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

                                    FORM 10-K

              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1998

                          Commission file number 1-7092

                        Illinois Central Railroad Company
             (Exact name of registrant as specified in its charter)

                Illinois                                        36-2728842
    (State or other jurisdiction of                          (I.R.S. Employer
    incorporation or organization)                          Identification No.)

455 North Cityfront Plaza Drive, Chicago, Illinois              60611-5504
(Address of principal executive offices)                        (Zip Code)

               Registrant's telephone number, including area code:
                                 (312) 755-7500

           Securities registered pursuant to Section 12(b) of the Act:
Title of each class so registered:              Name of each exchange on which
Illinois Central Railroad Company               each class is registered:
6-3/4% Notes due May 15, 2003                   New York Stock Exchange


Gulf, Mobile and Ohio Railroad Company               New York Stock Exchange
5% Income Debentures,
Series A, due December 1, 2056

           Securities registered pursuant to Section 12(g) of the Act:
                                      None

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes ..X.. No ....

     As of March 26,  1999,  there  were 100 shares of the  registrant's  common
stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

     THE REGISTRANT THROUGH ITS PARENT, ILLINOIS CENTRAL CORPORATION (FORMER SEC
FILE NO. 1-10720), IS AN INDIRECT  WHOLLY-OWNED  SUBSIDIARY OF CANADIAN NATIONAL
RAILWAY  COMPANY  (SEC FILE  NO.1-2413)  AND 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.


<PAGE>





                        ILLINOIS CENTRAL RAILROAD COMPANY
                                AND SUBSIDIARIES
                                    FORM 10-K

                          Year Ended December 31, 1998

                                      INDEX

PART I                                                                10-K Page

   Item 1.   Business...................................................  3
   Item 2.   Properties.................................................  9
   Item 3.   Legal Proceedings.......................................... 13
   Item 4.   Submission of Matters to a Vote of Security Holders (A).... 14

PART II

   Item 5.   Market for the Registrant's Common Equity and Related
             Stockholder Matters........................................ 14
   Item 6.   Selected Financial Data (A).................................14
   Item 7.   Management's Discussion and Analysis of Financial Condition
             And Results of Operations...................................14
   Item 8.   Financial Statements and Supplementary Data.................26
   Item 9.   Changes in and Disagreements with Accountants on
             Accounting and Financial Disclosure.........................26

PART III

   Item 10.  Directors and Executive Officers of the Registrant (A)......27
   Item 11.  Executive Compensation (A)..................................27
   Item 12.  Security Ownership of Certain Beneficial Owners and
             Management (A)..............................................27
   Item 13.  Certain Relationships and Related Transactions (A)..........27

PART IV

   Item 14.  Exhibits, Financial Statement Schedules and Reports on
             Form 8-K....................................................27

SIGNATURES   ............................................................28

   (A)   Omitted or amended  as the  registrant  through  its  parent,  Illinois
         Central  Corporation  (Former  Sec File No.  1-10720),  is an  indirect
         wholly-owned  subsidiary of Canadian National Railway Company (Sec File
         No. 1-2413) and 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


<PAGE>



                                     PART I

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

Background

        Illinois Central Railroad Company (the "ICR") traces its origin to 1851,
when ICR was  incorporated  as the  nation's  first  land  grant  railroad.  ICR
currently operates 2,600 miles of main line track between Chicago,  Illinois and
the Gulf of Mexico,  primarily  transporting  chemicals,  coal, paper, grain and
milled grain,  and  intermodal  trailers and  containers.  ICR is a wholly owned
subsidiary  and  a  principal  asset  of  Illinois   Central   Corporation  (the
"Corporation").  The  Corporation  is an indirect  wholly  owned  subsidiary  of
Canadian National Railway Company (the "CN")

        The principal  executive office of ICR is located at 455 North Cityfront
Plaza Drive,  Chicago,  Illinois  60611-5504  and its telephone  number is (312)
755-7500.

Railroad Commodities and Customers

         ICR's  customers are engaged in a wide variety of businesses and ship a
number of different products that can be classified into seven primary commodity
groupings:

    --   organic, inorganic, agricultural and other chemicals
    --   grain,  milled  grain  such as corn  syrup and  soybean  meal,  and
         other agricultural/food  products
    --   paper,  lumber,  and other forest products
    --   coal
    --   intermodal, comprising a wide variety of primarily consumer products
         shipped in containers or truck trailers on specially designed cars
    --   metals,  metal  products  such as coiled  steel,  and scrap metal
    --   bulk commodities such as sand, stone, coke, and ores

        In 1998,  no  customer  accounted  for more  than 10% of  revenues,  two
customers exceeded 5% and the ten largest customers  accounted for approximately
36% of revenues.


<PAGE>

Contributions to Total Revenues by Commodity Group

         The respective percentage contributions by principal commodity group to
ICR's revenues during the past five years are set forth below:

               Contributions to Total Revenues by Commodity Group
 Commodity
 Group                        1998      1997       1996       1995      1994
 -----                        ----      ----       ----       ----      ----
Chemicals...................  25.1%     26.7%      27.6%      25.2 %    24.8%
Grain, mill & food products.  18.4      17.4       18.9       21.9      18.7
Paper & forest products.....  16.2      16.9       12.6       16.9      18.1
Coal........................  12.0      12.2       14.1       12.9      15.2
Intermodal..................   8.3       8.6        8.7        7.3       6.6
All other...................  20.0      18.2       18.1       15.8      16.6
Total....................... 100.0%    100.0%     100.0%     100.0%    100.0%

         In 1998,  approximately 67% of ICR's freight traffic  originated on its
own  lines,  of  which  approximately  21%  was  forwarded  to  other  carriers.
Approximately  19% of ICR's freight was received  from other  carriers for final
delivery by ICR,  and the balance of  approximately  14%  represented  bridge or
through traffic.

Terminal Operations

         ICR currently has facilities or terminal  operations that contribute to
revenues and enhance the flow of rail  traffic.  Most of these  facilities  have
been developed since 1994. Following are descriptions of two ICR terminals.

         In  1996,  ICR  constructed  a  75-acre  intermodal  terminal  for  the
exclusive use of the Canadian National Railway  Company("CN").  The facility has
an annual capacity of 250,000  intermodal  "lifts." An intermodal  "lift" is the
placement  of a  container  or truck  trailer on or off a railcar.  ICR owns the
facility and operates it on CN's behalf.  ICR is  compensated  through fees paid
for each lift.

         In 1994, ICR constructed a transload facility in Harvey, Illinois. This
facility  stores  primarily  railcars  of plastic  pellets.  These  pellets  are
subsequently   loaded  into   tanker   trucks  for   distribution   to  smaller,
non-rail-served manufacturers.  ICR spent $1.0 million to double the capacity of
this terminal in 1997.


<PAGE>


Operating Statistics

         Set  forth  below is  certain  information  relating  to ICR's  freight
traffic during the past five years.

                                  1998      1997      1996      1995      1994
                                  ----      ----      ----      ----      ----

Carloads (in thousands).......     951       926       927       957       915
Freight train miles
  (in thousands)1.............   8,102     8,078     7,950     7,758     7,179
Revenue ton miles of freight
  traffic (in millions)23.....  23,359    22,156    22,511    23,773    20,582
Revenue tons per carload......    72.8      67.6      71.7      74.7      76.3
Average length of haul
  (in miles)..................     325       307       309       328       286
Gross freight revenue per
  ton mile34..................   $.026     $.026     $.026    $ .026   $  .028
Net freight ton miles per
  average route mile
  (in millions)...............     9.0       8.4       8.2       9.0       7.6
Gallons per ton mile5.......... .00227    .00235    .00236    .00234    .00248
Active locomotives............     301       324       331       333       328
Track resurfacing (miles).....   1,228     1,235     1,360     1,360     1,397
Percent resurfaced............   31.1%     31.0%     33.7%     32.2%     33.0%
Ties laid in replacement
  (including switch ties)..... 243,853   329,413   425,999   408,760   346,994
Slow order miles..............   77.85     58.78    100.00    209.76    275.79


1 Freight  train  miles  equals the total  number of miles  traveled  by all
  trains in the movement of freight.
2 Revenue  ton-miles of freight  traffic equals the product of the weight in
  tons of freight carried for hire and the distance in miles between origin and
  destination.
3 Prior years have been restated to eliminate non-revenue ton-miles.
4 Revenue per  ton-mile  equals  gross  freight  revenue  divided by revenue
  ton-miles of freight  traffic.  5 Gallons per ton-mile  equals the amount of
  fuel required to move one ton of freight one mile.


         The following table summarizes operating  expense-to-revenue  ratios of
ICR for each of the past five years.  The table analyzes the various  components
of  operating  expenses  based  on  the  line  items  appearing  on  the  income
statements.  The ratio is  generally  used  within the  railroad  industry  as a
measure of operating efficiency;  ICR has had the lowest, i.e. best, ratio among
major railroads in the U.S. and Canada in each of the last eight years.

    Ratio                           1998      1997       1996     1995   1994
    -----                           ----      ----       ----     ----   ----

Operating1.......................   63.8%     63.4%      64.4%    65.6%   67.7%
Labor and fringe benefits........   29.2      29.8       29.5     30.2    30.9
Leases and car hire..............    8.3       8.2        9.2      9.1    10.0
Diesel fuel......................    4.2       5.4        5.6      5.1     5.3
Materials and supplies...........    5.2       5.3        5.1      5.4     6.0
Depreciation and amortization....    5.5       5.3        5.0      4.8     4.2
Casualty, insurance and losses...    2.7       2.5        1.8      2.7     4.0
Other taxes......................    3.0       3.2        2.7      2.8     2.9
Other............................    5.7       3.7        5.5      5.5     4.4


1 Operating  ratio means the ratio of operating  expenses  before special charge
  over operating revenues.

Employees; Labor Relations

         Labor  relations  in the  railroad  industry  are subject to  extensive
governmental  regulation under the Railway Labor Act.  Employees in the railroad
industry  are  covered  by the  Railroad  Retirement  System  instead  of Social
Security.  Employer  contribution rates under the Railroad Retirement System are
currently more than double those in other industries and may rise further as the
proportion of retired employees  receiving  benefits  increases  relative to the
number of working employees. Also, railroad employees are covered by the Federal
Employer's  Liability  Act  ("FELA")  rather  than by state  no-fault  workmen's
compensation  systems.  FELA is a  fault-based  system,  with  compensation  for
injuries determined by individual negotiation or litigation.

         Approximately  90% of all  employees are  represented  by one of eleven
unions.  The general  approach to labor  negotiations by Class I railroads is to
bargain on a  collective  national  basis.  For several  years now, one of ICR's
guiding  principles  is that local -- rather  than  national,  industry-wide  --
negotiations will result in labor agreements that better address both employees'
concerns and preferences and ICR's actual operating environment. To date, all of
ICR's eleven  bargaining  units have ratified local agreements that resolve wage
and work-rule issues through 1999 for non-operating  crafts and through the year
2000 for engineers and trainmen.

         There are risks  associated with  negotiating  locally.  Presidents and
Congress  have  repeatedly  demonstrated  they  will  step in to avoid  national
strikes, while a local dispute may not generate federal intervention,  making an
extended work stoppage  potentially more likely.  ICR's management  believes the
potential mutual benefits of local bargaining outweigh the risk.

         The following table shows the average annual  employment levels for the
last five years:

                      1998    1997    1996    1995    1994
                      ----    ----    ----    ----    ----
    Total Employees  3,192   3,295   3,238   3,268   3,250


         Management  believes  that over the next several  years  attrition  and
retirements  will be the  primary  source  of  declines  in  employment  levels.
Increases in employment levels,  particularly in train operations,  are possible
in response to growth of business.

Regulatory Matters; Freight Rates; Environmental Considerations

         ICR is subject to  significant  governmental  regulation by the Surface
Transportation  Board (the "STB") and other federal,  state and local regulatory
authorities with respect to rates, service, safety and operations.

         The  jurisdiction  of the STB  encompasses,  among other things,  rates
charged for certain transportation  services,  assumption of certain liabilities
by railroads,  mergers or the  acquisition  of control of one carrier by another
carrier and extension or abandonment of rail lines or services.

         The Federal Railroad Administration, the Occupational Safety and Health
Administration and certain state transportation  agencies have jurisdiction over
railroad  safety  matters.  These  agencies  prescribe  and enforce  regulations
concerning car and locomotive safety equipment, track safety standards, employee
work conditions and other operating practices.

         ICR currently  transports Southern Illinois coal that will not meet the
environmental  standards  of Phase II of the Clean Air Act unless  blended  with
lower-sulfur coal or users of the coal install air scrubbers.  As a result, this
source of  traffic  may  decline  in  advance  of or  consistent  with  Phase II
implementation  in the year 2000.  On the other hand,  ICR is  participating  in
movements of Western coal (lower-sulfur) and certain Southern Illinois coal that
is being  blended  with  low-sulfur  Eastern  coal to comply  with Phase II. ICR
anticipates these sources of traffic may increase.  Overall, management believes
that  implementation  of Phase II of the  Clean  Air Act is  unlikely  to have a
material adverse effect on the results of ICR.

         Currently,  the utility  industry is undergoing  deregulation  creating
enormous  pressures for change,  innovation,  and cost  control.  In the face of
increased competition caused by deregulation, utilities are attempting to reduce
costs,  including rail transportation  costs. Methods being investigated include
"power  wheeling",  "coal-by-wire",  and for those utilities  served by a single
railroad, re-regulation of rail rates. Some analysts have suggested that utility
deregulation  may  significantly  reduce  rail  revenues  through a shift in the
pattern of coal movements forcing lower rail rates. At this point, there are too
many  variables to know if utility  deregulation  will have a neutral,  modestly
positive  or  modestly  negative  effect  on  ICR  in  the  long-term.  However,
management believes that ICR will not be materially,  adversely affected because
it already provides its utility  customers highly  competitive rates and service
as  determined  through  competitive  bids  against  other  railroads  and river
options.

         Inherent in the operations  and real estate  activities of railroads is
the risk of environmental  liabilities.  ICR is subject to extensive  regulation
under  environmental  laws  and  regulations  concerning,  among  other  things,
discharges into the environment and the handling,  storage,  transportation  and
disposal  of  waste  and  hazardous   materials.   See  Item  2.  "Properties  -
Environmental  Conditions"  for  discussion  of sites on which ICR  currently or
formerly  conducted  operations  that are  subject  to  governmental  action  in
connection with environmental degradation.

Railroad's Results Influenced by Economic Conditions

         In any given year, ICR, like other railroads, is susceptible to changes
in the economic  conditions of the industries and geographic  areas that produce
and consume the freight it transports. Many of the goods and commodities carried
by ICR experience  cyclicality in demand.  The operations of ICR can be expected
to reflect this cyclicality  because of the significant  fixed costs inherent in
railroad  operations.   ICR's  revenues  are  affected  by  prevailing  economic
conditions  and should an  economic  slowdown or  recession  occur in the United
States or other key markets,  the volume of rail shipments  carried is likely to
be reduced.

Competition

         ICR faces intense  competition for freight  traffic from trucks,  river
barges,  pipeline carriers, and other railroads.  Competition is generally based
on the rates charged and the quality and reliability of the service provided. At
December 31, 1998,  there were 9 railroads in the United  States  classified  by
revenues  as  Class I  railroads.  ICR is  sixth  in  revenues  and has the best
operating ratio.

         To a greater  degree than other rail  carriers,  ICR is  vulnerable  to
barge competition  because its main routes are parallel to the Mississippi River
system.  The use of barges for some  commodities,  particularly  coal and grain,
often  represents a lower cost mode of  transportation.  Barge  competition  and
barge rates are  affected by  navigational  interruptions  from ice,  floods and
droughts  that can cause  widely  fluctuating  barge  rates.  ICR's  ability  to
maintain  its market  share of the  available  freight  has  traditionally  been
affected by the navigational conditions on the river. As a result, ICR's revenue
per  ton-mile  has  generally  been  lower  than  industry  averages  for  these
commodities.

         In April  1998,  the  Corporation,  ICR's  parent,  announced a 15-year
marketing  alliance  with CN and  Kansas  City  Southern  Railway  Company.  The
alliance  will  offer  shippers  new  competitive  options  in  a  rail  freight
transportation  network linking key north-south  continental freight markets. In
addition,  the marketing  alliance will give shippers access to Mexico's largest
rail  system.  Under  terms  of  the  marketing  alliance,  the  companies  will
coordinate sales and marketing, operations, fleets, and information systems, but
not for traffic movements where any two alliance members provide the only direct
rail service.

         Most of ICR's operations are conducted  between points served by one or
more competing carriers. The consolidation in recent years of major rail systems
has  resulted  in  strong  competition  in the  service  territory  of ICR.  The
mega-carriers  could use their size and pricing power to block shippers'  access
to efficient  gateways  and routing  options  that are  currently  and have been
historically  available.  Mergers have not had a material  adverse impact on the
results or financial condition of ICR. See Item 7. "Management's  Discussion and
Analysis  of  Financial  Condition  and  Results  of  Operations  -  Significant
Developments - Canadian National Tender Offer."

Adverse Factors Affecting Fuel Prices

         ICR currently has hedging  programs in place through  November 1999, to
mitigate the effects of fuel price changes on its operating  margins and overall
profitability.  ICR has entered into several  collar  agreements to mitigate the
risk of fuel price  volatility.  ICR also  monitors  its hedging  positions  and
credit  ratings of its  counter  parties and does not  anticipate  losses due to
counterparty nonperformance.

Liens on Properties

         ICR's equipment is not subject to liens.

