<PAGE>
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                   FORM 10-K
                                        
(MARK ONE)

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

  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

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

       For the transition period from ________ to ________   Commission file
           number    1-6324
                  ---------

              THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY
             (Exact name of registrant as specified in its charter)

            Delaware                                      41-6034000
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)

      2650 Lou Menk Drive
       Fort Worth, Texas                                  76131-2830
(Address of principal executive offices)                  (Zip Code)

              Registrant's telephone number, including area code:
                                (817) 333-2000

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
          ---------------------------------------------------------- 

   The securities listed below are registered on the New York Stock Exchange.

                                    Title of each class
                                    -------------------
Burlington Northern Inc.            Northern Pacific Railway Company
(Now The Burlington Northern and    General Lien Railway and Land Grant 3% 
      Santa Fe Railway Company)        Bonds,due 2047
Consolidated Mortgage Bonds
                                    Great Northern Railway Company
  9.25%, Series H, due 2006             General Mortgage Bonds
  6.55%, Series K, due 2020             3 1/8%, Series O, due 2000
  3.80%, Series L, due 2020             2 5/8%, Series Q, due 2010
  3.20%, Series M, due 2045
  8.15%, Series N, due 2020  
  6.55%, Series O, due 2020
  8.15%, Series P, due 2020         St. Louis-San Francisco Railway Company
                                     Income Debentures, 5%, Series A, due 2006
<PAGE>
 
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_____
                                              -----          

          Class                    Outstanding
          -----                    -----------                         

Common Stock, par value $1.00
as of February 28, 1999*           1,000 shares

*The Burlington Northern and Santa Fe Railway Company is a wholly-owned
subsidiary of Burlington Northern Santa Fe Corporation (BNSF); as a result there
is no market data with respect to registrant's shares.

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

None

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

 

<PAGE>
 
 
TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                          PAGE
                                                                          ----
<S>                                                                       <C>
PART I

Items 1 and 2. Business and Properties                                       1

Item 3. Legal Proceedings                                                    9

PART II

Item 5. Market for Registrant's Common Equity and Related
 Stockholder Matters                                                        13

Item 7. Management's Narrative Analysis of Results of Operations            14

Item 7A. Quantitative and Qualitative Disclosures About Market Risk         18

Item 8. Financial Statements and Supplementary Data                         20

Item 9. Changes in and Disagreements with Accountants
 on Accounting and Financial Disclosure                                     20

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports
 on Form 8-K                                                                21

SIGNATURES                                                                  22

REPORT OF INDEPENDENT ACCOUNTANTS                                           F-1

CONSOLIDATED FINANCIAL STATEMENTS AND NOTES                                 F-2

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS                             F-18

EXHIBIT INDEX                                                               E-1
</TABLE>

                                       
<PAGE>
 
                                     PART I

ITEMS 1 AND 2. BUSINESS AND PROPERTIES

     The Burlington Northern and Santa Fe Railway Company (BNSF Railway),
formerly known as the Burlington Northern Railroad Company (BNRR), was
incorporated in the State of Delaware on January 13, 1961 and is a wholly-owned
subsidiary of Burlington Northern Santa Fe Corporation (BNSF). On September 22,
1995, the stockholders of Burlington Northern Inc. (BNI) and Santa Fe Pacific
Corporation (SFP) became the stockholders of BNSF pursuant to a business
combination of the two companies. To effect the combination, BNSF was formed to
act as the parent holding company of BNI and SFP. BNI and SFP each owned a
large, Class I railroad: the BNRR and The Atchison, Topeka and Santa Fe Railway
Company (ATSF), respectively.

     On December 30, 1996, BNI merged with and into SFP.  On December 31, 1996,
ATSF merged with and into BNRR, and BNRR changed its name to The Burlington
Northern and Santa Fe Railway Company. On January 2, 1998, BNSF Railway's
parent, SFP, merged with and into BNSF Railway.

     Through March 6, 1998, BNSF Railway also had an equity interest in Santa Fe
Pacific Pipeline Partners, L.P. and its operating subsidiary, which operated a
3,300-mile refined petroleum products pipeline system in six western and
southwestern states, substantially all of which interest has now been sold.  See
the discussion in Note 2 of the consolidated financial statements for further
information.

     BNSF Railway operates one of the largest railroad systems in the United
States.  At December 31, 1998, BNSF Railway had approximately 42,900 employees.

TRACK CONFIGURATION

     BNSF Railway operates over a railroad system consisting of, at December 31,
1998, approximately 34,000 route miles of track (excluding, among other things,
second main track), approximately 25,000 miles of which are owned route miles,
including easements, through 28 states and two Canadian provinces.
Approximately 7,700 route miles of BNSF Railway's system consist of trackage
rights which permit BNSF Railway to operate its trains with its crews over
another railroad's tracks.  BNSF Railway operates over other trackage through
lease or contractual arrangements.

     As of December 31, 1998, the total BNSF Railway system--including first,
second, third and fourth main tracks, yard tracks, and sidings--consisted of
approximately 51,000 operated miles of track, all of which were owned by or held
under easement by BNSF Railway except for approximately 8,500 miles operated
under trackage rights agreements with other parties. At December 31, 1998,
approximately 27,000 miles of BNSF Railway's track consisted of 112-pound per
yard or heavier rail, including approximately 18,800 track miles of 131-pound
per yard or heavier rail.

                                       1
<PAGE>
 
EQUIPMENT CONFIGURATION

     BNSF Railway owned or had under non-cancelable leases exceeding one year
the following units of railroad rolling stock as of the dates shown below:

<TABLE>
<CAPTION>
                                                                            At December 31,
                                                          ----------------------------------------------------
                                                               1998               1997               1996
                                                          --------------     --------------     --------------  
<S>                                                         <C>                <C>                <C>
 
Diesel Locomotives                                                 4,992              4,697              4,434
                                                          --------------     --------------     --------------
 
Freight Cars:
     Box--general purpose                                            948              1,042              1,082
     Box--specially equipped                                      10,295             10,533             10,719
     Open Hopper                                                  10,772             10,617             10,430
     Covered Hopper                                               44,643             43,145             44,112
     Gondola                                                      12,427             11,845             11,714
     Refrigerator                                                  6,476              6,606              6,817
     Autorack                                                      3,304              3,588              3,597
     Flat                                                          6,289              5,454              5,508
     Tank                                                            489                491                493
     Caboose                                                         351                389                451
     Other                                                           729                732                732
                                                          --------------     --------------     --------------
     Total Freight Cars                                           96,723             94,442             95,655
                                                          --------------     --------------     --------------
 
Domestic Containers                                                9,849             15,513             15,595
Trailers                                                           2,410                721                821
Domestic Chassis                                                   9,409              5,152              5,273
Company Service Cars                                               4,685              5,196              6,140
Commuter Passenger Cars                                              141                141                141
</TABLE>

     In addition to the containers, trailers, and chassis shown above, BNSF
Railway had under short-term leases 12,269 containers, 3,101 trailers, and
15,623 chassis at December 31, 1998. In addition to the owned and leased
locomotives identified above, BNSF Railway operated 99 freight locomotives under
power-purchase agreements as of December 31, 1998. The average age from date of
manufacture of the locomotive fleet at December 31, 1998 was 10.63 years; the
average age from date of manufacture or remanufacture of the freight car fleet
at December 31, 1998 was 20.78 years . These averages are not weighted to
reflect the greater capacities of the newer equipment.

CAPITAL EXPENDITURES AND MAINTENANCE

     BNSF Railway capital expenditures for the periods indicated were as
follows:

<TABLE>
<CAPTION>
                                                                             Year Ended December 31,              
                                                             ---------------------------------------------------- 
                                                                   1998              1997               1996      
                                                             --------------     --------------     -------------- 
                                                                                  (in millions)                   
     <S>                                                     <C>                <C>                <C>       
     Maintenance of Way                                                                                           
         Rail                                                         $  238             $  286             $  188
         Ties                                                            220                230                191
         Surfacing                                                       136                124                130
         Other                                                           323                334                345
                                                              --------------     --------------     --------------
            Total Maintenance of Way                                     917                974                854
     Equipment                                                           583                572                544
     Terminal and Line Expansion                                         488                428                439
     Other                                                               159                208                445
                                                              --------------     --------------     --------------
     Total Capital Expenditures                                        2,147              2,182              2,282
     Less Non-Cash Capital Expenditures(1)                                 -                  -                 48
                                                              --------------     --------------     --------------
     Net Cash Capital Expenditures                                    $2,147             $2,182             $2,234
                                                              ==============     ==============     ============== 
</TABLE>
------------------
 (1)  Consists primarily of directly financed equipment acquisitions.

                                       2
<PAGE>

     The above table does not include expenditures for equipment financed
through operating leases (principally, locomotives and rolling stock). BNSF
Railway's planned 1999 cash capital expenditures approximate $2.1 billion,
although up to $150 million primarily related to expansion projects may be
deferred. Approximately $1.3 billion of total expenditures will be for
maintenance of business activities, primarily consisting of expenditures to
maintain BNSF Railway's track, signals, bridges and tunnels, and to overhaul
locomotives and freight cars. The remainder will be spent on terminal and line
expansions and other projects, and on approximately $335 million of new
locomotive acquisitions. In addition to the capital expenditures on new
locomotives, BNSF Railway expects to acquire approximately $400 million of new
locomotives through long-term operating leases in 1999.

     As of December 31, 1998, General Electric Company, the Electro-Motive
Division of General Motors Corporation, and Boise Locomotive Corporation
performed locomotive maintenance and overhauls for BNSF Railway under various
maintenance agreements that covered approximately 2,300 locomotives. These
agreements require the work to be done at BNSF Railway's facilities using BNSF
Railway employees.

     The majority of maintenance of way expenditures for track have been for
rail and tie refurbishment and track resurfacing. The extent of the BNSF Railway
track maintenance program is depicted in the following table:

<TABLE>
<CAPTION>
                                                                     Year Ended December 31,             
                                                        -------------------------------------------------
                                                            1998               1997              1996    
                                                        -----------        -----------        -----------
          <S>                                           <C>                <C>                <C>        
          Track miles of rail laid (1)                        1,029              1,035              1,139
          Cross ties inserted (thousands) (1)                 2,440              2,941              3,768
          Track resurfaced (miles) (1)                       12,383             12,430             12,033 
</TABLE>
[FN] 
          (1) Includes expenditures for both maintenance of existing route
              system and expansion projects. These expenditures are primarily
              capitalized.
</FN> 
     BNSF Railway's planned 1999 track maintenance of way program, together with
expansion projects, calls for the installation of approximately 800 track miles
of rail, the replacement of about 2.4 million ties and the resurfacing of
approximately 12,500 miles of track.

PROPERTY AND FACILITIES

     BNSF Railway operates facilities and equipment to maintain its track,
locomotives and freight cars. It also owns or leases other equipment to support
rail operations, such as highway trailers, containers and vehicles. Support
facilities for rail operations include yards and terminals throughout its rail
network, system locomotive shops to perform locomotive servicing and
maintenance, a centralized network operations center for train dispatching and
network operations monitoring and management in Fort Worth, Texas, computers,
telecommunications equipment, signal systems, and other support systems.
Transfer facilities are maintained for rail-to-rail as well as intermodal
transfer of containers, trailers and other freight traffic.  These facilities
include 38 major intermodal hubs located across the system and eleven intermodal
hub centers off-line used in connection with haulage agreements with other
railroads.  BNSF Railway's largest intermodal facilities in terms of 1998 volume
are:
 
<TABLE>
<CAPTION>
          Intermodal Facilities                              Units  
          --------------------------------                  --------
          <S>                                               <C>     
          Hobart Yard (Los Angeles)                          937,000
          Corwith Yard (Chicago)                             728,000
          Willow Springs                                     637,000
          Chicago Hub Center                                 426,000
          Alliance                                           377,000
          San Bernardino                                     302,000
          Seattle International Gateway (SIG)                292,000 
</TABLE>

                                       3
<PAGE>

     BNSF Railway owns 27 automotive distribution facilities where automobiles
are loaded or unloaded from multi-level rail cars and serves eight port
facilities in the United States and Canada.

     BNSF Railway's largest freight car classification yards based on the
average daily number of cars processed (excluding cars that do not change trains
at the terminal and intermodal and coal cars) are shown below:

<TABLE>
<CAPTION>
                                                           Daily Average 
          Classification Yard                              Cars Processed
          ----------------------                           -------------- 
          <S>                                              <C>             
          Argentine Yard (Kansas)                               1,690    
          Galesburg (Illinois)                                  1,450    
          Northtown (Minnesota)                                 1,400    
          Memphis (Tennessee)                                   1,200    
          Barstow (California)                                  1,170    
          Pasco (Washington)                                    1,080     
</TABLE>
                                        
     Certain BNSF Railway properties and other assets are subject to liens
securing, as of December 31, 1998, $498 million of mortgage debt. Certain
locomotives and rolling stock of BNSF Railway are subject to equipment
obligations, as referred to in Note 8 to the consolidated financial statements.

EMPLOYEES AND LABOR RELATIONS

     Productivity as measured by revenue ton miles per employee has risen
steadily in the last three years, while compensation and benefits expense per
revenue ton mile decreased from 1997 to 1998 and increased from 1996 to 1997, as
shown in the table below.
 
<TABLE>
<CAPTION>
                                                                                       Year Ended December 31,
                                                                          ----------------------------------------------
                                                                              1998              1997              1996
                                                                          ----------         ----------        ---------
<S>                                                                        <C>               <C>               <C>
Thousand revenue ton-miles divided by average number of employees            10,576             9,769             9,398
Compensation and benefits expense per thousand revenue ton-miles            $  6.00            $ 6.30            $ 6.23
</TABLE>

     Approximately 88 percent of BNSF Railway employees are union-represented.
They work under collective bargaining agreements with 13 different labor
organizations. The collective bargaining agreements reached in 1996 and 1997 as
a result of industry-wide and certain local labor contract negotiations will
remain in effect through at least December 31, 1999 and until new agreements are
reached or the Railway Labor Act's procedures (which include mediation, cooling-
off periods, and the possibility of Presidential intervention) are exhausted.

     Railroad industry personnel are covered by the Railroad Retirement System
instead of Social Security. BNSF Railway's contributions under the Railroad
Retirement System are approximately triple those in industries covered by Social
Security.

     Railroad industry personnel are also covered by the Federal Employers'
Liability Act (FELA) rather than by state workers' compensation systems. FELA is
a fault-based system, with compensation for injuries settled by negotiation and
litigation, not subject to specific statutory limitations on the amount of
recovery. By contrast, most other industries are covered under state
administered no-fault plans with standard compensation schedules. BNSF Railway
believes it has adequate recorded liabilities for its FELA claims. However, the
ultimate costs of these FELA claims are uncertain and the actual costs could be
significantly higher than anticipated.

BUSINESS MIX

     In serving the Midwest, Pacific Northwest and the Western, Southwestern,
and Southeastern regions and ports of the country, BNSF Railway transports,
through one operating transportation services segment, a range of commodities
derived from manufacturing, agricultural, and natural resource industries.
Accordingly, its financial performance is influenced by, among other things,
general and industry economic conditions at the international, national, and
regional levels.

