UNION PACIFIC CORP - 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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER 1-6075

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

UTAH 13-2626465
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1416 DODGE STREET, OMAHA, NEBRASKA
(Address of principal executive offices)

68179
(Zip Code)

(402) 271-5777
(Registrant's telephone number, including area code)

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

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. [ X ].

As of January 31, 2002, the aggregate market value of the registrant's
Common Stock held by non-affiliates (using the New York Stock Exchange closing
price) was approximately $15,113,551,697.

The number of shares outstanding of the registrant's Common Stock as of
January 31, 2002, was 243,570,535.

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Documents Incorporated by Reference - Portions of the registrant's definitive
Proxy Statement for the annual meeting of shareholders to be held on April 19,
2002, have been incorporated by reference into Part III of this Form 10-K.

TABLE OF CONTENTS
UNION PACIFIC CORPORATION

PART I

Item 1. Business................................................................................ 3

Item 2. Properties.............................................................................. 6

Item 3. Legal Proceedings....................................................................... 8

Item 4. Submission of Matters to a Vote of Security Holders..................................... 10

Executive Officers of the Registrant and Principal Executive Officers of Subsidiaries... 10

PART II

Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters................ 12

Item 6. Selected Financial Data................................................................. 12

Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations......................................................................... 13

Cautionary Information.................................................................. 29

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.............................. 29

Item 8. Financial Statements and Supplementary Data............................................. 30

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure......................................................................... 55

PART III

Item 10. Directors and Executive Officers of the Registrant...................................... 56

Item 11. Executive Compensation.................................................................. 56

Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... 56

Item 13. Certain Relationships and Related Transactions.......................................... 56

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 57

Signatures.............................................................................. 58

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PART I

ITEM 1. BUSINESS

CORPORATE STRUCTURE

Union Pacific Corporation (UPC or the Corporation) was incorporated in Utah in
1969. The Corporation's principal executive offices are located at 1416 Dodge
Street, Room 1230, Omaha, NE 68179. The telephone number at that address is
(402) 271-5777. The Corporation's common stock is listed on the New York Stock
Exchange under the symbol "UNP". The Corporation operates primarily in the areas
of rail transportation, through its indirect wholly owned subsidiary Union
Pacific Railroad Company (UPRR or the Railroad), and trucking, through its
indirect wholly owned subsidiaries Overnite Transportation Company (Overnite)
and, subsequent to November 30, 2001, Motor Cargo Industries, Inc. (Motor
Cargo). The details of strategic transactions in recent years are as follows:

SOUTHERN PACIFIC - During 2001, UPC completed its integration of Southern
Pacific's rail operations (see notes 1 and 2 to the Consolidated Financial
Statements, Item 8). 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.

MOTOR CARGO - The Corporation entered into an Agreement and Plan of Merger,
dated October 15, 2001 (the Agreement), with Motor Cargo, a Utah corporation,
and Motor Merger Co., a Utah corporation and wholly owned subsidiary of UPC,
pursuant to which, the Corporation agreed to offer to exchange for each share of
Motor Cargo common stock, no par value (Motor Cargo Stock), at the election of
the holder, either 0.26 of a share of common stock, par value $2.50 per share,
of the Corporation or $12.10 in cash. As a result of the exchange offer, UPC
acquired 99.7% of Motor Cargo Stock as of November 30, 2001, and therefore,
Motor Cargo's results of operations were consolidated with the Corporation
subsequent to November 30, 2001. The Corporation utilized approximately 1.7
million shares of UPC common stock in the exchange. In February 2002, the
Corporation completed the acquisition of the remaining shares of Motor Cargo
Stock, and Motor Merger Co. was merged with Motor Cargo leaving Motor Cargo as
the surviving corporation. After completion of the merger, the trucking segment
of the Corporation now includes Overnite and Motor Cargo operating as separate
and distinct companies under Overnite Corporation, a newly formed holding
company. Under the purchase method of accounting, the purchase price was
approximately $85 million, including assumed liabilities.

OPERATIONS

Union Pacific Corporation consists of two reportable segments, rail and
trucking, as well as UPC's other product lines (Other). The rail segment
includes the operations of UPRR and UPRR's subsidiaries and rail affiliates
(collectively, the Railroad). The trucking segment includes the operations of
Overnite and, subsequent to November 30, 2001, Motor Cargo. The Corporation's
other product lines are comprised of the corporate holding company (which
largely supports the Railroad), Fenix LLC and affiliated technology companies
(Fenix), self-insurance activities and all appropriate consolidating entries
(see note 1 to the Consolidated Financial Statements, Item 8).