Liability Insurance

         ICR is  self-insured  for the first $5 million  of each  loss.  ICR has
available  $245 million of liability  insurance  per  occurrence,  subject to an
annual cap of $385 million in the  aggregate  for all losses.  This  coverage is
considered  by ICR's  management  to be adequate in light of ICR's safety record
and claims experience.

Item 2.  Properties
-------------------

Physical Plant and Equipment

         System.  As of December  31,  1998,  ICR's total  system  consisted  of
approximately  4,500 miles of track  comprised of 2,600 miles of main line,  200
miles of  secondary  main line and 1,700  miles of passing,  yard and  switching
track.  ICR owns all of the track except for 190 miles owned by other railroads.
ICR  operates  over  the  non-owned  track by  separate  agreements  with  those
railroads.

         Track and Structures.  The following amounts have been spent during the
five years ended  December 31,  1998,  on track and  structure to construct  and
maintain rail lines and related  signal  equipment,  and other  facilities ($ in
millions):

                          Capital
                       Expenditures        Maintenance                Total
                       ------------        -----------                -----

1998.........              76.6                23.9                   100.5
1997.........              91.1                16.7                   107.8
1996.........              91.2                23.7                   114.9
1995.........              66.9                33.5                   100.4
1994.........              63.2                29.1                    92.3
                           ----                ----                    ----

  Total......            $389.0              $126.9                  $515.9
                         ======              ======                  ======

         These   expenditures  have   concentrated   primarily  on  the  routine
maintenance  of the track roadway and bridges.  Approximately  1,200,  1,200 and
1,400  miles  of  roadway  ballast  was  resurfaced  in  1998,  1997  and  1996,
respectively.  In 1996,  a total of $20.1  million  was  spent to  construct  an
intermodal terminal facility for the CN (the "CN Terminal").

         Locomotives and Freight Cars. Over the last five years lease of 61 used
SD-40-2's and 20 new SD-70's have enabled ICR to replace older, lower horsepower
and less  efficient  locomotives.  (The 20 SD-70's  replaced  31 older,  smaller
locomotives.)

         In March and April 1999,  ICR will  purchase an additional 20 new SD-70
locomotives.  These units will also be used to replace older,  lower  horsepower
and less efficient locomotives.

         Approximately  1,825 freight cars and 79 locomotives  leased by ICR are
leased from another subsidiary of the Corporation.

         In 1998, ICR sold 230 woodchip hopper freight cars  representing 24% of
that car type as a result of declining demand for that car type.

         In 1996,  ICR began a covered hopper fleet program under which existing
equipment was either modernized or replaced. In 1997 and 1996, approximately 800
cars,  operated under short-term car hire arrangements and various leases,  were
returned and replaced with 900 new high capacity  hoppers which are being leased
under an operating lease from an unrelated third party.

         The following is the overall fleet at December 31:

Total Units:              1998     1997     1996     1995     1994
------------              ----     ----     ----     ----     ----
Locomotives1               346      365      391      397      417
Freight cars..........  14,213   15,375   15,838   15,872   16,498
Work equipment........     641      641      655      654      625
Highway trailers......     928      888      889      898      898


1   Approximately  28  locomotives  need  repair  before they can be returned to
    service.  This equipment is either repaired,  if needed on an ongoing basis,
    or sold. ICR sold 16, 30, 6, 40 and 48 surplus  locomotives  in 1998,  1997,
    1996, 1995 and 1994,  respectively.  The active fleet was 301 as of December
    31, 1998. Also, 17 locomotives are being subleased.

    The components of the fleet owned, leased and in total for 1998 and in total
for 1997 are shown below:

                                         Long-Term        1998            1997
Description 1              Owned 2         Lease         Total           Total
-------------              -------         -----         -----           -----

Locomotives:
  Multipurpose               209             79            288             300
  Switching                   58              -             58              65
                              --                            --              --
            Total            267             79            346             365
                             ===             ==            ===             ===

Freight Cars:
 Box (general service)       214            649            863           1,430
 Box (special purpose)     2,226          1,088          3,314           2,896
 Gondola                     989            598          1,587           1,617
 Hopper (open top)         1,585          1,970          3,555           3,738
 Hopper (covered)          2,661          1,709          4,370           4,612
 Flat                        209            366            575             579
 Other                       523            567          1,090           1,264
                             ---            ---          -----           -----
   Total                   8,407          6,947         15,354          16,136
                           =====          =====         ======          ======
 Work Equipment              641              -            641             641
                             ---                           ---             ---
  Highway trailers            40            888            928             888
                              ==            ===            ===             ===


1 In  addition,  approximately  1,117  freight cars were being used by ICR under
  short-term car hire  agreements.  2 Includes 53 locomotives and 760 freight
  cars under capital leases.

Environmental Conditions

         ICR  faces  potential   environmental  cleanup  costs  associated  with
approximately 9 contaminated  sites and various  fueling  facilities for which a
total of $7.2  million  has been  reserved  as of December  31,  1998.  The most
significant of those sites are described below.

Mobile, Alabama

        ICR owned property in Mobile prior to 1976 upon which a lessee conducted
creosoting  operations.  The Alabama Department of Environmental  Management has
determined  that  the soil  and  groundwater  are  contaminated  with  creosote,
pentachlorophenol  and possibly  dioxins.  ICR has been  participating  in joint
clean-up  efforts with the current  owner and ICR's former  lessee.  See Item 3.
"Legal Proceedings."

Jackson, Tennessee

         A rail  yard in  Jackson,  Tennessee,  formerly  owned  by ICR has been
placed on the federal and state "superfund" list as a result of the discovery of
Trichloroethane ("TCE") in the adjacent municipal water well field. ICR formerly
operated a shop  facility at the site and TCE is a common  component of solvents
similar to those believed to have been used in the shop. ICR demonstrated to the
Tennessee Department of Environmental Management's satisfaction that the TCE did
not come from its operation,  or from this site. In November 1998, ICR excavated
a small volume of lead contaminated soil from the site and has now completed all
remediation  required under federal and state  superfund  laws. ICR is currently
negotiating  the scope of a  clean-up  plan to address  petroleum  contamination
discovered  during the course of its superfund site  investigation.  See Item 3.
"Legal Proceedings."

McComb, Mississippi

         ICR has  conducted a site  assessment  of a facility  where car repairs
were  formerly  performed to determine  the nature and extent of  contamination,
primarily lead from removed paint,  at the site.  Currently,  ICR is preparing a
remediation  plan under the supervision of the  Mississippi  Bureau of Pollution
Control.  Estimates of remaining  clean-up  costs range between $2.7 million and
$8.0 million.

Kegley, Illinois

         Emergency response action has been taken by ICR at this scene of a 1994
derailment  in which about 22,000  gallons of TCE were  released.  The spill has
been contained by  construction  of an impervious wall extended into the bedrock
and encircling the site. ICR has enrolled in Illinois'  Pre-Notice  Site Cleanup
Program and is voluntarily remediating the site. Estimates of remaining clean-up
costs range between $1.4 million and $7.0 million.

East Hazel Crest, Illinois

         In 1994,  ICR learned  that an  underground  fuel line had leaked about
100,000 gallons of diesel fuel into the soil and  groundwater.  ICR has replaced
the fuel tank and piping,  has constructed a groundwater  remediation system and
has enrolled the site in Illinois'  Pre-Notice Site Clean-up Program.  Estimates
of remaining clean-up costs range between $.3 million and $.7 million.

Bossier City

         ICR leased land  located in Bossier  City,  Louisiana to T. J. Moss Tie
Company and corporate  successor  Kerr McGee Chemical  Corporation  from 1928 to
1980,  at which time the  property  was sold to Kerr McGee.  Moss and Kerr McGee
operated  a  creosoting  facility  at this site from  1928 to 1988.  Kerr  McGee
notified ICR that it intends to hold ICR  responsible  for a portion of whatever
cleanup  costs,  if  any  it  ultimately  incurs  at  this  site.  ICR is not in
possession  of any  information  at this time that would  enable it to determine
whether any clean-up is necessary and to estimate what that clean-up might cost.

Fueling Facilities

         ICR has  maintained  fueling  facilities  at more than 20  locations at
various  times  from the  1950's  to date.  Many of  those  sites  are or may be
contaminated  with spilled fuel.  Those  stations  currently in use are equipped
with drip pans and  treatment  facilities  and ICR has  initiated  a program  of
rebuilding all fuel lines above ground.

Waste Oil Generation

         ICR has been identified as a Potentially Responsible Party ("PRP") at a
site where waste oil was allegedly  processed  and  disposed.  ICR is alleged to
have generated some of the waste oil. ICR believes any  contribution it may have
made to the site contamination is de minimis.

Item 3.  Legal Proceedings
--------------------------

GATX Tank Car Explosion September 9, 1987 at New Orleans (Civil District Court,
Parish of Orleans, Louisiana No. 87-16374)

         ICR is one of several defendants in a New Orleans class action in which
a jury has  returned a verdict  against  the ICR for $125  million  in  punitive
damages as a result of a tank car fire. The Louisiana  Supreme Court has vacated
the judgment for technical  reasons and remanded the case to the trial court for
further  proceedings.  On June 17, 1998, the trail court re-entered  judgment in
favor of the class and certified it for  interlocutory  appeal.  The case awaits
hearing in the trail  court on  post-trial  motions.  The Company  believes  the
plaintiff's  claims  have no basis and intends to  continue  to  challenge  them
vigorously.

State of Alabama, et al. v. Alabama Wood Treating Corporation, Inc., et al.,
S.D. Ala. No. 85-0642-C

         The State of Alabama and Alabama State Docks ("ASD") filed suit in 1985
seeking damages for alleged pollution of land in Mobile, Alabama,  stemming from
creosoting operations over several decades.  Defendants include ICR, which owned
the land  until  1976,  Alabama  Wood  Treating  Corporation,  Inc.,  and Reilly
Industries,  Inc. ("RII"), which leased the land from ICR and conducted creosote
operations  on the site.  In December  1976,  ICR sold the  premises to ASD. The
complaint  sought payment for the clean-up cost together with punitive and other
damages.

         In 1986, ASD, RII and ICR agreed to form a joint technical committee to
clean the site,  sharing  equally the cost of clean-up,  and in October 1986 the
court stayed  further  proceedings  in the suit.  Under the  agreement the joint
technical committee has spent approximately $6.8 million and has been authorized
to expend  up to a total of $6.9  million.  ICR has  contributed  $2.3  million.
Further clean-up activities are anticipated,  the cost of which could range from
$1.8  million  to  $5.6  million  depending  upon  the  clean-up  standards  and
remediation methods ultimately required and utilized.

         ASD  terminated  the Joint Tech  Agreement  on August 27,  1997 and has
threatened to reinstate the 1985 litigation - ICR expects its share of remaining
clean-up cost to range between $0.6 million and $4.0 million.

In the Matter of Illinois Central Railroad Company, et al., Tennessee Division
of Superfund No. 94-0187

         The Tennessee  Department of Environment and  Conservation,  on June 6,
1994,  issued a Remedial Order  requiring clean up by ICR and the current owners
of a site in Jackson,  Tennessee. ICR operated a rail yard and locomotive repair
facility at the site. TCE has been found in several  municipal  water wells near
the site.  TCE is a common  component of solvents  similar to those  believed to
have been used at the shop.  ICR  demonstrated  to the  Tennessee  Department of
Environmental  Management's  satisfaction  that  the TCE did not  come  from its
operation,  or from this site. In November 1998, ICR excavated a small volume of
lead  contaminated  soil  from the site and has now  completed  all  remediation
required under federal and state  superfund  laws. ICR is currently  negotiating
the scope of a  clean-up  plan to  address  petroleum  contamination  discovered
during the course of its superfund site investigation.

Item 4.  Submission of Matters to a Vote of Security Holders
------------------------------------------------------------

      Intentionally omitted. See Index page of this report for explanation.

                                     PART II

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

         All of the outstanding common stock of the ICR (100 shares) is owned by
the Corporation and therefore is not traded on any market.  Certain covenants of
ICR's Revolver, while not specifically restricting dividends, do require the ICR
to maintain minimum levels of tangible net worth.  While not  anticipated,  such
restrictions  could  limit  the  amount  of  dividends  paid  by the  ICR to the
Corporation.  ICR paid cash  dividends to the  Corporation  of $50.3  million in
1998, $62.9 million in 1997,  $103.2 million in 1996 and $107.7 million in 1995.
At December 31, 1998, approximately $42.1 million of ICR equity was free of such
restriction.

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

         Intentionally omitted. See Index page of this Report for explanation.

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

Significant Developments

Canadian National Tender Offer

         On February 10, 1998, the  Corporation and CN entered into an Agreement
and Plan of Merger (as subsequently  amended, the "Merger Agreement"),  pursuant
to which Blackhawk Merger Sub, Inc. (the "Purchaser"), a wholly-owned subsidiary
of CN, acquired on March 13, 1998,  46,051,761 of the outstanding  shares of the
Corporation's Common Stock (the "Shares") at a price of $39.00 per share through
a cash  tender  offer  (the  "Offer").  The  Corporation's  Board  of  Directors
unanimously approved the Merger Agreement and the transaction  contemplated.  On
June 4, 1998,  the  Purchaser  was  merged  with and into the  Corporation  (the
"Merger") and the remaining outstanding  Corporation common shares not purchased
pursuant to the Offer were  converted  into a right to receive 0.633 share of CN
common stock for each share of Corporation common stock. Pursuant to the Merger,
each share of the Corporation's  Common Stock,  including treasury stock held by
the Corporation,  was cancelled, and the Corporation became an indirect,  wholly
owned  subsidiary  of CN with 100  shares  of no-par  Common  Stock  issued  and
outstanding.  These shares were deposited in an independent,  irrevocable voting
trust while CN and the Corporation await review of the transaction by the STB.

         Pursuant to the Merger  Agreement,  subject to  consultations  with the
Corporation  and  after  giving  good  faith  consideration  to the views of the
Corporation,  CN shall have final authority over the  development,  presentation
and conduct of the STB case,  including  decisions  as to whether to agree to or
acquiesce in  conditions.  The  Corporation  shall take no  regulatory  or legal
action in  connection  with the STB without CN's  consent.  The STB could impose
conditions or restrictions  as it relates to CN's  acquisition of control of the
Corporation.  If the STB does not  approve  CN's  acquisition  of control of the
Corporation or CN deems any conditions imposed by the STB unacceptable, CN would
be obligated to sell all the Corporation common shares held by the voting trust.
The STB's decision is expected in the second quarter of 1999.

         The  Corporation  and ICR  recorded  a  special  charge  (the  "Special
Charge")  during 1998 for costs  associated  with the CN Merger  Agreement.  The
Special  Charge  totaled  $28.4 million at ICR for costs  relating  primarily to
payments  under  various  compensation  plans  payable  following  the change in
control.  Included  in the $28.4  million  is  approximately  $9.1  million  for
payments  under the  Incentive  2000 Plan.  Additionally,  approximately  thirty
executive officers of ICR are covered by Employment  Security Agreements and are
entitled to receive  either two or three years of  severance  benefits if within
two years after the change in control,  their  employment  is  terminated by ICR
without  cause or they resign with good  reason.  The  Special  Charge  includes
approximately $12.0 million in connection with these agreements. If all Employee
Security  Agreements  were  to  be  activated,  ICR  estimates  it  would  incur
additional liability of $14.0 million.

        The Corporation's  Employee Stock Purchase Plan and Management  Employee
Discounted  Stock  Purchase  Plan were  terminated  following  completion of the
Offer.


Results of Operations

        The  discussion  below takes into account the  financial  condition  and
results  of  operations  of ICR  for the  years  presented  in the  consolidated
financial statements.

1998 Compared to 1997

        Total  revenues for 1998 increased from the prior year by $28.8 million,
or 4.6%, to $651.3  million.  Modest  increases in the number of  carloadings of
2.7% and average  freight  revenue per carload of 1.5%, were offset by decreases
in other revenues including switching and terminal services.

        Chemical  traffic  losses  created  by the Asian  economic  crisis  were
partially  offset by  strength  in  certain  commodity  lines and gain in market
share. The benefits of the service agreement with the Burlington  Northern Santa
Fe Railroad  ("BNSF") and effects of the newly created  Alliance between ICR, CN
and Kansas City Southern  Railway ("KCS") also contributed to the positive gain.
(See "Item 1. Business-Competition").

        Despite  a  continued  weakness  in the U.S.  export  markets  for whole
grains,  ICR's export volumes increased  slightly.  This increase coupled with a
continued  growth in both the domestic  processor  business and the  traditional
poultry  markets,  resulted in a modest increase in both carloads and revenue in
1998.  Grain mill  products  experienced  an  increase  during  1998,  driven by
increased  shipments of oils and meals to both export markets  (including  river
terminals and Gulf exports) and domestic markets.

        Paper and forest products remained flat year over year. The Asian market
crisis also impacted ICR's forest products business during 1998. Pulp production
was  affected  by  extended  downtime  at two  ICR-served  mills as a result  of
decreased  export  shipments.  As these mills  operated  throughout  the year at
reduced  capacity,  inbound fiber  shipments were also reduced.  Linerboard held
steady in spite of weak paper prices. Conversely,  several mills served by other
carriers  took  downtime   providing   opportunities   for   ICR-served   mills.
Additionally,  the increased number of housing starts was reflected in increased
lumber and plywood shipments in 1998.

        Coal revenues increased slightly in 1998. Early correction of production
problems at mines in the  Illinois  Basin and  resumption  of  near-normal  rail
operations  on Western  Coal  movements,  coupled  with a hot summer and nuclear
powered  electric  generation  plant outages,  increased coal consumption in the
Midwest and Southeast.

