UNION PACIFIC RAILROAD CO/DE - 10-K Annual Report

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

FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 1-6146

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)

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

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

YES X NO
--- ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ].

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).

YES NO X
--- ---

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

As of February 28, 2003, the Registrant had outstanding 7,130 shares of
Common Stock, $10 par value, and 620 shares of Class A Stock, $10 par value.

DOCUMENTS INCORPORATED BY REFERENCE: None

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TABLE OF CONTENTS
UNION PACIFIC RAILROAD COMPANY

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PART I

ITEM 1. BUSINESS

Union Pacific Railroad Company (the Registrant), together with a number of
wholly owned and majority-owned subsidiaries, certain affiliates and various
minority-owned companies (collectively, the Company, UPRR or the Railroad), is a
Class I Railroad, incorporated in Delaware, and is an indirect wholly owned
subsidiary of Union Pacific Corporation (the Corporation or UPC). The Company's
principal executive offices are located at 1416 Dodge Street, Room 1230, Omaha,
NE 68179. The telephone number at that address is (402) 271-5000.

A copy of this Annual Report on Form 10-K, as well as the Company's
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments
to such reports are available, free of charge, on the Internet at the
Corporation's website www.up.com/investors. The reference to the Corporation's
website address does not constitute incorporation by reference of the
information contained on the website and should not be considered part of this
document.

The Company operates various railroad and railroad-related businesses. The
Railroad has over 33,000 route miles linking Pacific Coast and Gulf Coast ports
to the Midwest and eastern United States gateways and providing several
north/south corridors to key Mexican gateways. The Railroad serves the western
two-thirds of the country and maintains coordinated schedules with other
carriers for the handling of freight to and from the Atlantic Coast, the Pacific
Coast, the Southeast, the Southwest, Canada and Mexico. Export and import
traffic is moved through Gulf Coast and Pacific Coast ports and across the
Mexican and Canadian borders. Railroad freight is comprised of six commodity
lines: agricultural, automotive, chemicals, energy, industrial products and
intermodal. The Railroad continues to focus on utilization of its capital asset
base to meet current operating needs and to introduce innovative rail services
across every commodity line.

ACQUISITIONS

SOUTHERN PACIFIC - During 2001, UPC completed its integration of Southern
Pacific's rail operations. UPC consummated the acquisition of Southern Pacific
in September 1996 for $4.1 billion. Sixty percent of the outstanding Southern
Pacific common shares was converted into UPC common stock and the remaining 40%
of the outstanding shares was acquired for cash. UPC initially funded the cash
portion of the acquisition with credit facility borrowings, all of which have
been subsequently refinanced with other borrowings. The acquisition of Southern
Pacific has been accounted for using the purchase method of accounting and was
fully consolidated into UPC results beginning October 1996.

MEXICAN RAILWAY CONCESSION - During 1997, the Railroad and a consortium of
partners were granted a 50-year concession to operate the Pacific-North and
Chihuahua Pacific lines in Mexico and a 25% stake in the Mexico City Terminal
Company at a price of $525 million. The consortium assumed operational control
of both lines in 1998. In March 1999, the Railroad purchased an additional 13%
ownership interest for $87 million from one of its partners. The Railroad
currently holds a 26% ownership share in the consortium. This investment is
accounted for using the equity method of accounting.

COMPETITION

The Railroad is subject to price and service competition from other railroads,
motor carriers and barge operators. The Railroad's main competitor is Burlington
Northern Santa Fe Corporation. Its rail subsidiary, The Burlington Northern and
Santa Fe Railway Company (BNSF), operates parallel routes in many of the
Railroad's main traffic corridors. In addition, the Railroad's operations are
conducted in corridors served by other competing railroads and by motor
carriers. Motor carrier competition is particularly strong for intermodal
traffic. Because of the proximity of the Railroad's routes to major inland and
Gulf Coast waterways, barge competition can be particularly pronounced,
especially for grain and bulk commodities.

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EMPLOYEES

Approximately 87% of the Railroad's nearly 47,000 employees are represented by
14 major rail unions. National negotiations under the Railway Labor Act to
revise the national labor agreements for all crafts began in late 1999. In May
2001, the Brotherhood of Maintenance of Way Employees (BMWE) ratified a
five-year agreement, which included provisions for an annual wage increase
(based on the consumer price index) and progressive health and welfare cost
sharing. In August 2002, the carriers reached a five-year agreement with the
United Transportation Union (UTU) for annual wage increases as follows: 4.0%
July 2002, 2.5% July 2003 and 3.0% July 2004. The agreement also established a
process for resolving the health and welfare cost sharing issue through
arbitration and also provided for the operation of remote control locomotives by
trainmen. The Brotherhood of Locomotive Engineers (BLE) challenged the remote
control feature of the UTU Agreement and a recent arbitration decision held that
operation of remote control by UTU members in terminals does not violate the BLE
agreement. In November 2002, the International Brotherhood of Boilermakers and
Blacksmiths (IBB) reached a five-year agreement following the UTU wage pattern.
In January 2003, an arbitration award was rendered establishing wage increases
and health and welfare employee cost sharing for the Transportation
Communications International Union (TCU). Contract discussions with the
remaining unions are either in negotiation or mediation. Also during 2002, the
National Mediation Board ruled against the UTU on its petition for a single
operating craft on the Kansas City Southern Railroad. The BLE is now working on
a possible merger with the International Brotherhood of Teamsters (Teamsters).

GOVERNMENTAL REGULATION

The Railroad's operations are currently subject to a variety of federal, state
and local regulations (see also the discussion of certain regulatory proceedings
in Legal Proceedings, Item 3).

The operations of the Railroad are subject to the regulatory jurisdiction
of the Surface Transportation Board (STB) of the United States Department of
Transportation (DOT) and other federal and state agencies. The operations of the
Railroad are also subject to the regulations of the Federal Railroad
Administration of the DOT. The STB has jurisdiction over rates charged on
certain regulated rail traffic; freight car compensation; transfer, extension or
abandonment of rail lines; and acquisition of control of rail common carriers.

The DOT and the Occupational Safety and Health Administration, along with
other federal agencies, have jurisdiction over certain aspects of safety,
movement of hazardous materials, movement and disposal of hazardous waste and
equipment standards. Various state and local agencies have jurisdiction over
disposal of hazardous waste and seek to regulate movement of hazardous materials
in areas not otherwise preempted by federal law.

ENVIRONMENTAL REGULATION

The Railroad is subject to various environmental statutes and regulations,
including the Resource Conservation and Recovery Act (RCRA), the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 (CERCLA) and the
Clean Air Act (CAA).

RCRA applies to hazardous waste generators and transporters, as well as to
persons engaged in treatment and disposal of hazardous waste, and specifies
standards for storage areas, treatment units and land disposal units. All
generators of hazardous waste are required to label shipments in accordance with
detailed regulations and to prepare a detailed manifest identifying the material
and stating its destination before waste can be released for offsite transport.
The transporter must deliver the hazardous waste in accordance with the manifest
and only to a treatment, storage or disposal facility qualified for RCRA interim
status or having a final RCRA permit.

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

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CERCLA was designed to establish a strategy for cleaning up facilities at
which hazardous waste or other hazardous substances have created actual or
potential environmental hazards. The EPA has designated certain facilities as
requiring cleanup or further assessment. Among other things, CERCLA authorizes
the federal government either to clean up such facilities itself or to order
persons responsible for the situation to do so. The act created a multi-billion
dollar fund to be used by the federal government to pay for such cleanup
efforts. In the event the federal government pays for such cleanup, it will seek
reimbursement from private parties upon which CERCLA imposes liability.

CERCLA imposes strict liability on the owners and operators of facilities
in which hazardous waste and other hazardous substances are deposited or from
which they are released or are likely to be released into the environment. It
also imposes strict liability on the generators of such waste and the
transporters of the waste who select the disposal or treatment sites. Liability
may include cleanup costs incurred by third persons and damage to publicly owned
natural resources. The Company is subject to potential liability under CERCLA as
an owner or operator of facilities at which hazardous substances have been
disposed of or as a generator or a transporter of hazardous substances disposed
of at other locations. Some states have enacted, and other states are
considering enacting, legislation similar to CERCLA. Certain provisions of these
acts are more stringent than CERCLA. States that have passed such legislation
are currently active in designating more facilities as requiring cleanup and
further assessment.

The operations of the Railroad are subject to the requirements of the CAA.
The 1990 amendments to the CAA include a provision under Title V requiring that
certain facilities obtain operating permits. EPA regulations require all states
to develop federally-approvable permit programs. Affected facilities must submit
air operating permit applications to the respective states within one year of
the EPA's approval of the state programs. Certain of the Railroad's facilities
may be required to obtain such permits. In addition, in December 1997, the EPA
issued final regulations which require that certain purchased and remanufactured
locomotives meet stringent emissions criteria. While the cost of meeting these
requirements may be significant, expenditures are not expected to materially
affect the Railroad's financial condition or results of operations.

The operations of the Railroad are also subject to other laws protecting
the environment, including permit requirements for wastewater discharges
pursuant to the National Pollutant Discharge Elimination System and storm-water
runoff regulations under the Federal Water Pollution Control Act.

Information concerning environmental claims and contingencies and estimated
remediation costs is set forth in Management's Discussion and Analysis of
Financial Condition and Results of Operations - Other Matters - Environmental
Costs, Item 7, and in note 10 to the Consolidated Financial Statements, Item 8.

RISK FACTORS

Competition - The Railroad is subject to price and service competition from
other railroads, which operate parallel routes in many of UPRR's traffic
corridors, in addition to operations providing other modes of transportation,
including motor carriers, ships, barges and pipelines. Competition is based
primarily upon the rate charged and the transit time required, as well as the
quality and reliability of the service provided. While the Railroad must build
or acquire and maintain its rail system, trucks and barges are able to use
public rights-of-way maintained by public entities. Any future improvements or
expenditures materially increasing the quality of these alternative modes of
transportation in the locations in which the Railroad operates, or legislation
granting materially greater latitude for motor carriers with respect to size or
weight limitations, could have a material adverse effect on the results of
operations, financial condition and liquidity.

Governmental Regulation - The Railroad is subject to governmental regulation by
a significant number of federal, state and local regulatory authorities with
respect to the Railroad operations and a variety of health, safety, labor,
environmental and other matters. Failure to comply with applicable laws and
regulations could have a material adverse effect on the financial statements.
Regulatory authorities may change the legislative framework within which the
Railroad operates without providing the Railroad any recourse for any adverse
effects that the change may have on the business. Also, some of the regulations
require the Railroad to obtain and maintain various licenses, permits and other
authorizations, and the Railroad cannot assure that it will continue to be able
to do so.

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Environmental Laws and Regulations - The Railroad's operations are subject to
extensive federal, state and local environmental laws and regulations
concerning, among other things, emissions to the air, discharges to water and
the handling, storage, transportation and disposal of waste and other materials
and cleanup of hazardous material or petroleum releases. Environmental liability
can extend to previously owned or operated properties, leased properties and
properties owned by third parties, as well as to properties currently owned and
used. Environmental liabilities may also arise from claims asserted by adjacent
landowners or other third parties in toxic tort litigation. The Railroad may be
subject to allegations or findings to the effect that it has violated, or is
strictly liable under, these laws or regulations. The Railroad could incur
significant costs as a result of any of the foregoing and may be required to
incur significant expenses to investigate and remediate environmental
contamination.

