UNION PACIFIC CORP - 10-Q Quarterly Report

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FORM 10-Q

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

(Mark One)

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

For the quarterly period ended June 30, 2002

- 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 1-6075

UNION PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)

UTAH 13-2626465
(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) 271-5777
(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 July 31, 2002, there were 252,770,119 shares of the Registrant's
Common Stock outstanding.

UNION PACIFIC CORPORATION
INDEX

PART I. FINANCIAL INFORMATION

2

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Union Pacific Corporation and Subsidiary Companies

The accompanying notes are an integral part of these Consolidated Financial
Statements.

3

Consolidated Statements of Income (Unaudited)
Union Pacific Corporation and Subsidiary Companies

The accompanying notes are an integral part of these Consolidated Financial
Statements.

4

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Union Pacific Corporation and Subsidiary Companies

The accompanying notes are an integral part of these Consolidated Financial
Statements.

5

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Union Pacific Corporation and Subsidiary Companies

The accompanying notes are an integral part of these Consolidated Financial
Statements.

6

CONSOLIDATED STATEMENT OF CHANGES IN COMMON SHAREHOLDERS' EQUITY (UNAUDITED)
Union Pacific Corporation and Subsidiary Companies

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

[a] Common stock $2.50 par value; 500,000,000 shares authorized; 275,499,087
shares issued at beginning of period: 275,565,937 shares issued at end of
period.

[b] 22,905,598 treasury shares at end of period, at cost.

The accompanying notes are an integral part of these Consolidated Financial
Statements.

7

UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. RESPONSIBILITIES FOR FINANCIAL STATEMENTS - The Consolidated Financial
Statements 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 presented. The Statement of Consolidated Financial Position at
December 31, 2001 is derived from audited financial statements. The Consolidated
Financial Statements should be read in conjunction with the Consolidated
Financial Statements and notes thereto contained in the Annual Report on Form
10-K for Union Pacific Corporation (the Corporation or UPC) for the year ended
December 31, 2001. The results of operations for the three months and six months
ended June 30, 2002 are not necessarily indicative of the results for the entire
year ending December 31, 2002. Certain prior year amounts have been reclassified
to conform to the 2002 financial statement presentation.

2. SEGMENTATION - Union Pacific Corporation consists of two reportable segments,
rail and trucking, and UPC's other product lines (Other). The rail segment
includes the operations of the Corporation's indirect wholly owned subsidiary,
Union Pacific Railroad Company (UPRR) and UPRR's subsidiaries and rail
affiliates (collectively, the Railroad). The trucking segment includes Overnite
Transportation Company (OTC) and Motor Cargo Industries, Inc. (Motor Cargo) as
of November 30, 2001, both operating as separate and distinct subsidiaries of
Overnite Corporation (Overnite), an indirect wholly owned subsidiary of UPC. The
Corporation's other operations are comprised of the corporate holding company
(which largely supports the Railroad), Fenix LLC and affiliated technology
companies and self-insurance activities, in addition to all appropriate
consolidating entries.

The following table details reportable financial information for UPC's
segments and other operations for the three months and six months ended June 30,
2002 and 2001:

[a] The Corporation has no significant intercompany sales activities.

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3. FINANCIAL INSTRUMENTS

STRATEGY AND RISK - The Corporation and its subsidiaries use derivative
financial instruments in limited instances for other than trading purposes to
manage risk related to changes in fuel prices and to achieve the Corporation's
interest rate objectives. The Corporation uses swaps, futures and/or forward
contracts to mitigate the downside risk of adverse price movements and hedge the
exposure to variable cash flows. The use of these instruments also limits future
gains from favorable movements. The Corporation uses interest rate swaps to
manage its exposure to interest rate changes. The purpose of these programs is
to protect the Corporation's operating margins and overall profitability from
adverse fuel price changes or interest rate fluctuations.

The Corporation may also use swaptions to secure near-term swap prices.
Swaptions are swaps that are extendable past their base period at the option of
the counterparty. Swaptions do not qualify for hedge accounting treatment.

MARKET AND CREDIT RISK - The Corporation addresses market risk related to
derivative financial instruments by selecting instruments with value
fluctuations that highly correlate with the underlying item being hedged. Credit
risk related to derivative financial instruments, which is minimal, is managed
by requiring high credit standards for counterparties and periodic settlements.
At June 30, 2002, the Corporation has not been required to provide collateral,
nor has UPC received collateral relating to its hedging activities.

DETERMINATION OF FAIR VALUE - The fair values of the Corporation's derivative
financial instrument positions at June 30, 2002 and December 31, 2001, detailed
below, were determined based upon current fair values as quoted by recognized
dealers or developed based upon the present value of expected future cash flows
discounted at the applicable U.S. Treasury rate, London Interbank Offered Rates
(LIBOR) or swap spread.

INTEREST RATE STRATEGY - The Corporation manages its overall exposure to
fluctuations in interest rates by adjusting the proportion of fixed and floating
rate debt instruments within its debt portfolio over a given period. The mix of
fixed and floating rate debt is largely managed through the issuance of targeted
amounts of each as debt matures or as incremental borrowings are required.
Derivatives are used as one of the tools to obtain the targeted mix. In
addition, the Corporation also obtains flexibility in managing interest costs
and the interest rate mix within its debt portfolio by evaluating the issuance
of and managing outstanding callable fixed-rate debt securities.

Swaps allow the Corporation to convert debt from fixed rates to variable
rates and thereby hedge the risk of changes in the debt's fair value
attributable to the changes in the benchmark interest rate (LIBOR). The swaps
have been accounted for using the short-cut method as allowed by Financial
Accounting Standard (FAS) 133; therefore no ineffectiveness has been recorded
within the Corporation's Consolidated Financial Statements. In January 2002, the
Corporation entered into an interest rate swap on $250 million of debt with a
maturity date of December 2006. In May 2002, the Corporation entered into an
interest rate swap on $150 million of debt with a maturity date of February
2023.

FUEL STRATEGY - Fuel costs are a significant portion of the Corporation's total
operating expenses. As a result of the significance of fuel costs and the
historical volatility of fuel prices, the Corporation's transportation
subsidiaries use swaps, futures and/or forward contracts to mitigate the impact
of adverse fuel price changes. In addition, the Corporation at times may use
swaptions to secure near-term swap prices.

9

The following is a summary of the Corporation's derivative financial
instruments at June 30, 2002 and December 31, 2001:

[a] Rail fuel hedges expired December 31, 2001. Rail fuel hedges included the
swap portion of a swaption with a base term expiring December 31, 2001, and
they excluded the option portion of the swaption to extend the swap through
December 31, 2002.

[b] Excluding taxes, transportation costs and regional pricing spreads.

[c] Rail fuel hedges expire December 31, 2002. Rail fuel hedges include the swap
portions of the swaptions with base terms expiring December 31, 2002, and
they exclude the option portions of the swaptions to extend the swaps
through December 31, 2003.

[d] Rail fuel hedges which are in effect during 2003. These hedges expire
December 31, 2003.

The fair value asset and liability positions of the Corporation's
outstanding derivative financial instruments at June 30, 2002 and December 31,
2001 were as follows:

Fuel hedging positions will be reclassified from accumulated other
comprehensive income to fuel expense over the life of the hedge as fuel is
consumed. Rail fuel swaption positions will be reflected in the Consolidated
Statements of Income as fuel expense over the life of the swap and as other
income as the fair value of the outstanding option fluctuates.