                                       4
<PAGE>

     Major markets served directly by BNSF Railway include Albuquerque,
Amarillo, Billings, Birmingham, Cheyenne, Chicago, Corpus Christi, Dallas,
Denver, Des Moines, Duluth/Superior, El Paso, Fargo/Moorhead, Fort Worth,
Galveston, Houston, Kansas City, Lincoln, Little Rock, Los Angeles, Memphis,
Mobile, New Orleans, Oklahoma City, Omaha, Phoenix, Portland, Reno, Salt Lake
City, San Antonio, the San Francisco Bay area, St. Louis, St. Paul/Minneapolis,
Seattle, Spokane, Springfield (Missouri), Tacoma, Tulsa, Wichita, Vancouver
(British Columbia), and Winnipeg (Manitoba). Other major cities are served
through Intermodal Market Extension terminals located at various off-line
points. Major ports served include Galveston, Houston, Long Beach, Los Angeles,
New Orleans, Mobile, Portland, Richmond (Oakland), San Diego, Seattle,
Duluth/Superior, Tacoma and Vancouver (British Columbia). Canadian traffic is
accessed through border crossings in Minnesota, North Dakota, Montana, and
Washington. BNSF Railway also accesses the Mexican market through the United
States/Mexico crossings at Brownsville, Eagle Pass and El Paso, Texas
and San Diego, California and, through an agreement with the Texas Mexican
Railway Company, reaches Laredo, Texas, a major border crossing point.

     In 1998, approximately 28 percent of revenues were derived from Intermodal
traffic and approximately 25 percent were derived from the transportation of
Coal. About 12 percent of 1998 revenues reflected the transportation of
Agricultural Commodities, with the balance largely accounted for by the
Chemicals, Metals and Minerals, Forest Products, Consumer Goods, and Automotive
business groups.

     Intermodal. The Intermodal freight business consists of the hauling of
freight containers or truck trailers by combinations of water, rail, or motor
carriers. The intermodal business is highly service-driven, and in many cases
motor carriers and railroads work jointly to provide intermodal service.

     Intermodal 1998 results include revenue from four types of business:

     . Direct Marketing. Direct marketing efforts resulted in approximately 33
percent of total intermodal revenue. These center around traffic contracted from
United Parcel Service and the United States Postal Service, and service for
nationwide LTL (Less-Than-Truckload) carriers including Yellow Freight, Roadway
Express, and Consolidated Freightways.

     . International. International business consists primarily of traffic from
steamship companies and accounted for approximately 29 percent of intermodal
revenues.

     . Intermodal Marketing Companies. Approximately 22 percent of total
intermodal revenue was generated through intermodal marketing companies,
primarily shipper agents and consolidators.

     . Truckload. Truckload traffic represented approximately 16 percent of
total intermodal revenue. The joint service arrangement with J.B. Hunt, referred
to as Quantum, represented the largest truckload component, while Schneider
National was the next largest.

     Coal. Based on carloadings and tons hauled, BNSF Railway is the largest
transporter of western low-sulfur coal in the United States. Approximately 90
percent of BNSF Railway's coal traffic originated in the Powder River Basin of
Wyoming and Montana during the three years ended December 31, 1998. These coal
shipments were destined for coal-fired electric generating stations located
primarily in the North Central, South Central and Mountain regions of the United
States.

     BNSF Railway also transports increasing amounts of low-sulfur coal from the
Powder River Basin for delivery to markets in the eastern and southeastern
portion of the United States. The low-sulfur coal from the Powder River Basin is
abundant, inexpensive to mine, clean-burning, and has a low delivered-cost to
power plants. Because the Clean Air Act of 1990 requires power plants to reduce
emissions either by burning coal with a lower sulfur content or by installing
expensive scrubbing units by the year 2000, there are opportunities for
increased shipments of this low-sulfur coal.  Also, deregulation in the electric
utility industry is expected to cause utilities to seek lower cost fuel sources
and boost demand for Powder River Basin coal.

     Other coal shipments originate principally in Colorado, Illinois, New
Mexico, and North Dakota and are moved to electrical generating stations and
industrial plants in the Mountain and North Central regions.

                                       5
<PAGE>
 
     Agricultural Commodities. Agricultural Commodities include barley, corn,
wheat, soybeans, oils, feeds, flour and mill products, specialty grains, malts,
and milo. The BNSF Railway system is strategically located to serve the grain-
producing regions of the Midwest and Great Plains where BNSF Railway serves most
major terminal, storage, feeding and food-processing locations. Additionally,
BNSF Railway has access to major export markets in the Pacific Northwest,
western Great Lakes, and Texas Gulf regions, and in Mexico.

     Chemicals. The Chemicals business is comprised of fertilizer, petroleum and
chemical commodities. Chemicals and plastics resins are transported for
industrial and agricultural use. Industrial chemicals and plastics resins are
used by the automotive, housing, and packaging industries, as well as for
feedstocks to produce other chemical and plastic products.  Access to
significant additional chemicals producers along the Louisiana and Texas Gulf
Coasts, and in the Central Corridor area in Utah and Nevada, was gained as a
result of the agreement and conditions resulting from the merger of the Union
Pacific and Southern Pacific railroads. Agricultural minerals include sulphur
that generally moves to the Gulf Coast and from there via vessels to Florida and
overseas markets for use in making phosphatic fertilizers. Potash is transported
to domestic markets and to export points for markets in Canada, Mexico, and
overseas.

     Metals and Minerals. The Metals and Minerals business serves virtually all
of the commodities included in or resulting from the production of steel.
Taconite, an iron ore derivative produced in northern Minnesota, scrap steel,
and coal coke are BNSF Railway's primary input products, while finished steel
products range from structural beams and steel coils to wire and nails. BNSF
Railway also hauls both ferrous and non-ferrous products including recyclable
metals. BNSF Railway links the integrated steel mills in the East with
fabricators in the West and Southwest. Service is also provided to various mini-
mills in the Southwest that produce rebar, beams, and coiled rod to the
construction industry. Various non-ferrous products such as copper, lead, and
aluminum are transported for the beverage, automotive, and telecommunications
industries. Commodities in the Metals and Minerals group also include clays,
sands, cements, aggregates, sodium compounds and other industrial minerals. Both
the oil and the construction industries are served. Industrial minerals include
various mined and processed commodities such as cement and aggregates
(construction sand, gravel and crushed stone) that generally move to domestic
markets for use in general construction and public work projects, including
highways. Borates and clays move to domestic points as well as to export markets
primarily through West Coast ports. Sodium compounds, primarily soda ash, is
moved to domestic markets for use in the manufacturing of glass and other
industrial products. Sand is utilized in the manufacturing of glass and for use
in foundry and oil drilling applications.

     Forest Products. The primary commodities in Forest Products are lumber,
plywood, oriented strand board, paper products, pulpmill feedstock, and wood
pulp. Based on carloadings and tonnage hauled, BNSF Railway is the largest rail
transporter of forest products in the United States. Commodity origins are
primarily from the Pacific Northwest, upper Midwest, and the Southeast for
shipment mainly into domestic markets. Industries served include construction,
furniture, photography, publishing, newspaper, and industrial packaging.

     Consumer Goods. Beverages, canned goods, and perishables are the principal
food commodities moved by BNSF Railway. Other consumer goods handled include
sugars and sweeteners, cotton, salt, rubber and tires, machinery, aircraft
parts, military and miscellaneous boxcar shipments. Shipments of waste, ranging
from municipal waste to contaminated soil, are transported to landfills and
reclamation centers across the country.

     Automotive. The Automotive group is responsible for both assembled motor
vehicles and shipments of vehicle parts to numerous destinations throughout the
Midwest, Southwest, West and Pacific Northwest.

                                       6
<PAGE>
 
     Freight Statistics. The following tables set forth certain freight
statistics relating to rail operations for the periods indicated. Certain
amounts have been reclassified to reflect changes in the business groups for
years prior to 1998 and to conform to current year presentation.

<TABLE> 
<CAPTION> 
                                                                Year Ended December 31,     
                                                            --------------------------------
                                                              1998         1997       1996  
                                                            --------     --------   --------
          <S>                                               <C>          <C>        <C>     
          Revenue ton-miles (millions)                       469,045      424,588    411,059 
          Freight revenue per thousand revenue ton-miles      $19.02       $19.71     $19.63
          Average haul per ton (miles)                           970          935        875

          REVENUES (in millions)

          Intermodal                                          $2,469       $2,282     $2,039
          Coal                                                 2,239        1,972      1,973
          Agricultural Commodities                             1,077        1,087      1,171
          Chemicals                                              841          812        782
          Metals and Minerals                                    757          731        693
          Forest Products                                        598          564        548
          Consumer Goods                                         553          497        468
          Automotive                                             388          422        396
                                                              ------       ------     ------ 
          Total Freight Revenue                                8,922        8,367      8,070
          Other Revenue                                           14           (1)        38
                                                              ------       ------     ------
          Total Revenues                                      $8,936       $8,366     $8,108
                                                              ======       ======     ======
                                                                                    
          CARS/UNITS (in thousands)                                                           
                                                                                    
          Intermodal                                           3,126       2,854      2,570
          Coal                                                 2,078       1,862      1,854
          Agricultural Commodities                               581         577        587
          Chemicals                                              504         482        460
          Metals and Minerals                                    660         622        628
          Forest Products                                        344         335        334
          Consumer Goods                                         365         349        308
          Automotive                                             226         264        251
                                                              ------      ------     ------
          Total Cars/units                                     7,884       7,345      6,992
                                                              ======      ======     ======
                                                                                      
          AVERAGE REVENUE PER CAR/UNIT                                                        
                                                                                    
          Intermodal                                          $  790       $  800     $  793
          Coal                                                 1,077        1,059      1,064
          Agricultural Commodities                             1,854        1,884      1,995
          Chemicals                                            1,669        1,685      1,700
          Metals and Minerals                                  1,147        1,175      1,104
          Forest Products                                      1,738        1,684      1,641
          Consumer Goods                                       1,515        1,424      1,519
          Automotive                                           1,717        1,598      1,578
                                                              ------       ------     ------ 
          Average Revenue Per Car/Unit                        $1,132       $1,139     $1,154
                                                              ======       ======     ======
</TABLE> 

                                       7
<PAGE>

GOVERNMENT REGULATION AND LEGISLATION

     Rail operations are subject to the regulatory jurisdiction of the Surface
Transportation Board (STB) of the United States Department of Transportation
(DOT), the Federal Railroad Administration of DOT, the Occupational Safety and
Health Administration (OSHA), and state regulatory agencies. The STB, which is
the successor to the Interstate Commerce Commission (ICC), has jurisdiction over
certain rates, routes, and services, the extension, sale, or abandonment of rail
lines, and consolidation or merger with, or acquisition of control of, rail
common carriers. DOT and OSHA have jurisdiction under several federal statutes
over a number of safety and health aspects of rail operations. State agencies
regulate some aspects of rail operations with respect to health and safety in
areas not otherwise preempted by federal law.

     BNSF Railway's rail operations, as well as those of its competitors, are
subject to extensive federal, state and local environmental regulation. These
laws cover discharges to waters, air emissions, toxic substances, and the
generation, handling, storage, transportation, and disposal of waste and
hazardous materials. This regulation has the effect of increasing the cost and
liabilities associated with rail operations. Environmental risks are also
inherent in rail operations which frequently involve transporting chemicals and
other hazardous materials.

     The railroad industry, including BNSF Railway, is subject to future
requirements regulating air emissions from diesel locomotives. Final regulations
applicable to new and rebuilt locomotives were promulgated by the United States
Environmental Protection Agency (EPA) and became effective June 15, 1998. The
new standards will be phased in between 2000 and 2005. BNSF Railway has
evaluated compliance requirements and associated costs and believes the costs
will not be material in any given year. BNSF Railway has also entered into
agreements with the California State Air Resources Board and the EPA regarding a
program to reduce emissions in Southern California through accelerated
deployment of locomotives which comply with the federal standards.

     Many of BNSF Railway's land holdings are and have been used for industrial
or transportation-related purposes or leased to commercial or industrial
companies whose activities may have resulted in discharges onto the property. As
a result, BNSF Railway is now subject and will from time to time continue to be
subject to environmental cleanup and enforcement actions. In particular, the
federal Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA), also known as the "Superfund" law, generally imposes joint and several
liability for cleanup and enforcement costs, without regard to fault or the
legality of the original conduct, on current and former owners and operators of
a site. Accordingly, BNSF Railway may be responsible under CERCLA and other
federal and state statutes for all or part of the costs to clean up sites at
which certain substances may have been released by BNSF Railway, its current
lessees, former owners or lessees of properties, or other third parties. For
further discussion, reference is made to Note 12 of the consolidated financial
statements.

COMPETITION

     The business environment in which BNSF Railway operates remains highly
competitive. Depending on the specific market, deregulated motor carriers, other
railroads and river barges exert pressure on various price and service levels.
The presence of advanced, high service truck lines with expedited delivery,
subsidized infrastructure and minimal empty mileage continues to affect the
market for non-bulk, time sensitive freight. The potential expansion of longer
combination vehicles could further encroach upon markets traditionally served by
railroads. In order to remain competitive, BNSF Railway and other railroads
continue to develop and implement operating efficiencies to improve
productivity.

                                       8
<PAGE>
 
     As railroads streamline, rationalize and otherwise enhance their
franchises, competition among rail carriers intensifies. BNSF Railway's primary
rail competitor in the western region of the United States is Union Pacific
Railroad Company (UP). Other Class I railroads and numerous regional railroads
and motor carriers also operate in parts of the same territories served by BNSF
Railway. Coal, one of BNSF Railway's primary commodities, continues to be
subject to various types of competitive pressures.

     In 1998, BNSF Railway and UP entered into an agreement to exchange half
interests in the two pieces of the former Southern Pacific Transportation
Company (SP) rail line between Houston and New Orleans which are separately
owned by the two railroads.  Both railroads now have access to all customers,
including chemical, steel, gas and other companies, along the entire line,
including on former SP branch lines.  The two railroads set up a joint regional
dispatching center at Spring, Texas in March 1998 for much of their Gulf Coast
train operations to better coordinate train flows in and through Houston.  In
February 1999, BNSF Railway and UP agreed to coordinate dispatching operations
covering Southern California, the Kansas City area, and the Powder River Basin
of Wyoming.

     The STB has approved the acquisition of Consolidated Rail Corporation
(Conrail) by CSX Corporation and Norfolk Southern Corporation which is expected
to be implemented in 1999. Conrail, CSX and Norfolk Southern operate the three
largest rail systems in the eastern United States. In March 1999, the STB also 
approved the acquisition of Illinois Central Corporation (IC) by Canadian
National Railway Company (CN). CN is Canada's largest railroad and reaches the
U.S. cities of Detroit and Chicago, while IC has operations extending from
Chicago to the Gulf of Mexico, and west through Iowa. The acquisitions of
Conrail and IC are not expected to have a material adverse competitive impact on
BNSF Railway.


ITEM 3. LEGAL PROCEEDINGS

     Set forth below is a description of certain legal proceedings involving
BNSF and its subsidiaries.


WHEAT AND BARLEY TRANSPORTATION RATES

     In September 1980, a class action lawsuit was filed against BNSF Railway in
United States District Court for the District of Montana (Montana District
Court) challenging the reasonableness of BNSF Railway's export wheat and barley
rates. The class consisted of Montana grain producers and elevators. The
plaintiffs sought a finding that BNSF Railway single car export wheat and barley
rates for shipments moving from Montana to the Pacific Northwest were
unreasonably high and requested damages in the amount of $64 million. In March
1981, the Montana District Court referred the rate reasonableness issue to the
ICC. Subsequently, the State of Montana filed a complaint at the ICC challenging
BNSF Railway's multiple car rates for Montana wheat and barley movements
occurring after October 1, 1980.

