UNION PACIFIC RAILROAD CO/DE, 10-K405, 1999-03-25

UNION PACIFIC RAILROAD CO/DE
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)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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 1-6146

UNION PACIFIC RAILROAD COMPANY
------------------------------

(Exact name of registrant as specified in its charter)

Delaware 94-6001323
- -----------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1416 Dodge Street, Omaha, Nebraska 68179
- -----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)

The registrant's telephone number, including area code (402) 271-5000

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

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

Name of each exchange on
Title of each Class which registered
------------------- -----------------------------

Missouri Pacific Railroad Company New York Stock Exchange, Inc.
4-1/4% First Mortgage Bonds due 2005
Missouri Pacific Railroad Company New York Stock Exchange, Inc.
4-3/4% General Income Mortgage Bonds
due 2020 and 2030
Missouri Pacific Railroad Company New York Stock Exchange, Inc.
5% Income Debentures due 2045
Texas and Pacific Railway Company New York Stock Exchange, Inc.
5% First Mortgage Bonds due 2000
Missouri-Kansas-Texas Railroad Company New York Stock Exchange, Inc.
5-1/2% Subordinated Income Debentures
due 2033
Securities registered pursuant to
Section 12(g) of the Act: None
<PAGE>

THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND
(b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.

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 the 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 ].
---

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

None of the Registrant's voting stock is held by non-affiliates. The Registrant
is a wholly-owned subsidiary of Union Pacific Corporation.

As of February 26, 1999, the Registrant had outstanding 7,130 shares of Common
Stock, $10 par value, and 620 shares of Class A Stock, $10 par value.

DOCUMENTS INCORPORATED BY REFERENCE: None

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

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PART I
-------

Item 1. Business
--------

COMPANY: Union Pacific Railroad Company, a Class I railroad incorporated in
Delaware (the Registrant) and its subsidiaries and certain affiliates
(collectively, the Company or Railroad), together with a number of terminal and
bridge companies in which the Company has a minority ownership interest, operate
various railroad and railroad-related transportation operations. The Registrant
is a wholly-owned subsidiary of Union Pacific Corporation (the Corporation or
UPC).

The Company operates 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.

Product Mix - In 1998, the Railroad had operating revenues of nearly $9.4
billion, approximately 97 percent of which were derived from rail freight
operations. The percentages of revenue ton-miles (RTM) and reported rail
commodity revenue for major commodities during 1998, 1997 and pro forma 1996
(including the Southern Pacific Rail Corporation acquisition, as described
below, as if the acquisition had taken place January 1, 1996) were as follows:
<TABLE>
<CAPTION>

1998 1997 1996
----------------------- ------------------ ----------------
Commodity Commodity Commodity
RTM Revenue RTM Revenue RTM Revenue
---------- ---------- ------ -------- ------ --------
(Percent of Total)
<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 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ====== ===== ====== ===== ======
Total (Billions) 432.1 $ 9.1 451.8 $ 9.7 482.1 $ 9.8
===== ====== ===== ====== ===== ======
</TABLE>

Competition - 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.

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Employees - Approximately 87% of the Railroad's 53,000 employees are represented
by rail unions. During 1996, nearly all of the Union Pacific Railroad
Company's, a Utah corporation (UPRR) and predecessor to the Registrant,
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 Rail Corporation
(SP or Southern Pacific) acquisition, labor agreements between the Railroad and
the unions representing SP employees must be negotiated before the rail systems
of Southern Pacific and UPRR 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 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 Company's results of
operations. The current national bargaining agreement will end in 2000. The
Company expects notices for negotiations to be served in November 1999.

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 the Railroad'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, the Railroad 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 Railroad's system. However, despite these
improvements, the Railroad's operations and financial results were significantly
affected by congestion in 1998.

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. The
Railroad 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

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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.

UPC ACQUISITIONS: In 1998, UPC continued implementing its strategy of
refocusing on its core rail transportation business begun several years earlier.
As part of this strategy, UPC disposed of several non-rail businesses and
invested heavily in rail assets, resulting in the creation of the largest rail
system in the United States.

CNW - In April 1995, UPC acquired the remaining 71.6% of Chicago and North
Western Transportation Company's (CNW) outstanding common stock not previously
owned by UPC for $1.2 billion. Prior to the acquisition, CNW was the nation's
eighth largest Class I railroad. CNW's rail operations were legally merged with
UPRR in October 1995 and have been completely integrated with the rail
operations of UPRR.

Southern Pacific - In September 1996, UPC completed the acquisition of Southern
Pacific after receipt of a favorable decision from the STB regarding the
Corporation's acquisition of SP. The aggregate purchase price was $4.1 billion
($2.5 billion in UPC common stock and $1.6 billion in cash funded with
borrowings by UPC, both of which were subsequently pushed down to the Railroad).
Prior to the acquisition, SP was the nation's sixth largest Class I railroad.
During 1998, UPRR 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).

LEGAL MERGERS: Since January 1, 1997, the Registrant and its predecessors have
been merged with and into several entities (the Legal Mergers) in order to
consolidate all of UPC's principal rail operations into one legal entity. The
Legal Mergers have been accounted for in a manner similar to a pooling-of-
interest combination of entities under common control since all entities
involved in the Legal Mergers were direct or indirect wholly-owned subsidiaries
of UPC at the respective dates of the Legal Mergers with the surviving entity
continuing as such following the Legal Mergers.

The consolidated financial statements of the Company are presented on a
"pooled basis" back to the effective dates on which the STB approval for common
control was granted to the Corporation. As a result, the consolidated financial
statements include the results of UPRR for all periods presented, the results of
SP and its various rail operating subsidiaries as of October 1, 1996, the
effective date on which the STB approval for common control was granted to the
Corporation for this acquisition, and the results of Missouri Pacific
Corporation's rail operating subsidiary, Missouri Pacific Railroad Company
(MPRR), for all periods presented. A detailed description of the Legal Mergers
follows:

On January 1, 1997, MPRR was merged with and into UPRR (the MPRR Merger),
with UPRR continuing as the surviving entity. Prior to the MPRR Merger, MPRR
was a Class I railroad, that operated as a unified rail system with UPRR, and
such operations continued following the MPRR Merger.

On June 30, 1997, two SP rail operating subsidiaries, Denver and Rio Grande
Western Railroad Company (DRGW) and SPCSL Corp. (SPCSL), were merged with

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and into UPRR (the DRGW and SPCSL Mergers), with UPRR continuing as the
surviving entity. Immediately prior to the DRGW and SPCSL Mergers, DRGW and
SPCSL were wholly-owned, direct subsidiaries of another SP rail operating
subsidiary, Southern Pacific Transportation Company (SPT), and UPRR and SPT
at that time and immediately thereafter were wholly-owned, indirect
subsidiaries of UPC.

On September 30, 1997, St. Louis and Southwestern Railway Company (SSW), an
SP rail operating subsidiary, was merged with and into SSW Merger Corp, with
SSW Merger Corp continuing as the surviving entity, and immediately
thereafter SSW Merger Corp was merged with and into UPRR (collectively, the
SSW Merger), with UPRR continuing as the surviving entity. Immediately prior
to the SSW Merger, SSW was a direct subsidiary of SPT, and UPRR and SPT at
that time and immediately thereafter were wholly-owned, indirect subsidiaries
of the Corporation.

On February 1, 1998, UPRR was merged with and into SPT, a Delaware
corporation and the principal SP rail affiliate (the SPT Merger), with SPT
continuing as the surviving corporation and changing its name to "Union
Pacific Railroad Company" immediately following the SPT Merger, thereby
creating the current Registrant. Immediately prior to the SPT Merger, SPT
and UPRR were wholly-owned, indirect subsidiaries of UPC. UPRR and SPT
operated as a unified system before and after the SPT Merger.

Mexican Railway Concession - During 1997 the Company 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 Company signed
a letter of intent to acquire an additional 13% ownership interest.

GOVERNMENTAL REGULATION: The Company'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 Railroad is subject to the regulatory jurisdiction of the STB and other
Federal and 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: The Railroad is 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

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<PAGE>

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.

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

CERCLA was designed to establish a strategy for cleaning up facilities at
which hazardous waste or other hazardous substances have created actual or
potential environmental hazards. The EPA has designated certain facilities as
requiring cleanup or further assessment. Among other things, CERCLA authorizes
the Federal government either to clean up such facilities itself or to order
persons responsible for the situation to do so. The act created a multi-billion
dollar fund to be used by the Federal government to pay for such cleanup
efforts. In the event the Federal government pays for such 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. The Company is subject to potential liability under CERCLA as an
owner or operator of facilities at which hazardous substances have been disposed
of, or as a generator or a transporter 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 Company 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 of the Company's
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 Company's financial
condition or results of operations.

The operations of the Company 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 10 to the Financial Statements
on pages F-19 and F-20. 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 Company 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 Company) 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 Company 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 Company'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 Company is fully successful in recovering from the effects of the
Company'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 2. Properties
----------

OPERATING EQUIPMENT: At December 31, 1998, the Railroad owned or leased from
others 7,083 locomotives, 119,776 freight cars and 9,218 units of work
equipment. Substantially all railway equipment secures various outstanding
equipment obligations.

RAIL PROPERTY: The Railroad operates approximately 34,000 miles of track,
including 27,200 miles of main line and 6,500 miles of branch line.
Approximately 12 percent of the main line track consists of trackage rights over
track owned by others. A substantial portion of the right-of-way and track is
subject to one or more mortgages.

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 UPC,
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 Company
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,

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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 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 Company 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 Southern Pacific merger, 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.

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 the Company and SPT as a
party thereto. Neither complaint proceeding individually involved a significant
exposure for reparations. However, if existing regulation of bottleneck

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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 the
Company 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 the Company 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 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 Company has accrued an aggregate of $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 (who are also directors of the Company) 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

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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 plaintiff's 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 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.

ENVIRONMENTAL MATTERS: EPA has brought a civil action against certain
subsidiaries of Southern Pacific which have been merged into the Company, 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 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 Harbor's 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

- 11 -
<PAGE>

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.

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 Company and it 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
Company 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 Company'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
---------------------------------------------------

Omitted in accordance with General Instruction I of Form 10-K.

- 12 -
<PAGE>

PART II
-------

Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
-------------------------------------------------------------

As of the date of filing this Report, the Registrant had the following
amounts of capital stock issued and outstanding: 7,130 shares of Common
Stock, par value $10.00 per share (the Company Common Stock), 620 shares
of Class A Stock, par value $10.00 per share (the Company Class A
Stock), 4,829 Redeemable Preference Shares (Series A), initial par value
$10,000 per share, and 436 Redeemable Preference Shares (Series B),
initial par value $10,000 per share (collectively, the Preference
Shares). All of the Company Common Stock and the Company Class A Stock,
which constitutes all of the voting capital stock of the Registrant, is
owned by the Corporation or a wholly-owned indirect subsidiary of the
Corporation, and all of the Preference Shares, which are non-voting
stock, are owned by the Federal Railroad Administration. Accordingly,
there is no market for the Registrant's capital stock.

Dividends on the Company Common Stock, which are paid on a quarterly
basis, totaled $308 million in 1998, $411 million in 1997 (dividends
also included $29 million of asset transfers between the Company and
UPC)and $392 million in 1996 (dividends also included $1,241 million of
dividends to UPC associated with the Legal Mergers). Dividends on the
Company Class A stock, which are paid annually out of available income
totaled $12 million in 1998, $9 million in 1997 and $8 million in 1996.
Information concerning restrictions on the Registrant's ability to pay
dividends on the Company Common Stock and the Company Class A Stock is
set forth in Notes 6 and 9 to the Financial Statements. All such
information is incorporated herein by reference.

Item 6. Selected Financial Data
-----------------------

Omitted in accordance with General Instruction I of Form 10-K.

Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------

Omitted in accordance with General Instruction I of Form 10-K. In lieu
thereof, a narrative analysis is presented beginning on Page F-22.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------

Information concerning market risk sensitive instruments is set forth
under Other Matters in the Management's Narrative Analysis of the
Results of Operations on page F-29, and in Note 4 to Financial
Statements on pages F-11 and F-12. All such information is incorporated
herein by reference.

- 13 -
<PAGE>

Item 8. Financial Statements and Supplementary Data
-------------------------------------------

The financial statements and supplementary information related thereto,
listed on the Index to Financial Statements, are provided on pages F-1
through F-33 herein.

Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------

None.
PART III
---------

Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------

Omitted in accordance with General Instruction I of Form 10-K.

Item 11. Executive Compensation
----------------------

Omitted in accordance with General Instruction I of Form 10-K.

Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------

Omitted in accordance with General Instruction I of Form 10-K.

Item 13. Certain Relationships and Related Transactions
----------------------------------------------

Omitted in accordance with General Instruction I of Form 10-K.

PART IV
--------

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------

(a) (1) and (2) Financial Statements and Schedules
----------------------------------------------
See Index to Financial Statements.

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

2(a) Agreement and Plan of Merger, dated as of January 29, 1998,
between UPRR and SPT is incorporated herein by reference to
Exhibit 2 to the Registrant's Current Report on Form 8-K dated
February 13, 1998.

3(a) Amended Certificate of Incorporation of the Registrant,
effective as of February 1, 1998.

3(b) By-Laws of the Registrant, as amended effective as of November
19, 1998.

- 14 -
<PAGE>

4 Pursuant to various indentures and other agreements, the Registrant has
issued long-term debt; however, no such agreement has securities or
obligations covered thereby which exceed 10% of the Registrant's total
consolidated assets. The Registrant 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, Anschutz 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) Agreement, dated September 25, 1995, among UPC, UPRR, MPRR, SP, SPT, DRGW,
SSW and 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(c) Supplemental Agreement, dated November 18, 1995, between UPC, UPRR, MPRR,
SP, SPT, DRGW, SSW 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).

12 Ratio of Earnings to Fixed Charges.

24 Powers of attorney.

27 Financial Data Schedule.

(b) Reports on Form 8-K

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

- 15 -
<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 the 25th day of
March, 1998.

UNION PACIFIC RAILROAD COMPANY

By /s/ Richard K. Davidson
------------------------------------
Richard K. Davidson,
Chairman 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, by the following persons on
behalf of the Registrant and in the capacities indicated.

PRINCIPAL EXECUTIVE OFFICER: By /s/ Richard K. Davidson
--------------------------------------
Richard K. Davidson,
Chairman and Chief Executive Officer

PRINCIPAL FINANCIAL OFFICER: By /s/ Gary M. Stuart
--------------------------------------
Gary M. Stuart,
Chief Financial Officer

PRINCIPAL ACCOUNTING OFFICER: By /s/ James R. Young
--------------------------------------
James R. Young,
Senior Vice President-Finance

- 16 -
<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*

Jerry R. Davis* John R. Meyer*

Thomas J. Donohue* Thomas A. Reynolds, Jr.*

Spencer F. Eccles* James A. Shattuck*

Ivor J. Evans* Richard D. Simmons*

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

- 17 -
<PAGE>

UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES

INDEX TO FINANCIAL STATEMENTS
-----------------------------

Independent Auditors' Report............................ F-2

Financial Statements:

Statement of Consolidated Income and Retained
Earnings - For the Years Ended December 31, 1998,
1997 and 1996...................................... F-3

Statement of Consolidated Financial Position -
At December 31, 1998 and 1997...................... F-4 - F-5

Statement of Consolidated Cash Flows - For the Years
Ended December 31, 1998, 1997 and 1996............. F-6

Accounting Policies................................... F-7

Notes to Consolidated Financial Statements............ F-8 - F-21

Management's Narrative Analysis of the
Results of Operations................................. F-22 - F-33

</TABLE>

Schedules are omitted because they are not applicable or the required
information is set forth in the financial statements referred to above.

