<COVER PAGE>


                             FORM 10-Q   
    
                           UNITED STATES
                 SECURITIES AND EXCHANGE COMMISSION
                    WASHINGTON, D.C.  20549-1004
  
  (Mark One)
  
  [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                     EXCHANGE ACT OF 1934                 
                                 
  For the quarterly period ended September 30, 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 1-6146
  
                   UNION PACIFIC RAILROAD COMPANY
       (Exact name of Registrant as specified in its charter)
  
             DELAWARE                            94-6001323
  (State or other jurisdiction of             (I.R.S. Employer
   incorporation or organization)           Identification No.)
  
                 1416 DODGE STREET, OMAHA, NEBRASKA
              (Address of principal executive offices)
  
                               68179
                             (Zip Code)
  
                          (402) 271-5000
        (Registrant's telephone number, including area code)
  
   Indicate by check mark whether the Registrant (1) has filed all
  reports required to be filed by Section 13 or 15(d) of the Securities
  Exchange Act of 1934 during the preceding 12 months (or for such shorter
  period that the registrant was required to file such reports), and (2) has
  been subject to such filing requirements for the past 90 days.
  
  YES   X     NO         
  
   As of October 31, 1998, the Registrant had outstanding 7,130 shares
  of Common Stock, $10 par value, and 620 shares of Class A Stock, $10 par
  value.
          THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL
  INSTRUCTIONS H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS
    FORM WITH THE REDUCED DISCLOSURE FORMAT.                
    
<INDEX PAGE>    
    
                  UNION PACIFIC RAILROAD COMPANY
                              INDEX
  
  
                PART I.  FINANCIAL INFORMATION
                ------------------------------
                               
  
  
                                                            Page Number
                                                            -----------
                                                            
  
  ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:                  
  
     CONDENSED STATEMENT OF CONSOLIDATED INCOME 
        AND RETAINED EARNINGS - For the Three Months
        and Nine Months Ended September 30, 1998 and 1997. . . .     1
  
        CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL 
          POSITION - At September 30, 1998 and 
        December 31, 1997. . . . . . . . . . . . . . . . . . . .     2
  
     CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS 
        For the Nine Months Ended 
        September 30, 1998 and 1997. . . . . . . . . . . . . . .     4
  
     NOTES TO CONDENSED CONSOLIDATED FINANCIAL 
        STATEMENTS . . . . . . . . . . . . . . . . . . . . . . .     5
                                                        
  ITEM 2: MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS 
        OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . .    10
  
  
  ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 
        MARKET RISK. . . . . . . . . . . . . . . . . . . . . . .    19
  
  
  
                 PART II.  OTHER INFORMATION
                  ----------------------------
                               
  
  ITEM 1: LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . .    20
  
  ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . .    22
  
  SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . .    23
  

<PAGE>  1
  
  PART I - FINANCIAL INFORMATION
  ------------------------------
  ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  
    UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
  
      CONDENSED STATEMENT OF CONSOLIDATED INCOME AND RETAINED EARNINGS
      For The Three and Nine Months Ended September 30, 1998 and 1997
      ---------------------------------------------------------------
                   (Millions of Dollars, Except Ratio)
                              (Unaudited)
                                                             
                                      Three Months Ended   Nine Months Ended
                                         September 30,        September 30,
                                        1998      1997       1998      1997 
                                       ------    ------     ------    ------ 
  Operating Revenues . . . . . . . . . $2,360    $2,538     $6,961    $7,712 
                                       ------    ------     ------    ------ 
  Operating Expenses:
   Salaries and benefits . . . . . . .    898       853      2,671     2,565 
   Equipment and other rents . . . . .    324       331      1,024       955 
   Depreciation and amortization . . .    251       242        745       725 
   Fuel and utilities (Note 3) . . . .    191       228        600       761 
   Purchased services. . . . . . . . .    142       147        437       451 
   Materials and supplies. . . . . . .    130       117        396       387 
   Other costs (Note 5). . . . . . . .    199       162        927       558 
                                       ------    ------     ------    ------ 
     Total . . . . . . . . . . . . . .  2,135     2,080      6,800     6,402 
                                       ------    ------     ------    ------ 
   
  Operating Income . . . . . . . . . .    225       458        161     1,310 
  Other Income - Net . . . . . . . . .     45        79        113       132 
  Interest Expense . . . . . . . . . .   (162)     (119)      (443)     (360)
                                       ------    ------     ------    ------ 
  
  Income (Loss) Before Income Taxes. .    108       418       (169)    1,082 
  Income Tax Expense (Benefit) . . . .     41       143        (82)      387 
                                       ------    ------     ------    ------ 
     Net Income (Loss) . . . . . . . . $   67    $  275     $  (87)   $  695 
                                       ======    ======     ======    ====== 
  Retained Earnings:                                       
   Beginning of period . . . . . . . . $3,736    $4,145     $4,110    $3,939 
   Net income (loss) . . . . . . . . .     67       275        (87)      695 
   Dividends to parent . . . . . . . .    (50)     (127)      (270)     (341)
                                       ------    ------     ------    ------ 
        End of Period. . . . . . . . . $3,753    $4,293     $3,753    $4,293 
                                       ======    ======     ======    ====== 
  Ratio of Earnings to Fixed 
     Charges (Note 4). . . . . . . . .      -         -        0.6       3.2 
                                       ======    ======     ======    ====== 
  
  The accompanying accounting policies and notes to condensed consolidated
    financial statements are an integral part of these statements.
    
    
<PAGE>  2
    
    UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
  
           CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
           ------------------------------------------------------
                         (Millions of Dollars)
                              (Unaudited)
  
  
                                              September 30,      December 31,
  ASSETS                                           1998             1997    
  ------                                      -------------      ------------
  Current Assets:
   Cash and temporary investments  . . . .     $    41             $    50
   Accounts receivable - net (Note 3)  . .         375                 456
   Materials and supplies  . . . . . . . .         307                 288
   Other current assets  . . . . . . . . .         200                 251
                                               -------             -------
     Total Current Assets  . . . . . . . .         923               1,045
                                               -------             -------
     
  Investments:                               
   Investments in and advances to            
    affiliated companies . . . . . . . . .         508                 443
   Other investments . . . . . . . . . . .         156                 181
                                               -------             -------
     Total Investments . . . . . . . . . .         664                 624
                                               -------             -------
  Properties, at cost:                                              
   Road and other  . . . . . . . . . . . .      24,624              23,610
   Equipment . . . . . . . . . . . . . . .       7,497               7,084
                                               -------             -------
     Total Properties  . . . . . . . . . .      32,121              30,694
   Accumulated depreciation  . . . . . . .      (5,633)             (5,208)
                                               -------             -------
     Properties - Net  . . . . . . . . . .      26,488              25,486
                                               -------             -------
  Other Assets . . . . . . . . . . . . . .         104                  92
                                               -------             -------
     Total Assets  . . . . . . . . . . . .     $28,179             $27,247
                                               =======             =======
  
  
  
  The accompanying accounting policies and notes to condensed consolidated
  financial statements are an integral part of these statements.
      