     The ICC issued a series of decisions in this case from 1988 to 1991. Under
these decisions, the ICC applied a revenue to variable cost test to the rates
and determined that BNSF Railway owed $9,685,918 in reparations plus interest.
In its last decision, dated November 26, 1991, the ICC found BNSF Railway's
total reparations exposure to be $16,559,012 through July 1, 1991. The ICC also
found that BNSF Railway's current rates were below a reasonable maximum and
vacated its earlier rate prescription order.

     BNSF Railway appealed to the United States Court of Appeals for the
District of Columbia Circuit (D.C. Circuit) those portions of the ICC's
decisions concerning the post-October 1, 1980 rate levels. BNSF Railway's
primary contention on appeal was that the ICC erred in using the revenue to
variable cost rate standard to judge the rates instead of Constrained Market
Pricing/Stand Alone Cost principles. The limited portions of decisions that
cover pre-October 1, 1980 rates were appealed to the Montana District Court.

                                       9
<PAGE>
 
     On March 24, 1992, the Montana District Court dismissed plaintiffs' case as
to all aspects other than those relating to pre-October 1, 1980 rates. On
February 9, 1993, the D.C. Circuit served its decision regarding the appeal of
the several ICC decisions in this case. The court held that the ICC did not
adequately justify its use of the revenue to variable cost standard as BNSF
Railway had argued and remanded the case to the ICC for further administrative
proceedings.

     On July 22, 1993, the ICC served an order in response to the D.C. Circuit's
February 9, 1993 decision. In its order, the ICC stated it would use the
Constrained Market Pricing/Stand-Alone Cost principles in assessing the
reasonableness of BNSF Railway wheat and barley rates moving from Montana to
Pacific Coast ports from 1978 forward. The ICC assigned the case to the Office
of Hearings to develop a procedural schedule. On October 28, 1994, plaintiffs
filed their opening evidence arguing that the revenue received by BNSF Railway
exceeded the stand alone costs of transporting that traffic and that BNSF
Railway rates were unreasonably high. BNSF Railway filed its evidence March 29,
1995, showing that the stand alone costs of transporting the traffic exceeded
the revenue derived by BNSF Railway on that traffic and that consequently, its
rates were not unreasonably high. The parties filed briefs simultaneously on
August 16, 1995.  In a decision served August 14, 1997, in McCarty Farms, Inc.
et al. v. Burlington Northern Inc., No. 37808, the STB, successor to the ICC,
ruled that the plaintiffs had failed to demonstrate that BNSF Railway rates
charged to transport export wheat and barley from Montana to West Coast ports
were unreasonable.  The STB dismissed the proceeding in its entirety.

     The plaintiffs filed petitions to review the STB's decision before the D.C.
Circuit and the Montana District Court.  In an October 20, 1998 decision,
McCarty Farms, Inc. et. al. v. Surface Transportation Board (No. 97-1632), the
D.C. Circuit affirmed the STB's decision in all respects for those claims as to
which it had jurisdiction (i.e., all claims except those relating to single-car
wheat shipments moving before September 12, 1980).  The plaintiffs' appeal of
the STB decision as to single-car wheat shipments moving before September 12,
1980 was dismissed by the Montana District Court on November 23, 1998.  This
matter is now considered terminated.

ENVIRONMENTAL PROCEEDINGS

     BNSF Railway had been advised that it was a target of a Grand Jury
investigation in the United States District Court for the Eastern District of
Missouri with respect to former railcar cleaning activities conducted by
independent contractors hired by BNSF Railway's predecessors at a rail siding
near Cherryville, Missouri. The proceeding related to alleged violations of
federal environmental protection statutes with respect to lead contamination at
several sites in the Cherryville area. In addition, BNSF Railway had received
personal injury claims from certain individuals formerly residing at or near
some of these sites. The Missouri Department of Natural Resources (DNR) also was
investigating the matter with respect to possible violations of state
environmental protection laws and BNSF Railway has been implementing remediation
plans developed in conjunction with DNR.

     On December 4, 1998, BNSF Railway entered a plea in federal district court
to one felony count under CERCLA for failure to immediately report to the
federal government a release of a reportable quantity of lead sulfide and one
misdemeanor count under the Clean Water Act for a negligent discharge of a
pollutant into a waterway. BNSF Railway agreed in the settlement to pay a fine
of $7 million and to make restitution payments to the State of Missouri of $3
million, and committed to spend $9 million, which includes amounts previously
paid, in remediation costs in connection with its ongoing remediation efforts.
In the plea agreement, the parties agreed that BNSF Railway had taken remedial
safety and procedural actions in an effort to reduce the likelihood of
recurrence of such matters.

                                       10
<PAGE>
 
     In addition, BNSF Railway has negotiated a settlement with the State of
Missouri that requires a payment of $900,000 in penalties and $500,000 in
natural resource damage. With the public comment period having ended January 26,
1999, BNSF Railway is executing the settlement agreement for entry by the court
as a consent decree. Implementation costs of the investigation and remediation
activities pursuant to the consent decree are not considered material. The
Company considers the federal Grand Jury matter to be terminated, and all
pending related matters, including personal injury claims received from certain
individuals residing at or near the area, are not considered material.

     On December 18, 1995, the State of Illinois filed a Complaint captioned
People of the State of Illinois v. Burlington Northern Railroad Company, Beazer
East, Inc. and Koppers Industries, Inc. (PCB No. 96-132) before the Illinois
Pollution Control Board against BNSF Railway, Beazer East, Inc. and Koppers
Industries, Inc. alleging violations of the Illinois Environmental Protection
Act with respect to a facility in Galesburg, Illinois. This facility is not
operated by BNSF Railway. The proceeding may result in monetary sanctions in
excess of $100,000. BNSF Railway and Beazer East, Inc. have made an offer to the
State of Illinois to settle this matter.


MERGER-RELATED LITIGATION

     Numerous complaints were filed arising out of the Agreement and Plan of
Merger dated June 29, 1994, as amended, between BNI and SFP. On June 30, 1994,
shortly after announcement of the proposed BNI-SFP merger (Merger), two
purported stockholder class action suits were filed in the Court of Chancery of
the State of Delaware (Miller v. Santa Fe Pacific Corporation, C.A. No. 13587;
Cosentino v. Santa Fe Pacific Corporation, C.A. No. 13588). On July 1, 1994, two
additional purported stockholder class action suits were filed in the Court of
Chancery of the State of Delaware (Fielding v. Santa Fe Pacific Corporation,
C.A. No. 13591; Wadsworth v. Santa Fe Pacific Corporation, C.A. No. 13597).

     The actions named as defendants SFP, the individual members of the SFP
Board of Directors, and BNI. In general, the actions variously alleged that
SFP's directors breached their fiduciary duties to the stockholders by agreeing
to the proposed merger for allegedly "grossly inadequate" consideration in light
of recent operating results of SFP, recent trading prices of SFP's common stock
and other alleged factors, by allegedly failing to take all necessary steps to
ensure that stockholders will receive the maximum value realizable for their
shares (including allegedly failing to actively pursue the acquisition of SFP by
other companies or conducting an adequate "market check"), and by allegedly
failing to disclose to stockholders the full extent of the future earnings
potential of SFP, as well as the current value of its assets. The Miller and
Fielding cases further alleged that the proposed Merger was unfairly timed and
structured and, if consummated, would allegedly unfairly deprive the
stockholders of standing to pursue certain pending stockholder derivative
litigation. Plaintiffs also alleged that BNI was responsible for aiding and
abetting the alleged breach of fiduciary duty committed by the SFP Board. The
actions sought certification of a class action on behalf of SFP's stockholders.
In addition, the actions sought injunctive relief against consummation of the
Merger and, in the event that the Merger was consummated, the rescission of the
Merger, an award of compensatory or rescissory damages and other damages,
including court costs and attorneys' fees, an accounting by defendants of all
profits realized by them as a result of the Merger, and various other forms of
relief.

     On October 6, 1994, shortly after Union Pacific Corporation (UPC) issued a
press release in which it announced a proposal for UPC to acquire SFP (the UPC
Proposal), plaintiffs in the four lawsuits described above filed in the Court of
Chancery of the State of Delaware a Consolidated Amended Complaint (Miller v.
Santa Fe Pacific Corporation, C.A. No. 13587). In their Consolidated Amended
Complaint, plaintiffs repeated the allegations contained in their earlier
lawsuits and further alleged that, in light of the UPC Proposal, SFP's directors
had breached their fiduciary duties by failing to fully inform themselves about
and to adequately explore available alternatives to the merger with BNI,
including the alternative of a merger transaction with UPC, and by failing to
fully inform themselves about the value of SFP. The Consolidated Amended
Complaint sought the same relief sought in plaintiffs' earlier lawsuits and, in
addition, requested that SFP's directors be ordered to explore alternative
transactions and to negotiate in good faith with all interested persons,
including UPC.

                                       11
<PAGE>
 
     Also, on October 6, 1994, five additional purported stockholder class
action suits relating to SFP's proposed participation in the Merger with BNI
were filed in the Court of Chancery of the State of Delaware (Weiss v. Santa Fe
Pacific Corporation, C.A. No. 13779; Lifshitz v. Krebs, C.A. No. 13780; Stein v.
Santa Fe Pacific Corporation, Lewis v. Santa Fe Pacific Corporation, C.A. No.
13783; Abramson v. Lindig, C.A. No. 13784). On October 7, 1994, three more
purported stockholder class action suits relating to SFP's proposed
participation in the Merger with BNI were filed in the Court of Chancery of the
State of Delaware (Graulich v. Santa Fe Pacific Corporation, C.A. No. 13786;
Anderson v. Santa Fe Pacific Corporation, C.A. No. 13787; Green v. Santa Fe
Pacific Corporation, C.A. No. 13788). All of these lawsuits named as defendants
SFP and the individual members of the SFP Board of Directors; the Lifshitz case
further named BNI as a defendant. In general, these actions variously alleged
that, in light of SFP's recent operating results and the UPC Proposal, SFP's
directors breached their fiduciary duties to stockholders by purportedly not
taking the necessary steps to ensure that SFP's stockholders would receive
"maximum value" for their shares of SFP stock, including purportedly refusing to
negotiate with UPC or to "seriously consider" the UPC Proposal and failing to
announce any active auction or open bidding procedures. The actions generally
sought relief that is materially identical to the relief sought in the Miller
case, and in addition sought entry of an order requiring SFP's directors to
immediately undertake an evaluation of SFP's worth as a merger/acquisition
candidate and to establish a process designed to obtain the highest possible
price for SFP, including taking steps to "effectively expose" SFP to the
marketplace in an effort to create an "active auction" in SFP. The Weiss case
further sought entry of an order enjoining SFP's directors from implementing any
poison pill or other device designed to thwart the UPC Proposal or any other
person's proposal to acquire SFP.

     The Anderson lawsuit was subsequently withdrawn. On October 14, 1994, the
Chancery Court entered an order consolidating the remaining 11 purported
stockholder class action suits under the heading In Re Santa Fe Pacific
Corporation Shareholder Litigation, C.A. No. 13587 (the Shareholder Litigation).

     On October 26, 1994, BNI filed a Motion to Dismiss the Consolidated and
Amended Complaint.

     On March 6, 1995, plaintiffs in the Shareholder Litigation filed a Revised
Second Consolidated and Amended Complaint, which superseded their previously
filed complaints. The Revised Second Consolidated and Amended Complaint
generally repeated many of the same allegations, and requested relief similar to
that requested in plaintiffs' earlier complaints. In addition, the Revised
Second Consolidated and Amended Complaint alleged that SFP's directors breached
their fiduciary duties: by proceeding with and completing the joint SFP-BNI
Tender Offer; by approving and implementing the Shareholder Rights Plan, which
purportedly resulted in a "premature ending" of the "bidding process" by
allegedly deterring and defeating UPC's acquisition overtures, exempting BNI
from its provisions, and "coercing" SFP stockholders to vote in favor of the
Merger; by approving the termination fee and expense reimbursement provisions of
the Merger Agreement by authorizing the stock repurchase provisions of the
Merger Agreement, which allegedly were designed to "lock-up" the Merger by
providing stockholders with an "illusory promise" that the Merger Agreement
exchange ratio would increase, while reserving SFP's right not to repurchase
such stock; and by purportedly failing to disclose all material facts necessary
for SFP's stockholders to evaluate in an informed manner and vote on the Merger,
including purportedly failing to fully disclose the risks that the ICC would not
approve the Merger and purportedly failing to fully disclose SFP's intentions
with respect to the repurchase of SFP stock, as permitted by the Merger
Agreement, as well as whether there will be a fair opportunity for all SFP
stockholders to "participate" in any SFP stock repurchases, and on what basis.
As additional relief to that requested in the earlier complaints, plaintiffs
requested injunctive and other relief: enjoining consummation of the Merger;
ordering SFP, SFP's directors, and BNI to make unspecified supplemental
disclosures to stockholders; requiring SFP to conduct a new vote on the Merger
subsequent to such disclosures; enjoining SFP from improperly or
discriminatorily implementing the Shareholder Rights Plan or any other
"defensive" tactic; ordering SFP's directors to take all appropriate steps to
enhance SFP's value and attractiveness as a merger or acquisition candidate,
including "effectively exposing" SFP to the marketplace by means of an active
auction on a "level playing field"; and declaring the termination fee and
expense reimbursement provisions of the Merger Agreement invalid and
unenforceable.

                                       12
<PAGE>
 
     On March 13, 1995, SFP and SFP's directors filed a motion to dismiss the
Shareholder Litigation on the grounds that the Plaintiffs failed to state a
cause of action upon which relief may be granted. BNI also filed a motion to
dismiss the Revised Second Consolidated and Amended Complaint. On May 31, 1995,
the Delaware Chancery Court rendered its decision granting the motion to dismiss
that was filed by SFP and SFP's directors on March 13, 1995 and the motion to
dismiss filed by BNI. The plaintiffs appealed the dismissal to the Delaware
Supreme Court.

     On November 22, 1995, the Delaware Supreme Court issued an opinion that
affirmed in part and reversed in part the May 31, 1995 decision of the Delaware
Chancery Court. The Delaware Supreme Court reversed the Chancery Court's
dismissal of plaintiffs' claims that, in taking the alleged "defensive" actions
identified in the Revised Second Consolidated and Amended Complaint, including
approval and implementation of the Shareholder Rights Plan, SFP's directors
violated their fiduciary duties to stockholders. The Delaware Supreme Court
affirmed the Chancery Court's dismissal of all other claims asserted by
plaintiffs in the litigation, including all claims against BNI.

     On December 11, 1995, the SFP defendants filed with the Delaware Chancery
Court a motion for summary judgment against plaintiffs' remaining claims in the
Shareholder Litigation, which motion is pending. On December 29, 1995, the SFP
defendants filed their Answer to plaintiffs' Revised Second Consolidated and
Amended Complaint.

     BNSF Railway believes this lawsuit is meritless and continues to oppose it
vigorously.

OTHER CLAIMS

     BNSF Railway and its subsidiaries also are parties to a number of other
legal actions and claims, various governmental proceedings and private civil
suits arising in the ordinary course of business, including those related to
environmental matters and personal injury claims. While the final outcome of
these and other legal actions referred to under Item 3 of this Report on Form 
10-K cannot be predicted with certainty, considering among other things the
meritorious legal defenses available, it is the opinion of BNSF Railway
management that none of these items, when finally resolved, will have a material
adverse effect on the annual results of operations, financial position or
liquidity of BNSF Railway, although an adverse resolution of a number of these
items could have a material adverse effect on the results of operations in a
particular quarter or fiscal year.

     Reference is made to Note 4 of the consolidated financial statements for
information concerning certain pending administrative appeals with the Internal
Revenue Service.