        Intermodal  revenues  exceeded 1997, even though volumes did not, due to
improvement  in ICR's traffic mix. Union Pacific  Railway  haulage for 1998 fell
below 1997 levels while other trailer and  container  business  finished  strong
ahead of a record year in 1997. ICR automotive  business  during 1998 was at the
highest  levels in six years.  The addition of Volkswagen  buoyed volumes during
the last  quarter  and  strong  sales  for  Honda  continue  to  anchor  the ICR
automotive numbers.

        In the all other commodities  group,  metals traffic was strong for ICR,
closing out 1998 well ahead of 1997 in both carloads and revenues. The advent of
a full year of  direct-reduction  iron pellet shipments from Convent,  LA, Stupp
Brothers'  expansion at Baton Rouge,  LA, several large pipe movements  combined
with  Birmingham  Steel at Memphis,  TN coming  on-line.  Fourth  quarter  1998,
however,  began to show weakness in the metals  market  place,  first with lower
scrap prices followed by lower steel prices as a result of intense pressure from
import steel.

        Excluding the $28.4 million Special Charge  discussed  above,  operating
expenses overall increased $21.0 million or 5.3% in 1998. Labor and fringe costs
increased  $4.7  million  or  2.5%  primarily   reflecting  contract  and  merit
increases. Lease and car hire increased $2.8 million or 5.5% in 1998 as a result
of  increased  business  levels.  Fuel expense  decreased  $6.2 million or 18.6%
reflecting  lower  cost  (20.3%)  offset by higher  usage  (1.6%).  Increase  in
depreciation  and  amortization  of $2.5 million or 7.6% is the result of higher
capital spending initiatives  beginning in 1996. Casualty,  insurance and losses
increased  $2.1 million or 13.5%  primarily as a result of two  fatalities  that
occurred in 1998 and adverse developments in other pre-1998  occurrences.  Other
expense increased a total of $14.3 million compared to 1997.  Approximately $5.9
million  of the  change  was  related  to  recovery  of  expenses  in 1997 for a
derailment that occurred in 1994. Additionally, $2.8 million in credits were not
received in 1998 compared to 1997  following the  termination  of joint facility
agreements with another  railroad.  Other income  (expense),  net increased $5.9
million in 1998 primarily from gains on sale of woodchip hopper freight cars and
settlement  of  contract  dispute,  and  elimination  of fees  relating to ICR's
accounts receivable program.

        Favorable  borrowing  rates  for  commercial  paper  resulted  in a $0.5
million decline in interest  expense,  net despite  increased  commercial  paper
issuances  as the  source  of funds  following  termination  of  ICR's  accounts
receivable sales program.

1997 Compared to 1996

        Total  revenues for 1997  increased from the prior year by $5.3 million,
or 0.9%, to $622.5  million.  Modest  decreases in the number of  carloadings of
0.1% and average  freight  revenue per carload of 0.7%, were offset by increases
in other revenues including switching and terminal services.

        Strength  in  chemical  traffic  that began in the  latter  part of 1996
continued  as  expected  into 1997.  Strength  was  across the board  among most
chemicals,  and rail rates were strong. Chemical loadings and revenues benefited
from a service  agreement  with the BNSF.  Management  believes  that the future
annual  benefit of the  agreement  will grow  although it is taking  longer than
expected  for BNSF to  penetrate  the Union  Pacific/Southern  Pacific  ("UPSP")
markets to which it gained access through the UPSP merger case.

        Export demand for U.S. grains remained weak throughout 1997. Very strong
demand for grain in 1996,  coupled  with  meager  supply  particularly  of corn,
resulted  in  abnormally  high  prices  paid  for  grain  in  1996  that in turn
stimulated abnormally high plantings of grains by other countries. Consequently,
while the 1996  harvests  of corn and  soybeans in  Illinois  were good,  export
demand for U.S.  grains was abnormally  low (including  wheat for which ICR is a
residual  carrier) as global buyers turned to other countries'  bumper crops and
lower prices.  In January 1997,  management  lowered its grain  expectations and
cautioned  that weak export  grain  markets  were  likely to curtail  ICR's 1997
revenue growth.

        Paper and forest products are  economically  sensitive  commodities that
respond  to  industrial  production,  housing  starts and other  basic  economic
indicators.  Fiber and pulpboard  were depressed all year as that industry found
its capacity  outstripping  demand  following  the addition of  significant  new
capacity in 1995/96.  However,  according to major  manufacturers,  capacity was
brought  into balance  with demand in the summer,  leading to a stronger  second
half of the year.  Additionally,  a plant conversion by a major ICR shipper from
short-log  to long-log  input took  several  months  longer than their  original
expectations, resulting in less rail service than planned.

        Coal  performed as expected.  However,  a mid-year  mine fire of a major
coal  producer/shipper on ICR's line and, separately,  severe rail congestion in
the western U.S.,  which disrupted the movement of coal,  resulted in ICR losing
about 18,000 loads of coal it might  otherwise have carried.  Underlying  demand
for coal remains strong.

        Base intermodal business, particularly trailer business, was very strong
throughout the year.  However,  a major intermodal  customer UPSP,  discontinued
some of their  business  with ICR in  September.  There was also  some  negative
impact from an  approximate  two-week  strike against  another major  intermodal
customer.

        As expected,  metals traffic of this  commodity  group fell short of the
1996  all-time  record  year that  mirrored  exceptional  strength  in the steel
industry and included some large non-recurring spot moves. Also, as expected,  a
major  shipper  took its plant down for several  months in order to  effectively
double its productive capacity, which resulted in near-term loss of business for
ICR but sets the stage for future growth with this  customer.  Birmingham  Steel
completed  construction of its new mill in Memphis in the fourth quarter of 1997
and began to take inbound product.

        Operating  expenses  overall  decreased  $3.1  million  or .8% in  1997.
Increased  labor and fringe costs  reflect  contract  increases  and  additional
management labor due to management services agreement with another subsidiary of
the Corporation  partially  offset by operational  efficiencies.  Leases and car
hire decreased  $5.6 million or 9.9% in 1997  reflecting a return to more normal
operating  levels and lower  export  grain  movements.  Fuel  expense  decreased
reflecting   the  decrease  in  usage  (.4%)  and  by  the  lower  cost  (3.0%).
Depreciation and amortization  expense was 6.8% higher due to increased  capital
spending in 1996 and 1997  compared to 1995.  Materials  and supplies  were 6.4%
higher in 1997  reflecting  higher  prices and increased  maintenance  costs for
locomotives and freight cars. Casualty expense increased 36.8% compared to 1996.
In 1996,  casualty  expense was lower than  expected  due to the  write-down  of
casualty  reserves  as a  result  of ICR's  improving  safety  performance.  The
increase in other taxes was primarily due to increased property tax assessments.
Other  expense  reflects the  recovery of prior  period  expenses in relation to
costs related to a derailment.

        Operating  income  for 1997  increased  $8.4  million  or 3.8% to $227.9
million for the reasons cited above.

        Other income  (expense),  net, in 1997  includes a $3.3 million  pre-tax
gain related to the grant of a permanent  easement for the  marketing of outdoor
advertising on ICR  rights-of-way.  On October 3, 1996, ICR sold its investments
in an  industry-captive  insurance  company,  RAIL, which resulted in a one-time
gain, recorded as other income (expense), net, of approximately $7.0 million.

        Net interest  expense of $28.2 million for 1997  increased 6.4% compared
to $26.5 million in 1996 caused by higher debt levels year to year.

        Provision  for income  taxes of $70.1  million for 1997  included a $4.1
million benefit from the donation of property.


Liquidity and Capital Resources

Operating Data ($ in millions):

Cash flows provided by (used for):         1998          1997            1996
                                           ----          ----            ----

     Operating activities                 $151.0        $184.3          $165.0
     Investing activities                 (122.3)       (117.0)         (226.1)
     Financing activities                  (28.1)        (85.4)          104.4
                                           -----         -----           -----
     Net change in cash and temporary
      cash investments                   $  0.6         $(18.1)         $ 43.3
                                         ======         ======          ======

        Cash from operating  activities in 1998, 1997 and 1996 was primarily net
income before depreciation, deferred taxes and extraordinary item.

Investing Data

     Additions to property were as follows ($ in millions):

                                               1998         1997           1996
                                               ----         ----           ----
         Communications and signals......     $10.1       $ 10.1         $ 12.1
         Equipment/rolling stock.........      21.7         19.9           27.7
         Track and bridges...............      53.7         65.7           53.9
         Other...........................      12.7         15.2           25.2
                                               ----         ----           ----
                 Total...................     $98.2       $110.9         $118.9
                                              =====       ======         ======

         Expenditures  for CN Terminal of $2.0 million was included in other for
1997 and  expenditures  of $3.3 million and $16.8 million were included in track
and bridges,  and other,  respectively,  in 1996.  In 1996 capital  expenditures
exceeded original  estimates as several  opportunities to acquire equipment were
acted upon in accordance  with ICR's  strategy of owning more of its  equipment.
Property  retirements  and removals  generated  proceeds of $6.4  million,  $4.9
million, and $6.0 million in 1998, 1997 and 1996, respectively.

         ICR   anticipates   that   capital   expenditures   for  1999  will  be
approximately  $91.0  million.  Replacement  expenditures  of $78.9 million will
concentrate on track maintenance, bridges and freight car upgrades. Productivity
and expansion  expenditures  will total $12.4 million.  These  expenditures  are
expected to be met from current  operations or other available  sources.  If the
merger with CN is approved,  additional capital  expenditures may be incurred to
implement various aspects of a combined operating plan.

Financing Activities

         For the three  years  ended  December  31,  1998,  ICR has paid  $222.1
million in dividends to the Corporation ($50.3 million in 1998, $62.9 million in
1997  and  $108.9  million  in  1996.)  Included  in the 1996  dividends  to the
Corporation  is the March 1996  transfer by ICR of its  ownership in the Chicago
Intermodal  Company  ("CIC") via a dividend of CIC stock.  The book value of the
CIC investment was $5.7 million.

         ICR has a commercial  paper program whereby a total of $200 million can
be issued and  outstanding at any one time. The program is supported by the $250
million ICR  Revolver  (see  below).  At December  31,  1998,  Standard & Poor's
Corporation  ("S&P") and Moody's  Investor  Services  ("Moody's") have rated the
commercial paper A2 and P2, respectively.  At December 31, 1998, no amounts were
outstanding.  The average interest rate on commercial paper  outstanding for the
year ended  December 31, 1998,  was 5.78% with a range of 5.71% to 5.82%.  ICR's
public debt is rated BBB by S&P and Baa2 by Moody's.

         In 1994,  ICR entered  into a  revolving  agreement  to sell  undivided
percentage interests in certain of its accounts receivable,  with recourse, to a
financial  institution.  This agreement which was terminated on January 8, 1998,
had permitted sales of trade accounts  receivable up to a maximum of $50 million
at any one time.  Costs  related to the  agreement  fluctuated  with  changes in
prevailing  interest  rates.  These  costs,  which are  included in other income
(expense), net, were $3.0 million, and $2.9 million for the years ended December
31, 1997 and 1996, respectively.

         ICR has a $250 million  revolver ("ICR Revolver") with its bank lending
group that expires in 2001.  Fees and borrowing  spreads are predicated on ICR's
long-term credit ratings.  Currently, the annual facility fee is 15 basis points
and  borrowings  under this  agreement are at Eurodollar  offered rate plus 22.5
basis points.  The Revolver is used  primarily  for backup for ICR's  commercial
paper  program but can be used for general  corporate  purposes.  The  available
amount is reduced by the outstanding  amount of commercial  paper borrowings and
any letters of credit  issued on behalf of ICR under the  facility.  At December
31, 1998, $20 million was drawn and  outstanding,  and no letters of credit were
outstanding.

         Certain  covenants of ICR's debt agreements  require specific levels of
tangible  net worth but not a specific  dividend  restriction.  At December  31,
1998, ICR exceeded its tangible net worth covenants by $42.1 million. ICR was in
compliance with all covenants at December 31, 1998, and does not contemplate any
difficulty maintaining such compliance.

         ICR has a shelf  registration  from 1996  which can be used to issue an
additional $50 million in MTN's or other debt until 2000.  Currently,  there are
no  plans  to  issue  additional  debt but  replacing  maturing  MTN's,  capital
investments and other ventures could necessitate use.

         The Company  believes that its available  cash,  cash  generated by its
operations  and cash  available  from the  facilities  described  above  will be
sufficient to meet foreseeable liquidity requirements. Additionally, the Company
believes it has access to the public debt market if needed.

Year 2000 Issues

      Overview

         ICR has long viewed the Year 2000 issue a serious challenge because the
safety of its employees,  customers, and the public is a top priority. ICR began
to address the Year 2000 issue in 1997. As a result of those  efforts,  mission-
and safety-critical  hardware,  software, and embedded systems controlled by ICR
are substantially Year 2000 ready.

         The Year 2000 Readiness  Project includes ICR and the Corporation.  The
Year 2000 Program  Office  established by ICR in 1997 to manage and oversee Year
2000  activities  will continue  monitoring,  testing and  contingency  planning
throughout  1999. The Year 2000  initiative is sponsored by the Vice President &
Chief  Financial  Officer and is fully  supported by senior  management.  Senior
management  receives regular project updates,  as does the Board of Directors at
each of its meetings.  The Year 2000 initiative includes information  technology
department  supported  systems;  user  department  supported  systems;  personal
computers and LAN; customers and electronic partners; vendors; public utilities;
subsidiaries; and process control.

         ICR expects to spend  approximately $12.0 million to modify and replace
its computer systems.  Of the total project cost,  approximately $3.0 million is
attributable  to the purchase of new software.  The total cost of the project is
being funded through  operating cash flows.  Maintenance or  modification  costs
will  be  expensed  as  incurred,  while  the  costs  of new  software  will  be
capitalized and amortized over the useful life of the software. Accordingly, ICR
does not expect the amounts required to be expensed to have a material effect on
its financial position or results of operations.  The amount of spending to date
is approximately $11.0 million.

      Process Control

         This category represents the greatest risk to ICR based on its analysis
of core business  processes and the impacts of Year 2000 failures.  It includes,
but is not limited to, locomotives,  the dispatching  system,  signal and switch
controllers, highway-rail grade crossing protection, telecommunications systems,
locomotive event recorders, and crew management systems. ICR's policy is to test
mission- and safety-critical hardware,  software and embedded systems regardless
of whether  they have been  certified  Year 2000 ready by the vendor.  ICR tests
indicate  that  signals and highway  grade  crossing  devices do not employ date
calculations. This finding is consistent with rail industry research.

         ICR is dependent on third party vendors for Year 2000  readiness of key
systems and equipment.  The vendor of the dispatching system provided ICR with a
written Year 2000 readiness statement.  ICR completed its own Year 2000 tests of
the  hardware and  software in May 1998.  ICR will  continue to test this system
during 1999 to confirm that vendor  maintenance  and software  upgrades have not
affected  Year  2000  readiness.   Another   third-party   vendor  supports  the
transportation  control system.  This vendor provides  periodic  updates on Year
2000  readiness  to ICR's  information  technology  steering  committee.  Vendor
remediation of the  transportation  control  system is complete and  integration
testing by the vendor was  completed  during 1998.  ICR will conduct  acceptance
testing on this system during the second quarter of 1999.

         IC  suppliers  provided  Year  2000  ready  versions  of  software  for
locomotive event recorders and crew management  systems during the first quarter
of 1999.  A  locomotive  manufacturer  is  scheduled  to install Year 2000 ready
software on 22 locomotives by June 1999. ICR will perform  additional testing as
necessary  throughout  1999 as  suppliers  provide  Year 2000 ready  upgrades to
hardware or software.

      Information Technology Department Supported Systems

         Upon   completion  of  an  inventory  in  July  1997,   ICR  identified
approximately  1.6 million lines of COBOL code in various programs as candidates
for remediation.  Remediation of approximately 1.4 million lines of code in more
than 2,100  programs  is  complete  and the  programs  have been unit tested and
returned to the production  environment.  In addition, ICR migrated the programs
to a Year 2000 ready COBOL compiler. An independent  validation and verification
of code changes was  completed  in March 1999.  User  acceptance  /  integration
testing of mainframe  applications  is scheduled  during March 1999 and is to be
completed by April 1999.

         ICR completed  installation  of two modules of an  enterprise  software
solution  during  January 1999.  This software  replaced the remaining  lines of
non-Year 2000 ready code.

         ICR  installed  a Year 2000  ready  version of the  mainframe  computer
operating  system in April  1998.  Subsequently,  the vendor  developed  and ICR
applied  more  than  800  patches  to the  operating  system  software.  We also
installed more than 60 system software tools during 1998.

         ICR will  implement  a  moratorium  on any new  applications  effective
October 1, 1999 that will  extend at least two months  into the year 2000.  This
will  reduce  the risk of  introducing  non-Year  2000 ready  elements  into our
systems and allow  information  technology  specialists to promptly identify and
resolve any Year 2000 issues that might emerge.

      User Department Supported Systems

         This category  includes  mainframe,  mid-range,  and personal  computer
applications.  Mainframe systems are comprised  primarily of data extraction and
analysis programs and databases. An inventory of these systems is complete. Many
of these systems are not critical or do not employ date comparisons. Remediation
was completed in 1998.

         The mid-range  computer and its  operating  system are Year 2000 ready.
Remediation of the application  programs was completed during the fourth quarter
1998.