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Board of Directors
Union Pacific Railroad Company
Omaha, Nebraska

We have audited the accompanying statements of consolidated financial
position of Union Pacific Railroad Company (a wholly-owned subsidiary of Union
Pacific Corporation) and subsidiary companies as of December 31, 1998 and 1997,
and the related statements of consolidated income and retained earnings and of
consolidated cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Union Pacific Railroad Company 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.

/s/ DELOITTE & TOUCHE LLP
- --------------------------

Omaha, Nebraska
January 21, 1999

F-2
<PAGE>

UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES

STATEMENT OF CONSOLIDATED INCOME AND RETAINED EARNINGS
For The Years Ended December 31, 1998, 1997 and 1996
----------------------------------------------------
(Millions of Dollars, Except for Ratio)
<TABLE>
<CAPTION>

1998 1997 1996
------- ------- --------
<S> <C> <C> <C>

Operating Revenues..................... $9,368 $9,981 $ 7,680
------ ------ -------
Operating Expenses:
Salaries, wages and employee benefits
(Note 8)............................... 3,607 3,467 2,502
Equipment and other rents.............. 1,328 1,309 857
Depreciation and amortization.......... 1,003 972 686
Fuel and utilities (Note 4)............ 792 987 725
Materials and supplies................. 513 515 418
Casualty costs......................... 423 432 319
Property and use taxes................. 185 183 137
Other costs............................ 1,084 863 434
------ ------ -------

Total.................................. 8,935 8,728 6,078
------ ------ -------

Operating Income....................... 433 1,253 1,602
Other Income - Net (Note 11)........... 186 172 138
Interest Expense (Notes 3 and 6)....... (603) (473) (323)
------ ------ -------

Income Before Income Taxes............. 16 952 1,417
Income Taxes (Note 5).................. (11) 332 477
------ ------ -------

Net Income (Notes 2 and 13).......... $ 27 $ 620 $ 940
====== ====== =======
Retained Earnings:
Beginning of year...................... $4,110 $3,939 $ 4,640
Net income............................. 27 620 940
Dividends to parent (Notes 2 and 9).. (320) (449) (1,641)
------ ------ -------

End of Year.......................... $3,817 $4,110 $ 3,939
====== ====== =======

Ratio of Earnings to Fixed Changes..... 1.0 2.4 4.0
====== ====== =======

</TABLE>

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

F-3
<PAGE>

UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES

STATEMENT OF CONSOLIDATED FINANCIAL POSITION
December 31, 1998 and 1997
--------------------------
(Millions of Dollars)

ASSETS
-------
<TABLE>
<CAPTION>

1998 1997
------- -------
<S> <C> <C>
Current Assets:
Cash and temporary investments....... $ 35 $ 50
Accounts receivable - net (Note 4)... 494 552
Inventories.......................... 337 288
Current deferred tax asset (Note 5).. 130 92
Other current assets................. 85 159
------- -------

Total Current Assets............... 1,081 1,141
------- -------

Investments:
Investments in and advances to
affiliated companies (Note 2)....... 681 595
Other investments.................... 10 29
------- -------

Total Investments.................. 691 624
------- -------

Properties, at cost (Notes 6 and 7):
Road and other....................... 24,789 23,610
Equipment............................ 7,545 7,084
------- -------
Total Properties................... 32,334 30,694
Less accumulated depreciation and
amortization....................... 5,871 5,208
------- -------

Properties - Net................... 26,463 25,486
------- -------

Other Assets.......................... 122 92
------- -------

Total Assets....................... $28,357 $27,343
======= =======
</TABLE>

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

F-4
<PAGE>

UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES

STATEMENT OF CONSOLIDATED FINANCIAL POSITION
December 31, 1998 and 1997

(Millions of Dollars)

LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Current Liabilities:
Accounts payable.................................... $ 493 $ 660
Accrued wages and vacation.......................... 380 382
Accrued casualty costs.............................. 364 364
Income and other taxes.............................. 297 263
Debt due within one year (Note 6)................... 178 229
Other current liabilities........................... 840 965
------- -------
Total Current Liabilities.......................... 2,552 2,863
------- -------
Intercompany borrowings from UPC (Notes 2,3 and 6)... 5,368 3,993
------- -------
Third-party debt due after one year (Notes 6 and 7).. 2,606 2,361
------- -------
Deferred income taxes (Note 5)....................... 6,759 6,698
------- -------
Accrued casualty costs............................... 928 929
------- -------
Retiree benefit obligations (Note 8)................. 737 722
------- -------
Other long-term liabilities (Note 10)................ 781 856
------- -------
Redeemable Preference Shares......................... 27 29
------- -------
Series A, $10,000 par value; 4,829 shares
outstanding
Series B, $10,000 par value; 436 shares
outstanding

Stockholders' Equity (Notes 2 and 9):
Common stock - $10.00 par value; 9,200 shares
authorized and 4,465 outstanding................... - -
Class A stock - $10.00 par value; 800 shares
authorized and 388 outstanding..................... - -
Capital surplus..................................... 4,782 4,782
Retained earnings................................... 3,817 4,110
------- -------
Total Stockholder's Equity......................... 8,599 8,892
------- -------
Total Liabilities and Stockholder's Equity......... $28,357 $27,343
======= =======
</TABLE>

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

F-5
<PAGE>

UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES

STATEMENT OF CONSOLIDATED CASH FLOWS
For The Years Ended December 31, 1998, 1997 and 1996

(Millions of Dollars)
<TABLE>
<CAPTION>

1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Cash From Operations:
Net Income................................................................................. $ 27 $ 620 $ 940
Non-Cash Charges to Income:
Depreciation and amortization............................................................. 1,003 972 686
Deferred income taxes (Note 5)............................................................ 7 336 236
Other, net................................................................................ (218) (289) (153)
Changes in current assets and liabilities................................................. (266) 120 58
------- ------- -------
Cash from Operations...................................................................... 553 1,759 1,767
------- ------- -------
Investing Activities:
Capital investments....................................................................... (2,044) (2,035) (1,339)
SP acquisition (Note 2)................................................................... - - (586)
Proceeds from sale of assets and
other investing activities............................................................... 212 265 233
------- ------- -------
Cash Used in Investing Activities......................................................... (1,832) (1,770) (1,692)
------- ------- -------
Financing Activities (Note 2):
Cash dividends paid to parent (Note 9).................................................... (320) (420) (1,000)
Financings (Note 6)....................................................................... 486 180 422
Debt repaid............................................................................... (276) (210) (908)
Advances, net............................................................................. 1,374 438 910
Proceeds from sale of stock............................................................... - - 600
Other..................................................................................... - (3) (39)
------- ------- -------
Cash Provided by (Used in) Financing
Activities............................................................................... 1,264 (15) (15)
------- ------- -------
Net Change in Cash and Temporary
Investments............................................................................... $ (15) $ (26) $ 60

Cash at Beginning of Year.................................................................. 50 76 16
------- ------- -------
Cash at End of Year........................................................................ $ 35 $ 50 $ 76
======= ======= =======

Changes in Current Assets and Liabilities (omitting working capital generated by the 1996 SP Merger;
see Note 2):

Accounts receivable...................................................................... $ 58 $ (105) $ (42)
Inventories.............................................................................. (49) 7 12
Other current assets..................................................................... 36 21 195
Accounts, wages and vacation payable..................................................... (169) 205 16
Debt due within one year................................................................. (51) 106 21
Other current liabilities................................................................ (91) (114) (144)
------- ------- -------
Total................................................................................... $ (266) $ 120 $ 58
======= ======= =======
</TABLE>
The accompanying accounting policies and notes to consolidated financial
statements are an integral part of these statements.

F-6
<PAGE>

UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Significant Accounting Policies

Principles of Consolidation - The consolidated financial statements include the
accounts of Union Pacific Railroad Company, a Delaware corporation (formerly
Southern Pacific Transportation Company) (the Registrant), and all subsidiaries
and certain affiliates (collectively, the Company or Railroad). The Registrant
is a wholly-owned subsidiary of Union Pacific Corporation, a Utah corporation
(the Corporation or UPC). Investments in affiliated companies (20% to 50% owned
and/or where the Company 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.

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

Hedging Transactions - The Company periodically hedges fuel purchases.
Unrealized gains and losses from fuel-related swaps, futures and forward
contracts are deferred and recognized as the fuel is consumed. The effect of
maturities, terminations and sales is recorded in earnings in the period the
instrument terminates (see Note 4).

Comprehensive Income - The Company 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 Company 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.

F-7
<PAGE>

1. Nature of Operations

The Registrant, a Class I railroad incorporated in Delaware and a wholly-owned
subsidiary of the Corporation, together with a number of wholly-owned and
majority-owned subsidiaries of the Company and various terminal and bridge
companies in which the Company has minority interests, operates various railroad
and railroad-related businesses. The Company's rail operations include for all
periods the operations of Union Pacific Railroad Company, a Utah corporation and
predecessor to the Registrant (UPRR), and as of October 1, 1996, the rail
operating subsidiaries of Southern Pacific Rail Corporation (Southern Pacific or
SP). 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, 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.

Approximately 87% of the Railroad's 53,000 employees are represented by rail
unions. During 1996, nearly all of the 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 SP acquisition, labor agreements between the Railroad and
the unions representing SP employees must be negotiated before the UPRR and
Southern Pacific rail systems can be fully integrated. 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 Company's results of
operations. The current national bargaining agreement will end in 2000. The
Company expects notices for negotiations to be served in November 1999.

2. Acquisitions

Southern Pacific - In September 1996, UPC completed the acquisition of Southern
Pacific after receipt of a favorable decision from the STB regarding the
Corporation's acquisition of SP. The aggregate purchase price was $4.1 billion
($2.5 billion in UPC common stock and $1.6 billion in cash funded with
borrowings by UPC, both of which were subsequently pushed down to the Railroad).
The acquisition of Southern Pacific has been accounted for using the purchase
method and was fully consolidated into Railroad's results beginning October
1996.

Merger Consolidation Activities - In connection with the acquisition and
continuing integration of UPRR and Southern Pacific's rail operations, the

F-8
<PAGE>

Company 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, the Company is relocating 4,700 positions, merging or
disposing of redundant facilities, and disposing of certain rail lines. The
Company is also canceling uneconomical and duplicative SP contracts.

To date the Company has severed 2,400 employees and relocated 3,800 employees
due to merger implementation activities. The Company 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 Company 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 Company to
incur more costs than were envisioned in the original merger plan, such costs
are charged to expense in the period incurred. The Company 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 UPRR's duplicate facilities and relocation or severance payments
to UPRR 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.

F-9
<PAGE>

(Millions of Dollars) Pro Forma 1996
--------------
<S> <C>
Operating Revenues..... $10,113
Operating Income....... 1,671
Net Income............. 871
</TABLE>

Legal Mergers: Since January 1, 1997, the Registrant and its predecessors have
been merged with and into several entities (the Legal Mergers) in order to
consolidate all of UPC's principal rail operations into one legal entity. The
Legal Mergers have been accounted for in a manner similar to a pooling-of-
interest combination of entities under common control since all entities
involved in the Legal Mergers were direct or indirect wholly-owned subsidiaries
of UPC at the respective dates of the Legal Mergers with the surviving entity
continuing as such following the Legal Mergers.

On June 30, 1997, two SP rail operating subsidiaries, Denver and Rio Grande
Western Railroad Company (DRGW) and SPCSL Corp. (SPCSL), were merged with and
into UPRR (the DRGW and SPCSL Mergers), with UPRR continuing as the surviving
entity. Immediately prior to the DRGW and SPCSL Mergers, DRGW and SPCSL were
wholly-owned, direct subsidiaries of another SP rail operating subsidiary,
Southern Pacific Transportation Company (SPT), and UPRR and SPT at that time
and immediately thereafter were wholly-owned, indirect subsidiaries of UPC.

Mexican Railway Concession - During 1997, the Company and a consortium of
partners were granted a 50-year concession to operate the Pacific-North and

F-10
<PAGE>

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 Company signed a
letter of intent to acquire an additional 13% ownership interest.

3. Related Party Transactions

Amounts due to and from affiliates, including advances to and borrowings from
the Corporation, bear interest at an annually determined rate which considers
the Corporation's cost of debt. Net intercompany interest expense charged on
such amounts was $399 million, $279 million and $192 million in 1998, 1997 and
1996, respectively.

4. Financial Instruments

Risk Management

Strategy and Risk - The Company uses derivative financial instruments in limited
instances and for other than trading purposes to manage risk as it relates to
fuel prices. Where the Company has fixed fuel prices through the use of swaps,
futures or forward contracts, the Company has mitigated the downside risk of
adverse price movements; however, it has also limited future gains from
favorable movements.

Market and Credit Risk - The Company 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 Company had no credit
risk related to these instruments at December 31, 1998. The Company has not
been required to provide, nor has it received any collateral relating to its
hedging activity.

Determination of Fair Value - The fair market values of the Company'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.

Fuel Hedging

Strategy - Over the past three years, fuel costs have been a significant portion
of the Company's total operating expenses. As a result of the significance of
fuel costs and the historical volatility of fuel prices, the Company
periodically uses swaps, futures and forward contracts to mitigate the impact of
fuel price volatility. The intent of this program is to protect the Company'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 had hedged 64% of its
forecasted 1999 fuel consumption at a price of $0.41 per gallon. At December 31,
1997, the Railroad had hedged 42% of its forecasted 1998 fuel consumption. 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.

F-11
<PAGE>

Fair Value of Debt Instruments

The fair value of the Company's long-term 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 7% of the
Company's total third-party debt portfolio. Approximately $145 million of the
Company's fixed-rate debt securities contain call provisions that allow the
Company 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 to third parties through a
bankruptcy-remote subsidiary (the Subsidiary). The Subsidiary is collateralized
by a $75 million note from Union Pacific Railroad Company. 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. Income Taxes

The Company is included in the consolidated income tax return of the
Corporation. The consolidated income tax liability of the Corporation is
allocated among the parent and its subsidiaries on the basis of their separate
contributions to the consolidated income tax liability, with full benefit of tax
losses and credits made available through consolidation by allocation to the
individual companies generating such losses and credits.

Components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>

(Millions of Dollars) 1998 1997 1996
------ ------ -----
<S> <C> <C> <C>
Current:
Federal......................... $ (15) $ 4 $ 231
State........................... (3) (8) 10
----- ----- -----
Total current................... (18) (4) 241

Deferred:
Federal......................... 286 304 217
State........................... 15 32 19
Benefit of net operating loss... (294) - -
----- ----- -----
Total deferred............... 7 336 236
----- ----- -----
Total............................. $ (11) $ 332 $ 477
===== ===== =====
</TABLE>

F-12
<PAGE>

Deferred tax liabilities (assets) comprise the following:
<TABLE>
<CAPTION>

(Millions of Dollars) 1998 1997
------- -------
<S> <C> <C>
Net current deferred tax asset........ $ (130) $ (92)
------ ------
Excess tax over book depreciation..... 7,322 7,064
State taxes - net..................... 530 540
SP merger reserves.................... (50) (235)
Long-term liabilities................. (328) (158)
Retirement benefits................... (272) (255)
Alternative minimum tax............... (5) (3)
Net operating loss.................... (719) (528)
Other................................. 281 273
------ ------
Net long-term deferred tax liability.. 6,759 6,698
------ ------
Net deferred tax liability............ $6,629 $6,606
====== ======
</TABLE>

The Company has a deferred tax asset reflecting the benefits of $2,309
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 - 2018.......... 1,096
------
Total................ $2,309
======
</TABLE>

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

A reconciliation between Federal statutory and effective tax rates is as
follows:
<TABLE>
<CAPTION>

1998 1997 1996
------- ----- -----
<S> <C> <C> <C>
Statutory tax rate 35.0% 35.0% 35.0%
State taxes - net (75.0) 1.6 1.3
Dividend Exclusion (75.0) (1.2) (0.6)
Tax Settlements - (0.6) (1.8)
Non-deductible Expenses 62.7 0.9 0.9
Property Contributions (18.8) (0.9) (0.3)
Other 2.3 0.1 (0.8)
------ ---- ----
Effective tax rate (68.8)% 34.9% 33.7%
====== ==== ====
</TABLE>

F-13
<PAGE>

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

Net payments (refunds) of income taxes were $(49) million in 1998, $49
million in 1997 and $162 million in 1996.

