNMENTAL REGULATION - UPC's operations are currently subject to a variety of
Federal, state and local regulations. The most significant areas of regulation
are described below. See also the discussion of certain regulatory proceedings
in "Item 3. Legal Proceedings", which is incorporated herein by reference.

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.

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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 cleanup, 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 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 owners or operators of facilities at which hazardous substances have
been disposed of, or as generators or transporters of hazardous substances
disposed of at other locations. 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 affect materially 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.

Information concerning environmental claims and contingencies and estimated
attendant remediation costs is set forth in Note 12 to the consolidated
financial statements on page 48 of the Annual Report. Such information is
incorporated herein by reference.

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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 claims, 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 Corporation is fully
successful in recovering from the effects of the Railroad's congestion-related
problems and implementing its financial and operational initiatives, industry
competition and legislative and/or regulatory developments, natural events such
as severe weather, floods and earthquakes, the effects of adverse general
economic conditions, changes in 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.

ITEM 3. LEGAL PROCEEDINGS
-----------------

SOUTHERN PACIFIC ACQUISITION
- ----------------------------

On August 12, 1996, the STB served a decision (the Decision) approving the
acquisition of control of Southern Pacific by the Corporation, subject to
various conditions. The acquisition was consummated on September 11, 1996.
Various appeals were filed with respect to the Decision, and all such appeals
were ultimately consolidated in the U.S. Court of Appeals for the District of
Columbia Circuit. All of the appeals have since been withdrawn except the appeal
of the Western Coal Traffic League. Oral argument in the case was held on
September 11, 1998, and the case is awaiting decision. The Corporation believes
that it is unlikely that the disposition of the remaining appeal will have a
material adverse impact on its consolidated financial condition or its results
of operations.

Among the conditions to the STB's approval of the Southern Pacific
acquisition was the requirement that the STB retain oversight jurisdiction for
five years to examine whether the conditions imposed under the Decision remain
effective to address the competitive harms caused by the merger. On December 21,
1998, the STB served a decision in the second annual general oversight
proceeding to review the implementation of the merger and the effectiveness of
the conditions imposed under the Decision. The STB concluded that,
notwithstanding

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the service problems that arose in the western United States following the
merger, the merger had thus far not caused any substantial competitive harm. The
STB rejected various requested adjustments to the merger conditions and refused
to impose additional conditions on the merger other than those imposed in
connection with the Gulf Coast Oversight Proceeding (defined below). The STB
ordered the Corporation to continue to report quarterly on merger implementation
and to provide a comprehensive summary presentation in the progress reports due
on July 1, 1999. The STB order also requires interested parties to file comments
concerning the next annual oversight proceeding on August 16, 1999, with replies
being due September 3, 1999.

SURFACE TRANSPORTATION BOARD PROCEEDINGS
- ----------------------------------------

In addition to the annual oversight proceeding, the Corporation and the Railroad
were parties to a separate proceeding before the STB that terminated during the
fourth quarter of 1998. This proceeding, which was initiated in March 1998
under the STB's continuing oversight jurisdiction with respect to the merger of
the Corporation and Southern Pacific, was for the purpose of considering
proposals for new remedial conditions to the merger pertaining to service in the
Houston, Texas area and surrounding coastal areas of Texas and Louisiana (the
Gulf Coast Oversight Proceeding). Various parties filed applications in the Gulf
Coast Oversight Proceeding seeking the imposition of additional conditions to
the merger including, among other things, requests by certain parties for
conditions that would effectively open up access to shippers on the Railroad's
lines and permit competing carriers to serve those shippers. On December 21,
1998, the STB issued a decision in the Gulf Coast Oversight Proceeding which
imposed the following additional conditions: (i) a "clear route" condition
pursuant to which the Joint Director of the UPRR/BNSF dispatching center in
Spring, Texas was granted authority to route traffic through Houston over any
available route, even a route over which the owner of a train does not have
trackage rights, thereby enhancing efficiency and facilitating the smooth
movement of rail traffic through the Houston area; (ii) the granting of
approximately four miles of additional trackage rights to BNSF to create a new
interchange with a short-line railroad in the Austin, Texas area; and (iii) the
imposition of certain annual reporting requirements on the Railroad with respect
to the implementation of its infrastructure plan for the Houston/Gulf Coast
region. The STB denied all other condition requests, including requests that
other railroads be granted "open access" to shippers not currently served by
other carriers on the Railroad's lines. The STB stated that the propriety of an
"open access" regulatory scheme for the railroad industry is a matter more
appropriately addressed by Congress.

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The Railroad was also party to another proceeding before the STB that
terminated during the fourth quarter of 1998. This proceeding arose as a result
of a petition filed by Kansas City Southern Railway Company (KCS) and Texas
Mexican Railway Company (Tex Mex) challenging actions taken by UPRR and BNSF to
rationalize the operations of the Houston Belt & Terminal Railway Company, of
which UPRR and BNSF each owns 50%. On December 21, 1998, the STB entered an
order denying this and related petitions filed by KCS and Tex Mex.

BOTTLENECK PROCEEDINGS
- ----------------------

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 over a
bottleneck segment (a line of railroad that is served by only one railroad
between a junction and an exclusively-served shipper facility). 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 that generally reaffirmed earlier rulings regarding a rail
carrier's obligation to provide rates for bottleneck segments and assured the
right of rail carriers to differentially price traffic based upon demand. 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 common carrier rate for the
bottleneck portion of the movement which can be legally challenged before the
STB apart from the contract rate for the remainder of the move. The STB
decisions were appealed to the U.S. Court of Appeals for the Eighth Circuit. On
February 10, 1999, the Eighth Circuit Court of Appeals entered an order
affirming the STB's decision and the dismissal of the two complaints against
UPRR and SPT. The Court also dismissed a cross-appeal by the railroads
challenging the aspect of the STB's decision finding that a shipper could
challenge the reasonableness of a published rate over only part of a joint route
if the rest of the route was covered by a contract. The ground for the Court's
dismissal of the cross-appeal was that no actual controversy involving such a
situation was presented in the case before the STB and, accordingly, there was
no actual case or controversy for the Court to decide. It is anticipated that
the same issues will be decided in a pending appeal before the U.S. Court of
Appeals for the District of Columbia Circuit. In that case, which was filed by
FMC Corporation and an affiliate with the STB in October 1997 and subsequently
appealed to the D.C. Circuit, the Railroad is challenging a December 1997 STB
decision requiring it to publish separately challengeable bottleneck segment

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rates for the portion of a route not covered by a contract. This appeal had
been stayed pending disposition of the appeals by the Eighth Circuit Court of
Appeals.

CUSTOMER CLAIMS
- ---------------

Certain customers have submitted claims for damages related to shipments delayed
by the Railroad as a result of congestion problems, 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 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 the Railroad. The Corporation
has accrued $456 million for these claims ($370 million in 1998 and $86 million
in 1997).

SHAREHOLDER LITIGATION
- ----------------------

The Corporation and certain of its directors and officers are defendants in two
purported class actions that have been consolidated into one proceeding. The
consolidated complaint alleges, among other things, that the Corporation
violated the Federal securities laws by failing to disclose material facts and
making materially false and misleading statements concerning the service,
congestion and safety problems encountered following the Corporation's
acquisition of Southern Pacific in 1996. These lawsuits were filed in late 1997
in the United States District Court for the Northern District of Texas and seek
to recover unspecified amounts of damages. Management believes that the
plaintiffs' claims are without merit and intends to defend them vigorously. The
defendants have moved to dismiss this action, and the motion has been fully
briefed.

In addition to the class action litigation, a purported derivative action
was filed on behalf of the Corporation and the Railroad in September 1998 in the
District Court for Tarrant County, Texas, naming as defendants the then-current
and certain former directors of the Corporation and the Railroad and, as nominal
defendants, the Corporation and the Railroad. The derivative action alleges,
among other things, that the named directors breached their fiduciary duties to
the Corporation and the Railroad by approving and implementing the Southern
Pacific merger without informing themselves of its impact or ensuring that
adequate controls were put in place and by causing UPC and the Railroad to make
misrepresentations about the Railroad's service problems to the financial
markets and regulatory authorities. The Corporation's Board of Directors
established a special litigation committee consisting of three independent
directors to review the plaintiffs' allegations and determine whether it is in
UPC's best interest to pursue them. The committee has unanimously concluded that
further prosecution of the derivative action on behalf of the Corporation and
the

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<PAGE>

Railroad is not in the best interest of either such company. Accordingly, the
Corporation and the Railroad have filed a motion with the Court to dismiss the
derivative action. The individual defendants also believe that these claims are
without merit and intend to defend them vigorously.

LABOR MATTERS
- -------------

The General Counsel of the National Labor Relations Board (NLRB) is seeking a
bargaining order remedy in 12 cases involving Overnite where a Teamsters local
union lost a representation election. 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. A thirteenth bargaining order case involving Overnite has tentatively
been settled by the parties thereto without imposing a requirement that Overnite
bargain with the Teamsters local involved in the case. In four of the remaining
12 cases, an administrative law judge has ruled that the bargaining order remedy
is warranted. Overnite has appealed that ruling to the NLRB. 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 in the bargaining
order cases and intends to continue to defend them aggressively.

ENVIRONMENTAL MATTERS
- ---------------------

The U.S. 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. Six of the seven
incidents are related to derailments dating back to 1992. Six of the incidents
involve alleged releases from ruptured locomotive fuel tanks, and one incident
in 1996 involves an alleged release of sulfuric acid near the Tennessee Pass.

The Railroad has been named as a defendant in a civil action brought by the
California Department of Fish and Game, Office of Spill Prevention and Response
on April 10, 1998. The complaint alleges violations of California Fish and Game
Code Section 5650, California Business and Professions Code Section 17200, Civil
Code Sections 3479 and 3480, and damage to the waters of California

13
<PAGE>

for which the Department of Fish and Game allege trusteeship. The complaint
results from derailments and alleged releases of diesel fuel oil during 1995 in
the Feather River Canyon in Butte County, California. The Complaint seeks
penalties, exemplary damages, natural resource damages and unspecified
injunctive relief.

The Railroad has been named as a defendant in a criminal misdemeanor action
brought by the State of California in the Municipal Court of Placer County,
California on February 24, 1998. The complaint alleges a violation of California
Fish and Game Code Section 5650 as a result of a diesel fuel spill in
Norden, California in February 1997. In addition, the California Department of
Fish and Game is seeking penalties, monitoring costs and natural resource
damages under state water statutes, and the EPA is seeking penalties for
violation of the Clean Water Act in connection with the same incident.

In March 1998, the Railroad received notice that the Railroad and Clean
Harbors, a waste disposal firm, were the subject of a criminal investigation by
the EPA and the Federal Bureau of Investigation. Tank cars containing hazardous
waste billed to Clean Harbors' transload facility in Sterling, Colorado were
held in the Railroad's Sterling, Colorado rail yard for periods longer than ten
days prior to placement in Clean Harbors' facility, allegedly in violation of
hazardous waste regulations. The Railroad is cooperating with the investigation
and has responded to grand jury subpoenas. A finding of violation could result
in significant criminal or civil penalties.

The Railroad has received approximately 20 Notices of Violation (NOVs) from
the South Coast Air Quality Management District (the District) relating to fumes
emitted from idling diesel locomotives at Slover siding near the Railroad's yard
in West Colton, California. Trains awaiting crews or room to enter the West
Colton yard were parked at Slover siding with their engines running for various
amounts of time, causing exhaust fumes to enter the backyards and homes of
residents living along the siding. The District has cited the Railroad for
creating a public nuisance pursuant to the California Health and Safety Code and
the District's regulations. Each violation carries a maximum civil penalty of
$25,000 per day, which may be increased in some circumstances to $50,000 per
day. Although the Railroad modified its operating procedures for trains entering
the West Colton yard to reduce the problem, the District entered an order with
respect to the situation which the Railroad believes is an impermissible burden
on interstate commerce and is preempted by applicable federal law. The Railroad
filed an action in Federal district court seeking to overturn the District's
order on those grounds, but it is complying with the order in the interim. The
Court denied the Railroad's request for a preliminary injunction but set the
matter for summary judgment hearing on July 19, 1999 and trial on September 21,
1999. The Railroad and the District have not entered into discussions
concerning settlement of the outstanding NOVs pending resolution of this
lawsuit. Accordingly, the exact amount of any payment to the District in
connection with the NOVs cannot be determined at this time.

14
<PAGE>

The Railroad has received notification that the District Attorney for San
Bernardino County, California has opened an investigation into the Railroad's
handling of several hazardous material spills in Barstow and West Colton,
California. The incident in Barstow involved a rear-end collision between two
trains near Barstow in August 1997 that resulted in a spillage of locomotive
diesel fuel and leakage from two tank cars containing toxic chemicals. Three
incidents in the West Colton yard in 1998 involved leaking tank cars and spills
of diesel fuel from a derailed locomotive. The District Attorney's office is
investigating allegations that cleanup procedures were not undertaken promptly
and required notices were not given in connection with these incidents. An
initial indication of fines exceeding $250,000 with respect to these incidents
has been communicated by the District Attorney's office. While the Railroad
expects to enter into settlement negotiations with the District Attorney's
office, the exact amount of any fines or penalties that may be required to be
paid as a part of any settlement cannot be determined at this time.

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.

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

Not applicable.

15
<PAGE>

Executive Officers of the Registrant and
----------------------------------------
Principal Executive Officers of Subsidiaries
--------------------------------------------

<TABLE>
<CAPTION>
BUSINESS
EXPERIENCE
DURING
PAST FIVE
NAME POSITION AGE YEARS
---- -------- --- -----
<S> <C> <C> <C>
Richard K. Davidson Chairman, President and Chief 57 (1)
Executive Officer
of UPC and Chairman and Chief Executive Officer
of the Railroad

Gary M. Stuart Executive Vice President - Finance 58 (2)

L. Merill Bryan, Jr. Senior Vice President - Information Technologies 55 (3)

Barbara W. Schaefer Senior Vice President - Human Resources 45 (4)

Robert F. Starzel Senior Vice President - Corporate Relations 58 (5)

Carl W. von Bernuth Senior Vice President, General Counsel and 55 (6)
Corporate Secretary

James R. Young Senior Vice President - Finance and Controller 46 (7)

Charles R. Eisele Vice President - Strategic Planning 49 (8)

Bernie R. Gutschewski Vice President - Taxes 48 (9)

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

Mary S. Jones Vice President and Treasurer 46 (10)

Gary F. Schuster Vice President Corporate Relations 57 Current
Position

Jerry R. Davis Vice Chairman of the Railroad 60 (11)

James A. Shattuck Vice Chairman of the Railroad 59 (12)
</TABLE>

16
<PAGE>

<TABLE>
<CAPTION>
BUSINESS
EXPERIENCE
DURING
PAST FIVE
NAME POSITION AGE YEARS
---- -------- --- -----
<S> <C> <C> <C>
Ivor J. Evans President and Chief Operating Officer of the 56 (13)
Railroad

Dennis J. Duffy Executive Vice President Operation of 48 (14)
the Railroad

John J. Koraleski Executive Vice President - Marketing and Sales 48 (15)
of the Railroad

R. Bradley King Executive Vice President - 51 (16)

Network Design and
Integration of the Railroad

Leo H. Suggs Chairman and Chief Executive Officer of Overnite 60 (17)

</TABLE>

________________________

17
<PAGE>

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 until August
1995, Chairman of the Railroad until November 1996 and Chairman and Chief
Executive Officer of the Railroad since November 1996.

(2) Mr. Stuart was elected to his current position effective June 1998. Prior
thereto, he was Vice President and Treasurer of UPC.

(3) Mr. Bryan was elected to his current position effective May 1997. Prior
thereto, he was President and Chief Executive Officer of Union Pacific
Technologies, Inc., a former subsidiary of UPC.

(4) 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 Services of UPC.

(5) Mr. Starzel was elected to his current position effective April 1998. From
September 1996 to April 1998 he was Vice President Western Region of the
Railroad and prior thereto he was Vice Chairman of Southern Pacific Rail
Corporation.

(6) Mr. von Bernuth was elected Corporate Secretary effective April 1997. He
has been Senior Vice President and General Counsel during the past five
years.

(7) Mr. Young was elected Controller of UPC and Senior Vice President - Finance
of the Railroad effective March 1999 and Senior Vice President - Finance of
UPC effective June 1998. He served as Treasurer of the Railroad from June
1998 to March 1999. He was Vice President - Customer Service Planning and
Quality of the Railroad from April 1998 to June 1998, Vice President -
Quality and Operations Planning from September 1997 to April 1998, Vice
President - Finance and Quality from September 1995 to September 1997, and
prior thereto he was Vice President - Re-engineering of the Railroad.

(8) Mr. Eisele was elected to his current position effective March 1999. He was
Vice President-Strategic Planning from September 1997 to March 1999. 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.

(9) Mr. Gutschewski was elected Vice President Taxes effective August 1998.
Prior thereto, he was Assistant Vice President Tax and Finance Management
of the Railroad.

18
<PAGE>

(10) Ms. Jones was elected to her current position effective March 1999. She
served as Vice President Investor Relations from June 1998 to March 1999.
She was Assistant Vice President Treasury and Assistant Treasurer of UPC
from September 1996 to June 1998 and prior thereto she was Assistant
Treasurer of UPC.

(11) Mr. Davis was elected to his current position in September 1998 and will
serve in such position until his retirement effective March 31, 1999. From
November 1996 to September 1998 he was President and Chief Operating
Officer of the Railroad. 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. Prior thereto, he served as Executive Vice President and Chief
Operating Officer of CSX Transportation, Inc., a company engaged in
transportation including railroad; ocean container-shipping; intermodal and
trucking; and contract logistics.

(12) Mr. Shattuck was elected to his current position effective March 1999.
Prior thereto, he served as Executive Vice President - Marketing and Sales
of the Railroad.

(13) Mr. Evans was elected to his current position effective September 1998.
Prior thereto, he was Senior Vice President of Emerson Electric Company, a
company engaged in the design, manufacture and sale of electrical,
electromechanical, and electronic products and systems.

(14) Mr. Duffy was elected to his current position effective September 1998. He
was Senior Vice President - Safety Assurance and Compliance Process from
October 1997 to September 1998. 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.

(15) Mr. Koraleski was elected to this position effective March 1999. He served
as Controller of UPC from August 1998 to March 1999 and as Executive Vice
President - Finance of the Railroad from May 1996 to March 1999. Prior to
May 1996, he was Executive Vice President Finance - and Information
Technologies of the Railroad.

(16) Mr. King was elected to his current position effective September 1998. He
was Executive Vice President - Operations from October 1997 to September
1998. He was Vice President - Transportation of the Railroad from November
1995 to October 1997. Prior thereto, he was Vice President - Risk
Management of the Railroad.

(17) Mr. Suggs was elected to his current position in April 1996. Prior thereto,
he was President and Chief Executive Officer of Preston Trucking Company,
Inc., a company engaged in truck transportation.

19
<PAGE>

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 29, 1999 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 the consolidated financial
statements on page 44 of the Annual Report. All 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 financial condition, changes in financial condition,
results of operations, cash flows, liquidity and capital resources, and other
matters is set forth in the Financial Review on pages 16 through 30 of the
Annual Report. All such information is incorporated herein by reference.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------

Information concerning market risk sensitive instruments is set forth under
Other Matters on pages 26 and 27 of the Annual Report and in Note 4 to the
consolidated financial statements on pages 40 and 41 of the Annual Report. All
such information is incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------

The Corporation's Consolidated Financial Statements, Significant Accounting
Policies, Notes to the Financial Statements, Business Segment Information and
Independent Auditors' Report are presented on pages 31 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.

20
<PAGE>

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 Election of 13 Directors segment 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 Section 16(a) Beneficial Ownership
Reporting Compliance segment of the Proxy Statement and is incorporated herein
by reference.

ITEM 11. EXECUTIVE COMPENSATION
----------------------

Information concerning compensation received by UPC's directors and certain
executive officers 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 8, 1999 by each of its directors and nominees for director,
its five most highly compensated executive officers, its directors and executive
officers as a group and certain beneficial owners is set forth in the Election
of 13 Directors, Security Ownership of Management, and Security Ownership of
Certain Beneficial Owners segments of the Proxy Statement and is incorporated
herein by reference.

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.

21
<PAGE>

PART IV
-------

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

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

The Consolidated Financial Statements, Significant Accounting Policies,
Notes to the Financial Statements and Independent Auditors' Report on
pages 31 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 consolidated financial statements referred to above.

(3) Exhibits
--------

Items 10(f) through 10(q) 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 November 19, 1998, are
incorporated herein by reference to Exhibit 3.1 to the Corporation's
Current Report on Form 8-K filed November 25, 1998.

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, 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).

22
<PAGE>

10(b) 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(c) Amended and Restated Registration Rights Agreement, dated as of July
12, 1996, among UPC, UP Holding Company, Inc., Union Pacific Merger
Co. and Southern Pacific Rail Corporation (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(d) Agreement, dated September 25, 1995, among UPC, UPRR, Missouri
Pacific Railroad Company (MPRR), 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(e) Supplemental Agreement, dated November 18, 1995, between UPC, UPRR,
MPRR, 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(f) 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(g) 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(h) Letter Agreement, dated September 8, 1998, between UPC and Mr. Ivor
J. Evans, is incorporated herein by reference to Exhibit 10.1 to the
Corporation's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.

23
<PAGE>

10(i) Letter Agreement, dated September 11, 1996, between UPC and Robert
Starzel.

10(j) Employment Agreement, dated as of October 26, 1994, between SP and
SPT, on the one hand, and Robert F. Starzel, on the other hand, is
incorporated herein by reference to Exhibit 10.10 to SP's Annual
Report on Form 10-K for the year ended December 31, 1994.

10(k) The 1988 Stock Option and Restricted Stock Plan of UPC, as amended
as of September 24, 1998, is incorporated herein by reference to
Exhibit 10.3 to the Corporation's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998.

10(l) The 1993 Stock Option and Retention Stock Plan of UPC, as
amended as of September 24, 1998, is incorporated herein by
reference to Exhibit 10.3 to the Corporation's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998.

10(m) 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(n) The Executive Life Insurance Plan of UPC, as amended October 1997,
is incorporated herein by reference to Exhibit 10(t) to the
Corporation's Annual Report on Form 10-K for the year ended December
31, 1997.

10(o) The UPC Stock Unit Grant and Deferred Compensation Plan for the
Board of Directors, as amended January 28, 1999.

10(p) Charitable Contribution Plan for Non-Employee Directors of Union
Pacific Corporation 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.

10(q) Written Description of Other Executive Compensation Arrangements of
Union Pacific Corporation.

12 Ratio of Earnings to Fixed Charges.

24
<PAGE>

13 The inside front cover ("Financial Highlights"), as well as, pages 1
through 53, inclusive, of UPC's Annual Report to Shareholders for
the year ended December 31, 1998, but excluding photographs set
forth on pages 1 through 15, none of which supplements the text and
which are not otherwise required to be disclosed in this Annual
Report on Form 10-K.

18 Letter from Independent Auditors regarding change in accounting
principle.

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(a) Financial Data Schedule.

27(b) Financial Data Schedule (restated for the periods ended March 31,
June 30 and September 30, 1998).

27(c) Financial Data Schedule (restated for the periods ended March 31,
June 30 and September 30, 1997).

27(d) Financial Data Schedule (restated for the periods ended March 31,
June 30 and September 30, 1996).

27(e) Financial Data Schedule (restated for the years ended December 31,
1997, 1996 and 1995).

99(a) Financial Statements for the Fiscal Year ended December 31, 1998
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, 1998
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, 1998
required by Form 11-K for the Union Pacific Agreement Employee
401(k) Retirement Thrift Plan - to be filed by amendment.

99(d) Financial Statements for the Fiscal Year ended December 31, 1998
required by Form 11-K for the Chicago and North Western Railway
Company Profit Sharing and Retirement Savings Program - to be filed
by amendment.

25
<PAGE>

99(e) Financial Statements for the Fiscal Year ended December 31, 1998
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 19, 1998, UPC filed a Current Report on Form 8-K describing
a shareholder lawsuit discussed in Item 3. Legal Proceedings in this Form 10-K,
and filing certain documents in connection with UPC's Registration Statements on
Form S-3 for debt issued under the Corporation's Medium Term Note Program. This
Report was re-filed in its entirety on October 20, 1998 to provide the required
conformed signature that was inadvertently omitted from the original filing.