         The inventory and risk  assessment  process  determined  that most user
department  supported  personal  computer   applications  are  not  mission-  or
safety-critical.  Repair of the programs was completed  during the first quarter
of 1999.

         ICR will complete  testing of systems in this category during the first
quarter of 1999.

      Personal Computers and LAN

         All  LAN-connected   personal   computers  have  been  inventoried  and
certified  as Year  2000  ready.  About  90  percent  of  freestanding  personal
computers are Year 2000 ready and the rest will be replaced during 1999.

         Generally, client-server hardware and software have been designed to be
Year 2000 ready. However, a client-server application with data feeds from older
mainframe  systems  using  two-digit  years  may  require  building  bridges  or
conversion programs to use data from those mainframe systems. These bridges were
built as part of the installation of enterprise software described above.

      Customers and Suppliers

         ICR contacted 165 shippers and approximately 1,500 rail and private car
interchange  partners to request  confirmation  of their  internal  processes in
place to prevent  Year 2000  failures.  About 75 percent  of the  shippers  have
responded  that  they  have  Year  2000  programs.  The  process  of  contacting
non-responding   shippers  began  in  September  1998.  Shippers  and  essential
interchange  partners  will be monitored  during 1999 to determine  whether Year
2000 readiness was attained.

         ICR uses  electronic  data  interchange  ("EDI") to exchange  data with
customers and other  railroads.  ICR has implemented new industry  standards for
EDI  requiring a four-digit  year.  Since some  companies  will  continue to use
two-digit  years,  ICR will support older versions of EDI  transaction  sets and
interpret two-digit years within the appropriate century.

         ICR is also taking  steps to increase the  likelihood  that the flow of
goods and services  provided by suppliers  will not be  interrupted by Year 2000
failures. ICR asked 1,100 suppliers to confirm that their products are Year 2000
ready and that their internal  systems will work properly beyond 1999. More than
700 have responded and indicated that they have a Year 2000 project in place. In
addition,  ICR has identified about 120 critical vendors.  These vendors will be
monitored during 1999 to determine whether Year 2000 readiness was attained. ICR
relies on a value-added  network ("VAN") for EDI with vendors.  The VAN provider
has verified  that hardware and software is Year 2000 ready via  information  on
its' Internet site.

         ICR asked 265 private and municipal public utility companies to confirm
that their services will not be interrupted by Year 2000 failures and that their
internal  business  processes  and  systems  will  work  properly  beyond  1999.
Approximately  fifty  percent have  responded and reported they have a Year 2000
plan.  In  addition,  ICR  monitors the  Internet  sites of  individual  utility
companies as well as electric utility and telecommunications industry forums.

      Business Continuity and Contingency Planning

         Business   continuity   and   contingency   planning  to  address  Year
2000-related  failure  scenarios and ICR's response is an integral part of ICR's
Year 2000 program.  Operations  managers are in the process of reviewing a draft
of  a  Year  2000   contingency   plan  that  addresses,   among  other  things,
telecommunications,  critical hardware and  software,critical  vendors,  and key
people. ICR's objective is to mitigate the effects of significant risks it would
face in the event certain aspects of its Year 2000  remediation plan fail. Under
a worst case  scenario,  ICR  operations  would  halt in about 72 hours.  Events
likely to trigger a worst case scenario include failure of third party supported
dispatching  or   transportation   control   systems  or  wide  spread  loss  of
telecommunication or electric power. ICR expects to complete risk assessment and
contingency  plans  by the end of the  first  quarter  of 1999.  We will  adjust
business continuity and contingency plans throughout 1999.


<PAGE>



      Forward-Looking Information

         Information  concerning  costs,  remediation,  testing and the dates on
which ICR plans to complete  Year 2000  efforts are based on  management's  best
estimates.  The estimates were derived utilizing numerous  assumptions of future
events.  There can be no  guarantee  that these  estimates  will be achieved and
actual results could differ  materially from those plans.  Specific factors that
might cause material  differences include, but are not limited to, the continued
availability of internal and external resources, the timetables for internal and
third party testing, the types of Year 2000 failures ICR might face, and similar
uncertainties.

Miscellaneous

         ICR has entered into various diesel fuel collar agreements  designed to
mitigate  significant  changes in fuel prices.  At December  31,  1998,  ICR has
hedged  approximately  61% of the estimated 1999 diesel fuel purchases.  In June
1998, the Financial  Accounting  Standards Board issued SFAS 133, Accounting for
Derivative  Instruments  and Hedging  Activities.  Effective for fiscal  periods
beginning  after June 15, 1999,  SFAS 133  establishes  accounting and reporting
standards  requiring that  derivative  financial  instruments  (including  those
embedded in other contracts) be recorded on the balance sheet as either an asset
or liability measured at its fair value.  Changes in the derivative's fair value
are to be recognized  currently in earnings,  unless certain specified  criteria
are met which allow the derivative to be treated as a hedge.  Special accounting
for qualifying  hedges allows a  derivative's  gains or losses to offset related
results of the hedged item in the income statement.  The effect of adopting SFAS
133 on ICR's  net  income or  financial  position  has not yet been  determined;
however,  volatility  of earnings  could be increased.  (See Item 8.  "Financial
Statements and Supplemental Data - Notes to Consolidated Financial Statements.")

         ICR has paid approximately $3 million in 1996 and $6 million in each of
1995 and 1994 for severance,  lump sum signing awards and other costs associated
with various labor agreements.  Under the terms of local bargaining  agreements,
wages will rise 3%-4% per year.

         In October  1996,  the  Brotherhood  of  Maintenance  of Way  Employees
membership  ratified a new  agreement  which settles wage and work rules through
1999.  In February and May 1997,  the United  Transportation  Union  ("UTU") and
Brotherhood of Locomotive Engineers, respectively, ratified new agreements which
settle wage and work rule issues through 2000. The agreements are similar to the
nationally negotiated agreements in effect with other Class I carriers. The main
distinction  is  timing of the  various  lump sum  payouts  and  scheduled  wage
increases.

Environmental Liabilities

         ICR's operations are subject to comprehensive  environmental regulation
by  federal,  state  and local  authorities.  Compliance  with  such  regulation
requires  the  Corporation  to modify  its  operations  and  expend  substantial
manpower and financial resources.

         Under the federal Comprehensive  Environmental  Response,  Compensation
and Liability Act of 1980 ("Superfund"), and similar state and federal laws, ICR
is potentially  liable for the cost of clean-up of various  contaminated  sites.
ICR  generally  participates  in the  clean-up at sites where other  substantial
parties  share  responsibility  through  cost-sharing  arrangements,  but  under
Superfund and other  similar laws ICR can be held jointly and  severally  liable
for all environmental costs associated with such sites.

         ICR is aware of approximately  nine  contaminated  sites at which it is
probably  liable for some  portion  of any  required  clean up. Of these,  three
involve  contamination  primarily by diesel fuel that can be remediated  without
material cost.  Five other sites are expected to require more than $1 million in
clean-up  costs. At four of these sites other parties are expected to contribute
the majority of the costs incurred.

         For all known sites of  environmental  contamination  where ICR loss or
liability is probable,  ICR has recorded an estimated liability at the time when
a  reasonable  estimate  of  remediation  cost and ICR  liability  can  first be
determined.  Adjustments  to initial  estimates are recorded as necessary  based
upon additional information developed in subsequent periods.  Estimates of ICR`s
potential   financial  exposure  for  environmental   claims  or  incidents  are
necessarily  imprecise  because of the  difficulty of determining in advance the
nature and extent of contamination,  the varying costs of alternative methods of
remediation,  the regulatory  clean-up standards which will be applied,  and the
appropriate  allocation of liability  among  multiple  responsible  parties.  At
December 31, 1998,  ICR estimated the probable range of its liability to be $7.2
million to $22.7  million,  and in accordance  with the provisions of SFAS No. 5
had a reserve of $7.2 million for  environmental  contingencies.  This amount is
not reduced for potential insurance recoveries or third-party contributions.

         The risk of incurring  environmental  liability in connection with both
past and current  activities  is inherent  in railroad  operations.  Decades-old
railroad  housekeeping  practices were not always  consistent with  contemporary
standards, historically ICR leased substantial amounts of property to industrial
tenants,  and ICR  continues  to haul  hazardous  materials  that are subject to
occasional  accidental release.  Because the ultimate cost of known contaminated
sites cannot be  definitively  established and because  additional  contaminated
sites  yet  unknown  may be  discovered  or  future  operations  may  result  in
accidental releases,  no assurance can be given that ICR will not incur material
environmental  liabilities in the future.  However,  based on its assessments of
the facts and circumstances now known,  management believes that it has recorded
adequate reserves for known liabilities and does not expect future environmental
charges or expenditures, based on these known facts and circumstances, to have a
material adverse effect on ICR`s financial position, results of operations, cash
flow or liquidity.

Litigation

         ICR is one of several defendants in a New Orleans class action in which
a jury has  returned a verdict  against  the ICR for $125  million  in  punitive
damages as a result of a tank car fire. The Louisiana  Supreme Court has vacated
the judgment for technical  reasons and remanded the case to the trial court for
further  proceedings.  On June 17, 1998, the trial court re-entered  judgment in
favor of the class and certified it for  interlocutory  appeal.  The case awaits
hearing in the trial court on  post-trial  motions.  While the final  outcome of
this  proceeding  cannot be determined,  in the opinion of management,  based on
present  information,  the ultimate  resolution  of this case is not expected to
have  a  material  adverse  effect  on  ICR's  financial  position,  results  of
operations, cash flow or liquidity.


Quantitative and Qualitative Disclosure about Market Risk

         In the ordinary  course of business,  ICR  utilizes  various  financial
instruments,  primarily debt  obligations,  that  inherently have some degree of
market risk. The quantitative  information  presented below describe significant
aspects of ICR's financial instrument programs which have material market risk.

Interest Rate Sensitivity

The table below provides  information about ICR's debt obligation as of December
31, 1998 that are  sensitive to changes in interest  rates.  The table  presents
principal cash flows and related  weighted average interest rates by contractual
maturity dates.

                                  Maturity Date
                                  -------------
                                                      There-            Fair
                  1999   2000    2001  2002     2003  after    Total   Value
                  ----   ----    ----  ----     ----  -----    -----   -----
Fixed rate debt
($ in millions)  $52.7  $33.0  $102.8  $2.4   $104.6  $302.0  $597.5   $637.8

Average
interest rate   6.483%  7.007% 6.980% 9.805%  6.765%  7.442%   6.950%       -

Commodity Price Sensitivity

        ICR has a  program  to hedge  against  fluctuations  in the price of its
diesel fuel  purchases.  The program  consists of collar  transactions  that are
accounted for as hedges.  See Item 8.  "Financial  Statements and  Supplementary
Data - Notes to  Consolidated  Financial  Statements"  Note 6.  for  information
relating to ICR's diesel fuel hedging program.

Item 8.  Financial Statements and Supplementary Data
-------  -------------------------------------------
See Index to Consolidated Financial Statements on page 30 of this Report.

Item 9.  Changes in and Disagreement with Accountants in Accounting Financial
         Disclosures
-------  ---------------------------------------------------------------------
                                     NONE


<PAGE>


                                    PART III
                                    --------

Items 10, 11, 12 and 13
-----------------------

         Intentionally   omitted.   See  the  Index  page  of  this  Report  for
explanation.

                                     PART IV
                                     -------

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

(a)    1.   Financial Statements:

            See Index to  Consolidated  Financial  Statements on page 30 of this
            Report.

       2.   Financial Statement Schedules:

            See  Index to  Financial  Statement  Schedules  on page F-25 of this
            Report.

       3.   Exhibits:

            See marked with "*" on the Exhibit  Index  beginning  on page E-1 of
            this  Report.  Items so  marked  identify  management  contracts  or
            compensatory plans or arrangements as required by Item 14.

(b)    1.   Reports on Form 8-K:

            None

(c)         Exhibits:

            The  response to this  portion of Item 14 is submitted as a separate
            section of this Report. See Exhibit Index beginning on page E-1.

(d)         Financial Statement Schedules:

            The  response to this  portion of Item 14 is submitted as a separate
            section of this Report.


<PAGE>


                                   SIGNATURES

     Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
Registrant  has duly  caused  this  Report  to be  signed  on its  behalf by the
undersigned, there unto duly authorized.

                        ILLINOIS CENTRAL RAILROAD COMPANY

                             By:  /s/ JOHN V. MULVANEY
                               John V. Mulvaney
                   Vice President and Chief Financial Officer
                              Date: March 26, 1999

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
Report has been signed by the  following  persons in the  capacities  and on the
dates indicated.

         Signature                     Title(s)                       Date

/s/ GEORGE D.  GOULD     Chairman of the Board and Director       March 26, 1999
    George D.  Gould

/s/ JOHN D.  MCPHERSON  President and Chief Executive Officer     March 26, 1999
    John D.  McPherson  (principal executive officer), Director

/s/ JOHN V.  MULVANEY               Vice President                March 26, 1999
    John V.  Mulvaney        and Chief Financial Officer
                             (principal financial officer)
                                      Director

/s/ DOUGLAS A.  KOMAN                Controller                   March 26, 1999
    Douglas A.  Koman        (principal accounting officer)

/s/  RONALD A. LANE                   Director                    March 26, 1999
     Ronald A. Lane

/s/ EDWARD G. KAMMERER                Director                    March 26, 1999
    Edward G. Kammerer


<PAGE>








                        ILLINOIS CENTRAL RAILROAD COMPANY
                                AND SUBSIDIARIES










                                  F O R M 10-K



                              FINANCIAL STATEMENTS


                         SUBMITTED IN RESPONSE TO ITEM 8









<PAGE>







                        ILLINOIS CENTRAL RAILROAD COMPANY
                                AND SUBSIDIARIES

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

                                                                      Page
                                                                      ----

Report of Independent Public Accountants...............................F-1

Consolidated Statements of Income for the three years
  ended December 31, 1998..............................................F-2

Consolidated Balance Sheets at December 31, 1998 and 1997..............F-3

Consolidated Statements of Cash Flows for the three years
  ended December 31, 1998..............................................F-4

Consolidated Statements of Stockholder's Equity and Retained
  Income for the three years ended December 31, 1998...................F-5

Notes to Consolidated Financial Statements for the three years
  ended December 31, 1998..............................................F-6

<PAGE>


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of Illinois Central Railroad Company:

         We  have  audited  the  accompanying  consolidated  balance  sheets  of
Illinois Central  Railroad Company (a Delaware  corporation) and subsidiaries as
of  December  31,  1998 and 1997,  and the related  consolidated  statements  of
income, cash flows and stockholder's  equity and retained income for each of the
three years in the period ended December 31,1998. These financial statements and
the  schedule  referred  to  below  are  the  responsibility  of  the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements and schedule based on our audits.

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

         In our opinion,  the  financial  statements  referred to above  present
fairly,  in all material  respects,  the financial  position of Illinois Central
Railroad  Company and  subsidiaries  as of 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.

         Our audits were made for the purpose of forming an opinion on the basic
financial  statements  taken as a whole.  The  schedule  listed  in the Index to
Financial Statement Schedules herein is presented for purposes of complying with
the  Securities  and  Exchange  Commission's  rules and is not part of the basic
financial  statements.   This  schedule  has  been  subjected  to  the  auditing
procedures  applied in the audits of the basic financial  statements and, in our
opinion,  fairly states in all material  respects the financial data required to
be set forth therein in relation to the basic  financial  statements  taken as a
whole.


                                                           ARTHUR ANDERSEN LLP


Chicago, Illinois
January 12, 1999


<PAGE>


               ILLINOIS CENTRAL RAILROAD COMPANY AND SUBSIDIARIES
                       Consolidated Statements of Income
                                ($ in millions)



                                              Years Ended Decemember 31,
                                              --------------------------
                                             1998       1997       1996
                                             ----       ----       ----
 Revenues                                  $651.3     $622.5     $617.2

 Operating expenses:
    Labor and fringe benefits               190.3      185.6      181.9
    Leases and car hire                      53.9       51.1       56.7
    Diesel fuel                              27.1       33.3       34.6
    Materials and supplies                   34.2       33.2       31.2
    Depreciation and amortization            35.6       33.1       31.0
    Casualty, insurance and losses           17.7       15.6       11.4
    Other taxes                              19.4       19.6       16.9
    Other                                    37.4       23.1       34.0
    Special charge                           28.4         -          -
                                             ----      -----      -----
 Operating expenses                         444.0      394.6      397.7

 Operating income                           207.3      227.9      219.5

 Other income, net                           12.5        6.6        9.9
 Interest expense, net                      (27.7)     (28.2)     (26.5)
                                            -----      -----      -----

 Income before income taxes                 192.1      206.3      202.9
 Provision for income taxes                  71.3       70.1       76.3
                                             ----       ----       ----

 Net income                                $120.8     $136.2     $126.6
                                           ======     ======     ======


The  following  notes  are  an  integral  part  of  the  consolidated  financial
statements.