                                    PART II

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

     All of BNSF Railway's common stock is owned by BNSF and therefore is not
traded on any market.

                                       13
<PAGE>
 
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS

     The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes (beginning on page F-2).

RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997

     BNSF Railway recorded net income for 1998 of $1,206 million, compared with
net income of $929 million for 1997. The $277 million increase in net income is
primarily due to increased revenues in intermodal, coal and other sectors. More
moderate winter weather in the first quarter of 1998 relative to 1997, gains on
real estate portfolio sales and a first quarter 1998 $67 million pre-tax gain
($32 million after-tax) on the sale of substantially all of the Company's
interest in Santa Fe Pacific Pipeline Partners, L.P. also contributed to the
improvement. In addition, 1997 included a $90 million pre-tax special charge
($57 million after-tax) principally related to the consolidation of clerical
functions (see Note 9 of the consolidated financial statements).

     Excluding the 1998 gain on the pipelines sale and the 1997 special charge,
BNSF Railway's adjusted net income for 1998 was $1,174 million compared with
1997 adjusted net income of $986 million.
 
REVENUE TABLE

     The following table presents BNSF Railway's revenue information by
commodity for the years ended December 31, 1998 and 1997 and includes certain
reclassifications of prior year information to conform to current year
presentation.
 
<TABLE> 
<CAPTION> 
                                                                Average Revenue
                              Revenues         Cars/Units         Per Car/Unit
                          ----------------  -----------------  -----------------
                           1998      1997    1998       1997    1998       1997
                          ------    ------  ------     ------  ------     ------
<S>                       <C>       <C>     <C>        <C>     <C>        <C> 
Intermodel                $2,469    $2,282   3,126      2,854  $  790     $  800
Coal                       2,239     1,972   2,078      1,862   1,077      1,059
Agricultural Commodities   1,077     1,087     581        577   1,854      1,884
Chemicals                    841       812     504        482   1,669      1,685
Metals and Minerals          757       731     660        622   1,147      1,175
Forest Products              598       564     344        335   1,738      1,684
Consumer Goods               553       497     365        349   1,515      1,424
Automotive                   388       422     226        264   1,717      1,598
                          ------    ------  ------     ------  ------     ------
Total Freight Revenues     8,922     8,367   7,884      7,345  $1,132     $1,139
                                            ======     ======  ======     ======
Other Revenues                14        (1)  
                          ------    ------                                      
Total Revenues            $8,936    $8,366
                          ======    ======
</TABLE> 

REVENUES

     Total revenues for 1998 were $8,936 million, 7 percent or $570 million
higher than revenues of $8,366 million for 1997. The increase primarily reflects
increases in the intermodal, coal, chemicals, metals and minerals, forest
products, and consumer goods sectors partially offset by lower agricultural
commodities and automotive revenues. Average revenue per car/unit decreased
slightly in 1998 to $1,132 from $1,139 in 1997. During 1998, BNSF Railway's
share of the Western United States (U.S.) rail traffic market, based on
reporting to the Association of American Railroads (AAR), increased 2.9 points
to 44.3 percent. This gain was primarily the result of the trackage rights
gained from UP and operating problems experienced by the UP associated with
consolidating operations.

                                       14
<PAGE>
 
     Intermodal revenues of $2,469 million improved $187 million or 8 percent
compared with 1997 reflecting increases in the direct marketing, international
and truckload sectors. Direct marketing revenues benefited from increased units
shipped for UPS, less than truckload (LTL) customers and the United States
Postal Service. International revenues were up due to higher volume associated
with market share gains and new business established with Sealand, NYK, Maersk
and K-Line. Truckload revenues increased primarily due to volume growth from
J.B. Hunt and Schneider.

     Coal revenues of $2,239 million for 1998 increased $267 million or 14
percent primarily due to strong demand, volume gains associated with market
share improvements and favorable operating conditions as a result of a more
moderate winter in 1998.

     Agricultural commodities revenues of $1,077 million for 1998 were $10
million or 1 percent lower than 1997 due to poor Pacific Northwest (PNW) corn
and soybeans exports as well as weak barley exports. This was partially offset
by increased movements of minor oilseeds exports.

     Chemicals revenues of $841 million for 1998 were $29 million or 4 percent
higher than 1997. Increases in industrial chemicals, petroleum products and
plastics were partially offset by weak fertilizer markets.

     Metals and minerals revenues of $757 million for 1998 were $26 million or 4
percent higher than 1997 and were led primarily by strength in aluminum and non-
ferrous materials as well as volume increases in steel products, cement and rock
and specialty minerals.

     Forest products revenues of $598 million for 1998 were $34 million or 6
percent higher than 1997 primarily due to printing paper volume gains as 1997
was impacted by severe winter weather, increased Canadian newsprint imports and
pulpboard volume gains as a result of market share gains. Lumber volumes
increased due to higher levels of construction activity.

     Consumer goods revenues of $553 million for 1998 were $56 million or 11
percent higher than 1997 primarily due to volume increases in corn syrup traffic
to Mexico, Texas and California and increased sugar traffic as 1997 was impacted
by severe winter weather. Government and machinery revenues increased as a
result of increased Boeing traffic.

     Automotive revenues of $388 million for 1998 were $34 million or 8 percent
lower than 1997 reflecting decreases in volumes due to the loss of Ford's
Southwestern U.S. business and the impact of the 1998 General Motors strike,
partially offset by strong Honda loadings.

EXPENSES

     Total operating expenses for 1998 were $6,781 million, an increase of $181
million or 3 percent higher than 1997. As discussed above, 1997 included a $90
million ($57 million after-tax) special charge principally related to the
consolidation of clerical functions. Excluding the special charge, 1998
operating expenses were $271 million or 4 percent higher than 1997. The
operating ratio improved to 75.9 percent for 1998 compared with a 77.8 percent
adjusted operating ratio for 1997.

     Compensation and benefits expenses of $2,811 million were $138 million or 5
percent higher than 1997. Wages were higher due to volume related increases
primarily in train crew costs, wage increases for salaried and union employees,
and increased incentive compensation expense. These increases were partially
offset by lower labor costs associated with repairs to track and equipment as
1997 was unusually high because of severe winter weather.

                                       15
<PAGE>
 
     Purchased services expenses of $894 million for 1998 were $71 million or 9
percent higher than 1997 due principally to higher joint facility costs from
increased operations over trackage rights obtained from UP, increased equipment
maintenance costs, and higher ramping costs related to increased intermodal
volumes.

     Equipment rents expenses of $804 million were $16 million or 2 percent
lower than 1997. Improved equipment utilization and lower performance penalties
for grain cars were partially offset by volume driven increases for leased coal
cars and locomotives.

     Fuel expenses of $724 million for 1998 were $23 million or 3 percent lower
than 1997, as a result of a 6 cent or 8 percent decrease in the average all-in
cost per gallon of diesel fuel, partially offset by a 6 percent volume driven
increase in consumption from 1,092 million gallons to 1,155 million gallons. The
decrease in the average all-in cost per gallon of diesel fuel includes a 13 cent
decrease in the average purchase price, partially offset by current year losses
related to BNSF's fuel hedging program. Gross ton-miles per gallon of fuel
increased 4 percent reflecting a continuing favorable operating trend resulting
from new, fuel efficient locomotives and more fuel efficient operating
practices.

     Materials and other expenses of $717 million for 1998 were $42 million or 6
percent higher than 1997 principally due to lower credits from joint facility
billings due to lower UP traffic levels on BNSF Railway facilities. Other
expenses in 1997 also included more income from the sale of easements and higher
tax incentives from the State of Nebraska related to investment and employment
levels in the state.

     Interest expense with external and related parties increased by $12 million
to $293 million reflecting higher debt levels, including intercompany notes
payable, which increased to $5,056 million at December 31, 1998 from $4,921
million at December 31, 1997, partially offset by lower interest rates.

     Other income (expense), net was $72 million higher than 1997 primarily due
to the $67 million pre-tax gain on the pipeline partnership sale in the first
quarter of 1998 as discussed in Note 2 of the consolidated financial statements.
In addition, lower equity in earnings of pipelines due to the first quarter sale
of this investment was offset by gains on real estate portfolio sales.

YEAR 2000
BACKGROUND

     The Company has established a committee of managers and employees, chaired
by the Company's Chief Information Officer, to evaluate and manage the costs and
risks associated with becoming Year 2000 compliant and to minimize the impact of
the Year 2000 problem on the Company. Because many existing computer programs
and microprocessors recognize only the last two digits of years (and not the
century designation), they may be unable to accurately recognize and process
dates beyond December 31, 1999, and consequently may fail or produce erroneous
data. The Year 2000 problem may adversely affect the Company's operations and
financial performance if its remediation efforts are not successfully
implemented or if the railroads with which the Company connects, critical
customers or suppliers fail to become Year 2000 compliant.

STATE OF READINESS

     Year 2000 issues were reviewed in September 1995 following the approval of
the merger of the two railroads that now constitute BNSF Railway . The core
mainframe systems for the merged railroad were selected in part because they
were substantially Year 2000 compliant. These systems integrate all
transportation-related activities and computer systems that support BNSF
Railway's transportation network, including operations, customer information,
and revenue data. This merger-related information systems integration and
upgrade activity was substantially completed by July 1997.

                                       16
<PAGE>
 
     Following this systems integration, BNSF Railway adopted a three-phase
approach to Year 2000: Inventory and Assessment; Remediation; and Certification
Testing. Separate teams address technologies administered or maintained by the
Information Systems Services department (ISS technologies) and other enterprise-
wide products and technologies used by the Company, including embedded
microprocessor technology (Enterprise technologies). BNSF Railway has completed
the Inventory and Assessment phase for both ISS and Enterprise technologies.
During this phase, BNSF Railway inventoried all ISS-administered source code,
hardware, software and communications equipment that could be affected by the
Year 2000 problem, and identified items potentially needing remediation. In
addition, the Enterprise team completed a company-wide audit of Enterprise
technologies and associated suppliers and service providers for potential Year
2000 problems.

     The Remediation phase is more than three-fourths complete. Remediation
includes converting source code and replacing or upgrading purchased software
and hardware. Remediation is substantially complete for ISS technologies and is
expected to be completed by July 1999 for Enterprise technologies.

     The Certification Testing phase includes validating the performance of ISS
and Enterprise technologies in a Year 2000 test environment. The Certification
Testing phase also includes validating Year 2000 compliance for critical third
party suppliers and service providers. This phase, which is ongoing, overlaps
with the Remediation phase. Certification testing for ISS technologies began in
November 1998, with critical applications receiving priority; testing for all
applications is scheduled for completion by the end of September 1999.
Certification testing of all critical Enterprise technologies began in May 1998
and is scheduled for completion in February 1999; testing for non-critical
Enterprise technologies is scheduled for completion by July 1999.

COSTS

     As a result of its merger-related systems integration that was completed in
1997, BNSF Railway achieved substantial Year 2000 compliance on its core
mainframe systems. In addition, spending on Year 2000 activities approximates $8
million to date. Currently, the total cost of achieving Year 2000 compliance for
the Company's ISS and Enterprise technologies is estimated to be approximately
$20 million.

YEAR 2000 RISKS AND CONTINGENCY PLANS

     Certain BNSF Railway business processes rely on third parties for the
efficient functioning of its transportation network. The Association of American
Railroads (AAR) administers systems that benefit all North American railroads
and their customers, including interline settlement, shipment tracing and
waybill processing. BNSF Railway and other AAR-member railroads are
participating in a process to test and certify these systems for Year 2000
compliance. The AAR expects that these systems will be compliant and pilot
tested by specific carriers by April 1999, with open carrier testing conducted
promptly thereafter. BNSF Railway plans to develop contingency plans for the
business processes supported by AAR systems.

     Certain BNSF Railway routes and resulting revenues are dependent on the use
of trackage rights over other railroads, including UP, Montana Rail Link and the
Arizona and California Railroad. Other BNSF Railway traffic may originate or
terminate on other carriers' lines or may otherwise involve use of a foreign
connection en route. Approximately 60 percent of units handled by BNSF Railway
run over BNSF Railway facilities only. BNSF Railway's traffic levels and
revenues could be significantly reduced and/or its operational network
significantly impaired through congestion and other factors if other railroads
are not able to accommodate BNSF Railway trains or interchange traffic for any
extended period of time due to Year 2000 problems. However, as a result of its
work with other railroads to address Year 2000 problems on an industry-wide
basis, management believes that the possibility of extended failures on other
railroads is not significant. At present, the Company generally has not
determined which of its customers may have Year 2000 problems that could result
in reduced traffic for the Company.

                                       17
<PAGE>
 
     It is the opinion of management that Year 2000 problems in BNSF Railway's
internal information systems and technology infrastructure will not have a
materially adverse effect on the results of operations, liquidity or financial
position of the Company. However, there can be no assurance that the systems or
equipment of other parties which interact with BNSF Railway's systems will be
compliant on a timely basis. BNSF Railway believes that the failure of systems
or equipment of one or more of its key third parties or customers is the most
reasonably likely worst case Year 2000 scenario, and that an extended failure
could have a material adverse effect on the results of operations, liquidity or
financial position of the Company. Where appropriate, BNSF Railway is developing
contingency plans in the event that BNSF Railway's key third parties do not
become Year 2000 compliant on a timely basis, which effort includes the
formalization of existing disaster recovery plans. Contingency plans are
expected to be in place by the end of the first quarter 1999.

FORWARD LOOKING INFORMATION

     The Year 2000 discussion above contains forward-looking statements,
including those concerning the Company's plans and estimated completion dates,
cost estimates, assessments of Year 2000 readiness of BNSF Railway and third
parties, and possible consequences of any failure on the part of the Company or
third parties to be Year 2000 compliant on a timely basis. Forward-looking
statements involve a number of risks and uncertainties that could cause actual
results to differ materially from those projected in the forward-looking
statements. Such factors include, but are not limited to, the following:
continued availability of qualified personnel to assess, remediate, and test ISS
and Enterprise technologies at current estimated costs; emergence of unforeseen
software or hardware problems, including where applications interact with each
other in ways not anticipated, which could delay or hinder commercial
transactions or other operations; the ability to locate and remediate Year 2000
problems with software source code and embedded computer chips in equipment; the
failure, in whole or in part, of other railroads or AAR-supported systems to be
Year 2000 compliant; the Year 2000 compliance of its business partners and
customers and reduced traffic levels due to their failure, in whole or part, to
be Year 2000 compliant; business interruption due to delays in obtaining
supplies, parts, or equipment from key vendors or suppliers that are affected by
Year 2000 problems; the ripple effect of Year 2000-related failures in
industries supporting the nation's basic infrastructure, including fuel vendors
and pipelines, gas, electric, and water utilities, communications companies,
banks and financial institutions, and highway, water, and air transportation
systems; and any significant downturn in the general economy, and adverse
industry-specific economic conditions at the international, national, and
regional levels, wholly or partially caused by Year 2000 problems.

     To the extent that all other written statements include predictions
concerning future operations and results of operations, such statements are
forward-looking statements that involve risks and uncertainties, and actual
results may differ materially. Factors that could cause actual results to differ
materially include, but are not limited to, general economic downturns, which
may limit demand and pricing; labor matters, which may affect the costs and
feasibility of certain operations; and competition and commodity concentrations,
which may affect traffic and pricing levels.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     In the ordinary course of business, BNSF Railway utilizes various financial
instruments which inherently have some degree of market risk.  The quantitative
information presented below and the additional qualitative information presented
in Notes 8, 10 and 11 of the consolidated financial statements describe
significant aspects of BNSF Railway's financial instrument programs which have a
material market risk.