On October 26, 1998, UPC filed a Current Report on Form 8-K announcing UPC's
financial results for the third quarter of 1998.

On November 25, 1998, UPC filed a Current Report on Form 8-K announcing certain
amendments to UPC's by-laws adopted by UPC's Board of Directors on November 19,
1998, and filing a copy of such by-laws, as amended.

26
<PAGE>

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 25th day of March,
1999.

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 25th day of March, 1999, 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:

/s/ Gary M. Stuart
-------------------------------
Gary M. Stuart, Executive
Vice President - Finance

PRINCIPAL ACCOUNTING OFFICER:

/s/ James R. Young
------------------------------
James R. Young,
Senior Vice President - Finance
and Controller

27
<PAGE>

SIGNATURES - (Continued)

DIRECTORS:
- ----------

Philip F. Anschutz* Elbridge T. Gerry, Jr.*

Robert P. Bauman* William H. Gray, III*

Richard B. Cheney* Judith Richards Hope*

E. Virgil Conway* Richard J. Mahoney*

Thomas J. Donohue* John R. Meyer*

Spencer F. Eccles* Thomas A. Reynolds, Jr.*

Ivor J. Evans* Richard D. Simmons*

* By /s/ Thomas E. Whitaker
--------------------------------------
Thomas E. Whitaker, Attorney-in-fact

28
<PAGE>

UNION PACIFIC CORPORATION
EXHIBIT INDEX

EXHIBIT No. DESCRIPTION
- ----------- -----------

FILED WITH THIS STATEMENT
- -------------------------

10(i) Letter Agreement with Robert Starzel

10(o) The UPC Stock Unit Grant and Deferred Compensation Plan
for the Board of Directors, as amended January 28, 1999.

10(q) Written Description of Other Executive Compensation
Arrangements of Union Pacific Corporation

12 Ratio of Earnings to Fixed Charges

13 The inside front cover ("Financial Highlights") as well
as, pages 1 through 53, inclusive, of UPC's Annual
Report to Shareholders for the year ended December 31,
1998, but excluding photographs set forth on pages 1
through 15, none of which supplements the text and which
are not otherwise required to be disclosed in this
Annual Report on Form 10-K.

18 Letter from Independent Auditors regarding change in
accounting principle

21 Significant Subsidiaries of Union Pacific Corporation

23 Independent Auditors' Consent

24 Powers of attorney executed by the directors of UPC

27(a) Financial Data Schedule

27(b) Restated Financial Data Schedule for the Periods ended
March 31, June 30 and September 31, 1998

27(c) Restated Financial Data Schedule for the Periods ended
March 31, June 30 and September 31, 1997

27(d) Restated Financial Data Schedule for the Periods ended
March 31, June 30 and September 31, 1996

27(e) Restated Financial Data Schedule for the Years ended
December 31, 1997, 1996 and 1995
<PAGE>

INCORPORATED BY REFERENCE
- -------------------------

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 November 19,
1998, are incorporated herein by reference to Exhibit
3.1 to the Corporation's Current Report on Form 8-K
filed November 25, 1998.

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, 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 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(c) Amended and Restated Registration Rights Agreement,
dated as of July 12, 1996, among UPC, UP Holding
Company, Inc., Union Pacific Merger Co. and Southern
Pacific Rail Corporation (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).
<PAGE>

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(e) Supplemental Agreement, dated November 18, 1995, between
UPC, UPRR, MPRR, 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(f) 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(g) 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(h) Letter Agreement, dated September 8, 1998, between UPC
and Mr. Ivor J. Evans, is incorporated herein by
reference to Exhibit 10.1 to the Corporation's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1998.

10(j) Employment Agreement, dated as of October 26, 1994,
between SP and SPT, on the one hand, and Robert F.
Starzel, on the other hand, is incorporated herein by
reference to Exhibit 10.10 to SP's Annual Report on Form
10-K for the year ended December 31, 1994.
<PAGE>

10(k) The 1988 Stock Option and Restricted Stock Plan of UPC,
as amended as of September 24, 1998, is incorporated
herein by reference to Exhibit 10.3 to the Corporation's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.

10(l) The 1993 Stock Option and Retention Stock Plan of UPC,
as amended as of September 24, 1998, is incorporated
herein by reference to Exhibit 10.3 to the Corporation's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.

10(m) 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(n) The Executive Life Insurance Plan of UPC, as amended
October 1997, is incorporated herein by reference to
Exhibit 10(t) to the Corporation's Annual Report on Form
10-K for the year ended December 31, 1997.

10(p) Charitable Contribution Plan for Non-Employee Directors
of Union Pacific Corporation 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.

14 Pages 4 through 53, inclusive, of UPC's Annual Report to
Shareholders for the year ended December 31, 1998, but
excluding photographs set forth on pages 4 through 15,
none of which supplements the text and which are not
otherwise required to be disclosed in this Annual Report
on Form 10-K.

99(a) Financial Statements for the Fiscal Year ended December
31, 1998 required by Form 11-K for the UPC Thrift Plan -
to be filed by amendment.
<PAGE>

99(b) Financial Statements for the Fiscal Year ended December
31, 1998 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, 1998 required by Form 11-K for the Union Pacific
Agreement Employee 401(k) Retirement Thrift Plan - to be
filed by amendment.

99(d) Financial Statements for the Fiscal Year ended December
31, 1998 required by Form 11-K for the Chicago and North
Western Railway Company Profit Sharing and Retirement
Savings Program - to be filed by amendment.

99(e) Financial Statements for the Fiscal Year ended December
31, 1998 required by Form 11-K for the Southern Pacific
Rail Corporation Thrift Plan - to be filed by amendment.

<PAGE>

EXHIBIT 10 (I)
--------------

September 11, 1996

Personal & Confidential

Mr. Robert Starzel
Vice Chairman
Southern Pacific Rail Corporation
One Market Plaza, 8th Floor
San Francisco, CA 94105

Dear Bob:

We are pleased that commencing with the merger (the "Merger") of Southern
Pacific Rail Corporation ("SP Rail") into a subsidiary of Union Pacific
Corporation, currently expected to occur on September 11, 1996, you will
continue in the employment of Union Pacific Railroad Company ("UPRR") and its
affiliates as Vice President, Western Region, based in San Francisco, CA.

You will receive an annual base salary of $350,000 (less applicable taxes
and withholding) and, after January, 1997, will participate in the Executive
Incentive Plan of Union Pacific Corporation and Subsidiaries with a 1997 bonus
guaranteed in the amount of $200,000 (less applicable taxes and withholding) if
employed by UPRR on December 31, 1997. Union Pacific Corporation's officers will
recommend to the Compensation, Benefits and Nominating Committee of Union
Pacific Corporation's Board (the "Committee") during the 1996 fall compensation
cycle that you receive 10,000 Union Pacific Corporation Retention Shares,
subject to the terms and conditions of Union Pacific Corporation's 1993 Stock
Option and Retention Stock Plan (the "Plan") and further subject to the number
being adjusted following Resources' Spin-Off in the same manner as other
outstanding Retention Shares under the Plan. These shares will vest three years
from grant date, or, if earlier, upon your death or upon disability under the
provisions of UPRR's long-term disability plan as in effect from time to time.
If prior to vesting, your working relationship with UPRR changes in a mutually
agreed upon manner, UPRR may recommend early vesting to the Committee as
permitted by the Plan; however, your Retention Shares shall be forfeited
automatically in the event you receive the $700,000 severance payment referred
to in the second following paragraph. Dividends will be held in escrow and
paid, net of applicable taxes and withholding, upon vesting. Upon the effective
date of the Merger (as defined below), you will be entitled to the balance of
the Management Continuity Payment described in the Merger Agreement.

The terms set forth in the letter agreement, dated October 26, 1994,
between you and SP Rail, as amended (the "SP Employment Agreement") with respect
to the remaining outstanding amount of the loan extended to you by SP Rail to
<PAGE>

purchase a residence in San Francisco will continue to apply, with Union Pacific
Railroad Company ("UPRR") as the obligee of the loan and the employer.

You will receive $350,000 (less applicable taxes and withholding) upon the
effective date of this agreement. In lieu of the severance provisions set forth
in the SP Employment Agreement and the Enhanced Severance Program described in
the Amended and Restated Agreement and Plan of Merger by and among Union Pacific
Corporation, UPRR, SP Rail, UP Holding Company, Inc. and Union Pacific Merger
Co., dated as of July 12, 1996 (the "Merger Agreement"), you will be entitled to
the following: (1) if, prior to September 11, 1998, your employment with UPRR
terminates, other than for "cause" as defined in the Employment Agreement, you
will be entitled to a severance payment of $700,000 less applicable taxes and
other withholdings reduced by any bonuses received prior to such termination,
and (2) if your employment with UPRR terminates for "cause" at any time, or your
employment with UPRR terminates for any reason on or after September 11, 1998,
you will not be entitled to any severance payment. In no event will you be
entitled to receive any severance payment if your Retention Shares referred to
above have vested.

If the compensation outlined in this agreement or previously paid by SP
Rail results in your being subject to IRS Excise Tax, Union Pacific Corporation
will reimburse you for or pay on your behalf the 20% Excise Tax and related Tax
Gross-up on such items, upon the terms and conditions described in Annex A.

As of January 1, 1998, your Southern Pacific service will be combined with
your continued Union Pacific service toward vesting and credited service in
Union Pacific Corporation's pension plans as in effect from time to time,
subject to any offset with respect to accrued benefits under the Southern
Pacific pension plan. Union Pacific will also continue to honor the terms of
your supplemental pension as provided for in the SP Employment Agreement. Prior
to January 1, 1998, you will continue to be covered by the Southern Pacific
pension plan and your supplemental pension.

While you are employed by UPRR you will devote your full energies, efforts
and productive time exclusively to the business and affairs of UPRR, and you
will do your utmost to promote its interest. You will not, without UPRR's prior
consent, render to others services of any kind for compensation, and you will
not engage in any other business activity that would interfere with the
performance of your duties for UPRR.

In the event that your employment with UPRR is terminated by UPRR for any
reason, you agree that, for a period of one year, commencing on the date of such
termination, without the approval of the Chief Executive Officer of Union
Pacific Corporation, you will not compete (as a proprietor, partner,
shareholder, director, employee, agent, consultant, or in any other capacity of
manner) with UPRR's railroad, fiber optic or real estate businesses or with
other material businesses of UPRR or its affiliated companies with which you
were involved at any time (including prior to the date of this Agreement), in
the geographical areas where such businesses are conducted on the date of such
termination, unless neither UPRR nor any of its affiliated companies is involved
in such business on the date of such termination, except that the foregoing
shall not apply to ownership by you of a 5% or less equity interest in a
publicly-traded entity if
<PAGE>

you have no other interest in or involvement with such entity. UPRR and you
intend that the provisions of this paragraph be enforceable to the fullest
extent permitted by law and public policy applied in each jurisdiction where
enforcement is sought. If a particular portion of this paragraph shall be
adjudicated to be unenforceable, such adjudication shall apply only with respect
to your activities in the particular jurisdiction in which such adjudication is
made. In addition, you agree that you will not, while you are employed by UPRR
or at any time prior to the end of the first year after your employment with
UPRR has terminated, without the approval of the Chief Executive Officer of
Union Pacific Corporation, solicit the employment of any person, who, at the
time of such solicitation, is an employee of UPRR or any of its affiliates.

You acknowledge that as an employee of UPRR, you will have access to
proprietary and Confidential Information that directly or indirectly relates to
the business of UPRR and its affiliates. For purposes of this Agreement,
"Confidential Information" means all information about UPRR and its affiliates
obtained or developed by you while an employee of SP Rail or UPRR including, but
not limited to, information regarding the officers and other key personnel of
UPRR and its affiliates and financial or business information, strategy or
plans, which UPRR or one of its affiliates has requested be held in confidence
or could reasonably be expected to desire to be held in confidence, or the
disclosure of which would likely be disparaging or damaging, to any extent, to
UPRR or one of its affiliates or any of their employees and directors, but shall
not include information already in the public domain. You agree that you will
not, without the prior written consent of UPRR or except pursuant to lawful
process, disclose to any person any Confidential Information or use Confidential
Information in any way detrimental to UPRR or its affiliates. For purposes of
this paragraph, affiliates of UPRR include SP Rail.

You agree that money damages may not be adequate to compensate UPRR and its
affiliates for your breach of the immediately preceding three paragraphs and
that UPRR will be entitled to a decree for specific performance or other
appropriate remedy to enforce your performance under such paragraphs.

None of the foregoing provisions is intended to give you any right to
continued employment with UPRR or its affiliates, and UPRR may terminate your
employment at any time, with or without cause or notice, subject only to payment
of amounts provided above for certain terminations. You acknowledge that this
Agreement contains the entire agreement between you and UPRR concerning the
terms of your employment.

Except as specifically provided in this Agreement, the SP Employment
Agreement is hereby terminated and neither SP Rail or UPRR or any of its
subsidiaries or affiliates will have any obligation thereunder.

This agreement will be governed by the laws of the State of Utah.

This agreement is subject to approval by the Board of Directors of Union
Pacific Corporation.
<PAGE>

If you are in agreement with the terms and conditions of employment
contained herein, please execute this Agreement by signing a copy and returning
it to the undersigned.

Sincerely,

UNION PACIFIC CORPORATION

/s/ Richard K. Davidson
------------------------------------
By: Richard K. Davidson
President and Chief Operating
Officer

Agreed to this 11th day of September, 1996.

/s/ Robert Starzel
- -----------------------------
Robert Starzel
<PAGE>

Annex A

Dear Mr. Starzel:

RE: PAYMENT OF CERTAIN TAXES AND RELATED AMOUNTS
--------------------------------------------

Pursuant to the provisions of the Amended and Restated Agreement and Plan of
Merger dated as of July 12, 1996, by and among Union Pacific Corporation
("UPC"), Union Pacific Railroad Company ("UPRR"), Southern Pacific Rail
Corporation ("SPRC"), UP Holding Company, Inc. and Union Pacific Merger Co. (the
"Amended Merger Agreement"), SPRC is to be merged with a subsidiary of Union
Pacific Corporation (the "Merger"). As of the date hereof, you have entered
into an employment agreement (the "Employment Agreement") with UPC concerning
your continued employment with UPRR and its affiliates. In connection with the
Merger, and in certain instances your termination of employment from UPRR, you
may become entitled to certain compensation from UPC or one or more of its
affiliates (collectively the "Company").

In consideration of your prior services to SPRC and the Company, and the
undertakings and agreements contained herein, the Company hereby agrees, subject
to the consummation of the Merger and to the extent set forth in this Agreement
and in the Employment Agreement, including the limitations and conditions set
forth in the fifth paragraph of the Employment Agreement, to indemnify and
protect you against any excise tax pursuant to Section 4999 of the Internal
Revenue Code of 1986, as amended (the "Code") and potential interest or
penalties that could be associated with that tax incurred in connection with the
transactions contemplated by the Amended Merger Agreement, including but not
limited to the Merger.

In the event it shall be determined that any compensation, payment or
distribution, made on account of a change in the ownership or effective control
of SPRC, within the meaning of Section 280G of the Code (a "Change of Control"),
by SPRC or one or more of its subsidiaries or affiliates or by the Company to
you or for your benefit (determined without regard to any additional payments
required under this Agreement) (each a "Payment") would be subject to the excise
tax imposed by Section 4999 of the Code, or any interest or penalties are
incurred by you with respect to such excise tax (such excise tax, together with
any such interest and penalties, are hereinafter collectively referred to as the
"Excise Tax"), then you shall be entitled to an additional payment (a "Gross-Up
Payment") in an amount representing the Company's good faith estimate of the
amount necessary to compensate you on an after-tax basis for the Excise Tax, but
only in the event that you are entitled to such Gross-Up Payment pursuant to the
terms of the fifth paragraph of the Employment Agreement.

The Gross-Up Payment will be made on your behalf within a reasonable period
of time prior to the date that the obligation to remit the applicable Excise Tax
is due. However, as a result of the uncertainty in the application of Section
4999 of the Code at the time of the initial determination, it is possible that
certain payments (the "Underpayment") that have not been made by the Company
should have been made to compensate you on an after-tax basis for the Excise
Tax; provided, however that the Underpayment shall not include any costs,
<PAGE>

expenses, taxes, penalties or other liabilities (a) incurred as a result of your
failure to timely remit taxes (other than the Excise Tax, except as otherwise
provided in clause (b)) otherwise due by you or with respect to you, (b)
incurred as a result of your failure to timely remit to the Internal Revenue
Service or any other taxing authority any amounts of Excise Tax that were paid
to you by the Company, or (c) resulting from your negligence or failure to
comply with the terms of this Agreement. In the event that the Company exhausts
its remedies pursuant to the immediately following paragraphs, and you
thereafter are required to make a payment of any Excise Tax, any such
Underpayment shall be paid by the Company to or for your benefit within a
reasonable period of time following such time as the obligation to make such
Underpayment is finally resolved.

You shall notify the Company in writing of any claim by the Internal
Revenue Service that, if successful, would require the payment by the Company of
any Underpayment. Such notification shall be given by you in a timely fashion,
but in no event later than ten business days after you are informed in writing
of such claim and shall apprise the Company of the nature of such claim and the
date on which such claim is requested to be paid. Notwithstanding any other
provision in this Agreement to the contrary, if you fail to timely notify the
Company of any Underpayment or claim relating thereto, the Company shall not be
obligated to pay any costs, expenses, taxes or penalties associated therewith.
If the Company notifies you within 30 days following receipt of notice from you,
in writing, that it desires to contest such claim, you shall:

(i) give the Company any and all information reasonably
requested by the Company relating to such claim,

(ii) take any and all such actions in connection with contesting
such claim as the Company shall reasonably request in writing from time to
time, including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the Company,

(iii) cooperate with the Company in good faith in order
effectively to contest such claim, and

(iv) permit the Company to participate in any proceedings
relating to such claim;

provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred by you in
connection with such contest and shall indemnify and hold you harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions
of this Agreement, the Company shall control all proceedings taken in connection
with such contest and, at its sole option, may pursue or forego any and all
administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option, either direct
you to pay the tax claimed and sue for a refund or to contest the claim in any
permissible manner, and you agree to prosecute such contest to a determination
before any administrative tribunal, in a court of initial jurisdiction and in
one or more appellate courts, as the Company may determine; provided further,
however, that if the Company directs you to pay such claim and sue for a refund,
the Company shall advance the amount of such payment to you, on an interest-free
<PAGE>

basis and shall indemnify and hold you harmless, on an after-tax basis, from any
Excise Tax or income tax (including interest or penalties with respect thereto)
imposed with respect to such advance or with respect to any imputed income with
respect to such advance; and further provided that any extension of the statute
of limitations relating to payment of taxes for your taxable year with respect
to which such contested amount is claimed to be due is limited solely to such
contested amount. Furthermore, the Company's control of the contest shall be
limited to issues with respect to which the Gross-Up Payment or Underpayment
would be payable hereunder and you shall be entitled, at your own cost and
expense, to settle or contest, as the case may be, any other issue raised by the
Internal Revenue Service or any other taxing authority.

If (a) after your receipt of an amount advanced by the Company hereunder,
you, for any reason, become entitled to receive any refund with respect to such
claim or amount, or (b) if any amount paid to you or on your behalf pursuant to
this Agreement exceeds the amount finally determined to compensate you on an
after-tax basis for the Excise Tax, taking into account the limitations on such
compensation described in this Agreement, then you shall promptly pay to the
Company the amount of such refund or excess (together with any interest or
penalties paid or credited thereon after taxes applicable thereto).

You and the Company shall each cooperate with the other in connection with
any administrative or judicial proceedings concerning the foregoing provisions
of this Agreement, and you agree to timely furnish the Company with all
documentation that the Company may reasonably request, including income tax
returns and all schedules thereto.

The provisions of this Agreement and the indemnities contained herein shall
continue for so long as may be necessary in order to fully protect you against
any Excise Tax with respect to the Payments. The provisions of this Agreement
may only be modified through a written instrument signed by you and the Company.
This Agreement shall be binding upon you and the Company and its successors,
assigns and transferees. This Agreement shall be governed by and construed in
accordance with the laws of the State of Utah, without regard to its conflict of
law rules.

Any notice given hereunder shall be in writing and shall be deemed to have
been given when delivered by messenger or courier service (against appropriate
receipt), or mailed by registered or certified mail (return receipt requested),
addressed as follows:

If to the Company: Union Pacific Corporation
Eighth and Eaton Avenues
Bethlehem, Pennsylvania 18018

Attn: Senior Vice President,
Human Resources;

If to you: At the address hereabove provided;

or at such other address as shall be indicated to either party in writing.
Notice of change of address shall be effective only upon receipt.
<PAGE>

If you are in agreement with the foregoing provisions of this Agreement,
please sign both copies of this letter and return one signed copy to the
undersigned.

UNION PACIFIC CORPORATION

By:____________________________________
Richard K. Davidson
President and Chief Operation Officer

Accepted:

________________________________
Robert Starzel

Dated: _________________________

<PAGE>

EXHIBIT 10(O)
-------------

UNION PACIFIC CORPORATION
STOCK UNIT GRANT AND DEFERRED COMPENSATION PLAN
FOR THE BOARD OF DIRECTORS
AS AMENDED AS OF JANUARY 28, 1999

1. Purpose
-------

The purpose of this Plan is to permit grants of Stock Units to Directors to
align their interests with those of stockholders, and to provide a means for
deferring payment of all or a portion of any cash compensation, excluding
expenses, payable to Directors for their service on the Board of Directors (the
"Board") of Union Pacific Corporation (the "Company") in accordance with Article
II, Section 5 of the By-Laws of Union Pacific Corporation. Such compensation
eligible to be deferred, not including any grants under paragraph 3, is referred
to herein as "Compensation".

2. Eligibility
-----------

Any individual (a "Director") serving as a member of the Board as of the
effective date of this Plan or who subsequently becomes a member is eligible
under this Plan, other than members who are employees of the Company or any of
its subsidiaries.

3. Stock Unit Grants
-----------------

a. Commencing with the second quarter of 1998, each full quarterly
installment of a Director's Compensation shall be accompanied by the grant of an
amount of whole Stock Units equal to $7,500 (as such amount may be changed from
time to time by the Board) divided by the Fair Market Value of one share of the
Company's Common Stock on the first business day of the month following the
quarter in which such Compensation was earned, plus cash in lieu of any
fractional Stock Unit resulting from such calculation. A pro-rata grant of
Stock Units will accompany any partial quarterly Compensation installment.
"Fair Market Value" on a date means the average of the high and low trading
prices per share on that date, as reported in The Wall Street Journal listing of
-----------------------
consolidated trading for New York Stock Exchange issues. Stock Units and cash
so granted shall be credited to such Director's Stock Unit Account referred to
in paragraph 6.

b. Each person serving as a member of the Board on January 25, 1996 who
has elected (the "Election") to forfeit $6,000 of the annual retirement pension
under the Directors' Pension Plan pursuant to Section 12 thereof shall receive a
grant of an amount of Stock Units equal to the dollar amount set forth in the
election form pursuant to which such person made the Election, divided by the
Fair Market Value of one share of the Company's Common Stock on the date that
the grant is credited to such Directors' Stock Unit Account, plus cash in lieu
of any fractional Stock Unit resulting from such calculation. For all persons
making the Election who are eligible on January 25, 1996 for benefits under the
<PAGE>

Directors' Pension Plan, such grant will be credited to such person's Stock Unit
Account on February 15, 1996. For all other persons making the Election, such
grant will be credited on the date they become eligible for such benefits (or if
such date is not a business day, on the next business day).

c. Each person elected as a member of the Board for the first time after
January 25, 1996 shall receive, on the date such person completes five
consecutive years of service on the Board (or if such date is not a business
day, on the next business day), a grant for immediate credit to such person's
Stock Unit Account of an amount of Stock Units equal to $85,000 (as such amount
may be changed from time to time by the Board), divided by the Fair Market Value
of one share of Common Stock on the date of such grant, plus cash in lieu of any
fractional Stock Unit resulting from such calculation. In determining whether a
person has completed five consecutive years of service, there shall be
disregarded any period of such service during which such person was employed by
the Company or any of its subsidiaries and, in the case of any person formerly
so employed, any period after termination of such employment if at the time of
termination the person is entitled to receive benefits as an employee under any
pension plan of the Company or any of its subsidiaries.

4. Deferral Election
-----------------

An election to defer Compensation is to be made on or before December 31 of
any year for Compensation for services as a member of the Board for the
following and later calendar years. In addition to deferrals of 1995
Compensation elected in the previous year, at any time prior to March 31, 1995,
a Director may elect to defer additional Compensation to be paid for services in
the last three quarters of 1995.