<PAGE>


               ILLINOIS CENTRAL RAILROAD COMPANY AND SUBSIDIARIES
                          Consolidated Balance Sheets
                                ($ in millions)

                                              December 31,        December 31,
               ASSETS                             1998                1997
               ------                             ----                ----
  Current assets:
       Cash and temporary cash investment       $  28.8             $  28.2
       Receivables, net of allowance for
         doubtful accounts of $.7 in 1998
         and $.9 in 1997                          152.3               100.6
       Loans to affiliates                           -                  4.9
       Materials and supplies, at average cost     14.9                15.3
       Assets held for disposition                  1.1                  -
       Deferred income taxes - current             18.6                17.5
       Other current assets                         6.5                 5.0
                                                    ---                 ---
            Total current assets                  222.2               171.5

  Investments                                      12.9                12.1

  Loans to affiliates                             193.2               160.9

  Properties:
     Transportation:
        Road and structures, including land      1,255.4             1,193.7
        Equipment                                 189.4               173.7
     Other, principally land                       41.0                41.3
                                                   ----                ----
        Total properties                        1,485.8             1,408.7
     Accumulated depreciation                     (57.5)              (45.8)
                                                  -----               -----
        Net properties                          1,428.3             1,362.9

  Other assets                                     28.5                23.6
                                                   ----                ----
            Total assets                       $1,885.1            $1,731.0
                                               ========            ========

                  LIABILITIES AND STOCKHOLDER'S EQUITY
  Current liabilities:
       Current maturities of long-term de       $  52.7             $  22.7
       Accounts payable                            54.5                53.1
       Income taxes payable                        25.8                  -
       Casualty and freight claims                 12.7                12.7
       Employee compensation                       29.1                19.1
       Taxes other than income taxes               15.4                16.4
       Accrued redundancy reserves                  3.7                 3.9
       Other accrued expenses                      76.7                80.1
                                                   ----                ----
            Total current liabilities             270.6               208.0

  Long-term debt                                  544.8               552.4
  Deferred income taxes                           334.2               302.9
  Other liabilities and reserves                  109.0               111.7

  Contingencies and commitments (Note 13)

  Stockholder's equity:
       Common stock authorized, issued and
        oustanding
         100 shares, $1 par value                    -                   -
       Additional paid-in capital                 129.6               129.6
       Retained income                            496.9               426.4
                                                  -----               -----
           Total stockholder's equity             626.5               556.0
                                                  -----               -----
           Total liabilities and stock-
            holder's equity                    $1,885.1            $1,731.0
                                               ========            ========

The  following  notes  are  an  integral  part  of  the  consolidated  financial
statements.

<PAGE>


               ILLINOIS CENTRAL RAILROAD COMPANY AND SUBSIDIARIES
                           Consolidated Statements of
                           Cash Flows ($ in millions)


                                                     Years Ended December 31,
                                                     ------------------------
                                                  1998        1997        1996
                                                  ----        ----        ----
 Cash flows from operating activities :
    Net income                                  $120.8      $136.2      $126.6
    Reconciliation of net income to net cash
       provided by (used for) operating
        activities :
          Depreciation and amortization           35.6        33.1        31.0
          Deferred income taxes                   30.2        39.9        31.5
          Equity in undistributed earnings of
             affiliates, net of dividends
             received                             (0.8)       (0.9)       (0.5)
          Net gains on sales of real estate       (3.3)       (0.6)       (1.6)
          Gain on abnormal retirement of
             equipment                            (1.7)         -           -
          Settlement of contract dispute          (2.0)         -           -
          Cash changes in working capital        (21.3)      (15.1)       (9.0)
          Changes in other assets                 (4.9)       (2.8)       (6.4)
          Changes in other liabilities and
           reserves                               (2.7)       (5.5)       (6.6)
             Net cash provided by operating
              activities                         149.9       184.3       165.0

 Cash flows from investing activities :
    Additions to properties                      (98.2)     (110.9)     (118.9)
    Proceeds from sales of real estate             4.6         2.4         3.0
    Proceeds from equipment sales                  1.8         2.5         3.0
    Proceeds from sales of investments             0.2         0.6         2.3
    Loans to affiliates                          (27.4)      (12.7)     (114.5)
    Other                                         (2.4)        1.1        (1.0)
                                                  ----         ---        ----
      Net cash (used for) investing
       activities                               (121.4)     (117.0)     (226.1)

 Cash flows from financing activities :
    Proceeds from issuance of debt                40.4         0.9       255.0
    Principal payments on debt                   (18.0)       (3.4)       (9.6)
    Net proceeds (payments)-Commercial Paper        -        (20.0)      (37.0)
    Dividends paid                               (50.3)      (62.9)     (103.3)
    Purchase of subsidiary's common stock           -           -         (0.7)
                                                  ----        ----        ----
      Net cash provided by (used for) financing
        activities                               (27.9)      (85.4)      104.4
                                                 -----       -----       -----
 Changes in cash and temporary cash invest-
   ments                                           0.6       (18.1)       43.3
 Cash and temporary cash investments at
   beginning                                      28.2        46.3         3.0
                                                  ----        ----         ---
 Cash and temporary cash investments at end of
   year                                         $ 28.8      $ 28.2      $ 46.3
                                                ======      ======      ======
 Supplemental  disclosure  of cash flow
   information :
  Cash paid during the year for:
       Interest (net of amount capitalized)     $ 43.5      $ 38.1      $ 28.5
                                                ======      ======      ======
       Income taxes                             $ 16.2      $ 32.5      $ 53.2
                                                ======      ======      ======

The  following  notes  are  an  integral  part  of  the  consolidated  financial
statements.

<PAGE>


               ILLINOIS CENTRAL RAILROAD COMPANY AND SUBSIDIARIES
      Consolidated Statements of Stockholder's Equity and Retained Income


                              Shares           Equity ($ in million
                              ------           --------------------
                                                                      Total
                                                  Additional          Stock-
                              Common    Common    Paid-in   Retained  holder
                              Share     Stock     Capital   Income    Equity
                              -----     -----     -------   ------    ------

  Balance December 31, 1995     100    $   -     $129.6    $335.4    $465.0

  Dividends                                                (108.9)   (108.9)

  Net income                                                126.6     126.6
                                                            -----     -----

  Balance December 31, 1996     100          -    129.6     353.1     482.7

  Dividends                                                 (62.9)    (62.9)

  Net income                                                136.2     136.2
                                                            -----     -----

  Balance December 31, 1997     100          -    129.6     426.4     556.0

  Dividends                                                 (50.3)    (50.3)

  Net income                                                120.8     120.8
                                                            -----     -----

  Balance December 31, 1998     100    $     -   $129.6    $496.9    $626.5
                                ===    ======    ======    ======    ======


The  following  notes  are  an  integral  part  of  the  consolidated  financial
statements.


<PAGE>



                        ILLINOIS CENTRAL RAILROAD COMPANY

                                AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

1.       ICR

         The Illinois Central Railroad Company ("ICR")an  Illinois  Corporation,
is principally engaged in the rail freight transportation business. ICR operates
2,600 miles of main line track between Chicago, Illinois and the Gulf of Mexico,
primarily  transporting  chemicals,  grain and  milled  grain,  coal,  paper and
intermodal  commodities.  ICR, through its parent,  Illinois Central Corporation
(the "Corporation"),is an indirect, wholly-owned subsidiary of Canadian National
Railway Company (the "CN").

2.       Merger and Special Charge

         On February 10, 1998, the  Corporation and CN entered into an Agreement
and Plan of Merger (as subsequently  amended, the "Merger Agreement"),  pursuant
to which Blackhawk Merger Sub, Inc. (the "Purchaser"), a wholly-owned subsidiary
of CN, acquired on March 13, 1998,  46,051,761 of the outstanding  shares of the
Corporation's Common Stock (the "Shares") at a price of $39.00 per share through
a cash  tender  offer  (the  "Offer").  The  Corporation's  Board  of  Directors
unanimously approved the Merger Agreement and the transaction  contemplated.  On
June 4, 1998,  the  Purchaser  was  merged  with and into the  Corporation  (the
"Merger") and the remaining outstanding  Corporation common shares not purchased
pursuant to the Offer were  converted  into a right to receive 0.633 share of CN
common stock for each share of Corporation common stock. Pursuant to the Merger,
each share of the Corporation's  Common Stock,  including treasury stock held by
the  Corporation,  was  cancelled,  and  the  Corporation  became  an  indirect,
wholly-owned  subsidiary of CN with 100 shares of no-par Common Stock issued and
outstanding.  These shares were deposited in an independent,  irrevocable voting
trust  while CN and the  Corporation  await  review  of the  transaction  by the
Surface Transportation Board ("STB").

         Pursuant to the Merger  Agreement,  subject to  consultations  with the
Corporation  and  after  giving  good  faith  consideration  to the views of the
Corporation,  CN shall have final authority over the  development,  presentation
and conduct of the STB case,  including  decisions  as to whether to agree to or
acquiesce in  conditions.  The  Corporation  shall take no  regulatory  or legal
action in  connection  with the STB without CN's  consent.  The STB could impose
conditions or restrictions  as it relates to CN's  acquisition of control of the
Corporation.  If the STB does not  approve  CN's  acquisition  of control of the
Corporation or CN deems any conditions imposed by the STB unacceptable, CN would
be obligated to sell all the Corporation common shares held by the voting trust.
The STB's decision is expected in the second quarter of 1999.

         The  Corporation  and ICR  recorded  a  special  charge  (the  "Special
Charge")  during 1998 for costs  associated  with the CN Merger  Agreement.  The
Special  Charge  totaled  $28.4 million at ICR for costs  relating  primarily to
payments  under  various  compensation  plans  payable  following  the change in
control.  Included  in the $28.4  million  is  approximately  $9.1  million  for
payments  under the  Incentive  2000 Plan.  Additionally,  approximately  thirty
executive officers of ICR are covered by Employment  Security Agreements and are
entitled to receive  either two or three years of  severance  benefits if within
two years after the change in control,  their  employment  is  terminated by ICR
without  cause or they resign with good  reason.  The  Special  Charge  includes
approximately  $12.0  million  in  connection  with  these  agreements.  If  all
Employment  Security  Agreements  were to be  activated,  ICR estimates it would
incur an additional liability of $14.0 million.

         The Corporation's  Employee Stock Purchase Plan and Management Employee
Discounted  Stock  Purchase  Plan were  terminated  following  completion of the
Offer.

3.       Summary of Significant Accounting Policies

         Principles of Consolidation

         The consolidated  financial  statements include the accounts of the ICR
and its  subsidiaries.  Significant  investments  in  affiliated  companies  are
accounted for by the equity method.  Transactions between consolidated companies
have been eliminated in the accompanying consolidated financial statements.

         Properties

         Depreciation  is  computed  by the  straight-line  method and  includes
depreciation on properties  under capital leases.  ICR uses the composite method
of depreciation for track structure,  other road property, and equipment. In the
case of routine retirements,  removal costs less salvage recovery are charged to
accumulated   depreciation.   Gains  and  losses  are  recognized  for  abnormal
retirements.  Expenditures  for maintenance and repairs are charged to operating
expense.

         The approximate ranges of annual  depreciation rates for major property
classifications are as follows:

         Road properties   ..........................1%-5%
         Transportation equipment....................2%-5%

         Revenues

         Revenues  are  recognized  based  on  services  performed  and  include
estimated  amounts  relating  to freight  movements  in  progress  for which the
settlement  process is not  complete.  Estimated  revenue  amounts  for  freight
movements in progress are not significant.

         Income Taxes

         Deferred  income  taxes are  accounted  for on the asset and  liability
method by  applying  enacted  statutory  tax rates to  differences  between  the
financial   statement   carrying  amounts  and  the  tax  bases  of  assets  and
liabilities.  The resulting  deferred tax liabilities and assets represent taxes
to be paid or  collected in the future when the related  assets and  liabilities
are recovered and settled, respectively.

         Cash and Temporary Cash Investments

         Cash in excess of operating  requirements  is invested in certain funds
having original maturities of three months or less. These investments are stated
at cost, which approximates market value.

         Income Per Share

         Income per share has been omitted, as ICR is a wholly-owned  subsidiary
of the Corporation.

         Derivative Financial Instruments

         ICR has only limited involvement with derivative financial  instruments
and does not use them for trading purposes.  ICR has entered into various diesel
fuel collar agreements with the objective of mitigating significant fluctuations
in fuel prices.  Amounts  receivable or payable under the collar  agreements are
accrued as  increases or decreases  to Diesel Fuel  Expense.  In June 1998,  the
Financial  Accounting Standards Board issued SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. Effective for fiscal periods beginning after
June 15, 1999, SFAS 133 establishes accounting and reporting standards requiring
that  derivative  financial  instruments  (including  those  embedded  in  other
contracts)  be  recorded on the  balance  sheet as either an asset or  liability
measured at its fair  value.  Changes in the  derivative's  fair value are to be
recognized  currently in earnings,  unless  certain  specified  criteria are met
which allow the  derivative  to be treated as a hedge.  Special  accounting  for
qualifying  hedges  allows a  derivative's  gains or losses  to  offset  related
results of the hedged item in the income statement.  The effect of adopting SFAS
133 on ICR's  net  income or  financial  position  has not yet been  determined;
however, volatility of earnings could be increased. (See Notes 6 and 15.)

         Casualty Claims

         ICR  accrues  for  injury  and  damage  claims  based  on   actuarially
determined  estimates of the ultimate costs  associated with asserted claims and
claims incurred but not reported.

         Stock-Based Compensation

         ICR has elected to adopt  Statement of Financial  Accounting  Standards
No.  123,  "Accounting  for  Stock-Based  Compensation"  ("SFAS No.  123"),  for
disclosure purposes only. ICR accounts for compensation under the 1990 Long-Term
Incentive Plan under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." (See Note 13.)

         Use of Estimates

         The  preparation of financial  statements in conformity  with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

         Reclassifications

         Certain items relating to prior years have been reclassified to conform
to the presentation in the current year.

4.       Other Income (Expense), Net

         Other income (expense), net consisted of the following ($ in millions):

                                             Years Ended December 31,
                                             ------------------------
                                               1998    1997    1996
                                               ----    ----    ----

Rental income, net............................$ 2.4    $2.5    $2.3
Net gains on sales of real estate.............  3.3      .6     1.6
Equity in undistributed
   earnings of affiliates.....................  1.9     1.6      .8
Sales of accounts receivable (see Note 9).....    -    (3.0)   (2.9)
Grant of permanent easement (see below).......    -     3.3       -
Gain on abnormal retirement of equipment......  1.7       -       -
Settlement of contract dispute................  2.0       -       -
Sale of investment(see below).................    -       -     7.3
Other, net   .................................  1.2     1.6      .8
                                                ---     ---      --
   Other income, net    ......................$12.5    $6.6    $9.9
                                              =====    ====    ====

          On  September  30,  1997,   ICR  granted  a  permanent   easement  for
development  of right of way property for signboard use. On October 3, 1996, ICR
sold its investment in an industry captive insurance company.

5.       Supplemental Cash Flow Information

         Cash changes in  components  of working  capital,  exclusive of current
maturities of long-term debt,  included in the  Consolidated  Statements of Cash
Flows were as follows ($ in millions):

                                                    Years Ended December 31,
                                                    ------------------------

                                                  1998        1997         1996
                                                  ----        ----         ----

Receivables, net.............................   $(51.7)     $(16.2)     $ (5.1)
Materials and supplies.......................       .4         1.9        (2.4)
Assets held for disposition..................     (1.1)        -           -
Other current assets.........................     (1.5)        3.4        (5.3)
Accounts payable.............................      1.4        (3.2)        4.9
Income taxes payable.........................     25.8        (1.8)       (8.4)
Accrued redundancy reserve...................      (.2)        (.4)        -
Other current liabilities....................      5.6         1.2         7.3
                                                   ---         ---         ---
    Cash changes in working capital..........   $(21.3)     $(15.1)      $(9.0)
                                                ======      ======       =====

         ICR recorded  capital leases of $4.3 million covering 40 locomotives in
1997. See Note 7 for the present value of the minimum lease payments.

6.      Materials and Supplies

        Materials and supplies,  valued using the average cost method, primarily
consist of track material, switches, car and locomotive parts and diesel fuel.

        The ICR has a hedging program in place to mitigate the effects of diesel
fuel price changes on its operating margins and overall  profitability.  Various
collar  agreements  are in place to  anticipate  the risk of diesel  fuel  price
volatility  for  which  ICR has  incurred  costs of $2.1  million  in 1998.  The
agreements  are not used for  trading  purposes,  but  rather are used as hedges
against ICR's  anticipated  diesel fuel purchases.  Hedging positions and credit
ratings  of  counterparties   are  monitored  and  losses  due  to  counterparty
nonperformance  are not  anticipated.  At December 31, 1998, ICR has four collar
agreements  in place that hedge  approximately  61% of the  estimated 62 million
gallons of diesel fuel  purchases in 1999.  Unrecognized  losses from ICR diesel
fuel hedging activities amounted to $2.1 mill1998. at December 31,

         If the  monthly  average  spot price for Gulf Coast  heating  oil,  the
referenced commodity,  as published in Platt's Oilgram ("Monthly Average") which
was $.2922  per  gallon in  December  1998,  is  greater  than the cap price per
gallon,  ranging from $.50 to $.54,  ICR receives a payment  equal to the excess
amount multiplied by the notional gallons. Conversely, if the Monthly Average is
below the floor  price per  gallon,  ranging  from $.35 to  $.3895,  ICR makes a
payment equal to the deficit amount multiplied by the notional  gallons.  If the
Monthly  Average is equal to or between the cap and floor  price per gallon,  no
payment is received or made by ICR.


7.      Leases

        As of December  31, 1998,  ICR leased  7,707  freight cars and 53 of its
locomotives.  These leases expire between 1999 and 2007. Under the terms of many
of its lease agreements,  ICR has the right of first refusal to purchase, at the
end of the lease  term,  certain  cars and  locomotives  at or below fair market
value. ICR also leases office facilities, computer equipment and vehicles.