      
<PAGE>  3
      
      UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
  
           CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
           ------------------------------------------------------
          (Millions of Dollars, Except Share and Per Share Amounts)
                                (Unaudited)
  
                                                September 30,    December 31,
  LIABILITIES AND STOCKHOLDERS' EQUITY               1998            1997
  ------------------------------------          -------------    ------------
  Current Liabilities:
   Accounts payable  . . . . . . . . . . . . .    $   488          $   660
   Accrued wages and vacation  . . . . . . . .        401              382
   Income and other taxes. . . . . . . . . . .        281              263
   Accrued casualty costs  . . . . . . . . . .        319              318
   Debt due within one year  . . . . . . . . .        176              229
   Other current liabilities (Notes 2 and 5) .        854              915
                                                  -------          -------
     Total Current Liabilities . . . . . . . .      2,519            2,767
                                                  -------          -------
  Debt Due After One Year  . . . . . . . . . .      2,539            2,361
  
  Deferred Income Taxes  . . . . . . . . . . .      6,623            6,698
  
  Accrued Casualty Costs . . . . . . . . . . .        669              671
  
  Retiree Benefit Obligations  . . . . . . . .        763              749
  
  Due to Parent  . . . . . . . . . . . . . . .      5,578            3,993
  
  Other Liabilities (Note 2) . . . . . . . . .        925            1,087
  
  Redeemable Preference Shares . . . . . . . .         28               29
   Series A, $10,000 par value; 4,829 shares 
     outstanding and Series B, $10,000 par 
     value; 436 shares outstanding
  
  Stockholders' Equity (Note 2):
   Common stock - $10.00 par value; 9,200 
     shares authorized and 4,465 outstanding .          -                -
   Class A stock - $10.00 par value; 800 
     shares authorized and 388 outstanding . .          -                -
  Capital surplus  . . . . . . . . . . . . . .      4,782            4,782
  Retained earnings  . . . . . . . . . . . . .      3,753            4,110
                                                  -------          -------
     Total Stockholders' Equity  . . . . . . .      8,535            8,892
                                                  -------          ------- 
     Total Liabilities and Stockholders' 
          Equity . . . . . . . . . . . . . . .    $28,179          $27,247
                                                  =======          ======= 
  
  The accompanying accounting policies and notes to condensed consolidated
    financial statements are an integral part of these statements.
    
    
<PAGE>  4    
    
    UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
         
               CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
            For the Nine Months Ended September 30, 1998 and 1997
            -----------------------------------------------------
                         (Millions of Dollars)
                              (Unaudited)
  
  
                                                     1998             1997      
                                                  --------         --------
  Cash from Operations:                              
  
   Net Income (Loss) . . . . . . . . . .          $   (87)         $   695 
  
   Non-Cash Charges to Income:
     Depreciation and amortization . . .              745              725 
     Deferred income taxes . . . . . . .              (83)             228 
     Other - net . . . . . . . . . . . .             (234)            (484)
   Changes in current assets and 
     liabilities . . . . . . . . . . . .             (135)              87 
                                                  -------          ------- 
     Cash Provided by Operations . . . .              206            1,251 
                                                  -------          ------- 
  Investing Activities:
  
   Capital investments . . . . . . . . . .         (1,753)          (1,398)
   Other - net . . . . . . . . . . . . . .             88              155 
                                                  -------          ------- 
     Cash Used in Investing Activities . .         (1,665)          (1,243)
                                                  -------          ------- 
  Equity and Financing Activities:
  
   Debt repaid . . . . . . . . . . . . . .           (245)            (188)
   Financings  . . . . . . . . . . . . . .            380              180 
   Dividends paid to parent. . . . . . . .           (270)            (315)
   Advances from affiliated 
     companies - net. . . . . .. . . . . .          1,585              309 
                                                  -------          ------- 
     Cash Provided (Used) by Equity  
        and Financing Activities . . . . .          1,450              (14)
                                                  -------          ------- 
     Net Change in Cash and Temporary
        Investments. . . . . . . . . . . .        $    (9)         $    (6)
                                                  =======          ======= 
  
  The accompanying accounting policies and notes to condensed consolidated
    financial statements are an integral part of these statements.
    
<PAGE>  5    
    
    
       UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
  
            NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
            ----------------------------------------------------
                              (Unaudited)
  
  
  1. RESPONSIBILITIES FOR FINANCIAL STATEMENTS: The condensed consolidated
     financial statements of Union Pacific Railroad Company (the Company or
     the Railroad) are unaudited and reflect all adjustments (consisting
     only of normal and recurring adjustments) that are, in the opinion of
     management, necessary for a fair presentation of the financial position
     and operating results for the interim periods. The condensed
     consolidated financial statements should be read in conjunction with
     the consolidated financial statements and notes thereto contained in
     the Company's Annual Report on Form 10-K for the year ended
     December 31, 1997.  The results of operations for the three months and
     nine months ended September 30, 1998 are not necessarily indicative of
     the results for the year ending December 31, 1998.  The financial
     statements present the results of operations and financial position of
     the Company combined with Southern Pacific Rail Corporation (Southern
     Pacific or SP), a holding company wholly-owned by Union Pacific
     Corporation (UPC or the Corporation), which owns 2,665 shares of common
     stock, $10 par value, of Union Pacific Railroad Company and 232 shares
     of Class A stock, $10 par value of Union Pacific Railroad Company. 
     Certain 1997 amounts have been reclassified to conform to the 1998
     financial statement presentation.
  
  2. ACQUISITION OF SOUTHERN PACIFIC:  UPC consummated the acquisition of
     Southern Pacific in September 1996.  The acquisition of Southern
     Pacific has been accounted for using the purchase method. During 1997
     and 1998, the Company executed several mergers to legally merge SP's
     rail operations with those of the Railroad and its predecessor company
     Union Pacific Railroad Company, a Utah corporation (UPRR-Utah).  These
     mergers were accounted for in a manner similar to a pooling-of-interest
     combination of entities under common control since both entities
     involved in the merger were indirect wholly-owned subsidiaries of UPC
     at the date of the mergers and with the surviving entity continuing as
     such.
  
     In connection with the continuing integration of the rail operations of
     UPRR-Utah and Southern Pacific, the Company is continuing to eliminate
     duplicate positions (primarily positions other than train crews),
     relocate positions, merge or dispose of redundant facilities, dispose
     of certain rail lines and cancel uneconomical and duplicative SP
     contracts.  The Company has also repaid certain of Southern Pacific's
     debt obligations. The Company recognized a $958 million liability in
     the Southern Pacific purchase price allocation for costs associated
     with SP's portion of these activities. 
     
     Through September 30, 1998, approximately $460 million in 
     merger-related costs were charged by the Company against these reserves,
     principally consisting of approximately $246 million and $76 million,


<PAGE>  6

     respectively, for severance and relocation payments made to
     approximately 4,400 Southern Pacific employees and approximately $96
     million for labor protection payments.  The Company expects the
     remaining merger payments will be made over the course of the next 
     three years as the rail operations of UPRR-Utah and SP are integrated
     and labor negotiations are completed and implemented.
  
     In addition, the Company expects to incur approximately $165 million in
     acquisition-related costs for severing or relocating Railroad
     employees, disposing of certain Railroad facilities, training and
     equipment upgrading.  These costs will be charged to expense as
     incurred over the next three years.  Results for the three and nine
     months ended September 30, 1998 include $7 million and $36 million
     (after tax), respectively, in acquisition-related operating costs.
  
  3. Financial Instruments - The Company uses derivative financial
     instruments in limited instances for other than trading purposes to
     manage risk as it relates to fuel prices.  Where the Company has fixed
     fuel prices through the use of swaps, futures or forward contracts, the
     Company has mitigated the downside risk of adverse price movements;
     however, it has also limited future gains from favorable movements. The
     Company's credit risk associated with its counterparties as of
     September 30, 1998 was less than $1 million.  The Company has not been
     required to provide, nor has it received, any collateral relating to
     its hedging activities.  
  
     The fair market value of the Company's derivative financial instrument
     positions at September 30, 1998 was determined based upon current fair
     market values as quoted by recognized dealers.
  