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RAIL

OPERATIONS - The Railroad is a Class I railroad that operates in the United
States. It 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 (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.

EMPLOYEES - Approximately 87% of the Railroad's nearly 48,000 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. The health and welfare cost sharing was a milestone as the BMWE is
the first union to make significant cost contributions to their health and
welfare plan. Contract discussions with the remaining unions are either in
negotiation or mediation. Also during 2001, much of the operating craft unions'
focus was on a proposed merger between the United Transportation Union and the
Brotherhood of Locomotive Engineers (BLE). In a December 2001 re-vote, the BLE
resoundingly rejected the merger. Both operating craft unions have indicated a
desire to complete national negotiations. The Corporation anticipates
significant progress in 2002.

TRUCKING

OPERATIONS - The trucking segment includes the operations of Overnite and Motor
Cargo. Overnite is a major interstate trucking company specializing in
less-than-truckload (LTL) shipments. Overnite serves all 50 states and portions
of Canada and Mexico through 170 service centers located throughout the United
States providing regional, inter-regional and long haul service. Overnite
transports a variety of products including machinery, tobacco, textiles,
plastics, electronics and paper products. Motor Cargo is a western regional LTL
carrier that provides comprehensive service throughout 10 western states. Motor
Cargo transports general commodities including consumer goods, packaged
foodstuffs, industrial and electronic equipment and auto parts. Overnite and
Motor Cargo experience intense service and price competition from regional,
inter-regional and national LTL carriers and, to a lesser extent, from truckload
carriers, railroads and overnight delivery companies. Major competitors include
USFreightways and CNF Inc. Overnite and Motor Cargo believe they are able to
compete effectively in their markets by providing high quality, customized
service at competitive prices.

EMPLOYEES - Overnite continues to oppose the efforts of the International
Brotherhood of Teamsters (Teamsters) to unionize Overnite service centers. Since
the Teamsters began their efforts at Overnite in 1994, Overnite has received 90
petitions for union elections at 66 of its 170 service centers, although there
have been only nine elections since August 1997, and Teamsters representation
was rejected in seven of those nine elections. Twenty-two service centers,
representing approximately 14% of Overnite's nearly 13,000 nationwide employee
work force, have voted for union representation, and the Teamsters have been
certified and recognized as the bargaining representative for such employees.
Employees at 18 of these 22 locations have filed decertification petitions since
1999. Elections affecting approximately 400 additional employees are unresolved,
and there are no elections currently scheduled. Additionally, proceedings are
pending in certain cases where a Teamsters' local union lost a representation
election. To date, Overnite has not entered

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into any collective bargaining agreements with the Teamsters, who began a job
action on October 24, 1999, that has continued into 2002. As of January 19,
2002, 19 Overnite service centers had approximately 369 employees, less than 3%
of Overnite's work force, who did not report to work. Despite the work stoppage,
Overnite has managed to improve its revenue and profitability on a
year-over-year basis. Employees at two Motor Cargo service centers located in
North Salt Lake, Utah and Reno, Nevada, representing approximately 11% of Motor
Cargo's total work force at 30 service centers, are covered by two separate
collective bargaining agreements with unions affiliated with the Teamsters.
Although the agreements cover most of the employees at these two facilities,
less than half of these covered employees are actual members of unions.

OTHER PRODUCT LINES

OTHER - Included in the other product lines are the results of the corporate
holding company, Fenix, self-insurance activities and all appropriate
consolidating entries.

OTHER INFORMATION

Additional information regarding UPC's operations is presented within Selected
Financial Data, Item 6, and the Consolidated Financial Statements, Item 8.

GOVERNMENTAL REGULATION - UPC'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 and trucking segment 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. In March 2000, the STB imposed a 15-month moratorium on
railroad merger applications between Class I railroads. The moratorium directed
large railroads to avoid merger activities for 15 months until the STB adopted
new rules governing merger proceedings. The rulemaking proceeding was completed
June 11, 2001. On that date, the moratorium ended, and the STB issued new rules
to be applied in merger proceedings involving Class I carriers which impose
greater protective conditions on future transactions to enhance competition.

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 - UPC and its subsidiaries are 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

5

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.

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 Corporation 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 Corporation'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 Corporation's financial condition or results of
operations.

The operations of the Corporation 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 12 to the Consolidated Financial Statements, Item 8.