6. Debt

Total debt is summarized below:
<TABLE>
<CAPTION>

(Millions of Dollars) 1998 1997
------- -------
<S> <C> <C>
Intercompany borrowings from UPC, 7.5%.............. $5,368 $3,993
Capitalized leases, due through 2011................ 1,429 1,243
Equipment obligations, 6.0% to 10.3%
due through 2019.................................. 857 910
Notes and debentures, 0% to 11.5% due through 2054.. 253 294
Term floating rate debt, 6.2% through 2012.......... 105 -
Mortgage bonds, 4.3% to 5.0% due through 2030....... 175 175
Tax-exempt financings, 4.2% through 2015............ 12 12
Unamortized discount................................ (47) (44)
------ ------
Total debt....................................... 8,152 6,583

Less current portion................................ (178) (229)
------ ------
Total long-term debt................................ $7,974 $6,354
====== ======
</TABLE>

Debt Maturities - For each year, 1999 through 2003, debt maturities are $178
million, $183 million, $168 million, $206 million and $327 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.

Income-Based Securities

As a result of the Legal Mergers, the Company has assumed all outstanding
indebtedness of its predecessors (see Note 2). The terms of certain instruments
evidencing a portion of such indebtedness contain provisions that limit the
payment of interest, require sinking fund installments and impose certain
restrictions in the event all interest is not paid. Other instruments
evidencing a portion of such indebtedness may also impose restrictions on the
Company's ability to declare dividends on certain classes of capital stock (see
Note 9). A description of those debt instruments follows.

MPRR Mortgage Bonds - As the successor to MPRR, the Company is the obligor under
the MPRR 4-1/4% First Mortgage Bonds due 2005 (the MPRR First Mortgage Bonds)
and the MPRR 4-3/4% General (Income) Mortgage Bonds, Series A and Series B, due
2020 and 2030, respectively (the MPRR General Mortgage Bonds). Payment of
current interest on the MPRR First Mortgage Bonds is mandatory, but current
interest on the MPRR General Mortgage Bonds must be paid only to the extent that
there is available income remaining after allocation to a capital fund for the
purpose of reimbursing the Company for certain capital expenditures and to the
payment of certain sinking fund installments required on the MPRR First Mortgage
Bonds. If

F-14
<PAGE>

available income is insufficient to pay interest in any calendar year, the
unpaid interest accumulates to an amount not in excess of 13-1/2% of the
principal amount of the MPRR General Mortgage Bonds and is paid in subsequent
years only to the extent that there is available income remaining after payment
of current interest.

MPRR Debentures - As the successor to MPRR, the Company is the obligor under the
MPRR 5% Income Debentures due 2045 (the MPRR Debentures). Current interest on
the MPRR Debentures must be paid only to the extent that there is available
income remaining after allocation to a capital fund for the purpose of
reimbursing the Company for certain capital expenditures, to the payment of
certain sinking fund installments on the MPRR First Mortgage Bonds, to the
payment of current and accumulated interest on the MPRR General Mortgage Bonds
and to the payment of certain sinking fund installments on the MPRR General
Mortgage Bonds.

MKT Subordinated Income Debentures - As a result of MPRR's acquisition of
Missouri-Kansas-Texas Railroad Company (MKT) in 1988, the Company, as the
successor to MPRR, is now the obligor under MKT's 5-1/2% Subordinated Income
Debentures due 2033 (the MKT Debentures). Current interest on the MKT
Debentures must be paid only to the extent that there is available income
remaining after allocation to a capital fund for the purpose of reimbursing the
Company for certain capital expenditures. Unpaid interest accumulates to an
amount not in excess of 16-1/2% of the principal amount of the MKT Debentures
and is paid only to the extent that there is available income remaining after
payment of current interest.

MKT Income Certificates - The Company has also assumed certain certificates
constituting a charge on income (the Certificates) issued by MKT. The
Certificates do not bear interest, and payments to a sinking fund for the
Certificates are made only from available income, as defined in such
Certificates. Available income must be applied to the capital fund, current and
accumulated interest on the MKT Debentures and a sinking fund for the MKT
Debentures before any payment is made to the sinking fund for the Certificates.

Interest Payments - The Company paid interest of $3.5 million for 1997 and $3.6
million for 1996 on the MPRR General Mortgage Bonds, $5.0 million for both 1997
and 1996 on the MPRR Debentures, and $1.5 million for both 1997 and 1996 on the
MKT Debentures. The Company generated no available income in 1998. As a
result, no interest payments will be made on the MPRR General Mortgage Bonds,
the MPRR Debentures or the MKT Debentures in 1999 for 1998 interest. 1998
interest for the MPRR General Mortgage Bonds and the MKT Debentures will be paid
out of future years' available income.

Sinking Fund Contributions - In addition, because the Company generated no
available income in 1998, no amount will be applied to the capital funds, to the
sinking funds for the MPRR General Mortgage Bonds, MKT Debentures and the
Certificates, or accrued as dividends on the Company's Class A stock (see Note
9). Amounts payable to the MPRR General Mortgage Bonds, the MKT Debentures or
the Certificates sinking funds may be covered by the cost of securities
previously repurchased by the Company or its predecessors. Amounts in the
capital fund for the MKT Debentures which are unused or unappropriated for the
reimbursement of capital expenditures may not exceed $4.0 million at any time.

Dividend Restriction - At December 31, 1998, the amount of the Registrant's
retained earnings available for dividends was $3.0 billion.

F-15
<PAGE>

7. Leases

The Company 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 are as follows:
<TABLE>
<CAPTION>

Operating Capital
(Millions of Dollars) Leases Leases
--------- --------
<S> <C> <C>
1999...................................... $ 381 $ 209
2000...................................... 354 214
2001...................................... 311 221
2002...................................... 241 208
2003...................................... 207 186
Later years............................... 1,906 1,225
------ ------
Total minimum payments................... $3,400 2,263
====== ======
Amount representing interest............. (834)
------
Present value of minimum lease payments.. $1,429
======
</TABLE>

Rent expense for operating leases with terms exceeding one month was $573
million in 1998, $495 million in 1997 and $405 million in 1996. Contingent
rentals and sub-rentals are not significant.

8. Retirement Plans

Benefit Summary - The Company provides defined benefit retirement income to
eligible non-union employees through qualified and non-qualified (supplemental)
pension plans of the Corporation. In addition, all non-union and certain of the
Company's union employees participate in defined contribution medical and life
insurance programs for retirees. All Railroad employees are covered by the
Railroad Retirement System (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 Company has settled a portion of the non-qualified
unfunded supplemental plan's accumulated benefit obligation by purchasing
annuities. The Company 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.

F-16
<PAGE>

The following illustrates the change in the Company's projected benefit
obligation for 1998 and 1997:
<TABLE>
<CAPTION>

Change in Benefit Obligation:
Other
Postretirement
Pension Benefits Benefits
------------------ ----------------

(Millions of Dollars) 1998 1997 1998 1997
-------- -------- ------- -------

<S> <C> <C> <C> <C>
Net benefit obligation at
beginning of year........................................................................... $1,294 $1,145 $ 368 $ 360
Service cost.................................................................................. 18 16 4 4
Interest cost................................................................................. 86 87 25 26
Plan amendments............................................................................... - 65 (1) -
Actuarial (gain) loss......................................................................... (1) 61 6 2
Gross benefits paid........................................................................... (82) (80) (24) (24)

------ ------ ----- -----
Net benefit obligation at end of year......................................................... $1,315 $1,294 $ 378 $ 368
====== ====== ===== =====

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

Change in Plan Assets:
Other
Postretirement
Pension Benefits Benefits
---------------- --------------
(Millions of Dollars) 1998 1997 1998 1997
------ ------ ----- -----
Fair value of plan assets at
beginning of year........................................................................... $1,247 $1,118 $ - $ -
Actual return on plan assets.................................................................. 222 187
Employer contributions........................................................................ 4 22 24 24
Gross benefits paid........................................................................... (82) (80) (24) (24)

------ ------ ----- -----
Fair value of plan assets at
end of year................................................................................. $1,391 $1,247 $ - $ -
====== ====== ===== =====

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

Components of Plan Liabilities:
Other
Postretirement
Pension Benefits Benefits
---------------- --------------
(Millions of Dollars) 1998 1997 1998 1997
------ ------ ----- -----
Funded status at end of year.................................................................. $ 76 $ (48) $(378) $(368)

Unrecognized net actuarial gain............................................................... (459) (340) (20) (22)

Unrecognized prior service
cost (credit)............................................................................... 65 69 (36) (40)

Unrecognized net transition
obligation.................................................................................. (9) (6) - -
------ ------ ----- -----
Net liability recognized at end
of year..................................................................................... $ (327) $ (325) $(434) $(430)

====== ====== ===== =====
</TABLE>

F-17
<PAGE>

In 1998 and 1997, $24 million and $33 million, respectively, of total pension
and other postretirement liability was reclassified as a current liability.
Amounts recognized for the benefit plan liabilities in the statement of
consolidated financial position for 1998 and 1997 consist of:
<TABLE>
<CAPTION>
Balance Sheet Components:
Other
Postretirement
Pension Benefits Benefits
------------------ --------------
(Millions of Dollars) 1998 1997 1998 1997
-------- -------- ------ ------
<S> <C> <C> <C> <C>
Prepaid benefit cost............. $ 1 $ 1 $ - $ -
Accrued benefit cost............. (328) (326) (434) (430)
Additional minimum liability..... (9) (22) - -
Intangible asset................. 9 22 - -
----- ----- ----- -----
Net liability recognized at end
of year........................ $(327) $(325) $(434) $(430)
===== ===== ===== =====
</TABLE>

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

Components of Expense:
Other
Postretirement
Pension Benefits Benefits
---------------------- -------------------------
1998 1997 1996 1998 1997 1996
------ ------ ------ ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Service cost..................... $ 18 $ 16 $ 13 $ 4 $ 4 $ 3
Interest cost.................... 86 87 58 25 26 15
Expected return on assets........ (96) (81) (53) - - -
Amortization of:
Transition obligation.......... 3 3 5 - - -
Prior service cost (credit).... 7 7 6 (3) (3) (3)
Actuarial gain................... (9) (9) (5) (1) (2) (1)
----- ----- ----- ----- ----- -----
Total net periodic benefit cost.. $ 9 $ 23 $ 24 $ 25 $ 25 $ 14
===== ===== ===== ===== ===== =====
</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.

F-18
<PAGE>

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

Key Assumptions:
Other
Postretirement
Pension Benefits Benefits
------------------- --------------------
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.. 9.00 9.0 8.0 N/A N/A N/A
Rate of compensation increase... 4.75 5.0 5.5 4.75 5.0 5.5
Health care cost trend:
Current....................... N/A N/A N/A 9.00 9.0 9.5
Level in 2005................. N/A N/A N/A 4.50 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 percentage One percentage
(Millions of Dollars) point increase point decrease
-------------- ---------------
<S> <C> <C>
Effect on total service and interest
cost components..................... $ 3 $ (3)
Effect on postretirement benefit
obligation.......................... 31 (26)
</TABLE>

9. Capital Stock

The Board of Directors of the Company has restricted the availability of
retained earnings for payment of dividends by $131 million. This represents (a)
the amount by which the estimated fair value of the Company's investment in its
non-transportation subsidiaries, as determined by the Board of Directors of the
Company, exceeded the net book value of such investment which was transferred to
the Corporation by means of a dividend in June 1971 ($110 million) and (b) the
amount by which the fair market value exceeded the book value of certain
investment securities which were transferred to the Corporation by means of a
dividend in November 1972 ($21 million).

The Company's capital structure consists of Class A Stock and Common Stock.
The Class A Stock is entitled to a cash dividend whenever a dividend is declared
on the Common Stock, in an amount which equals 8 percent of the sum of the
dividends on both the Class A Stock and the Common Stock. However, dividends
may be declared and paid on the Class A Stock only when there is unappropriated
available income in respect of prior calendar years which is sufficient to make
a sinking fund payment equal to 25 percent of such dividend for the benefit of
the MKT Debentures or the Certificates (see Note 6). To the extent that
dividends are paid on the Common Stock but not the Class A Stock because the
amount of unappropriated available income is insufficient to make such a sinking
fund payment, a special cash dividend on the Class A Stock shall be paid when
sufficient unappropriated available income exists to make the sinking fund
payment. Such insufficiency does not affect the Company's right to declare
dividends on the Common Stock. In 1998, the Company did not have sufficient
available income to declare a special cash dividend on the Class A Stock (see
Note 6). Dividends in arrears on the Class A Stock total $82 million.

F-19
<PAGE>

The number of shares shown in the Stockholders' Equity section of the
Statement of Consolidated Financial Position on page F-5 excludes 2,665 shares
of Common Stock and 232 shares of Class A Stock owned by Southern Pacific Rail
Corporation, whose results are included in the consolidated financial
statements.

10. Commitments and Contingencies

There are various claims and lawsuits pending against the Company and certain of
its subsidiaries. The Company 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 Company periodically enters into financial and other commitments
in connection with its business, and has retained certain contingent liabilities
upon the disposition of formerly-owned operations.

It is not possible at this time for the Company 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
Company has recorded a liability. The Company does not expect that any known
lawsuits, claims, environmental costs, commitments or guarantees will have a
material adverse effect on its consolidated financial condition or results of
operations. Certain potentially significant contingencies relating to the
Company 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 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 Company has accrued an aggregate of $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 Company has
recorded a liability. At December 31, 1998, the Company had accrued $206 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 officers and directors (who are
also directors of the Company) 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.

F-20
<PAGE>

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 plaintiff's 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 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.

11. Other Income

Other income included the following:
<TABLE>
<CAPTION>

Millions of Dollars 1998 1997 1996
------ ------ ------
<S> <C> <C> <C>

Net gain on asset dispositions.. $ 124 $ 102 $ 115
Rental income................... 55 75 38
Interest income................. 20 15 14
Other - net..................... (13) (20) (29)
----- ----- -----
Total......................... $ 186 $ 172 $ 138
</TABLE> ===== ===== =====
12. 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 Company's financial statements (see Note 4 for a quantification
of the fair value of the Company's financial instruments).

13. Quarterly Financial Information (Unaudited)

Selected unaudited quarterly financial information for the Company for 1998 and
1997 are as follows (Millions of Dollars):
<TABLE>
<CAPTION>

Mar. 31 Jun. 30 Sep. 30 Dec. 31 Total
------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Operating 1998 $2,284 $2,317 $2,360 $2,407 $9,368
Revenues: 1997 2,564 2,610 2,538 2,269 9,981

Operating 1998 53 (117) 225 272 433
Income
(Loss): 1997 353 499 457 (56) 1,253

Net Income 1998 (32) (122) 67 114 27
(Loss): 1997 170 250 275 (75) 620
</TABLE>
1997 and 1998 results were negatively impacted by congestion (see F-22 for
further discussion).