10

The Corporation's use of derivative financial instruments had the following
impact on pre-tax income for the three months and six months ended June 30, 2002
and 2001:

Through June 30, 2002, the Corporation had recorded less than $1 million for
fuel hedging ineffectiveness.

The Corporation's interest rate swaps have been accounted for using the
short-cut method as allowed by FAS 133; therefore, no ineffectiveness has been
recorded within the Corporation's Consolidated Financial Statements.

SALE OF RECEIVABLES - The Railroad has sold, on a revolving basis, an undivided
percentage ownership interest in a designated pool of accounts receivable to
third parties through a bankruptcy-remote subsidiary. Receivables are sold at
carrying value, which approximates fair value. 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 June 30,
2002 and December 31, 2001, accounts receivable are presented net of
approximately $600 million receivables sold. In May 2002, the sale of
receivables program was renewed for one year without any significant term
changes.

4. DEBT

CREDIT FACILITIES - On June 30, 2002, the Corporation had $1.875 billion in
revolving credit facilities available, of which $875 million expires in March
2003, with the remaining $1.0 billion expiring in 2005. The credit facility for
$875 million includes $825 million that was entered into during March 2002 and
$50 million entered into during June 2002. The $1.0 billion credit facility was
entered into during March 2000. The credit facilities are designated for general
corporate purposes and none of the credit facilities were used as of June 30,
2002. Commitment fees and interest rates payable under the facilities are
similar to fees and rates available to comparably rated investment-grade
borrowers.

CONVERTIBLE PREFERRED SECURITIES - Union Pacific Capital Trust (the Trust), a
statutory business trust sponsored and wholly owned by the Corporation, has
issued $1.5 billion aggregate liquidation amount of 6-1/4% Convertible Preferred
Securities (the CPS). Each of the CPS has a stated liquidation amount of $50 and
is convertible, at the option of the holder, into shares of UPC's common stock,
par value $2.50 per share (the Common Stock), at the rate of 0.7257 shares of
Common Stock for each of the CPS, equivalent to a conversion price of $68.90 per
share of Common Stock, subject to adjustment under certain circumstances. The
CPS accrue and pay cash distributions quarterly in arrears at the annual rate of
6-1/4% of the stated liquidation amount. The Corporation owns all of the common
securities of the Trust. The proceeds from the sale of the CPS and the common
securities of the Trust were invested by the Trust in $1.5 billion aggregate
principal amount of the Corporation's Convertible Junior Subordinated Debentures
due 2028, which debentures represent the sole assets of the Trust. For financial
reporting purposes, the Corporation has recorded distributions payable on the
CPS as an interest charge to earnings in the Consolidated Statements of Income.

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SHELF REGISTRATION STATEMENT AND SIGNIFICANT NEW BORROWINGS - During January
2002, under an existing shelf registration statement, the Corporation issued
$300 million of 6-1/8% fixed rate debt with a maturity of January 15, 2012. The
proceeds from the issuance were used for repayment of debt and other general
corporate purposes. In April 2002, the Corporation called its $150 million,
8-5/8% debentures due May 15, 2022 for redemption in May 2002. The Corporation
issued $350 million of 6-1/2% fixed rate debt with a maturity of April 15, 2012,
in order to fund the redemption. The Corporation used the remaining proceeds to
repay other debt and for other general corporate purposes. On May 17, 2002, the
Corporation issued the remaining $50 million of debt under the existing shelf
registration statement. The debt carries a fixed rate of 5-3/4% with a maturity
of October 15, 2007. The proceeds from the issuance were used for repayment of
debt and other general corporate purposes.

The Corporation filed a new $1.0 billion shelf registration statement, which
became effective in July 2002. Under the new shelf registration statement, the
Corporation may issue, from time to time, any combination of debt securities,
preferred stock, common stock or warrants for debt securities or preferred stock
in one or more offerings.

During June 2002, UPRR entered into a capital lease covering new
locomotives. The related capital lease obligation totaled approximately $126
million and is included in the Consolidated Statements of Financial Position as
debt.

5. EARNINGS PER SHARE - The following table provides a reconciliation between
basic and diluted earnings per share for the three months and six months ended
June 30, 2002 and 2001:

6. OTHER INCOME - Other income included the following for the three months and
six months ended June 30, 2002 and 2001:

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7. COMMITMENTS AND CONTINGENCIES

CLAIMS AND LITIGATION - There are various claims and lawsuits pending against
the Corporation and certain of its subsidiaries, in addition to unasserted
claims. It is not possible at this time for the Corporation to determine fully
the effect of all such claims on its consolidated financial condition, results
of operations or liquidity; however, to the extent possible, where unasserted
claims can be estimated and where such claims are considered probable, the
Corporation has recorded a liability. The Corporation does not expect that any
known lawsuits or claims, including unasserted claims, will have a material
adverse effect on its consolidated financial condition, results of operations or
liquidity.

Western Resources (Western) filed a complaint on January 24, 2000 in the
U.S. District Court for the District of Kansas alleging that UPRR and The
Burlington Northern Santa Fe Railway Company (BNSF) materially breached their
service obligations under the transportation contract to deliver coal in a
timely manner to Western's Jeffrey Energy Center. The original complaint sought
recovery of consequential damages and termination of the contract, excusing
Western from further performance. In an amended complaint filed September 1,
2000, Western claimed the right to retroactive termination and added a claim for
restitution. On October 23, 2001, Western moved for leave to file a second
amendment to its complaint to add counts for innocent misrepresentation and
negligent misrepresentation and to request rescission of the contract. During
the period covered by this report, the judge affirmed the magistrate's earlier
decision to reject Western's motion for leave to amend the complaint to include
claims for negligent and innocent misrepresentation and rescission on grounds
that the motion was not timely. Two motions filed by the railroads to remove the
restitution and termination claims were denied on June 19, 2002 and June 26,
2002. The trial date for this action has been rescheduled from August 6, 2002 to
August 19, 2002 to allow for the disposition of several procedural motions. The
railroads believe they have substantial defenses in the case and continue to
defend it aggressively.

ENVIRONMENTAL - The Corporation generates and transports hazardous and
nonhazardous waste in its current and former operations, and is subject to
federal, state and local environmental laws and regulations. The Corporation has
identified approximately 370 active sites at which it is or may be liable for
remediation costs associated with alleged contamination or for violations of
environmental requirements. This includes 52 sites that are the subject of
actions taken by the U.S. government, 28 of which are currently on the Superfund
National Priorities List. Certain federal legislation imposes joint and several
liability for the remediation of identified sites; consequently, the
Corporation's ultimate environmental liability may include costs relating to
other parties, in addition to costs relating to its own activities at each site.

When environmental issues have been identified with respect to the property
owned, leased or otherwise used in the conduct of the Corporation's business,
the Corporation and its external consultants perform environmental assessments
on such property. The Corporation expenses the cost of the assessments as
incurred. The Corporation accrues the cost of remediation where its obligation
is probable and such costs can be reasonably estimated.