INTEREST RATE SENSITIVITY

     The tables below provide information about the Company's financial
instruments that are sensitive to changes in interest rates, including debt
obligations as of December 31, 1998 and 1997. For debt obligations, the tables
present principal cash flows and related weighted average interest rates by
contractual maturity dates.

                                       18
<PAGE>
 
LONG-TERM DEBT

<TABLE> 
<CAPTION> 
                                                                December 31, 1998
                                   ----------------------------------------------------------------------
                                                  Maturity Date                                    Fair
                                   ---------------------------------------------------
                                    1999    2000    2001    2002    2003    Thereafter    Total    Value  
                                   ------  ------  ------  ------  ------  -----------   -------  ------- 
<S>                                <C>     <C>     <C>     <C>     <C>     <C>           <C>      <C>      
Fixed Rate Debt (in millions)      $  268  $  146  $  222  $  248  $  130     $  1,754   $ 2,768  $ 2,918  
Average Interest Rate                7.41%   6.45%   7.75%   7.10%   7.22%        7.49%     7.40%       -
</TABLE> 

<TABLE> 
<CAPTION> 
                                                                 December 31, 1997
                                    ----------------------------------------------------------------------
                                                   Maturity Date                                    Fair
                                    ---------------------------------------------------
                                     1998    1999    2000    2001    2002    Thereafter    Total    Value  
                                    ------  ------  ------  ------  ------  -----------   -------  ------- 
<S>                                 <C>     <C>     <C>     <C>     <C>     <C>           <C>      <C>      
Fixed Rate Debt (in millions)       $  108  $  256  $  138  $  204  $  258    $   1,894   $ 2,858  $ 3,000
Average Interest Rate                 7.78%   7.46%   6.47%   7.96%   7.16%        8.08%     7.84%       -
</TABLE> 

     Excluded from the 1998 and 1997 tables is $2,288 million and $2,063
million, respectively, of intercompany notes payable to BNSF. As of December 31,
1998 and 1997, $1,579 million of the intercompany notes payable had a fixed
interest rate of 6.9 percent and the remainder had a variable rate. These notes
are due on demand; however, it is not anticipated that BNSF Railway will be
required to pay these obligations in 1999.

COMMODITY PRICE SENSITIVITY

     During 1998 and 1997, fuel expenses approximated 11 percent of total
operating expenses. Due to the significance of diesel fuel expenses to the
operations of the railroad and the historical volatility of fuel prices, BNSF
Railway has established a program to hedge against fluctuations in the price of
its diesel fuel purchases. The intent of the program is to protect BNSF
Railway's operating margins and overall profitability from adverse fuel price
changes. However, to the extent BNSF Railway hedges portions of its fuel
purchases, it will not realize the impact of decreases in fuel prices. The 
fuel-hedging program in 1998 and 1997 includes the use of commodity swap 
transactions that are accounted for as hedges. Additionally, the 1997 
fuel-hedging program also includes forward purchases for delivery at fueling
facilities. Any gains or losses associated with changes in the market value of
these hedging instruments are deferred and recognized as a component of fuel
expense in the period in which the fuel is purchased and used.

     Swap transactions are typically based on the price of pipeline delivery
Gulf Coast #2 heating oil and require BNSF Railway to purchase a defined
quantity at a defined price. Swap transactions are generally settled in cash
with the counterparty. Based on historical information, BNSF Railway believes
there is a significant correlation between the market prices of diesel fuel and
Gulf Coast #2 heating oil.

     The tables below provide information about BNSF Railway's diesel fuel
hedging instruments that are sensitive to changes in commodity prices. The
tables present notional amounts in gallons and the weighted average contract
price by contractual maturity date. The prices included in the tables do not
include taxes, transportation costs, certain other fuel handling costs and,
except for forward contracts, any differences which may occur from time to time
between the prices of commodities hedged and the purchase price of BNSF
Railway's diesel fuel.

<TABLE> 
<CAPTION> 
                                                                   December 31, 1998                           
                                             ---------------------------------------------------------------  
                                                            Maturity Date                            Fair    
                                             ----------------------------------------                        
                                               1999      2000      2001       2002       Total     Value(1)  
                                             --------  --------  --------   ---------   -------   ---------- 
<S>                                          <C>       <C>       <C>        <C>         <C>       <C> 
Diesel Fuel Swaps:                                                                                           
     Gallons (in millions)                       907        491       277         101      1,776    $   (174)  
     Weighted average price per gallon       $  0.48    $  0.50   $  0.49     $  0.50    $  0.49           -
</TABLE> 

                                       19
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                              December 31, 1997                          
                                             ------------------------------------------------------
                                                    Maturity Date                        
                                             ----------------------------                    Fair         
                                               1998      1999      2000       Total        Value(1)  
                                             --------  --------  --------   ---------    ---------- 
<S>                                          <C>       <C>       <C>        <C>          <C> 
Diesel Fuel Swaps:
     Gallons (in millions)                       479       302       189         970        $  (24)
     Weighted average price per gallon       $  0.54   $  0.52   $  0.52     $  0.53             -

Diesel Fuel Forward Purchase Contracts:
     Gallons (in millions)                       144         -         -         144        $    2
     Weighted average price per gallon       $  0.48   $     -         -     $  0.48             -
</TABLE> 

(1)  Represents unrecognized gains (losses) (in millions) based on the price of
     Gulf Coast #2 heating oil.

     Additionally, at December 31, 1998 and 1997, BNSF Railway maintained fuel
inventories for use in normal operations which were not material to the
Company's overall financial position and therefore represented no significant
market exposure.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of BNSF Railway and the report thereon of
PricewaterhouseCoopers LLP are set forth on pages F-1 to F-18.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
       FINANCIAL DISCLOSURE
 
None.

                                       20
<PAGE>
 
                                    PART IV

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

(a) The following documents are filed as a part of this report:

<TABLE> 
<S>                                                                                                         <C> 
1. Consolidated Financial Statements

   Report of PricewaterhouseCoopers LLP                                                                     F-1
 
   Consolidated Statement of Income for the three years ended December 31, 1998                             F-2
 
   Consolidated Balance Sheet at December 31, 1998 and 1997                                                 F-3
 
   Consolidated Statement of Cash Flows for the three years ended December 31, 1998                         F-4
 
   Consolidated Statement of Changes in Stockholder's Equity for the three years ended December 31, 1998    F-5
 
   Notes to Consolidated Financial Statements                                                               F-6
 
2. Consolidated Financial Statement Schedules for the three years ended December 31, 1998
 
   Report of PricewaterhouseCoopers LLP                                                                     F-1

   Schedule II - Valuation and Qualifying Accounts                                                          F-18
</TABLE>

     Schedules other than that listed above are omitted because they are not
required or applicable, or the required information is included in the
consolidated financial statements or related notes.

3. Exhibits:

     See Index of Exhibits on page E-1 for a description of the exhibits filed
as a part of this Report.

(b)  Reports on Form 8-K

     BNSF Railway filed the following Current Reports on Form 8-K during the
quarter ended December 31, 1998, or subsequently:

     Current Report on Form 8-K (Date of earliest event reported:  December 4,
1998), which disclosed under Item 5, Other Events, the resolution of claims by
federal and State of Missouri authorities as to environmental contamination near
Cherryville, Missouri stemming from former railcar cleaning activities conducted
by independent contractors of BNSF Railway's predecessors.

     Current Report on Form 8-K (Date of earliest event reported:  November 10,
1998), which referenced under Item 5, Other Events, and filed as an exhibit
under Item 7, Financial Statements, Pro Forma Financial Information and Exhibits
the following:  a statement regarding computation of ratio of earnings to fixed
charges (as of September 30, 1998) and the Company's consolidated financial
statements and notes thereto for the three and nine month periods ended
September 30, 1998.

                                       21
<PAGE>
 
                                   SIGNATURES

     The Burlington Northern and Santa Fe Railway Company, pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

                                         THE BURLINGTON NORTHERN AND
                                           SANTA FE RAILWAY COMPANY
                                         
                                         
                                           /s/ Robert D. Krebs
                                           ------------------------
                                           Robert D. Krebs 
                                           Chairman, President and Chief 
                                           Executive Officer (Principal
                                           Executive Officer) and Director

Dated:  March 31, 1999

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of The
Burlington Northern and Santa Fe Railway Company and in the capacities and on
the date indicated.

/s/  Robert D. Krebs                Chairman, President and
-------------------------------     Chief Executive Officer
     Robert D. Krebs                (Principal Executive   
                                    Officer) and Director   
                                    


/s/  Denis E. Springer              Senior Vice President and
-------------------------------     Chief Financial Officer
     Denis E. Springer              (Principal Financial Officer)
                                    and Director                  
                                    


/s/  Thomas N. Hund                 Vice President and Controller
-------------------------------     (Principal Accounting Officer)
     Thomas N. Hund                 


/s/  Douglas J. Babb                Director
-------------------------------               
     Douglas J. Babb


/s/  Jeffrey R. Moreland            Director
-------------------------------             
     Jeffrey R. Moreland

 
Dated: March 31, 1999

                                       22
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholder and Board of Directors of
The Burlington Northern and Santa Fe Railway Company and Subsidiaries


In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)1. and 2. of this Form 10-K present fairly, in all
material respects, the financial position of The Burlington Northern and Santa
Fe Railway Company and subsidiary companies at December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

/s/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
Fort Worth, Texas
February 8, 1999
<PAGE>
 
CONSOLIDATED STATEMENT OF INCOME
The Burlington Northern and Santa Fe Railway Company and Subsidiaries
(Dollars in millions)

<TABLE>
<CAPTION>
 
Year ended December 31,                                                1998                1997                1996
---------------------------------------------                    ---------------     ---------------     --------------- 
<S>                                                              <C>                 <C>                 <C>
Revenues                                                                  $8,936              $8,366              $8,108
                                                                 ---------------     ---------------     --------------- 
Operating expenses:                                            
 Compensation and benefits                                                 2,811               2,673               2,561
 Purchased services                                                          894                 823                 800
 Depreciation and amortization                                               831                 772                 760
 Equipment rents                                                             804                 820                 736
 Fuel                                                                        724                 747                 727
 Materials and other                                                         717                 675                 777
 Special charge                                                                -                  90                   -
                                                                 ---------------     ---------------     --------------- 
   Total operating expenses                                                6,781               6,600               6,361
                                                                 ---------------     ---------------     ---------------
Operating income                                                           2,155               1,766               1,747
Interest expense                                                             178                 185                 183
Interest expense, related parties                                            115                  96                  92
Other income (expense), net                                                   77                   5                  17
                                                                 ---------------     ---------------     ---------------
Income before income taxes                                                 1,939               1,490               1,489
Income tax expense                                                           733                 561                 570
                                                                 ---------------     ---------------     --------------- 
Net income                                                                $1,206              $  929              $  919
                                                                 ===============     ===============     ===============
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-2
<PAGE>
 
CONSOLIDATED BALANCE SHEET

The Burlington Northern and Santa Fe Railway Company and Subsidiaries

(Dollars in millions)
 
<TABLE>
<CAPTION>
December 31,                                                                     1998                1997
----------------------------------------------------                       --------------      --------------
<S>                                                                        <C>                 <C> 
ASSETS                                                         
Current assets:                                                
 Cash and cash equivalents                                                        $    95             $     -
 Accounts receivable, net                                                             676                 632
 Materials and supplies                                                               244                 205
 Current portion of deferred income taxes                                             335                 333
 Other current assets                                                                   7                  27
                                                                           --------------      -------------- 
   Total current assets                                                             1,357               1,197
                                                               
Property and equipment, net                                                        20,604              19,152
Other assets                                                                          764                 850
                                                                           --------------      --------------  
     Total assets                                                                 $22,725             $21,199
                                                                           ==============      ==============
                                                               
LIABILITIES AND STOCKHOLDER'S EQUITY                           
Current liabilities:                                           
 Accounts payable and other current liabilities                                   $ 1,907             $ 1,981
 Long-term debt due within one year                                                   268                 108
                                                                           --------------      --------------
   Total current liabilities                                                        2,175               2,089
                                                               
Long-term debt                                                                      2,500               2,750
Intercompany notes payable                                                          2,288               2,063
Deferred income taxes                                                               5,634               5,172
Casualty and environmental liabilities                                                389                 448
Employee merger and separation costs                                                  409                 469
Other liabilities                                                                   1,102               1,185
                                                                           --------------      --------------  
   Total liabilities                                                               14,497              14,176
                                                                           --------------      --------------
                                                               
Commitments and contingencies (see Notes 8, 11 and 12)         
                                                               
Stockholder's equity:                                          
 Common stock, $1 par value, (1,000 shares authorized, issued  
   and outstanding) and paid-in capital                                             4,706               4,706
 Retained earnings                                                                  3,530               2,324
 Accumulated other comprehensive deficit                                               (8)                 (7)
                                                                           --------------      -------------- 
   Total stockholder's equity                                                       8,228               7,023
                                                                           --------------      -------------- 
     Total liabilities and stockholder's equity                                   $22,725             $21,199
                                                                           ==============      ==============
</TABLE>


See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>
 
CONSOLIDATED STATEMENT OF CASH FLOWS
The Burlington Northern and Santa Fe Railway Company and Subsidiaries
(Dollars in millions)

<TABLE>
<CAPTION>
Year ended December 31,                                                1998                1997                1996
-----------------------------------------------------           ---------------      --------------      --------------
<S>                                                             <C>                  <C>                 <C> 
OPERATING ACTIVITIES                                         
 Net income                                                             $ 1,206             $   929             $   919
 Adjustments to reconcile net income to net cash             
  provided by operating activities:                         
   Depreciation and amortization                                            831                 772                 760
   Deferred income taxes                                                    461                 451                 450
   Special charge                                                             -                  90                   -
   Employee merger and separation costs paid                                (77)               (116)               (183)
   Other, net                                                              (218)                (93)                (93)
 Changes in current assets and liabilities:
   Accounts receivable:
     Sale of accounts receivable                                             19                 301                  40
     Other changes                                                         (337)               (386)               (146)
   Materials and supplies                                                   (39)                 17                  (2)
   Other current assets                                                      20                   6                  (4)
   Accounts payable and other current liabilities                           241                 (91)                203 
                                                                ---------------      --------------      -------------- 
     Net cash provided by operating activities                            2,107               1,880               1,944
                                                                ---------------      --------------      -------------- 
                                                             
INVESTING ACTIVITIES                                         
 Capital expenditures                                                    (2,147)             (2,182)             (2,234)
 Other, net                                                                (271)               (146)                 (4)
                                                                ---------------      --------------      -------------- 
   Net cash used for investing activities                                (2,418)             (2,328)             (2,238)
                                                                ---------------      --------------      --------------
                                                             
FINANCING ACTIVITIES                                         
 Net decrease in commercial paper and bank borrowings                         -                   -                (224)
 Proceeds from issuance of long-term debt                                   294                 327                 251
 Payments on long-term debt                                                (112)               (177)                (68)
 Net increase in intercompany notes payable                                 225                 277                 331
 Other, net                                                                  (1)                  1                  (2)
                                                                ---------------      --------------      -------------- 
   Net cash provided by financing activities                                406                 428                 288
                                                                ---------------      --------------      --------------
                                                             
Increase (decrease) in cash and cash equivalents                             95                 (20)                 (6)
Cash and cash equivalents:                                   
 Beginning of year                                                            -                  20                  26
                                                                ---------------      --------------      -------------- 
 End of year                                                            $    95             $     -             $    20
                                                                ===============      ==============      ==============
                                                             