ITEM 2. PROPERTIES

The Corporation's primary real estate, equipment and other property (properties)
are owned or leased to support its rail and trucking operations. The Corporation
believes that its properties are in good condition and adequate for current
operations. The rail and trucking segments operate facilities and equipment
designated for both the maintenance and repair of their respective property,
including locomotives, rail cars, tractors and trailers 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 and
service centers operated by the trucking segment. Additionally, the Corporation
had approximately $1.7 billion in capital expenditures during 2001 for, among
other things, building and maintaining track, structures and infrastructure,
upgrading and augmenting equipment and developing and implementing new
technologies.

Certain of the Corporation's properties are subject to federal, state and
local provisions involving the protection of the environment. See discussion of
environmental issues in Management's Discussion and Analysis of Financial
Condition and Results of Operations - Other Matters - Environmental Costs, Item
7, and in note 12 to the Consolidated Financial Statements, Item 8. See also
notes 1, 5, 7 and 8 to the Consolidated Financial Statements, Item 8, for
additional information regarding the Corporation's properties.

6

RAIL OPERATIONS

TRACK - The Corporation's rail operations utilize over 33,000 main line and
branch line route miles in 23 states in the western two-thirds of the United
States. The Corporation owns 27,500 route miles with the remainder of route
miles operated under trackage rights or leases. As of and for the years ending
December 31, 2001, 2000 and 1999, route miles operated and track miles installed
and replaced are as follows:

EQUIPMENT - The Corporation's primary rail equipment as of and for the years
ending December 31, 2001, 2000 and 1999, consisted of the following:

TRUCKING OPERATIONS

Properties related to trucking operations consist primarily of terminals and
tractor and trailer equipment. The following table provides the number of
tractors, trailers and service centers owned or leased within the trucking
operations:

7

ITEM 3. LEGAL PROCEEDINGS

SOUTHERN PACIFIC ACQUISITION

On August 12, 1996, the STB served a decision (the Decision) approving the
acquisition of control of Southern Pacific by UPC, subject to various
conditions. The acquisition was consummated on September 11, 1996. Various
appeals were filed with respect to the Decision, and all such appeals were
ultimately consolidated in the U.S. Court of Appeals for the District of
Columbia Circuit, and all of the appeals have since been withdrawn or denied.

Among the conditions to the STB's approval of the Southern Pacific
acquisition was the requirement that the STB retain oversight jurisdiction for
five years to examine whether the conditions imposed under the Decision remain
effective to address the competitive harms caused by the merger. On July 2,
2001, the Railroad filed its fifth comprehensive summary with the STB.
Interested parties were required to file comments concerning the fifth annual
oversight proceeding by August 21, 2001, and replies were due on September 4,
2001. On December 20, 2001, the STB issued a decision concluding the fifth and
final oversight proceeding and announcing the end to the formal oversight
process. The STB will continue to have authority to enforce the conditions it
imposed on the merger to ensure they are implemented in a manner that
effectively preserves pre-merger competition.

SHAREHOLDER LITIGATION

A purported derivative action was filed by nine individuals, seven of whom are
members of the Teamsters, on behalf of the Corporation on June 21, 2001, in the
Chancery Court of Shelby County, Tennessee, naming as defendants current and
certain former directors of the Corporation and various present and former
officers and employees of Overnite, as well as Overnite, and, as a nominal
defendant, the Corporation. The derivative action alleges, among other things,
that the named defendants breached their fiduciary duties to the Corporation,
wasted its assets and mismanaged the company by opposing the efforts of the
Teamsters to organize the employees of Overnite. Plaintiffs claim that the
"anti-union" campaign allegedly waged by the defendants cost millions of dollars
and caused a substantial decline in the value of Overnite. On July 31, 2001,
defendants filed a motion to dismiss the action on various grounds. The
Corporation, Overnite and the individual defendants believe that the claims
raised by the plaintiffs are without merit and intend to defend them vigorously.