F-21
<PAGE>

UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES

MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
1998 COMPARED TO 1997

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 the Railroad'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, the Railroad 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 Railroad's system. However, despite these
improvements, the Railroad's operations and financial results were significantly
impacted by congestion in 1998.

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. The
Railroad 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.

F-22
<PAGE>

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.

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 currency 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:

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

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
currency 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.

F-23
<PAGE>

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 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:

F-24
<PAGE>
<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). The Railroad 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 the
Railroad'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.

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.

F-25
<PAGE>
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.

1997 COMPARED TO 1996

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

Operating Results - 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:

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

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

F-26
<PAGE>

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.

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.

F-27
<PAGE>

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.

Material 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 (Pro Forma) - 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.

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 Company 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 Company 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 remediation of identified sites; consequently, the
Company'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 $206 million has been accrued for future costs at all sites
where the Company'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 Company
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

F-28
<PAGE>

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 Company 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 Company 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 Company.

Labor Matters - Approximately 87% of the Railroad's 53,000 employees are
represented by rail unions. Under the conditions imposed by 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 Company's
results of operations. The current national bargaining agreement will end in
2000. The Company expects notices for negotiations to be served in November
1999.

Inflation - The cumulative effect of long periods of inflation has significantly
increased asset replacement costs for capital-intensive companies such as the
Railroad. 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 Company uses derivative financial instruments in
limited instances for other than trading purposes to manage risk as it relates
to fuel prices. Where the Company has fixed fuel prices by using swaps, futures
or forward contracts, the Company has mitigated the downside risk of adverse
price movements; however, it has also limited future gains from favorable
movements.

Fuel - Over the past three years, fuel costs have been a significant portion of
the Company's total operating costs. As a result of the significance of fuel
costs and the historical volatility of fuel prices, the Company 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 Company's
operating margins and overall profitability from adverse fuel price changes.

Sensitivity Analysis - The Company had a number of fuel hedging contracts in
place at year-end 1998 (see Note 4 to the Financial Statements). 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 Company. In addition, the Company is subject to various Federal,
state and local environmental laws and is currently participating in the
investigation and remediation of various sites. A discussion of certain claims,

F-29
<PAGE>

lawsuits, guarantees and contingencies is set forth in Note 10 to the Financial
Statements, which is incorporated herein by reference. Reference is also made to
"Item 3. Legal Proceedings" of this Form 10-K.

Surface Transportation Board Proceedings - The Railroad was a party to two
proceedings before the 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 the following
additional conditions: (i) a "clear route" condition pursuant to which the Joint
Director of the joint dispatching center operated by the Railroad and The
Burlington Northern and Santa Fe Railway Company (BNSF) in Spring, Texas, was
granted authority to route rail 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.

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 Company'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 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

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<PAGE>

organizational structure. To provide the organizational structure to
facilitate the Company'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 the Railroad'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.

The Railroad anticipates revenue gains in coal volumes, as congestion in the
Central Corridor continues to be eliminated and the Railroad 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.

Risk Factors - The Company'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 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
Railroad's operating results. The Railroad'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, the Company's 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 Railroad's future results are dependent on the continued
success of its Service Recovery Process in preventing congestion and improving
service, and regaining its customers who switched to alternative transportation
arrangements during the service crisis.

1999 Capital Investments - The Railroad'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,

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<PAGE>

additional debt financings and the sale or lease of various operating and non-
operating properties. The Railroad expects that such sources will continue to
provide sufficient funds to meet cash requirements in the foreseeable future.
The Railroad 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. Capital investments will be made to continue capacity
expansion of main lines, upgrade and augment equipment to better meet customer
needs, build infrastructure in the Texas area (the Railroad has committed to
spend $1.4 billion over the next few years on Gulf Coast infrastructure) and
develop and implement new technologies.

Year 2000 - The Year 2000 (Y2K) compliance project at the Company includes
software (internally developed and purchased), hardware and embedded chips
inside equipment and machinery. The Company'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 the Company. The Y2K project started
with research in 1994 and an impact analysis of the Company's mainframe COBOL
systems in 1995. The Y2K project has been a high priority since then.

The Company'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
Company 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 Company 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, the Company is
testing selected critical software, hardware and embedded systems, even if the
vendor has already certified the product. The Company 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 Company plans extensive Y2K
testing with customers and trading partners in 1999.

F-32
<PAGE>

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 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 Company's systems 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. Costs to convert the
Company's systems are expensed as incurred. As of December 31, 1998, more than
70% of the costs of the Y2K project, estimated to be $46 million in total, have
been expensed. Although the Company believes its systems will be successfully
modified, failure by it, or by those from whom the Company purchases equipment,
or by other entities with whom the Company 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

F-33
<PAGE>

EXHIBIT INDEX
- -------------

Exhibit Number Description
- -------------------------

Filed with this Statement
- -------------------------

3(a) Amended Certificate of Incorporation of the Company, effective as of
February 1, 1998.

3(b) By-Laws of the Company, as amended effective as of November 19, 1998.

12 Ratio of Earnings to Fixed Charges.

24 Powers of attorney.

27 Financial Data Schedule.

Incorporated by Reference
- -------------------------

2(a) Agreement and Plan of Merger, dated as of January 29, 1998,
between UPRR and SPT is incorporated herein by reference to
Exhibit 2 to the Company's Current Report on Form 8-K dated
February 13, 1998.

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

<PAGE>

EXHIBIT 3(a)
------------

CERTIFICATE OF INCORPORATION

UNION PACIFIC RAILROAD COMPANY

ARTICLE I - NAME

The name of the corporation is Union Pacific Railroad Company (the
"Corporation").

ARTICLE II - ADDRESS AND REGISTERED AGENT

The address of the registered office of the Corporation in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle.
The name of its registered agent at such address is The Corporation Trust
Company.

ARTICLE III - PURPOSE

The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
the State of Delaware (as the same may be amended from time to time, the "GCL").

ARTICLE IV - AUTHORIZED SHARES

4.1 Authorized Capital. The Corporation is authorized to issue three
-------------------
classes of capital stock to be designated, respectively, "Common Stock", "Class
A Stock" and "Redeemable Preference Shares." The total number of shares of all
classes of capital stock which the Corporation shall have authority to issue
shall be Fifteen Thousand Five Hundred (15,500). The total number of authorized
shares of Common Stock shall be Nine Thousand Two Hundred (9,200), and the par
value of each such share shall be Ten Dollars ($10.00). The total number of
authorized shares of Class A Stock shall be Eight Hundred (800), and the par
value of each such share shall be Ten Dollars ($10.00). The total number of
authorized shares of Redeemable Preference Shares shall be Five Thousand Five
Hundred (5,500), with an initial par value of $10,000 per share.

4.2 Issuance of Class A Stock. The Class A Stock shall be issued only in
-------------------------
such number of shares as, when taken together with the number of shares of
Common Stock issued and outstanding, will equal 8% of the total number of shares
of Class A Stock and Common Stock outstanding.

4.3 Identical Rights and Privileges; Voting; Liquidation. The Common
----------------------------------------------------
Stock and Class A Stock shall be identical in all respects and shall have the
same voting, liquidation and other rights, except as provided herein with
respect to cash dividends. The Common Stock and Class A Stock shall vote as a
single class on all matters and shall have unlimited voting rights. Upon
dissolution, the holders of the Common Stock and Class A Stock shall be entitled
to receive the net assets of the Corporation. Such net assets shall be divided
among and paid to the holders on a pro-rata basis based on the number of shares
of Common Stock and Class A Stock held by them. Each holder of record of the
Redeemable Preference Shares shall have the rights and privileges, and shall be
subject to the restrictions and limitations, set forth in Article V hereof.

-1-
<PAGE>

4.4 Dividend Rights of Class A Stock. The shares of Class A Stock shall
--------------------------------
be entitled to a cash dividend, as and when a cash dividend is declared on the
shares of Common Stock, in such amount as shall equal 8% of the sum of such
dividend on the Class A Stock and such dividend on the Common Stock, provided
that dividends shall be declared and paid in any calendar year on the Class A
Stock only to the extent that Unappropriated Allocated Available Income (as
defined below) in respect of prior calendar years (including Unappropriated
Allocated Available Income for years prior to the merger of MPRR (as defined
below) into UPRR (as defined below)) shall be sufficient to pay any required
Additional Sinking Fund Payment (as defined below).

If any deficiency in the payment of cash dividends on the Class A Stock
occurs because Unappropriated Allocated Available Income is insufficient to
permit the requisite Additional Sinking Fund Payment, a special cash dividend
shall be paid on the Class A Stock in the amount of such deficiency as and when
Unappropriated Allocated Available Income which is subsequently earned in
respect of a calendar year suffices to permit an Additional Sinking Fund Payment
in the requisite amount related to such special cash dividend to be made in
accordance with the preceding paragraph.

Any deficiency in the payment of cash dividends on the Class A Stock of
MPRR which shall have accrued prior to the merger of MPRR into UPRR shall, from
and after the effectiveness of such merger, be treated as a deficiency in the
payment of cash dividends on the Corporation's Class A Stock and shall be
payable to the holders of the Corporation's Class A Stock as a special cash
dividend in accordance with the next preceding paragraph.

4.5 No Restrictions on Common Stock Dividends. Nothing in this Article IV
-----------------------------------------
shall limit or restrict the amount of dividends which the Corporation may pay on
the Common Stock.

4.6 Subdivision or Combination. If the Corporation shall in any manner
--------------------------
subdivide (by stock split, stock dividend or otherwise) or combine (by reverse
stock split or otherwise) the outstanding shares of either the Common Stock or
the Class A Stock, or in the event of any change in the capitalization of the
Corporation as the result of a merger of the Corporation with or into another
company or a similar transaction, the voting, dividend and liquidation rights of
Class A Stock relative to Common Stock shall be appropriately adjusted so as to
avoid any dilution in the aggregate voting, dividend or liquidation rights of
the Class A Stock in relation to the Common Stock.

4.7 Definitions. The following definitions shall apply to this Article
-----------
IV:

An "Additional Sinking Fund Payment" means the sinking fund payment
required by the terms of the third paragraph of the Certificates and Section
3.03 of the Indenture and shall be an amount equal to 25% of the aggregate
amount of cash dividends declared and paid on the Class A Stock.

The "Certificates" mean the Registered Certificates Representing a
Charge on Income issued by MKT and dated as of January 1, 1958, as modified by
the Order of the Interstate Commerce Commission served May 19, 1988, in Finance
Docket No. 30800 (the "Order").

The "Debentures" mean the 5 1/2% Subordinated Income Debentures due
January 1, 2033, issued by MKT pursuant to the Indenture.

The "Indenture" means that certain Indenture, dated as of January 1,
1958, between MKT and The New York Trust Company, as modified by (i) a First
Supplemental Indenture, dated as of July 1, 1960, between MKT and Chemical Bank
New York Trust Company (as successor to The New York Trust Company), (ii) the

-2-
<PAGE>

Order and a Second Supplemental Indenture, dated as of August 12, 1988, between
MPRR (as successor to MKT) and Chemical Bank (formerly called Chemical Bank New
York Trust Company), (iii) a Third Supplemental Indenture, dated as of January
1, 1997, between UPRR (as successor to MPRR) and The Chase Manhattan Bank
(formerly called Chemical Bank), and (iv) a Fourth Supplemental Indenture, dated
as of February 1, 1998, between the Corporation (as successor to UPRR) and The
Chase Manhattan Bank.

"MKT" means Missouri-Kansas-Texas Railroad Company, a Delaware
corporation.

"MPRR" means Missouri Pacific Railroad Company, a Delaware
corporation.

"Unappropriated Allocated Available Income" for a calendar year means
the Allocated Available Income (as defined in the Indenture) remaining
unappropriated under clause (6) of the provisions of the Certificates relating
to the application of Allocated Available Income and paragraph (6) of Section
2.03 of the Indenture.

"UPRR" means Union Pacific Railroad Company, a Utah corporation.

ARTICLE V - REDEEMABLE PREFERENCE SHARES

5.1. General. The Redeemable Preference Shares shall be issued in the
-------
manner, and shall have and be subject to the designations, privileges, powers,
preferences and rights, and the qualifications, limitations, restrictions, and
priorities, set forth herein:

(A) Definitions. In addition to the other terms defined in this
-----------
Amended Certificate of Incorporation, the following definitions shall apply to
this Section 5.1, unless the context otherwise requires:

"Agreement" means a written agreement between the Corporation and the
United States of America represented by the Secretary acting through the
Administrator, for the issuance and sale to the United States of the Shares to
which reference is made.

"Secretary" means the U.S. Secretary of Transportation of the United
States or his or her designee (by delegation of authority the Administrator of
the Federal Railroad Administration, United States Department of Transportation,
hereinafter the "Administrator", or his or her designee).

"Share" means a Redeemable Preference Share.

"SSW" means St. Louis Southwestern Railway Company, a Missouri
Corporation.

"SSW Mergers" means the merger of SSW into SSW Merger Corp. and the
merger of SSW Merger Corp. into UPRR, both of which were effective on September
30, 1997.

"SSW Redeemable Preference Shares" means those redeemable preference
shares originally issued by SSW which contained terms substantially similar to
the terms of the UPRR Redeemable Preference Shares and which were ultimately
converted into UPRR Redeemable Preference Shares as a result of the SSW Mergers.

-3-
<PAGE>

"UPRR Merger" means the merger of UPRR into the Corporation, which was
effective on February 1, 1998.

"UPRR Redeemable Preference Shares" means those redeemable preference
shares originally issued by UPRR which contained terms substantially similar to
the terms of the Shares as authorized in Article V hereof and which were
ultimately converted into Shares issued by the Corporation as a result of the
UPRR Merger.

The terms "original issuance date", "issuance date" and words of like
import mean the original issuance date of the SSW Redeemable Preference Shares
of the applicable series, which were ultimately converted into UPRR Redeemable
Preference Shares as a result of the SSW Mergers, which UPRR Redeemable
Preference Shares were in turn ultimately converted into Shares as a result of
the UPRR Merger.

(B) Other Preference Shares. All Shares of any series shall rank
-----------------------
equally and be identical in all respects with all other series of Shares, except
as otherwise expressly provided in this Amended Certificate of Incorporation.

(C) Par Value. Each Share shall have an initial par value of
---------
$10,000.00. Upon payment of any mandatory redemption installment of any Shares,
the par value of each such Share shall become an amount equal to the initial par
value of such Share reduced by the amount of such redemption installment on such
Share. The initial par value of any Share shall also be reduced by (1) the
amount of any mandatory redemption installments paid by SSW with respect to any
SSW Redeemable Preference Share that was ultimately converted into a UPRR
Redeemable Preference Share as a result of the SSW Mergers, and which UPRR
Redeemable Preference Share was in turn ultimately converted into such Share as
a result of the UPRR Merger, and (2) the amount of any mandatory redemption
installments paid by UPRR with respect to any UPRR Redeemable Preference Share
that was ultimately converted into such Share as a result of the UPRR Merger.

(D) Seniority.
---------

(1) The Shares shall be senior in right to all common stock and
preferred stock of the Corporation, whenever issued, with respect to dividend
and redemption payments, and in the case of liquidation or dissolution of the
Corporation; but said Shares shall be subordinate, as to dividend and redemption
payments thereon and in the case of liquidation or dissolution of the
Corporation, to all of the Corporation's Senior Debt (as defined herein).