An election to defer is a continuing election until changed by the Director on
or before December 31 of any year for the then following and later calendar
years. However, once an election is made (and effective), subsequent elections
will have no effect on the amounts, timing and manner of payment covered by the
previous election.

Any newly elected Director who was not a Director on the preceding December 31
may elect, before his term begins, to defer Compensation for services as a
member of the Board for the balance of the calendar year following such
election.

Forms shall be made available to Directors each year for the purpose of making
or changing their election.

5. Amount
------

All or any portion, in multiples of 10%, of a Director's Compensation may be
deferred.

6. Deferred Accounts
-----------------

Each Director shall have a Stock Unit Account and a Fixed Income Account
(together, the "Accounts"). Amounts deferred pursuant to paragraph 4 may be
credited to either Account, at the election of the Director made at the time of
the deferral election, in multiples of 10% of such Director's Compensation.
<PAGE>

Amounts deferred and credited to the Stock Unit Account shall be converted into
whole Stock Units on the basis of the Fair Market Value of the Company's Common
Stock on the first business day of the month following the quarter in which the
Compensation was earned, and cash shall be credited to the Stock Unit Account in
lieu of any fractional Stock Unit. In addition, (i) on or prior to March 31,
1995, each Director shall have a one-time election to transfer all or any part
of the balance of his or her Fixed Income Account to the Stock Unit Account
based on the Fair Market Value of the Company's Common Stock on April 3, 1995,
and (ii) during the 60-day period following the date of a Director's termination
from the Board, such Director shall have a one-time election_to transfer all or
any part of the balance of his or her Fixed Income Account to the Stock Unit
Account, or of his or her Stock Unit Account to the Fixed Income Account, based
on the Fair Market Value of the Company's Common Stock on the first day of the
month following the month in which the election was made. Partial transfers
shall be made in multiples of 10%.

On the payment date for each cash dividend or other cash distribution with
respect to the Company's Common Stock, each Director's Stock Unit Account shall
be credited with an amount equal to the amount of the per share dividend or
distribution, multiplied by the number of Stock Units in such Account, and, if
such Director is then serving as a member of the Board, shall be converted into
whole Stock Units on the basis of the Fair Market Value of the Company's Common
Stock on the payment date for such dividend or distribution, and cash shall be
credited to the Stock Unit Account in lieu of any fractional Stock Units. If a
Director is no longer serving as a member of the Board on the payment date for
such dividend or distribution, the amount representing such dividend or
distribution shall be paid out of the Stock Unit Account to such Director as
soon as practicable after the payment date for such dividend or distribution.

Except as provided in the preceding sentence, any cash credited to a
Director's Stock Unit Account shall be added to other cash credited to such
Account and converted into a whole Stock Unit on the date sufficient cash exists
to purchase a whole Stock Unit, based on the Fair Market Value of the Company's
Common Stock on such date. In the event of a subdivision or combination of
shares of Company Stock, the number of Stock Units credited to the Stock Unit
Accounts on the effective date of such subdivision or combination shall be
proportionately subdivided or combined as the case may be. No adjustment shall
be made in Stock Units in connection with the issuance by the Company of any
rights or options to acquire additional shares of Company Common Stock or
securities convertible into Company Common Stock. In the event of any stock
dividend or reclassification of Company Common Stock, any merger or
consolidation to which the Company is a party, or any spinoff of shares or
distribution of property other than cash with respect to the Company Common
Stock, the Committee shall cause appropriate adjustments, if any, to be made in
the Stock Units to reflect such stock dividend, reclassification, merger or
consolidation, spinoff or distribution of property.

Amounts credited to the Fixed Income Account shall earn interest compounded
quarterly, from the date the Compensation would otherwise have been paid until
it is actually paid in full. The rate of interest shall be the same rate as
that paid on deferrals into the "Fixed Income Account" (formerly "Investment
Account A") under the Company's Executive Incentive Plan.
<PAGE>

7. Distribution
------------

All distribution from Accounts shall be made in cash. For purposes of
distributions from the Stock Unit Account, each Stock Unit shall be converted
into an amount of cash equal to the Fair Market Value of one share of the
Company's Common Stock on the first business day of the month in which such
distribution is made. The Director must elect the timing and manner of payment:
(a) in the case of deferred Compensation, at the same time and on the same form
he elects a deferral of Compensation, (b) in the case of a Stock Unit grant
under 3.a., on or prior to the time an election to defer the accompanying
Compensation would have been required to be made, (c) in the case of a Stock
Unit grant under 3.b., at the same time as the Election referred to therein, and
(d) in the case of a Stock Unit grant under 3.c., prior to the time the Director
receives such grant.

- Timing of Payment: Directors may elect to begin distributions from the
-----------------
Accounts (a) following termination from the Board, (b) in a year
specified by the Director which, in the case of distributions from the
Stock Unit Account, must be after termination from the Board, or (c) in
the case of distributions from the Fixed Income Account, following
retirement from the Director's principal occupation.

- Manner of Payment: The Director may elect to receive payment from the
-----------------
Accounts in a lump sum or in a number of equal annual installments, not
to exceed ten.

The lump sum or first installment is to be paid in January of the year
following the year of termination or retirement or in January of the year
selected by the Director, as applicable, and any remaining installments in
January of each succeeding year until the total balance is paid.

Distributions from the Stock Unit Account in installments shall be based on
equal numbers of Stock Units in each installment.

In the event of the death of a Director then serving as a member of the Board
or a terminated or retired Director entitled to a distribution under this Plan,
the balance of the Accounts shall be payable to the estate or designated
beneficiary in full during the January of the year following the year of such
Director's, terminated Director's or retired Director's death.

The Director may designate his beneficiary at the same time he elects deferral
of Compensation. However, the latest designated beneficiary will be the
beneficiary or beneficiaries for the total of all distributions from the
Accounts. The designated beneficiary may be changed at any time on a form
provided by the Corporate Secretary, provided that no designation will be
effective unless it is filed with the Corporate Secretary prior to the
Director's death.

8. Unfunded Plan
-------------

The liability of the Union Pacific Corporation to any Director, terminated
Director, retired Director or his estate or designated beneficiary under the
Plan
<PAGE>

shall be that of a debtor only pursuant to such contractual obligations as are
created by the Plan, and no such obligation of Union Pacific Corporation shall
be deemed to be secured by any assets, pledges, or other encumbrances on any
property of Union Pacific Corporation.

9. Inalienability of Deferred Compensation
---------------------------------------

Except to the extent of the rights of a designated beneficiary, no
distribution pursuant to, or interest in, the Plan may be transferred, assigned,
pledged or otherwise alienated and no such distribution or interest shall be
subject to legal process or attachment for the payment of any claims against any
individual entitled to receive the same.

10. Controlling State Law
---------------------

All questions pertaining to the construction, regulation, validity and effect
of the Plan shall be determined in accordance with the laws of the Commonwealth
of Pennsylvania.

11. Amendment
---------

The Board of Directors of the Union Pacific Corporation at its sole discretion
may amend, suspend or terminate the Plan at any time. However, any such
amendment, suspension or termination of the Plan may not adversely affect any
Director's or his beneficiary's rights with respect to Compensation previously
deferred.

12. Administration
--------------

Administration of the Plan will be coordinated by the Corporate Finance
Department. Administration will include, but not be limited to, crediting of
deferred compensation, dividends and accrued interest to individual Director
accounts and ultimate disbursement of deferred amounts.

13. Effective Date
--------------

This Plan shall become effective December 1, 1978, applicable only to
compensation for services after December 31, 1978, provided that the provisions
hereof related to Stock Units shall be effective January 1, 1995.

<PAGE>

EXHIBIT 10(q)
-------------

Written Description of Other Executive Compensation
Arrangements of Union Pacific Corporation
-----------------------------------------

Union Pacific Corporation and its subsidiaries make available benefits to
certain of their executive officers in the form of annual physical examinations,
financial planning, tax planning and return preparation assistance, excess
general liability insurance, club memberships and home security systems.

<PAGE>

EXHIBIT 12
----------

UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
RATIO OF EARNINGS TO FIXED CHARGES (A)
(Millions of Dollars, Except for Ratio)
<TABLE>
<CAPTION>
1998(b) (c) 1997 1996 1995 1994
------------- ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
Earnings from
continuing
operations.................. $ (633) $ 432 $ 733 $ 619 $ 569
Undistributed equity
earnings................... (43) (37) (47) (29) (42)
------------- ------------ ------------ ------------- -----------

Total......................... (676) 395 686 590 527
------------- ------------ ------------ ------------- -----------
Income taxes.................. (63) 244 380 314 330
------------- ------------ ------------ ------------- -----------
Fixed Charges:
Interest Including
amortization of
debt discount............... 714 605 501 450 347
Portion of rentals
representing an
interest factor............. 181 166 135 66 42
------------- ------------ ------------ ------------- -----------
Total..................... 895 771 636 516 389
------------- ------------ ------------ ------------- -----------
Earnings Available
for fixed charges........... $ 155 $1, 410 $ 1,702 $1, 419 $1,246
============= ============ ============ ============= ===========
Fixed charges as
above....................... $ 895 $ 771 $ 636 $ 516 $ 389
Interest capitalized.......... - - - - -

Total.................... $ 895 $ 771 $ 636 $ 516 $ 389
============= ============ ============ ============= ===========
Ratio of earnings to
fixed charges............... 0.2 1.8 2.7 2.8 3.2
============= ============ ============ ============= ===========
</TABLE>

(a) 1996 information reflected Resources as discontinued operations (See Note 3
to the Financial Statements).
(b) Excluding the impact of the one time goodwill charge of $547 million pre-and
after-tax in 1998, the ratio of earnings to fixed charges would have been
0.8.
(c) 1998 earnings were inadequate to cover fixed charges by $740 million.

<PAGE>

Contents

1 Letter to Our Shareholders
4 Review of Operations
16 Financial Review
32 Financial Statements
49 Supplementary Information
51 Ten-Year Financial Summary
52 Map of Union Pacific
54 Board of Directors
56 Senior Officers

Financial Highlights
Union Pacific Corporation and Subsidiary Companies

<TABLE>
<CAPTION>
Millions of Dollars,
Except Ratios and Per Share Amounts 1998 [a] 1997 1996 [b]
--------- ------- --------
<S> <C> <C> <C>
For the Year
Operating Revenues............................. $10,553 $11,079 $ 8,786
Operating Income (Loss)........................ (171) 1,144 1,432
Income (Loss) from Continuing Operations....... (633) 432 733
Income from Discontinued Operations............ - - 171
Net Income (Loss).............................. (633) 432 904
Per Share - Basic:
Income (Loss) from Continuing Operations..... (2.57) 1.76 3.38
Income from Discontinued Operations.......... - - 0.79
Net Income (Loss)............................ (2.57) 1.76 4.17
Per Share - Diluted:
Income (Loss) from Continuing Operations..... (2.57) 1.74 3.36
Income from Discontinued Operations.......... - - 0.78
Net Income (Loss)............................ (2.57) 1.74 4.14
Dividends Per Share............................ 0.80 1.72 1.72
Operating Cash Flow............................ 565 1,600 1,657
Capital Investments............................ 2,111 2,101 1,360

At Year-End
Assets......................................... $29,374 $28,860 $27,990
Total Debt..................................... 8,692 8,518 8,027
Common Stockholders' Equity.................... 7,393 8,225 8,225
Equity Per Common Share........................ 29.88 33.30 33.35

Financial Ratios (%)
Operating Ratio................................ 101.6 89.7 83.7
Debt to Capital Employed....................... 49.4 50.9 49.4
Return on Average Common Stockholders' Equity.. (8.1) 5.3 12.4
</TABLE>

[a] 1998 operating loss and net loss included a one-time $547 million pre- and
after-tax charge (see Note 1 to the Financial Statements). 1998 operating income
and net loss, excluding the charge, would have been $376 million and $86
million, respectively, with a negative return on average common stockholders'
equity of (1.1)%.

[b] Included the effect of the completion of the Southern Pacific Rail
Corporation acquisition that occurred in September 1996 (see Note 2 to the
Financial Statements) and the completion of the spin-off of Union Pacific
Resources Group Inc. (see Note 3 to the Financial Statements).

GRAPHS INSIDE FRONT COVER

Operating Revenues
Union Pacific Corporation

$ Millions

Chart

94 95 96 97 98
- ----- ----- ----- ------ ------
6,492 7,486 8,786 11,079 10,563

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

Operating Income
Union Pacific Corporation

$ Millions

Chart

94 95 96 97 98
- ----- ----- ----- ----- ------
1,145 1,242 1,432 1,144 (171)*

* 376 -- Excluded $547 million Overnite goodwill revaluation.

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

Income from Continuing Operations
Union Pacific Corporation

$ Millions

94 95 96 97 98
- ----- ----- ----- ------ -----
568 619 733 432 (633) **

** (86) Excluded $547 million Overnite goodwill revaluation.
<PAGE>

Letter to Our Shareholders

There's no question that 1998 was a difficult year for all of us at Union
Pacific as we continued to battle system-wide service difficulties. Our 53,000
Railroad employees worked through severe adversity, and as a result of their
dedication we turned the situation around and headed the company in the right
direction again. We are using the lessons learned from this experience to help
us rebuild and improve our company.

We thoroughly examined all of our business processes, making several key changes
that will allow us to operate more effectively and efficiently in 1999 and into
the new millennium. Union Pacific is committed to being a company where
customers want to do business, employees are proud to work and value is created
for shareholders. To achieve this transformation, our company has redefined and
clarified its core values of safety first, quality principles, respect for
employees, commitment, accountability, simplicity, and communications.

Driving these changes was input from meetings with our customers, employees,
unions, government agencies, and shareholders as we proceeded to strengthen the
franchise. No one was shy -- especially our customers, who pointedly told us to
provide reliable, consistent transportation services and be easier to do
business with across the board. With all of this in mind, we invested time,
thought and money in areas that would have the greatest impact on Union Pacific
becoming the highest quality provider of transportation.

Financial Results

As a result of the Railroad's service difficulties and the goodwill write-down
at Overnite, we recorded a net loss of $633 million for 1998. During the year we
had set out to sell Overnite through an initial public offering. When trucking
stocks softened, it became clear that we would not be able to obtain a fair
price for the company. We subsequently decided not to proceed with the offering.
Meanwhile, Overnite posted very solid results in 1998, and with a renewed focus
on quality, produced continued improvement in revenues and operating costs
compared to 1997.

At the Railroad, results for the first half of the year fell far below
expectations, but by mid-year we turned the corner on profitability, and our
recovery efforts began to bear fruit. The fourth quarter saw further progress as
operations continued to become more efficient and customers began to bring their
business back to the Railroad.

Early in the year our difficulties required us to reduce the dividend and issue
equity-related securities. These were among the most difficult decisions I have
had to make in my 40-year career, but they were essential to maintain the
financial flexibility needed to restore service, fund capital spending,
strengthen the company's infrastructure and provide for future growth.

1
<PAGE>

Transformation

We have learned a great deal about ourselves and our customers this past year.
We are putting that knowledge to work to build a better company and, in a
nutshell, to change the way we do business. At the heart of our transformation
process is a three-pronged approach to reshaping the company. The key elements
include:

Decentralization of the operating group into three regions -- North, South and
West. Mergers with Chicago and North Western and Southern Pacific (SP) added
over 20,000 track miles, more than doubling our system in a little over three
years. We determined that managing a system of that size could be done more
effectively from regional centers than from a single headquarters location. This
regionalization put the tactical decision making closer to the field people who
are responsible for doing the work.

Formation of the Network Design and Integration (NDI) team. To help ensure that
we utilize our assets efficiently and effectively, NDI will balance demands for
critical resources, system capacity and our commitment to meet customer
requirements. NDI will help make sure that our Railroad provides the single most
important service in the eyes of customers -- reliability. This is the
centerpiece of our efforts to redesign our key business practices.

Dramatic change in the leadership and culture of the Railroad. We need to create
a more positive and productive work environment for employees to best meet
customer needs. Through mergers, we have brought together three very different
cultures. Our goal is to use one clearly delineated set of values for all of our
employees.

Building a Foundation for Growth

Union Pacific also made progress in implementing the SP merger and laying a
foundation for growth. We purchased approximately 270 new locomotives, hired
over 6,000 employees, completed implementation of our computerized
Transportation Control System and Crew Management System, and negotiated more
hub-and-spoke agreements with our unions.

To strengthen our infrastructure, we spent nearly $1.5 billion in capital. We
increased capacity on the Central Corridor and in the Houston/Gulf Coast area,
completed an intermodal facility in Arkansas, opened a locomotive repair shop in
Hinkle, Oregon, and made major strides in completing the Roseville, California
Classification Yard.

2
<PAGE>

Running a successful business also means running a safe business. Throughout
1998, Union Pacific, its unions and the Federal Railroad Administration -- the
three partners in the Safety Assurance and Compliance Program (SACP) --
continued their all-out effort to make Union Pacific the safest railroad. SACP
committees have spent many hours talking with people in the field, uncovering
issues of common concern and developing initiatives for improving safety
standards and performance.

A New President

In September Ike Evans joined us as president and chief operating officer of the
Railroad, bringing to our company years of experience in customer relations and
quality processes. In this role, Ike replaces Jerry Davis, now vice chairman,
who has helped acquaint Ike with the Railroad and has passed on his perspectives
gleaned from over 40 years in the business. Jerry will be retiring at the end of
March, and his valuable insight and keen leadership will be missed as we go
forward.

Conclusion

Our plan is coming together, and that's bringing a renewed enthusiasm and
commitment to everyone at Union Pacific. Our fourth quarter was the best quarter
in the last 18 months, and our indicators are headed in the right direction --
train speed is up, inventory numbers have improved and carloadings have
increased. Additionally, we made significant progress on our merger integration
during the year. But even more heartening, customers in our major commodity
groups are giving us a real vote of confidence by starting to bring their
business back.

We realize there is a great deal of work ahead to fully regain customer
confidence and rebuild our revenue base. This will be everyone's focus in the
coming year. With the strength of our newly merged franchise and the continued
support of our hardworking, dedicated employees, we are building great momentum
for 1999 and beyond. And that makes me optimistic about the future. We have what
it takes to transform Union Pacific into an invigorated, customer-driven
company, with a solid balance sheet and strong return for our shareholders. I am
deeply committed to making our vision a reality.

Dick Davidson
Chairman and Chief Executive Officer
February 25, 1999

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

3
<PAGE>

Review of Operations

Union Pacific Railroad

1998 1997 1996[a]
------ ------ -------
Operating Revenues (millions) $9,368 $9,981 $10,113
Operating Income (millions) $ 433 $1,253 $ 1,671
Carloadings (thousands) 7,998 8,453 8,814
Operating Ratio (%) 95.4 87.4 83.5

[a] On a pro forma basis as if the Southern Pacific acquisition had occurred on
January 1, 1996.

1998 was a pivotal year for Union Pacific Railroad as it worked diligently to
eliminate system-wide service congestion that spilled over from the previous
year. UPRR took incremental, yet significant steps to restore customer service,
improve its system and facilities, and allow the company to operate more safely
and efficiently. Striving for operational excellence, the Railroad initiated a
transformation process that reaches all corners of the company and affects every
employee. Its purpose is to set the stage that will allow UPRR to complete the
integration of Southern Pacific and lay a foundation for growth.

Transformation of the Railroad

First on the agenda, the Railroad addressed the disruptive service problems that
still plagued it into 1998. For example, to restore consistent service in the
Gulf Coast area, UPRR instituted, among other things, directional running, which
covers a triangle from

4
<PAGE>

Houston to Dexter, Missouri to Livonia, Louisiana; set up a joint dispatching
center in Spring, Texas with the Burlington Northern Santa Fe; linked Houston's
Englewood and Settegast Yards with connecting track; made a strong hiring push;
and bought nearly 270 new locomotives for use system-wide. Attacking these
problems one by one ended congestion on the Railroad and made the system fluid
again.

The effects of these actions began to take hold in the third quarter, and by
year-end there was encouraging news on three vital fronts: operations, business
levels and financial results. Though the news is better, UPRR is well aware that
customers, investors and employees expect -- and deserve -- more.

Financial Results

Union Pacific Railroad realized net income of $27 million, compared to last
year's $620 million. Carloadings declined approximately 5 percent compared to
1997.

System congestion and weather-related delays negatively affected the Railroad's
operating ratio, which increased to 95.4, compared to 87.4 last year. The
operating ratio improved during the second half of the year following the
application of new operating practices, the completed implementation of the
Transportation Control System (TCS) on all former SP lines and the positive
impact of merger-related activities.

5
<PAGE>

Commodity Results

Overall carloadings were down as a result of system-wide congestion during the
first half of the year and weak demand in certain markets, most notably grain,
paper and steel.

Total coal tonnage in 1998 grew 2 percent, and revenues were up 4 percent over
last year. Coal carloadings from Powder River Basin and Colorado/Utah mines grew
by 6 percent and 8 percent, respectively, while southern Illinois tonnage was
down. UPRR averaged nearly 25 trains a day or 119 million tons for the year from
the Powder River Basin, and in late September loaded its 75,000th coal train
since commencing service from that area. Mines in Colorado and Utah averaged
more than 11 trains a day in 1998, a substantial increase from 1997.

Automotive carloadings were flat, while revenues were down 2 percent in 1998
compared to record levels of a year ago. Increases in both new and existing
businesses offset the effects of service interruptions, a 54-day work stoppage
at a major manufacturer and a declining number of import vehicles.

Increased communications with customers and a larger commitment of resources
better prepared UPRR to handle a robust 1998 grain harvest. However, due to a
drop in export demand, grain volumes fell nearly 8 percent compared to 1997.
Although shipments to West Coast ports declined, grain traffic into the Gulf
states and Mexico increased.

Because of poor service, UPRR lost some important chemical business during 1998.
To overcome delays, improve the fluidity of

6
<PAGE>

yards and increase train velocity, the Railroad made a number of significant
changes in the way it handles petrochemical shipments out of the Gulf Coast. The
use of directional running, an investment in infrastructure and the
establishment of a joint dispatching center in Spring, Texas had an immediate
impact on operations. Nevertheless, volumes fell approximately 7 percent from
last year, mostly in liquid and dry chemicals, LP gas, plastics and petroleum
products. A 4 percent increase in fertilizers partially offset these losses.

UPRR's service interruptions last year had a severe impact on intermodal
business, as volume fell 9 percent. However, UPRR views this segment as a growth
market. To meet future intermodal demands, the Railroad has built business plans
that are market competitive and supported by all needed resources.

Business with Mexico

Revenue from Mexico traffic was off compared to 1997 due mostly to service-
related difficulties, with declines in grain, steel and automotive shipments.
Additionally it was necessary to place an embargo on certain traffic through the
Laredo crossing at the end of the first quarter to help relieve congestion. With
the Railroad making a number of capital investments at specific border points,
traffic volumes improved during the fourth quarter, especially shipments of
finished autos and auto parts and electronics.

7
<PAGE>

The formation of Ferromex and Transportacion Ferroviaria Mexicana, two
privatized Mexican rail systems serving the border gateways, now provides better
traffic flow across the border and offers broad opportunities for expanded
trade. Ferromex, in which UPRR is a minority investor, began operations in the
first quarter and interchanges with four Union Pacific gateways -- Eagle Pass,
El Paso, Nogales and Calexico.

Improving the Franchise

The Railroad has a far-reaching infrastructure of track and facilities for its
customers. In 1998 the Railroad made substantial investments in new facilities,
as well as modernizing and expanding others, which will result in bottom-line
improvement. For example:

In July UPRR opened a $70 million Memphis-area intermodal facility in Marion,
Arkansas. The 600-acre facility, a dramatic improvement over the former site,
has an annual lift capacity of 375,000 trailers and containers, using five
cranes and one mobile packer. Trucks can now move in and out of the facility in
about one third the time of the national average.

Completed in October, the $32 million Hinkle Locomotive Service and Repair Shop
in eastern Oregon now allows UPRR to perform virtually all engine repairs and
maintenance for the Pacific Northwest in one shop. The 100,000 square foot
facility consolidates shop activities and makes repair work easier

8
<PAGE>

and more efficient. Twelve locomotives can be repaired or maintained at the same
time on four tracks that run through the main building.