        Net  obligations  under  capital  leases at December  31, 1998 and 1997,
included  in the  Consolidated  Balance  Sheets  were  $17.8  million  and $15.7
million,  respectively.  The gross  assets under  capitalized  leases were $28.6
million and $32.6 million at December 31, 1998 and 1997,  respectively,  and are
included in properties in the Consolidated Balance Sheets.

         At  December  31,  1998,  minimum  rental  payments  under  capital and
operating leases that have initial or remaining  noncancellable  terms in excess
of one year were as follows ($ in millions):


                                                   Capital           Operating
                                                   Leases              Leases
                                                   ------              ------

1999......................................         $ 4.2               $ 41.3
2000......................................           3.7                 40.3
2001......................................           3.5                 38.1
2002......................................           2.9                 37.2
2003......................................           4.9                 39.5
Thereafter................................           3.3                 81.2
                                                     ---                 ----
    Total minimum lease payments..........         $22.5               $277.6

Less: Imputed interest....................           4.7
                                                     ---
    Present value of minimum payments.....         $17.8
                                                   =====

        Total  rent  expense  applicable  to  noncancellable   operating  leases
amounted to $36.1  million,  $32.6 million and $38.8  million in 1998,  1997 and
1996, respectively.  Most of the leases provide that ICR pay taxes, maintenance,
insurance and certain other operating expenses.

8.      Long-Term Debt and Interest Expense

        Long-term  debt  at  December  31,  consisted  of  the  following  ($ in
millions):


                                                                 1998      1997
                                                                 ----      ----

Equipment obligations, due annually to 2007, 6.32% to 7.7%.... $  1.1    $   .9
Debentures and other debt, due 2022 to 2056, 4.5% to 5.0%.....    9.6       9.6
Debentures, due 2096, 7.7%....................................  125.0     125.0
Notes, due 2003, 6.75%........................................  100.0     100.0
Notes, due 2005, 7.75%........................................  100.0     100.0
Medium term notes, due 2000 to 2008, 6.63% to 7.12%...........  200.0     210.0
Capitalized leases (see Note 7)...............................   15.2      13.2
Unamortized discount, net ....................................   (6.1)     (6.3)
                                                                 ----      ----


             Total long-term debt............................. $544.8    $552.4
                                                               ======    ======

        At December 31, 1998, the aggregate  annual  maturities and sinking fund
requirements  for debt payments for 1999 through 2004 and thereafter  were $52.7
million,  $33.0 million,  $102.8  million,  $2.4 million,  $104.6  million,  $.8
million and $301.2 million, respectively. The weighted-average interest rate for
1998 and 1997 on total debt  excluding  the effect of  discounts,  premiums  and
related amortization was 7.0% and 7.1%, respectively.

        In December 1996, ICR issued $125 million  aggregate amount of 100-year,
7.7%  debentures  due September 15, 2096.  These bonds may not be redeemed until
2026 and then only at a premium that declines to par in 2056.

        ICR has a commercial  paper program  whereby a total of $200 million can
be issued and  outstanding  at any one time.  The program is supported by a $250
million  Revolver(the  "ICR  Revolver").  At December 31, 1998,  no amounts were
outstanding.

        The $250 million ICR Revolver expires in 2001. ICR pays an annual fee of
15 basis  points on the  committed  amount and the current  floating  Eurodollar
offered rate plus 22.5 basis points for any borrowings.  The ICR Revolver may be
used as backup for commercial  paper. The available amount for general corporate
services is reduced by the outstanding amount of commercial paper borrowings and
any letters of credit issued on behalf of ICR under the facility. As of December
31, 1998,  $20 million was drawn under the ICR Revolver and no letters of credit
were issued.

        Borrowings  of ICR are  governed  by  agreements  that  contain  certain
affirmative  and negative  covenants  customary  for  facilities of this nature,
including  restrictions  on additional  indebtedness,  investments,  guarantees,
liens,  distributions,  sales and  leaseback,  and sales of assets  and  capital
stock. Some also require  satisfaction of certain  financial tests,  including a
leverage ratio, an earnings before interest and taxes to interest charges ratio,
and minimum consolidated tangible net worth requirements. See Note 12.

        Interest expense, net consisted of the following ($ in millions):


                                            Years Ended December 31,
                                            ------------------------
                                            1998     1997     1996
                                            ----     ----     ----

Interest expense........................   $45.7    $43.1    $34.3
Less:
   Interest capitalized ................     1.3      1.5      1.7
   Interest income......................    16.7     13.4      6.1
                                            ----     ----      ---
Interest expense, net...................   $27.7    $28.2    $26.5
                                           =====    =====    =====

9.      Receivables

        On January 8, 1998,  ICR  terminated  its  revolving  agreement  to sell
undivided percentage interests in certain accounts receivable, with recourse, to
a  financial  institution.  The  agreement  had  allowed  for sales of  accounts
receivable up to a maximum of $50 million at any one time.  Costs related to the
agreement  fluctuated with changes in prevailing  interest  rates.  These costs,
which are included in other  income  (expense),  net,  were $3.0  million,  $2.9
million for 1997 and 1996, respectively.

10.     Benefit Plans

        All  employees of ICR are covered under the Railroad  Retirement  System
instead   of  Social   Security.   Additionally,   various   retirement   plans,
postemployment benefits and postretirement benefits are provided.

        Retirement Plans. ICR has two qualified plans permitting participants to
make  "pre-tax"  contributions  of their  salary  up to  Internal  Revenue  Code
limitations  and each  contains a company match  provision.  The ICR union plan,
which started in mid-1995,  allows  eligible  union  employees  covered by local
contracts to  participate.  ICR matches 25% of the first 4% of salary  deferral.
The management employee plan matches 50% of the first 6% of salary deferral. The
management plan also contains a separate defined  contribution  portion of 2% of
each employee's salary.  Expenses related to both plans were $1.8 million,  $1.5
million,  and  $1.2  million  in  1998,  1997 and  1996,  respectively.  All ICR
contributions are fully vested upon contribution.

        ICR also has a  supplemental  executive  retirement  plan ("SERP") which
covers officers and certain other management employees.  The SERP provides for a
monthly  benefit equal to 35% of a participant's  final average  compensation as
defined  in the plan.  The  monthly  benefit  is  subject  to  certain  offsets,
including  employer  contributions  to the 401(k) plan.  The plan was adopted in
1994.  Expenses  for this plan were $1.5  million in 1998 by reason of immediate
vesting  as a result of the change in  control,  see Note 2.  Expenses  were not
material in 1997 and 1996.

        Salary  Deferral Plans. In addition to the 401(k) plan, all officers and
certain other  management  employees may elect to defer up to 50% of base salary
and 100% of  annual  bonus.  Participant  deferrals  are fully  vested  and earn
interest at a specified,  variable rate.  Approximately $.4 million, $.3 million
and $1.1 million were deferred in 1998, 1997 and 1996, respectively.

        Unfunded  Plan.  ICR has an unfunded  plan  whereby 10% of an  officer's
combined  salary and bonus in excess of a wage offset factor  ($114,000 in 1998)
is accrued and earns interest at a specified, variable rate. Amounts accrued are
paid when the employee leaves the Company, normally at retirement.  Expenses for
this plan were $.4 million in each of 1998, 1997 and 1996.

        Postemployment   Benefit  Plans.  ICR  provides  certain  postemployment
benefits such as long-term  salary  continuation  and waiver of medical and life
insurance co-payments while on long-term disability.

        Postretirement  Plans.  In addition to retirement  plans,  ICR has three
benefit  plans  which  provide  some  postretirement  benefits  to  most  former
full-time  salaried employees and selected former  union-represented  employees.
The  medical  plan  for  salaried   retirees  is   contributory,   with  retiree
contributions  adjusted annually if expected medical cost inflation rate exceeds
9.5%,  and  contains  other  cost  sharing  features  such  as  deductibles  and
co-payments.  ICR's contribution will be fixed at the 1999 year end rate for all
subsequent  years.  Salaried  retirees are covered by a life insurance plan that
provides a nominal death benefit and is  non-contributory.  The medical plan for
locomotive  engineers who retired under a special  early  retirement  program in
1987 provides  non-contributory  coverage  until age 65. All benefits under this
medical plan terminate in 1998. There are no postretirement  plan assets and ICR
funds these benefits as claims are paid.

        The  accumulated  postretirement  benefit  obligations  ("APBO")  of the
postretirement   plans,   prepared  in  accordance  with  FAS  132,  "Employer's
Disclosure about Pensions and Other Postretirement Benefits", were as follows,($
in millions):

                                                         December 31,
                                                         ------------

                                                       1998         1997
                                                       ----         ----

         Accumulated postretirement benefit
          obligation at beginning of year             $19.3        $19.1
         Service cost                                    .2           .2
         Interest cost                                  1.3          1.4
         Loss (gain) due to discount rate change         .9           .7
         Loss (gain) due to experience                  1.3          (.1)
         Estimated benefits paid                       (2.0)        (2.0)
                                                       ----         ----
         Accumulated postretirement benefit
          obligation at end of year                    21.0         19.3
                                                       ----         ----

         Funded status                                (21.0)       (19.3)
         Unrecognized net actuarial gain              (13.3)       (16.5)
                                                      -----        -----
         Prepaid (accrued) benefit cost              $(34.3)      $(35.8)
                                                     ======       ======


        The  weighted-average  discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% at December 31, 1997. As a result of
the change in general  interest rates on high quality fixed rate  investments in
1998, ICR decreased the  weighted-average  discount rate to 6.75% as of December
31, 1998. The change in rates resulted in  approximately  $.9 million  actuarial
loss.  The  actuarial  gains and losses  along  with  actual  experience  gains,
primarily  fewer claims and lower  medical rate  inflation,  resulted in a total
$13.3 million  unrecognized net gain as of December 31, 1998. In accordance with
SFAS No.  106,  the excess gain is subject to $.8  million  annual  amortization
based on an amortization period of approximately 14 years. The components of the
net periodic postretirement benefits cost were as follows ($ in millions):

                                       Years Ending December 31,
                                       -------------------------
                                       1998      1997       1996
                                       ----      ----       ----
Service costs.....................     $ .2     $  .2     $   .1
Interest costs....................      1.3       1.4        1.4
Net amortization of excess gain...     (1.1)     (1.2)      (1.2)
                                       ----      ----       ----
Net periodic postretirement
  benefit costs...................     $ .4     $  .4     $   .3
                                       ====     =====     ======

         The weighted-average  annual assumed rate of increase in the per capita
cost of covered  benefits  (e.g.,  health  care cost trend rate) for the medical
plans is 9.0% for 1999 and is assumed to decrease gradually to 6.25% by 2002 and
remain at that  level  thereafter.  The health  care cost trend rate  assumption
normally has a significant  effect on the amounts  reported;  however,  the plan
limits  annual  inflation  for ICR's portion of such costs to 9.5% each year and
caps ICR's contribution at the actual 1999 level.  Therefore, an increase in the
assumed  health  care cost trend  rates by one  percentage  point  would have no
impact on ICR's accumulated  postretirement  benefit  obligation for the medical
plans at December 31, 1998, and no impact on the aggregate  total of the service
and interest cost components of net periodic  postretirement  benefit expense in
future years.  A one  percentage  point decrease in the assumed health care cost
trend rates  would have no impact on ICR's  accumulated  postretirement  benefit
obligation  at  December  31, 1998 and the impact on  aggregate  total of annual
service and interest  cost  components  of the periodic  postretirement  benefit
expense would not be material.

11.     Provision for Income Taxes

        The Provision for Income Taxes for  continuing  operations  consisted of
the following ($ in millions):


                                     Years Ended December 31,
                                     ------------------------
                                     1998     1997      1996
                                     ----     ----      ----
Current income tax:
  Federal.......................    $35.8     $27.1     $39.9
  State ........................      4.3       4.9       4.5
Deferred income taxes...........     31.2      39.9      31.5
                                     ----      ----      ----
Provision for income taxes......    $71.3     $70.1     $76.3
                                    =====     =====     =====

        The  effective  income tax rates for the years ended  December 31, 1998,
1997 1996, were 37%, 34% and 38%, respectively.

        At December 31, 1998, ICR had no Federal net operating  loss  carryovers
for tax or financial reporting purposes.

        In 1998  and  1996  tax  benefits  of $1.0  million  and  $1.8  million,
respectively,  were recorded to reflect the favorable resolution of prior-period
tax issues.  The items which gave rise to  differences  between the income taxes
provided for continuing operations in the Consolidated  Statements of Income and
income  taxes  computed  at  the  statutory  rate  are  summarized  below  ($ in
millions):

                                            Years Ended December 31,
                                            ------------------------
                                      1998           1997          1996
                                      ----           ----          ----
Expected tax expense computed
 at statutory rate...............  $67.2  35.0%  $72.2  35.0% $71.0  35.0%
Dividends received exclusion.....    (.1)    -     (.2)    -    (.1)    -
State income taxes, net
 of federal tax effect...........    5.4    2.8    5.5   3.0    5.9   3.0
Charitable contribution of
 property........................      -      -   (4.1) (2.0)     -     -
Favorable resolution of
 prior period tax issues.........   (1.0)   (.5)     -     -   (1.8) (1.0)
Costs associated with merger.....    4.1    2.1      -     -      -     -
Stock options exercised..........   (3.5)  (1.9)     -     -      -     -
Other items, net.................    (.8)   (.5)  (3.3)   (2)   1.3   1.0
                                     ---    ---   ----    --    ---   ---

Provision for income taxes.......  $71.3   37.0% $70.1  34.0% $76.3  38.0%
                                   =====   ====  =====  ====  =====  ====

        Temporary  differences between book and tax income arise because the tax
laws  require that  certain  items of income and expense be treated  differently
than under  generally  accepted  accounting  principles.  As a result,  the book
provisions  for taxes  differ from the actual  taxes  reported on the income tax
returns.  The net results of such  differences  are included in deferred  income
taxes in the Consolidated Balance Sheets.

         Deferred income taxes consisted of the following ($ in millions):

                                               December 31,
                                               ------------
                                           1998             1997
                                           ----             ----
Deferred tax assets     .............   $  62.7          $  66.8
Less: Valuation allowance............      (1.5)            (1.5)
                                           ----             ----
Deferred tax assets,
    net of valuation allowance.......      61.2             65.3
Deferred tax liabilities.............    (376.8)          (350.7)
                                         ------           ------
Deferred income taxes   .............   $(315.6)         $(285.4)
                                        =======          =======

        The  valuation  allowance  is  comprised of the portion of state tax net
operating  loss  carryforwards  expected to expire  before they are utilized and
non-deductible  expenses  incurred  with the  previous  merger  of  wholly-owned
subsidiaries.

        Major types of deferred  tax assets are:  reserves  not yet deducted for
tax purposes ($53.0 million) and safe harbor leases ($9.1 million).  Major types
of deferred tax liabilities are: accelerated depreciation ($353.6 million), land
basis differences ($10.5 million) and debt marked to market ($2.1 million).

        The Company and its subsidiaries  have a tax sharing  agreement  whereby
each  subsidiary's  federal  income  tax and state  income tax  liabilities  are
determined on a separate  company income tax basis as if it were not a member of
the Company's  consolidated  group,  with no benefit for net operating losses or
credit carryovers from prior years.

12.     Equity and Restrictions on Dividends

        ICR paid dividends to the  Corporation  of $50.3 million in 1998,  $62.9
million in 1997 and $108.9  million in 1996.  Included in the 1996  dividends to
the  Corporation  is the March 1996  transfer by ICR of its ownership in Chicago
Intermodal  Company  ("CIC") via a dividend of CIC stock.  The book value of the
CIC investment  was $5.7 million.  Certain  covenants of ICR's Revolver  require
specific levels of tangible net worth but not a specific  dividend  restriction.
At December 31, 1998,  ICR's  tangible net worth  exceeded the required level by
$42.1 million.

13.      Stock Based Compensation

         Until the Merger,  the Corporation  made annual grants of stock options
to employees of ICR under the 1990 Long-Term Incentive Plan. Grants to employees
were at the closing  market  price on date of grant,  vested  ratably  over four
years and expired 10 years from grant date.

         Additionally,  the  Corporation  sponsored two employee  stock purchase
plans.  One  plan,  open  to  all  employees,   used  payroll   deductions  from
participating  employees  to acquire on the open  market  shares of  Corporation
common stock. The other plan, open to management employees only, used funds from
payroll deductions of participants to acquire on the open market shares at a 15%
discount.  Participants  in the  discounted  plan  were  required  to repay  the
discount if they left the  Corporation  within two years of purchase.  Repayment
was not required in the event of retirement,  disability or change of control in
the Corporation.

         ICR accounted for the option plan and the two stock  purchase  plans in
accordance with APB Opinion 25 under which no  compensation  cost was recognized
upon grant, vesting or exercise. ICR did reduce Stockholder's Equity and charged
expense  $.1  million,  $.2  million  and $.8  million  in 1998,  1997 and 1996,
respectively,  for the vesting of  restricted  stock  issued in 1994.  The final
segment of the restricted stock vested in 1998.

         Under the terms of the options  outstanding  at the time of the Merger,
all unvested options vested  immediately upon the CN's acquisition of 75% of the
outstanding common stock of the Corporation.

         Pursuant to the Merger  Agreement  all options  outstanding  on June 4,
1998,  ("Merger  Date") were converted into CN options.  The expiration date was
not changed. The number of options and related exercise price were adjusted such
that the value of the  Corporation  options prior to conversion  was the same as
the value of the resulting converted CN options.