LABOR MATTERS

The General Counsel of the National Labor Relations Board (NLRB) is seeking a
bargaining order remedy in 11 cases involving Overnite where a Teamsters' local
union lost a representation election. A bargaining order remedy would require
Overnite to recognize and bargain with the union as if the union had won instead
of lost the election and would be warranted only if the following findings are
made: (1) the petitioning Teamsters' local had obtained valid authorization
cards from a majority of the employees in an appropriate unit; (2) Overnite
committed serious unfair labor practices; and (3) those unfair labor practices
would preclude the holding of a fair election despite the application of less
drastic remedies. In these 11 cases, an administrative law judge and the NLRB
ruled that the bargaining order remedy is warranted. Overnite appealed the
NLRB's ruling to the United States Court of Appeals for the Fourth Circuit. By a
two-one decision, the Fourth Circuit initially enforced the first four
bargaining orders. Last year, the full Fourth Circuit agreed to rehear that
case. On February 11, 2002, the full Fourth Circuit ruled in Overnite's favor on
the bargaining order remedy in the first four cases and remanded the cases to
the NLRB for new representation elections. The time for seeking review in the
United States Supreme Court has not yet expired. Appeal of the seven cases had
been held in abeyance pending this decision and now will be heard by the Fourth
Circuit if the NLRB does not withdraw the bargaining orders on its own. Overnite
believes that Supreme Court review of the first four cases in unlikely and that
there is no substantial basis to distinguish the seven remaining cases from the
four recently decided by the Fourth Circuit. In a twelfth case, the
administrative law judge found that a bargaining order remedy was not warranted.

8

ENVIRONMENTAL MATTERS

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 on May 27, 2000. The Railroad
previously met with the LDEQ regarding this matter to present documentation
indicating that no penalty should be assessed and intends to vigorously defend
this matter.

The State of Illinois filed a complaint against the Railroad with the
Illinois Pollution Board on May 14, 2001, seeking penalties for an alleged
violation of state air pollution laws arising out of a release of styrene from a
tank car near Cora, Illinois, which occurred on August 29, 1997. The car
contained styrene monomer, a hazardous substance, stabilized by an inhibitor by
the origin shipper. The car was delayed in transit for a number of different
reasons including rerouting and reconsignment by the shipper. The Railroad was
not notified that such delays could jeopardize the shipment. Eventually the
effect of the inhibitor wore off and the styrene went into a reactive state
resulting in pressure and venting near Cora, Illinois. A sparsely-populated area
was evacuated for a few hours. The situation was controlled and remediated
promptly. Styrene has since been put on the Railroad's list of time sensitive
shipments for special monitoring. The State of Illinois seeks to assess a
penalty in excess of $100,000. The Railroad believes the penalty should be
significantly less than $100,000 and is vigorously defending the case. A hearing
of the complaint is scheduled for March 22, 2002.

The Corporation and its affiliates have 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
Corporation 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
Corporation'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 12 to the Consolidated Financial Statements, Item 8.

OTHER MATTERS

As previously reported in the Corporation's Annual Report on Form 10-K for 2000,
Western Resources (Western) filed a complaint on January 24, 2000, in the U.S.
District Court for the District of Kansas alleging that UPRR and BNSF materially
breached their service obligations under the transportation contract to deliver
coal in a timely manner to Western's Jeffrey Energy Center. The original
complaint sought recovery of consequential damages and termination of the
contract, excusing Western from further performance. In an amended complaint
filed September 1, 2000, Western claimed the right to retroactive termination
and added a claim for restitution. On October 23, 2001, Western moved for leave
to file a second amendment to its complaint to add counts for innocent
misrepresentation and negligent misrepresentation and to request rescission of
the contract. The railroads are vigorously defending this lawsuit and oppose
amendment of the complaint. The suit currently is scheduled for trial in May
2002. If, however, Western is permitted to file the second amended complaint,
the trial date likely will be postponed. UPRR and BNSF have filed two motions
seeking dismissal of the termination and restitution claims, both of which are
still pending. The railroads believe they have substantial defenses in the case
and intend to continue to defend it aggressively.

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

No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 2001.

EXECUTIVE OFFICERS OF THE REGISTRANT AND PRINCIPAL EXECUTIVE OFFICERS OF
SUBSIDIARIES

10

EXECUTIVE OFFICERS OF THE REGISTRANT AND PRINCIPAL EXECUTIVE OFFICERS OF
SUBSIDIARIES

(Continued)

(1) Mr. Young was elected Executive Vice President-Finance of UPC and Chief
Financial Officer of the Railroad effective December 1, 1999. He was
elected Controller of UPC and Senior Vice President-Finance of the
Railroad effective March 1999 and Senior Vice President-Finance of UPC
effective June 1998. He served as Treasurer of the Railroad from June
1998 to March 1999. He was Vice President-Customer Service Planning and
Quality of the Railroad from April 1998 to June 1998, Vice
President-Quality and Operations Planning from September 1997 to April
1998, and Vice President-Finance and Quality from September 1995 to
September 1997.

(2) Mr. Bryan was elected to his current position effective May 1997. Prior
thereto, he was President and Chief Executive Officer of Union Pacific
Technologies, Inc., a subsidiary of UPC.