Fuel Costs - Fuel costs constitute a significant portion of transportation
expenses. Diesel fuel prices are subject to dramatic fluctuations. Significant
price increases may have a material adverse effect on the Railroad's operating
results. Additionally, fuel prices and supplies are influenced significantly by
international political and economic circumstances. If a fuel supply shortage
were to arise from OPEC production curtailments, a disruption of oil imports or
otherwise, higher fuel prices and any subsequent price increases would
materially affect the Railroad's results of operations, financial condition and
liquidity.

Labor Unions - The Railroad is a party to collective bargaining agreements and
ongoing negotiations with various labor unions in the United States. Disputes
with regard to the terms of these agreements or the Railroad's potential
inability to negotiate acceptable contracts with these unions could result in,
among other things, strikes, work stoppages or other slowdowns by the affected
workers. If the unionized workers were to engage in a strike, work stoppage or
other slowdown, or other employees were to become unionized or the terms and
conditions in future labor agreements were renegotiated, the Railroad could
experience a significant disruption of its operations and higher ongoing labor
costs.

General Economic Conditions - Several of the commodities transported by the
Railroad come from industries with cyclical business operations. As a result,
prolonged negative changes in domestic and global economic conditions affecting
the producers and consumers of the commodities carried by the Railroad may have
an adverse effect on the results of operations, financial condition and
liquidity.

Weather - Severe weather conditions and other natural phenomena, including
earthquakes and floods, may cause significant business interruptions and result
in increased costs and liabilities and decreased revenues, which could have an
adverse effect on the results of operations, financial condition and liquidity.

Supplier Risk - The Railroad is dependent on two key suppliers of locomotives.
Due to the capital intensive nature and sophistication of this equipment, there
are strong barriers of entry to new suppliers. Therefore, if one of these
suppliers would no longer produce locomotives, the Railroad could realize a
significant increase in the cost and the potential for reduced availability of
the locomotives that are necessary to its operations.

Claims and Lawsuits - The nature of the Railroad's business exposes it to the
potential for various claims and litigation related to labor and employment,
personal injury and occupational illness, property damage, environmental and
other matters. Therefore, the Railroad may be subject to claims or litigation
that could involve significant expenditures.

Future Acts of Terrorism or War or Risk of War - Terrorist attacks, such as
those that occurred on September 11, 2001, any government response thereto and
war or risk of war may adversely affect the Railroad's results of operations,
financial condition, the ability to raise capital or the Railroad's future
growth. The Railroad's rail lines and facilities could be direct targets or
indirect casualties of an act or acts of terror, which could cause significant
business interruption and result in increased costs and liabilities and
decreased revenues, which could have an adverse effect on the operating results
and financial condition. Any act of terror, retaliatory strike, sustained
military campaign or war or risk of war may have an adverse impact on the
operating results and financial condition by causing or resulting in
unpredictable operating or financial conditions, including disruptions of rail
lines, volatility or sustained increase of fuel prices, fuel shortages, general
economic decline and instability or weakness of financial markets which could
restrict the Railroad's ability to raise capital. In addition, insurance
premiums charged for some or all of the coverages currently maintained by the
Railroad could increase dramatically or certain coverages may not be available
in the future.

ITEM 2. PROPERTIES

The Company's primary real estate, equipment and other property (properties) are
owned or leased to support its operations. The Company believes that its
properties are in good condition and adequate for current operations. The

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Railroad operates facilities and equipment designated for both the maintenance
and repair of the property, including locomotives, rail cars and other
equipment, and for monitoring such maintenance and repair work. The facilities
include rail yards, intermodal ramps and maintenance shops throughout the rail
system. Additionally, the Company had approximately $1.8 billion in capital
expenditures during 2002 for, among other things, building and maintaining
track, structures and infrastructure and upgrading and augmenting equipment.

Certain of the Company's properties are subject to federal, state and local
provisions involving the protection of the environment. See discussion of
environmental issues in Management's Narrative Analysis of the Results of
Operations - Other Matters - Environmental Costs, Item 7, and in note 10 to the
Consolidated Financial Statements, Item 8. See also notes 1, 5 and 6 to the
Consolidated Financial Statements, Item 8, for additional information regarding
the Company's properties.

TRACK - The Railroad utilizes over 33,000 main line and branch line route miles
in 23 states in the western two-thirds of the United States. The Company owns
27,400 route miles with the remainder of route miles operated under trackage
rights or leases. As of and for the years ending December 31, 2002, 2001 and
2000, route miles operated and track miles installed and replaced are as
follows:

EQUIPMENT - The Company's primary rail equipment as of and for the years ending
December 31, 2002, 2001 and 2000, consisted of the following:

ITEM 3. LEGAL PROCEEDINGS

As previously reported in the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000, a UPRR train carrying hazardous materials derailed
on May 27, 2000 near Eunice, Louisiana, resulting in the evacuation of
approximately 3,500 residents of the surrounding area and numerous claims for
personal injury, property damage and business interruption. Following the
incident, forty lawsuits were filed in various courts, and thirty-eight of those
cases were consolidated in the United States District Court for the District of
Western Louisiana. The remaining two cases were filed in the State District
Court in Baton Rouge, Louisiana, and are being coordinated with the federal
cases. After the

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federal District Court certified a class of over 20,000 potential claimants, the
Railroad appealed to the Unites States Court of Appeals for the Fifth Circuit.
The plaintiffs agreed to stay the appeal to facilitate settlement negotiations,
which are ongoing. While it is not possible to predict the ultimate outcome of
these proceedings, the Railroad believes it has substantial defenses. Although
losses exceed the self-insured retention amounts, the Railroad believes its
insurance coverage is adequate to cover material damage claims or settlement
amounts.

As previously reported in the Company's Annual Report on Form 10-K for
2001, on January 30, 2002, the Louisiana Department of Environmental Quality
(LDEQ) issued to the Railroad a notice of a proposed penalty assessment in the
amount of $195,700 in connection with the release of water potentially impacted
by the derailment of a train near Eunice, Louisiana, as discussed above. The
Railroad previously met with the LDEQ regarding this matter to present
documentation indicating that no penalty should be assessed. The Railroad has
filed suit against the LDEQ in Louisiana State District Court challenging the
penalty.

As previously reported in the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2002, the District Attorneys of Merced, Madera and
Stanislaus counties in the State of California threatened to file criminal
charges against the Railroad in connection with the release of calcium oxide
(lime), which leaked from an unidentified railcar between Chowchilla and
Sacramento, California, on December 27, 2001, and another incident in which lime
leaked from a railcar between Chowchilla and Stockton, California, on February
21, 2002. On December 20, 2002, the District Attorney of Stanislaus county filed
criminal charges against the Railroad, and on December 23, 2002, the District
Attorneys of Merced and Madera counties filed criminal charges against the
Railroad relating to these incidents. They contend that criminal violations
occurred by virtue of the alleged failure by the Railroad to timely report the
release of a hazardous material, its alleged disposal of hazardous waste and the
alleged release of material into the waters of the State of California. The
District Attorneys of San Joaquin and Sacramento Counties are still evaluating
these incidents, as well as other alleged releases. The Railroad disputes both
the factual and legal bases for these claims and intends to vigorously defend
any action that might be filed.

As previously reported in the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2002, the United States Environmental Protection
Agency, Region 9, has filed two administrative complaints against UPRR, the
first of which alleges that the Railroad violated the Clean Water Act in 1997 by
discharging dredged or fill materials into the Carpenteria Salt Marsh in Santa
Barbara County, California, and seeks civil penalties from the Railroad in an
amount up to $137,500. The second complaint alleges that the Railroad violated
the Clean Water Act in 1999 by discharging dredged or fill materials into Laguna
Creek, in Santa Barbara County, California, without a Section 404 permit and
likewise seeks civil penalties up to $137,500. UPRR disputes the allegations set
forth in these complaints and intends to defend the matters in any subsequent
administrative proceedings.

As previously reported in the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2002, the South Coast Air Quality Management
District has filed an action against the Railroad in the Los Angeles County
Superior Court, in which it seeks civil penalties in an amount up to $225,000
from the Railroad. The complaint alleges that the Railroad has violated certain
provisions of the California Health and Safety Code and District rules, as a
result of air emissions from idling diesel locomotives in Los Angeles,
California. The complaint further alleges that the Railroad has violated the
California Health and Safety Code and District rules as a result of fugitive
dust emissions from railroad property located in Colton, California. The
Railroad disputes the allegations of the complaint and maintains that the claims
relating to idling locomotives are preempted by federal law. The Railroad has
reached an agreement to settle these claims for a payment of $25,500 in
penalties.

As previously reported in the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002, on April 26, 2002, UPRR received written
notice of a proposed $250,000 penalty from the Illinois Environmental Protection
Agency relating to a collision between trains from Conrail and the Railroad. The
collision occurred near Momence, Illinois, on March 23, 1999 when an eastbound
Conrail train failed to stop at a signal and struck a UPRR train that was
properly occupying a crossing. The collision resulted in a release of diesel
fuel from the fuel tanks of a Union Pacific locomotive, which was promptly
reported and remediated. The Railroad received notice in January 2003 that the
amount of the proposed penalty, including oversight costs has been reduced to
$127,000. The Railroad will vigorously oppose this proposed penalty.

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The Company has received notices from the EPA and state environmental
agencies alleging that they are or may be liable under certain federal or state
environmental laws for remediation costs at various sites throughout the United
States, including sites which are on the Superfund National Priorities List or
state superfund lists. Although specific claims have been made by the EPA and
state regulators with respect to some of these sites, the ultimate impact of
these proceedings and suits by third parties cannot be predicted at this time
because of the number of potentially responsible parties involved, the degree of
contamination by various wastes, the scarcity and quality of volumetric data
related to many of the sites, and/or the speculative nature of remediation
costs. Nevertheless, at many of the superfund sites, the Company believes it
will have little or no exposure because no liability should be imposed under
applicable law, one or more other financially able parties generated all or most
of the contamination, or a settlement of the Company 's exposure has been
reached although regulatory proceedings at the sites involved have not been
formally terminated.

Information concerning environmental claims and contingencies and estimated
remediation costs is set forth in Management's Discussion and Analysis of
Financial Condition and Results of Operations - Other Matters - Environmental
Costs, Item 7, and in note 10 to the Consolidated Financial Statements, Item 8.

OTHER MATTERS

As previously reported, Western Resources, Inc. (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 and 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. The matter went to trial before a jury on
August 20, 2002. On September 12, 2002, the jury returned a verdict finding that
the contract had not been breached by the railroads, and the judgment dismissing
the case was entered by the court on September 16, 2002. Western filed a motion
for new trial on September 30, 2002, which the railroads believe will be
unsuccessful. UPRR and BNSF filed a response opposing the motion for a new trial
on October 15, 2002, and Western filed its reply on October 28, 2002. UPRR and
BNSF will vigorously defend this and all other post-trial efforts by Western to
overturn the jury verdict.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

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

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PART II

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

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

Dividends on the Company Common Stock, which are paid on a quarterly basis,
totaled $189 million and $146 million in 2002 and 2001, respectively. Dividends
paid on the Company Class A Stock were $16 million and $54 million in 2002 and
2001, respectively. Information concerning restrictions on the Registrant's
ability to pay dividends on the Company Common Stock and the Company Class A
Stock is set forth in note 8 to the Consolidated Financial Statements, Item 8.
All such information is incorporated herein by reference.