To provide value-added service to customers and create a strategic marketing
advantage, the Railroad has a number of storage-in-transit (SIT) rail yards
under construction to support chemical business in the Gulf Coast area. SIT
yards store hopper cars filled with a customer's plastic pellets. This type of
rolling "warehousing" reduces the need for storage at the manufacturer and saves
time when pellets are transported to their final destination.

Significant progress was made on construction of the Roseville Classification
Yard in northern California. When completed in May of 1999, Roseville will
process up to 2,300 cars per day going through the Central Corridor. This
strategic $145 million facility on 915 acres will become one of the largest rail
yards in the UP system, with 55 classification tracks, eight receiving and eight
departing tracks, a second main line, 247 switches, and over 86 miles of new
track.

9
<PAGE>

Capacity Expansion

UPRR invested a substantial amount of money in 1998 to relieve congestion
causing the greatest impact on our system velocity. Projects included:

Completing the 108-mile triple main line track between North Platte and Gibbon,
Nebraska. This construction is part of a five-year project to expand capacity on
UPRR's busiest corridor lines that carry Powder River Basin coal to utilities in
the Southwest and Midwest.

Expanding the main line from one track to two between Missouri Valley and
Denison, Iowa, a stretch of 32 miles. This expansion will improve UPRR's ability
to serve grain shippers and coal customers in the Midwest and East.

Constructing nearly 12 miles of double main line track on two lines in Nebraska
that are part of the Marysville subdivision. The extra track capacity will help
with a number of commodities, especially moving empty coal cars to the Powder
River Basin mines. To further support the routing of coal traffic, UPRR
purchased the rail line from St. Joseph, Missouri to Marysville, Kansas.

Spending nearly $288 million in the Gulf Coast region for capacity expansion,
track upgrades and new facilities.

Upgrading the Tucumcari line between El Paso and Chicago, providing faster
movement of intermodal traffic from the Midwest to southern California ports.

10
<PAGE>

Technology Enhancements

The Railroad's ability to unify information and computer systems quickly and
accurately is the linchpin to achieving merger benefits. In July the Railroad
completed its fourth and final cutover of former SP locations by joining four
western states to UPRR's Transportation Control System. This completed a two-
year project that now brings the entire merged company under one system.
Improved customer service and operating efficiencies followed computer system
implementation.

One of the most critical issues facing the Railroad and its business partners is
Year 2000 (Y2K) computer compliance. Because of the critical need for Y2K
compliance, UPRR has given this project the highest priority. By the end of
1998, Union Pacific completed the bulk of the work, allowing time during 1999 to
handle any additional issues and to help ensure a smooth transition on January
1, 2000. Currently the Railroad continues Y2K testing and compliance, working
closely with customers and suppliers as well.

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

11
<PAGE>

Review of Operations

Overnite Transportation

1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Operating Revenues (millions) $1,034 $ 946 $ 961
Operating Income (Loss) (millions)[a] $ 54[b] $ 30 $ (47)
Shipments (thousands) 7,789 7,506 8,223
Operating Ratio (%)[a] 94.8[b] 96.8 104.9
</TABLE>

[a] Excluded goodwill amortization of $15 million in 1998 and $20 million in
both 1997 and 1996.

[b] Excluded the one-time charge for the revaluation of Overnite's goodwill of
$547 million pre- and after-tax (see Note 1 to the Financial Statements).

In 1998 cost-reduction and revenue-enhancing programs, improved asset
utilization, a continued focus on quality and favorable economic conditions
helped Overnite Transportation, the nation's sixth largest less-than-truckload
carrier, post net income of $40 million compared to net income of $24 million in
1997, before goodwill in both years and excluding the effects of a $547 million
write-down. Overnite's shipments increased 4 percent over 1997, and its
operating ratio improved to 94.8 from 96.8.

Keys to Success

Throughout a three-year growth period, Overnite has made a significant
turnaround in all facets of operation. With higher levels of service and
reliability -- spearheaded by its 12,500 employees -- and flexibility of
operations, Overnite built market strength, attracted more profitable freight,
improved its customer mix and added national and

12
<PAGE>

local accounts, all while maintaining a disciplined pricing structure.

Overnite continues to develop and cultivate its specialty high-yield services:
Assembly and Distribution, Trade Show Division, Cross Border and Ocean Services,
and Special Services Division. During 1998 Overnite initiated Guaranteed
Transportation Solutions (GTS), a value-added niche service that complements its
core less-than-truckload capabilities. GTS offers customers premium, time-
definite service to any direct-service point coast to coast, as well as Canada
and Puerto Rico.

Overnite improved its website by adding customer-friendly interactive features
including applications for shipment tracing, rate-quote requests and access to
Rate EDGE, as well as transit times for all direct and indirect destinations.

Building the Franchise

Early this year Overnite opened its expanded Dallas Service Center, which will
be key to providing service that will blanket the state and allow the movement
of freight between Texas and New England in 48 hours. Additionally, by mid-1999
Overnite will have a network of more than 200 service centers and agencies
stretching from coast to coast, offering complete coverage in 35 states.
Overnite will offer next-day service and coverage to match the best-in-class
regional carriers east of the Rockies, together with inter-regional and long-
haul sleeper team services that are among the industry leaders.

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

13
<PAGE>

Review of Operations

Union Pacific Technologies

Union Pacific Technologies, drawing upon the expertise of its experienced staff,
had another successful year providing a variety of transportation-related
software and services to carriers and shippers in the commercial marketplace.
Technologies also developed sophisticated computer systems for the Corporation's
operating companies.

Transportation Management

Technologies supports UPRR's Transportation Control System (TCS) and markets
that software to the rail industry. In 1998 Technologies experienced significant
growth, providing TCS and other transportation management solutions to various
railroads in the United States, Mexico and the United Kingdom. This remains a
growth area with continued product investment in innovative technologies,
expanded functionality and multilingual capabilities.

In 1998 Technologies, working with UPRR's Information Technologies department,
completed the complex process of installing TCS on the former Southern Pacific
(SP) lines. This included making significant software changes to handle unique
SP operating requirements. Implementation of TCS is one of the critical
components of the Railroad's strategy to provide customers with merger-related
enhanced service and operating efficiencies.

14
<PAGE>

Another significant growth area for Technologies was Shipment Management
Services (SMS), where several new value-added services were introduced.
Currently, SMS interacts with virtually all North American rail carriers to
provide shippers with real-time visibility of products in transit. Technologies
now provides Internet access to SMS for shipment location and interline
performance measurement information, and will continue to expand such
capabilities.

Product Expansion

PS Technology, Inc. (PST), a growing UP technology company, has been the market
leader of train crew management software and services in the North American
freight and transit railroad industry since 1988. PST's System for Assignment
and Tracking schedules, manages and produces payroll data for over 70,000 train
and engine employees. The company also provides a Logistics Ordering and
Tracking System that automates the booking, tracking and accounting interfaces
for intermodal shipments. Commercial expansion efforts under way include
employee management software for companies with complex work and payroll
procedures.

A major expansion of capabilities and product offerings happened in late 1998
with the addition of Automated Monitoring and Control Incorporated (AMCI).
AMCI's current product offerings include systems design and integration, rail
work order and event management applications, data radio solutions, and mobile
computing equipment used on board locomotives.

15
<PAGE>

FINANCIAL REVIEW

This review should be read in combination with the financial statements, notes
and supplementary information.

CORPORATE REORGANIZATION

In 1998, Union Pacific Corporation (UPC or the Corporation) continued
implementing its strategy of refocusing on its core rail transportation
business. The implementation of this strategy began with the 1994 sale of USPCI,
Inc., the Corporation's waste-management business. Since then, the Corporation
disposed of its oil and gas operations, sold its logistics business and
attempted to sell its trucking operations. At the same time, the Corporation
invested heavily in rail assets creating the largest rail system in the United
States. The Corporation's rail investments included the 1995 purchase of the
Chicago and North Western Transportation Company (CNW) - the nation's eighth
largest railroad, the 1996 acquisition of Southern Pacific Rail Corporation (SP
or Southern Pacific) - the country's sixth largest railroad, and the 1997
investment in the Pacific-North and Chihuahua Pacific lines in Mexico.

Key strategic transactions in 1998, 1997 and 1996 were as follows:

OVERNITE DIVESTITURE - In May 1998, the Corporation's Board of Directors
approved a formal plan to divest of UPC's investment in Overnite Transportation
Company (OTC or Overnite) through an initial public offering (IPO). UPC recorded
a $262 million after-tax loss from discontinued operations in the second quarter
of 1998 to provide for the expected loss from the sale of Overnite (see Note 1
to the Financial Statements). During the second half of 1998, UPC attempted to
sell Overnite. However, market conditions deteriorated in the third quarter of
1998 to the point that UPC decided not to consummate the IPO. UPC also pursued a
sale of OTC to strategic buyers. Based upon market conditions, a divestiture of
OTC within the one-year time frame prescribed by generally accepted accounting
principles (GAAP) was no longer reasonably assured. As a result, in the fourth
quarter of 1998, the Corporation reclassified Overnite's results to continuing
operations and reversed the $262 million loss from discontinued operations. In
the fourth quarter of 1998, the Corporation also recorded a $547 million pre-and
after-tax charge to reflect an impairment of Overnite's goodwill that was
recorded in continuing operations. Previously reported results for the second
and third quarters of 1998 have been restated to reflect Overnite's earnings in
continuing operations.

MEXICAN RAILWAY CONCESSION - During 1997, the Corporation's rail subsidiary,
Union Pacific Railroad Company (UPRR or 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 on the equity method. The consortium assumed
operational control of both lines in 1998. In January 1999, the Corporation
signed a letter of intent to acquire an additional 13% ownership interest.

RESOURCES - In July 1995, the Corporation's Board of Directors approved a formal
plan to divest of UPC's natural resources business, Union Pacific Resources
Group Inc. (Resources), through an IPO by Resources, followed by a pro-rata
distribution of 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 in September 1996, the Corporation's Board of
Directors declared a special

16
<PAGE>

dividend consisting of the shares of Resources common stock owned by UPC.
Resources' results have been reported as discontinued operations in the
Corporation's 1996 financial statements.

SERVICE ISSUES

1998 COMPARED TO 1997

CONSOLIDATED

NET INCOME - The Corporation reported a net loss of $633 million (a loss of
$2.57 per basic and diluted share), reflecting a one-time revaluation of
Overnite's goodwill of $547 million pre- and after-tax (see Note 1 to the
Financial Statements) and the effects of system congestion at the Railroad.
Excluding the effect of the one-time revaluation of goodwill at Overnite, the
Corporation would have returned to profitability in the second half of 1998, as
the Railroad began to see the benefits of its service recovery process. Despite
service improvements in the second half of 1998, service problems and congestion
significantly affected year-over-year results. As a result, the Corporation
would have reported a net loss of $86 million ($0.35 per basic share and diluted
share) in 1998, excluding the one-time goodwill revaluation, compared to
earnings of $432 million ($1.76 per basic share and $1.74 per diluted share) in
1997.

OPERATING REVENUES - Operating revenues declined $526 million (5%) to $10.6
billion in 1998, reflecting lower volumes at the Railroad (the result of system
congestion) partially offset by higher revenues at Overnite. Operating expenses
increased to $10.7 billion for 1998, $789 million (8%) higher than 1997
operating costs of $9.9 billion. Excluding the goodwill revaluation, operating
costs would have increased to $10.2 billion (2%). Salaries, wages and employee
benefit costs were $182 million (4%) higher than 1997. Slower train speeds
(causing the need for increased train crew levels) and other congestion-related
labor cost overruns at the Railroad, inflation, and higher volumes at OTC all
contributed to higher labor costs. These higher costs were partially offset by
lower rail volumes (loads down 5%) and the elimination of duplicative positions
as part of the SP merger implementation. Rent expense was up $22 million (2%)
versus 1997, caused by slower average train speeds at UPRR (car cycle times ran
2 days above 1997 levels at 16 versus 14 days), locomotives leased for service
recovery and higher volumes at OTC. Depreciation expense grew $27 million (3%)
to $1,070 million, driven by the Railroad's extensive capital programs in 1997
and 1998. Fuel and utilities expenses were down $199 million (19%) from 1997. A
year-over-year reduction in gross-ton miles at the Railroad (down 4%) generated
volume-related fuel savings, while prices fell 13% and 16% at UPRR and OTC,
respectively. Materials and supplies costs were up $5 million (1%) to $565
million from 1997, reflecting price inflation and increased maintenance of
locomotives and freight cars, partially offset by merger consolidation benefits
and lower material transportation costs. Lower volumes due to slow train speeds
partially offset these higher materials and supplies costs. Casualty costs
declined $3 million to $475 million, as lower personal injury costs were offset
by increased insurance and damaged freight costs. Property and use taxes
increased $3 million to $229 million. Other costs increased $205 million (20%)
from 1997, largely reflecting costs associated with the resolution of customer
claims (see Note 12 to the Financial Statements).

OPERATING INCOME - Operating income declined $1.3 billion to a loss of $171
million in 1998, reflecting operating declines at the Railroad of $820 million
and the goodwill revaluation of $547 million at Overnite. Excluding the goodwill
revaluation at Overnite, operating income would have been $376 million, compared
to $1.1 billion in 1997, reflecting the impact of congestion at the Railroad
partially offset by operating improvements at Overnite.

NON-OPERATING ITEMS - Other income improved $52 million to $189 million,
reflecting higher year-over-year asset sales. Interest costs were $109 million
unfavorable to 1997 at $714 million, reflecting higher borrowings to fund
capital investments that could not be funded from operating cash flow at the
Railroad due to the effects of system congestion. Income taxes (state and
Federal) were favorable by $307 million compared to $244 million in 1997, the
result of lower pre-tax income.

17
<PAGE>

KEY MEASURES - Net income (excluding the one-time revaluation of goodwill at
Overnite) as a percentage of operating revenues declined to (0.8)% from 3.9% in
1997. Return on average common stockholders' equity (excluding the one-time
revaluation of goodwill at Overnite) dropped to (1.1)% in 1998 from 5.3% a year
ago, reflecting the impact of congestion issues at the Railroad. In addition,
the Corporation's operating ratio, excluding the one-time revaluation of
goodwill, was 96.4% in 1998, compared to 89.7% in 1997.

RAIL

WEATHER AND OTHER CONGESTION ISSUES - During 1998, service in the Railroad's
Central Corridor between Chicago and Utah was slowed by track maintenance and
capacity expansion work that is expected to be completed during 1999. UPRR also
experienced congestion on its lines in northern California, in the Los Angeles
Basin and on the Sunset Route west of El Paso, Texas. This was caused in part by
two derailments that occurred in July 1998, tight crew supply and limited track
capacity in that region, and the learning curve associated with the integration
of the computer system of Southern Pacific in the region with the Railroad's
computer system that commenced in July 1998. The Railroad alleviated this
congestion by various measures, including temporarily rerouting trains from this
region to other portions of its system. Late in the third quarter and early in
the fourth quarter of 1998, the Railroad's operations were also adversely
affected by severe weather in the southern portion of its system, including
Hurricane Georges, which disrupted operations in New Orleans and other parts of
Louisiana at the end of September, heavy rains that moved from northern Texas
through Oklahoma and into the Kansas City area in early October, heavy rains
that resulted in severe flooding in central and southern Texas later in October,
and heavy rains and flooding across parts of Oklahoma and Kansas in early
November. The Railroad was able to respond quickly to these problems by
rerouting traffic, repairing damages caused by washouts and restoring service
without severe or lengthy disruptions to the Railroad's operations, which
reflected the success of the Railroad's Service Recovery Process in addressing
service and congestion problems. Despite these external difficulties, the
Railroad was able to recoup the financial loss generated in the first half of
1998 and reported net income for the full year of 1998.

OPERATING RESULTS - The Railroad returned to profitability in the third quarter
of 1998 (by posting net income of $67 million after three consecutive quarterly
losses) and continued its earnings improvement in the fourth quarter of 1998
(posting net income of $114 million), as the Railroad began to see the benefits
of implementing its Service Recovery Process. Despite service improvements in
the second half of 1998, year-over-year results were significantly affected by
the congestion problems discussed above. As a result, the Railroad reported net
income of $27 million in 1998 compared to $620 million in 1997.

18
<PAGE>

REVENUE SUMMARY - Rail operating revenues were down $613 million (6%) at $9.4
billion. Carloadings for 1998 of 8.0 million were down 5% from 1997 loads of 8.5
million. Declines followed continuing system congestion - which significantly
lowered overall train velocity and efficiency, weakening demand for whole grain
exports (due to strong worldwide crop yields), and a soft export market (caused
by the Asian economic crisis). Average revenue per car (ARC) was down 1% for
1998 at $1,134 per car from last year's $1,149. The decline in ARC was driven by
a shift in corn shipments from long-haul Pacific Northwest moves to shorter-haul
Gulf Coast traffic and large volumes of very low-ARC empty repositioning moves
for intermodal traffic, partially offset by longer-haul, high-ARC coal traffic.

The following table summarizes the year-over-year change in rail commodity
revenue (CR) and ARC by commodity type:

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Carloads in Thousands, Commodity Revenues in Millions of Dollars

1998 Change % Change
Cars ARC CR Cars ARC CR Cars ARC CR
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Automotive....... 643 1,459 $ 938 2 $(27) $ (15) - % (2)% (2))%
Agriculture...... 847 1,545 1,308 (69) (33) (138) (8) (2) (10)
Intermodal....... 2,500 601 1,503 (247) (28) (225) (9) (4) (13)
Chemicals........ 900 1,707 1,535 (72) (57) (179) (7) (3) (10)
Energy........... 1,767 1,130 1,997 31 28 84 2 2 4
Industrial....... 1,341 1,335 1,791 (100) (23) (167) (7) (2) (8)
- --------------------------------------------------------------------------------------------------
Total............ 7,998 $1,134 $9,072 (455) $ 15 $(640) (5)% (1)% (7)%
</TABLE>

Automotive-Revenues were down 2%, reflecting flat volume and a 2% decrease in
ARC. Finished vehicles volumes were up 3%, reflecting new Ford business (up 25%)
and growth in Chrysler business (up 12%) that were partially mitigated by the
effects of the General Motors (GM) strike in mid-1998. Parts volumes lost 4%
year-over-year as Ford's volumes fell because of the Railroad's equipment
shortages and GM's switch from intermodal containers to boxcars, which lowered
parts carloadings as more parts fit in each boxcar. ARC fell 2% as a result of
the new Ford business that generated a shorter length of haul than existing
business.

Agriculture - Revenues fell 10% for 1998, as loads finished down 8% and ARC
decreased 2%. Low export demand due to strong worldwide crop yields, the Asian
economic crisis and falling corn prices caused a 12% decline in corn volumes.
System congestion limited traffic for canned and packaged products (down 16%),
fresh fruit and vegetables (off 13%), beverages (down 12%), frozen products (off
4%) and food grains (down 3%). Livestock/feed declined 16% as feed additives
were replaced by less expensive corn. These volume declines were partially
offset by higher wheat (strong harvest - up 2%) and meals and oils (up 3%)
traffic. ARC declined 2% as a result of a drop in Pacific Northwest corn moves
(very long haul moves) due to weak export markets.

Intermodal - Revenue showed a 13% year-over-year decline as volumes fell 9% and
ARC fell 4%. Congestion issues and related diversions severely affected several
intermodal segments, especially Intermodal Marketing Company (IMC)/truckload
(TL) and less-than-truckload (LTL)/premium. Volumes also suffered from weak
exports due to the Asian crisis. A partial offset was the impact of new American
President Lines business and the high demand for containers. ARC fell as traffic
mix shortfalls (relatively fewer high-ARC IMC/truckload and LTL/premium loads)
were exacerbated by increased volumes of low-ARC empty repositioning moves, as
equipment imbalances precipitated by strong imports and weak exports caused
customers to significantly increase empty container repositioning moves.

Chemicals-Shipments fell 7%, while revenues dropped 10% when compared to 1997
results. Congestion-related diversions to truck, barge and other railroads
plagued most business lines (especially liquid and dry chemicals - off 9% and
petroleum products down 19%). LP gas traffic (down 18%) was hurt by the
introduction of new pipelines, while the Asian crisis significantly reduced the
movements of soda ash causing carloads to fall 10%. In addition, an unplanned
mine shutdown reduced shipments of phosphorus (off 9%). The 3% decline in ARC
was largely due to a higher volume of short-haul storage-in-transit moves, lower
high-ARC liquid and dry chemical and soda ash moves, and the loss of long-haul
business due to system congestion.

Energy - Movements were up 2%, while revenues were up 4% from 1997 levels.
Congestion caused by, among other things, maintenance and capacity expansion in
the Central Corridor and diversion of Illinois traffic hampered coal volumes
throughout 1998. However, efficiency gains in both Powder River Basin (PRB)
trains per day (24.7 in 1998 from 23.9 a year ago) and PRB train

19
<PAGE>

length (119 cars/train in 1998 vs. 116 in 1997) helped boost year-over-year
volumes despite the effects of congestion caused by maintenance and track
expansion in the Railroad's Central Corridor. Colorado and Utah volumes were
also up due to better service performance than 1997 levels. The 2% increase in
ARC was primarily a result of more high-ARC PRB traffic.

Industrial - Volumes declined 7%, while ARC declined 2%, resulting in an 8% drop
in revenues. Volumes continued to be plagued by equipment shortages and service
issues (caused by slowed local switching and congestion). A large portion of
industrial product moves occurred in the South, where congestion hit hardest,
although service levels have continued to improve. Shipments of ferrous scrap
(down 20%), steel (17% lower due to congestion and higher steel imports),
metallic minerals (off 15%) and paperboard, newsprint and non-metallic products
(all off 11%) were affected by congestion. In addition, several of the same
commodities have also been affected by Central Corridor congestion (due to,
among other things, maintenance and capacity expansion) and congestion in the
western portion of the Railroad's system, as the final portion of UPRR's
computerized operating system was brought on-line in SP's western territory in
the third quarter of 1998. ARC fell 2% due to product mix issues and shortfalls
of high-ARC steel traffic, lumber and metallic minerals.

EXPENSE SUMMARY - Operating expenses were $8.9 billion for 1998, $207 million
(2%) higher than 1997 operating expenses of $8.7 billion. However, second half
1998 operations improved significantly from the first half of 1998. The
following statistical table reflects the improvements in the Railroad's
operating performance in the second half of 1998:

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1998
Averages, Except Ratios 2Q 3Q 4Q 1Q 2Q 3Q 4Q
<S> <C> <C> <C> <C> <C> <C> <C>
Seven-Day Loadings
(000's).............. 170.7 165.9 153.6 152.5 154.9 155.3 160.6
Train Speed (MPH)........ 18.4 15.0 13.2 13.8 14.0 14.4 15.5
Car Cycle Times (Days)... 12.7 15.2 17.5 17.6 16.4 15.9 14.4
Operating Ratio (%)...... 80.9 82.0 102.5 97.7 105.1 90.5 88.7
- --------------------------------------------------------------------------------
</TABLE>

Salaries, wages and employee benefits - Labor expenses were $140 million (4%)
higher than 1997. Slower train speeds (which created the need to increase the
number of train crews required as re-crew rates jumped to 18% in 1998 vs. 15% a
year ago), inflation and other congestion- and service-related cost overruns
contributed to higher labor costs. These higher costs were partially offset by
lower volumes (gross-ton miles were down 4%) and the elimination of duplicative
positions as part of the SP merger implementation.

Rent - Expenses were up $19 million (1%) versus 1997. Cycle times were up 2 days
from 1997 causing the Railroad to rent more equipment due to the decrease in
equipment utilization. Locomotives leased to alleviate congestion and support
service recovery also increased equipment costs, as slower train speeds lowered
locomotive utilization increasing the need for additional locomotive power.
However, these increases were partially offset by lower traffic levels due to
congestion-related volume shortfalls.

Depreciation - Expense grew $31 million (3%) to $1.0 billion, driven by the
Railroad's extensive capital programs in 1997 and 1998. The Railroad spent over
$2.0 billion on capital projects in 1998 (including $400 million of SP
integration projects). UPC expects to spend $1.7 to $1.9 billion in 1999, of
which $200 million will be merger-related.

Fuel and utilities - Expenses were down $195 million (20%) from 1997. A
reduction in gross-ton miles year-over-year (down 4%) generated volume-related
fuel savings of $36 million versus 1997. Prices were down 9 cents per gallon to
62 cents, saving $106 million. The fuel consumption rate of 1.39 gallons per
thousand gross-ton miles improved 2% from last year's 1.42, lowering the
Railroad's fuel costs by $23 million. Hedges of 57% of 1998 fuel volumes
increased fuel costs by $87 million, or 8 cents per gallon (included in the cost
per gallon information above).