(3) Mr. Eisele was elected to his current position effective October 1,
2001. He was Vice President-Strategic Planning and Administration from
March 1999 to October 2001, Vice President-Strategic Planning from
September 1997 to March 1999, and Vice President-Purchasing for the
Railroad prior thereto.

(4) Mr. Knight was elected to his current position effective February 1,
2002. He was Vice President and General Manager Autos for the Railroad
from June 2000 to February 1, 2002, Vice President and General Manager
Energy for the Railroad from March 1999 to June 2000, Vice President
Quality and Administration for UPC from April 1997 to March 1999, and
prior thereto, Director-Compensation and HRIS for UPC.

(5) Ms. Schaefer was elected to her current position effective April 1997.
Prior thereto, she was Vice President-Human Resources of the Railroad.

(6) Mr. Turner was elected to his current position effective August 2000.
Prior thereto, he was Vice President-Public Affairs of Champion
International Corporation, a paper and forest products company.

(7) Mr. von Bernuth was elected Secretary effective April 1997. He has been
Senior Vice President and General Counsel during the past five years.

(8) Mr. Gutschewski was elected Vice President-Taxes effective August 1998.
Prior thereto, he was Assistant Vice President-Tax and Financial
Management of the Railroad.

(9) Mr. Putz was elected Vice President and Controller of UPC and Chief
Accounting Officer and Controller of the Railroad effective December 1,
1999. Prior thereto, he was Assistant Vice President and Controller of
the Railroad.

(10) Ms. Sanders Jones was elected to her current position effective March
1999. She served as Vice President-Investor Relations from June 1998 to
March 1999. Prior thereto, she was Assistant Vice President-Treasury
and Assistant Treasurer of UPC.

(11) Mr. Evans was elected to his current position effective September 1998.
Prior thereto, he was Senior Vice President of Emerson Electric
Company, a company engaged in the design, manufacture and sale of
electrical, electromechanical, and electronic products and systems.

(12) Mr. Duffy was elected to his current position effective September 1998.
He was Senior Vice President-Safety Assurance and Compliance Process
from October 1997 to September 1998. Prior thereto, he was Senior Vice
President-Customer Service and Planning of the Railroad.

(13) Mr. Koraleski was elected to his current position effective March 1999.
He served as Controller of UPC from August 1998 to March 1999 and prior
thereto as Executive Vice President-Finance of the Railroad. Prior to
May 1996, he was Executive Vice President-Finance and Information
Technologies of the Railroad.

(14) Mr. King was elected to his current position effective September 1998.
He was Executive Vice President-Operations from October 1997 to
September 1998. Prior thereto, he was Vice President-Transportation of
the Railroad.

11

PART II

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

The common stock of the Corporation is traded on the New York Stock Exchange
under the symbol "UNP". The following table sets forth, for the fiscal quarters
indicated, the dividends declared and the high and low sales prices of the
Corporation's common stock.

At January 31, 2002, there were 251,097,904 shares of outstanding common
stock and approximately 36,179 common shareholders of record. At that date, the
closing price of the common stock on the New York Stock Exchange was $62.05. The
Corporation has paid dividends to its common shareholders during each of the
past 102 years. The Corporation is subject to certain restrictions related to
the payment of cash dividends. The amount of retained earnings available for
dividends under the most restrictive test was $4.1 billion and $3.2 billion at
December 31, 2001 and 2000, respectively.

ITEM 6. SELECTED FINANCIAL DATA

The following table presents, as of and for the years ended December 31,
selected financial data for the Corporation for each of the last 10 years. The
selected financial data should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations, Item
7, and with the Consolidated Financial Statements and notes thereto, Item 8. The
information below is not necessarily indicative of the results of future
operations.

[a] Data included the effects of the acquisitions of Motor Cargo as of
November 30, 2001, Southern Pacific Rail Corporation as of October 1,
1996, Chicago and North Western Transportation Company as of May 1,
1995, and Skyway Freight Systems, Inc. as of May 31, 1993, and reflects
the disposition of the Corporation's natural resources subsidiary in
1996, waste management subsidiary in 1995 and Skyway Freight Systems in
1998.
[b] 2000 operating income and net income included $115 million pre-tax ($72
million after-tax) work force reduction charge (see note 15 to the
Consolidated Financial Statements, Item 8).
[c] 1998 operating loss and net loss included a $547 million pre-and
after-tax charge for the revaluation of Overnite goodwill.
[d] 1994 net income included a net after-tax loss of $404 million from the
sale of the Corporation's waste management operations.
[e] 1993 net income included a net after-tax charge for the adoption of
changes in accounting methods for income taxes, postretirement benefits
other than pensions and revenue recognition, and a one-time charge for
the deferred tax effect of the Omnibus Budget Reconciliation Act of
1993.
[f] Based on results from continuing operations.
[g] Excluded goodwill amortization in all years, and the revaluation of
goodwill in 1998.
[h] Based on average common shareholders' equity.