SUPPLEMENTAL CASH FLOW INFORMATION                           
 Interest paid, net of amounts capitalized                              $   205             $   207             $   194
 Income taxes paid, net of refunds                                          113                 232                   8
 Directly financed asset acquisitions                                         -                   -                  43
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>
 
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY

The Burlington Northern and Santa Fe Railway Company and Subsidiaries

(Dollars in millions)

<TABLE>
<CAPTION>
                                                              Common                            Accumulated
                                                            Stock and                              Other
                                                             Paid-in          Retained         Comprehensive
                                                             Capital          Earnings            Deficit               Total
-----------------------------------------------------     ------------     ------------     ----------------      --------------
<S>                                                       <C>              <C>              <C>                   <C>
Balance at December 31, 1995                                    $4,573           $  476               $  (19)             $5,030
Comprehensive income:
     Net income                                                      -              919                    -                 919
     Minimum pension liability adjustment
      (net of tax of $9)                                             -                -                   15                  15
                                                                                                                  --------------
   Total comprehensive income                                                                                                934
-----------------------------------------------------     ------------     ------------     ----------------      --------------
Balance at December 31, 1996                                     4,573            1,395                   (4)              5,964
Comprehensive income:
     Net income                                                      -              929                    -                 929
     Minimum pension liability adjustment (net of                    -                -                   (3)                 (3)
      tax benefit of $2)
                                                                                                                  --------------
   Total comprehensive income                                                                                                926
Capital contribution from BNSF                                     130                -                    -                 130
Other                                                                3                -                    -                   3
-----------------------------------------------------     ------------     ------------     ----------------      --------------
Balance at December 31, 1997                                     4,706            2,324                   (7)              7,023
Comprehensive income:
     Net income                                                      -            1,206                    -               1,206
     Minimum pension liability adjustment (net of                    -                -                   (1)                 (1)
      tax benefit of $0.5)
                                                                                                                  --------------
   Total comprehensive income                                                                                              1,205
-----------------------------------------------------     ------------     ------------     ----------------      --------------
Balance at December 31, 1998                                    $4,706           $3,530               $   (8)             $8,228
-----------------------------------------------------     ============     ============     ================      ==============
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY

AND SUBSIDIARIES
 
1.  ACCOUNTING POLICIES

THE COMPANY AND PRINCIPLES OF CONSOLIDATION

  The consolidated financial statements include the accounts of the Burlington
Northern and Santa Fe Railway Company and its majority owned subsidiaries (BNSF
Railway or Company). BNSF is a wholly owned subsidiary of Burlington Northern
Santa Fe Corporation (BNSF). BNSF Railway was formerly known as the Burlington
Northern Railroad Company (BNRR). On December 31, 1996, The Atchison, Topeka and
Santa Fe Railway Company (ATSF) merged with and into Burlington Northern
Railroad Company (BNRR) and the name of the surviving entity, BNRR, was changed
to the Burlington Northern and Santa Fe Railway Company. Additionally, on
January 2, 1998, BNSF Railway's parent, Santa Fe Pacific Corporation (SFP),
merged with and into BNSF Railway.

  BNSF Railway operates one of the largest railroad networks in the United
States, with approximately 34,000 route miles covering 28 states and two
Canadian provinces. Through one operating transportation services segment, BNSF
Railway transports a wide range of products and commodities including the
transportation of containers and trailers (intermodal), coal and agricultural
commodities which constituted 28 percent, 25 percent and 12 percent,
respectively, of total revenues for the year ended December 31, 1998. Revenues
derived from sources other than transportation services are not significant.

  All significant intercompany accounts and transactions have been eliminated.

USE OF ESTIMATES

  The preparation of financial statements in accordance 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 periods presented.

RECLASSIFICATIONS

  Certain comparative prior year amounts in the consolidated financial
statements and notes have been reclassified to conform with the current year
presentation.

CASH AND CASH EQUIVALENTS

  All short-term investments with original maturities of less than 90 days are
considered cash equivalents. Cash equivalents are stated at cost, which
approximates market value.

MATERIALS AND SUPPLIES

  Materials and supplies, which consist mainly of rail, ties and other items for
construction and maintenance of property and equipment, as well as diesel fuel,
are valued at the lower of average cost or market.

PROPERTY AND EQUIPMENT

  Property and equipment are depreciated and amortized on a straight-line basis
over their estimated useful lives. Upon normal sale or retirement of depreciable
railroad property, cost less net salvage is charged to accumulated depreciation
and no gain or loss is recognized. Significant premature retirements are
recorded as gains or losses at the time of their occurrence. Expenditures which
significantly increase asset values or extend useful lives are capitalized.
Repair and maintenance expenditures are charged to operating expense when the
work is performed. Property and equipment are stated at cost.

  The Company incurs certain direct labor, contract service and other costs
associated with the development and installation of computer software. Costs for
newly developed software or significant enhancements to existing software are
typically capitalized. Research, operations and maintenance costs are charged to
operating expense when the work is performed.

REVENUE RECOGNITION

  Transportation revenues are recognized based upon the proportion of service
provided.

                                      F-6
<PAGE>
 
2. SALE OF INVESTMENT IN PIPELINE PARTNERSHIP

  Santa Fe Pacific Pipelines, Inc. (SFP Pipelines), an indirect, wholly-owned
subsidiary of BNSF Railway, served as the general partner of Santa Fe Pacific
Pipeline Partners, L.P. (Pipeline Partnership) and of its operating partnership
subsidiary, SFPP, L.P. SFP Pipelines owned a two percent interest as the
Pipeline Partnership's and SFPP, L.P.'s general partner and an approximate 42
percent interest as limited partner of the Pipeline Partnership. As general
partner, SFP Pipelines received two percent of all amounts available for
distribution by the Partnership and an additional incentive depending upon the
level of cash distributions paid to holders of limited partner interests in the
Pipeline Partnership (Partnership Units). SFP Pipeline Holdings, Inc., a direct,
wholly-owned subsidiary of BNSF Railway (SFP Holdings), had outstanding $219
million principal amount of Variable Rate Exchangeable Debentures due 2010
(VREDs) at December 31, 1997.

  In October 1997, SFP Pipelines and SFP Holdings entered into an agreement with
Kinder Morgan Energy Partners, L.P. (Kinder Morgan) pursuant to which Kinder
Morgan acquired substantially all of SFP Pipelines' interests in the Pipeline
Partnership and SFPP, L.P. for approximately $84 million in cash on March 6,
1998. The Pipeline Partnership was liquidated as part of the transaction and
each Partnership Unit was converted into the right to receive 1.39 Kinder Morgan
common units. SFP Pipelines' 8,148,148 Partnership Units were converted into the
right to receive 11,325,925 Kinder Morgan common units. In addition, the
agreement called for the interest of SFP Pipelines in SFPP, L.P. to be partially
redeemed for a cash distribution of $5.8 million, with SFP Pipelines retaining
only a 0.5 percent special limited partnership interest in SFPP, L.P. The
Company recognized a $67 million one-time pre-tax gain ($32 million after-tax)
at the time of the sale.

  Consummation of the transaction caused an "Exchange Event" under the VRED
agreement and in June 1998 all VRED holders received either partnership units of
Kinder Morgan or cash equal to the par value of the VREDs. As a result of this
transaction, substantially all of the Company's investment in the Pipeline
Partnership and SFPP, L.P. and the VREDs were removed from the consolidated
balance sheet.

3. OTHER INCOME (EXPENSE), NET

  Other income (expense), net includes the following (in millions):

<TABLE>
<CAPTION>
Year ended December 31,                             1998               1997               1996
-----------------------------------------     -------------      -------------      -------------
<S>                                             <C>                <C>                <C>
  Gain on sale of Pipeline Partnership                $ (67              $   -              $   -
  Gain on property dispositions                          48                 14                 23
  Equity in earnings of Pipeline                          4                 30                 24
   Partnership
  Accounts receivable sale fees                         (34)               (27)               (14)
  Miscellaneous, net                                     (8)               (12)               (16)
-----------------------------------------     -------------      -------------      -------------
      Total                                           $  77              $   5              $  17
-----------------------------------------     =============      =============      =============
</TABLE>

                                      F-7
<PAGE>
 
4. INCOME TAXES

  Income tax expense was as follows (in millions):

<TABLE>
<CAPTION>
Year ended December 31,                                                   1998             1997             1996
----------------------------------------------------------------     ------------     ------------     ------------
<S>                                                                  <C>              <C>              <C>
Current:
 Federal                                                                    $ 247            $ 104            $  95
 State                                                                         25                6               30
----------------------------------------------------------------     ------------     ------------     ------------
                                                                              272              110              125
                                                                     ------------     ------------     ------------
Deferred:
 Federal                                                                      399              365              398
 State                                                                         62               86               47
----------------------------------------------------------------     ------------     ------------     ------------
                                                                              461              451              445
                                                                     ------------     ------------     ------------
 Total                                                                      $ 733            $ 561            $ 570
----------------------------------------------------------------     ============     ============     ============
</TABLE>

  Reconciliation of the federal statutory income tax rate to the effective tax
rate was as follows:

<TABLE>
<CAPTION>
Year ended December 31,                                                    1998              1997              1996
-----------------------------------------------------------------     ------------      ------------      ------------
<S>                                                                   <C>               <C>               <C>
Federal statutory income tax rate                                             35.0%             35.0%             35.0%
State income taxes,
 net of federal tax benefit                                                    2.9               4.0               3.4
Other, net                                                                    (0.1)             (1.3)             (0.1)
-----------------------------------------------------------------     ------------      ------------      ------------
 Effective tax rate                                                           37.8%             37.7%             38.3%
-----------------------------------------------------------------     ============      ============      ============
</TABLE>

  The components of deferred tax assets and liabilities were as follows (in
millions):

<TABLE>
<CAPTION>
December 31,                                                                1998                1997
-----------------------------------------------------------------     --------------      --------------
Deferred tax liabilities:
<S>                                                                     <C>                 <C>
 Depreciation and amortization                                               $(5,868)            $(5,677)
 Other                                                                          (417)               (331)
-----------------------------------------------------------------     --------------      --------------
   Total deferred tax liabilities                                             (6,285)             (6,008)
-----------------------------------------------------------------     --------------      --------------
Deferred tax assets:
 Casualty and environmental                                                      253                 270
 Employee merger and separation costs                                            182                 213
 Post-retirement benefits                                                         89                  86
 Non-expiring AMT credit carryforwards                                             -                  36
 Other                                                                           462                 564
-----------------------------------------------------------------     --------------      --------------
   Total deferred tax assets                                                     986               1,169
-----------------------------------------------------------------     --------------      --------------
   Net deferred tax liability                                                $(5,299)            $(4,839)
-----------------------------------------------------------------     ==============      ==============
Noncurrent deferred income tax liability                                     $(5,634)            $(5,172)
Current deferred income tax asset                                                335                 333
-----------------------------------------------------------------     --------------      --------------
   Net deferred tax liability                                                $(5,299)            $(4,839)
-----------------------------------------------------------------     ==============      ==============
</TABLE>

  In accordance with the income tax allocation agreement between BNSF and BNSF
Railway, the Company makes payments to or receives refunds from BNSF based on
its separate consolidated tax liabilities.  BNSF filed its first federal income
tax return for 1995. The federal income tax returns of BNSF's predecessor
companies, BNI and SFP have been examined through 1994 and 1992, respectively.
All years prior to 1989 for BNI and 1991 for SFP are closed. Issues relating to
the years 1991-1992 for SFP and for the years 1989-1994 for BNI are being
contested through various stages of administrative appeal. In addition, BNSF
Railway and its subsidiaries have various state income tax returns in the
process of examination, administrative appeal or litigation. Management believes
that adequate provision has been made for any adjustment that might be assessed
for open years through 1998.

                                      F-8
<PAGE>
 
5. ACCOUNTS RECEIVABLE, NET

  Effective June 1997, an accounts receivable sale agreement which allowed the
sale of up to $300 million in receivables effective through 1999, was replaced
by an amended and restated agreement which allows BNSF Railway, through a
special purpose subsidiary, to sell up to $600 million of variable rate
certificates which mature in 2002 evidencing undivided interests in an accounts
receivable master trust. The master trust's assets include an ownership interest
in a revolving portfolio of BNSF Railway's accounts receivable which are used to
support the certificates. At December 31, 1998, $600 million of certificates
were outstanding and were supported by receivables of approximately $1.1 billion
in the master trust. Certificates outstanding were $581 million at December 31,
1997. BNSF Railway has retained the collection responsibility with respect to
the accounts receivable held in trust. BNSF Railway is exposed to credit loss
related to collection of accounts receivable to the extent that the amount of
receivables in the master trust exceeds the amount of certificates sold. Costs
related to such agreements vary on a monthly basis and are generally related to
certain interest rates. These costs are included in Other income (expense), net.

  BNSF Railway maintains an allowance for corrections to and collectibility of
freight and other billings. At December 31, 1998 and 1997, $84 million and $70
million of such allowances had been recorded, respectively. BNSF Railway
believes the allowance is adequate to cover disputed and uncollectible
receivables at December 31, 1998.


6. PROPERTY AND EQUIPMENT, NET

  Property and equipment, net (in millions), and the weighted average annual
depreciation rate (%) were as follows:

<TABLE>
<CAPTION>
                                                                                                         1998
                                                                                                     Depreciation
December 31,                                                   1998                1997                  Rate
------------------------------------------------------   --------------      --------------      -----------------
<S>                                                        <C>                 <C>                 <C>
Land                                                            $ 1,416             $ 1,404                -
Track structure                                                  11,316              10,500              4.0%
Other roadway                                                     8,369               7,836              2.5
Locomotives                                                       2,275               1,873              4.9
Freight cars and other equipment                                  1,860               1,870              4.0
Computer hardware and software                                      405                 412             15.5
------------------------------------------------------   --------------      --------------
Total cost                                                       25,641              23,895
Less accumulated depreciation and amortization                   (5,037)             (4,743)
------------------------------------------------------   --------------      --------------
Property and equipment, net                                     $20,604             $19,152
------------------------------------------------------   ==============      ==============
</TABLE>

  The consolidated balance sheet at December 31, 1998 and 1997 included $1,082
million and $875 million, respectively, for property and equipment under capital
leases.

7. ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES

  Accounts payable and other current liabilities consisted of the following (in
millions):

<TABLE>
<CAPTION>
December 31,                                                  1998             1997
----------------------------------------------------     ------------     ------------
<S>                                                      <C>              <C>
Compensation and benefits payable                              $  384           $  399
Casualty and environmental liabilities                            272              291
Accounts payable                                                  174              350
Rents and leases                                                  155              144
Tax liabilities                                                   190              111
Employee merger and separation costs                               65               82
Other                                                             667              604
----------------------------------------------------     ------------     ------------
Total                                                          $1,907           $1,981
----------------------------------------------------     ============     ============
</TABLE>

                                      F-9
<PAGE>
 
8. DEBT

  Debt outstanding was as follows (in millions):

<TABLE>
<CAPTION>
December 31,                                                                                    1998                1997
-------------------------------------------------------------------------------------     --------------      --------------
<S>                                                                                         <C>                 <C>
Notes and debentures, weighted average rate of 7.81%, due 1999 to 2023                            $  873              $1,142
Capitalized lease obligations, weighted average rate of 6.65%, due 1999 to 2012                      818                 695
Equipment obligations, weighted average rate of 7.62%, due 1999 to 2016                              595                 565
Mortgage bonds, weighted average rate of 7.56%, due 1999 to 2047                                     498                 467
Unamortized discount and other, net                                                                  (16)                (11)
-------------------------------------------------------------------------------------     --------------      --------------
 Total                                                                                             2,768               2,858
Less current portion of long-term debt                                                              (268)               (108)
                                                                                          --------------      --------------
 Long-term debt                                                                                   $2,500              $2,750
-------------------------------------------------------------------------------------     ==============      ==============
</TABLE>

  Aggregate long-term debt scheduled maturities are $268 million, $146 million,
$222 million, $248 million and $130 million for 1999 through 2003, respectively.