As of June 30, 2002, the Corporation has a liability of $170 million accrued
for future environmental costs. The liability includes future costs for
remediation and restoration of sites, as well as for ongoing monitoring costs,
but excludes any anticipated recoveries from third parties. Cost estimates are
based on information available for each site, financial viability of other
potentially responsible parties, and existing technology, laws and regulations.
The Corporation believes that it has adequately accrued for its ultimate share
of costs at sites subject to joint and several liability. However, the ultimate
liability for remediation is difficult to determine because of the number of
potentially responsible parties involved, site-specific cost sharing
arrangements with other potentially responsible parties, the degree of
contamination by various wastes, the scarcity and quality of volumetric data
related to many of the sites and/or the speculative nature of remediation costs.
The Corporation expects to pay out the majority of the June 30, 2002,
environmental

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liability over the next five years, funded by cash generated from operations.
The impact of current obligations is not expected to have a material adverse
effect on the results of operations, financial condition or liquidity of the
Corporation.

OTHER MATTERS - The Corporation and its subsidiaries periodically enter into
financial and other commitments in connection with their businesses. It is not
possible at this time for the Corporation to determine fully the effect of all
unasserted claims on its consolidated financial condition, results of operations
or liquidity; however, to the extent possible, where unasserted claims can be
estimated and where such claims are considered probable, the Corporation has
recorded a liability. The Corporation does not expect that any known lawsuits,
claims, environmental costs, commitments, contingent liabilities or guarantees
will have a material adverse effect on its consolidated financial condition,
results of operations or liquidity.

At June 30, 2002, the Corporation had unconditional purchase obligations of
$392 million for the purchase of locomotives as part of the Corporation's
multi-year capital asset acquisition plan. In addition, the Corporation was
contingently liable for $355 million in guarantees and $53 million in letters of
credit at June 30, 2002. These contingent guarantees were entered into in the
normal course of business and include guaranteed obligations of affiliated
operations. The Corporation is not aware of any existing event of default, which
would require it to satisfy these guarantees.

8. ACCOUNTING PRONOUNCEMENTS - In August 2001, the Financial Accounting
Standards Board (FASB) issued FAS 143, "Accounting for Asset Retirement
Obligations" (FAS 143). FAS 143 requires the Corporation to record the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred and is effective for the Corporation's fiscal year beginning
January 1, 2003. Management is in the process of evaluating the impact this
standard will have on the Corporation's Consolidated Financial Statements.

In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" (FAS 145). FAS 145 concludes that debt extinguishments used as part
of a company's risk management strategy should not be classified as an
extraordinary item. FAS 145 also requires sale-leaseback accounting for certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions. Management believes that FAS 145 will not have a
significant impact on the Corporation's Consolidated Financial Statements.

In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (FAS 146). FAS 146 requires that a
liability for a cost associated with an exit or disposal activity is recognized
at fair value when the liability is incurred and is effective for exit or
disposal activities that are initiated after December 31, 2002. Management is
evaluating the impact this standard may have on the Corporation's Consolidated
Financial Statements.

14

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES
RESULTS OF OPERATIONS

THREE AND SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO
THREE AND SIX MONTHS ENDED JUNE 30, 2001

Union Pacific Corporation (UPC or the Corporation) consists of two reportable
segments, rail and trucking, and UPC's other product lines (Other). The rail
segment includes the operations of the Corporation's indirect wholly owned
subsidiary, Union Pacific Railroad Company (UPRR) and UPRR's subsidiaries and
rail affiliates (collectively, the Railroad). The trucking segment includes
Overnite Transportation Company (OTC) and Motor Cargo Industries, Inc. (Motor
Cargo), both operating as separate and distinct subsidiaries of Overnite
Corporation (Overnite), an indirect wholly owned subsidiary of UPC. The
Corporation's other product lines are comprised of the corporate holding company
(which largely supports the Railroad), Fenix LLC and affiliated technology
companies (Fenix), and self-insurance activities, in addition to all appropriate
consolidating entries (see note 2 to the Consolidated Financial Statements).

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management's Discussion and Analysis of Financial Condition and Results of
Operations addresses Union Pacific Corporation's Consolidated Financial
Statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires management to make estimates and assumptions. Management
bases its estimates on historical experience and on various other factors that
are believed to be reasonable under the circumstances. Actual results may vary
under different assumptions or conditions.

Management believes the following accounting policies are among the most
critical in the preparation of the Consolidated Financial Statements in that
they depend upon the application of judgement and the extensive use of
estimates.

Revenue recognition - The Corporation recognizes transportation revenues on a
percentage-of-completion basis as freight moves from origin to destination.
Other revenue is recognized as service is performed or contractual obligations
are met.

Environmental costs - When environmental issues have been identified with
respect to the property owned, leased or otherwise used in the conduct of the
Corporation's business, the Corporation and its consultants perform
environmental assessments on such property. The Corporation expenses the cost
for the assessments as incurred. The Corporation accrues the cost of remediation
where its obligation is probable and such costs can be reasonably estimated.

Personal injury - The cost of injuries to employees and others on Railroad
property or in accidents involving the trucking segment is charged to expense
based on actuarial estimates of the ultimate cost and number of incidents each
year.

CONSOLIDATED

NET INCOME - The Corporation reported net income of $304 million ($1.21 per
basic share and $1.15 per diluted share) in the second quarter of 2002, compared
to $243 million ($0.98 per basic share and $0.95 per diluted share) in the
second quarter of 2001. Year-to-date net income totaled $526 million ($2.09 per
basic share and $2.01 per diluted share) compared to $424 million ($1.71 per
basic share and $1.67 per diluted share) for the same period in 2001. The
increase in net income for both periods was the result of revenue growth, lower
fuel prices, productivity gains and lower interest expense, which offset the
effects of wage and benefit inflation and lower other income. Productivity is
measured as total output during the quarter.

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Total output is measured by both gross ton miles per inflation-adjusted expense
dollar and gross ton miles per employee. Cost control is defined as focused
actions to reduce discretionary spending and failure cost minimization.

OPERATING REVENUES - Operating revenues increased $156 million (5%) in the
second quarter to $3.2 billion. Year-to-date revenues increased $180 million
(3%) to $6.1 billion. Revenue growth in both periods is the result of increased
commodity revenue led by gains in Intermodal and Automotive carloads. This
increase also reflects 14% revenue growth in the trucking segment in the second
quarter and 12% revenue growth year-to-date due to the acquisition of Motor
Cargo in November 2001. Excluding Motor Cargo in the current year, operating
revenues were up $121 million (4%) for the second quarter and were up $113
million (2%) year-to-date.

OPERATING EXPENSES - Operating expenses increased $48 million (2%) to $2.6
billion in the second quarter of 2002 and increased $12 million for the
year-to-date period. Excluding Motor Cargo in the current year, operating
expenses increased $16 million (1%) in the second quarter and decreased $51
million (1%) year-to-date, compared to 2001. The increase in expenses in the
second quarter is due to wage and benefit inflation and higher volume costs
related to a 5% increase in second quarter carloads at the Railroad, partially
offset by lower fuel prices, a 3% reduction in employment levels, and cost
control efforts. For the year-to-date period, lower fuel prices, a 3% reduction
in employment levels and cost control more than offset wage and benefit
inflation and volume costs.