ITEM 6. SELECTED FINANCIAL DATA

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

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

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

MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES

The Company's discussion and analysis of its financial condition and results of
operations are based upon its Consolidated Financial Statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
estimation and judgment that affect the reported amounts of revenues, expenses,
assets and liabilities. The Company bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. The following are the Company's critical accounting policies that
affect significant areas of the Company's operations and involve judgment and
estimates. If these estimates differ materially from actual results, the impact
on the Consolidated Financial Statements may be material.

DEPRECIATION - Provisions for depreciation are computed principally on the
straight-line method based on estimated service lives of depreciable property.
The cost (net of salvage) of depreciable rail property retired or replaced in
the ordinary course of business is charged to accumulated depreciation. Various
methods are used to estimate useful lives for each group of depreciable
property. Due to the capital intensive nature of the business and the large base
of depreciable assets, variances to those estimates could have a material effect
on the Company's Consolidated Financial Statements.

ENVIRONMENTAL - The Company generates and transports hazardous and non-hazardous
waste in its current and former operations, and is subject to federal, state and
local environmental laws and regulations. The Company has identified
approximately 433 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, 27 of which are currently on the Superfund National
Priorities List. Certain federal legislation imposes joint

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and several liability for the remediation of identified sites; consequently, the
Company's ultimate environmental liability may include costs relating to
activities of other parties, in addition to costs relating to its own activities
at each site.

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

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 Company believes that it has
adequately accrued for its ultimate share of costs at sites subject to joint and
several liability. However, the ultimate liability for remediation is difficult
to determine 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.

INCOME TAXES - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (FAS 109). The objectives of accounting for income taxes are to recognize
the amount of taxes payable or refundable for the current year and deferred tax
liabilities and assets for the future tax consequences of events that have been
recognized in an entity's financial statements or tax returns. These expected
future tax consequences are measured based on provisions of tax law as currently
enacted; the effects of future changes in tax laws are not anticipated. Future
tax law changes, such as a change in the corporate tax rate, could have a
material impact on the Company's financial position or its results of
operations.

PENSION AND POSTRETIREMENT BENEFITS - The Company incurs certain
employment-related expenses associated with pensions and postretirement health
benefits. In order to measure the expense associated with these benefits,
management must make various estimates and assumptions, including discount rates
used to value liabilities, assumed rates of return on plan assets, compensation
increases, employee turnover rates, anticipated mortality rates and expected
future healthcare costs. The estimates used by management are based on the
Company 's historical experience as well as current facts and circumstances. The
Company uses third-party actuaries to assist management in properly measuring
the expense and liability associated with these benefits. Actual future results
that vary from the previously mentioned assumptions could have a material impact
on the Consolidated Financial Statements.

Recent declines in the equity markets have caused the market value of the
plan assets to decrease. As a result, a minimum pension liability adjustment of
$141 million, net of tax, was recorded in the fourth quarter of 2002 as a
reduction to shareholders' equity (see note 7 to the Consolidated Financial
Statements, Item 8). Also, during 2002, the Company decreased its assumed
long-term rate of return on pension plan assets from 10% to 9%. This assumption
change resulted in a $16 million increase to 2002 pension expense. While the
interest rate and asset return environment have significantly impacted the
funded status of the Company's plans, the Company does not have any minimum
pension funding requirements, as set forth in employee benefit and tax laws.

PERSONAL INJURY AND OCCUPATIONAL ILLNESS - The cost of injuries to employees and
others related to Railroad activities 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. Compensation for Railroad work-related
accidents is governed by the Federal Employers' Liability Act (FELA). Under
FELA, damages are assessed based on a finding of fault through litigation or
out-of-court settlements. The Railroad offers a comprehensive variety of
services and rehabilitation programs for employees who are injured at work.
Changes in estimates can vary due to evolving trends in litigation related to
personal injury and occupational illness cases based on large jury awards and
public pressures associated with certain occupational related injuries.

2002 COMPARED TO 2001 RESULTS OF OPERATIONS

RAIL SEGMENT

NET INCOME - Rail operations reported net income of $1.37 billion in 2002
compared to $1.06 billion in 2001, up 30%. The increase in earnings resulted
from stronger operating results, the asset sale transactions with the UTA and
VTA, lower

12

interest costs and a tax adjustment for prior years' income tax examinations.
Higher operating revenue and lower fuel expense combined with productivity gains
and cost control efforts offset inflation 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
non-railroad 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. Rail
operating revenues increased $303 million (3%) over 2001 to a record $11.1
billion. Revenue carloads increased 2% primarily driven by growth in the
automotive, intermodal and chemicals commodity groups. Other revenue increased
$31 million (8%) due to increased passenger, subsidiary and accessorial
revenues.

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 4%, due to a 1% increase in carloads coupled
with a 3% increase in average revenue per car. Meals and oils carloads increased
due to strong export demand and more shipments to Mexico. Corn shipments to
Mexico also increased. Revenue gains were also achieved through increased
shipments of cottonseed, ethanol used as a fuel additive and frozen french
fries. Average revenue per car increased due to a higher average length of haul,
resulting from fewer short-haul empty storage moves and corn processor shipments
combined with increased long-haul meals and oils and animal feed shipments.

Automotive - Revenue increased 8%, as a result of a 7% increase in carloads and
a 1% increase in average revenue per car. Volume growth resulted from market
share gains for finished vehicles, where carloads were up 11% despite a decline
in U.S. light vehicle sales. Materials shipments declined 1%, due primarily to
reduced production in Mexico. Market share gains partially offset the decline.
Average revenue per car increased due to a shift in mix of carloads shipped,
resulting from increased higher average revenue per car vehicles shipments and a
decline in lower average revenue per car materials shipments. In addition,
average length of haul for vehicle shipments increased.

13

Chemicals - Revenue increased 2%, as a result of a 3% increase in carloads and a
1% decrease in average revenue per car. Volume increased for liquid and dry
chemicals due to relatively higher economic demand from industrial
manufacturers. Plastics shipments rose as a result of increased demand for
consumer durables. Revenue also increased due to higher domestic demand for
fertilizer and demand for domestic and export soda ash shipments. Average
revenue per car declined due to changes in customer contract terms.

Energy - Energy commodity revenue decreased 2% as average revenue per car
declined 3%. Records were set for total carloads and coal trains loaded per day
in the Southern Powder River Basin in Wyoming. Results were achieved through
favorable weather conditions and improved cycle times. Offsetting the volume
increase were reduced West Coast export shipments originating from the Colorado
and Utah mining regions. Average revenue per car declined due to the impact of
contract price negotiations on expiring long-term contracts with certain major
customers.

Industrial Products - Revenue increased 3%, due to a slight increase in carloads
coupled with a 3% increase in average revenue per car. Increased lumber
shipments were the primary growth driver, due to strong housing construction and
greater production in the Pacific Northwest region. Stone shipments increased
due to strong building and road construction activity in the South. Revenue also
increased for paper and newsprint commodities due to higher general demand.
Reduced shipments of steel and metallic shipments in the first three quarters
partially offset these increases. However, steel shipments rebounded in the
fourth quarter as new U.S. tariffs made domestic producers more
price-competitive with foreign producers. Average revenue per car increased due
to price increases and a greater mix of longer average length of haul.

Intermodal - Revenue increased 5%, primarily due to a 4% increase in carloads.
Volumes increased due to higher international shipments, resulting from strong
import demand and market share gains in some segments. These gains were
partially offset by the labor dispute between the International Longshoreman and
Warehouse Union (ILWU) and the Pacific Maritime Association, which had a
significant impact on intermodal volumes during the fourth quarter, primarily in
October. Revenue declined for domestic shipments, due to soft market demand and
the voluntary action of shedding low-margin trailer business in favor of
higher-margin containers. The slight increase in average revenue per car was the
result of price increases, offset by the mix impact of more lower revenue per
car international shipments.

Mexico Business - In 2002 and 2001, respectively, UPRR generated $873 million
and $860 million of revenues from rail traffic with businesses located in
Mexico, which is included in the rail commodity revenue reported above.
Shipments increased for agricultural products, chemicals and industrial products
commodity groups. Increased revenue for agricultural products resulted from
higher corn and meal exports as well as increased beer imports. Increased
chemicals business consisted of plastics exports, in addition to higher imports
and exports of liquid and dry chemicals. The increase in industrial products
resulted from higher imports and exports of steel and scrap and exports of pulp
and paper products. Reduced automobile production partially offset these gains
resulting in fewer shipments of parts and finished vehicles.

OPERATING EXPENSES - Operating expenses increased $51 million (1%) to $8.8
billion in 2002. The increase in expense is primarily due to inflation,
increased volume-related costs, contract services, casualty and depreciation
expense, partially offset by savings from lower employee force levels, cost
control efforts and significantly lower fuel prices.

Salaries, Wages and Employee Benefits - Salaries, wages and employee benefits
increased $76 million (2%) in 2002 to $3.6 billion. Increases were driven by
inflation and volume-related costs related to a 4% increase in gross ton miles.
A 3% reduction in employee force levels in conjunction with worker productivity
improvements partially offset the inflation and higher volume-related costs.

Equipment and Other Rents - Equipment and other rents primarily includes rental
expense the Railroad 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 $24
million (2%) compared to 2001 due primarily to higher locomotive leases and
volume-related costs, partially offset by savings from lower car cycle times
(the average number of accumulated days per load or cycle that loaded and empty
cars from other railroads spend on UPRR's

14

system) and rental prices for private 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 increase in volume costs is primarily due to
increased shipments of finished autos that almost exclusively utilize rented
freight cars. The reduction in car cycle times is attributable to increased
volume demand and better car utilization.

Depreciation - The majority of depreciation relates to track structure,
including rail, ties and other track material. Depreciation expense increased
$19 million (2%) over 2001 as a result of higher capital spending in recent
years. Capital spending totaled $1.8 billion in 2002 and $1.7 billion in 2001.

Fuel and Utilities - Fuel and utilities is comprised of locomotive fuel,
utilities other than telephone and gasoline and other fuels. Expenses declined
$184 million (15%) in 2002. The decrease was driven by lower fuel prices and a
record low fuel consumption rate, as measured by gallons consumed per thousand
gross ton miles. Fuel prices averaged 73 cents per gallon in 2002 compared to 88
cents per gallon in 2001 (including taxes, transportation costs and regional
pricing spreads). The Railroad hedged approximately 42% of its fuel consumption
for the year, which decreased fuel costs by $55 million. As of December 31,
2002, expected fuel consumption for 2003 is 7% hedged at 58 cents per gallon
excluding taxes, transportation costs and regional pricing spreads (see note 3
to the Consolidated Financial Statements, Item 8).

Materials and Supplies - Materials used for the maintenance of the Railroad's
track, facilities 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 $9 million (2%), primarily reflecting a reduction in the number of
locomotives overhauled. Materials expense for locomotive overhauls decreased due
to the use of new, more-reliable locomotives during the past several years, the
sale of older units, which required higher maintenance, and increased
outsourcing of locomotive maintenance. Partially offsetting the reductions in
locomotive overhauls was an increase in cost for freight car repairs.

Casualty Costs - The largest component of casualty costs is personal injury
expense. Freight and property damage, insurance, environmental matters and
occupational illness expense are also included in casualty costs. Costs
increased $32 million (10%) compared to 2001, as higher personal injury and
insurance costs were partially offset by lower costs for freight damage.