     Fuel - At September 30, 1998, the Company had hedged approximately 49%
     of its estimated remaining 1998 diesel fuel consumption at $0.51 per
     gallon, on a Gulf Coast basis and approximately 37% of its estimated
     1999 diesel fuel consumption at $0.42 per gallon, on a Gulf Coast
     basis. At September 30, 1998, the Company had outstanding swap
     agreements covering $291 million of fuel purchases, with gross and net
     asset positions of less than $1 million.  Fuel hedging increased third
     quarter 1998 fuel expense by $25 million and third quarter 1997 fuel
     expense by approximately $1 million.  For the nine months ended
     September 30, fuel hedging increased 1998 fuel expense by $59 million
     and 1997 fuel expense by approximately $1 million.
  
     Sale of Receivables - The Company has sold, on a revolving basis, an
     undivided percentage ownership interest in a designated pool of
     accounts receivable.  The amount of receivables sold fluctuates based
     upon the availability of the designated pool of receivables and is
     directly affected by changing business volumes and credit risks.  At
     December 31, 1997 and September 30, 1998, accounts receivable are
     presented net of the $650 million and $580 million, respectively, of
     receivables sold.
  
  4. Ratio of Earnings to Fixed Charges - The ratio of earnings to fixed
     charges has been computed on a total enterprise basis.  Earnings
                                                  
                                                  
<PAGE>  7                                                  
                                                  
     represent income from continuing operations less equity in
     undistributed earnings of unconsolidated affiliates, plus income taxes
     and fixed charges.  Fixed charges represent interest, amortization of
     debt discount and expense, and the estimated interest portion of rental
     charges.  For the nine months ended September 30, 1998, fixed charges
     exceeded earnings by approximately $203 million.
  
  5. Commitments and Contingencies - There are various claims and lawsuits
     pending against the Company and certain of its subsidiaries.  Certain
     customers have submitted claims for damages related to shipments
     delayed by the Railroad as a result of congestion problems, and certain
     customers have filed lawsuits seeking relief related to such delays. 
     The nature of the damages sought by claimants includes, but is not
     limited to, contractual liquidated damages, freight loss or damage,
     alternative transportation charges, additional production costs, lost
     business and lost profits.  In addition, some customers have asserted
     that they have the right to cancel contracts as a result of alleged
     material breaches of such contracts by the Railroad. The Company
     continues to evaluate the adequacy of its reserves for customer claims.
  
     The Railroad is also party to certain regulatory proceedings before the
     Surface Transportation Board of the U.S. Department of Transportation
     (STB). One proceeding pertains to rail service problems in the western
     United States. As an outgrowth of this proceeding, the STB issued an
     emergency service order imposing certain temporary measures on the
     Railroad designed, among other things, to reduce congestion on the
     Railroad's lines in the Houston, Texas area.  On July 31, 1998, the STB
     terminated the emergency service order.  The STB kept in place the
     requirement that the Railroad report certain service data, which the
     Railroad had acknowledged the STB had the authority to impose under a
     provision of the Interstate Commerce Act separate from the emergency
     service provision.  The STB also prescribed, under another statutory
     provision separate from the emergency service provision, a 45-day
     "wind-down" period during which certain rights that Texas Mexican
     Railway Company (Tex Mex) and The Burlington Northern and Santa Fe
     Railway Company (BNSF) had received under the emergency service order
     to handle Railroad traffic in Houston would be continued. The 45-day
     "wind-down" period expired September 17, 1998.  A second proceeding,
     initiated under the STB's continuing oversight jurisdiction with
     respect to the merger of the Corporation and Southern Pacific (and
     separate from the STB's regularly scheduled annual proceeding to review
     the implementation of the merger and the effectiveness of the
     conditions that the STB imposed on it), is for the purpose of
     considering the justification for and advisability of any proposals for
     new remedial conditions to the merger as they pertain to service in the
     Houston, Texas area, and surrounding coastal areas of Texas and
     Louisiana.  Various parties have filed applications in this proceeding
     seeking the imposition of additional conditions to the merger
     including, among other things, the granting of overhead trackage rights
     on certain of the Railroad's lines in Texas, "neutral switching
     supervision" on certain of the Railroad's branch lines, the opening to
     other railroads and switching by a "neutral switching company" of
     
     
<PAGE>  8     
     
     numerous industries now exclusively served by the Railroad in the
     Houston area, and the compulsory sale or lease to other carriers of
     certain of the Railroad's lines and facilities.  The Company's response
     in opposition to the condition requests was filed on September 18,
     1998, and rebuttal in support of the condition applications was filed
     on October 16, 1998.  The Railroad believes that the applications are
     without merit and vigorously opposed them in its September 18
     submission.  Separately from this proceeding, a shortline railroad, the
     Arkansas, Louisiana and Mississippi Railroad (AL&M), has filed a
     request that an additional condition be imposed on the merger allowing
     AL&M to interchange traffic with  BNSF.  The Railroad has also opposed
     this request.  In addition, the STB has initiated various inquiries and
     formal rulemaking proceedings regarding certain elements of rail
     regulation following two days of hearings by the STB in April 1998 at
     the request of two members of Congress and in response to shippers'
     expressions of concern regarding railroad service quality, railroad
     rates and allegedly inadequate regulatory remedies.  There can be no
     assurance that the proposals advanced by parties in the remedial
     conditions proceeding or the proceedings initiated in response to the
     rail regulation hearings will not be approved in some form.  Should the
     STB or Congress take aggressive action in the rail regulation
     proceedings (e.g., by making purportedly competition-enhancing changes
     in rate and route regulation and "access" provisions), the adverse
     effect on the Railroad and other rail carriers could be material.
  
     The Company is also subject to Federal, state and local environmental
     laws and regulations, and is currently participating in the
     investigation and remediation of numerous sites.  Where the remediation
     costs can be reasonably determined, and where such remediation is
     probable, the Company has recorded a liability.  In addition, the
     Company periodically enters into financial and other commitments and
     has retained certain contingent liabilities upon the disposition of
     formerly-owned operations.
   
     In addition, UPC and certain of its officers and directors are
     currently defendants in two purported class actions, which have been
     consolidated into one proceeding.  The consolidated complaint alleges,
     among other things, that UPC violated the federal securities laws by
     failing to disclose material facts and making materially false and
     misleading statements concerning the service, congestion and safety
     problems encountered following the Corporation's acquisition of
     Southern Pacific in 1996.  These lawsuits were filed in late 1997 in
     the United States District Court for the Northern District of Texas and
     seek to recover unspecified amounts of damages.  UPC management
     believes that the plaintiffs' claims are without merit and intends to
     defend them vigorously. The defendants have moved to dismiss this
     action, and the motion has been fully briefed.
  
     In addition to the class action litigation, certain current and former
     directors of UPC and the Company were named as defendants in a
     purported derivative action filed on behalf of UPC and the Company in
     the United States District Court for the Northern District of Texas in
     late 1997.  The derivative action alleged, among other things, that the
     
<PAGE>  9     
     
     
     named current and former directors breached their fiduciary duties to
     UPC and the Company by approving the acquisition of Southern Pacific. 
     The defendants moved to dismiss the derivative action.  In response,
     the plaintiffs sought to voluntarily dismiss their claims, and the
     derivative action was dismissed, without prejudice, by order of the
     court dated May 26, 1998.
  