Salaries, wages and employee benefits increased $56 million (5%) in the
second quarter and increased $76 million (4%) year-to-date, compared to 2001.
Excluding Motor Cargo in the current year, expenses increased $38 million (4%)
as wage and benefit inflation and volume costs exceeded savings from lower
employment levels and improved productivity. During the second quarter of 2002,
the Corporation reduced its assumed long-term rate of return on pension plan
assets from 10% to 9%. This change in assumption resulted in an $8 million
increase in salaries, wages and employee benefits in the second quarter of 2002.
Equipment and other rents expense increased $8 million (2%) in the second
quarter and $20 million (3%) year-to-date, compared to 2001 as a result of
additional locomotive lease expense and higher contract transportation costs at
OTC. The higher locomotive lease expenses at the Railroad were partly offset by
lower freight car costs. Depreciation expense increased $7 million (2%) in the
second quarter and $14 million (2%) year-to-date, compared to 2001 as a result
of the Railroad's capital spending in recent years, which increased the total
value of the Corporation's depreciable assets.

Fuel and utilities costs were down $53 million (16%) in the second quarter
and $165 million (24%) year-to-date, compared to 2001, due to lower fuel prices,
which were partially offset by increased volume-related expense due to higher
gross ton miles at the Railroad. Materials and supplies expense decreased $7
million (5%) in the second quarter and $13 million (5%) year-to-date, compared
to 2001, due to reduced locomotive repairs and cost control actions. Casualty
costs increased $21 million (24%) in the second quarter and $19 million (10%)
year-to-date, compared to 2001 primarily due to higher costs for personal injury
and environmental matters. Purchased services and other costs increased $16
million (6%) in the second quarter and $61 million (13%) year-to-date, compared
to 2001 due to higher contract services and other general expenses.

OPERATING INCOME - Operating income increased $108 million (22%) to $602 million
in the second quarter compared to $494 million in 2001. Year-to-date operating
income increased $168 million (18%) over 2001 to $1.1 billion. The increase in
operating income in both periods is attributable to higher operating revenue,
lower fuel prices, cost control, and productivity which more than offset
inflation and volume costs.

NON-OPERATING ITEMS - Interest expense decreased $19 million (11%) in the second
quarter and $37 million (10%) year-to-date compared to 2001 due to lower
interest rates and a lower average debt level in 2002. In the three months ended
June 30, 2002, the Corporation's average debt level decreased to $9.6 billion in
2002 from $10.1 billion for the same period in 2001. In the six months ended
June 30, 2002, the Corporation's

16

average debt level decreased to $9.7 billion in 2002 from $10.1 billion for the
same period in 2001. The Corporation's weighted-average interest rate was 6.6%
during the second quarter of 2002 compared to 7.0% in 2001. For the year-to-date
period, the weighted average interest rate was 6.7% in 2002 compared to 7.1% in
2001. Other income decreased $40 million (53%) in the second quarter and
decreased $49 million (47%) for the year-to-date period in 2002 compared to 2001
due to lower real estate sales. Income tax expense increased $26 million (18%)
in the second quarter and $54 million (21%) in the year-to-date period over
2001, primarily due to higher pre-tax income in 2002.

During the last six months of 2002, the Railroad expects to sell
approximately 175 miles of a rail corridor to the Utah Transit Authority. When
this transaction is complete, the Railroad anticipates that it will result in a
pre-tax gain of approximately $140 million and will be recorded in other income.

OTHER KEY MEASURES - Operating income as a percentage of operating revenues
increased to 19.1% in the second quarter of 2002 from 16.5% in the same period
of 2001. Year-to-date, operating income as a percentage of operating revenues
increased to 18.0% from 15.7% in the same period of 2001. The Corporation's
operating ratio (operating expenses divided by operating revenues) was 80.9% in
the second quarter and 82.0% in the year-to-date period of 2002 compared to
83.5% in the second quarter and 84.3% in the year-to-date period of 2001.

RAIL SEGMENT

NET INCOME - Rail operations reported net income in the second quarter of 2002
of $316 million, compared to net income of $262 million in 2001, an increase of
$54 million (21%). Year-to-date, net income increased $88 million (19%) to $559
million, compared to 2001 net income of $471 million. The increase in earnings
in both periods resulted primarily from lower fuel prices and higher operating
revenue combined with productivity gains and cost control efforts. These
improvements were partially offset by inflation, lower real estate sales and
higher volume-related costs.

OPERATING REVENUES - Operating revenue is comprised of Commodity Revenue and
other revenues. Other revenues primarily include subsidiary revenue from various
companies that are wholly owned or majority owned by the Railroad, revenue from
the Chicago commuter rail operations and accessorial revenue earned due to
customer detainment of railroad owned or controlled equipment. Second quarter
rail operating revenues increased $108 million (4%) to $2.8 billion compared to
2001. Year-to-date, rail revenues increased $102 million (2%) compared to 2001.
Second quarter revenue carloads increased 5% and year-to-date carloads increased
3% compared to a year ago, with the greatest growth in both periods in the
intermodal and automotive commodity groups. Other revenues increased 4% in the
second quarter due to higher subsidiary and switching revenue. Year-to-date,
other revenue was flat compared to 2001.

The following tables summarize the year-over-year changes in rail commodity
revenue, revenue carloads and average revenue per car by commodity type:

Agricultural - Revenue increased 3% in the second quarter and 1% for the
year-to-date period of 2002 over the comparable periods in 2001, despite flat
carloads in both periods. Meals and oils led the increase, due to increased
demand for soybean meal shipments into Mexico and soybean oil exports. Demand
for cottonseed shipments used for feed also increased. Weak domestic demand for
wheat partially offset these increases. Average revenue per car increased due to
the positive mix impact of more carloads with a longer average length of haul.

Automotive - Revenue increased 8% for the second quarter and 5% for the
year-to-date period of 2002 over the comparable periods in 2001, due to
increases in carloads. The carload increase was due primarily to market share
gains for finished vehicle shipments. Average revenue per car declined due to a
combination of competitive pressures and increased shipments of shorter average
length.

Chemicals - Revenue increased 4% for the second quarter and 1% for the
year-to-date period of 2002 over the comparable periods in 2001, due to
increases in carloads. While general economic conditions and decreased
industrial production resulted in a revenue decline in the first quarter,
increased levels of industrial production boosted second quarter carloads 5%
higher than 2001. Plastics carloads increased due to greater activity in the
automotive industry and strong housing starts, while increased demand among
commodity liquid producers drove shipments of liquid and dry chemicals higher.
Average revenue per car declined due to a 26% increase in phosphate rock
carloads that have low average revenue per car and rate pressures.

Energy - Revenue decreased 1% for the second quarter and 2% for the year-to-date
period of 2002 over the comparable periods in 2001, as a 1% increase in carloads
in both periods was more than offset by a decline in average revenue per car.
The second quarter carload increase was driven mainly by the absence of an
annual track maintenance program that reduced energy carloads in June of 2001
and in prior years. The track maintenance program is now performed without an
annual shutdown. The second quarter and year-to-date carload increases were also
driven by more efficient train performance and favorable operating weather
conditions. Partially offsetting the increase was softer demand caused by mild
winter weather. Average revenue per car declined primarily due to the impact of
contract price negotiations on expiring long-term contracts with certain major
customers.