Purchased Services and Other Costs - Purchased services and other costs include
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. Expenses increased $93 million (11%) compared to 2001
primarily due to increased spending for contract services, jointly operated
facilities and state and local taxes.

OPERATING INCOME - Operating income increased $252 million (12%) to a record
$2.3 billion in 2002. The operating margin for 2002 was 21.0%, compared to 19.3%
in 2001.

NON-OPERATING ITEMS - Interest expense decreased $43 million (7%) as a result of
lower average debt levels and lower weighted-average interest rates in 2002.
Other income increased $147 million (84%) due to the sale transactions with the
UTA and VTA. Income taxes increased $126 million (21%) in 2002 compared to 2001
resulting from higher pre-tax income levels in 2002 partially offset by a tax
adjustment for prior years' income tax examinations.

OTHER MATTERS

PERSONAL INJURY AND OCCUPATIONAL ILLNESS - The cost of injuries to employees and
others related to Railroad activities is charged to expense based on actuarial
estimates of the ultimate cost and number of incidents each year. During 2002,
the Railroad's reported number of work-related injuries that resulted in lost
job time decreased 5% compared to the number of injuries reported during 2001,
and accidents at grade crossings decreased 16% compared to 2001. Annual expenses
for the Railroad's personal injury-related events were $221 million in 2002,
$204 million in 2001 and $207

15

million in 2000. As of December 31, 2002 and 2001, the Railroad had a liability
of $668 million and $697 million, respectively, accrued for future personal
injury costs, of which $272 million was recorded in current liabilities as
accrued casualty costs for both years. The Railroad has additional amounts
accrued for claims related to certain occupational illnesses. Compensation for
Railroad work-related accidents is governed by the Federal Employers' Liability
Act (FELA). Under FELA, damages are assessed based on a finding of fault through
litigation or out-of-court settlements. The Railroad offers a comprehensive
variety of services and rehabilitation programs for employees who are injured at
work.

ENVIRONMENTAL COSTS - The Company generates and transports hazardous and
non-hazardous waste in its current and former operations, and is subject to
federal, state and local environmental laws and regulations. The Company has
identified approximately 433 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, 27 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 Company's
ultimate environmental liability may include costs relating to activities of
other parties, in addition to costs relating to its own activities at each site.

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

As of December 31, 2002 and 2001, the Company had a liability of $188
million and $171 million, respectively, accrued for future environmental costs,
of which $71 million and $70 million were recorded in current liabilities as
accrued casualty 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 Company
believes that it has adequately accrued for its ultimate share of costs at sites
subject to joint and several liability. However, the ultimate liability for
remediation is difficult to determine 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 Company expects to pay out the
majority of the December 31, 2002, environmental liability over the next five
years, funded by cash generated from operations.

Remediation of identified sites previously used in operations, used by
tenants or contaminated by former owners required cash spending of $68 million
in 2002, $63 million in 2001 and $62 million in 2000. The Company is also
engaged in reducing emissions, spills and migration of hazardous materials, and
spent cash of $6 million, $5 million and $8 million in 2002, 2001 and 2000,
respectively, for control and prevention. In 2003, the Company anticipates
spending $65 million for remediation and $9 million for control and prevention.
The impact of current obligations is not expected to have a material adverse
effect on the liquidity of the Company.

LABOR MATTERS - Approximately 87% of the Railroad's nearly 47,000 employees are
represented by 14 major rail unions. National negotiations under the Railway
Labor Act to revise the national labor agreements for all crafts began in late
1999. In May 2001, the Brotherhood of Maintenance of Way Employees (BMWE)
ratified a five-year agreement, which included provisions for an annual wage
increase (based on the consumer price index) and progressive health and welfare
cost sharing. In August 2002, the carriers reached a five-year agreement with
the United Transportation Union (UTU) for annual wage increases as follows: 4.0%
July 2002, 2.5% July 2003 and 3.0% July 2004. The agreement also established a
process for resolving the health and welfare cost sharing issue through
arbitration and also provided for the operation of remote control locomotives by
trainmen. The Brotherhood of Locomotive Engineers (BLE) challenged the remote
control feature of the UTU Agreement and a recent arbitration decision held that
operation of remote control by UTU members in terminals does not violate the BLE
agreement. In November 2002, the International Brotherhood of Boilermakers and
Blacksmiths (IBB) reached a five-year agreement following the UTU wage pattern.
In January 2003, an arbitration award was rendered establishing wage increases
and health and welfare employee cost sharing for the Transportation
Communications International Union (TCU). Contract discussions with the
remaining unions are either

16

in negotiation or mediation. Also during 2002, the National Mediation Board
ruled against the UTU on its petition for a single operating craft on the Kansas
City Southern Railroad. The BLE is now working on a possible merger with the
International Brotherhood of Teamsters (Teamsters).

INFLATION - The cumulative effect of long periods of inflation has significantly
increased asset replacement costs for capital-intensive companies such as the
Railroad. As a result, depreciation charges on an inflation-adjusted basis,
assuming that all operating assets are replaced at current price levels, would
be substantially greater than historically reported amounts.

DERIVATIVE FINANCIAL INSTRUMENTS - The Company and its subsidiaries use
derivative financial instruments in limited instances for other than trading
purposes to manage risk related to changes in fuel prices. The Company 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 purpose of
these programs is to protect the Company's operating margins and overall
profitability from adverse fuel price changes.

The Company 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 and
are marked-to-market through the Consolidated Statements of Income.

Market and Credit Risk - The Company 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 December 31,
2002, the Company has not been required to provide collateral, nor has the
Company received collateral relating to its hedging activities.

In addition, the Company enters into secured financings in which the debtor
has pledged collateral. The collateral is based upon the nature of the financing
and the credit risk of the debtor. The Company generally is not permitted to
sell or repledge the collateral unless the debtor defaults.

Determination of Fair Value - The fair values of the Company's derivative
financial instrument positions at December 31, 2002 and 2001, 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 swap spread.

Sensitivity Analyses - The sensitivity analyses that follow illustrate the
economic effect that hypothetical changes in interest rates or fuel prices could
have on the Company's financial instruments. These hypothetical changes do not
consider other factors that could impact actual results.

Interest Rates - At December 31, 2002 and 2001, the Company had variable-rate
debt representing less than 1% of its total debt. If variable interest rates
averaged 10% higher in 2002 than the Company's December 31, 2002 variable rate,
the Company's interest expense would increase by less than $1 million after tax.
If variable interest rates had averaged 10% higher in 2001 than the Company's
December 31, 2001 variable rate, the Company's interest expense would have
increased by less than $1 million after tax. These amounts were determined by
considering the impact of the hypothetical interest rates on the balances of the
Company's variable-rate debt at December 31, 2002 and 2001, respectively. In
addition, the Company obtains flexibility in managing interest costs and the
interest rate mix within its debt portfolio by issuing callable fixed-rate debt
securities.

Market risk for fixed-rate debt is estimated as the potential increase in
fair value resulting from a hypothetical 10% decrease in interest rates as of
December 31, 2002, and amounts to approximately $74 million at December 31,
2002. Market risk resulting from a hypothetical 10% decrease in interest rates
as of December 31, 2001, amounted to approximately $84 million at December 31,
2001. The fair values of the Company's fixed-rate debt were estimated by
considering the impact of the hypothetical interest rates on quoted market
prices and current borrowing rates.

Fuel - Fuel costs are a significant portion of the Company's total operating
expenses. As a result of the significance of fuel costs and the historical
volatility of fuel prices, the Company periodically uses swaps, futures and/or
forward contracts

17

to mitigate the impact of adverse fuel price changes. The Company, at times, may
use swaptions to secure more favorable swap prices.

As of December 31, 2002, expected rail fuel consumption for 2003 is 7%
hedged at 58 cents per gallon excluding taxes, transportation costs and regional
pricing spreads. As of December 31, 2002, the Railroad has no outstanding hedges
for 2004. Based on annualized fuel consumption during 2002, and excluding the
impact of the hedging program, each one-cent increase in the price of fuel would
have resulted in approximately $8.2 million of additional fuel expense, after
tax.

As of December 31, 2001, the Company had hedged approximately 44% of its
forecasted 2002 fuel consumption and 5% of its forecasted 2003 fuel consumption
at 56 cents per gallon, excluding taxes, transportation costs and regional
pricing spreads.

ACCOUNTING PRONOUNCEMENTS - In August 2001, the Financial Accounting Standards
Board (FASB) issued Statement No. 143, "Accounting for Asset Retirement
Obligations" (FAS 143). FAS 143 is effective for the Company beginning January
1, 2003. FAS 143 requires that the Company record a liability for the fair value
of an asset retirement obligation when the Company has a legal obligation to
remove the asset. The standard will affect the way the Company accounts for
track structure removal costs, but will have no impact on liquidity. The Company
is currently evaluating the impact of this statement on the Company's
Consolidated Financial Statements. Any impact resulting from the adoption of
this statement will be recorded as a cumulative effect of a change in accounting
principle in the first quarter of 2003.

In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activites" (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
believes that FAS 146 will not have a material impact on the Company's
Consolidated Financial Statements.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Guarantees of
Indebtedness of Others" (FIN 45). FIN 45 is effective for guarantees issued or
modified after December 31, 2002. The disclosure requirements were effective for
the year ending December 31, 2002, which expand the disclosures required by a
guarantor about its obligations under a guarantee. FIN 45 also requires the
Company to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in the issuance of the guarantee. Management
does not believe that FIN 45 will have a material impact on the Company's
Consolidated Financial Statements.

In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" (FAS 148). FAS 148
provides alternative methods of transition for voluntary changes to the fair
value based method of accounting for stock-based employee compensation, and
amends the disclosure requirements including a requirement for interim
disclosures. The Company currently discloses the effects of stock-based employee
compensation and does not intend to voluntarily change to the alternative
accounting principle.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). FIN 46 requires a variable interest entity
to be consolidated by a company if that company is subject to a majority of the
risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or both. FIN 46 also
requires disclosures about variable interest entities that a company is not
required to consolidate but in which it has a significant variable interest. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
existing entities in the first fiscal year or interim period beginning after
June 15, 2003. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. As described in note 10 to the Consolidated
Financial Statements, Item 8, the Railroad has a synthetic operating lease
arrangement to finance a new headquarters building, which falls within the
guidance of FIN 46. In accordance with FIN 46, the Railroad will either
consolidate, restructure or refinance the synthetic lease prior to July 1, 2003.
The Company does not expect FIN 46 to have any impact on the treatment of the
Sale of Receivables program as described in note 3 to the Consolidated Financial
Statements, Item 8.

18

COMMITMENTS AND CONTINGENCIES - There are various claims and lawsuits pending
against the Company and certain of its subsidiaries. The Company 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 10 to the Consolidated Financial Statements,
Item 8.

PENSIONS - During the second quarter of 2002, the Company decreased its assumed
rate of return on pension plan assets from 10% to 9%. This assumption change
resulted in an increase to 2002 pension expense of $16 million. In addition, due
to declines on plan assets, a minimum pension liability adjustment was recorded
during the fourth quarter of 2002. This adjustment resulted in a reduction of
common shareholders' equity. The reduction in equity totaled $141 million, after
tax.