  Certain BNSF Railway properties and other assets are pledged as collateral to,
or are otherwise restricted under, the various BNSF Railway long-term debt
agreements. Equipment obligations and capital leases are secured by the
underlying equipment. During 1998, BNSF Railway entered into $258 million of
equipment secured debt of which $173 million was recorded as capital lease
obligations.

  An indirect wholly-owned subsidiary of BNSF Railway, in connection with its
remaining 0.5 percent special limited partner interest in a pipeline
partnership, is contingently liable for $190 million of certain debt of the
pipeline partnership assumed by Kinder Morgan pursuant to the sale discussed in
Note 2: Sale of Investment in Pipeline Partnership. In addition, BNSF Railway
and another major railroad jointly and severally guarantee $75 million of debt
of KCT Intermodal Transportation Corporation, the proceeds of which are being
used to finance the construction of a double track grade separation bridge in
Kansas City, Missouri, to be operated and used by Kansas City Terminal Railway
Company.

9. EMPLOYEE MERGER AND SEPARATION COSTS
LIABILITY BALANCE AND ACTIVITY

  Current and long-term employee merger and separation liabilities totaling $474
million and $551 million are included in the consolidated balance sheet at
December 31, 1998 and 1997, respectively, and principally represent: (i)
employee-related severance costs for the consolidation of clerical functions;
(ii) deferred benefits payable upon separation or retirement to certain active
conductors, trainmen and locomotive engineers; and (iii) certain non-union
employee severance costs.

  Liabilities related to the consolidation of clerical functions (the
Consolidation Plan) were $211 million and $259 million at December 31, 1998 and
1997, respectively. These liabilities provide for severance costs associated
with the Consolidation Plan adopted in 1995 upon consummation of the merger of
Burlington Northern Inc. (BNI) and SFP (the Merger). The Consolidation Plan will
result in the elimination of approximately 1,600 permanent positions, of which
approximately 1,500 positions have been eliminated through 1998, including
approximately 250 positions that were eliminated in 1998. Upon adoption in 1995,
the Consolidation Plan was expected to be completed by early 1999. However, the
Consolidation Plan was partially delayed as a result of the timing related to
completion of merger integration and other issues and is now expected to be
completed by 2001. Remaining clerical positions to be eliminated by the Company
will result in involuntary separations. Benefits paid to affected employees are
in the form of lump-sum payments or payments made over five to ten years or in
some cases through retirement.

  Liabilities related to deferred benefits payable upon separation or retirement
to certain active conductors, trainmen and locomotive engineers were $207
million and $224 million at December 31, 1998 and 1997, respectively. These
costs were incurred in connection with labor agreements reached prior to the
Merger which, among other things, reduced train crew sizes and allowed for more
flexible work rules.

                                     F-10
<PAGE>
 
  Liabilities principally related to certain remaining non-union employee
severances resulting from the Merger were $56 million and $68 million at
December 31, 1998 and 1997, respectively. These costs will be paid over the next
several years based on deferral elections made by affected employees.
Approximately 1,500 non-union employees received or are receiving severance
payments and special termination benefits under the Company's retirement and
health and welfare plans resulting from the Merger.

  During 1998, 1997 and 1996, BNSF Railway made employee merger and
separation payments of $77 million, $116 million and $183 million, respectively.
At December 31, 1998, $65 million of the remaining liabilities are included
within current liabilities for anticipated costs to be paid in 1999.

1997 SPECIAL CHARGE

  In the fourth quarter of 1997, the Company recorded a $90 million pre-tax
special charge. Approximately $65 million of the charge related to the
Consolidation Plan and the remainder of the charge related to severance and
other costs for non-union employees. BNSF Railway recorded an initial charge in
1995 for the Consolidation Plan, however, the 1995 charge excluded costs
associated with voluntary severance for employees who were given the opportunity
to relocate and follow their work, but elected severance.

10. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

  The estimated fair values of BNSF Railway's financial instruments at December
31, 1998 and 1997 and the methods and assumptions used to estimate the fair
value of each class of financial instruments held by BNSF Railway, were as
follows (see also Note 11: Hedging Activities, Leases and Other Commitments
regarding the fair values of BNSF Railway's outstanding hedging instruments):

CASH AND CASH EQUIVALENTS

  The carrying amount approximated fair value because of the short maturity of
these instruments.

LONG-TERM DEBT

  The fair value of BNSF Railway's long-term debt was primarily based on quoted
market prices for the same or similar issues, or on the current rates that would
be offered to BNSF Railway for debt of the same remaining maturities.  The
carrying amounts of BNSF Railway's long-term debt at December 31, 1998 and 1997
were $2,768 million and $2,858 million, respectively, while the estimated fair
values at December 31, 1998 and 1997 were $2,918 million and $3,000 million,
respectively.

11. HEDGING ACTIVITIES, LEASES AND OTHER COMMITMENTS 
HEDGING ACTIVITIES

FUEL
  During 1998, 1997 and 1996 fuel expenses approximated 11 percent of total
operating expenses. Due to the significance of diesel fuel expenses to the
operations of the railroad and the historical volatility of fuel prices, the
Company has established a program to hedge against fluctuations in the price of
its diesel fuel purchases. The intent of the program is to protect the Company's
operating margins and overall profitability from adverse fuel price changes.
However, to the extent the Company hedges portions of its fuel purchases, it
will not realize the impact of decreases in fuel prices. The fuel-hedging
program includes the use of commodity swap transactions that are accounted for
as hedges. Any gains or losses associated with changes in the market value of
the fuel swaps are deferred and recognized as a component of fuel expense in the
period in which the fuel is purchased and used. Based on 1998 fuel consumption
and excluding the impact of the hedging program, each one-cent increase in the
price of fuel would result in approximately $12 million of additional fuel
expense on an annual basis.

  As of February 8, 1999, BNSF Railway had entered into fuel swaps for
approximately 1,776 million gallons at an average price of approximately 49
cents per gallon. The above price does not include taxes, transportation costs,
certain other fuel handling costs, and any differences which may occur from time
to time between the prices of commodities hedged and the purchase price of BNSF
Railway's diesel fuel.

                                     F-11
<PAGE>
 
  Currently, BNSF Railway's fuel hedging program covers approximately 75
percent, 40 percent, 22 percent and 7 percent of estimated annual and quarterly
fuel purchases for 1999, 2000, 2001, and 2002, respectively. Hedge positions are
closely monitored to ensure that they will not exceed actual fuel requirements
in any period. Unrecognized losses from BNSF Railway's fuel swap transactions
were approximately $174 million as of December 31, 1998, of which $120 million
relates to swap transactions that will expire in 1999. BNSF Railway also
monitors its hedging positions and credit ratings of its counterparties and does
not anticipate losses due to counterparty nonperformance.

LEASES

  BNSF Railway has substantial lease commitments for locomotives, freight cars,
trailers, office buildings and other property. Most of these leases provide the
option to purchase the equipment at fair market value at the end of the lease.
However, some provide fixed price purchase options. Future minimum lease
payments (which reflect leases having non-cancelable lease terms in excess of
one year) as of December 31, 1998 are summarized as follows (in millions):

<TABLE>
<CAPTION>
                                                                     Capital          Operating  
          Year ended December 31                                     Leases             Leases   
          ------------------------------------------------       -------------     --------------
          <S>                                                      <C>               <C>         
          1999                                                          $  116             $  350
          2000                                                             105                256
          2001                                                             116                206
          2002                                                             110                175
          2003                                                             109                164
          Thereafter                                                       594              1,814
          ------------------------------------------------       -------------     --------------
          Total                                                          1,150             $2,965
                                                                                   ==============
          Less amount representing interest                                332                   
          ------------------------------------------------       -------------
          Present value of minimum lease payments                       $  818                   
          ------------------------------------------------       =============                    
</TABLE>

  Lease rental expense for all operating leases was $503 million, $456 million
and $446 million for the years ended December 31, 1998, 1997 and 1996,
respectively. Contingent rentals and sublease rentals were not significant.

OTHER COMMITMENTS

  BNSF Railway has entered into commitments to acquire 476 locomotives in 1999.
The locomotives will be financed from one or a combination of sources including,
but not limited to, cash from operations, capital or operating leases, and debt
issuances. The decision on the method used will depend upon the current market
conditions and other factors at the time of financing. Additionally, BNSF
Railway has committed to acquire 196 and 50 locomotives in 2000 and 2001,
respectively.

  In connection with the closing of the sale of rail lines in Southern
California in 1992 and 1993, BNSF Railway has a $50 million liability recorded
for an obligation retained by BNSF Railway which under certain conditions
requires the Company to repurchase a portion of the properties sold.

12. ENVIRONMENTAL AND OTHER CONTINGENCIES

ENVIRONMENTAL

  BNSF Railway's operations, as well as those of its competitors, are subject to
extensive federal, state and local environmental regulation. BNSF Railway's
operating procedures include practices to protect the environment from the
environmental risks inherent in railroad operations, which frequently involve
transporting chemicals and other hazardous materials. Additionally, many of BNSF
Railway's land holdings are and have been used for industrial or transportation-
related purposes or leased to commercial or industrial companies whose
activities may have resulted in discharges onto the property. As a result, BNSF
Railway is subject to environmental clean-up and enforcement actions. In
particular, the Federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980 (CERCLA), also known as the "Superfund" law, as well as
similar state laws generally impose joint and several liability for clean-up and
enforcement costs without regard to fault or the legality of the original
conduct on current and former owners and operators of a site. BNSF Railway has
been notified that it is a potentially responsible party (PRP) for study and
clean-up costs at approximately 32 Superfund sites for which investigation and
remediation payments are or will be made or are yet to be determined (the
Superfund sites) and, in many instances, is one of several PRPs. In addition,
BNSF Railway may be 

                                     F-12
<PAGE>
 
considered a PRP under certain other laws. Accordingly, under CERCLA and other
federal and state statutes, BNSF Railway may be held jointly and severally
liable for all environmental costs associated with a particular site. If there
are other PRPs, BNSF Railway generally participates in the clean-up of these
sites through cost-sharing agreements with terms that vary from site to site.
Costs are typically allocated based on relative volumetric contribution of
material, the amount of time the site was owned or operated, and/or the portion
of the total site owned or operated by each PRP.

  Environmental costs include initial site surveys and environmental studies of
potentially contaminated sites as well as costs for remediation and restoration
of sites determined to be contaminated. Liabilities for environmental clean-up
costs are initially recorded when BNSF Railway's liability for environmental
clean-up is both probable and a reasonable estimate of associated costs can be
made. Adjustments to initial estimates are recorded as necessary based upon
additional information developed in subsequent periods. BNSF Railway conducts an
ongoing environmental contingency analysis, which considers a combination of
factors including independent consulting reports, site visits, legal reviews,
analysis of the likelihood of participation in and the ability of other PRPs to
pay for clean-up, and historical trend analyses.

  BNSF Railway is involved in a number of administrative and judicial
proceedings and other clean-up efforts at approximately 400 sites, including the
Superfund sites, at which it is participating in the study or clean-up, or both,
of alleged environmental contamination. BNSF Railway paid approximately $64
million, $55 million and $47 million during 1998, 1997 and 1996 respectively,
for mandatory and unasserted clean-up efforts, including amounts expended under
federal and state voluntary clean-up programs. BNSF Railway has accruals of
approximately $185 million for remediation and restoration of all known sites.
BNSF Railway anticipates that the majority of the accrued costs at December 31,
1998, will be paid over the next five years. No individual site is considered to
be material.

  During 1998, BNSF Railway settled an environmental matter in the State of
Missouri related to the release of a reportable quantity of lead sulfide into a
waterway. BNSF Railway agreed in the settlement to pay a fine of $7 million,
make restitution payments to the State of Missouri of $3 million and committed
to spend $9 million, which includes amounts previously paid, in connection with
its ongoing remediation efforts. BNSF Railway has made payments of approximately
$16 million related to this settlement, including approximately $12 million that
was paid during 1998, which is included in total 1998 payments discussed above.

  Liabilities recorded for environmental costs represent BNSF Railway's best
estimates for remediation and restoration of these sites and include both
asserted and unasserted claims. Unasserted claims are not considered to be a
material component of the liability. Although recorded liabilities include BNSF
Railway's best estimates of all costs, without reduction for anticipated
recoveries from third parties, BNSF Railway's total clean-up costs at these
sites cannot be predicted with certainty due to various factors such as the
extent of corrective actions that may be required, evolving environmental laws
and regulations, advances in environmental technology, the extent of other
parties' participation in clean-up efforts, developments in ongoing
environmental analyses related to sites determined to be contaminated, and
developments in environmental surveys and studies of potentially contaminated
sites. As a result, future charges to income for environmental liabilities could
have a significant effect on results of operations in a particular quarter or
fiscal year as individual site studies and remediation and restoration efforts
proceed or as new sites arise. However, management believes that it is unlikely
that any identified matters, either individually or in the aggregate, will have
a material adverse effect on BNSF's consolidated financial position or
liquidity.

  The railroad industry, including BNSF Railway, is subject to future
requirements regulating air emissions from diesel locomotives. Final regulations
applicable to new and rebuilt locomotive engines were promulgated by the United
States Environmental Protection Agency (EPA) and became effective June 15, 1998.
The new standards will be phased in between 2000 and 2005. BNSF Railway has
evaluated compliance requirements and associated costs and believes the costs
will not be material in any given year. BNSF Railway has also entered into
agreements with the California State Air Resources Board and the EPA regarding a
program to reduce emissions in Southern California through accelerated
deployment of locomotives which comply with the federal standards.

                                     F-13
<PAGE>
 
OTHER CLAIMS AND LITIGATION

  BNSF Railway is party to a number of legal actions and claims, various
governmental proceedings and private civil suits arising in the ordinary course
of business, including those related to environmental matters and personal
injury claims. While the final outcome of these items cannot be predicted with
certainty, considering among other things the meritorious legal defenses
available, it is the opinion of management that none of these items, when
finally resolved, will have a material adverse effect on the annual results of
operations, financial position or liquidity of BNSF Railway, although an adverse
resolution of a number of these items could have a material adverse effect on
the results of operations in a particular quarter or fiscal year.

13. RETIREMENT PLANS AND OTHER POSTEMPLOYMENT BENEFIT PLANS

  BNSF Railway is included with certain other BNSF affiliates in the qualified
BNSF Retirement Plan and the nonqualified BNSF Supplemental Retirement Plan.

  BNSF sponsors two significant defined benefit pension plans: the
noncontributory qualified BNSF Retirement Plan, which covers substantially all
non-union employees, and the nonqualified BNSF Supplemental Retirement Plan,
which covers certain officers and other employees. The benefits under BNSF's
plans are based on years of credited service and the highest five-year average
compensation levels. BNSF Railway's funding policy is to contribute annually not
less than the regulatory minimum and not more than the maximum amount deductible
for income tax purposes.

  Certain salaried employees of BNSF Railway that have met certain age and years
of service requirements are eligible for medical benefits and life insurance
coverage during retirement. The retiree medical plan is contributory and
provides benefits to retirees, their covered dependents and beneficiaries.
Retiree contributions are adjusted annually. The plan also contains fixed
deductibles, coinsurance and out-of-pocket limitations. The life insurance plan
is noncontributory and covers retirees only. BNSF Railway's policy is to fund
benefits payable under the medical and life insurance plans as they come due.
Employees beginning salaried employment with BNSF Railway subsequent to
September 22, 1995 are not eligible for benefits under these plans.