18

Industrial Products - Revenue increased 2% for the second quarter and 1% for the
year-to-date periods of 2002 over the comparable periods in 2001, as declining
carloads in both periods were more than offset by higher average revenue per
car. The volume decline was mainly the result of the soft economy, which had a
negative effect on many economically-sensitive commodities including steel and
paper products. Steel producers were adversely impacted by high levels of
low-cost imported steel, which forced plant shutdowns and bankruptcies in prior
periods. Metallic minerals shipments were also negatively impacted by the weak
steel market. Offsetting these declines were volume increases in
construction-related commodities, led by stone and cement, as strong building
and road construction activity continued in the Southern and Southwestern
regions of the country. Lumber volumes increased due to strong housing
construction and other general demand for lumber products. Average revenue per
car increased due to price increases and a greater mix of longer average length
of haul business, mainly lumber.

Intermodal - Revenue increased 11% for the second quarter and 6% for the
year-to-date periods of 2002 over the comparable periods in 2001. Consecutive
first and second quarter records were set for revenue, which was driven by
increased international shipments due to high import demand and increased market
share. Partially offsetting this increase were declines in domestic shipments,
due to soft economic demand and the voluntary action of reducing low-margin
domestic truckload trailer business in favor of higher-margin containers.
Average revenue per car declined 1% in the second quarter and was flat for the
six month period compared to 2001, due to a higher mix of international
shipments, which have a lower average revenue per car compared to domestic
shipments. The effect of this mix more than offset price increases.

OPERATING EXPENSES - Second quarter operating expenses were flat at $2.2 billion
in 2002 and 2001. Year-to-date operating expenses decreased $64 million (1%).
Expenses in both periods were reduced by significantly lower fuel prices and
savings from lower employee force levels and productivity improvements. These
decreases more than offset inflation, second-quarter volume costs, and increased
casualty, lease and depreciation expense.

Salaries, Wages and Employee Benefits - Salaries, wages and employee benefits
increased $19 million (2%) in the second quarter of 2002, compared to 2001.
Year-to-date, wage and benefit expenses rose $16 million (1%). Increases were
driven by inflation and volume related costs as the result of 3% growth in gross
ton miles in the first quarter and a 5% increase in the second quarter. A 3%
reduction in employee force levels in both periods and improvements in worker
productivity partially offset wage and employee benefits inflation and volume
costs.

Equipment and Other Rents - Equipment and other rents primarily includes rental
expense UPRR pays for freight cars owned by other railroads or private
companies; freight car, intermodal, and locomotive leases; other specialty
equipped vehicle leases; and office and other rentals. Expenses increased $2
million (1%) in the second quarter and $8 million (1%) year-to-date, compared to
2001. The increases were due primarily to higher expenses for locomotive leases
and office and miscellaneous rentals in both periods and higher volume-related
costs in the second quarter. Partially offsetting the increases was a decrease
in car cycle times (the average number of accumulated days that loaded and empty
cars from other railroads spend on the Railroad's system during a month) and
lower rental prices for freight cars. The higher locomotive lease expense is due
to the Railroad's increased leasing of new, more reliable and fuel efficient
locomotives. These new locomotives replaced older, non-leased models in the
fleet, which helped reduce expenses for depreciation, labor, materials and fuel
during the year. The decrease in car cycle times is partially attributable to
improved train speed and better car utilization. The increase in volume costs
was attributable to an increase in carloads in certain commodity types such as
intermodal, automotive, and chemicals that utilize a high percentage of rented
freight cars.

Depreciation - The majority of depreciation relates to road property.
Depreciation expense increased $4 million (1%) in the second quarter and $7
million (1%) year-to-date, over 2001, resulting from capital spending in recent
years. Capital spending totaled $946 million in the first six months of 2002
compared to

19

$780 million in the first six months of 2001. Capital spending for the year
totaled $1.7 billion in both 2001 and 2000 and $1.8 billion in 1999.

Fuel and Utilities - Fuel and utilities is comprised of locomotive fuel,
utilities other than telephone, and gasoline and other fuels. Expenses decreased
$52 million (16%) in the second quarter and $161 million (25%) in the
year-to-date period of 2002 compared to a year ago. The decrease was driven by
significantly lower fuel prices and a lower fuel consumption rate, as measured
by gallons consumed per thousand gross ton miles. Fuel prices averaged 72 cents
per gallon in the second quarter of 2002 compared to 92 cents per gallon in the
second quarter of 2001, including taxes and transportation costs. Year-to-date,
fuel prices averaged 67 cents per gallon compared to 92 cents per gallon in the
year-to-date period a year ago. Lower fuel prices in 2002 resulted in a $65
million reduction in fuel expense in the second quarter and a $165 million
reduction in the first six months, compared to 2001. The lower consumption rate
decreased fuel expense by $1 million in the second quarter and $12 million
year-to-date. A 5% increase in gross ton miles increased fuel expense by $16
million in the second quarter and a 4% increase in gross ton miles year-to-date
increased fuel expense by $25 million compared to a year ago. The Railroad
hedged or had fuel swaptions in place which equaled approximately 42% of its
fuel consumption for the second quarter and 43% of its fuel consumption year to
date, which decreased fuel costs by $9 million in the second quarter and $13
million in the first six months of 2002. As of June 30, 2002, expected fuel
consumption for the remainder of 2002 is 40% hedged at 68 cents per gallon
(including estimated taxes and transportation costs and regional pricing
spreads) and is 5% hedged at 70 cents per gallon (including estimated taxes,
transportation costs and regional pricing spreads) for 2003. Utilities,
gasoline, and propane expenses decreased $3 million in the second quarter and
decreased $9 million year-to-date primarily due to lower rates and fuel prices.

Materials and Supplies - Materials used for the maintenance of the Railroad's
lines, structures, and equipment is the principal component of materials and
supplies expense. Office, small tools, and other supplies and the costs of
freight services purchased to ship company materials are also included. Expenses
decreased $8 million (6%) in the second quarter and decreased $13 million (5%)
year-to-date, primarily reflecting locomotive overhaul reductions. Locomotive
overhauls decreased due to acquisition of new, more-reliable locomotives during
the past year and the sale of older units, which required higher maintenance and
outsourcing some locomotive maintenance which is included in purchased services
and other.

Casualty Costs - The largest component of casualty costs is expenses associated
with personal injury. Freight and property damage; and bad debt, insurance, and
environmental matters are also included in casualty costs. Costs increased $21
million (28%) in the second quarter compared to 2001 and increased $20 million
(12%) year-to-date. The increase in expenses in both periods is due to higher
personal injury costs, higher expenses for environmental matters and an increase
in bad debt expense. The quarterly year-over-year increase in casualty costs is
expected to continue for the remainder of 2002 and first quarter of 2003 due to
higher personal injury and insurance expenses.

Purchased Services and Other Costs - Purchased services and other costs includes
the costs of services purchased from outside contractors, state and local taxes,
net costs of operating facilities jointly used by UPRR and other railroads,
transportation and lodging for train crew employees, trucking and contracting
costs for intermodal containers, leased automobile maintenance expenses,
telephone and cellular expense, employee travel expense, and computer and other
general expenses partially offset by credits for overhead expenses charged to
capital projects. Expenses increased $15 million (7%) in the second quarter and
increased $59 million (14%) year-to-date, compared to last year. The increase in
both periods is primarily due to increased spending for contract services,
higher expenses for jointly operated facilities, higher volume-related
intermodal transportation costs in the second quarter, and higher general
expenses.