(2) As used herein, the term "Senior Debt" means principal and
premium, if any, and accrued interest to the extent payable thereon, whether
outstanding on the issue date of the Shares or created thereafter but prior to
the time the Shares shall become a fixed interest debt obligation of the
Corporation (pursuant to the Section providing for the issuance of each series
of Shares hereunder or the Agreement) on all the following indebtedness of the
Corporation: (a) for money borrowed by the Corporation, whether the same be
evidenced by bonds, notes, equipment trust certificates or debentures or
evidenced by a loan agreement or an indenture or similar instruments; or (b) for
money borrowed by others and assumed or guaranteed, directly or indirectly, by
the Corporation; or (c) constituting purchase money obligations or mortgage
indebtedness for payment of which the Corporation is directly or contingently
liable, or on which the Corporation customarily pays interest, including, but
not limited to, purchase money bonds, notes, debentures or mortgages,
conditional sale agreements, mortgages made or given or guaranteed by the
Corporation as mortgagor or guarantor, and assumed or guaranteed mortgages upon
property; or (d)

-4-
<PAGE>

under equipment lease obligations; or (e) to general creditors, including
lessors, trade creditors and employees of the Corporation; and (f) if prior to
the time the Shares shall become a fixed interest debt obligation of the
Corporation, renewals, extensions and refundings of such indebtedness.

(E) Dividends. The Board of Directors shall have no discretion in the
---------
declaration and payment of dividends on the Shares. Each outstanding Share
shall be entitled to mandatory dividend payments payable annually on the
anniversary of the original issue thereof in accordance with the Payment
Schedule in the Section providing for the issuance of each series of Shares
hereunder; provided, however, that such dividend shall be payable only if and to
the extent that (a) the Corporation has "Available Capital" (as defined herein);
and (b) the Corporation is not insolvent and the payment of such dividend would
not render the Corporation insolvent. The Administrator shall be the sole
determiner of whether conditions (a) and (b) above have been met. "Available
Capital" means surplus or net profits or other capital legally available for the
payment of dividends, in accordance with the GCL, reduced by any amount the
payment of which the Administrator, in the Administrator's sole judgment, deems
would impair the safe operation of the railroad properties of the Corporation or
the maintenance of the usual standards of efficiency or economy of operation of
such properties. The determinations and judgments of the Administrator provided
for under clauses (a) and (b) of this paragraph shall be reached following
consideration of such information with respect thereto as the Corporation may
present to the Administrator not later than thirty (30) days prior to the date
specified for payment of such dividend. If the conditions set forth in clauses
(a) and (b) are met, either as to the entire amount of such dividend or any part
thereof, such dividend (or the part thereof with respect to which such
conditions are met) shall become an immediately due and payable debt obligation
of the Corporation to the extent such dividend is payable. If any such dividend
would not be payable (and is not fully paid) because of failure to meet the
conditions set forth in clauses (a) or (b), the unpaid portion thereof shall
cumulate until such conditions are met either as to the entire unpaid portion or
any part thereof, at which time the Corporation shall pay such unpaid portion
(or the part thereof with respect to which such conditions are met) to the
extent so payable. If not so paid, such payable amount shall become an
immediately due and payable debt obligation of the Corporation. Unless and
until the cumulated and then due dividends are fully paid, the Corporation shall
not make any distribution of assets, surplus, net profits or other capital
(whether by dividends, redemptions or otherwise) to any other class of the
Corporation's securities to which the Shares have priority as to dividends or
redemption installments thereon or in the case of dissolution or liquidation.
Nothing herein contained, however, gives any holder of Shares the right and
privilege to participate in the net profits of the Corporation beyond the
aforesaid fixed, preferential annual dividend. Notwithstanding the foregoing,
the Corporation shall have the right at its option, to pay at any time part or
all of any unpaid portion of a dividend payable or cumulating pursuant hereto,
provided that the Corporation is not prohibited at such time from making such
payment by the laws of the Corporation's state of incorporation.

(F) Redemption.
----------

(1) Each outstanding Share shall be entitled to mandatory redemption
installments payable annually on the anniversary date of the date of issuance
thereof in accordance with the Payment Schedule in the Section providing for the
issuance of each series of Shares hereunder, but not to exceed in the aggregate
the initial par value of such Share. Upon payment of any mandatory redemption
installment on any Share, the par value of such Share shall become an amount
equal to the initial par value of such Share reduced by the amount of such

-5-
<PAGE>

redemption installment and all previously paid redemption installments on such
Share (including redemption installments paid by SSW in respect of the SSW
Redeemable Preference Shares and redemption installments paid by UPRR in respect
of the UPRR Redeemable Preference Shares).

(2) The Board of Directors shall have no discretion in the declaration
and payment of redemption installments on Shares. Except where prepaid in
accordance with the terms and conditions set forth in the Section providing for
the issuance of each series of Shares hereunder, each redemption installment
shall be paid on its due date to the extent that (a) the Corporation has
Available Assets (as defined herein), and (b) the Corporation is not insolvent
and the payment of such redemption installment would not render it insolvent.
The Administrator shall be the sole determiner of whether conditions (a) and (b)
above have been met. "Available Assets" means assets of the Corporation legally
available for the redemption of shares of capital stock in accordance with the
GCL, reduced by any amount the payment of which the Administrator, in the
Administrator's sole judgment, deems would impair the safe operation of the
railroad properties of the Corporation or the maintenance of the usual standards
of efficiency or economy of operation of such properties. The determinations and
judgments of the Administrator provided for under clauses (a) and (b) of this
subparagraph (2) shall be reached following consideration of such information
with respect thereto as the Corporation may present to the Administrator not
later than thirty (30) days prior to the date specified for payment of such
redemption installment. If the conditions set forth in clauses (a) and (b)
above are met, either as to the entire amount of such installment or any part
thereof, such installment (or the part thereof with respect to which such
conditions are met) shall become an immediately due and payable debt obligation
of the Corporation to the extent such installment is payable. If any such
redemption installment would not be payable (and is not fully paid) because of a
failure to meet the conditions set forth in clauses (a) or (b) hereof, the
unpaid portion thereof shall cumulate until such conditions are met as to such
unpaid portion to the extent thereof, at which time the Corporation shall pay
such unpaid portion (or the part thereof with respect to which such conditions
are met) to the extent so payable. If not so paid, such payable amount shall
become an immediately due and payable debt obligation of the Corporation.
Unless and until the cumulated and then due redemption installments are fully
paid, the Corporation shall not make (i) any distribution of assets (whether by
dividend, redemption or otherwise) to any other class of the Corporation's
securities to which the Shares have priority as to dividends or redemption
installments thereon, or in the case of liquidation or dissolution; or (ii) any
voluntary distribution of assets (whether by dividend, redemption, or otherwise)
to any of the Corporation's securities which have priority over the Shares as to
dividend or redemption installment thereon, without the Administrator's prior
written consent. Nothing herein contained, however, gives any holder of Shares
the right and privilege in the case of liquidation or dissolution to participate
in the assets of the Corporation beyond the aggregate unredeemed par value of,
and unpaid cumulated and unpaid accrued dividends (contingent or fixed principal
and vested and/or accrued interest, as the case may be) on the Shares which have
been issued to such holder or the outstanding part thereof. Notwithstanding the
foregoing, the Corporation shall have the right at its option, to pay at any
time part or all of any unpaid portion of a redemption payment payable or
cumulating pursuant hereto, provided that the Corporation is not prohibited at
such time from making such payment by the laws of the state of its
incorporation.

(3) Upon payment of any mandatory redemption installment on any Share,
the par value of each such Share shall be reduced by the amount of such
redemption installment. If at any time Available Assets are insufficient to pay
the full amount of the redemption installments due on Shares having the

-6-
<PAGE>

same date of issuance, such Available Assets shall be applied pro rata to reduce
the par value of such Shares. Inclusion by the stockholders of this subparagraph
(3) in this Amended Certificate of Incorporation of the Corporation shall
constitute the approval by the stockholders, including the holder or holders of
the Shares, of all further amendments to said Certificate necessary to reduce
the par value of the Shares as contemplated hereunder, and no further meeting of
the stockholders, including the holder or holders of the Shares, shall be
required to effect such amendments. Upon the reduction of the par value of the
Shares hereunder, the Corporation shall cause a Certificate of Amendment to be
filed in accordance with state law.

(4) Shares redeemed pursuant to subparagraphs (1) and (2) of this
Paragraph (F) shall be surrendered to the Corporation. Notwithstanding that any
certificate for Shares shall not have been surrendered to the Corporation, the
rights of the holders of such Shares shall cease and such Shares shall be deemed
no longer outstanding, if:

(a) in the case of optional redemption pursuant to the
Section providing for the issuance of each series of Shares hereunder,
notice shall have been given and, on or before the redemption date
specified in such notice, all funds necessary for such redemption
shall have been deposited in trust with the bank or trust corporation
specified in the notice; or

(b) in the case of mandatory redemption pursuant to
subparagraphs (1) and (3) hereof, payment shall have been made of the
outstanding par value of any Shares and any unpaid cumulated dividends
and unpaid accrued dividends (in excess of such unpaid cumulated
dividends) thereof, or if the address of the holder of any such Shares
is unknown, all funds necessary for such payment shall have been
deposited in trust with a national bank or trust company for the
benefit of such holder.

(5) Where dividends and redemption installments are to be paid from
coincidentally Available Capital and Available Assets, dividends and any
cumulations thereof are to be paid first and redemption installments and any
cumulations thereof are to be paid second. In no event shall there be a full
redemption of any Shares without full payment of all cumulated and then due
dividends thereon.

(G) Voting Rights.
-------------

(1) Other than as set forth in this Paragraph (G), or as required by
law, the Shares shall not have any voting rights in the conduct of the business
of the Corporation, and such Shares shall not have any voting rights on any
Transaction (as defined in Paragraph (I) hereof) consummated in accordance with
the provisions of said Paragraph (I).

(2) Whenever any dividend or redemption payment which is due on the
Shares (in accordance with the payment Schedule in the Section providing for
issuance of each series of Shares hereunder) shall have remained unpaid for a
period of four (4) months, whether or not payable as provided herein, the holder
or holders of the Shares shall have the exclusive right to elect or appoint, in
the manner hereinafter provided, two persons to serve as members of the Board of
Directors of the Corporation, in which event the number of directors
constituting the Board of Directors shall be increased by two to reflect such
newly created directorships. Whenever the right of the holder or holders of the
Shares to elect or appoint two members of the Board of Directors shall have

-7-
<PAGE>

vested, it shall be exercised initially in the most expeditious manner, either
by written consent of such holder or holders as provided or permitted by law, or
at an annual meeting of the stockholders, or at a special meeting of
stockholders called in accordance with the By-Laws, and thereafter either by
such written consent or at such annual or special meeting. The term of office
of the directors so elected or appointed by the holder or holders of the Shares
shall continue until the next annual meeting or until their successors are
elected or appointed, provided that upon payment by the Corporation of all
dividend and redemption installments which are due, such terms shall forthwith
terminate. Any vacancies in the two specially created directorships prior to
such termination may be filled by written consent of the holder or holders of
the Shares. Notwithstanding the foregoing, in no event shall such holder or
holders be entitled at any time to elect or appoint more than an aggregate of
two members of the Corporation's Board of Directors.

(H) Liquidation, Dissolution or Winding Up.
--------------------------------------

(1) In the event of any voluntary liquidation, dissolution or winding
up of the Corporation, but only in the event that the Shares shall not have
become a debt obligation of the Corporation pursuant to the Agreement, the
holders of Shares shall be entitled to receive, after payment in full of Senior
Debt, the outstanding par value plus any unpaid cumulated and unpaid accrued
dividends (in excess of unpaid cumulated dividends) thereon.

(2) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, but only in the event that the
Shares shall have become a debt obligation of the Corporation pursuant to the
Agreement, the holders of Shares shall be entitled to receive after payment in
full of Senior Debt, the unpaid principal thereof and all unpaid interest
thereon due to the date of payment whether accrued, contingent, cumulated or
vested or whether previously denoted par value and dividends.

(3) If the distributable assets are insufficient to make payment in
full in accordance with the foregoing subparagraphs (1) and (2), such assets
shall be distributed pro rata to the holders of the Shares according to the
outstanding par value of such Shares held by each.

(I) Merger or Consolidation. In the case of any consolidation of the
-----------------------
Corporation with, or merger of the Corporation with or into, one or more
corporations (other than a consolidation or merger in which the Corporation is
the continuing corporation and which does not result in any reclassification or
change in securities of the Corporation), or in case of any sale or conveyance
to another corporation of the property of the Corporation as an entirety or
substantially as an entirety, or in the case of a reclassification or change of
any outstanding equity security of the Corporation (other than a change in par
value, or from par value to no par value, or as a result of a subdivision or
combination) (any and all such events being herein called a "Transaction"), the
Corporation or such successor or purchasing corporation shall give to the
holders of the Shares written notice thereof at least twenty (20) days prior to
the effective date of the Transaction and shall have its authorized
representative certify to the holders that the holders of such Shares then
outstanding shall have the same rights and privileges upon the effectiveness of
such Transaction as the holders had immediately prior thereto. Nothing herein,
however, waives any of the holders' rights available under the laws of the
Corporation's state of incorporation.

-8-
<PAGE>

(J) Agreement.
---------

(1) Shares shall be subject to and entitled to the benefits of these
Articles and an Agreement. An Agreement gives the holders of a majority of
aggregate par value then outstanding of the Shares the rights, upon the
happening of certain events of default set forth in the Agreement, to declare
the Shares to be a fixed interest debt obligation of the Corporation and/or to
declare an acceleration of redemption payments (or principal payments, as the
case may be) to not less than 15 annual payments (including payments already
made), with such payments (or further payments) to begin 10 days after
declaration thereof (except, if scheduled redemptions have already begun, to
continue with the next redemption installment) but not earlier than the 6th
anniversary date of the date of the original issuance of Shares and/or to
declare an increase in the dividend rate (or interest rate, as the case may be)
on the Shares in accordance with the Section providing for the issuance of each
series of Shares. Except as otherwise provided, commencing upon each such
declaration and until the next declaration each subsequent payment shall be
equal in total redemption and dividend (principal and interest) amount. In the
event of certain other events of default, including the Corporation's
discontinuance of business, making a general assignment for the benefit of
creditors, and filing a petition in bankruptcy, the Shares shall automatically
become a fixed interest debt obligation of the Corporation and the redemption
installments (or principal payments, as the case may be) set forth in the
Payment Schedule in the Section providing for the issuance of each series of
Shares hereunder shall automatically accelerate to a maximum of 15 annual
payments (including payments already made), each subsequent payment to be equal
in total principal and interest amount, with such payments (or further payments)
to begin immediately upon the occurrence of such event of default (except, if
scheduled redemptions have already begun, to continue with the next redemption
installment) but not earlier than the 6th anniversary date of the date of
original issuance of the Shares, and the dividend rate (or interest rate, as the
case may be) on the Shares shall automatically be to the highest permissible
rate raised in accordance with the Section providing for the issuance of each
series of Shares.

Notwithstanding the provisions of this subparagraph, the Shares may
become a fixed interest debt obligation only if, when and to the extent they may
become a debt obligation without violating any provisions of the laws of the
Corporation's state of incorporation. The holders of the Shares and the
Corporation agree that in the event of any litigation concerning the question of
whether the provisions of the laws of the Corporation's state of incorporation
must be met in order that the Shares become a fixed interest debt obligation of
the Corporation pursuant to an Agreement, no evidence other than the Agreement
and the Shares as to the intent of the parties to the Agreement on such question
shall be introduced by the parties to the Agreement. Except as otherwise
provided in this Paragraph (J) or an Agreement, upon the Shares becoming a fixed
interest debt obligation hereunder, the Payment Schedule in the Section
providing for the issuance of each series of Shares hereunder shall represent
fixed mandatory interest (at the dividend rate set forth in such Section
hereunder) and principal payments, and any unpaid cumulated dividend and/or
redemption installments (and contingent interest and/or principal payments, as
the case may be), shall respectively become immediately due and payable accrued
interest and principal (and any accrued dividends or vested right to interest
shall become immediately accrued interest payable in accordance with the Payment
Schedule in the Section providing for the issuance of each series of Shares
hereunder except as otherwise provided in this Paragraph (J) or the Agreement)
and such fixed mandatory interest payments and fixed mandatory principal
payments shall be, when due, an absolute and unconditional obligation of the
Corporation and shall not be governed by statutory limitations regarding
distributions in respect of equity securities, nor by the provisions of
Paragraphs (E) and (F) hereof.