     On September 14, 1998, a different shareholder plaintiff filed a new
     purported derivative action on behalf of the Corporation and the
     Company in the District Court of Tarrant County, Texas, naming as
     defendants the Corporation, the Company, and the current and certain
     former directors of the Corporation and the Company. This new
     derivative action alleges, among other things, that the named current
     and former directors breached their fiduciary duties to the Corporation
     and the Company by approving and implementing the Southern Pacific
     merger without informing themselves of its impact or ensuring that
     adequate controls were put in place and by causing the the Corporation
     and the Company to make misrepresentations about the Company's service 
     problems to the financial markets and regulatory authorities.  The 
     defendants believe that these claims are without merit and intend to 
     defend them vigorously.
  
     It is not possible at this time for the Company to fully determine the
     effect of all unasserted claims on its consolidated financial
     condition, results of operations or liquidity; however, to the extent
     possible, where unasserted claims can be estimated and where such
     claims are considered probable, the Company has recorded a liability. 
     The Company does not expect that any known lawsuits, claims,
     environmental costs, commitments or guarantees will have a material
     adverse effect on its consolidated financial condition.
  
  6. Accounting Pronouncements - In June 1997, the Financial Accounting
     Standards Board (FASB) issued Statement No. 130, "Reporting
     Comprehensive Income" (FAS 130), that is effective for all periods in
     1998, including interim periods.  The Company has adopted the
     provisions of FAS 130 effective January 1, 1998.  The components of
     comprehensive income include, among other things, changes in the market
     value of derivative instruments which qualify for hedge accounting
     under Statement No. 133, when adopted, and net loss recognized as an
     additional pension liability but not yet recognized as net periodic
     pension cost.  There is no impact from adopting FAS 130 for the nine
     months ended September 30, 1998.
  
     Also in June 1997, the FASB issued Statement No. 131, "Disclosures about
     Segments of an Enterprise and Related Information", that is effective in
     1998.  The Company currently complies with the provisions of this
     Statement.
  
     In February 1998, the FASB issued Statement No. 132, "Employers'
     Disclosures about Pensions and Other Postretirement Benefits", that is
     effective in 1998 (FAS 132).  FAS 132 revises and standardizes
     disclosures required by FAS 87, 88, and 106.  This Statement will only
    
<PAGE> 10


     affect footnote disclosure and will not otherwise have an effect on the 
     financial statements of the Company. 
   
     In June 1998, the FASB issued Statement No. 133, "Accounting for 
     Derivative Instruments and Hedging Activities" (FAS 133), that will be 
     effective in 2000.  Management is just beginning the process of 
     determining the effect, if any, FAS 133 will have on the Company's 
     financial statements.
  
  ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS
  
       UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
  
         MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
  
                                 Mergers
  
  In September 1996, Union Pacific Corporation (the Corporation or UPC)
  completed its acquisition of Southern Pacific Rail Corporation (Southern
  Pacific or SP) and, throughout 1997 and 1998, continued the process of
  integrating the operations of SP's rail subsidiaries into those of Union
  Pacific Railroad Company (the Company or the Railroad) and its
  predecessor, Union Pacific Railroad Company, a Utah Corporation 
  (UPRR-Utah).  The legal mergers facilitating the SP operational 
  integration were completed in February 1998.  The Company expects to 
  complete the full integration of the operations of the Southern Pacific 
  rail subsidiaries over the next three years.  The Company believes that 
  the full implementation of the merger will result in shorter routes, faster 
  transit times, better on-time performance, expanded single-line service 
  and more efficient traffic flow.
  
  As a result of the SP acquisition, the Company now operates the largest
  rail system in the United States, with 35,000 route miles linking Pacific
  Coast and Gulf Coast ports to the Midwest and eastern U.S. gateways. 
  
                     Congestion and Service Issues
                               
  As previously reported, congestion in and around Houston and the coastal
  areas of Texas and Louisiana (the Gulf Coast region) began to have a
  material adverse effect on the Company's operations and earnings in the
  third quarter of 1997.  System congestion started in the Gulf Coast region
  and spread throughout the system during the third and fourth quarters of
  1997, and continued to adversely affect the Railroad's operations and
  financial results during the first nine months of 1998.  The Railroad has
  adopted certain measures to alleviate the congestion problems, and
  implementation of these service recovery measures has significantly 
  relieved congestion in the Gulf Coast region.    
  
  During the third quarter of 1998, service in the Railroad's Central
  Corridor between Chicago and Utah was slowed by track maintenance and

<PAGE> 11


  capacity expansion work which is expected to be completed during 1999. 
  The Company also experienced congestion on its lines in Northern
  California, in the Los Angeles Basin and on the Sunset Route west of El
  Paso, Texas, caused in part by two derailments on July 8 and July 9, 1998,
  tight crew supply and limited track capacity in that region, and the
  learning curve associated with the integration of the computer system of
  Southern Pacific in the region with the Railroad's computer system, which
  commenced July 1, 1998. The Railroad has eliminated this 
  congestion by various measures, including rerouting trains from this region 
  to other portions of its system.  During the late third quarter and early 
  fourth quarter of 1998, the Railroad's operations were also adversely 
  affected by severe weather in the southern portion of its system, including 
  Hurricane Georges, which disrupted operations in New Orleans and other 
  parts of Louisiana during the last three days of September, heavy rains 
  that moved from northern Texas through Oklahoma and into the Kansas City 
  area on October 3 and 4, heavy rains that resulted in severe flooding in 
  central and southern Texas later in the month of October, and heavy rains 
  and flooding across parts of Oklahoma and Kansas in early November.  
  Despite these weather problems, the Railroad has been able to respond 
  quickly to reroute traffic, repair damages caused by washouts and restore 
  service without severe or lengthy disruptions to the Railroad's operations, 
  reflecting the Railroad's overall progress in addressing the service and 
  congestion problems.  Although progress has been made in improving service, 
  the Company expects these problems to continue to have an adverse impact 
  on 1998 results.  
  
  During the third quarter of 1998, the Company announced a new long-term 
  strategy to improve the effectiveness of the organization.  This effort 
  will be focused on culture change, business process improvement and 
  decentralization, each of which is designed to improve customer 
  satisfaction, increase employee engagement, and improve financial results. 
  
                         Results of Operations
      Quarter Ended September 30, 1998 Compared to September 30, 1997
  
  The Railroad returned to profitability in the third quarter of 1998 after
  three consecutive quarterly losses by posting earnings of $67 million,
  down from $275 million in the third quarter of 1997.  Despite service
  improvements during the quarter, year-over-year results were affected by
  service problems in the western part of the Railroad's system, which were 
  resolved during the quarter, traffic slow-downs related to major track 
  maintenance and capacity expansion efforts along the Railroad's Central 
  Corridor (scheduled to be completed during 1999), severe weather in the 
  southern portion of the Railroad's system and the cost of continued service
  recovery.  Operating income of $225 million for the third quarter of 1998
  compares to $458 million in last year's third quarter, reflecting a 
  year-over-year increase in pre-tax service-related costs and lost revenues, 
  as service issues began late in the third quarter of 1997.  The operating
  ratio for the third quarter of 1998 was 90.5%, up 8.5 points from 1997's
  82.0%.  Lost revenue and costs related to service performance were the key
  drivers of the change.
  