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

The following discussion should be read in conjunction with the Consolidated
Financial Statements and applicable notes to the Consolidated Financial
Statements, Item 8, and other information included in this Form 10-K.

As stated in Item 1, Union Pacific Corporation consists of two reportable
segments, rail and trucking, as well as UPC's other product lines (Other). The
rail segment includes the operations of UPRR and UPRR's subsidiaries and rail
affiliates (collectively, the Railroad). The trucking segment includes the
operations of Overnite and, subsequent to November 30, 2001, Motor Cargo. The
Corporation's other product lines are comprised of the corporate holding company
(which largely supports the Railroad), Fenix LLC and affiliated technology
companies (Fenix), self-insurance activities, and all appropriate consolidating
entries (see note 1 to the Consolidated Financial Statements, Item 8).

2001 COMPARED TO 2000 RESULTS OF OPERATIONS

CONSOLIDATED

NET INCOME - The Corporation reported record net income of $966 million ($3.90
per basic share and $3.77 per diluted share) in 2001 compared to $842 million
($3.42 per basic share and $3.34 per diluted share) in 2000. Excluding the
effect of a $115 million pre-tax ($72 million after-tax) charge in 2000 related
to a work force reduction plan at the Railroad, 2000 net income was $914 million
($3.71 per basic share and $3.61 per diluted share). The increase in net income
excluding the work force reduction charge in 2000 was due primarily to revenue
growth, productivity gains and cost control, lower non-operating expense and
lower fuel prices.

OPERATING REVENUES - Operating revenues increased $95 million (1%) to a record
$12.0 billion in 2001, reflecting 1% growth at the Railroad and 3% growth in the
trucking segment. The Corporation recognizes transportation revenues on a
percentage-of-completion basis as freight moves from origin to destination.
Other revenue is recognized as service is performed or contractual obligations
are met.

13

OPERATING EXPENSES - Operating expenses decreased $74 million (1%) to $9.9
billion in 2001 from $10.0 billion in 2000. Excluding the effect of the work
force reduction charge in 2000, operating expenses increased $41 million
compared to 2000 reflecting wage and benefit inflation and higher equipment
rents and depreciation expenses. These increases were partially offset by a 4%
reduction in employment levels at the Railroad, lower fuel prices and cost
control efforts. Lower fuel prices in 2001 versus 2000 reduced fuel expense by
$35 million in 2001.

Salaries, wages and employee benefits decreased $35 million compared to
2000. Excluding the work force reduction charge, salaries, wages and employee
benefits increased $80 million (2%), as wage and benefit inflation and volume
costs exceeded savings from lower employment levels and improved productivity.
Equipment and other rents expense increased $26 million (2%) as a result of
additional locomotive lease expense and longer car cycle times, which indicates
that cars spent more time on the rail system between shipments. Partially
offsetting these increases were lower costs due to declines in rail traffic
requiring rental of freight cars. In addition, the Railroad experienced lower
rental rates, and Overnite experienced lower contract transportation costs.
Depreciation expense increased $34 million (3%) as a result of the Railroad's
capital spending in recent years which increased the total value of the
Corporation's assets subject to depreciation (see note 1 to the Consolidated
Financial Statements, Item 8). Fuel and utilities costs were down $34 million
(3%) compared to 2000 due to lower fuel prices and a lower fuel consumption
rate, partially offset by higher gross ton miles at the Railroad and losses on
fuel hedging activity (see note 4 to the Consolidated Financial Statements, Item
8). Materials and supplies expense decreased $56 million (9%) primarily due to
reduced locomotive repairs and cost control actions. Casualty costs increased
$16 million (4%) over 2000 due to higher insurance, bad debts and environmental
expenses. Other costs decreased $25 million (3%) as productivity and cost
control efforts more than offset higher state and local taxes.

OPERATING INCOME - Operating income increased $169 million (9%) to $2.1 billion
in 2001. Excluding the effect of the $115 million work force reduction charge in
2000, 2001 operating income increased $54 million (3%) as revenue growth,
productivity gains and lower fuel prices more than offset inflation, increased
depreciation expense and higher rail costs due to increased rail volume.