-9-
<PAGE>

(2) If the Corporation shall classify the Shares as debt on any
balance sheet furnished to any class of its stockholders or creditors, or
otherwise issued publicly, such Shares shall automatically become a subordinated
debt obligation of the Corporation ("Subordinated Debt") as of the date of such
balance sheet, and dividend and redemption installments thereon shall become,
respectively, contingent interest and principal payments, provided such Shares
could lawfully become Subordinated Debt. In such event, contingent interest
will be payable at the dividend rate set forth in the Section providing for the
issuance of each series of Shares hereunder and in accordance with the Payment
Schedule in such Section hereunder (except as otherwise provided in this
Paragraph (J) or the Agreement); provided, however, that the Corporation's
obligation to pay contingent interest shall be subject to the conditions set
forth in clauses (a) and (b) of Paragraph (E). Contingent principal payments
will be payable in accordance with the provisions of Paragraph (F) hereof
(except as otherwise provided in this Paragraph (J) or the Agreement); provided,
however, that the Corporation's obligation to pay contingent principal payments
shall be subject to the conditions set forth in clauses (a) and (b) of
subparagraph (2) of Paragraph (F). Such Shares which have become Subordinated
Debt will be subordinate to Senior Debt of the Corporation. The classification
of the Shares as Debt and such Shares becoming Subordinated Debt in accordance
with this subparagraph shall not constitute an event of default under the
Agreement, but if an event of default shall have occurred before or shall occur
after such Shares have become Subordinated Debt, such Subordinated Debt may
become fixed interest debt as that term is used in the Agreement when Shares
directly become fixed interest debt.

(K) No Waiver. The failure of any holder of Shares to exercise any
---------
rights granted to it hereunder or under the share certificate shall not
constitute a waiver of such rights or of any other rights. Failure by any
holder of Shares to exercise any rights granted hereunder or under the share
certificate, in the event of non-payment of any required payment when due, shall
not be deemed a waiver of such non-payment or of further non-payments by the
Corporation. The remedies granted to the holders of Shares hereunder or under
the share certificate shall be deemed cumulative and not exclusive.

(L) Certificates. The Shares are issued subject to the following
------------
conditions and each certificate for such Shares shall be marked or stamped
substantially as follows:

"The preferences and other rights, terms and conditions of the
Redeemable Preference Shares are as stated in the Corporation's
Amended Certificate of Incorporation. A written description of such
preferences and other rights, terms and conditions will be supplied
upon request to each holder by the Corporation. This Certificate is
issued subject to the provisions limiting transfer or sale of the
Shares of the Corporation contained in the Amended Certificate of
Incorporation, and neither this Certificate nor any of the Shares
represented by it may be sold, transferred or assigned, except in
accordance with the provisions of the Amended Certificate of
Incorporation. A full statement of said limitations upon transfer or
sale will be furnished upon request and without charge to any
stockholder.

-10-
<PAGE>

The Shares represented by this Certificate have not been
registered under the Securities Act of 1933, as amended, or any other
state or Federal laws, including the provisions of Section 11301 of
Title 49 of the United States Code (49 U.S.C. 11301). Such shares have
been acquired for investment and all holders thereof at any time
hereby acknowledge and agree that such shares may not be offered for
sale, sold, delivered after sale, transferred, pledged or
hypothecated, nor will any assignee or endorsee hereof be recognized
as an owner hereof by the issuer for any purpose, unless a
Registration Statement under the Securities Act of 1933 as amended
with respect to such Shares shall then be in effect and the
requirements of other applicable state and Federal laws, rules and
regulations, including Section 11301 of Title 49 of the United States
Code, shall have been complied with or unless the availability of an
exemption from registration shall be established to the satisfaction
of outside counsel for the Corporation, whose fees shall be paid by
the Corporation. In determining the availability of such an exemption
such counsel shall take into account the Corporation's obligation
hereunder to make available adequate current information concerning
the Corporation. The Corporation shall be under no obligation to pay
for any registration of such Shares under applicable state and Federal
laws, rules and regulations, or otherwise to pay (except for such
outside counsel fees) for any steps which might be necessary to
accomplish a transfer of such Shares under such laws. Upon the
request of any holder of such Shares or part thereof, the Corporation
will make available adequate current information concerning the
Corporation to enable such holder to sell such Shares or part thereof
(whether or not a sale is then contemplated) in compliance with such
Federal and state laws, rules and regulations to the extent such
information shall not already be publicly available. In addition, the
United States of America (and no other holder) hereby acknowledges and
agrees that no such Shares shall be transferred or conveyed except
upon twenty (20) days' prior written notice to the Corporation of the
terms and conditions of such proposed transfer or conveyance and that,
for twenty days after receipt of such notice, the Corporation shall
have the right of first refusal to purchase any such Shares to be
transferred or conveyed."

(M) Alteration of Rights. So long as any Shares are outstanding, the
--------------------
Corporation shall not without the written consent or affirmative vote of the
holders of at least 2/3rds of such Shares, amend, alter or repeal the powers,
preferences or special rights of such Shares so as to affect them adversely.

5.2 Series A. The relative rights, preferences, limitations and
--------
restrictions of the Redeemable Preference Shares, Series A (the "Series A
Shares") which are not otherwise provided for in Section 5.1 hereunder are as
follows (terms not otherwise defined under this Section 5.2 shall have the
meanings given them in Section 5.1 hereunder):

(A) Dividends.
---------

(1) The holders of Series A Shares shall be entitled to receive fixed
preferential annual dividends in cash at the rate of 4.2% on the then
outstanding par value thereof payable annually on the anniversary date of the
date of issuance thereof commencing on the 11th anniversary in accordance with
the payment schedule in Paragraph (C) hereunder (the "Payment Schedule");
provided that for the purpose of this subparagraph "the then outstanding par

-11-
<PAGE>

value" shall be determined for each year as if all scheduled mandatory
redemption installments had been paid, whether or not such installments have in
fact been paid.

(2) Except in the case of optional redemption of Series A Shares by
the Corporation according to the terms prescribed, each Series A Share shall
accrue a dividend of 50% of its initial par value commencing on the 10th
anniversary date of its original issuance, which accrual shall be payable in
accordance with the provisions hereof. If, prior to or upon any liquidation,
dissolution or winding up of the Corporation, (a) such Series A Share has become
a Subordinated Debt obligation of the Corporation (pursuant to this Amended
Certificate of Incorporation or the Agreement), such dividend accrual of 50% or
the remaining unpaid portion thereof shall become a vested right to interest to
the extent of such unpaid portion, but shall be payable only in accordance with
such Agreement and this Amended Certificate of Incorporation, or (b) such Series
A Share shall become a fixed interest debt obligation of the Corporation
(pursuant to this Amended Certificate of Incorporation or the Agreement), such
dividend accrual of 50% or the remaining unpaid portion thereof, or such vested
right to interest or the remaining unpaid portion thereof, shall become an
immediate interest accrual to the extent of such unpaid portion, but shall be
payable only in accordance with the Agreement and this Amended Certificate of
Incorporation.

(3) Except as otherwise provided herein or in the Agreement the total
amount of dividends payable on each Series A Share shall not exceed 50% of the
initial par value thereof.

(B) Redemption.
----------

(1) Prior to the 11th anniversary date of the date of issuance of any
Series A Shares, the Corporation may at its option redeem any number of such
Shares at any time at a redemption price of the initial par value of such Shares
plus a per Share premium of $203.00 (or such other amount as correlates to the
then determined yield to maturity multiplied by 100) multiplied by the number of
years (including fractional years as whole years) such Shares were outstanding.
If less than all of the outstanding Series A Shares are to be redeemed, the
Shares to be redeemed shall be determined by lot or in any other fair and
impartial manner normally used to select Shares for redemption or as hereafter
provided. If redemption is to be by lot each certificate representing more than
one Share shall be assigned a number for each Share represented by such
certificate.

(2) On or after the 11th anniversary date of the date of issuance of
any Series A Shares, the Corporation may at any time redeem Series A Shares but
no less than all such Shares having that same date of issuance, at a redemption
price of the then outstanding par value of such Shares and all unpaid cumulated
dividends thereon, plus a per Share premium of $203.00 (or such other amount as
correlates to the then determined yield to maturity multiplied by 100)
multiplied by the number of years (including fractional years as whole years)
such Shares were outstanding. If such Shares shall have become contingent or
fixed debt, as the case may be, prepayment shall be in an amount computed hereby
as if the Shares had not become such.

(3) There shall be credited only against the premium payable on any
optionally redeemed Series A Shares (but not against the par value or dividends
thereof) the aggregate amount of dividends previously payable and then paid on
such optionally redeemed Series A Shares.

-12-
<PAGE>

(4) Notice of optional redemption of Series A Shares shall be mailed,
addressed to the holders of record of the Shares to be redeemed at their
respective addresses as they shall appear on the stock books of the Corporation
at least 10 days prior to the date fixed for redemption.

Redemption
Anniversary Date Dividends Installments
of Issuance Per Share Per Share
------------------ --------- ------------
<S> <C> <C>

1980........... - -
1981........... - -
1982........... - -
1983........... - -
1984........... - -
1985........... - -
1986........... - -
1987........... - -
1988........... - -
1989........... - -
1990........... - -
1991........... $421.43 $328.57
1992........... 406.53 343.47
1993........... 393.20 356.80
1994........... 378.18 371.82
1995........... 362.53 387.47
1996........... 347.30 402.70
1997........... 329.23 420.72
1998........... 311.52 438.48
1999........... 293.06 456.94
2000........... 273.82 476.18
2001........... 253.77 496.23
2002........... 232.87 517.13
2003........... 211.09 538.91
2004........... 188.39 561.61
2005........... 164.73 585.27
2006........... 140.08 609.92
2007........... 114.38 635.62
2008........... 87.60 662.40
2009........... 59.69 690.31
2010........... 30.60 719.40

</TABLE>
(D) Agreement. Series A Shares shall be subject to and entitled to the
---------
benefits of this Amended Certificate of Incorporation and an Agreement. The
Agreement gives the holders of a majority of aggregate par value then
outstanding of the Series A Shares the rights, upon the happening of certain
events of default set forth in the Agreement, to declare the Series A Shares to
be a fixed interest debt obligation of the Corporation and/or to declare an
acceleration of redemption payments (or principal payments, as the case may be)
to not less than 15 annual payments (including payments already made), with such
payments (or further payments) to begin 10 days after declaration thereof
(except, if scheduled redemptions have already begun, to continue with the next
redemption installment) but not earlier than the 6th anniversary date of the
date of the original issuance of Series A Shares and/or to declare an increase
in the dividend rate (or interest rate, as the case may be) in the Series A
Shares so as to reflect a yield to maturity on the Series A Shares of 2.03% from
the date

-13-
<PAGE>

of original issuance to the declaration date and up to 6.68% from the
declaration date, which yields shall return to the holder not less than 150% of
the aggregate par value of the Shares (but with accrual and payment thereof to
commence not earlier than the 10th anniversary date of the date of original
issuance of the Series A Shares). Except as otherwise provided, commencing upon
each such declaration and until the next declaration each subsequent payment
shall be equal in total redemption and dividend (principal and interest) amount.
In the event of certain other events of default, including the Corporation's
discontinuance of business, making a general assignment for the benefit of
creditors, and filing a petition in bankruptcy, the Series A Shares shall
automatically become a fixed interest debt obligation of the Corporation and the
redemption installments (or principal payments, as the case may be) set forth in
the Payment Schedule in this Section shall automatically accelerate to a maximum
of 15 annual payments (including payments already made), each subsequent payment
to be equal in total principal and interest amount, with such payments (or
further payments) to begin immediately upon the occurrence of such event of
default (except, if scheduled redemptions have already begun, to continue with
the next redemption installment) but not earlier than the 6th anniversary date
of the date of original issuance of the Series A Shares, and the dividend rate
(or interest rate, as the case may be) on the Series A Shares shall
automatically be raised so as to reflect a yield to maturity on the Series A
Shares of 2.03% from the date of original issuance to the date of such event of
default and 6.68% from the date of such event of default, which yields shall
return to the holder not less than 150% of the aggregate par value of the Shares
(but with accrual and payment thereof to commence not earlier than the 10th
anniversary date of the date of original issuance of the Series A Shares).

Notwithstanding the provisions of this subparagraph, the Series A
Shares may become a fixed interest debt obligation only if, when and to the
extent they may become a debt obligation without violating any provisions of the
laws of the Corporation's state of incorporation. The holders of the Series A
Shares and the Corporation agree that in the event of any litigation concerning
the question of whether the provisions of the laws of the Corporation's state of
incorporation must be met in order that the Series A Shares become a fixed
interest debt obligation of the Corporation pursuant to this Amended Certificate
of Incorporation and the Agreement, no evidence other than the Agreement and the
Series A Shares as to the intent of the parties to the Agreement on such
question shall be introduced by the parties to the Agreement. Except as
otherwise provided in this Paragraph (D) or the Agreement, upon the Series A
Shares becoming a fixed interest debt obligation hereunder, the Payment Schedule
in this Section shall represent fixed mandatory interest (at the dividend rate
set forth in this Section) and principal payments, and any unpaid cumulated
dividend and/or redemption installments (and contingent interest and/or
principal payments, as the case may be), shall respectively become immediately
due and payable accrued interest and principal (and any accrued dividends or
vested right to interest shall become immediately accrued interest payable in
accordance with the Payment Schedule in this Section except as otherwise
provided in this Paragraph (D) or the Agreement), and such fixed mandatory
interest payments and fixed mandatory principal payments shall be, when due, an
absolute and unconditional obligation of the Corporation and shall not be
governed by statutory limitations regarding distributions in respect of equity
securities, nor by the provisions of Paragraphs (E) and (F) of Section 5.1
hereof.

5.3 Series B. Sections 5.1 and 5.2 herein shall apply to the Redeemable
---------
Preference Shares issued to finance the rehabilitation of certain parts of
Armourdale Yard, Kansas City, Kansas, only if a court of competent jurisdiction
by a final, binding judgment determines that such Redeemable

-14-
<PAGE>

Preference Shares shall be equity instruments in which case they shall be
denoted for purposes hereof as "Series B Shares."

The relative rights, preferences, limitations and restrictions of the
Series B Shares which are not otherwise provided for in Section 5.1 hereunder
are as follows (terms not otherwise defined under this Section 5.3 shall have
the meanings given them in Section 5.1 hereunder):

(A) Dividends.
- --- ---------

(1) The holders of Series B Shares shall be entitled to receive fixed
preferential annual dividends in cash at the rate of 28.454524% on the then
outstanding par value thereof payable annually on the anniversary date of the
date of issuance commencing upon the date of issuance in accordance with the
payment schedule in Paragraph (C) hereunder (the "Payment Schedule"); provided
that for the purpose of this subparagraph "the then outstanding par value" shall
be determined for each year as if all scheduled mandatory redemption
installments had been paid, whether or not such installments have in fact been
paid.