OPERATING INCOME - Operating income increased $107 million (22%) in the second
quarter to $598 million. Operating income for the first six months of 2002 grew
$166 million (18%) to $1.1 billion. The operating ratio for the second quarter
was 78.7%, compared to 81.8% in 2001. The year-to-date operating ratio was 79.7%
compared to 82.4% a year ago.

20

NON-OPERATING ITEMS - Interest expense decreased $9 million (6%) in the second
quarter and $17 million (6%) year-to-date, primarily as a result of lower
average debt levels and lower weighted-average interest rates in 2002. Income
taxes increased $25 million (16%) in the second quarter and $48 million (17%)
year to date, compared to 2001, which was primarily the result of higher pre-tax
income in both periods in 2002.

TRUCKING SEGMENT

OPERATING REVENUES - For the second quarter and year-to-date periods ended June
30, 2002, trucking revenues increased $42 million (14%) to $332 million and $67
million (12%) to $637 million, respectively, over the comparable periods in
2001. The acquisition of Motor Cargo accounted for $35 million of revenue in the
second quarter and $67 million of revenue in the first six months of 2002.
Excluding Motor Cargo in the current year, revenues rose $7 million (3%) in the
second quarter and were flat year-to-date, due to a 4% increase in volume in the
second quarter and lower fuel surcharge revenue in both periods as a result of
lower fuel prices in 2002.

OPERATING EXPENSES - In the second quarter operating expenses increased $39
million (14%) to $313 million and increased $63 million (12%) to $608 million,
year-to-date, over the same periods in 2001. The acquisition of Motor Cargo
accounted for $32 million in the second quarter and $63 million year-to-date of
incremental expenses. Excluding Motor Cargo in the second quarter, expenses
increased $7 million (3%) due to wage and benefit inflation, increased linehaul
contract transportation costs, and a 4% increase in volume. Excluding Motor
Cargo in the year-to-date period, expenses decreased $1 million over the
comparable period in 2001.

Salaries, Wages and Employee Benefits - Salaries, wages and employee benefits
increased $31 million (18%) for the second quarter and increased $52 million
(15%) year-to-date. Excluding Motor Cargo in the current year, second quarter
expenses increased $12 million (7%) and year-to-date expenses increased $16
million (5%) due to wage and benefit inflation, and an increase in volume costs.
Expenses were partially offset by a decrease in employee force levels and
productivity improvements.

Equipment and Other Rents - Equipment and other rents increased $7 million (29%)
in the second quarter of 2002 and $11 million (24%) year-to-date, compared to a
year ago. Excluding Motor Cargo in the current year, expenses increased $3
million (14%) and $4 million (9%) for the second quarter and year-to-date
periods, respectively, due to increased use of linehaul contract transportation
partially offset by decreased local purchased transportation costs.

Depreciation - Depreciation expense increased $2 million (17%) in the second
quarter and $5 million (21%) year to date, compared to 2001. Excluding Motor
Cargo in the current year, expenses were flat in the second quarter and
increased $1 million (4%) in the six-month period due to a higher depreciable
asset base resulting from lower salvage value for surplus revenue equipment due
to a depressed resale market.

Fuel and Utilities - Fuel and utilities costs were flat in the second quarter
and decreased $3 million (9%) year-to-date, compared to a year ago. Excluding
Motor Cargo in the second quarter of 2002, expenses decreased $3 million (18%),
as a result of lower fuel prices during the quarter (72 cents per gallon average
in 2002 compared to 88 cents per gallon average in 2001, including
transportation costs and excluding taxes), combined with a 3% decrease in
gallons consumed. Excluding Motor Cargo in the first six-month period of 2002,
expenses decreased $8 million (23%) due to lower fuel prices in the first half
of the year (67 cents per gallon average in 2002 compared to 89 cents per gallon
average in 2001, including transportation costs and excluding taxes), combined
with a 6% decrease in gallons consumed. Overnite did not hedge any fuel volume
for the first quarter of 2002. Beginning in the second quarter of 2002, Overnite
hedged approximately 19% of its expected fuel consumption for the remainder of
2002 through March 2003 at an average of 58 cents per gallon, excluding taxes
and transportation costs and regional pricing spreads.

21

Materials and Supplies - Materials and supplies expense increased $1 million
(8%) in the second quarter and was flat for the year-to-date period, compared to
a year ago. Excluding Motor Cargo in the current year, expenses were flat in the
second quarter and decreased $2 million (10%) for the six-month period in 2002,
due to lower maintenance and operating supplies expense as a result of lower
volumes, fleet maintenance productivity and cost control measures in the first
quarter 2002.

Casualty Costs - Casualty costs decreased $1 million (8%) in the second quarter
and were flat for the year-to-date periods, compared to a year ago. Excluding
Motor Cargo in the current year, expenses decreased $1 million (6%) in the
second quarter and $2 million (7%) for the first six months, due to a reduction
in bad debt expense, offset by higher insurance and cargo loss and damage
expenses.

Purchased Services and Other Costs - Other costs decreased $1 million (5%) in
the second quarter and $2 million (4%) year-to-date, compared to the same
periods in 2001. Excluding Motor Cargo in the current year, expenses decreased
$4 million (18%) in the second quarter and decreased $10 million (20%) in the
first six months, due to lower expenses related to decreased security (related
to Teamsters' matters), employee travel expenses, legal expense and cost control
measures.

OPERATING INCOME - Operating income increased $3 million to $19 million (19%) in
the second quarter and increased $4 million to $29 million (16%) for the
year-to-date period ended June 30, 2002. Excluding Motor Cargo in the current
year, operating income was essentially flat in the second quarter and increased
$1 million (2%) year-to-date. The operating ratio for the second quarter of 2002
and 2001 was 94.5%. The operating ratio for the six months ended June 30, 2002
and 2001 was 95.5%. Motor Cargo lowered the operating ratio by 0.3 percentage
points for the second quarter and 0.2 percentage points for the first six month
period of 2002.

OTHER PRODUCT LINES

OTHER - Operating losses increased $2 million (15%) in the second quarter of
2002 and were up $2 million (6%) in the first six months of 2002, compared to
the same periods in 2001. Operating revenues increased $6 million in the second
quarter and $11 million year-to-date. However, operating expenses increased $8
million in the second quarter and $13 million year-to-date over 2001. Interest
expense decreased $11 million in the second quarter and $21 million in the first
six months of the year due to lower interest rates and a lower average debt
level compared to 2001.

LIQUIDITY AND CAPITAL RESOURCES

FINANCIAL CONDITION

Cash from operations was $1.1 billion in the first half of 2002 compared to $843
million in 2001. The increase is the result of higher net income and better
working capital.

Cash used in investing activities was $916 million in the first half of 2002
compared to a use of $903 million in 2001. The increased use of cash is due to
higher capital spending including locomotive acquisitions and lower real estate
proceeds in 2002, partly offset by the receipt of $34 million related to a
warranty refund from a vendor in 2002.

Cash provided by financing activities was $80 million in the first half of
2002 compared to $85 million in the first half of 2001. The decrease in cash
provided is due to higher debt repayments ($697 million in 2002 compared to $439
million in 2001) partly offset by increased debt borrowings ($877 million in
2002 compared to $623 million in 2001), and by an increase in the proceeds from
the exercise of stock options ($102 million in 2002 compared to $44 million in
2001).