<PAGE> 12


  REVENUE SUMMARY - Rail operating revenues were down $178 million (7%) at
  $2,360 million.  Carloadings for the third quarter of 1998 of 2,021,969
  were down 149,127 units, or 7%, from year-ago loads of 2,171,096. 
  Declines were led by continuing service issues, weakening demand for whole
  grain exports (due to strong worldwide crop yields) and a soft export market
  (caused by the Asian currency crisis impact).  Average revenue per car
  (ARC) was down slightly for the quarter at $1,126 per car from last year's
  $1,131.  The decline in ARC was driven by large volumes of very low-ARC
  empty repositioning moves for intermodal traffic, higher low-ARC stone
  moves, shortfalls of high-ARC steel traffic, and large volumes of very
  low-ARC storage-in-transit (SIT) moves in the chemical business.  The
  following table summarizes the quarter-over-quarter change in rail
  commodity revenue (CR) and ARC by commodity type (carloads in thousands and
  commodity revenues in millions):
  
                                            Change              % Change   
                Cars     ARC      CR    Cars   ARC    CR     Cars  ARC   CR 
                ----   ------  ------   ----  ----  -----    ----  ---  ----
  Automotive     141   $1,447  $  204    (8)  $(14) $ (14)    (6)  (1)   (6)
  Agriculture    213    1,566     334   (11)    38     (9)    (5)   2    (3)
  Intermodal     633      604     382  (106)   (34)   (89)   (14)  (5)  (19)
  Chemicals      232    1,657     385   (18)   (71)   (47)    (7)  (4)  (11)
  Energy         449    1,148     516    10     51     33      2    5     7
  Industrial     354    1,289     456   (16)   (88)   (53)    (4)  (6)  (10)
               -----   ------  ------   ---   ----  -----     ---  ---  ----
  Total        2,022   $1,126  $2,277  (149)  $ (5) $(179)    (7)  --    (7)
               =====   ======  ======   ===   ====  =====     ===  ===  ====

  Agricultural Products revenues fell 3% for the quarter, as loads finished
  down 5% and ARC improved 2%.  Key drivers included diversions of wet corn
  milling products from the Railroad to trucks and other rails; congestion, 
  which limited canned and packaged, wheat, frozen and food grains categories
  of agricultural products business; inexpensive corn replacing feed-additives
  which lowered livestock/feed moves; and depressed corn prices and very
  soft export demand which hurt corn traffic. Quarter-over-quarter ARC was
  up 2% primarily due to price increases and improvements in haul length for
  wheat moves.
  
  Automotive revenues were down 6%, reflecting a 6% decline in volume and a
  1% decrease in ARC.  Finished vehicles volumes were down 1% primarily due
  to the impact of the General Motors (GM) strike, which cost the Railroad
  approximately $21 million for the quarter.  International business, 
  down 22% in loadings, experienced lower Asian imports in addition to 
  service-related diversions.  These declines were partially offset by Ford's 
  new Mixing Center business and strong Chrysler volumes (up 18%). Parts 
  volumes lost 10% year-over-year as Ford's volumes fell from the Railroad's 
  equipment shortages and GM switched from intermodal containers to boxcars, 
  which switch lowered parts carloadings as more parts fit in each boxcar.  
  ARC fell 1% as a result of large shortfalls of higher-ARC finished vehicles 
  due to the GM strike.
  
  Chemicals shipments fell 7%, while ARC dropped 4% when compared to 1997
  results.  Congestion-related diversions to truck, barge and other
  railroads plagued most business lines (especially liquid and dry
  chemicals).  In addition, the Asian crisis significantly reduced the
  demand for export soda ash, as carloads were down nearly 11%, while an
  unplanned mine shutdown not only reduced traffic for phosphate rock, but

<PAGE> 13


  also reduced the overall demand for phosphorus.  The 4% decline in ARC was
  largely due to lower high-ARC liquid and dry and soda ash moves, strong
  movements of low-ARC plastics (softness in international market and
  weakening prices hurt higher-ARC volumes) and the loss of long-haul
  business due to slow train speeds. 
  
  Energy movements were up 2% versus 1997, while ARC was up 5%.  Maintenance
  and capacity-driven congestion in the Central Corridor continued to hamper
  Powder River Basin (PRB) trains.  However, PRB trains per day showed gains
  year-over-year (25.2 in 1998 from 24.3 a year ago), and longer trains
  (119.7 cars/train in the third quarter of 1998 vs. 117.3 in 1997) helped
  boost quarter-over-quarter volumes.  Colorado and Utah volumes were also
  up for the quarter due to better service performance than 1997 levels. 
  The 5% increase in ARC was primarily a result of more high-ARC PRB
  traffic.
  
  Industrial Products posted a 4% volume decline and a 6% decline in ARC,
  resulting in a 10% drop in revenues.  Volumes continued to be plagued by
  instances of equipment shortages and service issues (caused by slowed
  local switching and congestion).  A large portion of industrial products
  moves occurred in the South where congestion hit hardest, although service
  levels have continued to improve. Construction materials, metallic
  minerals, cement, ferrous scrap, and consumer/machinery moves were all
  affected by Southern congestion.  In addition, several of the same
  commodities have also been affected by Central Corridor congestion
  (due to maintenance and capacity expansion) and congestion in the Western 
  portion of the Railroad's system, as the final portion of the Company's 
  operating system was brought on-line in SP's western territory in the third 
  quarter of 1998.  ARC fell 6% due to product mix issues, largely strong 
  low-ARC stone moves and shortfalls of high-ARC steel traffic. 
  
  Intermodal revenue showed a 19% year-over-year decline, as volumes fell
  14% and ARC fell 5%.  Congestion issues and related-diversions severely
  affected several intermodal segments, especially Intermodal Marketing
  Company (IMC)/truckload and less-than-truckload (LTL)/premium. Volumes
  also suffered from weak exports (Asian currency crisis).  A partial offset
  was the impact of  new APL business and the high demand for containers. 
  ARC fell as traffic mix shortfalls (relatively fewer high-ARC
  IMC/truckload and LTL/premium loads) were exacerbated by increased volumes
  of low-ARC empty repositioning moves--as equipment imbalances precipitated
  by strong imports and weak exports caused customers to significantly
  increase empty container repositioning moves. 
  
  EXPENSE SUMMARY  -  Operating expenses were $2,135 million for the third
  quarter of 1998, $55 million (3%) worse than the third quarter 1997
  operating expenses of $2,080 million.  However, third quarter 1998
  operations did improve significantly from the second quarter of 1998.  The
  following statistical table reflects the improvements in the Railroad's
  operating performance: 


<PAGE> 14

                                          1997                   1998        
                                   2nd     3rd     4th     1st    2nd    3rd
  (Average Units, Except Ratios)   Qtr     Qtr     Qtr     Qtr    Qtr    Qtr  
                                  -----   -----   -----   -----  -----  -----
  Seven-Day Loadings (000's)      170.7   165.9   153.6   152.5  154.9  155.3
  Train Speed (MPH)                18.4    15.0    13.2    13.8   14.0   14.4
  Car Cycle Times (Days)           12.7    15.2    16.8    17.6   16.4   15.9
  Operating Ratio                  80.9    82.0   102.5    97.7  105.1   90.5
                                      
  Labor Expense was $45 million (5%) higher than 1997.  Slower train speeds,
  (which created the need to increase the number of train crews required),
  inflation and other service-related cost overruns contributed to higher
  costs.   These higher costs were partially offset by lower volumes 
  (gross-ton miles were down 3%) and the elimination of duplicative positions 
  as part of merger implementation.  
  
  Depreciation expense grew $9 million, or 4%, to $251 million, driven by
  the Railroad's extensive capital programs in 1997 and 1998.  The Railroad
  spent over $2 billion on capital projects in 1997 and expects to spend
  $2.2 billion in 1998, of which $400 million is merger-related.
  
  Materials and Supplies costs for the quarter were up $13 million to $130
  million, or 11%, from third quarter 1997.  The increase reflects increased
  maintenance of locomotives, freight cars and roadway machines.  Material
  costs for signal and communications equipment were also higher 
  year-over-year.
  