         The following table summarizes changes in shares under options:

                                    Weighted  Weighted
                                     Average  Average Fair             Weighted
                                    Exercise  Value On   Exercisable   Exercise
                         Options      Price   Grant Date  At Year End    Price
                         -------      -----   ----------  -----------    -----

Outstanding 12-31-95    1,283,774     20.528               531,131     $19.886
Granted                   530,250     25.250   $  9.016
Exercised (a)              (4,125)    21.257
Forfeited (b)              (3,375)    22.389
Outstanding 12-31-96    1,806,524     21.909               961,105     $20.821
Granted                   476,050     34.125   $ 12.888
Exercised (c)            (277,872)    18.193
Forfeited                 (19,200)    24.713
                          -------     ------
Outstanding 12-31-97    1,985,502     25.331             1,248,872     $23.050
Granted                   552,590     38.688   $ 14.138
Exercised (d)            (406,762)    24.674
Converted (e)          (2,131,330)    28.919
Issued (e)              1,349,262     45.681
Exercised after Merger    (31,524)    38.580
Outstanding 12-31-98    1,317,738                        1,317,738     $45.851
                        =========                        =========     =======

(a)      Includes 3,375 pre-1995 option awards
(b)      Includes 1,125 pre-1995 option awards
(c)      Includes 232,498 pre-1995 option awards
(d)      Includes 136,478 pre-1995 option awards
(e)      Pursuant to the Merger Agreement

         The last date exercisable for options above is March 14, 2008.

        Had ICR adopted the compensation  cost  recognition  methods outlined in
SFAS No. 123, ICR's 1998,  1997 and 1996 net income would have been as follows -
on a pro forma basis - ($ in millions):

                   1998              1997                   1996
                   ----              ----                   ----
               As       Pro        As        Pro          As     Pro
            Reported   Forma    Reported    Forma    Reported    Forma
            --------   -----    --------    -----    --------    -----

Net income   $120.8   $113.5     $136.2     $134.0    $126.6     $125.4

         These pro forma  results  assume  that the 1998  revisions  to the plan
(described  above) had no impact on assumptions used by ICR in its Black-Scholes
model,  and that such  revisions  resulted in  recognition in 1998 of previously
unrecognized compensation expense.

         Because the SFAS No. 123 method of  accounting  has not been applied to
options  granted prior to January 1, 1995, the resulting pro forma  compensation
cost may not be representative of that to be expected in future years.

         All of the options  outstanding at December 31, 1998,  are  exercisable
with  exercise  prices  between  $26.197 and  $61.117,  with a weighted  average
exercise price of $45.851, and a weighted average remaining  contractual life of
7 years.

         The fair value of each option is  estimated on the grant date using the
Black-Scholes   option  pricing  models  with  the  following   weighted-average
assumptions:

                                1998             1997             1996
                                ----             ----             ----

Risk-free interest rate(s)      5.6%             6.7%             6.7%
Dividend yields                 2.4%             2.7%             3.2%
Days to expiration              3652             3652             3652
Volatility                    29.35%            30.18%            31.4%

14.      Contingencies, Commitments and Concentration of Risks

         ICR is  self-insured  for the first $5  million  of each  loss.  ICR is
covered for $245 million of liability  insurance per  occurrence,  subject to an
annual cap of $385 million in the  aggregate  for all losses.  This  coverage is
considered  by ICR's  management  to be adequate in light of ICR's safety record
and claims experience.

         ICR has guaranteed repayment of certain indebtedness of a jointly owned
company aggregating $7.8 million.  ICR's share of the guarantee is $1.0 million;
the remainder is the obligation of other unrelated owner companies.

         ICR is one of several defendants in a New Orleans class action in which
a jury has  returned a verdict  against  the ICR for $125  million  in  punitive
damages as a result of a tank car fire. The Louisiana  Supreme Court has vacated
the judgment for technical  reasons and remanded the case to the trial court for
further  proceedings.  On June 17, 1998, the trial court re-entered  judgment in
favor of the class and certified it for  interlocutory  appeal.  The case awaits
hearing in the trial court on  post-trial  motions.  While the final  outcome of
this  proceeding  cannot be determined,  in the opinion of management,  based on
present  information,  the  ultimate  resolution  of this  case  will not have a
material adverse effect on ICR's financial position, results of operations, cash
flow or liquidity.

         There are other various regulatory  proceedings,  claims and litigation
pending  against  ICR.  While the ultimate  amount of liability  that may result
cannot be  determined,  in the  opinion  of ICR's  management,  based on present
information, adequate provisions for liabilities have been recorded.

         Environmental  Contingencies.   ICR  is  aware  of  approximately  nine
contaminated  sites at which  it is  probably  liable  for some  portion  of any
required  clean up. Of these,  three involve  contamination  primarily by diesel
fuel that can be remediated without material cost. Five other sites are expected
to require more than $1 million in clean-up  costs. At four of these sites other
parties are  expected  to  contribute  the  majority  of the  remediation  costs
incurred.

         For all known sites of  environmental  contamination  where ICR loss or
liability is probable,  ICR has recorded an estimated liability at the time when
a  reasonable  estimate  of  remediation  cost and ICR  liability  can  first be
determined.  Adjustments  to initial  estimates are recorded as necessary  based
upon additional information developed in subsequent periods.  Estimates of ICR`s
potential   financial  exposure  for  environmental   claims  or  incidents  are
necessarily  imprecise  because of the  difficulty of determining in advance the
nature and extent of contamination,  the varying costs of alternative methods of
remediation,  the regulatory  clean-up standards which will be applied,  and the
appropriate  allocation of liability  among  multiple  responsible  parties.  At
December 31, 1998,  ICR estimated the probable range of its liability to be $7.2
million to $22.7  million,  and in accordance  with the provisions of SFAS No. 5
had a reserve of $7.2 million for  environmental  contingencies.  This amount is
not reduced for potential insurance recoveries or third-party contributions.

         The risk of incurring  environmental  liability in connection with both
past and current  activities  is inherent  in railroad  operations.  Decades-old
railroad  housekeeping  practices were not always  consistent with  contemporary
standards. Historically ICR leased substantial amounts of property to industrial
tenants,  and ICR  continues  to haul  hazardous  materials  that are subject to
occasional  accidental release.  Because the ultimate cost of known contaminated
sites cannot be  definitively  established and because  additional  contaminated
sites  yet  unknown  may be  discovered  or  future  operations  may  result  in
accidental releases,  no assurance can be given that ICR will not incur material
environmental  liabilities in the future.  However,  based on its assessments of
the facts and circumstances now known,  management believes that it has recorded
adequate reserves for known liabilities and does not expect future environmental
charges or expenditures, based on these known facts and circumstances, to have a
material adverse effect on ICR`s financial position, results of operations, cash
flow or liquidity.

15.      Disclosures about Fair Value of Financial Instruments

         The following  methods and  assumptions  were used to estimate the fair
value of each class of  financial  instruments  for which it is  practicable  to
estimate that value:

         Cash and Temporary Cash Investments.  The carrying amount  approximates
fair value because of the short  maturity of those  instruments.  Investments in
U.S.  corporate demand notes of $25.0 million and $25.4 million included in cash
and temporary cash  investments as of December 31, 1998 and 1997,  respectively,
have been classified and accounted for as held to maturity securities.

         Investments.  ICR has  investments  of $5.0  million  in 1998  and $5.2
million in 1997 for which there are no quoted market prices.  These  investments
are in joint railroad  facilities,  railroad  terminal  associations,  switching
railroads  and  other  transportation  companies.  For  these  investments,  the
carrying  amount  is a  reasonable  estimate  of  fair  value.  ICR's  remaining
investments ($7.9 million in 1998 and $6.9 million in 1997) are accounted for by
the equity method.

         Loans to Affiliates.  See Note 16

         Long-Term  Debt.  The fair value of ICR's  long-term  debt is estimated
based on the  quoted  market  prices  for the same or  similar  issues or on the
current rates offered to ICR for debt of the same remaining maturities.

         Derivative Financial Instruments.  The fair value of diesel fuel collar
agreements  is the  estimated  amount that ICR would receive or pay to terminate
the agreements as of year end, taking into account the current credit worthiness
of the agreement counterparties.

         The estimated fair values of ICR's financial instruments are as follows
($ in millions):

                                                  December 31,
                                                  ------------
                                               1998             1997
                                               ----             ----
                                        Carrying  Fair    Carrying    Fair
                                         Amount  Value    Amount      Value
                                         ------  -----    ------      -----

Cash and temporary cash investments..    $28.8    $28.8    $ 28.2    $ 28.2
Investments..........................      5.0      5.0       5.2       5.2
Fuel Hedge...........................        -     (2.1)        -       (.5)
Loans to affiliates - short-term.....        -        -       4.9       4.9
Loans to affiliates - long-term......    193.2    193.2     160.9     160.9
Debt.................................   (597.5)  (637.8)   (575.1)   (604.3)


<PAGE>



16.     Related Party Transactions and Intercompany Advances

        The Corporation and its subsidiaries  maximize the consolidated  group's
borrowing  power and  minimize  the  group's  interest  costs.  If an  affiliate
requires  funds for operations or capital  expenditures,  the lowest cost source
provides  the cash.  The  affiliate  that needs the funds pays  interest  at the
borrowed  rate with no mark up or add-on fees.  Borrowings  are due one year and
one day from the date repayment is requested but may be prepaid without penalty.

        The amounts outstanding at December 31, consisted of the following ($ in
millions):

                                                     1998               1997
                                                     ----               ----
Loans due from:
       -   IC Financial Services                       -                 1.4
       -   IC Leasing III                              -                 3.5
Total Short-Term Intercompany                          -              $  4.9

Advances due from:
           IC Corporation                         $ 94.6              $156.3
           IC RailMarine Terminal Company           98.6                  -
Loans due from IC Financial Services                   -                 4.6
Total Long-Term Intercompany                      $193.2              $160.9
                                                  ======              ======

       In 1997, the amount due from the Corporation  includes $39.8 million used
to fund construction  costs for IC RailMarine  Terminal Company, a subsidiary of
the  Corporation.  Amounts due from the Corporation  bear interest at prime rate
minus 2.3%. Amounts due from the IC RailMarine Terminal Company bear interest at
prime rate.

       ICR charged  affiliates  interest of $16.1  million and $11.6  million in
1998 and 1997, respectively.

       ICR leases 79 locomotives  and 1,825 freight cars from another  affiliate
of the  Corporation.  In 1998 and 1997,  lease expense  incurred with respect to
this equipment was $14.4 million and $14.7 million, respectively.

         ICR charges  another  affiliate of the  Corporation for inventory items
and maintenance of the affiliate's rolling stock. Beginning in 1997, ICR charges
the affiliate a flat fee for various  management  services,  such as payroll and
accounts payable  processing,  computer services and legal counsel.  The monthly
amount  charged  under this  arrangement  was $.2 million for the years 1998 and
1997. Charges between ICR and the affiliate are recorded in loans to affiliates.

17.    Selected Quarterly Financial Data - (Unaudited) ($ in millions):

                            First      Second      Third       Fourth
1998                       Quarter    Quarter     Quarter     Quarter
----                       -------    -------     -------     -------

Revenues ...................$163.0   $162.4       $161.4       $164.5
Operating income 1..........  45.1     59.4         56.1         46.7
Net income..................  29.0     35.3         30.9         25.6

1997

Revenues ...................$154.2   $147.9       $152.9       $167.5
Operating income  ..........  57.7     56.1         52.4         61.7
Net income..................  31.9     32.9         30.8         40.6

1996

Revenues ..................$162.6    $149.4       $150.8       $154.4
Operating income  ..........  57.8     52.3         54.9         54.5
Net income..................  30.2     29.5         30.2         36.7

1    Operating  income  for the  first  and  fourth  quarters  of 1998  were
     decreased  by $16.4  and  $12.0  million, respectively, relating to the
     Special Charge (See Note 2).



<PAGE>








                        ILLINOIS CENTRAL RAILROAD COMPANY
                                AND SUBSIDIARIES




                                   I N D E X


                                       T O

                          FINANCIAL STATEMENT SCHEDULES
                       SUBMITTED IN RESPONSE TO ITEM 14(a)





Schedules for the three years ended December 31, 1998:

         II-Valuation and qualifying accounts...........................F-26

Pursuant to Rule 5.04 of General  Rules of Regulation  S-X, all other  schedules
are omitted because they are not required or because the required information is
set forth in the financial statements or related notes thereto.








<PAGE>


                       ILLINOIS CENTRAL RAILROAD COMPANY
                                AND SUBSIDIARIES

             SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS ($ in
                                   millions)


Year Ended December 31, 1998

                                    Balance At  Additions  Payments Balance
                                    Beginning   Charged      And    At End
           Classification           Of Year   To Expense (Charges)  Of Year
           --------------           -------   --------------------  -------
Accrued redundancy reserve..........$ 28.5   $    2.1   $    3.7   $  26.9
Casualty and other reserves.......... 37.9        6.8        3.7      41.0
Environmental........................  9.1        1.3        3.2       7.2
Bad debt reserve.....................  0.9        1.9        2.1       0.7
Employment security agreements.......   -        12.0        2.6       9.4
Taxes................................  1.5         -          -        1.5
                                       ---                             ---
 Total..............................$ 77.9   $   24.1   $   15.3   $  86.7
                                    ======   ========   ========   =======


Year Ended December 31, 1997

                                    Balance At  Additions  Payments Balance
                                    Beginning   Charged      And    At End
           Classification           Of Year   To Expense (Charges)  Of Year
           --------------           -------   --------------------  -------
Accrued redundancy reserve..........$ 30.2   $    1.1   $    2.8   $  28.5
Casualty and other reserves.......... 43.7        7.1       12.9      37.9
Environmental........................ 17.1        2.1       10.1       9.1
Bad debt reserve.....................  1.3        1.6        2.0       0.9
Taxes................................  1.5         -          -        1.5
                                       ---                             ---
 Total..............................$ 93.8   $   11.9   $   27.8   $  77.9
                                    ======   ========   ========   =======


Year Ended December 31, 1996


                                    Balance At  Additions  Payments Balance
                                    Beginning   Charged      And    At End
           Classification           Of Year   To Expense (Charges)  Of Year
           --------------           -------   --------------------  -------
Accrued redundancy reserve..........$ 33.9   $    2.1   $    5.8   $  30.2
Casualty and other reserves.......... 55.7        8.8       20.8      43.7
Environmental........................ 12.9        1.9       (2.3)     17.1
Bad debt reserve.....................  2.0        1.8        2.5       1.3
Taxes................................  1.8         -         0.3       1.5
                                       ---      -----        ---       ---
 Total..............................$106.3   $   14.6   $   27.1   $  93.8
                                    ======   ========   ========   =======


<PAGE>



                        ILLINOIS CENTRAL RAILROAD COMPANY

                                AND SUBSIDIARIES

                                  EXHIBIT INDEX
    Exhibit                                                           Sequential
      No.                         Descriptions                         Page No.



3.1       Articles of  Incorporation of Illinois Central Railroad
          Company,  as amended.  (Incorporated  by  reference  to
          Exhibit 3.1 to the  Registration  Statement of Illinois
          Central  Railroad  Company  on  Form  S-1  dated  as of
          September 26, 1989. (SEC File No. 33-29269))

3.2       By-Laws  of  Illinois  Central  Railroad  Company,   as
          amended.  (Incorporated  by reference to Exhibit 3.2 to
          the Registration Statement of Illinois Central Railroad
          Company  on Form S-1 dated as of  September  26,  1989.
          (SEC File No. 33-29269))

3.3       Restated  Articles of Incorporation of Illinois Central
          Corporation.  (Incorporated by reference to Exhibit 3.1
          to  the  Current   Report  of  the   Illinois   Central
          Corporation on Form 8-K dated July 29, 1994.  (SEC File
          No. 1-10720))

3.4       By-Laws of Illinois  Central  Corporation,  as amended.
          (Incorporated  by  reference  to  Exhibit  3.4  to  the
          Registration  Statement of Illinois Central Corporation
          and Illinois Central Railroad Company on Form S-1 dated
          as of August  21,  1990.  (SEC File Nos.  33-36321  and
          33-36321-01))

3.5       Certificate   of   Retirement   of   Illinois   Central
          Corporation  (Incorporated  by reference to Exhibit 3.3
          to  the  Registration  Statement  of  Illinois  Central
          Corporation and Illinois  Central  Railroad  Company on
          Form S-1, as amended dated as of August 21, 1990.  (SEC
          File No.  33-40696  and  Post-Effective  Amendments  to
          Registration Statement Nos. 33-36321 and 33-36321-01))

3.6       By-Laws  of  Illinois  Central  Railroad  Company,   as
          amended. (Incorporated by reference to Exhibit 3 to the
          Quarterly  Report  of  the  Illinois  Central  Railroad
          Company  on Form 10-Q for the three  months  ended June
          30, 1997. (SEC File No. 1-07092))


*         Used  herein  to  identify   management   contracts  or
          compensation  plans or arrangements as required by Item
          14 of Form 10-K.