  Components of the net benefit costs for these plans were as follows (in
millions):
<TABLE>
<CAPTION>
                                                                Pension Benefits                     
                                             ---------------------------------------------------     
Year ended December 31,                            1998               1997               1996        
----------------------------------------     -------------      -------------      -------------     
<S>                                            <C>                <C>                <C>             
Service cost                                         $  15              $  14              $  17     
Interest cost                                          101                100                 97     
Expected return on plan assets                        (117)              (112)              (113)    
Net amortization and deferred amounts                    4                  4                  8     
----------------------------------------     -------------      -------------      -------------     
Net benefit cost                                     $   3              $   6              $   9     
----------------------------------------     =============      =============      =============     
<CAPTION> 
                                                           Medical and Life Benefits
                                                -----------------------------------------------
Year ended December 31,                              1998             1997              1996
----------------------------------------        ------------     ------------      ------------
<S>                                               <C>              <C>               <C>
Service cost                                           $   4            $   4             $   5
Interest cost                                             16               14                16
Expected return on plan assets                             -                -                 -
Net amortization and deferred amounts                      -               (1)                -
----------------------------------------        ------------     ------------      ------------
Net benefit cost                                       $  20            $  17             $  21
----------------------------------------        ============     ============      ============
</TABLE>

  The following tables show the change in benefit obligation and plan assets of
these plans (in millions):

<TABLE>
<CAPTION> 
                                                                                                       Medical and Life
                                                                    Pension Benefits                       Benefits
                                                            ------------------------------     ------------------------------
Change in benefit obligation                                     1998              1997             1998              1997
-------------------------------------------------           ------------      ------------     ------------      ------------
<S>                                                         <C>               <C>              <C>               <C>
Benefit obligation at beginning of year                           $1,404            $1,286            $ 190             $ 210
Service cost                                                          15                14                4                 4
Interest cost                                                        101               100               16                14
Plan participants' contributions                                       -                 -                3                 5
Amendments                                                             -                 -               13                 -
Actuarial (gain) loss                                                 85               117               39               (22)
Benefits paid                                                       (118)             (113)             (16)              (21)
-------------------------------------------------           ------------      ------------     ------------      ------------
Benefit obligation at end of year                                 $1,487            $1,404            $ 249             $ 190
-------------------------------------------------           ============      ============     ============      ============
</TABLE>

                                     F-14
<PAGE>
 
<TABLE>
<CAPTION>
                                                                                                        Medical and Life
                                                                    Pension Benefits                        Benefits
                                                            ------------------------------     -------------------------------
Change in plan assets                                            1998              1997              1998              1997
-------------------------------------------------------     ------------      ------------     -------------      ------------
<S>                                                         <C>               <C>              <C>                <C>
Fair value of plan assets at beginning of year                    $1,540            $1,320             $   -             $   -
Actual return on plan assets                                          43               329                 -                 -
Employer contribution                                                  4                 4                13                16
Plan participants' contributions                                       -                 -                 3                 5
Benefits paid                                                       (118)             (113)              (16)              (21)
-------------------------------------------------------     ------------      ------------     -------------      ------------
Fair value of plan assets at end of year                          $1,469            $1,540             $   -             $   -
-------------------------------------------------------     ============      ============     =============      ============
</TABLE>

  The following tables show the reconciliation of the funded status of these
plans with amounts recorded in BNSF Railway's consolidated balance sheet (in
millions):

<TABLE>
<CAPTION>
                                                                                                        Medical and Life       
                                                                   Pension Benefits                         Benefits           
                                                            ------------------------------      ------------------------------
December 31,                                                     1998              1997              1998              1997
-------------------------------------------------------     ------------      ------------      ------------      ------------
<S>                                                         <C>               <C>               <C>               <C>  
Funded status                                                      $ (18)            $ 136             $(249)            $(190)
Unrecognized net (gain) loss                                           7              (151)                4               (16)
Unrecognized prior service cost                                       (8)               (8)               13                 -
Unamortized net transition obligation                                 11                14                 -                 -
-------------------------------------------------------     ------------      ------------      ------------      ------------
Net amount recognized                                              $  (8)            $  (9)            $(232)            $(206)
-------------------------------------------------------     ============      ============      ============      ============
</TABLE>

<TABLE>
<CAPTION>
                                                                                                          Medical and Life        
                                                                     Pension Benefits                         Benefits            
                                                              -------------------------------      ------------------------------
December 31,                                                        1998              1997              1998              1997
-------------------------------------------------------       -------------      ------------      ------------      ------------
<S>                                                           <C>                <C>               <C>               <C> 
Amounts recognized in the consolidated balance sheet:
   Prepaid benefit cost                                               $  20             $  17             $   -             $   -
   Accrued benefit liability                                            (43)              (39)             (232)             (206)
   Intangible asset                                                       2                 2                 -                 -
   Accumulated other comprehensive income                                13                11                 -                 -
-------------------------------------------------------       -------------      ------------      ------------      ------------
Net amount recognized                                                 $  (8)            $  (9)            $(232)            $(206)
-------------------------------------------------------       =============      ============      ============      ============
</TABLE>

  BNSF Railway uses a September 30 measurement date.  The assumptions used in
accounting for these plans were as follows:

<TABLE>
<CAPTION>
                                                                                                        Medical and Life
                                                                    Pension Benefits                        Benefits
                                                            ------------------------------      ------------------------------
Assumptions                                                      1998              1997              1998              1997
-------------------------------------------------------     ------------      ------------      ------------      ------------
<S>                                                         <C>               <C>               <C>               <C>
Discount rate                                                        7.0%              7.5%              7.0%              7.5%
Rate of increase in compensation levels                              4.0%              4.0%              N/A               N/A
Expected return on plan assets                                       9.5%              9.5%              N/A               N/A
</TABLE>

  For purposes of the medical and life benefits calculations for 1998, the
assumed health care cost trend rate for both managed care and non-managed care
medical costs is 9 percent and is assumed to decrease gradually to 5 percent by
2005 and remain constant thereafter. Increasing the assumed health care cost
trend rates by one percentage point would increase the accumulated
postretirement benefit obligation by $18 million and the combined service and
interest components of net postretirement benefit cost recognized in 1998 by $1
million. Decreasing the assumed health care cost trend rates by one percentage
point would decrease the accumulated postretirement benefit obligation by $17
million and the combined service and interest components of net postretirement
benefit cost recognized in 1998 by $1 million.

                                     F-15
<PAGE>
 
OTHER PLANS

  Under collective bargaining agreements, BNSF Railway participates in
multiemployer benefit plans which provide certain postretirement health care and
life insurance benefits for eligible union employees. Insurance premiums paid
attributable to retirees, which are generally expensed as incurred, were $18
million, $15 million and $14 million, in 1998, 1997 and 1996, respectively.

DEFINED CONTRIBUTION PLANS

  BNSF Railway sponsors 401(k) thrift and profit sharing plans which cover
substantially all non-union employees and certain union employees. BNSF Railway
matches 50 percent of the first 6 percent of non-union employees' contributions,
which are subject to certain percentage limits of the employees' earnings, at
each pay period. Depending on BNSF Railway's performance, an additional matching
contribution of up to 30 percent of the first 6 percent can be made at the end
of the year. Employer contributions for all non-union employees are subject to a
five year length of service vesting schedule. BNSF Railway's 401(k) matching
expense was $16 million, $14 million and $13 million in 1998, 1997 and 1996,
respectively.

14. RELATED PARTY TRANSACTIONS

  BNSF Railway is involved with BNSF and certain of its subsidiaries in related
party transactions in the ordinary course of business, which include payments
made on each other's behalf and performance of services.  Under the terms of a
tax allocation agreement with BNSF, BNSF Railway made federal and state income
tax payments of $113 million during 1998 and $232 million during 1997, which are
reflected in changes in working capital in the consolidated statement of cash
flows.

  BNSF Railway had a net intercompany receivable balance of $86 million at
December 31, 1998, which is reflected in accounts receivable, net in the
consolidated balance sheet.  BNSF Railway had a net intercompany payable balance
of $135 million at December 31, 1997, which is reflected in accounts payable and
other current liabilities in the consolidated balance sheet.  Net intercompany
receivable or payable balances are settled in the ordinary course of business.

  BNSF Railway had intercompany notes payable to BNSF of $2,288 million and
$2,063 million at December 31, 1998 and 1997, respectively, included in the
consolidated balance sheet. At December 31, 1998, $1,579 million of the
intercompany notes payable had a fixed interest rate of 6.9 percent and $709
million had a variable interest rate of 1.0 percent above the monthly average of
the daily effective Federal Funds rate. During 1998, BNSF Railway had borrowings
from BNSF of $225 million which was primarily used to fund capital expenditures
and other investing activities. Interest is paid semi-annually on all
intercompany notes payable. Interest expense on intercompany notes payable is
reflected in interest expense, related parties in the consolidated income
statement. The intercompany notes are due on demand; however, it is not
anticipated that BNSF Railway will be required to pay these obligations in 1999.

  SFP Pipelines Holdings, Inc. had a $130 million intercompany note receivable
from SFP.  During 1997, BNSF assumed the note payable from SFP and SFP
recognized the assumption as a capital contribution from BNSF.

  Under various plans, BNSF has granted options to employees to purchase its
common stock at a price not less than the fair market value at the date of
grant.  Certain employees of BNSF Railway participate in these plans.  In
addition, BNSF has other long-term incentive plans administered separately on
behalf of employees which are participated in by certain BNSF Railway employees.
These plans include, among other things, incentive compensation, issuance of
restricted stock and a discounted stock purchase program.  Compensation expense
is recorded for stock incentive plans in accordance with Accounting Principles
Board Opinion 25 and was not material in 1998, 1997 or 1996.

                                     F-16
<PAGE>
 
15. QUARTERLY FINANCIAL DATA - UNAUDITED

<TABLE>
<CAPTION>
(Dollars in millions)                         Fourth             Third              Second             First
------------------------------------     --------------     --------------     --------------     --------------
1998                                
<S>                                        <C>                <C>                <C>                <C>
Revenues(1)                                      $2,293             $2,293             $2,203             $2,147
------------------------------------     --------------     --------------     --------------     -------------- 
Operating income                                    567                613                528                447
------------------------------------     --------------     --------------     --------------     -------------- 
Net income (2)                                   $  307             $  330             $  291             $  278
------------------------------------     --------------     --------------     --------------     -------------- 
 
1997
Revenues(1)                                      $2,173             $2,124             $2,054             $2,015
-----------------------------------      --------------     --------------     --------------     -------------- 
Operating income                                    438                541                458                329
-----------------------------------      --------------     --------------     --------------     -------------- 
Net income (3)                                   $  227             $  291             $  246             $  165
-----------------------------------      --------------     --------------     --------------     -------------- 
</TABLE>

(1)  Amounts do not agree to previously reported amounts due to certain
     reclassifications between revenues and expenses which were not significant.
(2)  First quarter 1998 results include a $67 million pre-tax gain ($32 million
     after-tax) on the sale of substantially all of the Company's interest in
     Santa Fe Pacific Pipeline Partners, L.P. as discussed in Note 2-Sale of
     Investment in Pipeline Partnership.
(3)  Fourth quarter 1997 results include a $90 million pre-tax charge ($57
     million after-tax) as discussed in Note 9-Employee Merger and Separation
     Costs.

                                     F-17
<PAGE>
 
                                                                     SCHEDULE II


              THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY
                       VALUATION AND QUALIFYING ACCOUNTS
             For the years ended December 31, 1998, 1997, and 1996
                                 (In Millions)


<TABLE>
<CAPTION>
                    Column A                            Column B          Column C           Column D           Column E
------------------------------------------------    ---------------   ---------------   -----------------   ---------------
                                                       Balance at         Additions                            Balance at
                                                        Beginning        Charged to                              End of
Description                                             of Period          Income         Deductions (1)       Period (2)
------------------------------------------------    ---------------   ---------------   -----------------   ---------------
<S>                                                 <C>               <C>               <C>                 <C> 
December 31, 1998:                                                                                          
Personal injury and environmental liabilities                  $711              $177                $253              $635
                                                    ===============   ===============   =================   ===============
December 31, 1997:                                                                                          
Personal injury and environmental liabilities                  $810              $165                $264              $711
                                                    ===============   ===============   =================   ===============
December 31, 1996:                                                                                          
Personal injury and environmental liabilities                  $916              $188                $294              $810
                                                    ===============   ===============   =================   ===============
</TABLE>


NOTES:

(1)   Principally represents cash payments.
(2)   Classified in the consolidated balance sheets as follows:

<TABLE>
<CAPTION>
                                                                            1998                 1997                 1996
                                                                      ---------------     -----------------     ---------------
<S>                                                                   <C>                 <C>                   <C>
Accounts payable and other current liabilities                                  $ 246                 $ 263               $ 267
Casualty and environmental liabilities                                            389                   448                 543
                                                                      ---------------     -----------------     ---------------
                                                                                $ 635                 $ 711               $ 810
                                                                      ===============     =================     ===============
</TABLE>

                                     F-18
<PAGE>
 
              THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY



                               INDEX OF EXHIBITS


<TABLE>
<CAPTION>
EXHIBIT
NUMBER   DESCRIPTION
         
<S>      <C>
2.1      Agreement and plan of merger dated December 30, 1996 between The
         Burlington Northern Railroad Company and The Atchison, Topeka and Santa
         Fe Railway Company incorporated by reference to The Burlington Northern
         and Santa Fe Railway Company's Report on Form 10-K for the fiscal year
         ended December 31, 1996.
         
2.2      Certificate of Ownership and Merger Merging Santa Fe Pacific
         Corporation and The Burlington Northern and Santa Fe Railway Company
         filed on December 30, 1997. Incorporated by reference to The Burlington
         Northern and Santa Fe Railway Company's Report on Form 10-K for the
         fiscal year ended December 31, 1997.
         
3.1      Restated Certificate of Incorporation of The Burlington Northern and
         Santa Fe Railway Company effective December 31, 1996 incorporated by
         reference to The Burlington Northern and Santa Fe Railway Company's
         Report on Form 10-K for the fiscal year ended December 31, 1996.
         
3.2      By-laws as amended through July 17, 1991. Incorporated by reference to
         Exhibit 3.2 to The Burlington Northern Railroad Company's Report on
         Form 10-K for the fiscal year ended December 31, 1991.
         
4        BNSF Railway is not filing any instruments evidencing indebtedness
         because the total amount of securities authorized under any single such
         instrument does not exceed ten percent of BNSF Railway's total assets.
         Copies of any such material instruments will be furnished to the
         Securities and Exchange Commission upon request.
         
12       Statement regarding the Computation of Ratio of Earnings to Fixed
         Charges.
         
27.1     Financial Data Schedule for the year ended December 31, 1998.
         
27.2     Restated Financial Data Schedule for the period ended March 31, 1998
         
27.3     Restated Financial Data Schedule for the period ended June 30, 1998
         
27.4     Restated Financial Data Schedule for the period ended September 30, 1998
         
27.5     Restated Financial Data Schedule for the year ended December 31, 1997
         
27.6     Restated Financial Data Schedule for the period ended March 31, 1997
         
27.7     Restated Financial Data Schedule for the period ended June 30, 1997
         
27.8     Restated Financial Data Schedule for the period ended September 30,
         1997
         
27.9     Restated Financial Data Schedule for the year ended December 31, 1996
</TABLE>

                                      E-1