Materials and supplies - Costs for 1998 were down $2 million from 1997 to $513
million caused by favorable contract pricing from economies of scale achieved
from the SP merger and lower material transportation costs - reflecting UPRR's
ability to move materials on its rail system rather than by truck, partially
offset by increased fleet maintenance.

Casualty - Costs decreased $9 million to $423 million in 1998. Lower personal
injury costs resulted from a decline in average settlement costs and were
partially offset by higher insurance and damaged freight costs.

20
<PAGE>

Other costs - Expenses increased $223 million (21%) from 1997, reflecting costs
($370 million in 1998 versus $86 million in 1997) for congestion-related
customer claims and liquidated damages on coal contracts. Increased use of
trackage rights by competitors and merger-related cost savings on computers and
contract pricing partially offset these cost increases.

OPERATING INCOME - Operating income of $433 million for 1998 compares to $1,253
million in 1997, reflecting a year-over-year increase in pre-tax congestion
costs and lost revenues, as congestion issues began late in the third quarter of
1997. The operating ratio for 1998 was 95.4%, up 8 points from 1997's 87.4%.
Lost revenues and costs related to service performance were the key drivers of
the change.

NON-OPERATING ITEMS - Other income was $14 million above last year's levels,
reflecting increased asset sales and recovery of funds from insurers for 1997
floods. Interest costs were $130 million (28%) unfavorable to 1997 at $603
million, reflecting borrowings to fund capital investments that could not be
funded from cash generated at the Railroad due to the effects of system
congestion. Income taxes (state and Federal) were $343 million less compared to
1997, the result of lower pre-tax income.

TRUCKING

NET INCOME - During the fourth quarter of 1998, the Corporation changed its
method of measuring an impairment of enterprise level goodwill from an
undiscounted cash flow method to one based on discounted cash flows (see Note 1
to the Financial Statements). The Corporation believes that a discounted cash
flow approach is preferable in that it provides a more current and realistic
valuation than the undiscounted method and more closely approximates Overnite's
fair value. In connection with the change in accounting policy with respect to
measurement of goodwill impairment described above, Overnite recorded a $547
million charge for a revaluation of goodwill in the fourth quarter of 1998. The
goodwill was related to the acquisition of Overnite by UPC in 1986. GAAP
precludes the recognition of tax benefits associated with goodwill charges to
income. Should the Corporation sell Overnite in the future, a gain from the
recognition of the tax benefit associated with the goodwill may be recognized.

As a result of the $547 million one-time goodwill revaluation charge,
Overnite posted a net loss of $522 million, compared to net income of $4 million
in 1997. Excluding the goodwill revaluation, Overnite would have posted net
income of $25 million, a $21 million improvement over 1997, including goodwill
amortization of $15 million in 1998 and $20 million in 1997.

OPERATING REVENUES - Operating revenues improved $88 million (9%) to $1.0
billion, reflecting a 2% rise in volumes combined with a 7% improvement in
price, as OTC continued to benefit from its focus on eliminating low margin
business and continuing its pricing initiatives. Improved volumes included a 4%
improvement in LTL tonnage partially offset by a 16% decrease in TL tonnage,
reflecting OTC's focus on its core LTL business.

OPERATING EXPENSES - Operating expenses increased $606 million to $1.5 billion.
Excluding the goodwill revaluation, operating expenses would have increased $59
million (6%) to $995 million. Salaries, wages and employee benefits were up $44
million, reflecting volume growth and inflation that more than offset
productivity improvements. Equipment rents increased $7 million (9%) reflecting
higher volumes and increased use of third-party transportation. Depreciation and
amortization declined $2 million, as the effect of capital spending was more
than countered by lower goodwill amortization caused by the goodwill write-down.
Materials and supplies costs were up $8 million, reflecting higher repair
activities. Fuel costs declined $4 million, driven by a 16% decrease in fuel
prices, which was only partially mitigated by a 2% increase in shipments. Other
costs rose $7 million due to a volume-related increase in damaged freight costs
and higher property and use taxes.

OPERATING INCOME - Overnite reported a 1998 operating loss of $508 million.
Excluding the effect of the goodwill revaluation, 1998 operating income would
have been $39 million, compared to operating income of $10 million in 1997,
while Overnite's operating ratio (including goodwill amortization but excluding
the goodwill revaluation) would have improved to 96.2% in 1998 from 98.9% in
1997. Excluding goodwill amortization, the operating ratio would have declined
to 94.8% in 1998 from 96.8% in 1997, a 2 point improvement.

21
<PAGE>

OTHER OPERATIONS

Corporate services and other operations consists 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 (see Note 1 to the Financial Statements).
Operating revenues declined $1 million year-over-year. Operating expenses
decreased $24 million, reflecting the absence of 1997 costs associated with the
relocation of the corporate office and cost savings from reductions in the
corporate staff. Operating losses declined $23 million, also due to the
corporate restructuring and improved operations at the Corporation's technology
subsidiary. Net losses from these operations declined $54 million, largely due
to the absence of the 1997 loss provision for the sale of Skyway and the
benefits of corporate restructuring.

1997 COMPARED TO 1996

CONSOLIDATED

NET INCOME - The Corporation reported consolidated 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 (see Note 3 to the Financial
Statements).

INCOME FROM CONTINUING OPERATIONS - 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 the
congestion that lowered train velocity, causing operating costs to rise while
carloading volumes declined.

OPERATING REVENUES - Operating revenues increased $2.3 billion (26%) to $11.1
billion in 1997, reflecting increased volumes at the Railroad (the result of the
full-year effect of the Southern Pacific merger). Merger-related revenue growth
was partially offset by volume declines resulting from congestion issues and a
2% volume-related revenue decline at Overnite. Operating expenses increased $2.6
billion (35%) to $9.9 billion in 1997, primarily the result of the addition of
Southern Pacific's operations, congestion costs at the Railroad and general
inflation. These factors resulted in increases in salaries, wages and employee
benefits ($906 million); rent expense ($438 million); fuel and utilities costs
($252 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. Casualty costs increased
$112 million, reflecting a $77 million increase in personal injury costs caused
by the addition of a full year of SP costs. Property and use taxes increased $43
million, also due to a full year impact of SP costs. Other costs increased $458
million, primarily related to the service and congestion issues ($138 million);
repair and maintenance expenses ($27 million); and a full year effect of SP
expenses.

OPERATING INCOME - Operating income declined $288 million (20%) to $1.1 billion
in 1997, the result of a $349 million decrease at the Railroad due to
congestion, partially offset by improved results at Overnite.

NON-OPERATING ITEMS - 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.

KEY MEASURES - 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% in 1996, reflecting the
impact of the service and congestion issues. In addition, the Corporation's
operating ratio was 89.7% in 1997, compared to 83.7% in 1996.

RAIL

The following discussion is based upon pro forma 1996 results as if the SP
acquisition had occurred on January 1, 1996:

The Railroad earned $620 million in 1997 compared to $871 million in 1996.
This decline in earnings is the result of congestion issues that arose in the
third quarter and continued through the remainder of 1997.

REVENUE SUMMARY (PRO FORMA) - Operating revenues were 1% lower in 1997. Average
commodity revenue per car increased 3% resulting from improved traffic mix,
while carloadings declined 4%.

The following table summarizes the year-over-year change in rail commodity
revenues and ARC by commodity type:

22
<PAGE>

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Carloads in Thousands, Commodity Revenues in Millions of Dollars

1997 Change % Change
Cars ARC CR Cars ARC CR Cars ARC CR
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Automotive...... 641 $1,486 $ 953 16 $(10) $ 18 3% (1)% 2%
Agriculture..... 916 1,578 1,446 (85) 60 (74) (8) 4 (5)
Intermodal...... 2,747 629 1,728 (33) 7 (2) (1) 1 -
Chemicals....... 972 1,764 1,714 (7) (29) (40) (1) (2) (2)
Energy.......... 1,736 1,102 1,913 (42) 35 15 (2) 3 1
Industrial...... 1,441 1,358 1,958 (210) 159 (21) (13) 13 (1)
- ---------------------------------------------------------------------------------------------
Total........... 8,453 $1,149 $9,712 (361) $ 35 $(104) (4)% 3% (1)%
</TABLE>

Carloadings for the year were down 4% from 1996 loads. Declines were
principally caused by traffic congestion, implementation of the Service Recovery
Process and the first quarter of 1997 sale of the Duck Creek North line.
Overall, ARC was up $35 to $1,149 for the year, as a result of improved traffic
mix.

Automotive - Commodity revenue grew 2% 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%, reflecting the
impact of shorter-haul traffic.

Agriculture - Carloadings fell 8% and related commodity revenues fell $74
million (5%) to $1.4 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.

Intermodal - Commodity revenues were flat at $1.7 billion, as traffic volumes
fell 1%. Strong market demand and new business opportunities were more than
offset by congestion issues later in the year, including the temporary
suspension of business in specific areas as part of the Service Recovery
Process, industry-wide equipment shortages and related diversions to truck and
other railroads. Average commodity revenue per car rose 1% caused by favorable
traffic mix compared to 1996.

Chemicals - Carloadings were down 1%, while commodity revenues fell 2% to $1.7
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 $29 or 2%, due to strong competitive pressures and a shift in the
business mix (increased short-haul business of low-ARC products).

Energy - Commodity revenues were up 1% at $1.9 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, 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 - Carloadings decreased 13% and commodity revenues declined 1% to
$2.0 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 13%, reflecting
a longer average length of haul due to the above mentioned line sale.

EXPENSE SUMMARY (PRO FORMA) - Operating expenses increased $286 million (3%) to
$8.7 billion in 1997, primarily from congestion costs and inflation offset
somewhat by merger benefits, cost containment programs and lower volumes.

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Salaries, wages and employee benefits - Expenses increased $50 million (1%), the
result of higher recrew rates in the second half of 1997, one-time merger
severance payments and wage inflation from new national labor agreements. These
cost increases were partially offset by reduced volumes (congestion) and lower
staff levels from merger-related severance and other productivity gains.

Rent - Expense increased $139 million (12%) from longer car cycle times,
incremental costs associated with providing grain cars, more operating leases
and price increases, which were somewhat offset by reduced volumes and merger
efficiencies.

Depreciation - Charges rose $72 million (8%), primarily reflecting the
Railroad's continued reinvestment in its equipment and rail infrastructure.

Fuel and utilities - Costs grew $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.

Materials and supplies - Expenses declined $18 million (3%), reflecting material
contract savings associated with the merger and the favorable timing of
scheduled maintenance.

Other costs - Expenses 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.

OPERATING INCOME - 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,
reflecting the effect of congestion and related declines in train velocity.

NON-OPERATING ITEMS (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. Income taxes (state and Federal) of $332 million were favorable by
$118 million compared to 1996, primarily the result of lower pre-tax income.

TRUCKING

NET INCOME - Throughout 1997, Overnite continued to benefit from several
strategic initiatives implemented in 1996 to better compete in the 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.

OPERATING REVENUES - Operating revenues decreased $15 million (2%) to $946
million as a 13% decrease in volumes more than offset improvements in average
prices - resulting from Overnite's pricing initiatives. A 10% decrease in LTL
tonnage and a 38% decrease in TL tonnage drove lower volumes.

OPERATING EXPENSES - Operating expenses decreased $92 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. 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.

OPERATING INCOME - Overnite reported 1997 operating income of $10 million,
compared to an operating loss of $67 million in 1996, while Overnite's operating
ratio (including goodwill amortization) improved to 98.9% in 1997 from 107.0% in
1996.

OTHER OPERATIONS

Operating revenues improved $7 million year-over-year, reflecting revenue
improvements at Skyway and the Corporation's technology subsidiary. Operating
expenses increased $23 million, while operating losses increased $16 million, as
a result of costs associated with relocating the corporate office to Texas and
higher operating costs at the Corporation's other operating units. Net losses
from these operations increased $28 million, reflecting the loss provision from
the sale of Skyway and costs associated with the corporate relocation partially
offset by a gain on the sale of corporate aircraft.

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CASH FLOWS, LIQUIDITY AND FINANCIAL RESOURCES

FINANCIAL CONDITION

In 1998, cash from operations was $565 million, compared to $1.6 billion in
1997. This $1,035 million decrease reflects lower earnings and the timing of
working capital requirements due to congestion and merger implementation issues,
as well as a deferral of tax benefits generated by the Corporation's loss
position. 1998 tax losses will be either carried forward to future periods or
carried back against prior periods taxable income.

Cash used in investing activities was $1.9 billion in 1998 compared to $1.8
billion in 1997, an increase of 7%. Capital investments were flat year-over-year
at $2.1 billion as the Railroad continued spending for equipment, track renewal
and maintenance, capacity and merger integration. The increase in investing
activities was created by lower cash proceeds from asset sales (1997 included
several significant property and rail line sales that did not recur in 1998) and
the funding of the Railroad's investment in Mexican rail operations.

Cash provided by equity and financing activities was $1.4 billion in 1998
compared to $71 million in 1997. This change in cash provided by equity and
financing activities principally reflects the need for UPC to borrow funds to
support capital spending levels and to replace operating cash shortfalls caused
by congestion issues. The ratio of debt to debt plus equity decreased to 49.4%
in 1998, compared to 50.9% at December 31, 1997. This change resulted from the
private placement of the Convertible Preferred Securities described below, which
are considered equity in the calculation of the ratio of debt to debt plus
equity, somewhat offset by increased debt levels.

FINANCING ACTIVITIES

PREFERRED SECURITIES - In April 1998, the Corporation completed a private
placement of $1.5 billion of 61.4% preferred securities of a statutory business
trust sponsored and wholly-owned by the Corporation ("Preferred Securities").
Each of the Preferred Securities is convertible, at the option of the holder,
into shares of UPC's common stock at the rate of 0.7257 shares of UPC's common
stock at a conversion price of $68.90 per share of UPC common stock, subject to
adjustment under certain circumstances. Proceeds from the sale of the Preferred
Securities were used for repayment of other corporate borrowings (see Note 7 to
the Financial Statements).

SHELF REGISTRATION - In October 1998, the Corporation designated the balance of
its shelf registration statement ($1,225 million) as potentially available for a
medium-term note program. By December 31, 1998, the Corporation had issued $598
million under the medium-term note program and intends to continue to issue debt
from time to time either pursuant to the medium-term program or in underwritten
transactions, with the proceeds of such issuances to be used for general
corporate purposes, including repayment of maturing debt or commercial paper
borrowings. At December 31, 1998, the Corporation had $627 million remaining to
be issued under its shelf registration.

OTHER MATTERS

PERSONAL INJURY - In 1998, work-related injuries that resulted in lost job time
declined 6% compared to 1997, and accidents at grade crossings declined by 14%.
Additionally, the average cost of employee injury claims settled in 1998
declined 8% over the prior year. Annual expenses for the Railroad's injury-
related events were $311 million in 1998, $328 million in 1997 and $251 million
in 1996. 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 415 sites, including 44 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

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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 $207 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 $58 million in
1998 and $46 million in 1997. The Corporation is also engaged in reducing
emissions, spills and migration of hazardous materials, and spent $9 million and
$7 million in 1998 and 1997, respectively, for control and prevention, a portion
of which has been capitalized. In 1999, the Corporation anticipates spending $83
million for remediation and $6 million for control and prevention. The majority
of the December 31, 1998 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

Rail - Approximately 87% of the Railroad's 53,000 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 other 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. The current national bargaining agreement
will end in 2000. The Corporation expects notices for negotiations to be served
in November 1999.

Trucking - Overnite continues to oppose the efforts of the International
Brotherhood of Teamsters (Teamsters) to unionize Overnite service centers. Since
year-end 1994, Overnite has received 89 petitions for union elections at 66 of
its 165 service centers. Twenty-one service centers, representing approximately
14% of Overnite's nationwide workforce, have voted for union representation, and
the Teamsters have been certified and recognized as the bargaining
representative for such employees. Elections affecting approximately 400
additional employees are unresolved, and there are no elections currently
scheduled. To date, Overnite has not entered into any collective bargaining
agreements with the Teamsters; however, Overnite is engaged in collective
bargaining negotiations over union contract demands at the 21 represented
locations.

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.

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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 have been a significant portion 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 purchase contracts 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 number of interest rate swaps and fuel hedging
contracts in place at year-end 1998 (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 approximately $10 million. If fuel costs changed by 5%, the
related change in the value of fuel hedging contracts would be approximately $20
million.

COMMITMENTS AND CONTINGENCIES - There are various claims and lawsuits pending
against the Corporation and certain of its subsidiaries. In addition, the
Corporation and its subsidiaries are subject to various Federal, state and local
environmental laws and are currently participating in the investigation and
remediation of various sites. A discussion of certain claims, lawsuits,
guarantees and contingencies is set forth in Note 12 to the Financial
Statements, which is incorporated by reference. Reference is also made to "Item
3. Legal Proceedings" of the Corporation's Form 10-K to be filed on or before
March 31, 1999.

SURFACE TRANSPORTATION BOARD PROCEEDINGS - The Railroad was a party to two
proceedings before the Surface Transportation Board of the U.S. Department of
Transportation (STB) that concluded in the latter half of 1998. One proceeding
pertained to rail service problems in the western United States, in which the
STB had issued an emergency service order in October 1997 that imposed certain
temporary measures on the Railroad designed, among other things, to reduce
congestion on the Railroad's lines in the Houston, Texas area. In July 1998, the
STB issued a decision that terminated the emergency service order as of August
2, 1998 but kept in place the requirement that the Railroad periodically report
certain service data. The STB also prescribed a 45-day "wind-down" period during
which certain rights that other carriers had received under the emergency
service order to handle the Railroad's traffic in Houston would be continued.
The "wind-down" period expired September 17, 1998. The reporting requirement
expired in mid-January 1999 when the Railroad joined other railroads in
reporting service data through the Association of American Railroads.

A second proceeding, initiated in March 1998 under the STB's continuing
oversight jurisdiction with respect to the merger of the Corporation and
Southern Pacific, was for the purpose of considering proposals for new remedial
conditions to the merger pertaining to service in the Houston, Texas area and
surrounding coastal areas of Texas and Louisiana. Various parties filed
applications in this proceeding seeking the imposition of additional conditions
to the merger including, among other things, requests by certain parties for
conditions that would effectively open up access to shippers on the Railroad's
lines and permit competing carriers to serve those shippers. On December 21,
1998, the STB issued a decision in the proceeding which imposed conditions that
were meant to enhance efficiency and facilitate the smooth movement of rail
traffic through the Houston area; that granted approximately four miles of
additional trackage rights to The Burlington Northern and Santa Fe Railway
Company to create a new interchange with a short-line railroad in the Austin,
Texas area; and that imposed certain annual reporting requirements on the
Railroad with respect to the implementation of its infrastructure plan for the
Houston/Gulf Coast region. The STB did not, however, grant the requests of those
applicants seeking open access to shippers not currently served by other
carriers on the Railroad's lines, stating that the propriety of an open access
regulatory scheme for the railroad industry is a matter more appropriately
addressed by Congress.

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ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting Standards
Board (FASB) issued Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133), that will be effective January 1, 2000.
Management is in the process of determining the effect, if any, FAS 133 will
have on the Corporation's financial statements.

A LOOK FORWARD

TRANSFORMATION - The Corporation's strategy to focus on its core rail business
has caused its rail operations to grow substantially. Since 1994, the year prior
to the CNW acquisition, the Railroad has nearly doubled the size of its rail
system, doubled the size of its locomotive and freight car fleets and added
nearly 20,000 employees to its rail operations. This substantial growth in
combination with congestion issues the Railroad has faced caused management to
reexamine its rail management process and organizational structure. To provide
an organizational structure to facilitate UPC's Service Recovery Process, two
key initiatives have been developed:

Decentralization - In the third quarter of 1998, the Railroad began a process of
decentralization. Three operating regions were created. Each region is composed
of various service units that make all day-to-day decisions for that region on
all local and through-freight train operations, yard operations, mechanical, car
and locomotive management issues. This change shifts decisions that were
historically centralized in Omaha to the field operations. To help support the
decision-making process, people from key disciplines such as engineering,
safety, quality, finance and human resources have been assigned to each region.
This strategy will allow the rail system to be divided into more manageable
components and will allow decision makers to be deployed where system
bottlenecks are occurring.

Network Design and Integration (NDI) - The NDI team was established to help
integrate market and resource planning and is organized by three separate
product offerings (premium, bulk and manifest business). NDI's focal point will
be to better match customer requirements to UPRR's operational capability with
an emphasis on improving consistency and dependability of service to customers.
NDI will focus on developing a transportation plan that meets customer
commitments, while maximizing system resources to help improve service levels.

1999 BUSINESS OUTLOOK - Financial results in 1999 will continue to be impacted
by the effects of the congestion and service issues at the Railroad; however,
management expects that the improvement in operating results and financial
performance that began in the third quarter of 1998 will continue to gain
momentum into 1999.

Rail - The Railroad anticipates revenue gains from higher coal volumes, as
congestion in the Central Corridor continues to be eliminated and UPRR is able
to meet the current strong demand. Auto traffic is expected to improve due to
strong Ford and Chrysler business and the absence of the effects of the 1998 GM
strike. Operating efficiency is also anticipated to improve in 1999, as higher
train velocity generates improvements in costs for equipment (improved
utilization and cycle times) and crews (fewer re-crews), while costs incurred
related to service disruptions with customers are not expected to recur in 1999.
In addition, the Railroad will continue to focus on implementation of the SP
merger integration plan and achieving the operational and financial benefits
associated with the integration.

Trucking - Overnite will continue to focus on streamlining its business
operations and maximizing its product mix to be competitive in the current
trucking industry environment. Through these efforts, Overnite will work to
improve its financial results during 1999. UPC will also continue to explore
opportunities to sell OTC in 1999, either through an IPO or a direct sale to a
third-party buyer.

Risk Factors - The Corporation's future results can be affected by changes in
the economic environment, fluctuations in fuel prices and external factors such
as weather. 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. The Railroad's and
Overnite's results can also 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. In addition,
rail operations are much more susceptible to prolonged interruptions due to
weather or derailment as operations continue to recover from the effects of
system congestion that began late in 1997. The Corporation's future results are
dependent on the continued success of its Service Recovery Process in

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preventing congestion and improving service, and regaining its customers who
switched to alternative transportation arrangements during the service crisis.

1999 CAPITAL INVESTMENTS - The Corporation's 1999 capital expenditures, debt
service requirements and payments related to the integration of Southern
Pacific's rail operations are expected to be funded through cash generated from
operations, additional debt financings and the sale or lease of various
operating and non-operating 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 spend $1.7 to $1.9 billion on
capital-related projects in 1999, including over $200 million to continue to
integrate the Southern Pacific rail system. Railroad-related capital
expenditures will be used to continue capacity expansion on its main lines,
upgrade and augment equipment to better meet customer needs, build
infrastructure in the Texas area (UPC has committed to spend $1.4 billion over
the next few years on Gulf Coast infrastructure) and develop and implement new
technologies. Overnite will continue to maintain its truck fleet and upgrade
technology.

YEAR 2000 - The Year 2000 (Y2K) compliance project at UPC includes software
(internally developed and purchased), hardware and embedded chips inside
equipment and machinery, primarily at the Railroad. The Corporation's
enterprise-wide project encompasses computer systems and equipment in multiple
data centers and a telecommunications network spread over 23 states. Equipment
containing embedded computer chips includes locomotives, automated train
switching systems, computer aided train dispatching systems, signaling systems,
computerized fueling stations, weigh-in-motion scales, cranes, lifts, PBX
systems, elevators, and computerized monitoring systems throughout UPC. The Y2K
project started with research in 1994 and an impact analysis of the
Corporation's mainframe COBOL systems in 1995. The Y2K project has been a high
priority since then.

UPC's Y2K Project is divided into five major initiatives, as follows:

Mainframe Systems - These systems have been converted, tested and deemed to be
Y2K compliant as of December 31, 1998. Periodic audits are planned during 1999
to help ensure that tested programs remain Y2K compliant.

Client Server Systems - Modifications of these systems are on schedule, and the
Corporation believes that all critical client server systems have been
converted, tested, and deemed to be Y2K compliant as of December 31, 1998. The
non-critical client server systems are scheduled to be tested as Y2K compliant
by mid-1999.