The Railroad voluntarily contributed $100 million to its pension plan
during the fourth quarter of 2002. The Company currently does not have any
minimum funding requirements, as set forth in employee benefit and tax laws;
however, the Company plans to voluntarily contribute approximately $50 million
during 2003. Required contributions subsequent to 2003 are dependent on asset
returns, current discount rates and a number of other factors; however, the
Company expects to continue discretionary funding to help manage any potential
required funding in the future. Future contributions are expected to be funded
primarily by cash generated from operating activities.

DIVIDEND RECEIVABLE - The Railroad owns a 26% interest in Grupo Ferroviario
Mexicano, S.A. de C.V. (GFM). GFM operates a major railway system in Mexico.
During the third quarter of 2002, the Railroad recorded a dividend from GFM of
approximately $118 million. As of December 31, 2002, the dividend is reflected
as a receivable in the Company's Consolidated Statements of Financial Position.
The dividend is accounted for as a reduction to investments in and advances to
affiliated companies in the Consolidated Statements of Financial Position as of
December 31, 2002 and creates no effect on the Company's Consolidated Statements
of Income. During the fourth quarter 2002, the Railroad received approximately
$20 million of the dividend receivable, and anticipates it will receive the
remainder of the dividend during 2003.

WEST COAST PORT DISRUPTION - During September of 2002, the labor dispute between
the International Longshoreman and Warehouse Union (ILWU) and the Pacific
Maritime Association escalated and resulted in work slow-downs and a lockout of
the ILWU dockworkers for four days at the end of the third quarter and continued
for nine days into the fourth quarter of 2002. The estimated net impact on
fourth quarter earnings is approximately $45 million, pre-tax, resulting mainly
from international intermodal shipments diverted to trucks and suspended
shipments due to vessel scheduling disruptions.

RAILROAD RETIREMENT REFORM - On December 21, 2001, The Railroad Retirement and
Survivors' Improvement Act of 2001 (the Act) was signed into law. The Act was a
result of historic cooperation between rail management and labor, and provides
improved railroad retirement benefits for employees and reduced payroll taxes
for employers. The estimated savings to the Railroad during 2002 from passage of
the Act was $36 million, pre-tax, in reduced employer payroll taxes. Incremental
savings are expected in 2003 as the employer tax rate is further reduced by 1.4
percentage points from 15.6% to 14.2%.

WORK FORCE REDUCTION - During 2003, the Company is planning to reduce
approximately 1,000 administrative positions, through a combination of attrition
and involuntary severance. The estimated 2003 severance cost is $45 million,
pre-tax, the majority of which should occur in the first quarter of 2003.

A LOOK FORWARD

2003 BUSINESS OUTLOOK

The Railroad expects to build on the positive momentum generated in the past
several years and continue to grow revenue, operating income and free cash flow.
Free cash flow is defined as cash provided by operating activities less cash
used in investing activities and dividends paid. Year-over-year revenue growth
is projected in all commodity groups with the largest percentage increases
projected in the intermodal, agricultural and industrial groups. Revenue derived
from chemical and energy shipments is expected to increase steadily over 2003.
Automotive revenue is also expected to increase slightly from last year's record
setting pace, thereby continuing as a strong revenue provider. The Railroad will

19

continue to focus on improving service performance while developing new,
innovative rail service offerings to meet the changing needs of its customers.
While operating expenses will likely increase for such items as insurance,
pension, operating taxes and minimum guaranteed payments to union employees,
cost controls and continuing improvements in productivity will remain a focus to
drive the operating ratio lower. Fuel price will remain susceptible to near term
volatile price swings. To help reduce the impact of fuel price volatility on
earnings, the Railroad will continue to look for opportunities to use hedge
contracts.

2003 CAPITAL INVESTMENTS

The Company's 2003 capital expenditures and debt service requirements are
expected to be funded through cash generated from operations, additional debt
financings and the sale or lease of various operating and non-operating
properties. The Company expects that these sources will continue to provide
sufficient funds to meet cash requirements in the foreseeable future. In 2003,
the Company expects to spend approximately $1.8 to $2.0 billion on capital
expenditures. These capital expenditures will be used to maintain track and
structures, continue capacity expansions on the Railroad's main lines, upgrade
and augment equipment to better meet customer needs, build infrastructure and
develop and implement new technologies.

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 or the Railroad) 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 the Company's consolidated financial position, results of operations
or liquidity; and statements concerning projections, predictions, expectations,
estimates or forecasts as to the Company'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 that, 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 Company 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 Company 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 industry;

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

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

o any adverse economic or operational repercussions from terrorist
activities and any governmental response thereto;

20

o war or risk of war;

o changes in fuel prices;

o changes in labor costs;

o labor stoppages; and

o the outcome of claims and litigation, including those related to
environmental contamination, personal injuries, and occupational
illnesses arising from hearing loss, repetitive motion and exposure to
asbestos and diesel fumes.

Forward-looking statements speak only as of the date the statement was
made. The Corporation and the Company assume 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 or the Company do update one or more forward-looking statements, no
inference should be drawn that the Corporation or the Company will make
additional updates with respect thereto or with respect to other forward-looking
statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information concerning market risk sensitive instruments is set forth under
Management's Narrative Analysis of the Results of Operations - Other Matters,
Item 7.

****************************************

21

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

22

INDEPENDENT AUDITORS' REPORT

To the Board of Directors
Union Pacific Railroad Company
Omaha, Nebraska

We have audited the accompanying consolidated statements of financial position
of Union Pacific Railroad Company (an indirect wholly owned subsidiary of Union
Pacific Corporation) and Consolidated Subsidiary and Affiliate Companies (the
Company) as of December 31, 2002 and 2001, and the related consolidated
statements of income, changes in common shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2002. Our audits also
included the consolidated financial statement schedule listed in the Table of
Contents at Part IV, Item 15. These consolidated financial statements and
consolidated financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
consolidated financial statements and consolidated financial statement schedule
based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Union Pacific Railroad Company
and Consolidated Subsidiary and Affiliate Companies at December 31, 2002 and
2001, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

/s/ DELOITTE & TOUCHE LLP

Omaha, Nebraska
January 22, 2003

23

CONSOLIDATED STATEMENTS OF INCOME
Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate
Companies

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

24

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate
Companies

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

25

CONSOLIDATED STATEMENTS OF CASH FLOWS
Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate
Companies

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

26

CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate
Companies

[a] Common stock $10.00 par value: 9,200 shares authorized; 4,465 outstanding.

[b] Class A stock, $10.00 par value: 800 shares authorized, 388 outstanding.

[c] Other comprehensive income (loss), net of tax of $(86), $(6) and $3 in 2002,
2001 and 2000, respectively.

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

27

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate
Companies

SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION - The Consolidated Financial Statements include the
accounts of Union Pacific Railroad Company, a Delaware corporation (the
Registrant), and all of its subsidiaries and certain affiliates (collectively,
the Company, UPRR or the Railroad). The Registrant is an indirect wholly owned
subsidiary of Union Pacific Corporation, a Utah corporation (the Corporation or
UPC). Investments in affiliated companies (20% to 50% owned) are accounted for
using the equity method of accounting. All significant intercompany transactions
are eliminated.

CASH AND TEMPORARY INVESTMENTS - Temporary investments are stated at cost which
approximates fair value and consist of investments with original maturities of
three months or less.

INVENTORIES - Inventories consist of materials and supplies carried at the lower
of average cost or market.

PROPERTY AND DEPRECIATION - Properties are carried at cost. Provisions for
depreciation are computed principally on the straight-line method based on
estimated service lives of depreciable property. The cost (net of salvage) of
depreciable rail property retired or replaced in the ordinary course of business
is charged to accumulated depreciation. A gain or loss is recognized in other
income for all other property upon disposition. The cost of internally developed
software is capitalized and amortized over a five-year period. An obsolescence
review of capitalized software is performed on a periodic basis.

IMPAIRMENT OF LONG-LIVED ASSETS - The Company reviews long-lived assets,
including identifiable intangibles, for impairment when events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If impairment indicators are present and the estimated future
undiscounted cash flows are less than the carrying value of the long-lived
assets, the carrying value is reduced to the estimated fair value as measured by
the discounted cash flows.

REVENUE RECOGNITION - Transportation revenues are recognized 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.

TRANSLATION OF FOREIGN CURRENCY - The Company translates its portion of the
assets and liabilities related to foreign investments into U.S. dollars at the
exchange rates in effect at the balance sheet date. Revenues and expenses are
translated at the average rates of exchange prevailing during the year. The
resulting translation adjustments are reflected within shareholders' equity as
accumulated other comprehensive income or loss. Transaction gains and losses
related to intercompany accounts are not significant.

FINANCIAL INSTRUMENTS - The carrying value of the Company's non-derivative
financial instruments approximates fair value. The fair value of financial
instruments is generally determined by reference to market values as quoted by
recognized dealers or developed based upon the present value of expected future
cash flows discounted at the applicable swap spread.

The Company periodically uses derivative financial instruments, for other
than trading purposes, to manage risk related to changes in fuel prices.

STOCK-BASED COMPENSATION - The Railroad participates in UPC's stock incentive
programs. At December 31, 2002, the Corporation has several stock-based employee
compensation plans, which are described more fully in note 9. The Corporation
accounts for those plans under the recognition and measurement principles of APB
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
Interpretations. No stock-based employee compensation expense, related to stock
option grants, is reflected in net income as all options granted under those
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant. Stock-based employee compensation expense related to
restricted stock and other incentive plans is reflected in net income. The
following table

28

illustrates the effect on net income if the Railroad had applied the fair value
recognition provisions of FASB Statement No. 123, "Accounting for Stock-Based
Compensation", to stock-based employee compensation.

USE OF ESTIMATES - The Consolidated Financial Statements of the Company include
estimates and assumptions regarding certain assets, liabilities, revenues and
expenses and the disclosure of certain contingent assets and liabilities. Actual
future results may differ from such estimates.

INCOME TAXES - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (FAS 109). The objectives of accounting for income taxes are to recognize
the amount of taxes payable or refundable for the current year and deferred tax
liabilities and assets for the future tax consequences of events that have been
recognized in an entity's financial statements or tax returns. These expected
future tax consequences are measured based on provisions of tax law as currently
enacted; the effects of future changes in tax laws are not anticipated. Future
tax law changes, such as a change in the corporate tax rate, could have a
material impact on the Company's financial position or its results of
operations.

PENSION AND POSTRETIREMENT BENEFITS - The Company incurs certain
employment-related expenses associated with pensions and postretirement health
benefits. In order to measure the expense associated with these benefits,
management must make various estimates including discount rates used to value
certain liabilities, assumed rates of return on plan assets used to fund these
expenses, compensation increases, employee turnover rates, anticipated mortality
rates and expected future healthcare costs. The estimates used by management are
based on the Company 's historical experience as well as current facts and
circumstances. The Company uses third-party actuaries to assist management in
properly measuring the expense associated with these benefits. Actual results
that vary from the previously mentioned assumptions could have a material impact
on the Company's results of operations, financial position or liquidity.

PERSONAL INJURY - The cost of injuries to employees and others on Union Pacific
Railroad Company (UPRR) property is charged to expense based on actuarial
estimates of the ultimate cost and number of incidents each year.

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

CHANGE IN PRESENTATION - Certain prior year amounts have been reclassified to
conform to the 2002 Consolidated Financial Statement presentation. These
reclassifications had no effect on previously reported operating income or net
income.