(2) Except in the case of optional redemption of Series B Shares by
the Corporation according to the terms prescribed, each Series B Share shall
accrue a dividend commencing on the 10th anniversary date of its original
issuance, which accrual shall be payable in accordance with the provisions
hereof. If, prior to or upon any liquidation, dissolution or winding up of the
Corporation, (a) such Series B Share has become a Subordinate Debt obligation of
the Corporation (pursuant to this Amended Certificate of Incorporation or the
Agreement), such dividend accrual thereof shall become a vested right to
interest to the extent of such unpaid portion, but shall be payable only in
accordance with such Agreement and this Amended Certificate of Incorporation, or
(b) such Series B Share shall become a fixed interest debt obligation of the
Corporation (pursuant to this Amended Certificate of Incorporation or the
Agreement), such dividend accrual or the remaining unpaid portion thereof, or
such vested right to interest or the remaining unpaid portion thereof, shall
become an immediate interest accrual to the extent of such unpaid portion, but
shall be payable only in accordance with the Agreement and this Amended
Certificate of Incorporation.

(B) Redemption.
----------

(1) Prior to the 6th anniversary date of the date of issuance of any
Series B Share, the Corporation may, at its option, redeem or cause to be
redeemed any number of such Series B Shares at any time, but only at a
redemption price of the then outstanding par value of each such Series B Share
and all unpaid, accrued dividends thereon to the date of such redemption, plus a
per Series B Share premium of four hundred ninety dollars ($490) for each year
(including fractional years as whole years) such Series B Shares were
outstanding. If less than all of the outstanding Series B Shares are to be
redeemed, the Series B Shares to be redeemed shall be determined by lot or in
any other fair and impartial manner.

(2) After the 6th anniversary date of the date of issuance of any
Series B Share, the Corporation may, at its option, redeem or cause to be
redeemed at any time only all such Series B Shares having the same date of
issuance, and only at a redemption price equal to the then outstanding par value
of each such Series B Share and all unpaid, accrued dividends thereon to the
date of such redemption, plus a per Series B Share premium of four hundred
ninety ($490) for each year (including fractional years as whole years) such
Series B Shares were outstanding.

-15-
<PAGE>

(3) There shall be credited only against the premium payable on any
optionally redeemed Series B Share (but not against the par value or dividends
thereof), the aggregate amount of dividends paid on such optionally redeemed
Series B Share.

(4) Notice of optional redemption of any Series B Share shall be
mailed and addressed to the Administrator in accordance with the manner
specified in Section 8.06 of the Series B Share Agreement.

Period Par Value Dividends Total Payment
- -------- ---------- --------- -------------
<S> <C> <C> <C>
1 0 0 0
2 0 0 0
3 0 0 0
4 0 0 0
5 0 0 0
6 $ 1,215.50 0 $ 1,215.50
7 1,215.50 0 1,215.50
8 1,215.50 0 1,215.50
9 1,215.50 0 1,215.50
10 1,215.50 0 1,215.50
11 99.37 $1,116.13 1,215.50
12 127.65 1,087.85 1,215.50
13 163.97 1,051.53 1,215.50
14 210.63 1,004.87 1,215.50
15 270.56 944.94 1,215.50
16 347.55 867.95 1,215.50
17 446.44 769.06 1,215.50
18 573.47 642.03 1,215.50
19 736.65 478.85 1,215.50
20 946.21 269.29 1,215.50
---------- --------- ----------
$10,000.00 $8,232.50 $18,232.50
</TABLE>
(D) Agreement. Series B Shares shall be subject to, and entitled to
---------
the benefits of an Agreement and this Amended Certificate of Incorporation. The
holders of a majority of aggregate par value outstanding of the Series B Shares
may upon the happening of certain events of default as set forth in the
Agreement declare the Series B Shares to be a fixed interest debt obligation of
the Corporation and/or declare an increase in the dividend rate (or interest
rate, as the case may be) on the Series B Shares so as to reflect a yield to
maturity on the Series B Shares of 4.90% from the date of original issuance to
the declaration date and up to 8.72% from the declaration date (but with accrual
and payment thereof to commence not earlier than the 10th anniversary date of
the date of original issuance of the Series B Shares). Except as otherwise
provided, commencing upon each such declaration and until the next declaration
each subsequent payment shall be equal in total redemption and dividend
(principal and interest) amount. In the event of certain other events of
default, including the Corporation's discontinuance of business, making a
general assignment for the benefit of creditors, and filing a petition in
bankruptcy, the Series B Shares shall automatically become a fixed interest debt
obligation of the Corporation and the dividend rate (or interest rate, as the
case may be) on the Series B Shares shall automatically be raised so as to
reflect as yield to maturity on the Series B Shares of 4.90% from the date of
original issuance to the date of such event of default and 8.72% from the date
of such event of default (but with accrual and payment thereof to commence not
earlier than the 10th anniversary date of the date of original issuance of the
Series B Shares).

-16-
<PAGE>

Notwithstanding the provisions of this subparagraph, the Series B
Shares may become a fixed interest debt obligation only if, when and to the
extent they may become a debt obligation without violating any provisions of the
laws of the Corporation's state of incorporation. The holders of the Series B
Shares and the Corporation agree that in the event of any litigation concerning
the question of whether the provisions of the laws of the Corporation's state of
incorporation must be met in order that the Series B Shares become a fixed
interest debt obligation of the Corporation pursuant to this Amended Certificate
of Incorporation and the Agreement, no evidence other than the Agreement and the
Series B Shares as to the intent of the parties to the Agreement on such
question shall be introduced by the parties to the Agreement. Except as
otherwise provided in this Paragraph (D) or the Agreement, upon the Series B
Shares becoming a fixed interest debt obligation hereunder, the Payment Schedule
in this Section shall represent fixed mandatory interest (at the dividend rate
set forth in this Section) and principal payments, and any unpaid cumulated
dividend and/or redemption installments (and contingent interest and/or
principal payments, as the case may be), shall respectively become immediately
due and payable accrued interest and principal (and any accrued dividends or
vested right to interest shall become immediately accrued interest payable in
accordance with the Payment Schedule in this Section except as otherwise
provided in this Paragraph (D) or the Agreement), and such fixed mandatory
interest payments and fixed mandatory principal payments shall be, when due, an
absolute and unconditional obligation of the Corporation and shall not be
governed by statutory limitations regarding distributions in respect of equity
securities, nor by the provisions of Paragraphs (E) and (F) of Section 5.1
hereof.

ARTICLE VI - MANAGEMENT PROVISIONS

The following provisions are inserted for the management of the business
and the conduct of the affairs of the Corporation, and for further definition,
limitation and regulation of the powers of the Corporation and its directors and
stockholders:

6.1 By-Laws. The directors of the corporation shall have concurrent power
-------
with the stockholders to adopt, alter, amend, change, add to or repeal the By-
laws of the Corporation.

6.2 Limitation of Liability of Directors. To the fullest extent permitted
------------------------------------
by the GCL or any other applicable law as now in effect or as may hereafter be
amended, a director of the Corporation shall not be liable to the Corporation or
its shareholders for monetary damages for breach of fiduciary duty as a
director. No amendment to or repeal of this Article VI shall apply to or have
any effect on the liability or alleged liability of any director of the
Corporation for or with respect to any action or failure to act by such director
occurring prior to such amendment or repeal.

-17-

<PAGE>

EXHIBIT 3(b)
------------

BY-LAWS

UNION PACIFIC RAILROAD COMPANY

(As Amended Effective as of November 19, 1998)

________

ARTICLE I

STOCKHOLDERS MEETINGS

SECTION 1. Meetings, annual or special, of the stockholders of this
Company may be held at such place or places as shall be ordered by the Board of
Directors or the Executive Committee.

SECTION 2. Annual meetings of the stockholders, for the purpose of
electing directors and transacting any other business, shall be held at such
time as shall be ordered by the Board of Directors or the Executive Committee,
but, unless otherwise ordered, shall be held at 11:00 a.m. on the third Friday
of April in each year.

SECTION 3. A special meeting of the stockholders may be called by the
Board of Directors, the Executive Committee or by any other person who, at such
time, is authorized by the General Corporation Law of the State of Delaware (the
"GCL") to call a special meeting of stockholders. The objects of a special
meeting shall be stated in the order therefor, and the business transacted shall
be confined to such objects.

SECTION 4. Notice of all meetings of the stockholders shall be given,
either personally or by mail, not less than ten nor more than sixty days prior
thereto. If given by mail, the notice shall be sent by United States mail,
postage prepaid, directed to each stockholder at his address as it appears on
the records of the Company. The notice of all special meetings shall state the
objects thereof. The failure to give notice of an annual meeting, or any
irregularity in the notice, shall not affect the validity of such annual meeting
or of any proceedings thereat. Any stockholder may consent in writing to the
holding of a special meeting without notice.

SECTION 5. The Board of Directors or the Executive Committee may fix in
advance a day and hour, which shall not precede the date upon which the
resolution fixing such day and hour is adopted by the Board of Directors or the
Executive Committee and which shall be not more than sixty nor less than ten
days preceding any annual or special meeting of stockholders or, in the case of
action of stockholders without a meeting, more than ten days after the date upon
which the resolution fixing such day and hour is adopted by the Board of
Directors or the Executive Committee, as the time for the determination of
stockholders entitled to vote at such meeting or to take such action.
Stockholders of record at the time so fixed by the Board of Directors or the
Executive Committee and only such stockholders shall be entitled to vote at such
meeting. Each share of stock shall entitle such record holder thereof to one
vote, in person or by proxy in writing.

SECTION 6. The Chairman of the Board, and in his absence the Chairman of
the Executive Committee, and in their absence the President or one of the Vice
Presidents, shall call meetings of the stockholders to order and act as chairman
<PAGE>

of such meetings. In the absence of all of these officers, the Board of
Directors may appoint a chairman of the meeting to act in such event; but if the
Board shall not make such appointment, then, in the absence of all of these
officers, any stockholder or proxy of any stockholder may call the meeting to
order, and a chairman shall be elected.

SECTION 7. The Secretary of the Company shall act as secretary at all
meetings of the stockholders; but the Board of Directors or the Executive
Committee may designate an Assistant Secretary for that purpose before the
meeting, and if no such designation shall have been made, then the presiding
officer at the meeting may appoint any person to act as secretary of the
meeting.

SECTION 8. Stockholders may take action on a matter at a meeting only if a
quorum exists with respect to that matter. Unless the certificate of
incorporation or the GCL provide otherwise, a majority of the shares entitled to
vote on the matter, represented in person or by proxy, constitutes a quorum for
action on that matter. If a quorum exists, action on a matter, other than the
election of directors, by stockholders is approved if the votes cast favoring
the action exceed the votes cast opposing the action, unless the certificate of
incorporation or the GCL require a greater number of affirmative votes.
Directors are elected by a plurality of the votes cast by the shares entitled to
vote in the election, represented in person or by proxy, at a meeting at which a
quorum is present.

- 2 -
<PAGE>

ARTICLE II

BOARD OF DIRECTORS

SECTION 1. All corporate powers shall be exercised by or under the
authority of, and the business and affairs of the Company shall be managed under
the direction of, the Board of Directors. The number of directors which shall
constitute the whole board shall be fixed from time to time by resolution of the
Board of Directors, provided that such number shall not be less than one (1).
Vacancies and newly created directorships resulting from any increase in the
authorized number of directors may be filled by a vote of the Board and, if the
directors remaining in office consist of fewer than a quorum of the Board, a
majority of directors then in office, though less than a quorum, may fill the
vacancy. A director elected to fill a vacancy shall be elected for the
unexpired term of his predecessor in office. Any director appointed by the
Board of Directors to fill a directorship caused by an increase in the number of
directors shall serve until the next annual meeting or a special meeting of the
stockholders called for the purpose of electing directors.

SECTION 2. Regular meetings of the Board of Directors shall be held at
such times as the Board shall from time to time designate, and no further notice
of such regular meetings shall be required. Special meetings shall be held
whenever called by order of the Chairman of the Board, the Chairman of the
Executive Committee, or the Executive Committee or any five members of the
Board. Notice of special meetings shall be given, at least one day prior
thereto, by personal service of written notice upon the directors or by
delivering the same at, or transmitting the same by first class mail, facsimile
transmission, telephone or other electronic means to, their respective
residences or offices. Any director may consent in writing to the holding of a
special meeting without notice, and the attendance or participation of any
director at a special meeting shall constitute a waiver by him of call and
notice thereof and a consent to the holding of said meeting and the transaction
of any corporate business thereat, unless the director at the beginning of the
meeting, or promptly upon the director's arrival, objects to holding the meeting
or transacting business thereat because of lack of notice or defective notice,
and does not thereafter vote for or assent to the action taken at the meeting.
Meetings of the Board of Directors may be held at such place or places as shall
be ordered by the Executive Committee or by a majority of the directors in
office, but, unless otherwise ordered, all meetings of the Board of Directors
shall be held at the principal executive offices of the Company in Dallas,
Texas.

SECTION 3. A majority of the number of directors prescribed by Article II,
Section 1 shall constitute a quorum at all meetings of the Board. If a quorum
be not present at any meeting, a majority of the directors present may adjourn
the meeting until a later day or hour.

- 3 -
<PAGE>

ARTICLE III

EXECUTIVE COMMITTEE

SECTION 1. There shall be an Executive Committee consisting of such number
of directors as shall be elected thereto by the vote of the majority of the
directors then in office, whose terms of office shall continue during the
pleasure of the Board. Except to the extent otherwise provided in the GCL, the
Executive Committee shall, when the Board of Directors is not in session, have
all the powers of the Board of Directors to manage and direct all the business
and affairs of the Company in all cases in which specific directions shall not
have been given by the Board of Directors.

SECTION 2. Meetings of the Executive Committee may be called at any time
by the Chairman of the Board, the Chairman of the Executive Committee, or a
majority of the members of the Executive Committee, to convene at such time and
place as may be designated. The rules regarding notice of meetings of the Board
set forth in Section 2 of Article II of these By-Laws shall apply to meetings of
the Executive Committee.

SECTION 3. A majority of the members of the Executive Committee shall
constitute a quorum. If a quorum be not present at any meeting, the member or
members of the Committee present may adjourn the meeting until a later day or
hour.

- 4 -
<PAGE>

ARTICLE IV

OFFICERS AND AGENTS

SECTION 1. The Board of Directors may elect such of the following officers
as it deems necessary or desirable: a Chairman of the Board, a Chairman of the
Executive Committee, a Chief Executive Officer, a Vice Chairman of the Board, a
President, a Chief Operating Officer, a Chief Financial Officer, a Chief
Accounting Officer, an Executive Vice President-Finance and Administration, an
Executive Vice President-Marketing and Sales, an Executive Vice President-
Operation, a Vice President and General Counsel, a Vice President-Taxes, a
Controller, a Secretary, a Treasurer and such other Executive Vice Presidents,
Senior Vice Presidents and Vice Presidents as the Board shall determine, and
there may also be appointed by the Board of Directors or Executive Committee
such Assistant Secretaries, Assistant Treasurers, General Tax Counsels and other
officers and agents as the Board of Directors or Executive Committee shall from
time to time determine.

SECTION 2. The Chairman of the Board shall perform such duties and possess
such powers as may be prescribed or conferred by the Board of Directors or the
Chairman of the Executive Committee.

SECTION 3. The Chairman of the Executive Committee shall preside at
meetings of the Executive Committee and Board of Directors, and shall have
general supervision of all business of the Company and of the interest of the
Company in all companies controlled by it and shall perform such other duties
and possess such powers as may be prescribed or conferred by the Board of
Directors.