User Department Developed Systems - These systems consist of both mainframe and
PC-based systems developed by internal user departments. Modifications of these
systems are on schedule, and the Corporation estimates that approximately 95% of
the systems are complete as of December 31, 1998, and the remaining 5% are
mostly low priority systems that are scheduled to be completed in the first half
of 1999.

Vendor Supplied and Embedded Systems - These systems consist of vendor-supplied
software, desktop, mainframe and server hardware, databases and operating
systems, as well as equipment and machinery with embedded systems. Approximately
90% of the suppliers of these systems have indicated that they have a
comprehensive Year 2000 plan. The review of the remaining 10% is scheduled to be
completed in early 1999, which will result in either comprehensive plans or a
contingency direction. To help assure safety and Y2K compliance, UPC is testing
selected critical software, hardware and embedded systems, even if the vendor
has already certified the product. The Corporation is sharing information on the
compliance and testing of safety critical components common to the industry with
the cooperation of the Association of American Railroads (AAR).

Electronic Commerce Systems - These systems consist of all electronic exchanges
of information with customers, vendors, other railroads, and financial
institutions. The railroad industry has agreed on a standard 4-digit year for
all electronic interchanges. The Railroad can now transmit and receive the new
EDI standard that involves a 4-digit year. The Corporation plans extensive Y2K
testing with customers and trading partners in 1999.

For each of these initiatives, seven major categories of events have been
identified for contingency plans. These categories are (1) key data -
integrity/loss, (2) critical software, (3) critical hardware, (4)
communications, (5) critical supplies and suppliers, (6) facilities, and (7) key
personnel. The contingency plans also include a Y2K command center that will be
staffed 24 hours a day in the fourth quarter of 1999 and continuing into early
2000 for any problems that might occur due to Y2K. The staff

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<PAGE>

will be composed of technical experts to fix or advise what to fix if systems
fail, and knowledgeable representatives from each business unit. Contingency
plans continue to be developed and will be refined and adjusted throughout 1999.

As of December 31, 1998, approximately 90% of the Corporation's systems
(excluding Overnite) have been converted, tested, and deemed to be Y2K
compliant, and the remaining systems are expected to be modified by the second
quarter of 1999. Modification to Overnite's systems comprises approximately 10%
of UPC's total Y2K workload, and is estimated to be 90% complete. The remaining
modification to Overnite's systems is expected to be completed in the second
quarter of 1999. Costs to convert UPC's systems are expensed as incurred. As of
December 31, 1998, more than 60% of the costs of the Y2K project, estimated to
be $61 million in total, have been expensed. Although the Corporation believes
its systems will be successfully modified, failure by it, or by those from whom
UPC purchases equipment, or by other entities with whom UPC exchanges data, or
on whom it relies for data, to successfully modify their systems, 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 claims, 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 Corporation is fully successful in recovering from
the effects of the Railroad's congestion-related problems and implementing its
financial and operational initiatives, industry competition and legislative
and/or regulatory developments, natural events such as severe weather, floods
and earthquakes, the effects of adverse general economic conditions, changes in
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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INDEPENDENT AUDITORS' REPORT

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, 1998 and
1997, 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, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, in 1998
the Corporation changed its method of measuring enterprise level goodwill
impairment from an undiscounted cash flows approach to a fair value method based
on a discounted cash flows approach.

Dallas, Texas
January 21, 1999

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 54, 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.

Chairman, President and Chief Executive Officer

Executive Vice President - Finance

Controller

31
<PAGE>

<TABLE>
<CAPTION>
STATEMENT OF CONSOLIDATED INCOME
Union Pacific Corporation and Subsidiary Companies
- ------------------------------------------------------------------------------------------------------------
Millions of Dollars, Except Per Share Amounts 1998 1997 1996

- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES Rail, trucking and other....................... $10,553 $11,079 $8,786

OPERATING EXPENSES Salaries, wages and employee benefits [Note 9]. 4,348 4,166 3,260
Equipment and other rents...................... 1,426 1,404 966
Depreciation and amortization [Notes 1 and 5].. 1,070 1,043 762
Fuel and utilities [Note 4].................... 843 1,042 790
Materials and supplies......................... 565 560 469
Goodwill impairment [Note 1]................... 547 -- --
Casualty costs................................. 475 478 366
Property and use taxes......................... 229 226 183
Other costs.................................... 1,221 1,016 558

Total.......................................... 10,724 9,935 7,354

INCOME Operating Income (Loss)........................ (171) 1,144 1,432
Other income [Note 13]......................... 189 137 182
Interest expense [Notes 4 and 7]............... (714) (605) (501)

Income (Loss) before Income Taxes.............. (696) 676 1,113
Income taxes [Note 6].......................... 63 (244) (380)

Income (Loss) from Continuing Operations....... (633) 432 733
Income from Discontinued Operations [Note 3]... -- -- 171

Net Income (Loss).............................. $ (633) $ 432 $ 904

- ------------------------------------------------------------------------------------------------------------
PER SHARE [Note 11] Basic:
Income (Loss) from Continuing Operations..... $ (2.57) $ 1.76 $ 3.38
Income from Discontinued Operations.......... -- -- 0.79
Net Income (Loss)............................ $ (2.57) $ 1.76 $ 4.17
Diluted:
Income (Loss) from Continuing Operations..... $ (2.57) $ 1.74 $ 3.36
Income from Discontinued Operations.......... -- -- 0.78
Net Income (Loss)............................ $ (2.57) $ 1.74 $ 4.14
Dividends...................................... $ 0.80 $ 1.72 $ 1.72
</TABLE>

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

32
<PAGE>

STATEMENT OF CONSOLIDATED FINANCIAL POSITION

Union Pacific Corporation and Subsidiary Companies

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Millions of Dollars 1998 1997

- -------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C>
Current Assets Cash and temporary investments.............................. $ 176 $ 90
Accounts receivable [Note 4]................................ 643 727
Inventories................................................. 343 296
Current deferred tax asset [Note 6]......................... 244 129
Other current assets........................................ 96 269

Total....................................................... 1,502 1,511

Investments Investments in and advances to affiliated companies [Note 1] 520 443
Other investments........................................... 171 181

Total....................................................... 691 624

Properties Cost [Notes 5 and 7]........................................ 33,145 31,514
Accumulated depreciation [Note 5]........................... (6,206) (5,537)
Net......................................................... 26,939 25,977

Other Excess acquisition costs net [Note 1]...................... -- 562
Other assets................................................ 242 186
Total Assets................................................ $29,374 $28,860
- -------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities Accounts payable............................................ $ 586 $ 758
Accrued wages and vacation.................................. 410 421
Accrued casualty costs...................................... 400 427
Income and other taxes [Note 6]............................. 301 268
Dividends and interest...................................... 289 295
Debt due within one year [Note 7]........................... 181 233
Other current liabilities................................... 765 941

Total....................................................... 2,932 3,343

Other Liabilities and Debt due after one year [Note 7]............................ 8,511 8,285
Stockholders' Equity Deferred income taxes [Note 6].............................. 6,308 6,252
Accrued casualty costs...................................... 995 991
Retiree benefits obligation [Note 9]........................ 803 766
Other long-term liabilities [Note 12]....................... 932 998
Preferred securities [Note 7]............................... 1,500 --
Common stockholders' equity (page 35)....................... 7,393 8,225

Total Liabilities and Stockholders' Equity.................. $29,374 $28,860
</TABLE>

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

33
<PAGE>

STATEMENT OF CONSOLIDATED CASH FLOWS

Union Pacific Corporation and Subsidiary Companies

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Millions of Dollars 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FROM CONTINUING Net Income (Loss).................................. $ (633) $ 432 $ 904
OPERATIONS Non-cash charges to income:
Depreciation and amortization.................... 1,070 1,043 762
Goodwill impairment [Note 1]..................... 547 -- --
Deferred income taxes [Note 6]................... (74) 300 166
Other net....................................... (29) (196) (559)
Income from discontinued operations [Note 3]....... -- -- (171)
Changes in current assets and liabilities [Note 2]. (316) 21 555

Cash from Continuing Operations.................... 565 1,600 1,657

INVESTING ACTIVITIES Capital investments................................ (2,111) (2,101) (1,360)
Cash provided by discontinued operations [Note 3].. -- -- 41
Proceeds from Resources' notes receivable
repayment [Note 3]............................... -- -- 650
Southern Pacific acquisition [Note 2].............. -- -- (586)
Proceeds from sale of assets and other
investing activities [Note 3].................... 213 329 161
Cash Used in Investing Activities.................. (1,898) (1,772) (1,094)

EQUITY AND FINANCING Dividends paid [Note 7]............................ (255) (422) (353)
ACTIVITIES Debt repaid........................................ (1,789) (572) (2,047)
Financings [Note 7]................................ 3,480 1,092 1,741
Other net......................................... (17) (27) 57
Cash Provided by (Used in) Equity and
Financing Activities............................. 1,419 71 (602)

Net Change in Cash and Temporary Investments....... 86 (101) (39)
Cash at Beginning of Year.......................... 90 191 230

Cash at End of Year................................ $ 176 $ 90 $ 191
- -----------------------------------------------------------------------------------------------------------------
CHANGES IN CURRENT Accounts receivable................................ $ 84 $ (157) $ (8)
ASSETS AND LIABILITIES Inventories........................................ (47) 8 12
(Excluding SP Assets and Other current assets............................... 58 (53) 762
Liabilities Acquired in 1996) Accounts, wages and vacation payable............... (183) 47 4
Debt due within one year........................... (52) 106 (62)
Other current liabilities.......................... (176) 70 (153)

Total.............................................. $ (316) $ 21 $ 555
</TABLE>

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

34
<PAGE>

STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY

Union Pacific Corporation and Subsidiary Companies

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Millions of Dollars 1998 1997 1996

- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCK Common stock, $2.50 par value
(authorized 500,000,000 shares)

Balance at beginning of year
(276,047,556 shares issued in 1998;
274,595,151 in 1997; 232,317,010 in 1996).......... $ 690 $ 686 $ 581

Common stock issued in Southern Pacific
acquisition (38,089,704 shares)[Note 2].............. -- -- 95

Conversions, exercises of stock options and other
(287,867 shares in 1998;
1,452,405 in 1997; 4,188,437 in 1996).............. 1 4 10

Balance at end of year
(276,335,423 shares issued in 1998;
276,047,556 in 1997; 274,595,151 in 1996).......... 691 690 686

PAID-IN SURPLUS Balance at beginning of year......................... 4,066 4,009 2,111
Common stock issued in Southern Pacific
acquisition [Note 2]............................... -- -- 2,381
Distribution of investment in Resources [Note 3]..... -- -- (638)
Conversions, exercises of stock options and other.... (13) 57 155

Balance at end of year............................... 4,053 4,066 4,009

RETAINED EARNINGS Balance at beginning of year......................... 5,271 5,262 5,327
Net Income (Loss).................................... (633) 432 904

Total................................................ 4,638 5,694 6,231
Cash dividends declared.............................. (197) (423) (371)
Distribution of investment in Resources [Note 3]..... -- -- (598)

Balance at end of year [Note 7]...................... 4,441 5,271 5,262
TREASURY STOCK Balance at end of year, at cost
(28,885,160 shares in 1998;
29,045,938 shares in 1997; 27,935,628 in 1996)..... (1,792) (1,802) (1,732)

Total Common Stockholders' Equity [Note 10].......... $ 7,393 $ 8,225 $ 8,225
</TABLE>

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

35
<PAGE>

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
or where UPC exercises significant influence over an investee's operations) are
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.

The cost of internally developed software is capitalized and amortized over
a five-year period. An obsolescence review of capitalized software is performed
on a periodic basis.

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 enterprise level goodwill through a review of discounted cash flows (see
Note 1).

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 fuel-related 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. The effect of extinguishments, maturities, terminations and sales is
recorded in earnings in the period the instrument terminates (see Note 4).

EARNINGS PER SHARE -- Basic earnings per share (EPS) is 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 11) and the potential conversion of the preferred securities
(see Note 7) where the conversion of such instruments would be dilutive.

COMPREHENSIVE INCOME -- The Corporation adopted the provisions of Statement
No. 130, "Reporting Comprehensive Income," in 1998 and had no items of
comprehensive income to report in 1998, 1997 or 1996.

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 1998 financial statement presentation.

1. OPERATIONS AND SEGMENTATION

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

RAIL

OPERATIONS -- 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) (collectively the Railroad). In addition
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
(see Note 2).

The Railroad is the largest rail system in the United States, with nearly
34,000 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,

36
<PAGE>

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 finalized the integration of CNW in 1996
and expects to complete the integration of the operations of Southern Pacific
over the next three years.

EMPLOYEES -- Approximately 87% of the Railroad's 53,000 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 SPrail 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. The terms of ratified and pending labor agreements are
not expected to have a material adverse effect on the Corporation's results of
operations. The current national bargaining agreement will end in 2000. The
Corporation expects notices for negotiations to be served in November 1999.

TRUCKING

OPERATIONS -- The Corporation's other major line of business is truck
transportation. Overnite Transportation Company (Overnite or OTC), a major
interstate trucking company specializing in less-than-truckload (LTL) shipments,
serves all 50 states and portions of Canada and Mexico through 165 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.

EMPLOYEES -- As the nation's largest predominantly 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, OTC has received 89 petitions
for union elections at 66 of its 165 service centers. Twenty-one service
centers, representing approximately 14% of Overnite's nationwide workforce,
voted for union representation, and the Teamsters have been certified and
recognized as the bargaining representative for such employees. Elections
affecting approximately 400 additional employees are unresolved, and there are
no elections currently scheduled. To date, Overnite has not entered into any
collective bargaining agreements with the Teamsters; however, OTC is engaged in
collective bargaining negotiations over union contract demands at the 21
represented locations.

OPERATIONAL INITIATIVES -- During 1998, 1997 and 1996, Overnite benefited from
several initiatives 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. OTC has
also benefited from growth in its customer base generated by continuing
improvements in its service levels.

ATTEMPTED SALE OF OVERNITE -- In May 1998, the Corporation's Board of Directors
approved a formal plan to divest UPC's investment in Overnite through an initial
public offering (IPO). UPC recorded a $262 million after-tax loss from
discontinued operations in the second quarter of 1998 to provide for the
expected loss from the sale of Overnite. During the fourth quarter of 1998, it
became apparent that because of continued weakness in the IPO market, a
successful divestiture of OTC within the one year time limit prescribed by
generally accepted accounting principles (GAAP) was no longer reasonably
assured. As a result, in the fourth quarter of 1998, the Corporation
reclassified Overnite's results to continuing operations and reversed the $262
million loss from discontinued operations. Overnite's operating results have
been reclassified to continuing operations for all periods. At December 31,
1998, Overnite had assets of $823 million, liabilities of $250 million, and for
the year ended December 31, 1998 had revenues of $1,034 million and an operating
loss of $508 million which included the one-time charge for the revaluation of
goodwill which generated a loss of $547 million both pre- and after-tax.

37
<PAGE>

GOODWILL REVALUATION -- During the fourth quarter of 1998, the Corporation
changed its method of measuring impairment of enterprise level goodwill from an
undiscounted cash flow method to a fair value method based on discounted cash
flows. The Corporation believes that a discounted cash flow approach is
preferable since it provides a more current and realistic valuation than the
undiscounted method and more closely matches Overnite's fair value. In
connection with the change in accounting policy with respect to measurement of
goodwill impairment described above, $547 million of goodwill related to the
acquisition of Overnite was written off during the fourth quarter of 1998. GAAP
precludes the recognition of tax benefits associated with goodwill charges to
income. Should the Corporation sell Overnite in the future, a tax benefit
associated with the goodwill write-down may be recognized.

The following tables detail reportable financial information for each of
the Corporation's segments:

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Millions of Dollars Rail Trucking Other/[a]/ Consol.
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Net sales and revenues from
external customers/[b]/........ $ 9,368 $ 1,034 $ 151 $10,553
Depreciation and
amortization/[c]/.............. 1,003 607 7 1,617
Operating income (loss)/[c]/....... 433 (508) (96) (171)
Interest income.................... 20 13 (5) 28
Interest expense................... 603 1 110 714
Income tax (benefit) expense....... (11) 24 (76) (63)
Earnings of non-
consolidated affiliates/[d]/... 52 -- -- 52
Net income (loss).................. 27 (522) (138) (633)
Investments in non-
consolidated affiliates/[d]/... 520 -- -- 520
Segment assets..................... 28,357 823 194 29,374
Expenditures for property.......... 2,044 59 8 2,111
- ------------------------------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------
Millions of Dollars Rail Trucking Other/[a]/ Consol.
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
Net sales and revenues from
external customers/[b]/........ $ 9,981 $ 946 $ 152 $11,079
Depreciation and
amortization/[c]/.............. 972 62 9 1,043
Operating income (loss)/[c]/....... 1,253 10 (119) 1,144
Interest income.................... 15 11 (9) 17
Interest expense................... 473 2 130 605
Income tax (benefit)
expense........................ 332 16 (104) 244
Earnings of non-
consolidated affiliates/[d]/... 41 -- -- 41
Net income (loss).................. 620 4 (192) 432
Investments in non-
consolidated affiliates/[d]/... 443 -- -- 443
Segment assets..................... 27,343 1,351 166 28,860
Expenditures for property.......... 2,035 40 26 2,101
- ------------------------------------------------------------------------------------------------------

<CAPTION>
- ------------------------------------------------------------------------------------------------------
Millions of Dollars Rail Trucking Other /[a/,/e]/ Consol.
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
Net sales and revenues from
external customers/[b]/........ $ 7,680 $ 961 $ 145 $ 8,786
Depreciation and
amortization/[c]/.............. 686 65 11 762
Operating income (loss)/[c]/....... 1,602 (67) (103) 1,432
Interest income.................... 14 9 27 50
Interest expense................... 323 2 176 501
Income tax (benefit)
expense........................ 477 (14) (83) 380
Earnings of non-
consolidated affiliates/[d]/... 52 -- -- 52
Net income (loss).................. 940 (43) 7 904
Investments in non-
consolidated affiliates/[d]/... 387 -- -- 387
Segment assets..................... 26,344 1,358 288 27,990
Expenditures for property.......... 1,339 10 11 1,360
- ------------------------------------------------------------------------------------------------------
</TABLE>

[a] UPC's other segments included corporate holding company operations; Skyway
Freight Systems, Inc., a provider of contract logistics and supply chain
management services; Union Pacific Technologies, a provider of transportation-
related technologies; and Wasatch Insurance Limited, a captive insurance
company.

[b] The Corporation does not have significant intercompany sales activities.

[c] Depreciation and amortization included the one-time revaluation of
Overnite's goodwill of $547 million in 1998 and goodwill amortization at
Overnite of $15 million in 1998 and $20 million in 1997 and 1996.

[d] The Railroad has equity interest in several railroad-related and other
businesses.

[e] Included $171 million of net income from UPC's discontinued oil and gas
operations (see Note 3). Excluding discontinued operations, the net loss from
other operations would have been $164 million.

38
<PAGE>

CONSOLIDATED

RISK FACTORS -- The Corporation's future results may be affected by changes in
the economic environment, fluctuations in fuel prices and external factors such
as weather. 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. Operating results at the
Railroad and Overnite can also 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. In addition,
rail operations are much more susceptible to prolonged interruption due to
weather or derailment as operations continue to recover from the effects of
system congestion that began late in 1997. The Corporation's future results are
dependent on the continued success of its service recovery efforts and regaining
its customers who switched to alternative transportation arrangements during the
service crisis.

2. ACQUISITIONS

SOUTHERN PACIFIC -- UPC consummated the acquisition of Southern Pacific in
September 1996. SP was acquired for $4.1 billion (60% of the outstanding
Southern Pacific common shares were converted into UPC common stock, and the
remaining 40% of the outstanding shares were acquired for 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
and was fully consolidated into UPC results beginning October 1996.

Merger Consolidation Activities -- 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
employees involved in activities other than train, engine and yard activities.
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.

To date UPC has severed 2,400 employees and relocated 3,800 due to merger
implementation activities. UPC recognized a $958 million pre-tax liability in
the SP purchase price allocation for costs associated with SP's portion of these
activities. In addition, the Railroad expects to incur $160 million in pre-tax
acquisition-related costs for severing or relocating UPRR employees, disposing
of certain UPRR facilities, and training and equipment upgrading over the merger
implementation period. Earnings for 1998 and 1997 included $68 million pre-tax
or $42 million after-tax, and $97 million pre-tax and $60 million after-tax,
respectively, for acquisition-related costs for UPRR consolidation activities.

The components of the merger liability as of December 31, 1998 were as follows:

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Original Cumulative Current
Millions Of Dollars Reserve Activity Reserve
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Labor protection related to
legislated and contractual
obligations....................... $361 $361 $ --
Severance costs...................... 343 253 90
Contract cancellation fees and
facility and line closure costs.... 145 121 24
Relocation costs..................... 109 79 30
Total................................ $958 $814 $144
- --------------------------------------------------------------------------------
</TABLE>

MERGER LIABILITIES -- Merger liability activity reflected cash payments for
merger consolidation activities and reclassification of contractual obligations
from merger liabilities to contractual liabilities. In addition, where merger
implementation has varied from the original merger plan, the Corporation has
adjusted the merger liability and the fair value allocation of SP's purchase
price to fixed assets to eliminate the portion of the merger liability that is
no longer required. Where the merger implementation has caused the Corporation
to incur more costs than were envisioned in the original merger plan, such costs
are charged to expense in the period incurred. The Corporation expects that the
remaining merger payments will be made over the course of the next three years
as labor negotiations are completed and implemented, and related merger
consolidation activities are finalized.

PRO FORMA RESULTS -- The pro forma results presented below have been prepared to
reflect the consummation of the Southern Pacific acquisition as if such events
occurred as of January 1, 1996. These results 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

39
<PAGE>

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
actually occurred on the date indicated, or of future results of operations of
the resulting entity.

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Millions of Dollars, Except Per Share Amounts Pro Forma 1996
- --------------------------------------------------------------------------------
<S> <C>
Operating Revenues............................. $11,219
Operating Income............................... 1,606
Net Income..................................... 664
EPS Basic...................................... 2.73
EPS Diluted.................................... 2.71
- --------------------------------------------------------------------------------
</TABLE>

MEXICAN RAILWAY CONCESSION - During 1997 the Corporation's rail subsidiary,
UPRR, 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 on the equity method. The
consortium assumed operational control of both lines in 1998. In January 1999,
the Corporation signed a letter of intent to acquire an additional 13% ownership
interest.

3. DIVESTITURES

SKYWAY - In November 1998, the Corporation completed the sale of Skyway Freight
Systems, Inc. (Skyway), a wholly-owned subsidiary. Skyway provides contract
logistics and supply chain management services. The proceeds were used to repay
outstanding debt. The sale of Skyway generated a net, after-tax loss of $50
million, of which $40 million was recognized in the fourth quarter of 1997.

RESOURCES - In July 1995, the Corporation's Board of Directors approved a formal
plan to divest of UPC's natural resources business, Union Pacific Resources
Group Inc. (Resources), through an 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 in September 1996, the
Corporation's Board of Directors declared a special dividend consisting of the
shares of Resources common stock owned by UPC. Resources' results have been
reported as discontinued operations in the Corporation's financial statements
for 1996.

4. FINANCIAL INSTRUMENTS

RISK MANAGEMENT

STRATEGY AND RISK - 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.

MARKET AND CREDIT RISK - 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 $41 million at December 31, 1998. The
Corporation has not been required to provide collateral; however, UPC has
received collateral relating to its hedging activity where the concentration of
credit risk was substantial.

DETERMINATION OF FAIR VALUE - The fair market values of the Corporation's
derivative financial instrument positions at December 31, 1998 and 1997,
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 U.S. treasury rate and swap
spread.

INTEREST RATES

STRATEGY - 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
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.

FINANCIAL IMPACT - At December 31, 1998, the Corporation had outstanding
interest rate swaps on $150 million of notional principal amount of debt (2% of
the total debt portfolio) with a gross fair market value asset

40
<PAGE>

position of $41 million and a gross fair market value liability position of $5
million. These contracts mature over the next 1 to 2 years. At December 31,
1997, the Corporation had outstanding interest rate swaps on $193 million of
notional principal amount of debt (2% 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 $16 million. Interest rate hedging activity increased
interest expense by $4 million in 1998, $3 million in 1997 and had no
significant effect in 1996, raising the weighted-average borrowing rate by no
more than 10 basis points in any year.

FUEL

STRATEGY - Over the past three years, fuel costs have been a significant portion
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.