<PAGE>



4.1       Form of 14-1/8% Senior Subordinated Debenture Indenture
          dated  as  of   September   15,   1989   (the   "Senior
          Subordinated  Debenture  Indenture")  between  Illinois
          Central   Railroad  Company  and  United  States  Trust
          Company  of New York,  Trustee  (including  the form of
          14-1/8%  Senior  Subordinated   Debenture  included  as
          Exhibit  A  therein).  (Incorporated  by  reference  to
          Exhibit 4.1 to the  Registration  Statement of Illinois
          Central  Railroad Company on Form S-1, as amended dated
          as of September 26, 1989. (SEC File No. 33-29269))

4.3       Form of  Pledge  Agreement  dated as of  September  22,
          1989,  and  amended and  restated as of July 23,  1991,
          among Illinois Central  Corporation and the Banks named
          therein  that are or may become  parties to the Amended
          and Restated  Revolving  Credit and Term Loan Agreement
          dated  as  of  September  22,  1989,  and  amended  and
          restated  as of  July  23,  1991,  among  the  Illinois
          Central  Railroad  Company and the Banks named  therein
          and the Senior Note  Purchasers that are parties to the
          Note  Purchase  Agreement  dated as of July  23,  1991.
          (Incorporated  by  reference  to  Exhibit  4.4  to  the
          Quarterly  Report of Illinois  Central  Corporation  on
          Form  10-Q for the three  months  ended  September  30,
          1991. (SEC File No. 1-10720))

4.4       Form of Note  Purchase  Agreement  dated as of July 23,
          1991,  among  Illinois  Central  Railroad  Company,  as
          issuer, and Illinois Central Corporation, as guarantor,
          for 10.02% Guaranteed Senior Secured Series A Notes due
          1999 and for 10.4%  Guaranteed  Senior Secured Series B
          Notes due 2001 (including the Form of Series A Note and
          Series  B  Note  included  as  Exhibits  A-1  and  A-2,
          respectively,  therein).  (Incorporated by reference to
          Exhibit  4.3 to the  Quarterly  Report of the  Illinois
          Central  Railroad  Company  on Form  10-Q for the three
          months ended September 30, 1991. (SEC File No. 1-7092))


<PAGE>



4.10      Form  of  Commercial  Paper  Dealer  Agreement  between
          Illinois Central Railroad Company and Lehman Commercial
          Paper,   Inc.   dated   as  of   November   19,   1993.
          (Incorporated  by  reference  to  Exhibit  4.10  to the
          Annual Report on Form 10-K for the year ended  December
          31, 1993 for Illinois  Central  Railroad  Company filed
          March 16, 1994. (SEC File No. 1-7092))

4.11      Form of Issuing  and  Paying  Agency  Agreement  of the
          Illinois   Central  Railroad  Company  related  to  the
          Commercial   Paper  Program  between  Illinois  Central
          Railroad   Company  and  Bank  America  National  Trust
          Company  dated  as of  November  19,  1993,  (including
          Exhibit  A the Form of  Certificated  Commercial  Paper
          Note included  therein).  (Incorporated by reference to
          Exhibit 4.11 to the Annual  Report on Form 10-K for the
          year  ended  December  31,  1993 for  Illinois  Central
          Railroad  Company  filed March 16, 1994.  (SEC File No.
          1-7092))

4.15      Form of  Receivables  Purchase  Agreement  dated  as of
          March  29,  1994,  between  Illinois  Central  Railroad
          Company   and   Golden   Gate   Funding    Corporation.
          (Incorporated  by  reference  to  Exhibit  4.2  to  the
          Quarterly  Report  of  the  Illinois  Central  Railroad
          Company on Form 10-Q for the three  months  ended March
          31, 1994. (SEC File No. 1-7092))

4.17      Form  of Note  Purchase  Agreement  dated  as of May 1,
          1993, between Illinois Central Railroad Company and The
          First   National  Bank  of  Boston   (Incorporated   by
          reference to Exhibit 4.1 to the Registration  Statement
          of Illinois  Central Railroad Company on Form S-3. (SEC
          File No. 33-61410))

4.18      Form of Second  Amended and Restated  Revolving  Credit
          Agreement  dated  as of  April  2,  1993,  amended  and
          restated as of October 27, 1993 and further amended and
          restated as of November 1, 1994, among Illinois Central
          Railroad   Company   and  the   Banks   named   therein
          (Incorporated  by  reference  to  Exhibit  4.14  to the
          Annual Report of Illinois  Central  Railroad Company on
          Form 10-K for the year ended  December 31,  1994.  (SEC
          File No. 1-7092))

4.19      Form of  Lease  Agreement  dated  as of  July 1,  1994,
          between IC Leasing Corporation III and Illinois Central
          Railroad Company. (Incorporated by reference to Exhibit
          4.10 to the  Annual  Report  on Form  10-K for the year
          ended  December  31,  1994,  for the  Illinois  Central
          Railroad Company. (SEC File No. 1-7092))

4.20      Form of  Lease  Agreement  dated  as of  July  1,  1994
          between IC Leasing Corporation III and Waterloo Railway
          Company.  (Incorporated by reference to Exhibit 4.11 to
          the  Annual  Report  on Form  10-K for the  year  ended
          December 31, 1994,  for the Illinois  Central  Railroad
          Company. (SEC File No. 1-7092))

4.21      Form of  Options  Agreement  dated as of July 1,  1994,
          between IC Leasing Corporation III and Illinois Central
          Railroad Company. (Incorporated by reference to Exhibit
          4.12 to the  Annual  Report  on Form  10-K for the year
          ended  December  31,  1994,  for the  Illinois  Central
          Railroad Company. (SEC File No. 1-7092))

4.22      Form of  Options  Agreement  dated as of July 1,  1994,
          between IC Leasing Corporation III and Illinois Central
          Railroad Company. (Incorporated by reference to Exhibit
          4.13 to the  Annual  Report  on form  10-K for the year
          ended  December  31,  1994,  for the  Illinois  Central
          Railroad Company. (SEC File No. 1-7092))

4.23      Third Amended and Restated  Revolving  Credit Agreement
          between Illinois Central Railroad Company and the banks
          named  therein  dated as of April 2, 1993,  amended and
          restated as of October 27,  1993,  further  amended and
          restated as of November 1, 1994 and further amended and
          restated  as  of  April  28,  1995.   (Incorporated  by
          reference  to Exhibit  4.1 to the  quarterly  report of
          Illinois  Central Railroad Company in Form 10-Q for the
          three  months  ended  June  30,  1995.  (SEC  File  No.
          1-7092))


<PAGE>



4.24      Form of  Indenture  dated as of April 1,  1995  between
          Illinois   Central   Railroad  Company  and  The  First
          National Bank of Boston.  (Incorporated by reference to
          Exhibit 4.1 to  Registration  Statement  on Form S-3 of
          Illinois Central Railroad Company dated April 12, 1995.
          (SEC File No. 33-58547))

4.25      Form of Fixed Rate  Medium-Term Note dated as of May 1,
          1995  between  Illinois  Central  Railroad  Company and
          Lehman Brothers Inc.,  Salomon Brothers,  Inc and Smith
          Barney Inc.  (Incorporated  by reference to Exhibit 4.1
          to the  Current  Report of  Illinois  Central  Railroad
          Company  of Form 8-K dated May 2,  1995.  (SEC File No.
          1-7092))

4.26      Form of Floating Rate Medium-Term Notes dated as of May
          1, 1995 between  Illinois  Central Railroad Company and
          Lehman  Brothers  Inc,  Salomon  Brothers Inc and Smith
          Barney Inc.  (Incorporated  by reference to Exhibit 4.2
          to the  Current  Report of  Illinois  Central  Railroad
          Company  on Form 8-K dated May 2,  1995.  (SEC File No.
          1-7092))

4.27      Amendment  No.  1,  dated as of April  29,  1996 to the
          Third Amended and Restated  Revolving Credit Agreement,
          between Illinois Central Railroad Company and the First
          National Bank of Boston  initially dated as of April 2,
          1993,  amended  and  restated  November  1,  1994,  and
          further  amended  and  restated  as of April 28,  1995.
          (Incorporated   by   reference  to  Exhibit  4  to  the
          Quarterly  Report  on Form 10-Q for the  quarter  ended
          June  30,  1996,  for  the  Illinois  Central  Railroad
          Company  filed  on  August  13,  1996.  (SEC  File  No.
          1-7092))

4.29      Form of Indenture between the Illinois Central Railroad
          Company and The Chase Manhattan Bank, N.A., dated as of
          July 25,  1996.  (Incorporated  by reference to Exhibit
          4.1 of  Form  S-3  dated  as of May  15,  1996  for the
          Illinois  Central  Railroad  Company.   (SEC  File  No.
          1-7092))


<PAGE>



4.30      Form of Indenture between the Illinois Central Railroad
          Company and The Chase Manhattan Bank, N.A., dated as of
          May 1996.  (Incorporated by reference to Exhibit 4.2 of
          Form  S-3  dated as of May 15,  1996  for the  Illinois
          Central Railroad Company. (SEC File No. 1-7092))

4.31      Form of Indenture between the Illinois Central Railroad
          Company and The Chase Manhattan Bank, N.A., dated as of
          July 25,  1996.  (Incorporated  by reference to Exhibit
          4.1 of Form S-4 dated as of  December  18, 1996 for the
          Illinois  Central  Railroad  Company.   (SEC  File  No.
          1-7092))

4.32      Form  of  First  Supplemental   Indenture  between  the
          Illinois   Central   Railroad  Company  and  The  Chase
          Manhattan  Bank,  N.A.  dated as of December  17, 1996.
          (Incorporated  by  reference to Exhibit 4.2 of Form S-4
          dated as of December 18, 1996 for the Illinois  Central
          Railroad Company. (SEC File No. 1-7092))

4.33      Form of  Registration  Rights  Agreement among Illinois
          Central  Railroad  Company,  Lehman  Brothers  Inc. And
          Merrill  Lynch,  Pierce,  Fenner  & Smith  Incorporated
          dated  as  of  December  10,  1996.   (Incorporated  by
          reference  to  Exhibit  4.3 of  Form  S-4  dated  as of
          December  18, 1996 for the  Illinois  Central  Railroad
          Company. (SEC File No. 1-7092))

4.34      Form of  fixed  and  floating  rate  Medium-Term  Notes
          Series B for the  Illinois  Central  Railroad  Company.
          (Incorporated  by  reference  to  Exhibit  4.3  to  the
          current  report on Form 8-K  dated as of July 29,  1996
          for the Illinois Central Railroad Company (SEC File No.
          1-7092))

10.1      * Form of  supplemental  retirement  and savings  plan.
          (Incorporated  by  reference  to  Exhibit  10C  to  the
          Registration     Statement    of    Illinois    Central
          Transportation Co. on Form 10 filed on October 7, 1988,
          as amended. (SEC File No. 1-10085))


<PAGE>



10.3      * Form of the  Corporation  1990 Stock  Purchase  Plan.
          (Incorporated  by  reference  to  Exhibit  10.6  to the
          Registration  Statement of Illinois Central Corporation
          on Form 10 filed on January 5, 1990,  as amended.  (SEC
          File No. 1-10720))

10.4      * Form of the Corporation  Long-Term  Incentive  Option
          Plan.  (Incorporated  by reference to Exhibit  10.17 to
          the   Registration   Statement   of  Illinois   Central
          Corporation and Illinois  Central  Railroad  Company on
          Form S-1 dated as of September 26, 1989. (SEC File Nos.
          33-36321 and 33-36321-01))

10.5      *  Amendments  No.  1 and  No.  2 to the  IC  Long-Term
          Incentive Plan. (Incorporated by reference to the Proxy
          Statement of Illinois Central Corporation in connection
          with its 1992 Annual Meeting of Stockholders. (SEC File
          No. 1-10720))

10.6      Railroad  Locomotive Lease Agreement between IC Leasing
          Corporation  I and Illinois  Central  Railroad  Company
          dated  as  of  September  5,  1991.   (Incorporated  by
          reference to Exhibit 10.9 to the Annual  Report on Form
          10-K  for the  year  ended  December  31,  1991 for the
          Illinois Central Railroad Company filed March 12, 1992.
          (SEC File No. 1-7092))

10.7      Railroad  Locomotive Lease Agreement between IC Leasing
          Corporation II and Illinois  Central  Railroad  Company
          dated  as  of  January  14,  1993.   (Incorporated   by
          reference to Exhibit 10.6 to the Annual  Report on Form
          10-K for the year  ended  December  31,  1992,  for the
          Illinois  Central Railroad Company filed March 5, 1993.
          (SEC File No. 1-7092))

10.13*    Form of the Illinois Central Railroad Company Executive
          Performance   Compensation  Program   (Incorporated  by
          reference  to Exhibit 10.1 to the report on Form 8-K of
          the Illinois  Central Railroad Company dated as of July
          29, 1994. (SEC File No. 1-7092))


<PAGE>


10.14*    Form  of  the   Illinois   Central   Railroad   Company
          Supplemental Executive Retirement Plan (Incorporated by
          reference  to Exhibit 10.2 to the report on Form 8-K of
          the Illinois  Central Railroad Company dated as of July
          29, 1994. (SEC File No. 1-7092))

10.15*    Form of the Illinois Central Railroad Company Executive
          Deferred  Compensation Plan  (Incorporated by reference
          to  Exhibit  10.3  to the  report  on  Form  8-K of the
          Illinois  Central Railroad Company dated as of July 29,
          1994. (SEC File No. 1-7092))

10.16*    Form of Illinois Central  Railroad Company  Performance
          Compensation  Program  (Incorporated  by  reference  to
          Exhibit  10.4 to the report on Form 8-K of the Illinois
          Central  Railroad  Company  dated as of July 29,  1994.
          (SEC File No. 1-7092)

10.17*    Illinois  Central   Corporation   Management   Employee
          Discounted   Stock  Purchase  Plan.   (Incorporated  by
          reference to Exhibit 10.7 to the report of Form 10-K of
          Illinois   Central   Corporation  for  the  year  ended
          December 31, 1995. (SEC File No. 1-10720)

10.18     Form  of  Illinois   Central   Railroad  Company  Union
          Employees' Savings Plan.  (Incorporated by reference to
          Registration  Statement of Illinois Central Corporation
          on Form S-8  dated as of July 18,  1995.  (SEC File No.
          33-61095))

10.20*    Form of Illinois  Central  Railroad  Company  Incentive
          2000 Plan  (Incorporated  by reference to Exhibit 10 to
          the Quarterly Report on Form 10-Q for the quarter ended
          March  31,  1996,  for the  Illinois  Central  Railroad
          Company filed on May 10, 1996. (SEC File No. 1-7092))

21        Subsidiaries of Registrant                           (Included at E-9)

23        Consent of Arthur Andersen LLP                                     (A)

27        Financial Data Schedule

99        Provisions of the Private Securities  Litigation Reform
          Act of 1995

(A)       Included herein but not reproduced.


<PAGE>

                                                                     Exhibit 21


                ILLINOIS CENTRAL RAILROAD COMPANY
                  Subsidiaries of the Registrant
                     as of December 31, 1998

Name
Place of Incorporation

Subsidiaries that are 100% owned by Illinois Central
 Railroad Company:

Kensington and Eastern Railroad Company                          Illinois
Mississippi Valley Corporation                                   Delaware
Waterloo Railroad Company                                        Delaware



<PAGE>


                                                                     Exhibit 23



                                      CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

ILLINOIS CENTRAL RAILROAD COMPANY

     As independent public  accountants,  we hereby consent to the incorporation
by  reference of our report dated  January 12, 1999  (included in the  Company's
Annual Report on Form 10-K for the year ended December 31, 1998),  into Illinois
Central Railroad  Company's  previously  filed Form S-3 Registration  Statements
File Nos. 33-58547 and 333-03825.

                                                             ARTHUR ANDERSEN LLP





Chicago, Illinois
March 26, 1999

<PAGE>

                                                                    EXHIBIT 99




 PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

The  Private  Securities  Litigation  Reform  Act of 1995  provides  a new "safe
harbor"  for  forward-looking  statements  to  encourage  companies  to  provide
prospective information about their companies without fear of litigation so long
as those  statements are identified as  forward-looking  and are  accompanied by
meaningful cautionary statements  identifying important factors that could cause
actual results to differ  materially from those projected in the statement.  ICR
desires to take  advantage of the new "safe  harbor"  provisions  of the Private
Securities  Litigation Reform Act of 1995 and is filing this exhibit in order to
do so. The Act became law in late December 1995 and no official  interpretations
of the Act's provisions have been published.  Accordingly, ICR hereby identifies
the following  important factors that could cause ICR's actual financial results
to differ  materially  from any such results that might be projected,  forecast,
estimated or budgeted by ICR in forward-looking statements.

Grain  traffic,   in  total,   is  subject  to  the  supply   domestically   and
internationally. A key factor affecting supply is the weather. Grain traffic for
export is further  impacted by changes in world supply and the  agricultural and
trade policies of both U.S. and foreign governments.

Coal  traffic   depends  on  stockpiles   and  weather  in  utilities'   service
territories.  Deregulation  in the  utility  industry  may  shift  coal  traffic
patterns and cause pressure on rail rates.

Chemical traffic and paper shipments are sensitive to the economic cycles. Other
forest products are also sensitive to industrial  production and housing starts.
Chemical traffic could be affected if other railroads decided to build new track
into our current service territories.

Market  realities  for new  ventures,  such as the  terminals,  may differ  from
assumptions    because   of   changes   in   the    economy    and   timing   of
construction/expansion.

Because ICR's mainline track parallels the Mississippi  River, barge competition
is  formidable.  Barge  rates  fluctuate  partially  based on water  levels  and
shipping conditions on the river.

The  merger  of SP and UP could  result  in the loss of the  haulage  moves  ICR
performs for the SP.

As to expenses,  the most volatile are labor costs and fuel. Negotiating locally
with the labor  unions  increases  the risk of a strike  and a strike may not be
averted via  governmental  intervention  as is  frequently  the case in national
labor disputes in the transportation industry.

The variability of fuel prices can be offset via hedging but hedging also brings
risk.

Finally, mergers in the railroad industry could create traffic diversions if the
new entity  routes  traffic  around ICR's routes or if it uses its size to block
shippers' routing options or pricing.