1. OPERATIONS

The Railroad is a Class I railroad that operates in the United States. As of
October 1, 1996, the Railroad included Southern Pacific Rail Corporation
(Southern Pacific or SP). In addition, during 1997, the Railroad and a
consortium of partners were granted a 50-year concession to operate the
Pacific-North and Chihuahua Pacific lines in Mexico. The Railroad made an
additional investment in the consortium in 1999. During 2001, the Company
completed its integration of Southern Pacific's rail operations.

29

The Railroad has over 33,000 route miles linking Pacific Coast and Gulf Coast
ports to the Midwest and eastern United States gateways and providing several
north/south corridors to key Mexican gateways. The Railroad serves the western
two-thirds of the country and maintains coordinated schedules with other
carriers for the handling of freight to and from the Atlantic Coast, the Pacific
Coast, the Southeast, the Southwest, Canada and Mexico. Export and import
traffic is moved through Gulf Coast and Pacific Coast ports and across the
Mexican and Canadian borders. Railroad freight is comprised of six commodity
lines: agricultural, automotive, chemicals, energy, industrial products and
intermodal. The Railroad continues to focus on utilization of its capital asset
base to meet current operating needs and to introduce innovative rail services
across every commodity line.

The Railroad is subject to price and service competition from other
railroads, motor carriers and barge operators. The Railroad's main competitor is
Burlington Northern Santa Fe Corporation. Its rail subsidiary, The Burlington
Northern and Santa Fe Railway Company, operates parallel routes in many of the
Railroad's main traffic corridors. In addition, the Railroad's operations are
conducted in corridors served by other competing railroads and by motor
carriers. Motor carrier competition is particularly strong for intermodal
traffic. Because of the proximity of the Railroad's routes to major inland and
Gulf Coast waterways, barge competition can be particularly pronounced,
especially for grain and bulk commodities.

The Railroad is dependent on two key suppliers of locomotives. Due to the
capital intensive nature and sophistication of this equipment, there are strong
barriers of entry to new suppliers. Therefore, if one of these suppliers would
no longer produce locomotives, the Railroad could realize a significant increase
in the cost and the potential for reduced availability of the locomotives that
are necessary to its operations.

EMPLOYEES - Approximately 87% of the Railroad's nearly 47,000 employees are
represented by 14 major rail unions. National negotiations under the Railway
Labor Act to revise the national labor agreements for all crafts began in late
1999. In May 2001, the Brotherhood of Maintenance of Way Employees (BMWE)
ratified a five-year agreement, which included provisions for an annual wage
increase (based on the consumer price index) and progressive health and welfare
cost sharing. In August 2002, the carriers reached a five-year agreement with
the United Transportation Union (UTU) for annual wage increases as follows: 4.0%
July 2002, 2.5% July 2003, and 3.0% July 2004. The agreement also established a
process for resolving the health and welfare cost sharing issue through
arbitration and also provided for the operation of remote control locomotives by
trainmen. The Brotherhood of Locomotive Engineers (BLE) challenged the remote
control feature of the UTU Agreement and a recent arbitration decision held that
operation of remote control by UTU members in terminals does not violate the BLE
agreement. In November 2002, the International Brotherhood of Boilermakers and
Blacksmiths (IBB) reached a five-year agreement following the UTU wage pattern.
In January 2003, an arbitration award was rendered establishing wage increases
and health and welfare employee cost sharing for the Transportation
Communications International Union (TCU). Contract discussions with the
remaining unions are either in negotiation or mediation. Also during 2002, the
National Mediation Board ruled against the UTU on its petition for a single
operating craft on the Kansas City Southern Railroad. The BLE is now working on
a possible merger with the International Brotherhood of Teamsters (Teamsters).

2. TRANSACTIONS WITH AFFILIATES

Amounts due to and from affiliates, including advances to and borrowings from
the Corporation, bear interest at an annually determined rate, which considers
the Corporation's cost of debt. Net intercompany interest expense charged to the
Railroad on such amounts was $371 million, $398 million, and $405 million in
2002, 2001 and 2000, respectively.

3. FINANCIAL INSTRUMENTS

ADOPTION OF STANDARD - Effective January 1, 2001, the Company adopted Financial
Accounting Standards Board Statement (FASB) No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133) and FASB No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities" (FAS 138). FAS
133 and FAS 138 require that the changes in fair value of all derivative
financial instruments the Company uses for fuel or interest rate hedging
purposes be recorded in the Company's Consolidated Statements of Financial
Position. In addition, to the extent fuel hedges are ineffective due to pricing
differentials resulting from the geographic dispersion of the Company's
operations, income statement recognition of the ineffective portion of the hedge
position is required. Also, derivative

30

instruments that do not qualify for hedge accounting treatment per FAS 133 and
FAS 138 require income statement recognition. The adoption of FAS 133 and FAS
138 resulted in the recognition of a $2 million asset on January 1, 2001.

STRATEGY AND RISK - The Company and its subsidiaries use derivative financial
instruments, in limited instances for other than trading purposes, to manage
risk related to changes in fuel prices. The Company 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 purpose of these programs is
to protect the Company's operating margins and overall profitability from
adverse fuel price changes.

The Company may also use fuel 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 and
are marked-to-market through the Consolidated Statements of Income.

MARKET AND CREDIT RISK - The Company 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 December 31,
2002, the Company has not been required to provide collateral, nor has the
Company received collateral relating to its hedging activities.

In addition, the Company enters into secured financings in which the debtor
has pledged collateral. The collateral is based upon the nature of the financing
and the credit risk of the debtor. The Company generally is not permitted to
sell or repledge the collateral unless the debtor defaults.

DETERMINATION OF FAIR VALUE - The fair values of the Company's derivative
financial instrument positions at December 31, 2002 and 2001, 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 swap spread.

FUEL STRATEGY - As a result of the significance of the Company's fuel costs and
the historical volatility of fuel prices, the Company periodically uses swaps,
futures and/or forward contracts to mitigate adverse fuel price changes. In
addition, the Company at times may use fuel swaptions to secure more favorable
swap prices. The following is a summary of the Company's derivative financial
instruments at December 31, 2002 and 2001:

[a] Fuel hedges which were in effect during 2002.

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

[c] Fuel hedges which are in effect during 2003. These hedges expire December
31, 2003.

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

31

Fuel hedging positions will be reclassified from accumulated other
comprehensive income (loss) to fuel expense over the life of the hedge as fuel
is consumed. During 2003, the Company expects fuel expense to decrease $12
million from this reclassification.

The Company's use of derivative financial instruments had the following
impact on pre-tax income for the years ended December 31, 2002, 2001 and 2000:

FAIR VALUE OF DEBT INSTRUMENTS - The fair value of the Company's long- and
short-term debt has been estimated using quoted market prices or current
borrowing rates. At December 31, 2002 and 2001, the fair value of total debt
exceeded the carrying value by approximately $323 million and $93 million,
respectively. At December 31, 2002 and December 31, 2001, approximately $251
million and $273 million, respectively, of fixed-rate debt securities contain
call provisions that allow the Company to retire the debt instruments prior to
final maturity subject, in certain cases, to the payment of premiums.

SALE OF RECEIVABLES - The Railroad has sold, on a 364-day 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 third parties
have designated the Railroad to service the sold receivables. 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. Payments collected from sold receivables can be reinvested in new
receivables on behalf of the buyers. Should the Company's credit rating fall
below investment grade, the amount of receivables sold would be reduced, and in
certain cases, the buyers have the right to discontinue this reinvestment, thus
requiring the Railroad to fund the receivables. At December 31, 2002 and 2001,
accounts receivable are presented net of $600 million of receivables sold.

4. INCOME TAXES

The Company is included in the consolidated income tax return of the
Corporation. The consolidated income tax liability of the Corporation is
allocated among the parent and its subsidiaries on the basis of the separate
contributions to the consolidated income tax liability, with the benefit of tax
losses and credits utilized in consolidation allocated to the companies
generating such losses and credits.

Components of income tax expense were as follows for the years ended
December 31, 2002, 2001 and 2000:

32

Deferred income tax liabilities (assets) were comprised of the following at
December 31, 2002 and 2001:

For the years ending December 31, 2002, 2001 and 2000, a reconciliation
between statutory and effective tax rates of continuing operations is as
follows:

During 2002, the Company made considerable progress on a number of
significant income tax examination issues for prior tax years. Most of the
Company's tax issues relating to 1986 through 1994, as well as some issues for
1995 through 1998, have now been substantially resolved, resulting in a decrease
in income tax expense of $33 million in 2002.

All federal income tax years prior to 1986 are closed, and most issues for
1986 through 1994 have been resolved. Years 1995 through 1998 are currently
under examination by the IRS.

The Company believes it has adequately reserved for federal and state income
taxes.

5. DEBT

Total debt as of December 31, 2002 and 2001, is summarized below:

33

DEBT MATURITIES - Aggregate debt maturities, excluding intercompany borrowings,
as of December 31, 2002, are as follows:

MORTGAGED PROPERTIES - At December 31, 2002 and 2001, approximately $9.5 billion
and $9.4 billion, respectively, of Railroad properties secure outstanding
equipment obligations and mortgage bonds.

INCOME-BASED SECURITIES - The Company has certain debt instruments which contain
provisions that limit the payment of interest, require sinking fund installments
and impose certain restrictions in the event all interest is not paid based upon
available income levels. Other debt instruments contain provisions that may
impose restrictions on the Company's ability to declare dividends on certain
classes of capital stock (note 8).

SIGNIFICANT NEW FINANCINGS - 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.

6. LEASES

The Company leases certain locomotives, freight cars, trailers and other
property. Future minimum lease payments for operating and capital leases with
initial or remaining non-cancelable lease terms in excess of one year as of
December 31, 2002 were as follows:

Rent expense for operating leases with terms exceeding one month was $581
million in 2002, $571 million in 2001 and $550 million in 2000. Contingent
rentals and sub-rentals are not significant.

7. RETIREMENT PLANS

THRIFT PLAN - The Company provides a defined contribution plan (thrift plan) to
eligible non-union employees. The Company's contributions into the thrift plan
are based on 50% of the participant's contribution, limited to 3% of the
participant's base salary. Company thrift plan contributions were $10 million
for the year ended December 31, 2002 and $11 million for the years ended
December 31, 2001, and 2000.

RAILROAD RETIREMENT SYSTEM - All Railroad employees are covered by the Railroad
Retirement System (the System). On December 21, 2001, The Railroad Retirement
and Survivors' Improvement Act of 2001 (the Act) was signed into law. The

34

Act was a result of historic cooperation between rail management and labor, and
provides improved railroad retirement benefits for employees and reduced payroll
taxes for employers. Contributions made to the System are expensed as incurred
and amounted to approximately $595 million in 2002, $607 million in 2001 and
$611 million in 2000.

OTHER POSTRETIREMENT BENEFITS - All non-union and certain of the Company's union
employees participate in defined contribution medical and life insurance
programs for retirees. The Company also provides medical and life insurance
benefits on a cost sharing basis for qualifying employees. These costs are
funded as incurred.