Including the Convertible Preferred Stock as an equity instrument, the ratio
of debt to total capital employed was 41.4% at June 30, 2002 compared to 42.2%
at December 31, 2001.

22

For the three and six months ended June 30, 2002, the Corporation's ratio of
earnings to fixed charges was 3.8 and 3.4, respectively, compared to 3.1 and 2.8
for the three and six month periods ended June 30, 2001. The ratio of earnings
to fixed charges has been computed on a consolidated basis. Earnings represent
net income less equity in undistributed earnings of unconsolidated affiliates,
plus fixed charges and income taxes. Fixed charges represent interest charges,
amortization of debt discount, and the estimated amount representing the
interest portion of rental charges.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

As described in the notes to the Consolidated Financial Statements and as
referenced in the tables below, the Corporation has contractual obligations and
commercial commitments that may affect the financial condition of the
Corporation. However, based on management's assessment of the underlying
provisions and circumstances of the material contractual obligations and
commercial commitments of the Corporation, including material sources of
off-balance sheet and structured finance arrangements, there is no known trend,
demand, commitment, event or uncertainty that is reasonably likely to occur
which would have a material effect on the Corporation's financial condition,
results of operations, or liquidity. In addition, the commercial obligations,
financings and commitments made by the Corporation are customary transactions,
which are similar to those of other comparable industrial corporations,
particularly within the transportation industry.

The following tables identify material obligations and commitments as of
June 30, 2002:

[a] Excludes capital lease obligations of $1,512 million.

[b] Represents total obligations, including interest component.

[c] Unconditional purchase obligations represent multi-year contractual
commitments to purchase assets at fixed prices and fixed volumes. These
commitments are made in order to take advantage of pricing opportunities and
to insure availability of assets to meet quality and operational
requirements. Excluded are contracts made in the normal course of business
for performance of routine services, as well as commitments where contract
provisions allow for cancellation.

[a] Includes guaranteed obligations of affiliated operations.

23

FINANCING ACTIVITIES

CREDIT FACILITIES - On June 30, 2002, the Corporation had $1.875 billion in
revolving credit facilities available, of which $875 million expires in March
2003, with the remaining $1.0 billion expiring in 2005. The credit facility for
$875 million includes $825 million that was entered into during March 2002 and
$50 million entered into during June 2002. The $1.0 billion credit facility was
entered into during March 2000. The credit facilities are designated for general
corporate purposes and none of the credit facilities were used as of June 30,
2002. Commitment fees and interest rates payable under the facilities are
similar to fees and rates available to comparably rated investment-grade
borrowers.

SHELF REGISTRATION STATEMENT AND SIGNIFICANT NEW BORROWINGS - During January
2002, under an existing shelf registration statement, the Corporation issued
$300 million of 6-1/8% fixed rate debt with a maturity of January 15, 2012. The
proceeds from the issuance were used for repayment of debt and other general
corporate purposes. In April 2002, the Corporation called its $150 million,
8-5/8% debentures due May 15, 2022 for redemption in May 2002. The Corporation
issued $350 million of 6-1/2% fixed rate debt with a maturity of April 15, 2012,
in order to fund the redemption. The Corporation used the remaining proceeds to
repay other debt and for other general corporate purposes. On May 17, 2002, the
Corporation issued the remaining $50 million of debt under the existing shelf
registration statement. The debt carries a fixed rate of 5-3/4% with a maturity
of October 15, 2007. The proceeds from the issuance were used for repayment of
debt and other general corporate purposes.

The Corporation filed a new $1.0 billion shelf registration statement, which
became effective in July 2002. Under the new shelf registration statement, the
Corporation may issue, from time to time, any combination of debt securities,
preferred stock, common stock or warrants for debt securities or preferred stock
in one or more offerings.

During June 2002, UPRR entered into a capital lease covering new
locomotives. The related capital lease obligation totaled approximately $126
million and is included in the Consolidated Statements of Financial Position as
debt.

OTHER MATTERS

COMMITMENTS AND CONTINGENCIES - There are various claims and lawsuits pending
against the Corporation and certain of its subsidiaries. The Corporation is also
subject to various federal, state and local environmental laws and regulations,
pursuant to which it is currently participating in the investigation and
remediation of various sites. A discussion of certain claims, lawsuits,
contingent liabilities and guarantees is set forth in note 7 to the Consolidated
Financial Statements, which is incorporated herein by reference.

ACCOUNTING PRONOUNCEMENTS - In August 2001, the Financial Accounting Standards
Board (FASB) issued FAS 143, "Accounting for Asset Retirement Obligations" (FAS
143). FAS 143 requires the Corporation to record the fair value of a liability
for an asset retirement obligation in the period in which it is incurred and is
effective for the Corporation's fiscal year beginning January 1, 2003.
Management is in the process of evaluating the impact this standard will have on
the Corporation's Consolidated Financial Statements.

In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" (FAS 145). FAS 145 concludes that debt extinguishments used as part
of a company's risk management strategy should not be classified as an
extraordinary item. FAS 145 also requires sale-leaseback accounting for certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions. Management believes that FAS 145 will not have a
significant impact on the Corporation's Consolidated Financial Statements.

In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (FAS 146). FAS 146 requires that a
liability for a cost associated with an exit or disposal activity is recognized
at fair value when the liability is incurred and is effective for exit or
disposal activities that are initiated after December 31, 2002. Management is
evaluating the impact this standard may have on the Corporation's Consolidated
Financial Statements.

24

CAUTIONARY INFORMATION

Certain statements in this report are, and statements in other material filed or
to be filed with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or to be made by
the Corporation) are, or will be, forward-looking statements as defined by the
Securities Act of 1933 and the Securities Exchange Act of 1934. These
forward-looking statements include, without limitation, statements regarding:
expectations as to operational improvements; expectations as to cost savings,
revenue growth and earnings; the time by which certain objectives will be
achieved; estimates of costs relating to environmental remediation and
restoration; proposed new products and services; expectations that claims,
lawsuits, environmental costs, commitments, contingent liabilities, labor
negotiations or agreements, or other matters will not have a material adverse
effect on our consolidated financial position, results of operations or
liquidity; and statements concerning projections, predictions, expectations,
estimates or forecasts as to the Corporation's and its subsidiaries' business,
financial and operational results, and future economic performance, statements
of management's goals and objectives and other similar expressions concerning
matters that are not historical facts.

Forward-looking statements should not be read as a guarantee of future
performance or results, and will not necessarily be accurate indications of the
times at, or by which, such performance or results will be achieved.
Forward-looking information is based on information available at the time and/or
management's good faith belief with respect to future events, and is subject to
risks and uncertainties that could cause actual performance or results to differ
materially from those expressed in the statements.

Important factors that could affect the Corporation's and its subsidiaries'
future results and could cause those results or other outcomes to differ
materially from those expressed or implied in the forward-looking statements
include, but are not limited to:

o whether the Corporation and its subsidiaries are fully
successful in implementing their financial and operational
initiatives;

o industry competition, conditions, performance and
consolidation;

o legislative and regulatory developments, including possible
enactment of initiatives to re-regulate the rail business;

o natural events such as severe weather, floods and earthquakes;

o the effects of adverse general economic conditions, both
within the United States and globally;

o changes in fuel prices;

o changes in labor costs;

o domestic and global economic repercussions from terrorist
activities and any governmental response thereto;

o labor stoppages; and

o the outcome of claims and litigation.