NON-OPERATING ITEMS - Interest expense decreased $22 million (3%) compared to
2000 due to lower weighted-average debt levels and weighted-average interest
rates in 2001. In 2001, the Corporation's weighted-average debt level decreased
from $10,044 million in 2000 to $9,980 million in 2001. The Corporation's
weighted-average interest rate was 7.0% in 2001 as compared to 7.2% in 2000.
Other income increased $32 million (25%) in 2001 compared to 2000 due primarily
to higher real estate sales. Income tax expense increased $99 million (21%) in
2001 over 2000. Excluding the effect of the $115 million work force reduction
charge on income tax expense in 2000, income taxes for 2001 increased $56
million (11%) over 2000. The increase was a result of higher pre-tax income
levels in 2001 and an increase in the effective tax rate from 35.7% in 2000 to
37.0% in 2001.

KEY MEASURES - Net income as a percentage of operating revenues increased to
8.1% in 2001 from 7.1% in 2000. Net income as a percentage of operating revenues
in 2000, excluding the work force reduction charge, was 7.7%. Return on average
common shareholders' equity was 10.6% in 2001, up from 10.1% in 2000. Excluding
the charge in 2000, return on average common shareholders' equity was 10.9% in
2000. The Corporation's operating ratio was 82.7% in 2001 compared to 84.0% in
2000 and 83.0% in 2000, excluding the work force reduction charge.

RAIL SEGMENT

NET INCOME - Rail operations reported record net income of $1.1 billion in 2001
compared to net income of $926 million in 2000, up 14%. Excluding the work force
reduction charge in 2000, net income was $998 million. The increase in earnings
resulted from higher commodity revenue and real estate sales combined with lower
fuel expense, interest expense and materials and supplies expense. These
improvements were partially offset by inflation, lower other revenue and higher
equipment rent and depreciation expenses.

OPERATING REVENUES - Rail operating revenues increased $69 million (1%) over
2000 to a record $10.8 billion. Revenue carloads were flat with an increase in
the energy and agricultural commodity groups offset by decreases in the other
four commodity groups. The decrease in other revenue was the result of lower
switching, subsidiary and accessorial revenues.

14

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 primarily to a 3% increase in average
revenue per car. Carloads were flat, as higher corn shipments and meals and oils
exports were offset by a decrease in demand for domestic and export wheat
shipments and a poor sugar-beet harvest. Revenue gains were also achieved
through increased beer imports from Mexico, wine shipments from California to
eastern markets, express service of fresh and frozen products and increased
demand for cottonseed. Average revenue per car increased due to a longer average
length of haul, resulting from fewer short-haul wheat and sweetener shipments
combined with increased long-haul domestic and Mexico corn shipments.

Automotive - Revenue declined 5% as a result of a 6% decrease in carloads and a
1% increase in average revenue per car. Materials volumes declined 16%, as the
soft economy and a decline in vehicle sales led to high inventories, low
industry production and auto plant shutdowns. Total finished vehicle shipments
declined only 1%, as industry weakness was mitigated by market share gains.
Consumer incentives in the fourth quarter stimulated vehicle sales and helped
offset weakness early in the year. Average revenue per car increased due to a
shift in mix of materials shipped, resulting from fewer shipments of materials
with lower average revenue per car. Additionally, more materials were shipped in
boxcars rather than containers, which yield higher average revenue per car than
containers.

Chemicals - Revenue declined 6%, due to a 6% decrease in carloads. Volume
declines were the result of the soft economy, as reduced demand for consumer
durables led to high manufacturer inventories and weak demand for plastics.
Reduced industrial manufacturing also depressed demand for liquid and dry
chemicals. Fertilizer and phosphate rock revenues decreased as high energy costs
early in the year reduced the market for these commodities. Average revenue per
car was flat, as the positive impact of fewer low average revenue per car
phosphate rock shipments was offset by a decrease in average revenue per car for
soda ash shipments.

Energy - Energy commodity revenue increased 11% compared to 2000, due to a 12%
increase in carloads. Records were set in 2001 for total carloads, revenue and
coal trains loaded per day in the Southern Powder River Basin in Wyoming

15

and in the coal mining regions of Colorado and Utah. These increases were driven
by strong utility demand caused by severe winter weather in late 2000 and the
first quarter of 2001. In the first half of the year, demand for coal also
increased due to the high cost of alternative fuels, such as natural gas, fuel
oil and higher-priced eastern-sourced coal. Carloads also increased due to gains
in market share.