  Fuel and Utilities expenses were down $37 million, or 16%, from 1997.  A
  reduction in gross-ton miles year-over-year (down 3%) generated 
  volume-related fuel savings of $6 million versus 1997.  Prices were down 
  7 cents per gallon to 60 cents, saving $20 million.  The fuel consumption 
  rate of 1.36 gallons per thousand gross-ton miles improved 3% from last 
  year's 1.40, lowering the Railroad's fuel costs by $6 million.  Hedges of 
  58% of third quarter fuel volumes increased fuel costs by $25 million, 
  or 9 cents per gallon (included in the cost per gallon information above).  
  Hedges have increased fuel expenses by $59 million year-to-date.
  
  Rent Expense was down $7 million, or 2%, versus 1997.  Cycle times were
  above normal at 15.9 days.  However, cycles were only 0.7 days higher than
  year-ago levels, resulting in increased year-over-year service-related
  costs of $5 million.  Locomotives leased for service recovery resulted in
  an additional $4 million.  However, these increases were more than offset
  by lower volumes due to service shortfalls. 
  
  Other Costs (Including Purchased Services) increased $32 million, or 10%,
  from 1997, reflecting continued customer relations and service recovery
  costs.  Service recovery increased other costs by $43 million, driven by
  higher liquidated damages on coal contracts, while crew transportation
  costs were higher by $4 million.  These cost increases were offset by
  BNSF's increased use of trackage rights and merger-related cost savings on
  computer costs and contract pricing.
  

<PAGE> 15
  
  NON-OPERATING COSTS  - Other income, net was $34 million below last year's
  levels, reflecting the absence of the sale of the Railroad's signboard
  business in 1997.  Interest costs were $43 unfavorable to 1997 at $162
  million, reflecting higher interest costs from borrowing to fund capital
  spending which could not be funded from cash generation at the Railroad
  due to the effects of service recovery.  Income taxes (State & Federal)
  were favorable $102 million compared to 1997, primarily the result of
  lower pre-tax income.
  
   Nine Months Ended September 30, 1998 Compared to September 30, 1997 
  
  The Railroad posted a loss of $87 million for the first nine months of
  1998, compared to earnings of $695 million in 1997.  1998 results were
  affected by slow train speeds and service issues that have been lessening
  as the year has progressed.  Operating income of $161 million for the
  period compares to $1,310 million last year, reflecting a year-over-year
  increase in pre-tax service-related costs and lost revenues, as service
  issues began late in the third quarter of 1997.  The year-to-date
  operating ratio for 1998 was 97.7%, up 14.7 points from 1997's 83.0%. 
  
  REVENUE SUMMARY - Rail operating revenues were down $751 million (10%) at
  $6,961 million.  Carloadings for the period were down 549,061 units, or
  8%, from year-ago loads of 6,504,713.  Declines were led by continuing
  service issues, weakening demand for whole grain exports (strong worldwide
  crop yields), the GM strike and a soft export market (Asian currency
  crisis impact).  Average revenue per car was off 1% versus last year at
  $1,134 per car from last year's $1,151.  The decline in ARC was driven by
  large volumes of very low-ARC empty repositioning moves for intermodal
  traffic; higher low-ARC stone moves and shortfalls of high-ARC steel
  traffic;  large volumes of very low-ARC storage-in-transit moves in the
  chemical business; the absence of long-haul Pacific Northwest grain moves
  (due to the Asian currency crisis); and the new shorter-distance Ford
  traffic.  The following table summarizes the year-over-year change in rail
  commodity revenue and ARC by commodity type (carloads in thousands and 
  commodity revenues in millions):
  
                                        Change           % Change    
               Cars    ARC     CR   Cars  ARC    CR    Cars ARC   CR 
              ----- ------ ------  ----- ----- ------  ---- ---- ---- 
  Automotive    466 $1,455 $  677    (8) $(38) $ (29)   (2)  (3)  (4)
  Agriculture   610  1,543    942   (88)  (43)  (166)  (13)  (3) (15)
  Intermodal  1,859    601  1,116  (282)  (26)  (227)  (13)  (4) (17)
  Chemicals     681  1,699  1,158   (63)  (72)  (161)   (8)  (4) (12)
  Energy      1,319  1,138  1,501   (14)   20     11    (1)   2    1
  Industrial  1,021  1,332  1,359   (94)  (29)  (159)   (8)  (2) (10)
              ----- ------ ------  ---   ----  -----    ---  --- ----
  Total       5,956 $1,134 $6,753 (549)  $(17) $(731)   (8)  (1) (10)
              ===== ====== ====== ====   ====  =====    ===  === ====
  
  
  EXPENSE SUMMARY  -  Operating expenses were $6,800 million for the nine
  months ended September 30, 1998, $398 million (6%) higher than 1997
  operating costs of $6,402 million.  Labor costs were $106 million (4%)
  higher than 1997.  Slower train speeds caused the need for increased train
  crew levels, while inflation and other service-related cost overruns

<PAGE> 16


  contributed to higher costs.   These higher costs were partially offset by
  lower volumes (loads down 8%) and the elimination of duplicative positions
  as part of merger implementation.  Depreciation expense grew $20 million,
  or 3%, to $745 million, driven by the Railroad's extensive capital
  programs in 1997 and 1998.  Materials and supplies costs were up $9
  million to $396 million, or 2%, from 1997, reflecting increased
  maintenance of locomotives and freight cars, and higher material costs. 
  Fuel and utilities expenses were down $161 million, or 21%, from 1997.  A
  reduction in gross-ton miles year-over-year (down 7%) generated 
  volume-related fuel savings, while prices fell 9 cents per gallon (13%) 
  to 62 cents.  Rent expense was up $69 million, or 7%, versus 1997.  Slower 
  train speeds caused car cycle times to run 3.1 days above 1997 levels. 
  Locomotives leased for service recovery also increased rent costs 
  year-over-year.  These higher costs were offset by lower volumes due to 
  service shortfalls.  Other costs, including purchased services, increased 
  $355 million, or 35%, from 1997, largely reflecting costs associated with 
  the resolution of customer claims, as well as higher property taxes, 
  contract services and legal costs.
    
  NON-OPERATING COSTS - Other income, net declined $19 million reflecting
  the absence of the 1997 signboard business sale and various line sales. 
  Interest costs were $83 million unfavorable to 1997 at $443 million,
  reflecting higher interest costs for borrowings to fund capital spending
  which could not be funded from operating cash flow at the Railroad due to
  the effects of service recovery.  Income taxes (State & Federal) were
  favorable $469 million compared to 1997, primarily the result of lower
  pre-tax income.
  
                            Other Matters
                               
  Accounting Pronouncements - In June 1997, the Financial Accounting
  Standards Board (FASB) issued Statement No. 130, "Reporting Comprehensive
  Income" (FAS 130), that is effective for all periods in 1998, including
  interim periods.  The Company has adopted the provisions of FAS 130
  effective January 1, 1998.  The components of comprehensive income
  include, among other things, changes in the market value of derivative
  instruments which qualify for hedge accounting under Statement No. 133,
  when adopted, and a net loss recognized as an additional pension liability
  but not yet recognized as net periodic pension cost.  There is no impact
  from adopting FAS 130 for the nine months ended September 30, 1998.
  
  Also in June 1997, the FASB issued Statement No. 131, "Disclosures about
  Segments of an Enterprise and Related Information", that is effective in
  1998.  The Company currently complies with the provisions of this
  Statement.
  