FINANCIAL IMPACT - At December 31, 1998, the Railroad and Overnite had hedged
64% and 41% of their forecasted 1999 fuel consumption at a price of $0.41 per
gallon and $0.45 per gallon, respectively. At December 31, 1997, the Railroad
and Overnite had hedged 42% and 34% of their forecasted 1998 fuel consumption,
respectively. In addition, at year-end 1998, the Railroad had outstanding swap
agreements covering its fuel purchases in 1999 of $343 million, with gross and
net liability positions of $49 million. 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 increased
the Railroad's 1998 fuel costs by $87 million, had no significant effect on 1997
fuel costs, and lowered 1996 fuel costs by $34 million. At year-end 1998,
Overnite had outstanding swap agreements of $10 million with gross and net
liability positions of $2 million. At year-end 1997, Overnite had outstanding
swap agreements of $10 million, with gross and net liability positions of $1
million. Fuel hedging increased 1998 fuel costs by $3 million and had no
significant effect on fuel costs for Overnite for 1997 and 1996.

FAIR VALUE OF DEBT 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, 1998, the
fair value of total debt exceeded the carrying value by approximately 4% of the
Corporation's total debt portfolio. Approximately $1.5 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.

SALE OF RECEIVABLES

The Railroad has sold, on a revolving basis, an undivided percentage ownership
interest in a designated pool of accounts receivable through a bankruptcy remote
subsidiary (the Subsidiary) to third parties. The Subsidiary is collateralized
by a $75 million note from UPRR. The amount of receivables sold fluctuates based
upon the availability of the designated pool of receivables and is directly
affected by changing business volumes and credit risks. At December 31, 1998 and
1997, accounts receivable are presented net of the $580 million and $650 million
of receivables sold, respectively.

5. PROPERTIES

Major property accounts were as follows:

- --------------------------------------------------------------------------------
Millions of Dollars 1998 1997
- --------------------------------------------------------------------------------

Railroad:
Road and other................................$24,789 $23,610
Equipment..................................... 7,545 7,084
Total Railroad.................................... 32,334 30,694
Trucking.......................................... 785 750
Other............................................. 26 70
Total.............................................$33,145 $31,514
- --------------------------------------------------------------------------------

Accumulated depreciation accounts were as follows:

- --------------------------------------------------------------------------------
Millions of Dollars 1998 1997
- --------------------------------------------------------------------------------

Railroad:
Road and other................................$ 3,303 $ 2,938
Equipment..................................... 2,568 2,270
Total Railroad.................................... 5,871 5,208
Trucking.......................................... 325 297
Other............................................. 10 32
Total.............................................$ 6,206 $ 5,537
- --------------------------------------------------------------------------------

41
<PAGE>

6. INCOME TAXES

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

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Millions of Dollars 1998 1997 1996
- -------------------------------------------------------------------------------

<S> <C> <C> <C>
Current:
Federal.................................. $ 13 $ (50) $ 200
State.................................... (2) (6) 14
Total current................................ 11 (56) 214
Deferred:
Federal.................................. 261 270 149
State.................................... 15 30 17
Benefit of net operating loss............ (350)
Total deferred............................... (74) 300 166
Total........................................ $ (63) $ 244 $ 380
- -------------------------------------------------------------------------------
</TABLE>

Deferred tax liabilities (assets) comprise the following:

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Millions of Dollars 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Net current deferred tax asset................. $ (244) $ (129)
Excess tax over book depreciation.............. 7,314 7,050
State taxes net............................... 494 504
SP merger reserves............................. (50) (235)
Long-term liabilities.......................... (362) (208)
Retirement benefits............................ (327) (307)
Alternative minimum tax........................ (192) (201)
Net operating loss............................. (754) (528)
Other.......................................... 185 177
Net long-term deferred tax liability........... 6,308 6,252
Net deferred tax liability..................... $ 6,064 $ 6,123
- -------------------------------------------------------------------------------
</TABLE>

The Corporation has a deferred tax asset reflecting the benefits of $2,552
million in net operating loss carryforwards (NOLs), which expire as follows:

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Millions of Dollars
- -------------------------------------------------------------------------------
<S> <C>
Expiring December 31:
2002............................................................... $ 455
2003............................................................... 262
2004............................................................... 134
2005............................................................... 136
2006............................................................... 226
2007-2016.......................................................... 1,339
Total................................................................ $2,552
- -------------------------------------------------------------------------------
</TABLE>

The Internal Revenue Code 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.

A reconciliation between statutory and effective tax rates of continuing
operations is as follows:

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory tax rate......... (35.0)% 35.0% 35.0%
State taxes net........... (1.6) 2.3 1.8
Goodwill amortization and
impairment [Note 1].... 28.4 1.3 0.7
Dividend exclusion......... (1.7) (1.6) (1.4)
Tax settlement............. (0.9) (2.3)
Other...................... 0.8 0.3
Effective tax rate......... (9.1)% 36.1% 34.1%
- -------------------------------------------------------------------------------
</TABLE>

All material IRS deficiencies prior to 1986 have been settled. The Corporation
and the IRS have settled all issues through 1982, including Tax Court cases for
years through 1979. In addition, the Corporation has reached a partial
settlement with the IRS Appeals for 1983 through 1985; the remaining issues will
be resolved as part of the refund claims filed for those years. The Corporation
is negotiating with the Appeals Office concerning 1986 through 1989. The IRS is
examining the Corporation's returns for 1990 through 1994. The Corporation
believes it has adequately provided for Federal and state income taxes.

Net payments (refunds) of income taxes were $(103) million in 1998, $64 million
in 1997 and $108 million in 1996.

42
<PAGE>

7. DEBT

Total debt is summarized below:

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Millions of Dollars 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Notes and debentures,
0.0% to 11.5% due through 2054..................... $4,219 $3,526
Capitalized leases..................................... 1,434 1,251
Medium-term notes,
6.3% to 10.0% due through 2020..................... 985 403
Equipment obligations,
6.0% to 10.3% due through 2019..................... 858 910
Term floating rate debt,
5.5% to 6.2% due through 2012...................... 644 392
Credit facility borrowings,
average of 5.7% in 1998............................ 200 -
Mortgage bonds,
4.3% to 5.0% due through 2030...................... 175 176
Tax-exempt financings,
4.2% to 5.7% due through 2026...................... 168 168
Commercial paper and bid notes,
average of 5.9% in 1998 and 6.1% in 1997........... 56 1,743
Unamortized discount................................... (47) (51)
Total debt............................................. 8,692 8,518
Less current portion................................... (181) (233)
Total long-term debt................................... $8,511 $8,285
- --------------------------------------------------------------------------------
</TABLE>

DEBT MATURITIES - For the years 1999 through 2003, debt maturities are $181
million, $736 million, $1,265 million, $604 million and $674 million,
respectively. Interest payments approximate gross interest expense.

MORTGAGED PROPERTIES - Approximately 30% of all rail equipment and other
Railroad properties secures outstanding equipment obligations and mortgage
bonds.

CREDIT FACILITIES - The Corporation has $4 billion of credit facilities with
various banks designated for general corporate purposes, of which $3.8 billion
is unused at December 31, 1998; $1.2 billion of these facilities expires in
1999, while the remaining $2.8 billion expires in 2001. Commitment fees and
interest rates payable under these facilities are similar to fees and rates
available to comparably rated investment-grade 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 $537 million,
which are due within one year, have been reclassified as long-term debt maturing
in the year 2001. This reclassification 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.

SIGNIFICANT NEW BORROWINGS

Convertible Preferred Securities - On April 1, 1998, Union Pacific Capital Trust
(the Trust), a statutory business trust sponsored and wholly-owned by the
Corporation, issued $1.5 billion aggregate liquidation amount of 61.4%
Convertible Preferred Securities (the Preferred Securities). Each of the
Preferred Securities has a stated liquidation amount of $50 and is convertible,
at the option of the holder, into shares of UPC's common stock, par value $2.50
per share, at the rate of 0.7257 shares of UPC common stock for each of the
Preferred Securities, equivalent to a conversion price of $68.90 per share of
UPC common stock, subject to adjustment under certain circumstances. The
Preferred Securities accrue and pay cash distributions quarterly in arrears at
the annual rate of 61.4%. The Corporation owns all of the common securities of
the Trust.

The proceeds from the sale of the Preferred Securities and the common
securities of the Trust were invested by the Trust in $1.5 billion aggregate
principal amount of the Corporation's Convertible Junior Subordinated Debentures
due 2028 (the Debentures). The Debentures represent the sole assets of the
Trust. The Debentures accrue and pay interest quarterly in arrears at the annual
rate of 61.4%. The Debentures mature on April 1, 2028, unless previously
redeemed or repurchased in accordance with the terms of the indenture (the
Indenture). The proceeds from the issuance of the Debentures were used by the
Corporation for repayment of corporate borrowings.

The Corporation has guaranteed, on a subordinated basis, distributions and
other payments due on the Preferred Securities (the Guarantee). Considered
together, the Corporation's obligations under the Debentures, the Indenture, the
Guarantee and the Amended and Restated Declaration of Trust governing the Trust
provide a full and unconditional guarantee by the Corporation of the Trust's
obligations under the Preferred Securities.

For financial reporting purposes, the Corporation has recorded distributions
payable on the Preferred Securities as an interest charge to earnings in the
statement of consolidated income.

43
<PAGE>

Medium-Term Notes - The Corporation designated the $1,225 million balance of its
shelf registration statement as potentially available for a medium-term note
program in the fourth quarter of 1998. By December 31, 1998, the Corporation had
issued $598 million under the medium-term note program and intends to continue
to issue debt from time to time, either pursuant to the medium-term note program
or in underwritten transactions. The proceeds of such issuances will be used for
general corporate purposes, including repayment of maturing debt or commercial
paper borrowings. At December 31, 1998, the Corporation had $627 million
remaining for issuance under its shelf registration.

DIVIDEND RESTRICTIONS - 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 $1.9 billion at
December 31, 1998.

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, 1998 were as follows:

- --------------------------------------------------------------------------------
Operating Capital
Millions of Dollars Leases Leases
- --------------------------------------------------------------------------------

1999..................................... $ 397 $ 213
2000..................................... 364 218
2001..................................... 317 221
2002..................................... 244 208
2003..................................... 209 186
Later years.............................. 1,909 1,225
- --------------------------------------------------------------------------------
Total minimum payments................... $3,440 2,271
- ----------------------------------------------------

Amount representing interest............. (837)

Present value of minimum lease payments.. $1,434
- --------------------------------------------------------------------------------

Rent expense for operating leases with terms exceeding one month was $672
million in 1998, $590 million in 1997 and $513 million in 1996. Contingent
rentals and sub-rentals are not significant.

9. RETIREMENT PLANS

BENEFIT SUMMARY - The Corporation provides defined benefit retirement income to
eligible non-union employees through qualified and non-qualified (supplemental)
pension plans. In addition, all non-union and certain of the Corporation's union
employees participate in defined contribution medical and life insurance
programs for retirees. All Railroad employees are covered by the Railroad
Retirement System (the System).

FUNDING AND BENEFIT PAYMENTS - 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. The
Corporation also provides medical and life insurance benefits on a cost sharing
basis for qualifying employees. These costs are funded as incurred. In addition,
contributions made to the System are expensed as incurred and amounted to
approximately $411 million in 1998, $392 million in 1997 and $275 million in
1996.

The following illustrates the change in the Corporation's projected benefit
obligation for 1998 and 1997:

- --------------------------------------------------------------------------------
Other
Pension Postretirement
Benefits Benefits
Millions of Dollars 1998 1997 1998 1997
- --------------------------------------------------------------------------------

Net benefit obligation at
beginning of year........................$1,849 $1,590 $ 425 $ 417
Service cost................................. 40 33 8 8
Interest cost................................ 127 122 29 30
Plan amendments.............................. 2 104 (2)
Actuarial (gain) loss........................ 39 94 12 (4)
Gross benefits paid.......................... (102) (94) (28) (26)
Net benefit obligation at
end of year..............................$1,955 $1,849 $ 444 $ 425

44
<PAGE>

Changes in the Corporation's benefit plan assets are summarized as follows
for 1998 and 1997:

- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fair value of plan assets
at beginning of year............................... $1,858 $1,634 $ - $ -
Actual return on
plan assets........................................ 331 263 - -
Employer contributions................................. 13 55 28 26
Gross benefits paid.................................... (102) (94) (28) (26)
Fair value of plan assets
at end of year..................................... $2,100 $1,858 $ - $ -
- -----------------------------------------------------------------------------------------------
</TABLE>

The components of funded status of the benefit plans for 1998 and 1997 were
as follows:

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Other
Pension Postretirement
Benefits Benefits
Millions of Dollars 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Funded status at
end of year........................................ $ 145 $ 8 $(444) $(425)
Unrecognized net
actuarial gain..................................... (554) (419) (44) (55)
Unrecognized prior
service cost (credit).............................. 107 117 (26) (32)
Unrecognized net
transition obligation.............................. (16) (14)
Net liability recognized
at end of year..................................... $ (318) $ (308) $(514) $(512)
- -----------------------------------------------------------------------------------------------
</TABLE>

Amounts recognized for the benefit plan liabilities in the statement of
consolidated financial position for 1998 and 1997 consisted of:

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Other
Pension Postretirement
Benefits Benefits
Millions of Dollars 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------

- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prepaid benefit cost....................... $ 1 $ 1 $ - $ -
Accrued benefit cost....................... (319) (309) (514) (512)
Additional minimum
liability.............................. (15) (33) - -
Intangible asset........................... 15 33 - -
Net liability recognized
at end of year......................... $(318) $(308) $(514) $(512)
- --------------------------------------------------------------------------------------------------------
</TABLE>

The components of the Corporation's net periodic pension costs for the years
ended December 31, 1998, 1997 and 1996 were as follows:

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Other
Pension Postretirement
Benefits Benefits

Millions of Dollars 1998 1997 1996 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost............................... $ 40 $ 33 $ 32 $ 8 $ 8 $ 8
Interest cost.............................. 127 122 89 29 30 22
Expected return on
assets................................. (144) (118) (88) - - -
Amortization of:
Transition obligation.................. 1 2 4 - - -
Prior service
cost (credit)...................... 12 9 7 (7) (7) (7)
Actuarial gain............................. (10) (11) (5) (3) (3) (2)
Total net periodic
benefit cost........................... $ 26 $ 37 $ 39 $ 27 $ 28 $ 21
- --------------------------------------------------------------------------------------------------------
</TABLE>

As of year-end 1998 and 1997, approximately 31% and 32%, respectively, of
the funded plans' assets were held in fixed-income and short-term securities,
with the remainder in equity securities.

The weighted-average actuarial assumptions for the years ended December 31,
1998, 1997 and 1996 were as follows:

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Other
Pension Postretirement
Benefits Benefits
Percentages 1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate............ 6.75% 7.0% 7.5% 6.75% 7.0% 7.5%
Expected return on
plan assets............. 9.0 9.0 8.0 N/A N/A N/A
Rate of compensation
increase................ 3.75 4.0 4.5 3.75 4.0 4.5
to to to to to to
4.75 5.0 5.5 4.75 5.0 5.5
Health care cost trend:
Current................. N/A N/A N/A 9.0 9.0 9.5
Level in 2005........... N/A N/A N/A 4.5 4.5 5.0
- ------------------------------------------------------------------------------------
</TABLE>

Assumed health care cost trend rates have a significant effect on the
amount reported for health care plans. A one percentage point change in the
assumed health care cost trend rates would have the following effects:

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
One % pt. One % pt.
Millions of Dollars increase decrease
- ------------------------------------------------------------------------------------
<S> <C> <C>
Effect on total service and interest
cost components.......................... $ 3 $ (3)
Effect on postretirement benefit obligation.. 32 (27)
- ------------------------------------------------------------------------------------
</TABLE>

45
<PAGE>

10. STOCK OPTION PLANS, RETENTION STOCK PLANS AND OTHER CAPITAL STOCK

OPTIONS - Pursuant to the Corporation's stock option and retention stock plans
for officers and key employees, 4,493,578, 8,997,375 and 8,586,773 common shares
were available for grant as retention stock or options at December 31, 1998,
1997 and 1996, respectively. Options under the plans are granted at 100% of
market value at the grant date and are exercisable for a period of 10 years from
the grant date. Options generally become exercisable no earlier than one year
after grant. Shares under option at the date of the Resources Spin-Off that
occurred in 1996 were increased and revalued to reflect the market value change
resulting from the Spin-Off.

RETENTION AND RESTRICTED STOCK - The plans also provide for awarding retention
shares of common stock to eligible employees, generally subject to forfeiture if
employment terminates during the prescribed restricted period or, in some cases,
if certain prescribed stock price or other financial criteria are not met, and
restricted stock to directors subject to forfeiture if certain service
requirements are not met. In 1996, the year of the Resources Spin-Off, 472,818
additional retention and restricted shares were issued to reflect the market
value change resulting from the Spin-Off. During 1996, 1,534,786 retention and
restricted shares were issued at a weighted-average fair value of $56.78. No
retention or restricted shares were issued in 1997. During 1998, 322,025
retention and restricted shares were issued at a weighted-average fair value of
$51.77. A portion of the retention shares issued in 1998 and 1996 were subject
to stock price or performance targets. The cost of retention shares is amortized
to expense over the vesting period. In 1998, 1997 and 1996, UPC charged $16
million, $24 million and $30 million, respectively, to expense for the
amortization of retention shares.

DETERMINATION OF FAIR VALUE OF OPTIONS - The fair value of each stock option
granted is estimated for the determination of pro forma expense using a Black-
Scholes option-pricing model. The expense impact of the option grant is
reflected in pro forma results, included in the table below, over the options'
vesting period and is determined as of the date of grant. During 1996, 5,687,448
options were granted at a weighted-average option price of $56.35. The pro forma
expense determination for options granted in 1996 was valued using the following
weighted-average assumptions: dividend yield of 3.0%, risk-free interest rate of
5.9%, expected option period of four years, and volatility of 21.1%. There were
no options granted during 1997. During 1998, 15,653,880 options were granted at
a weighted-average option price of $53.10. The pro forma expense determination
for options granted in 1998 was based on the following weighted-average
assumptions: dividend yield of 1.8%, risk-free interest rate of 4.5%, expected
option period of four years, and volatility of 24.2%.

Pro forma net income (loss) and EPS for 1998, 1997 and 1996 including
compensation expense for options that vested in each year were as follows:

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
1998/[a]/ 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income (Loss) (millions)................................... $ (684) $ 418 $ 901
EPS Basic..................................................... $(2.78) $1.70 $ 4.16
EPS Diluted................................................... $(2.78) $1.69 $ 4.13
- ------------------------------------------------------------------------------------------------------
</TABLE>

Changes in common stock options outstanding were as follows:

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Weighted-
Shares Average Option
Under Option Price Per Share
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance December 31, 1995...................................... 7,091,452 $ 49.58
Granted........................................................ 5,687,448 56.35
Exercised...................................................... (2,081,752) 39.39
Expired/Surrendered............................................ (326,082) 51.43
Spin-Off Conversion [Note 3]................................... 2,833,601 (16.51)
Balance December 31, 1996...................................... 13,204,667 43.42
Granted........................................................ - -
Exercised...................................................... (1,620,648) 32.85
Expired/Surrendered............................................ (247,676) 55.61
Balance December 31, 1997...................................... 11,336,343 44.65
GRANTED/[a]/................................................... 15,653,880 53.10
EXERCISED...................................................... (315,528) 27.52
EXPIRED/SURRENDERED............................................ (175,116) 56.13

BALANCE DECEMBER 31, 1998...................................... 26,499,579 49.77
- ------------------------------------------------------------------------------------------------------
</TABLE>

[a] During 1998 the Corporation implemented a broad-based option program that
granted each employee 200 options at $55.00 per share. This program resulted in
11,236,400 new options in 1998 and generated an after-tax pro forma compensation
expense of $33 million in 1998. The conversion of these options will be effected
with treasury shares and are not issued under the stock option plan for officers
and key employees.

46
<PAGE>

Stock options outstanding at December 31, 1998 were as follows:

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Weighted- Weighted-
Average Average
Number of Years to Option
Options Expiration Price
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Range of Option Prices:
$6.02 to $42.25............................................. 4,412,832 5 $31.75
$42.87 to $48.19............................................ 5,314,477 9 46.45
$55.00...................................................... 11,236,400 9 55.00
$56.50 to $59.82............................................ 5,535,870 8 56.72
BALANCE DECEMBER 31, 1998....................................... 26,499,579 8 49.77
- -------------------------------------------------------------------------------------------------------------
</TABLE>

Stock options exercisable at December 31, 1998 were as follows:

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Weighted- Weighted-
Average Average
Number of Years to Option
Options Expiration Price
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Range of Option Prices:
$6.02 to $31.60............................................. 3,392,094 5 $30.21
$32.26 to $43.75............................................ 1,928,802 4 39.94
$45.69 to $59.82............................................ 2,070,603 8 54.59
Balance December 31, 1998....................................... 7,391,499 6 39.5
- -------------------------------------------------------------------------------------------------------------

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

11. EARNINGS PER SHARE

The following table provides a reconciliation between basic and diluted earnings
per share for the years ended:

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Millions, Except Per Share Amounts 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income Statement Data:
Income (loss) from
continuing operations........................................... $ (633) $ 432 $ 733
Income (loss) available to
common stockholders from
continuing operations....................................... (633) 432 733
Income from discontinued
operations...................................................... - - 171
Net income (loss) available
to common stockholders.......................................... (633) 432 904
Weighted-Average Number of
Shares Outstanding:
Basic........................................................... 246.0 245.7 216.7
Dilutive effect of common
stock equivalents/[a]/...................................... - 2.4 1.3
Diluted................................................................. 246.0 248.1 218.0
Earnings per Share:
Basic:
Income (loss) from
continuing operations....................................... $ (2.57) $ 1.76 $ 3.38
Income from discontinued
operations.................................................. 0.79
Net income (loss)................................................... $ (2.57) $ 1.76 $ 4.17
Diluted:/[a]/
Income (loss) from
continuing operations....................................... $ (2.57) $ 1.74 $ 3.36
Income from discontinued
operations.................................................. 0.78
Net income (loss)................................................... $ (2.57) $ 1.74 $ 4.14
- ----------------------------------------------------------------------------------------------------------------
</TABLE>

[a] Excluded the effect of anti-dilutive common stock equivalents related to
options and Convertible Preferred Securities (see Note 7), which were 1.4
million and 16.3 million, respectively, at December 31, 1998.

12. COMMITMENTS AND CONTINGENCIES

There are various claims and lawsuits pending against the Corporation and
certain of its subsidiaries. The Corporation is also subject to Federal, state
and local environmental laws and regulations, pursuant to which it is currently
participating in the investigation and remediation of numerous sites. In
addition, the Corporation and its subsidiaries also periodically enter into
financial and other commitments in connection with their businesses, and have
retained certain contingent liabilities upon the disposition of formerly-owned
operations.

47
<PAGE>

It is not possible at this time for the Corporation to determine fully the
effect of all unasserted claims on its consolidated financial condition, results
of operations or liquidity; however, to the extent possible, where unasserted
claims can be estimated and where such claims are considered probable, the
Corporation has recorded a liability. The Corporation does not expect that any
known lawsuits, claims, environmental costs, commitments or guarantees will have
a material adverse effect on its consolidated financial condition. Certain
potentially significant contingencies relating to the Corporation's and its
subsidiaries' businesses are detailed below:

CUSTOMER CLAIMS - Certain customers have submitted claims for damages related to
shipments delayed by the Railroad as a result of congestion problems, 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 damages, alternative
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
the Railroad. The Corporation has accrued $456 million for these claims ($370
million in 1998 and $86 million in 1997).

ENVIRONMENTAL ISSUES - For environmental sites where remediation costs can be
reasonably determined, and where such remediation is probable, the Corporation
has recorded a liability. At December 31, 1998, the Corporation had accrued $207
million for estimated future environmental costs and believes it is reasonably
possible that actual environmental costs could be lower than the recorded
reserve or as much as 25% higher.

SHAREHOLDER LAWSUITS - UPC and certain of its current and former directors and
officers are defendants in two purported class actions, which have been
consolidated into one proceeding. The consolidated complaint alleges, among
other things, that the Corporation violated the Federal securities laws by
failing to disclose material facts and making materially false and misleading
statements concerning the service, congestion and safety problems encountered
following the Corporation's acquisition of Southern Pacific in 1996. These
lawsuits were filed in late 1997 in the United States District Court for the
Northern District of Texas and seek to recover unspecified amounts of damages.
Management believes that the plaintiffs' claims are without merit and intends to
defend them vigorously. The defendants have moved to dismiss this action, and
the motion has been fully briefed.