SECTION 4. The Chief Executive Officer shall have charge of all departments
and offices of the Company and of the interest of the Company in all companies
controlled by it and shall perform such other duties and possess such powers as
may be prescribed or conferred by the Board of Directors or the Chairman of the
Executive Committee.

SECTION 5. The Vice Chairman of the Board shall perform such duties and
possess such powers as may be prescribed or conferred by the Board of Directors
or the Chief Executive Officer.

SECTION 6. The President shall perform such duties and possess such powers
as may be prescribed or conferred by the Board of Directors or the Chief
Executive Officer.

SECTION 7. The Chief Operating Officer shall have day to day operating
responsibilities for the affairs of the Company, reporting to the Chief
Executive Officer, and shall perform such other duties as may be prescribed or
conferred by the Chief Executive Officer.

SECTION 8. The Chief Financial Officer shall have general supervision of
the financial affairs and investments of the Company and shall perform such
other duties as may be prescribed or conferred by the Chairman of the Executive
Committee.

SECTION 9. The Executive Vice President-Finance and Administration shall
have immediate charge of the financial affairs and investments of the Company
and shall have general supervision of the information technologies systems of
the Company and shall perform such other duties as may be prescribed or
conferred by the President.

SECTION 10. The Executive Vice President-Marketing and Sales shall have
charge of all marketing and sales activities of the Company and shall perform
such other duties as may be prescribed or conferred by the President.

- 5 -
<PAGE>

SECTION 11. The Executive Vice President-Operation shall have charge of
the maintenance and operation of the railroads of the Company and shall perform
such other duties as may be prescribed or conferred by the Chief Operating
Officer.

SECTION 12. The other Executive Vice Presidents and Senior Vice Presidents
elected from time to time shall perform such duties and possess such powers as
may be prescribed or conferred by the Board of Directors or the President.

SECTION 13. The Vice President and General Counsel shall have general
supervision of all legal business of the Company except as otherwise provided in
Section 13 of this ARTICLE IV, and shall perform such other duties as may be
prescribed or conferred by the Chairman of the Executive Committee.

SECTION 14. The Vice President-Taxes shall, under the control of the Chief
Financial Officer, have charge of all aspects of federal, foreign, state and
local taxes and shall perform such other duties as may be prescribed or
conferred by the Chief Financial Officer.

SECTION 15. The other Vice Presidents elected from time to time shall
perform such duties and possess such powers as may be prescribed or conferred by
the Board of Directors or the President.

SECTION 16. Except as otherwise provided herein or directed by the Board
of Directors, the Chief Accounting Officer shall have immediate charge of the
general books, accounts and statistics of the Company and shall be the custodian
of all vouchers, drafts, invoices and other evidences of payment and all bonds,
interest coupons and other evidences of indebtedness which shall have been
canceled. He is authorized to approve for payment by the Treasurer vouchers,
payrolls, drafts or other accounts. He shall have prepared periodically or
specially as requested by him with the approval of and in forms prescribed by
the Chief Financial Officer, statements of operating revenues and expenses and
estimates thereof and of expenditures and estimates on all other accounts; and
copies of all statistical data that may be compiled in regular course and also
other information in reference to the financial affairs and operations of the
Company and of any subsidiary company that may be required by the Chief
Financial Officer or the Board of Directors. He shall submit for each regular
meeting of the Board of Directors, and, at such other times as may be required
by said Board or the Chief Financial Officer, statements of operating results,
of cash resources and requirements and of appropriations for Capital
Expenditures, and shall perform such other duties as the Chief Financial Officer
may from time to time direct.

SECTION 17. The Secretary shall attend all meetings of the stockholders,
the Board of Directors and the Executive Committee, and keep a record of all
their proceedings. He shall procure and keep in his files copies of the minutes
of all meetings of the stockholders, boards of directors and executive
committees of all companies a majority of whose capital stock is owned by this
Company. He shall be the custodian of the seal of the Company. He shall have
the power to affix the seal of the Company to instruments, the execution of
which is authorized by these By-Laws or by action of the Board of Directors or
Executive Committee, and to attest the same. He shall have supervision of the
issuance, transfer and registration of the capital stock and debt securities of
the Company. He shall perform such other duties as may be assigned to him by
the Board of Directors, the Chairman of the Board or the Chairman of the
Executive Committee.

The Assistant Secretaries shall have power to affix the seal of the Company
to instruments, the execution of which is authorized by these By-laws or

- 6 -
<PAGE>

by action of the Board of Directors or Executive Committee, and to attest the
same, and shall exercise such of the other powers and perform such of the other
duties of the Secretary as shall be assigned to them by the Secretary.

SECTION 18. Except as otherwise provided herein or directed by the Board
of Directors, the Treasurer shall be the custodian of all moneys, stocks, bonds,
notes and other securities of the Company. He is authorized to receive and
receipt for stocks, bonds, notes and other securities belonging to the Company
or which are received for its account. All stocks, bonds, notes and other
securities in the custody of the Treasurer shall be held in the safe deposit
vaults of the Company or in one or more depositories selected by the Treasurer
or other officer authorized by the Board of Directors, in each case subject to
access thereto as shall from time to time be authorized or required by the Board
of Directors, the Chief Financial Officer or the Treasurer. Stocks, bonds,
notes and other securities shall be deposited in the safe deposit vaults or
depositories, or withdrawn from them, only by persons and pursuant to procedures
as shall be determined by the Board of Directors, the Chief Financial Officer or
the Treasurer. The Treasurer is authorized and empowered to receive and collect
all moneys due to the Company and to receipt therefor. All moneys received by
the Treasurer shall be deposited to the credit of the Company in such
depositories as shall be designated by the Board of Directors, the Chief
Financial Officer, the Treasurer or such other officers as may be authorized by
the Board of Directors; and the Treasurer or other officer designated by the
Treasurer may endorse for deposit therein all checks, drafts, or vouchers drawn
to the order of the Company or payable to it. He is also authorized to draw
checks against any funds to the credit of the Company in any of its
depositories. All such checks shall be signed by such persons, either by manual
or facsimile signature, as shall be authorized by the Board of Directors and
countersigned if required by the Board of Directors. The Treasurer is
authorized to make disbursements in settlement of vouchers, payrolls, drafts or
other accounts, when approved for payment by the Chief Accounting Officer; or
such other person as shall be authorized by the Board of Directors, the Chief
Financial Officer or these By-Laws; for payments which have been otherwise
ordered or provided for by the Board of Directors or the Chief Financial
Officer; for interest on bonds and dividends on stock when due and payable; for
vouchers, pay checks, drafts and other accounts properly certified to by the
duly authorized officers of the Company and approved for payment by or on behalf
of the Chief Accounting Officer; and for vouchers, pay checks, drafts and other
accounts approved by the officers duly authorized to approve for payment of any
company which this Company controls through ownership of stock or otherwise, as
may be designated in writing from time to time by the Chief Financial Officer to
the Treasurer. He shall cause to be kept in his office true and full accounts
of all receipts and disbursements of his office. He shall also perform such
other duties as shall be assigned to him by the Chief Financial Officer.

The Assistant Treasurers may exercise all the powers of the Treasurer
herein conferred in respect of the receipt of moneys and securities, endorsement
for deposit and signature of checks.

- 7 -
<PAGE>

ARTICLE V

SUPERVISION, REMOVAL AND SALARIES OF
OFFICERS AND EMPLOYEES

SECTION 1. Any officer or employee elected or appointed by the Board of
Directors may be removed as such at any time by the affirmative vote of a
majority of the directors then in office, with or without cause. Any other
officer or employee of the Company may be removed at any time by vote of the
Board of Directors or of the Executive Committee or by the officer supervising
such officer or employee, with or without cause.

SECTION 2. All officers, agents and employees of the Company, in the
exercise of the powers conferred and the performance of the duties imposed upon
them, by these By-Laws or otherwise, shall at all times be subject to the
direction, supervision and control of the Board of Directors or the Executive
Committee.

SECTION 3. No office or position shall be created and no person shall be
employed at a salary of more than $300,000 per annum, and no salary shall be
increased to an amount in excess of $300,000 per annum, without the approval of
the Board of Directors or Executive Committee.

SECTION 4. Except to the extent otherwise provided in the GCL, the Board
of Directors may from time to time vest general authority in the Chairman of the
Board, the Chairman of the Executive Committee, the Chief Executive Officer, the
President, the Chief Operating Officer, the Head of any department or office of
the Company, or any such other officer of the Company as any of the foregoing
shall designate, for the sole determination of disposition of any matter which
otherwise would be required to be considered by the Board of Directors or the
Executive Committee under the provisions of this Article.

- 8 -
<PAGE>

ARTICLE VI

CONTRACTS AND EXPENDITURES

SECTION 1. All capital expenditures, leases and property dispositions must
be authorized by the Board of Directors or Executive Committee, except that
general or specific authority with regard to such matters may be delegated to
such officers of the Company as the Board of Directors may from time to time
direct to the extent not inconsistent with the provisions of the GCL.

SECTION 2. Expenditures chargeable to operating expenses may be made by or
under the direction of the Head of the department in which they are required,
without explicit or further authority from the Board of Directors or Executive
Committee, subject to direction, restriction or prohibition by the Chairman of
the Board, the Chairman of the Executive Committee, the Chief Executive Officer,
the President or the Chief Operating Officer.

SECTION 3. No contract shall be made without the approval of the Board of
Directors or Executive Committee, except as authorized by the Board of Directors
or these By-Laws.

SECTION 4. Contracts for work, labor and services and materials and
supplies, the expenditures for which will be chargeable to operating expenses,
may be made in the name and on behalf of the Company by the Chairman of the
Board, the Chairman of the Executive Committee, the Chief Executive Officer, the
President or the Chief Operating Officer, or by such officer as he shall
designate, without further authority.

SECTION 5. All written contracts and agreements to which the Company may
become a party shall be approved as to form by or under the direction of counsel
for the Company.

SECTION 6. The Chairman of the Board, the Chairman of the Executive
Committee, the Chief Executive Officer, the President, the Chief Operating
Officer and the Executive Vice Presidents, Senior Vice Presidents and Vice
Presidents shall severally have the power to execute on behalf of the Company
any deed, bond, indenture, certificate, note, contract or other instrument
authorized or approved by, or pursuant to authority granted by, the Board of
Directors or the Executive Committee, and to cause the corporate seal to be
thereto affixed and attested by the Secretary or an Assistant Secretary.

SECTION 7. Except to the extent otherwise provided in the GCL, the Board
of Directors may from time to time vest general or specific authority in such
officers of the Company as the Board of Directors shall designate for the sole
determination of disposition of any matter which otherwise would be required to
be considered by the Board of Directors or the Executive Committee under the
provisions of this Article.

- 9 -
<PAGE>

ARTICLE VII

INDEMNIFICATION

SECTION 1. The Company shall indemnify to the full extent permitted by law
any person who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that (i) such
person is or was a director or officer of the Company or (ii) while a director
or officer of the Company, such person is or was serving at the request of the
Company as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise. The indemnification provided in this
Section 1 of this Article VII shall include the right to receive payment in
advance of the final disposition of any such action, suit or proceeding of any
expenses (including attorneys' fees) incurred by any such person in defending
such action, suit or proceeding, consistent with the provisions of then
applicable law. For purposes of this Article VII, the term "other enterprise"
shall include any employee benefit plan; and "serving at the request of the
Company" shall include any service as a director or officer of the Company which
imposes duties on, or involves services by, such director or officer with
respect to an employee benefit plan, its participants or beneficiaries; and any
action by a person with respect to an employee benefit plan taken in good faith
and in a manner such person reasonably believed to be in the interest of the
participants and beneficiaries of such plan shall be deemed to be action not
opposed to the best interests of the Company. This Section 1 of this Article
VII shall not apply to any action, suit or proceeding pending or threatened on
the date of adoption hereof provided that the right of the Company to indemnify
any person with respect thereto shall not be limited hereby.

SECTION 2. Any indemnification under Section 1 of this Article VII (unless
ordered by a court) shall be made by the Company only as authorized in the
specific case upon a determination that indemnification of the present or former
director or officer is proper in the circumstances because such person has met
the applicable standard of conduct required by law. Such determination shall be
made by the persons authorized by the GCL.

SECTION 3. Notwithstanding Sections 1 and 2 of this Article VII, except
for proceedings to enforce rights to indemnification, the Company shall not be
obligated to indemnify any director or officer in connection with a proceeding
(or part thereof) initiated by such person unless such proceeding (or part
thereof) was authorized or consented to by the Board of Directors. The
indemnification and advancement of expenses provided by Section 1 of this
Article VII shall not be deemed exclusive of any other rights to which any
person seeking indemnification may be entitled under any law, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in such
person's official capacity and as to action in another capacity while holding
such office, and shall continue as to a person who has ceased to be a director
or officer and shall inure to the benefit of the heirs, executors and
administrators of such a person. Any amendment or repeal of Section 1 or
Section 2 of this Article VII or this Section 3 shall not limit the right of any
person to indemnity with respect to actions taken or omitted to be taken by such
person prior to such amendment or repeal.

- 10 -
<PAGE>

ARTICLE VIII

FINAL

SECTION 1. The common corporate seal is, and, until otherwise ordered by
the Board of Directors, shall be, an impression upon paper or wax, circular in
form, with the words "Union Pacific Railroad Company" and "Delaware" on the
outer edge thereof.

SECTION 2. Except as otherwise proved by the GCL, these By-Laws may be
altered, amended or repealed at a meeting of the stockholders by a majority vote
of those present in person or by proxy or at any meeting of the Board of
Directors by a majority vote of the directors then in office.

- 11 -

<PAGE>

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

UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES

RATIO OF EARNINGS TO FIXED CHARGES

For the Years Ended December 31,
--------------------------------

(Millions of Dollars, Except for Ratio)
<TABLE>
<CAPTION>

1998(a) 1997 1996 1995 1994
------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>

Earnings from continuing
operations..................... $ 27 $ 620 $ 940 $ 867 $ 754

Undistributed equity earnings.... (44) (37) (47) (30) (42)
----- ------ ------ ------ ------
Total operating earnings.... $ (17) $ 583 $ 893 $ 837 $ 712
===== ====== ====== ====== ======

Income taxes..................... (11) 332 477 443 413

Fixed charges:
Interest expense including
amortization of debt
discount..................... $ 603 $ 473 $ 323 $ 193 $ 100

Portion of rentals representing
an interest factor............. 175 158 129 60 36
----- ------ ------ ------ ------

Total fixed charges....... $ 778 $ 631 $ 452 $ 253 $ 136
----- ------ ------ ------ ------

Earnings available for fixed
Charges........................ $ 750 $1,546 $1,822 $1,533 $1,261
===== ====== ====== ====== ======

Ratio of earnings to fixed charges 1.0 2.4 4.0 6.0 9.3
===== ====== ====== ====== ======

</TABLE>

(a) 1998 earnings were inadequate to cover fixed charges by $28 million.

<PAGE>

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

UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES

Powers of Attorney

I, the undersigned, a director of Union Pacific Railroad Company, a Delaware
Corporation (the Railroad), 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 Railroad'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/ JERRY R. DAVIS
----------------------------
Jerry R. Davis

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

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

/s/ IVOR J. EVANS
---------------------------
Ivor J. Evans
<PAGE>

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

/s/ WILLIAM H. GRAY, III
---------------------------
William H. Gray, III

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

/s/ RICHARD J. MAHONEY
---------------------------
Richard J. Mahoney
<PAGE>

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

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

/s/ JAMES A. SHATTUCK
---------------------------
James A. Shattuck

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

<PAGE>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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0
0
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</TABLE>