PENSION PLANS - The Company provides defined benefit retirement income to
eligible non-union employees through qualified and non-qualified (supplemental)
pension plans. Qualified and non-qualified pension benefits are based on years
of service and the highest compensation during the latest years of employment.
The qualified plans are funded based on the Projected Unit Credit actuarial
funding method and are funded at not less than the minimum funding standards set
forth in the Employee Retirement Income Security Act of 1974, as amended and not
more than the maximum amount deductible for tax purposes. The Company has
settled a portion of the non-qualified unfunded supplemental plan's accumulated
benefit obligation by purchasing annuities.

Changes in the Company's projected benefit obligation are as follows, for
the years ended December 31, 2002 and 2001:

As part of the work force reduction plan, discussed in note 13, the Company
reclassified $59 million and $1 million in 2001 for pension and other
postretirement benefits, respectively, from other current liabilities to retiree
benefits obligation.

Changes in the Company's benefit plan assets are as follows for the years
ended December 31, 2002 and 2001:

As of December 31, 2002, the Company had pension plans with accumulated
benefits that exceeded the fair value of plan assets. The accumulated benefit
obligation for these plans was $1.6 billion while the fair value of the assets
was $1.2 billion at the end of 2002.

35

The components of the funded status of the benefit plans for the years ended
December 31, 2002 and 2001 were as follows:

At December 31, 2002 and 2001, $43 million and $29 million, respectively,
of the total pension and other postretirement liability were classified as a
current liability.

The Company decreased its assumed long-term rate of return on pension plan
assets, during 2002, from 10% to 9%. This assumption change resulted in an
increase to 2002 pension expense of $16 million.

During 2002, actual asset returns for the Company's pension plans were
adversely impacted by continued deterioration in the equity markets. Actual
return on pension plan assets was approximately negative 10% in 2002. During the
same time, corporate bond yields, which are used in determining the discount
rate for future pension obligations, continued to decline. As a result of
negative asset returns and lower discount rates, the Company was required to
recognize an additional minimum pension liability. The liability was recorded as
a $141 million after-tax reduction to common shareholders' equity as part of
accumulated other comprehensive income (loss). The equity reduction would be
restored to the balance sheet in future periods when the fair value of plan
assets exceeds the accumulated benefit obligations. Recognition of this
reduction to equity does not affect net income or cash flow in 2002 and has no
impact on compliance with debt covenants.

While the interest rate and asset return environment has significantly
impacted the funded status of the Company's plans, the Company does not
currently have minimum funding requirements, as set forth in employee benefit
and tax laws. Even though no minimum funding is required, the Company
voluntarily contributed $100 million to its pension plan during 2002.

Amounts recognized for the benefit plan liabilities in the Consolidated
Statements of Financial Position for December 31, 2002 and 2001 consisted of:

The components of the Company's net periodic pension and other postretirement
costs (income) for the years ended December 31, 2002, 2001 and 2000 were as
follows:

36

At December 31, 2002 and 2001, approximately 34% and 32%, respectively, of
the funded plans' assets each year were held in fixed-income and short-term
securities, with the remainder in equity securities.

The weighted-average actuarial assumptions for the years ended December 31,
2002, 2001 and 2000 were as follows:

Assumed health care cost trend rates have a significant effect on the
amount reported for health care plans. A one-percentage point change in the
assumed health care cost trend rates would have the following effects on other
postretirement benefits:

8. CAPITAL STOCK AND DIVIDEND RESTRICTIONS

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

The Company's capital structure consists of Class A Stock and Common Stock.
The Class A Stock is entitled to a cash dividend whenever a dividend is declared
on the Common Stock, in an amount which equals 8 percent of the sum of the
dividends on both the Class A Stock and the Common Stock.

The number of shares shown in the Statements of Changes in Common
Shareholders' Equity in the Consolidated Financial Statements, Item 8, excludes
2,665 shares of Common Stock and 232 shares of Class A Stock owned by Southern
Pacific Rail Corporation, whose results are included in the Consolidated
Financial Statements.

The Company is subject to certain restrictions related to the payment of
dividends. The amount of retained earnings available for dividends under the
most restrictive test was $6.4 billion and $4.8 billion at December 31, 2002 and
2001, respectively.

37

9. STOCK OPTIONS AND OTHER STOCK PLANS

The Railroad participates in the Corporation's stock incentive plans. There are
no options outstanding for Railroad participants under the 1988 Stock Option and
Restricted Stock Plan of Union Pacific Corporation (1988 Plan) and 6,744,020
options outstanding under the 1993 Stock Option and Retention Stock Plan of
Union Pacific Corporation (1993 Plan) for Railroad participants. There are
1,064,053 retention shares and stock units (the right to receive shares of
common stock) outstanding under the 1993 Plan for Railroad participants. The
Corporation no longer grants options or awards of restricted stock under the
1988 Plan or the 1993 Plan.

The UP Shares Stock Option Plan of Union Pacific Corporation (UP Shares
Plan) was approved by UPC's Board of Directors on April 30, 1998. The UP Shares
Plan reserved 12,000,000 shares of UPC common stock for issuance. The UP Shares
Plan was a broad-based option program that granted eligible active employees on
April 30, 1998 an option to purchase 200 shares of UPC common stock at $55.00
per share. All options granted were non-qualified options that became
exercisable on May 1, 2001 and remain exercisable until April 30, 2008. If an
optionee's employment terminates for any reason, the option remains exercisable
for a period of one year after the date of termination, but no option is
exercisable after April 30, 2008. Pursuant to the terms of the UP Shares Plan,
no options may be granted after April 30, 1998. As of December 31, 2002, there
were 7,976,920 options outstanding for Railroad participants under the UP Shares
Plan.

The Corporation adopted the Executive Stock Purchase Incentive Plan (ESPIP)
effective October 1, 1999, in order to encourage and facilitate ownership of UPC
common stock by officers and other key executives of the Corporation and its
subsidiaries. Under the ESPIP, participants purchased a total of 1,008,000
shares of UPC common stock with the proceeds of 6.02% interest-bearing, full
recourse loans from the Corporation. Loans totaled $47 million and have a final
maturity date of January 31, 2006. Deferred cash payments were to be awarded to
the participants to repay interest and the loan principal if certain performance
and retention criteria were met within a 40-month period ending January 31,
2003. Dividends paid on the purchased shares were originally assigned to the
Corporation to offset the accrued interest on the loan balance until March 2001
when the first performance criterion was satisfied and, accordingly thereafter,
the dividends on the purchased shares were paid directly to the participants.
Satisfaction of the first performance criterion also entitled participants to
receive a cash payment equal to the net accrued interest on the outstanding
principal balance of the loan. Satisfaction of the second performance criterion,
in December 2002, entitled participants to receive a cash payment equal to
one-third of the outstanding principal balance of their loan, and satisfaction
of the retention criterion of continued employment with the Corporation until
January 31, 2003, entitled participants to receive an additional cash payment
equal to one-third of the outstanding principal balance of their loan. Such
payments shall be applied against the participants' outstanding loan balance
pursuant to the terms of the ESPIP. The remaining balance of the loan is payable
in three equal installments on January 31, 2004, January 31, 2005 and January
31, 2006.

In November 2000, the Corporation approved the 2001 Long Term Plan (LTP).
Participants were awarded retention shares or stock units and cash awards
subject to the attainment of certain performance targets and continued
employment through January 31, 2004. The LTP performance criteria include three
year (for fiscal years 2001, 2002 and 2003) cumulative earnings per share and
stock price targets.

The Union Pacific Corporation 2001 Stock Incentive Plan (2001 Plan) was
approved by the shareholders in April 2001. The 2001 Plan reserved 12,000,000
shares of UPC common stock for issuance to eligible employees of the Corporation
in the form of non-qualified options, incentive stock options, retention shares,
stock units and incentive bonus awards. Awards and options under the 2001 Plan
may be granted to employees of the Corporation and its subsidiaries.
Non-employee directors are not eligible. As of December 31, 2002, there were
474,245 retention shares and stock units outstanding for Railroad participants
under the 2001 Plan, and there were 1,348,200 options outstanding for Railroad
participants under the 2001 Plan.

Pursuant to the above plans, 9,544,569, 12,461,025 and 6,089,561 shares of
UPC common stock were available for grant by the Corporation at December 31,
2002, 2001 and 2000, respectively.

38

OPTIONS - Stock options are granted with an exercise price equal to the fair
market value of the Corporation's common stock as of the date of the grant.
Options are granted with a 10-year term and are generally exercisable one to two
years after the date of the grant. A summary of the stock options issued under
the 1988 Plan, the 1993 Plan, the UP Shares Plan and the 2001 Plan and changes
during the years ending December 31 are as follows:

The following table summarizes information about the Railroad's outstanding
stock options as of December 31, 2002:

The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model, with the following
weighted-average assumptions for options granted in 2002, 2001 and 2000,
respectively: risk-free interest rates of 4.4%, 4.3% and 5.1%; dividend yield of
1.3%, 1.4% and 1.6%; expected lives of 5 years, 4 years and 4 years; and
volatility of 28.8%, 29.5% and 31.4%.

RESTRICTED STOCK AND OTHER INCENTIVE PLANS - The Corporation's plans provide for
awarding retention shares of common stock or stock units to eligible employees.
These awards are subject to forfeiture if employment terminates during the
prescribed retention period, generally three or four years, or, in some cases,
if a certain prescribed stock price or other financial criteria is not met.
Restricted stock awards are issued to non-employee directors and are subject to
forfeiture if certain service requirements are not met. During the year ended
December 31, 2002, 436,270 retention shares, stock units and restricted shares
were issued to Railroad participants at a weighted-average fair value of $58.25.
During 2001, 223,502 retention shares, stock units and restricted shares were
issued to Railroad participants at a weighted-average fair value of $49.95.
During 2000, 171,309 retention shares, stock units and restricted shares were
issued to Railroad participants at a weighted-average fair value of $41.22. The
cost of retention and restricted awards is amortized to expense over the
retention period.

Under the LTP, 4,400 performance retention stock units and 766,900
performance retention shares and stock units were issued to Railroad
participants at a weighted-average fair value of $60.68 and $50.11 during 2002
and 2001, respectively. The cost of the LTP is expensed over the performance
period which ends January 31, 2004.

39

The cost associated with the ESPIP retention criterion is amortized to
expense over the 40-month period. The cost associated with the ESPIP first
performance criterion is expensed over the life of the loan, and the cost
associated with the second performance criterion was expensed in December 2002.

During the years ended December 31, 2002 and 2001, the Railroad expensed
$13 million and $8 million, respectively, related to the other incentive plans
described above. During the years ended December 31, 2002, 2001 and 2000, UPC
expensed $15 million, $4 million and $11 million, respectively, attributable to
Railroad participants in the other incentive plans described above.

10. COMMITMENTS AND CONTINGENCIES

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

PERSONAL INJURY AND OCCUPATIONAL ILLNESS - The cost of injuries to employees and
others related to Railroad activities is charged to expense based on actuarial
estimates of the ultimate cost and number of incidents each year. During 2002,
the Railroad's reported number of work-related injuries that resulted in lost
job time decreased 5% compared to the number of injuries reported during 2001,
and accidents at grade crossings decreased 16% compared to 2001. Annual expenses
for the Railroad's personal injury-related events were $221 million in 2002,
$204 million in 2001 and $207 million in 2000. As of December 31, 2002 and 2001,
the Railroad had a liability of $668 million and $697 million, respectively,
accrued for future personal injury costs, of which $272 million was recorded in
current liabilities as accrued casualty costs for both years. The Railroad has
additional amounts accrued for claims related to certain occupational illnesses.
Compensation for Railroad work-related accidents is governed by the Federal
Employers' Liability Act (FELA). Under FELA, damages are assessed based on a
finding of fault through litigation or out-of-court settlements. The Railroad
offers a comprehensive variety of services and rehabilitation programs for
employees who are injured at work.