  In February 1998, the FASB issued Statement No. 132, "Employers'
  Disclosures about Pensions and Other Postretirement Benefits," that is
  effective in 1998 (FAS 132).  FAS 132 revises and standardizes disclosures
  required by FAS 87, 88, and 106.  This Statement will only affect footnote
  disclosure and will not otherwise have an effect on the financial 
  statements of the Company. 
   
<PAGE> 17


  In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
  Instruments and Hedging Activities" (FAS 133), that will be effective in
  2000.  Management is just beginning the process of determining the effect,
  if any, FAS 133 will have on the Company's financial statements.
  
  Commitments and Contingencies - There are various claims and lawsuits
  pending against the Company and certain of its subsidiaries.  In addition,
  the Company and its subsidiaries are subject to various Federal, state and
  local environmental laws and are currently participating in the
  investigation and remediation of various sites.  A discussion of certain
  claims, lawsuits and contingencies is set forth in Note 7 to the
  condensed consolidated financial statements, which is incorporated herein
  by reference. 
  
  Year 2000 - The Year 2000 (Y2K) compliance project at the Company includes
  modifications to software (internally developed and purchased), hardware
  and embedded chips inside equipment and machinery.  The Railroad's
  enterprise-wide project encompasses computer systems,  equipment in
  multiple data centers and a telecommunications network spread over 23
  states.  Equipment containing embedded computer chips includes locomotives,  
  automated train switching systems, computer aided train dispatching systems,
  signaling systems, computerized fueling stations, weigh-in-motion scales,
  crane, lifts, PBX systems, elevators, and computerized monitoring systems
  throughout the Railroad. The Company began work early on its Y2K 
  project,beginning research in 1994 and completing an impact analysis of its 
  mainframe COBOL systems in 1995.  The Y2K project has been a high priority 
  since then.
  
  The Company's Y2K Project is divided into five major initiatives, as
  follows:
  
     The Mainframe Systems - consists of the Company's enterprise-wide
     mainframe systems.  Modifications of these systems are ahead of
     schedule, and the Railroad estimates that approximately 90% of these
     systems have been converted, tested, and certified as Y2K compliant as
     of September 30, 1998.  The remainder are expected to be completed by
     December 31, 1998.  Periodic audits are planned during 1999 to ensure
     that certified programs remain Y2K complaint.
  
     The Client Server Systems - consists of the Railroad's enterprise-wide
     client server systems.  Modifications of these systems are on schedule,
     and the Railroad estimates that approximately 50% of all critical
     client server systems have been converted, tested, and certified as Y2K
     compliant as of September 30, 1998.  The remainder are expected to be
     completed by December 31, 1998.  The non-critical client server systems
     are scheduled to be certified as Y2K compliant by mid-1999. 
  
     The User Department Developed Systems - consists of both mainframe and
     PC-based systems developed by internal user departments.  Modifications
     of these systems are on schedule, and the Company estimates that
     approximately 84% of these systems have been converted, tested, and
     certified as Y2K compliant as of September 30, 1998.  Ninety-eight
     percent of the systems will be completed by December 31, 1998, and the
     remaining 2% are non-critical systems and will be completed in the
     first quarter of 1999.
  

<PAGE> 18

  
     The Vendor Supplied and Embedded Systems - consists of vendor-supplied
     software, desktop, mainframe and server hardware, databases and
     operating systems, as well as, equipment and machinery with embedded
     systems.  Work on these components and systems is on schedule, and the
     Company estimates that approximately 90% of the suppliers of these
     systems have indicated that they have a solid plan in place to be Year
     2000 compliant in a timely manner.  The review of the remaining 10%
     will be completed in 1998, which will result in either solid plans or
     a contingency direction.  To assure safety and Y2K compliance, the
     Company is testing selected critical software, hardware and embedded
     systems, even if the vendor has already certified the product and the
     Company is working with other railroads via involvement in various
     Association of American Railroad (AAR) committees and is sharing
     information on the compliance and testing of safety critical components
     common to the industry.  In addition, the Company has helped fund the
     development of a shared web site for this purpose, and access to this
     information is now available to participating railroads.
  
     The Electronic Commerce Systems - consists of all electronic exchanges
     of information with customers, vendors, other railroads, and financial
     institutions.  The railroad industry has agreed on a standard 4-digit
     year for all electronic interchanges.   The Railroad expects to be able
     to transmit and receive the new EDI standard which involves a 4-digit
     year by January 1999.  In addition, by December 1998, the Railroad will
     be in position to continue to handle EDI transactions in existing     
     formats with proper interpretation of the century date.  The Company is
     working with the AAR in testing the new standard with other railroads
     and with its trading partners.
  
  For each of these initiatives, seven major categories of events have been
  identified for which contingency plans are being developed.  These
  categories are 1) key data - integrity/loss, 2) critical software, 3)
  critical hardware, 4) communications, 5) critical supplies and suppliers,
  6) facilities, and 7) key personnel.  The contingency plans also include
  a Y2K command center which will be staffed 24 hours a day in the fourth
  quarter of 1999 and continuing into early 2000 for any problems that might
  occur due to Y2K.  The staff will be comprised of technical experts to fix
  or advise what to fix if systems fail, and knowledgeable representatives
  from each business unit.  Preliminary contingency plans are on schedule to
  be completed by year-end 1998 and will be adjusted as needed in 1999.
  
  Costs to convert these systems are expensed as incurred.  As of September
  30, 1998, more than half of the costs of the Y2K project, estimated to be
  $51 million in total, have been expensed. In addition, as of September 30,
  1998, approximately 85% of the Company's systems have been certified as
  Y2K compliant, and the majority of the remaining systems are expected to
  be modified by year-end 1998.  Although the Company believes its systems
  will be successfully modified, failure to modify its systems and purchased
  equipment, or failure on the part of other entities with whom the Company
  exchanges or on whom the Company relies for data, to successfully modify 
  their systems, could materially impact operations and financial results 
  in the year 2000.
  


<PAGE> 19
  
                        CAUTIONARY INFORMATION
  
  Certain information included in this report contains, and other materials
  filed or to be filed by the Company with the Securities and Exchange
  Commission (as well as information included in oral statements or other
  written statements made or to be made by the Company) contain or will
  contain, forward-looking statements within the meaning of the Securities
  Act of 1933, as amended, and the Securities Exchange Act of 1934, as
  amended.  Such forward-looking information may include, without
  limitation, statements that the Company does not expect that claims,
  lawsuits, environmental costs, commitments, contingent liabilities, labor
  negotiations or other matters will have a material adverse effect on its
  consolidated financial condition, results of operations or liquidity and
  other similar expressions concerning matters that are not historical
  facts, and projections or predictions as to the Company's financial or
  operational results.  Such forward-looking information is or will be based
  on information available at that time, and is or will be subject to risks
  and uncertainties that could cause actual results to differ materially
  from those expressed in the statements.  Important factors that could
  cause such differences include, but are not limited to whether the Company
  is fully successful in overcoming its congestion-related problems and
  implementing its service recovery plans and other financial and
  operational initiatives, industry competition and regulatory developments,
  natural events such as severe weather, floods and earthquakes, the effects
  of adverse general economic conditions, changes in fuel prices, labor
  strikes, the impact of year 2000 systems problems and the ultimate outcome
  of shipper claims related to congestion, environmental investigations or
  proceedings and other types of claims and litigation.
  
  Item 3.  Quantitative and Qualitative Disclosures About Market Risk
  
  The Company uses derivative financial instruments in limited instances for
  other than trading purposes to manage risk as it relates to fuel prices. 
  Where the Company has fixed fuel prices through the use of swaps, futures
  or forward contracts, the Company has mitigated the downside risk of
  adverse price movements; however, it has also limited future gains from
  favorable movements. 
  