Forward-looking statements speak only as of the date the statement was made.
The Corporation assumes no obligation to update forward-looking information to
reflect actual results, changes in assumptions or changes in other factors
affecting forward-looking information. If the Corporation does update one or
more forward-looking statements, no inference should be drawn that the
Corporation will make additional updates with respect thereto or with respect to
other forward-looking statements.

25

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in market risk from the information provided
in Item 7A. Quantitative and Qualitative Disclosures About Market Risk of the
Corporation's Annual Report on Form 10-K for the year ended December 31, 2001.
Disclosure concerning market risk-sensitive instruments is set forth in note 3
to the Consolidated Financial Statements included in Item 1 of Part I of this
Report and is incorporated herein by reference.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

SHAREHOLDER LITIGATION

As previously reported by the Corporation in its Annual Report on Form 10-K for
2001, a purported derivative action was filed by nine individuals, seven of whom
are members of the Teamsters, on behalf of the Corporation on June 21, 2001, in
the Chancery Court of Shelby County, Tennessee, naming as defendants current and
certain former directors of the Corporation and various present and former
officers and employees of Overnite, as well as Overnite, and, as a nominal
defendant, the Corporation. The derivative action alleged, among other things,
that the named defendants breached their fiduciary duties to the Corporation,
wasted its assets and mismanaged the company by opposing the efforts of the
Teamsters to organize the employees of Overnite. Plaintiffs claimed that the
"anti-union" campaign allegedly waged by the defendants cost millions of dollars
and caused a substantial decline in the value of Overnite. On July 31, 2001, the
defendants filed a motion to dismiss the action on various grounds, and on July
1, 2002, the court granted the motion and dismissed the derivative action on
procedural grounds. The plaintiffs have filed notice of their intention to
appeal the decision with the court.

LABOR MATTERS

As previously reported by the Corporation in its Annual Report on Form 10-K for
2001 and Form 10-Q for the quarter ended March 31, 2002, the General Counsel of
the National Labor Relations Board (NLRB) sought a bargaining order remedy with
respect to 12 cases involving OTC in which a Teamsters local union lost a
representation election. A bargaining order remedy would require OTC to
recognize and bargain with the union as if the union had won instead of lost the
election and would be warranted only if the following findings are made: (1) the
petitioning Teamsters' local had obtained valid authorization cards from a
majority of the employees in an appropriate unit; (2) OTC committed serious
unfair labor practices; and (3) those unfair labor practices would preclude the
holding of a fair election despite the application of less drastic remedies. In
one of the 12 cases, the administrative UPC law judge found that a bargaining
order remedy was not warranted. In the other 11 cases, an administrative law
judge and the NLRB ruled that the bargaining order remedy was warranted. OTC
appealed the NLRB's ruling to the United States Court of Appeals for the Fourth
Circuit. By a two-one decision, the Fourth Circuit initially enforced the first
four bargaining orders. Last year, the full Fourth Circuit agreed to rehear that
case. On February 11, 2002, the full Fourth Circuit issued its ruling in favor
of OTC on the bargaining order remedy in the first four cases and remanded the
cases to the NLRB for new representation elections. The time period for seeking
review of the decision in the United States Supreme Court has expired, and
neither the NLRB nor the Teamsters has sought such a review. On July 16, 2002,
the NLRB also filed a motion with the Fourth Circuit acknowledging that the full
bench decision of the court would apply to the other seven cases, which motion
effectively concludes these cases unless the Teamsters seek to re-run the
elections.

ENVIRONMENTAL MATTERS

As previously reported by the Corporation in its Annual Report on Form 10-K for
2001 and Form 10-Q for the quarter ended March 31, 2002, the State of Illinois
filed a complaint against the Railroad with the Illinois Pollution Board on May
14, 2001 seeking penalties for an alleged violation of state air pollution laws

26

arising out of a release of styrene from a tank car near Cora, Illinois, which
occurred on August 29, 1997. The car contained styrene monomer, a hazardous
substance, stabilized by the origin shipper with an inhibitor. The car was
delayed in transit for a number of different reasons, including rerouting and
reconsignment by the shipper. The Railroad was not notified that such delays
could jeopardize the stability of the shipment. Eventually the effect of the
inhibitor wore off and the styrene went into a reactive state resulting in
pressure and venting near Cora, Illinois. A sparsely-populated area was
evacuated for a few hours. The situation was controlled and remediated promptly.
Styrene has since been put on the Railroad's list of time sensitive shipments
subject to special monitoring. The Railroad has agreed in principle with the
State of Illinois to settle the matter and will pay a penalty of $50,000.

As previously reported by the Corporation in its report on Form 10-Q for the
quarter ended March 31, 2002, The District Attorneys of Merced, Madera,
Stanislaus, San Joaquin and Sacramento counties in the state of California have
threatened to file criminal charges against the Railroad in connection with
various releases of calcium oxide (lime), cement and fly ash between December
27, 2001 and March 16, 2002. They contend that criminal violations occurred by
virtue of the alleged failure by the Railroad to timely report one or more of
the releases, its alleged disposal of hazardous waste and the alleged release of
material into the waters of the State of California. The Company disputes both
the factual and legal bases for these claims and intends to vigorously defend
any action that might be filed.

OTHER MATTERS

As previously reported by the Corporation in its Annual Report on Form 10-K
for 2001 and Form 10-Q for the quarter ended March 31, 2002, Western Resources
(Western) filed a complaint on January 24, 2000 in the U.S. District Court for
the District of Kansas alleging that UPRR and The Burlington Northern Santa Fe
Railway Company (BNSF) materially breached their service obligations under the
transportation contract to deliver coal in a timely manner to Western's Jeffrey
Energy Center. The original complaint sought recovery of consequential damages
and termination of the contract, excusing Western from further performance. In
an amended complaint filed September 1, 2000, Western claimed the right to
retroactive termination and added a claim for restitution. On October 23, 2001,
Western moved for leave to file a second amendment to its complaint to add
counts for innocent misrepresentation and negligent misrepresentation and to
request rescission of the contract. During the period covered by this report,
Western's motion for leave to amend the complaint was denied by the magistrate
on grounds that the motion was not timely and the magistrate's denial of leave
to amend has been affirmed by the judge. Two motions filed by the railroads to
remove the restitution and termination claims were denied on June 19, 2002 and
June 26, 2002. The trial date for this action has been rescheduled from August
6, 2002 to August 19, 2002 to allow for the disposition of several procedural
motions. The railroads believe they have substantial defenses in the case and
continue to defend it aggressively.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

Exhibits are listed in the exhibit index on page 29.

(b) REPORTS ON FORM 8-K

On April 25, 2002, UPC filed a Current Report on Form 8-K announcing
UPC's financial results for the first quarter of 2002.

On July 18, 2002, UPC filed a Current Report on Form 8-K announcing
UPC's financial results for the second quarter of 2002.

27

SIGNATURES

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

Dated: August 8, 2002

UNION PACIFIC CORPORATION
(Registrant)

By /s/ James R. Young
----------------------------------
James R. Young,
Executive Vice President - Finance
(Principal Financial Officer)

By /s/ Richard J. Putz
----------------------------------
Richard J. Putz,
Vice President and Controller
(Principal Accounting Officer)

28

UNION PACIFIC CORPORATION
EXHIBIT INDEX