ENVIRONMENTAL - The Company generates and transports hazardous and non-hazardous
waste in its current and former operations, and is subject to federal, state and
local environmental laws and regulations. The Company has identified
approximately 433 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, 27 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 Company's ultimate
environmental liability may include costs relating to activities of other
parties, in addition to costs relating to its own activities at each site.

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

As of December 31, 2002 and 2001, the Company had a liability of $188
million and $171 million, respectively, accrued for future environmental costs,
of which $71 million and $70 million were recorded in current liabilities as
accrued casualty 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 Company
believes that it has adequately accrued for its ultimate share of costs at sites
subject to joint and several liability. However, the ultimate liability for
remediation is difficult to determine 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,

40

and/or the speculative nature of remediation costs. The Company expects to pay
out the majority of the December 31, 2002, environmental 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 or financial condition of the Company.

PURCHASE OBLIGATIONS AND GUARANTEES - The Company periodically enters into
financial and other commitments in connection with their businesses. The Company
does not expect that these commitments or guarantees will have a material
adverse effect on its consolidated financial condition, results of operations or
liquidity.

At December 31, 2002, the Company had unconditional purchase obligations of
$404 million for the purchase of locomotives as part of the Company's multi-year
capital asset acquisition plan. In addition, the Company was contingently liable
for $305 million in guarantees and $28 million in letters of credit at December
31, 2002. These contingent guarantees were entered into in the normal course of
business and include guaranteed obligations of affiliated operations. None of
the guarantees individually are significant, and no liability related to these
guarantees exists as of December 31, 2002. The final guarantee expires in 2022.
The Company is not aware of any existing event of default, which would require
it to satisfy these guarantees.

OTHER - In December 2001, the Railroad entered into a synthetic operating lease
arrangement to finance a new headquarters building which will be constructed in
Omaha, Nebraska. The expected completion date of the building is mid-2004. It
will total approximately 1.1 million square feet with approximately 3,800 office
workspaces. The cost to construct the new headquarters, including capitalized
interest, is approximately $260 million. The Corporation has guaranteed all of
the Railroad's obligation under this lease.

UPRR is the construction agent for the lessor during the construction
period. The Railroad has guaranteed, in the event of a loss caused by or
resulting from its actions or failures to act as construction agent, 89.9% of
the building related construction costs incurred up to that point during the
construction period. Total building related costs incurred and drawn from the
lease funding commitments as of December 31, 2002, were approximately $50
million. Accordingly, the Railroad's guarantee at December 31, 2002, was
approximately $45 million. As construction continues and additional costs are
incurred, this guarantee will increase accordingly.

After construction is complete, UPRR will lease the building under an
initial term of five years with provisions for renewal for an extended period
subject to agreement between the Railroad and lessor. At any time during the
lease, the Railroad may, at its option, purchase the building at approximately
the amount expended by the lessor to construct the building. If the Railroad
elects not to purchase the building or renew the lease, the building is returned
to the lessor for remarketing, and the Railroad has guaranteed a residual value
equal to 85% of the total construction related costs. The guarantee will be
approximately $220 million.

11. OTHER INCOME

Other income included the following:

Included in the 2002 gain on non-operating asset dispositions is a pre-tax
gain of $141 million related to the sale of land, track, operating rights and
facilities to the Utah Transit Authority (UTA) for $185 million, which included
approximately 175 miles of track that stretches from Brigham City, Utah, through
Salt Lake City, Utah, south to Payson, Utah. The transaction contributed $88
million to the Railroad's earnings on an after-tax basis. An additional $16
million of the pre-tax gain has been deferred pending successful completion of
arrangements for the relocation of various existing facilities.

41

Also included in the 2002 gain on non-operating asset dispositions is a
pre-tax gain of $73 million related to the sale of land and track to the Santa
Clara Valley Transportation Authority (VTA) for $80 million, which included
approximately 15 miles of track that stretches from William Street in San Jose,
California, north to Paseo Padre Parkway in Fremont, California. The transaction
contributed $45 million to the Railroad's earnings on an after-tax basis.

12. ACCOUNTING PRONOUNCEMENTS

In August 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations" (FAS 143). FAS 143 is effective for the Company
beginning January 1, 2003. FAS 143 requires that the Company record a liability
for the fair value of an asset retirement obligation when the Company has a
legal obligation to remove the asset. The standard will affect the way the
Company accounts for track structure removal costs, but will have no impact on
liquidity. The Company is currently evaluating the impact of this statement on
the Company's Consolidated Financial Statements. Any impact resulting from the
adoption of this statement will be recorded as a cumulative effect of a change
in accounting principle in the first quarter of 2003.

In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activites" (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
believes that FAS 146 will not have a material impact on the Company's
Consolidated Financial Statements.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Guarantees of
Indebtedness of Others" (FIN 45). FIN 45 is effective for guarantees issued or
modified after December 31, 2002. The disclosure requirements were effective for
the year ending December 31, 2002, which expand the disclosures required by a
guarantor about its obligations under a guarantee. FIN 45 also requires the
Company to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in the issuance of the guarantee. Management
does not believe that FIN 45 will have a material impact on the Company's
Consolidated Financial Statements.

In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" (FAS 148). FAS 148
provides alternative methods of transition for voluntary changes to the fair
value based method of accounting for stock-based employee compensation, and
amends the disclosure requirements including a requirement for interim
disclosures. The Company currently discloses the effects of stock-based employee
compensation and does not intend to voluntarily change to the alternative
accounting principle.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). FIN 46 requires a variable interest entity
to be consolidated by a company if that company is subject to a majority of the
risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or both. FIN 46 also
requires disclosures about variable interest entities that a company is not
required to consolidate but in which it has a significant variable interest. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
existing entities in the first fiscal year or interim period beginning after
June 15, 2003. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. As described in note 10 to the Consolidated
Financial Statements, the Railroad has a synthetic operating lease arrangement
to finance a new headquarters building, which falls within the guidance of FIN
46. In accordance with FIN 46, the Railroad will either consolidate, restructure
or refinance the synthetic lease prior to July 1, 2003. The Company does not
expect FIN 46 to have any impact on the treatment of the Sale of Receivables
program as described in note 3 to the Consolidated Financial Statements.

13. 2000 WORK FORCE REDUCTION PLAN

The Corporation's Board of Directors approved a work force reduction plan (the
Plan) in the fourth quarter of 2000. The Plan called for the elimination of
approximately 2,000 Railroad positions during 2001. The Railroad accrued $115
million pre-tax or $72 million after-tax in the fourth quarter of 2000 for costs
related to the Plan. The expense was charged to salaries, wages and employee
benefits in the Company's 2000 Consolidated Statements of Income. Plan liability
activity

42

in 2001 included $49 million paid in cash or reclassified to contractual
liabilities for severance benefits to 571 employees; $60 million of subsidized
early retirement benefits covering 480 employees; with the remaining $6 million
charged back against salaries, wages and employee benefits in the Company's
Consolidated Statements of Income. In December 2001, the Plan was completed with
positions eliminated through a combination of subsidized early retirements,
involuntary layoffs and attrition.

14. SELECTED QUARTERLY DATA

Selected unaudited quarterly data are as follows:

****************************************

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

43

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

ITEM 11. EXECUTIVE COMPENSATION

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

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

ITEM 14. CONTROLS AND PROCEDURES

Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the CEO and the CFO concluded that the
Company's disclosure controls and procedures are effective in alerting them, in
a timely manner, to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic SEC
filings.

Additionally, the CEO and CFO determined that there were no significant changes
in the Company's internal controls or in other factors that could significantly
affect the Company's internal controls subsequent to the date of their most
recent evaluation.

44

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Financial Statements, Financial Statement Schedules and Exhibits:

(1) Financial Statements

The financial statements filed as part of this filing are listed on
the index to Consolidated Financial Statements, Item 8, on page 22.

(2) Financial Statement Schedules

Schedule II - Valuation and Qualifying Accounts

Schedules not listed above have been omitted because they are not
applicable or not required or the information required to be set forth
therein is included in the Consolidated Financial Statements, Item 8,
or notes thereto.

(3) Exhibits

Exhibits are listed in the exhibit index on page 50.

(b) Reports on Form 8-K

On October 24, 2002, the Registrant filed a Current Report on Form 8-K
announcing UPC's financial results for the third quarter of 2002.

On January 22, 2003, the Registrant filed a Current Report on Form 8-K
announcing UPC's financial results for the fourth quarter of 2002.

45

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 21st day of
February, 2003.

UNION PACIFIC RAILROAD COMPANY

By /s/ Richard K. Davidson
----------------------------------------
Richard K. Davidson, Chairman,
Chief Executive Officer and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below, on this 21st day of February, 2003, by the following
persons on behalf of the registrant and in the capacities indicated.

PRINCIPAL EXECUTIVE OFFICER
AND DIRECTOR:

/s/ Richard K. Davidson
----------------------------------------
Richard K. Davidson, Chairman,
Chief Executive Officer and Director

PRINCIPAL FINANCIAL OFFICER:

/s/ James R. Young
----------------------------------------
James R. Young,
Chief Financial Officer

PRINCIPAL ACCOUNTING OFFICER:

/s/ Richard J. Putz
---------------------------------------
Richard J. Putz,
Chief Accounting Officer and Controller

DIRECTORS:

Philip F. Anschutz* Elbridge T. Gerry, Jr.*
Thomas J. Donohue* Judith Richards Hope*
Archie W. Dunham* Richard J. Mahoney*
Spencer F. Eccles* Steven R. Rogel*
Ivor J. Evans* Ernesto Zedillo Ponce de Leon*

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

46

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, Richard K. Davidson, certify that:

1. I have reviewed this annual report on Form 10-K of Union Pacific Railroad
Company;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: February 21, 2003

/s/ Richard K. Davidson
------------------------------------
Richard K. Davidson, Chairman,
Chief Executive Officer and Director

47

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, James R. Young, certify that:

1. I have reviewed this annual report on Form 10-K of Union Pacific Railroad
Company;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: February 21, 2003

/s/ James R. Young
------------------
James R. Young,
Chief Financial Officer

48

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate
Companies

49

UNION PACIFIC RAILROAD COMPANY
EXHIBIT INDEX

10(d) Agreement, dated September 25, 1995, among UPC, UPRR, Missouri
Pacific Railroad Company (MPRR), SP, SPT, The Denver & Rio Grande
Western Railroad Company (D&RGW), St. Louis Southwestern Railway
Company (SLSRC) and SPCSL Corp. (SPCSL), on the one hand, and
Burlington Northern Railroad Company (BN) and The Atchison, Topeka
and Santa Fe Railway Company (Santa Fe), on the other hand, is
incorporated by reference to Exhibit 10.11 to UPC's Registration
Statement on Form S-4 (No. 33-64707).

10(e) Supplemental Agreement, dated November 18, 1995, between UPC, UPRR,
MPRR, SP, SPT, D&RGW, SLSRC and SPCSL, on the one hand, and BN and
Santa Fe, on the other hand, is incorporated herein by reference to
Exhibit 10.12 to UPC's Registration Statement on Form S-4 (No.
33-64707).