In addition to the class action litigation, a purported derivative action
was filed on behalf of the Corporation and the Railroad in September 1998 in the
District Court for Tarrant County, Texas, naming as defendants the then-current
and certain former directors of the Corporation and the Railroad and, as nominal
defendants, the Corporation and the Railroad. The derivative action alleges,
among other things, that the named directors breached their fiduciary duties to
the Corporation and the Railroad by approving and implementing the Southern
Pacific merger without informing themselves of its impact or ensuring that
adequate controls were put in place and by causing UPC and the Railroad to make
misrepresentations about the Railroad's service problems to the financial
markets and regulatory authorities. The Corporation's Board of Directors has
established a special litigation committee consisting of three independent
directors to review the plaintiff's allegations, and determine whether it is in
UPC's best interest to pursue them. Pleadings have been filed seeking a stay of
further proceedings in that action pending completion of the special committee's
investigation. The individual defendants believe that these claims are without
merit and intend to defend them vigorously.

13. OTHER INCOME

Other income included the following:

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Millions of Dollars 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net gain on asset dispositions........ $ 125 $ 102 $ 92
Rental income......................... 55 75 38
Interest income....................... 28 17 50
Interest on Resources
notes receivable [Note 3]......... - - 33
Loss on sale of Skyway................ (18) (65)
Other net............................ (1) 8 (31)
Total................................. $ 189 $ 137 $ 182
- --------------------------------------------------------------------------------
</TABLE>

14. ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement No. 133
"Accounting for Derivative Instruments and Hedging Activities," that will be
effective in 2000. Management is determining the effect, if any, the Statement
will have on the Corporation's financial statements (see Note 4 for a
quantification of the fair value of the Corporation's financial instruments).

48
<PAGE>

SUPPLEMENTARY INFORMATION (unaudited)

SELECTED QUARTERLY DATA

Selected unaudited quarterly data are as follows:

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Millions of Dollars
Except Per Share Amounts
- -------------------------------------------------------------------------------------------------------------------
1998 MAR 31 JUN 30/[a]/ SEP 30 DEC 31/[b]/
- -------------------------------------------------------------------------------------------------------------------

- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues..................................... $2,586 $2,623 $2,660 $2,684
Operating Income (Loss)................................ 33 (139) 210 (275)
Income (Loss) from
Continuing Operations.............................. (62) (154) 34 (451)
Net Income (Loss)...................................... (62) (416) 34 (189)
Per Share Basic:
Income (Loss) from
Continuing Operations.......................... (0.25) (0.63) 0.14 (1.83)
Net Income (Loss).................................. (0.25) (1.69) 0.14 (0.77)
Per Share Diluted:
Income (Loss) from
Continuing Operations.......................... (0.25) (0.63) 0.14 (1.83)
Net Income (Loss).................................. (0.25) (1.69) 0.14 (0.77)
Dividends Per Share.................................... 0.20 0.20 0.20 0.20
Common Stock Price:
High............................................... 63.75 58.25 47.75 49.50
Low................................................ 49.00 42.38 37.31 41.56
- -------------------------------------------------------------------------------------------------------------------

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

1997 Mar 31 Jun 30 Sep 30 Dec 31/[c]/

Operating Revenues..................................... $2,810 $2,883 $2,825 $2,561
Operating Income (Loss)................................ 317 475 423 (71)
Income (Loss) from
Continuing Operations.............................. 128 216 240 (152)
Net Income (Loss)...................................... 128 216 240 (152)
Per Share Basic:
Income (Loss) from
Continuing Operations.......................... 0.52 0.88 0.98 (0.62)
Net Income (Loss).................................. 0.52 0.88 0.98 (0.62)
Per Share Diluted:
Income (Loss) from
Continuing Operations.......................... 0.52 0.87 0.96 (0.62)
Net Income (Loss).................................. 0.52 0.87 0.96 (0.62)
Dividends Per Share.................................... 0.43 0.43 0.43 0.43
Common Stock Price:
High............................................... 64.00 72.00 72.97 65.44
Low................................................ 56.75 56.25 60.94 57.69
- -------------------------------------------------------------------------------------------------------------------
</TABLE>

[a] Included a $262 million provision for the anticipated sale of Overnite (see
Note 1 to the Financial Statements).

[b] Included a $547 million charge for the one-time write-down of Overnite
goodwill and the reversal of the $262 million provision for the potential
sale of Overnite (see Note 1 to the Financial Statements).

[c] Included a $65 million pre-tax ($40 million after-tax or $0.16 per diluted
share) loss on planned sale of Skyway.STOCKHOLDERS AND DIVIDENDS

STOCKHOLDERS AND DIVIDENDS

The common stock of the Corporation is traded on various stock exchanges,
principally the New York Stock Exchange. At January 29, 1999, there were
247,516,086 shares of outstanding common stock and approximately 53,640 common
stockholders. At that date, the closing price of the common stock on the New
York Stock Exchange was $51.44. Cash dividends declared on common stock by the
Corporation were $0.80 and $1.72 per share in 1998 and 1997. Union Pacific has
paid dividends to its common stockholders during each of the past 99 years. See
Note 7 to the Financial Statements for a discussion regarding restrictions
relating to the payment of cash dividends.

RAIL TRANSPORTATION

Rail transportation data includes Southern Pacific statistics as if the
acquisition had taken place January 1, 1996 (pro forma).

COMMODITIES

Revenue ton-miles (RTM) and commodity revenue (CR) for major commodities by
percent and in total were as follows:

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1998 1997 1996
Percent of Total RTM CR RTM CR RTM CR
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Automotive...................... 3.1% 10.3% 3.4% 9.8% 3.2% 9.5%
Agriculture..................... 14.1 14.4 15.4 14.9 17.3 15.5
Intermodal...................... 14.7 16.6 15.8 17.8 15.5 17.6
Chemicals....................... 11.4 16.9 12.1 17.7 12.4 17.9
Energy.......................... 40.1 22.0 36.1 19.7 34.2 19.3
Industrial...................... 16.6 19.8 17.2 20.1 17.4 20.2
Total........................... 100% 100% 100% 100% 100% 100%
Total (billions)................ 432.1 $ 9.1 451.8 $ 9.7 482.1 $ 9.8
- ---------------------------------------------------------------------------------------------------------
</TABLE>

CAPITAL EXPENDITURES

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Millions of Dollars 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Roadway and other............... $ 1,538 $ 1,534 $ 930
Equipment....................... 506 501 409
Total........................... $ 2,044 $ 2,035 $ 1,339
- ---------------------------------------------------------------------------------------------------------
</TABLE>

49
<PAGE>

EQUIPMENT

- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Owned or leased at year-end:
Locomotives.................... 7,083 6,966 6,755
Freight cars:
Covered hoppers.............. 40,097 41,149 42,406
Box cars..................... 23,263 24,718 22,934
Open-top hoppers............. 20,324 20,674 20,989
Gondolas..................... 17,828 16,083 15,325
Other........................ 18,264 17,143 19,675
Work equipment................. 9,218 10,045 11,631

Purchased or leased during the
year:
Locomotives.................... 256 276 245
Freight cars................... 2,120 1,525 2,263
Average age of equipment
(years):
Locomotives.................... 14.4 14.4 13.7
Freight cars................... 20.1 19.3 19.2

Bad order ratio freight cars... 4.5% 4.4% 4.1%
- --------------------------------------------------------------------------------

TRACK

- --------------------------------------------------------------------------------
Miles 1998 1997 1996
- --------------------------------------------------------------------------------
Main line....................... 27,197 27,421 27,406
Branch line..................... 6,509 7,526 8,431
Yards, sidings and other
main line...................... 21,597 21,588 21,915

Total........................... 55,303 56,535 57,752

Track miles of continuous
welded rail at year-end........ 23,647 23,392 23,172
Track miles under centralized
traffic-control at year-end.... 15,944 15,590 15,277
Track miles of rail replaced:
New............................ 858 716 451
Used........................... 341 273 362
Track miles re-ballasted........ 3,259 3,557 4,503
Ties replaced (thousands)....... 2,691 3,853 2,919
- --------------------------------------------------------------------------------

RAIL OPERATIONS

- --------------------------------------------------------------------------------
1998 1997 1996/[a]/
- --------------------------------------------------------------------------------

Operating ratio (%)............. 95.4 87.4 83.5
Carloadings (thousands)......... 7,998 8,453 8,814
Average commodity revenue
per car........................ $ 1,134 $ 1,149 $ 1,114
Average price of diesel fuel
per gallon..................... 62C 71c 70c

- --------------------------------------------------------------------------------
[a] On a pro forma basis as if the SP acquisition had occurred on January 1,
1996 (see Note 2 to the Financial Statements).

TRUCKING

FREIGHT OPERATIONS

- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Shipments (thousands):
Less-than-truckload............ 7,768 7,482 8,184
Truckload...................... 21 24 39

Total........................... 7,789 7,506 8,223

Tonnage (thousands):
Less-than-truckload............ 3,983 3,841 4,290
Truckload...................... 226 269 436

Total........................... 4,209 4,110 4,726

Revenue per hundredweight....... $ 11.98 $ 11.24 $ 9.97

Operating ratio (%)/[a]/........ 94.8 96.8 104.9
- --------------------------------------------------------------------------------

[a] Excluded goodwill amortization and the $547 million one-time goodwill
revaluation charge in 1998.

EQUIPMENT AND SERVICE CENTERS

- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Owned or leased at year-end:
Tractors....................... 4,839 4,799 5,023
Trailers....................... 19,460 19,439 19,479
Straight trucks................ 77 77 77
Automobiles and
service units................ 160 162 177
Service centers................ 165 164 161

Average age of equipment
(years):
Tractors....................... 6.8 7.1 7.0
Trailers....................... 8.4 8.7 7.7
- --------------------------------------------------------------------------------

CAPITAL EXPENDITURES

- --------------------------------------------------------------------------------
Millions of Dollars 1998 1997 1996
- --------------------------------------------------------------------------------

Revenue equipment............... $ 33 $ 24 $ 5
Other........................... 26 16 5

Total........................... $ 59 $ 40 $ 10
- --------------------------------------------------------------------------------

50
<PAGE>

TEN-YEAR FINANCIAL SUMMARY/[a]/
Union Pacific Corporation and Subsidiary Companies
<TABLE>
<CAPTION>
Millions of Dollars, Except Per Share Amounts, Ratios and Employee Statistics
1998/[b]/ 1997 1996 1995 1994/[c]/ 1993/[d]/ 1992 1991/[e]/ 1990 1989
- -----------------------------------------------------------------------------------------------------------------------------------

- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR
Operating Revenues.............. $10,553 11,079 8,786 7,486 6,492 6,002 5,773 5,687 5,739 5,453
Operating Income (Loss)......... (171) 1,144 1,432 1,242 1,145 1,015 992 139 905 913
Income (Loss)/[f]/.............. (633) 432 733 619 568 412 456 (123) 374 398
Net Income (Loss)............... (633) 432 904 946 546 530 728 64 618 595
Per Share Basic:
Income (Loss)/[f]/............ (2.57) 1.76 3.38 3.02 2.77 2.01 2.24 (0.61) 1.87 1.89
Net Income (Loss)............. (2.57) 1.76 4.17 4.62 2.66 2.59 3.58 0.32 3.09 2.82
Per Share Diluted:
Income (Loss)/[f]/............ (2.57) 1.74 3.36 3.01 2.76 2.00 2.24 (0.60) 1.86 1.88
Net Income (Loss)............. (2.57) 1.74 4.14 4.60 2.66 2.58 3.57 0.31 3.08 2.81
Dividends Per Share............. 0.80 1.72 1.72 1.72 1.66 1.54 1.42 1.31 1.18 1.12
Operating Cash Flow............. 565 1,600 1,657 1,454 1,079 975 842 794 904 956
Capital Investments............. 2,111 2,101 1,360 1,058 876 899 864 667 674 870
Average Employees............... 65,100 65,600 54,800 49,500 45,400 44,000 42,800 43,800 45,400 45,400
Revenues Per Employee (000)..... 162.1 168.9 160.3 151.4 143.0 136.3 135.0 129.9 126.4 120.0

AT YEAR-END
Total Assets.................... $29,374 28,860 27,990 19,500 14,543 13,797 12,901 12,272 12,063 11,567
Total Debt...................... 8,692 8,518 8,027 6,364 4,479 4,105 4,035 3,966 3,982 3,975
Common Stockholders' Equity..... 7,393 8,225 8,225 6,364 5,131 4,885 4,639 4,163 4,277 3,911
Equity Per Common Share......... 29.88 33.30 33.35 30.96 24.92 23.81 22.75 20.52 21.63 19.50

SEGMENT DATA
Rail Commodity Revenue.......... $ 9,072 9,712 7,419 6,105 5,216 4,873 4,819 4,708 4,630 4,496
Trucking Revenue................ 1,034 946 961 976 1,037 939 873 800 805 700
Rail Carloadings................ 7,998 8,453 6,632 5,568 4,991 4,619 4,458 4,304 4,158 3,975
Trucking Shipments.............. 7,789 7,506 8,223 8,332 8,593 8,206 7,669 7,106 7,475 6,832
Rail Operating Ratio............ 95.4 87.4 79.1 78.1 77.9 79.1 79.0 80.4 80.8 80.6
Trucking Operating Ratio/[g]/... 94.8 96.8 104.9 103.0 91.3 90.2 90.9 91.9 90.4 90.8

FINANCIAL RATIOS (%)
Debt to Capital Employed........ 49.4 50.9 49.4 50.0 46.6 45.7 46.5 48.8 48.2 50.4
Return on Equity/[h]/........... (8.1) 5.3 12.4 16.5 10.9 11.1 16.5 1.5 15.1 14.2
</TABLE>

[a] Data included the effects of the acquisitions of Southern Pacific Rail
Corporation as of October 1, 1996, Chicago and North Western Transportation
Company as of May 1, 1995 and Skyway Freight Systems, Inc. as of May 31, 1993,
and reflects the disposition of the Corporation's natural resources segment in
1996 and waste management segment in 1995.

[b] 1998 operating loss and net loss included a one-time $547 million pre-and
after-tax charge (see Note 1 to the Financial Statements). 1998 operating income
and net loss, excluding the charge, would have been $376 million and $86
million, respectively, with a negative return on average common stockholders'
equity of (1.1)%.

[c] 1994 net income included a net after-tax loss of $404 million from the sale
of the Corporation's waste management operations. Excluding this loss, 1994
return on common stockholders' equity would have been 18.2%.

[d] 1993 net income included a net after-tax charge for the adoption of changes
in accounting methods for income taxes, postretirement benefits other than
pensions and revenue recognition, and a one-time charge for the deferred tax
effect of the Omnibus Budget Reconciliation Act of 1993. Excluding the impact of
these items, income from continuing operations would have been $468 million
($2.28 per basic share and $2.27 per diluted share) with a return on common
stockholders' equity of 15.7%.

[e] Net income excluding the special charges would have been $639 million with a
return on common stockholders' equity of 14.2%.

[f] Based on results from continuing operations.

[g] Excluded goodwill amortization.

[h] Based on average common stockholders' equity.

51
<PAGE>

UNION PACIFIC CORPORATION

MAP OF UNITED STATES

MAP DESCRIPTION
- ---------------

Two-page light gray map of the Continental United States, western provinces of
Canada, and Alaska, on a white background.

The locations of significant assets and operations are indicated on the map by
operating company as follows:

A. Union Pacific Corporation

1. Corporate Headquarters in Dallas, Texas.

B. Union Pacific Railroad

1. Headquarters in Omaha, Nebraska.

2. Single and Double Track located in the states of Arizona, Arkansas,
California, Colorado, Idaho, Illinois, Iowa, Kansas, Louisiana, Minnesota,
Missouri, Montana, Nebraska, Nevada, New Mexico, Oklahoma, Oregon,
Tennessee, Texas, Utah, Washington, Wisconsin and Wyoming.

3. Triple and Quadruple Track located in the States of California, Nebraska
and Wyoming.

4. Classification Yards located in the states of Arkansas, California, Idaho,
Illinois, Louisiana, Missouri, Nebraska, Oregon, and Texas.

5. Major Intermodal Trailer/Container Terminals located in the states of
Arizona, Arkansas, California, Colorado, Idaho, Illinois, Louisiana,
Missouri, Nebraska, Nevada, Oregon, Tennessee, Texas, Utah, Washington and
Wyoming.

C. Overnite Transportation

1. Headquarters in Richmond, Virginia

2. Key Terminals spread throughout the eastern half of the Continental United
States, and in the Western States of Arkansas, Arizona, California,
Colorado, Illinois, Iowa, Kansas, Louisiana, Minnesota, Missouri, Nebraska,
Nevada, Oklahoma, Oregon, Tennessee, Texas, Utah, Washington, and
Wisconsin.

D. Union Pacific Technologies

1. Headquarters in St. Louis, Missouri.

52
<PAGE>

(Legend)

MAP OF UNITED STATES (continued)

MAP DESCRIPTION
- ---------------

Two-page light gray map of the Continental United States, western provinces of
Canada, and Alaska, on a white background.

The locations of significant assets and operations are indicated on the map by
operating company as follows:

E. Union Pacific Corporation

2. Corporate Headquarters in Dallas, Texas.

F. Union Pacific Railroad

6. Headquarters in Omaha, Nebraska.

7. Single and Double Track located in the states of Arizona, Arkansas,
California, Colorado, Idaho, Illinois, Iowa, Kansas, Louisiana, Minnesota,
Missouri, Montana, Nebraska, Nevada, New Mexico, Oklahoma, Oregon,
Tennessee, Texas, Utah, Washington, Wisconsin and Wyoming.

8. Triple and Quadruple Track located in the States of California, Nebraska
and Wyoming.

9. Classification Yards located in the states of Arkansas, California, Idaho,
Illinois, Louisiana, Missouri, Nebraska, Oregon, and Texas.

10. Major Intermodal Trailer/Container Terminals located in the states of
Arizona, Arkansas, California, Colorado, Idaho, Illinois, Louisiana,
Missouri, Nebraska, Nevada, Oregon, Tennessee, Texas, Utah, Washington and
Wyoming.

G. Overnite Transportation

3. Headquarters in Richmond, Virginia

4. Key Terminals spread throughout the eastern half of the Continental United
States, and in the Western States of Arkansas, Arizona, California,
Colorado, Illinois, Iowa, Kansas, Louisiana, Minnesota, Missouri, Nebraska,
Nevada, Oklahoma, Oregon, Tennessee, Texas, Utah, Washington, and
Wisconsin.

H. Union Pacific Technologies

2. Headquarters in St. Louis, Missouri.

<PAGE>

EXHIBIT 18
----------

January 21, 1999

Board of Directors
Union Pacific Corporation
1717 Main Street, Suite 5900
Dallas, Texas 75201

Dear Directors:

We have audited the consolidated financial statements of Union Pacific
Corporation and subsidiary companies (the Corporation) as of December 31, 1998
and 1997, and for each of the three years in the period ended December 31, 1998,
incorporated by reference in your Annual Report on Form 10-K to the Securities
and Exchange Commission and have issued our report thereon dated January 21,
1999. Note 1 to such consolidated financial statements contains a description of
your adoption during the year ended December 31, 1998 of a change in the method
of measuring enterprise level goodwill impairment under Accounting Principles
Board Opinion No. 17, Intangible Assets, from an undiscounted cash flows
approach to a fair value method based on a discounted cash flows approach. In
our judgment, such change is to an alternative accounting principle that is
preferable under the circumstances.

Yours truly,
/s/ Deloitte & Touche LLP

<PAGE>

EXHIBIT 21
----------

SIGNIFICANT SUBSIDIARIES OF UNION PACIFIC CORPORATION
-----------------------------------------------------

<TABLE>
<CAPTION>
STATE OF
NAME OF CORPORATION INCORPORATION
- ------------------- -------------
<S> <C>
Overnite Transportation Company........................... Virginia
Southern Pacific Rail Corporation......................... Utah
Union Pacific Railroad Company............................ Delaware
</TABLE>

<PAGE>

Exhibit 23
----------

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Post-Effective Amendment No. 1
to Registration Statement No. 2-79663, Post-Effective Amendment No. 1 to
Registration Statement No. 33-12513, Registration Statement No. 33-18877,
Registration Statement No. 33-22106, Registration Statement No. 33-44236,
Registration Statement No. 33-53968, Registration Statement No. 33-49785,
Registration Statement No. 33-49849, Registration Statement No. 33-51071,
Registration Statement No. 33-51735, Registration Statement No. 33-58563,
Registration Statement No. 333-10797, Registration Statement No. 333-13115 and
Registration Statement No. 333-16563 on Forms S-8 and Registration Statement
No. 333-18345, Registration Statement No. 333-54009 and Post-Effective Amendment
No. 1 to Registration Statement No. 333-51617 on Forms S-3 of our report dated
January 21, 1999 (which expresses an unqualified opinion and includes an
explanatory paragraph relating to a change in accounting principle),
incorporated by reference in this Annual Report on Form 10-K of Union Pacific
Corporation for the year ended December 31, 1998.

/s/ Deloitte & Touche LLP

Dallas, Texas
March 25, 1999

<PAGE>

EXHIBIT 24
----------

UNION PACIFIC RAILROAD CORPORATION

POWERS OF ATTORNEY

I, the undersigned, a director of Union Pacific Corporation, a Utah Corporation
(the Company), do hereby appoint each of Gary M. Stuart, Carl W. von Bernuth,
Richard J. Ressler and Thomas E. Whitaker my true and lawful attorney-in-fact
and agent, to sign on my behalf the Company's Annual Report on Form 10-K for the
year ended December 31, 1998, and any and all amendments thereto, and to file
the same, with all exhibits thereto, with the Securities and Exchange
Commission.

/s/ PHILIP F. ANSCHUTZ
- -------------------------
Philip F. Anschutz

/s/ ROBERT P. BAUMAN
- -------------------------
Robert P. Bauman

/s/ RICHARD B. CHENEY
- -------------------------
Richard B. Cheney

/s/ E. VIRGIL CONWAY
- -------------------------
E. Virgil Conway
<PAGE>

/s/ RICHARD K. DAVIDSON
- -----------------------------
Richard K. Davidson

/s/ THOMAS J. DONOHUE
- -----------------------------
Thomas J. Donohue

/s/ SPENCER F. ECCLES
- -----------------------------
Spencer F. Eccles

/s/ ELBRIDGE T. GERRY, JR.
- -----------------------------
Elbridge T. Gerry, Jr.

/s/ WILLIAM H. GRAY, III
- -----------------------------
William H. Gray, III
<PAGE>

/s/ JUDITH RICHARDS HOPE
- -----------------------------
Judith Richards Hope

/s/ RICHARD J. MAHONEY
- -----------------------------
Richard J. Mahoney

/s/ JOHN R. MEYER
- -----------------------------
John R. Meyer

/s/ THOMAS A. REYNOLDS, JR.
- -----------------------------
Thomas A. Reynolds, Jr.

/s/ RICHARD D. SIMMONS
- -----------------------------
Richard D. Simmons

<PAGE>

<ARTICLE> 5
<MULTIPLIER> 1,000,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 176
<SECURITIES> 0
<RECEIVABLES> 643
<ALLOWANCES> 0
<INVENTORY> 343
<CURRENT-ASSETS> 1,502
<PP&E> 33,145
<DEPRECIATION> 6,206
<TOTAL-ASSETS> 29,374
<CURRENT-LIABILITIES> 2,932
<BONDS> 8,511
0
0
<COMMON> 691
<OTHER-SE> 6,702
<TOTAL-LIABILITY-AND-EQUITY> 29,374
<SALES> 0
<TOTAL-REVENUES> 10,553
<CGS> 0
<TOTAL-COSTS> 10,724
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 714
<INCOME-PRETAX> (696)
<INCOME-TAX> (63)
<INCOME-CONTINUING> (633)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (633)
<EPS-PRIMARY> (2.57)
<EPS-DILUTED> (2.57)

</TABLE>

<PAGE>

<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000,000

<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 APR-01-1998 OCT-01-1998
<PERIOD-END> MAR-31-1998 JUN-30-1998 SEP-01-1998
<CASH> 191 301 557
<SECURITIES> 0 0 0
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<PAGE>

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0 0 0
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<PAGE>

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<S> <C> <C> <C>
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<PAGE>

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0 0 0
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</TABLE>