  The Company addresses market risk related to these instruments by
  selecting instruments whose value fluctuations correlate highly with the
  underlying item being hedged.  Credit risk related to derivative financial
  instruments, which is minimal, is managed by requiring minimum credit
  standards for counterparties and periodic settlements.  The total credit
  risk associated with the Company's counterparties was $1 million at
  September 30, 1998.  The Company has not been required to provide, nor has
  it received, any collateral relating to its hedging activities.  
  
  The fair market value of the Company's derivative financial instrument
  positions at September 30, 1998 was determined based upon current fair
  market values as quoted by recognized dealers.
  
  Fuel - Over the past three years, fuel costs approximated 10% of the
  Company's total operating expenses.  As a result of the significance of


<PAGE> 20

  the fuel costs and the historical volatility of fuel prices, the Railroad
  periodically use swaps, futures and forward contracts to mitigate the
  impact of fuel price volatility. The intent of this program is to protect
  the Company's operating margins and overall profitability from adverse
  fuel price changes.  
  
  At September 30, 1998, the Railroad had hedged approximately 49% of its
  estimated remaining 1998 diesel fuel consumption at $0.51 per gallon, on
  a Gulf Coast basis and approximately 37% of its estimated 1999 diesel fuel
  consumption at $0.42 per gallon, on a Gulf Coast basis. At September 30,
  1998, the Railroad had outstanding swap agreements covering fuel purchases
  of $291 million, with gross and net asset positions of $1 million.  Fuel
  hedging increased third quarter 1998 fuel expense by $25 million and third
  quarter 1997 fuel expense by approximately $1 million.  For the nine
  months ended September 30, fuel hedging increased 1998 fuel expense by $59
  million and 1997 fuel expense by approximately $1 million.
  
  PART II.  OTHER INFORMATION
  
  Item 1.  Legal Proceedings
  
  The discussion of certain legal proceedings affecting the Company and/or
  certain of its subsidiaries set forth in Note 5 to the condensed
  consolidated financial statements included in Item 1 of Part I of this
  Report is incorporated herein by reference.  In addition to those matters,
  the following proceedings, or developments in proceedings presently
  pending, arose or occurred during the third quarter of 1998.
  
  SOUTHERN PACIFIC ACQUISITION: As previously reported, various appeals have
  been filed with respect to the STB's August 12, 1996 decision (the
  Decision) approving the acquisition of control of Southern Pacific by the
  Corporation. All of the appeals have been consolidated in the U.S. Court
  of Appeals for the District of Columbia Circuit. Oral argument in the case
  was held on September 11, 1998, and the case is awaiting decision.  The
  Company believes that it is unlikely that the disposition of the remaining
  appeals will have a material adverse impact on its consolidated financial
  condition or its results of operations.
  
  ENVIRONMENTAL MATTERS:  As previously reported, the Railroad has received
  approximately 20 Notices of Violation (NOVs) from the South Coast Air
  Quality Management District (the District) relating to fumes emitted from
  idling diesel locomotives at Slover siding near the Railroad's yard in
  West Colton, California.  Trains awaiting crews or room to enter the West
  Colton yard have been parked at Slover siding with their engines running
  for various amounts of time, causing exhaust fumes to enter the backyards
  and homes of residents living along the siding.  The District has cited
  the Railroad for creating a public nuisance pursuant to the California
  Health and Safety Code and the District's regulations.  Each violation
  carries a maximum civil penalty of $25,000 per day, which may be increased
  in some circumstances to $50,000 per day.  Although the Railroad modified
  its operating procedures for trains entering the West Colton yard to
  reduce the problem, the District entered an order with respect to the
  situation which the Railroad believes is an impermissible burden on

<PAGE> 21


  interstate commerce and is preempted by applicable federal law.  The
  Railroad has filed an action in federal district court seeking to overturn
  the District's order on those grounds, but the court has not yet ruled on
  this matter.  The Railroad and the District have not entered into
  discussions concerning settlement of the outstanding NOVs pending
  resolution of this lawsuit.  Accordingly, the exact amount of any payment
  to the District in connection with the NOVs cannot be determined at this
  time.
  
  The Railroad has received notification that the District Attorney for San
  Bernardino County, California has opened an investigation into the
  Railroad's handling of several hazardous material spills in Barstow and
  West Colton, California.  The incident in Barstow involved a rear-end
  collision between two trains near Barstow in August 1997 that resulted in
  a spillage of locomotive diesel fuel and leakage from two tank cars
  containing toxic chemicals.  Three incidents in the West Colton yard in
  1998 involved leaking tank cars and spills of diesel fuel from a derailed
  locomotive.  The District Attorney's office is investigating allegations
  that cleanup procedures were not undertaken promptly and required notices
  were not given in connection with these incidents.  An initial indication
  of fines exceeding $250,000 with respect to these incidents has been
  communicated by the District Attorney's office.  While the Railroad
  expects to enter into settlement negotiations with the District Attorney's
  office, the exact amount of any fines or penalties that may be required to
  be paid as a part of any settlement cannot be determined at this time.
  
    
<PAGE> 22


  Item 6.    EXHIBITS AND REPORTS ON FORM 8-K
             --------------------------------
        
          (a) Exhibits
              --------
              3     By-Laws of Union Pacific Railroad Company, as
                    amended as of September 8, 1998.
  
              10.1  Letter Agreement, dated September 8, 1998, between UPC 
                    and Mr. Ivor J. Evans, is  incorporated herein by 
                    reference to Exhibit 10.1 to the Corporation's Quarterly
                    Report on Form 10-Q for the quarter ended September 30,
                    1998, as filed with the Securities and Exchange Commission 
                    on November 12, 1998
             
              12    Ratio of Earnings to Fixed Charges
  
              27    Financial Data Schedule
                  
          (b) Reports on Form 8-K
              -------------------
        
              On July 23, 1998,  the Company filed a Current Report on
              Form 8-K announcing second quarter 1998 results, which Report 
              was refiled on July 24, 1998 for the purpose of changing EDGAR 
              data concerning address information for the Company.
                                                                               
[SIGNATURE]

                              SIGNATURES
  
  
  Pursuant to the requirements of the Securities Exchange Act of 1934,
  Registrant has duly caused this report to be signed on its behalf by the
  undersigned thereunto duly authorized, on this 12th day of November, 1998.
  
  

  
  
                                         UNION PACIFIC RAILROAD COMPANY
  
  
  
                                         By /s/     John J. Koraleski
                                            -------------------------- 
                                                    John J. Koraleski
                                            Executive Vice President-Finance 
                                               and Chief Financial Officer
                                              (chief accounting officer and
                                               duly authorized officer)
  
  
  
  
  
                                
<EXHIBIT INDEX>  INDEX  
  
                     
  UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES
  
                                  EXHIBIT INDEX
  
  Exhibit No.                 Description              
  -----------  -----------------------------------------
  
    3             By-Laws of Union Pacific Railroad Company, as
                  amended as of September 8, 1998.
  
    10.1          Letter Agreement, dated September 8, 1998, between UPC and 
                  Mr. Ivor J. Evans, is incorporated herein by reference to
                  Exhibit 10.1 to the Corporation's Quarterly Report on 
                  Form 10-Q for the quarter ended September 30, 1998, as 
                  filed with the Securities and Exchange Commission on 
                  November 12, 1998
  
    12            Ratio of Earnings to Fixed Charges
  
    27            Financial Data Schedule