Industrial Products - Revenue decreased 1%, as a 2% decline in carloads was
partially offset by a 1% increase in average revenue per car. The decline was
mainly the result of the economic slowdown, which had a negative effect on many
economically sensitive commodities including steel and paper markets. Steel
producers were additionally impacted by high levels of low-cost imported steel,
which forced plant shutdowns and bankruptcies. Newsprint and fiber revenue
declined due to lack of demand for printed advertising. Partially offsetting
these declines were increases in construction-related commodities, led by stone
and cement, as strong building and road construction activity continued in the
South and Southwestern regions of the country. Lumber volumes increased due to
strong housing construction and uncertainty surrounding restrictions on Canadian
lumber imports. Average revenue per car increased due to price increases and a
greater mix of longer average length of haul business. These gains were
partially offset by the impact of increased shipments of stone, which generates
lower average revenue per car.

Intermodal - Revenue was flat, as a 3% decline in carloads was offset by a 3%
increase in average revenue per car. The volume decrease was primarily the
result of soft economic demand for domestic shipments. In addition, the
voluntary action of shedding low-margin trailer business in favor of
higher-margin containers contributed to the decline. Partially offsetting the
domestic declines were increases in international shipments, the result of
higher import demand. The increase in average revenue per car was primarily the
result of price increases.

OPERATING EXPENSES - Operating expenses decreased $109 million (1%) to $8.7
billion in 2001. Excluding the $115 million work force reduction charge in 2000,
operating expenses were essentially flat. Higher expenses as a result of
inflation, higher equipment rents expense and depreciation were offset by
savings from lower force levels, productivity gains and cost control efforts and
lower fuel prices.

Salaries, Wages and Employee Benefits - Salaries, wages and employee benefits
decreased $83 million (2%) in 2001 to $3.5 billion. Excluding the $115 million
work force reduction charge in 2000, salaries, wages and employee benefits
expense increased $32 million (1%). The primary driver of the increase was wage
and employee benefits inflation. A 3% gross ton mile increase also added volume
costs. A 4% reduction in employee force levels as a result of the work force
reduction plan offset a significant portion of these higher costs.

Equipment and Other Rents - Expenses increased $32 million (3%) compared to 2000
due primarily to higher locomotive leases and longer car cycle times. 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 car cycle times is
partially attributable to a decline in automotive shipments earlier in the year,
which resulted in excess freight cars being stored at assembly plants and
unloading facilities. Partially offsetting the increases in expenses were lower
volume costs, lower car leases and lower prices for equipment. The decrease in
volume costs was attributable to a decline in carloads in business segments such
as industrial products and intermodal that utilize a high percentage of rented
freight cars.

Depreciation - Depreciation expense increased $31 million (3%) over 2000,
resulting from capital spending in recent years. Capital spending totaled $1.7
billion in 2001 and in 2000 and $1.8 billion in 1999.

Fuel and Utilities - Expenses decreased $30 million (2%). 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 88 cents
per gallon in 2001 compared to 90 cents per gallon in 2000, including taxes,
transportation costs and regional pricing spreads of 17 cents and 13 cents in
2001 and 2000, respectively. The Railroad hedged approximately 32% of its fuel
consumption for the year, which increased fuel costs by $20 million. As of
December 31, 2001, expected fuel consumption for 2002 is 44% hedged at 56 cents
per gallon excluding taxes, transportation costs and regional pricing spreads
and for 2003 is 5% hedged at 56 cents per gallon excluding taxes, transportation
costs and regional pricing spreads (see note 4 to the Consolidated Financial
Statements, Item 8).

16

Materials and Supplies - Expenses decreased $71 million (13%), reflecting
locomotive overhaul reductions and productivity improvements and cost control
measures. Locomotive overhauls decreased due to acquisition of new,
more-reliable locomotives during the year and the sale of older units, which
required higher maintenance. Materials and supplies expenses related to car
maintenance also declined due to lower business levels in the industrial
products and automotive commodity groups. The cars utilized in these commodity
groups normally require more maintenance than the cars utilized within the other
commodity groups.

Casualty Costs - Costs increased $9 million (3%) compared to 2000, as higher
insurance, bad debt and environmental expenses were partially offset by lower
personal injury costs and lower costs for damaged freight cars.

Other Costs - Expenses increased $3 million (flat) compared to 2000 primarily
due to higher state and local taxes.

OPERATING INCOME - Operating income increased $178 million (9%) to $2.1 billion.
Excluding the $115 million work force reduction charge in 2000, operating income
increased $63 million (3%) in 2001. The operating ratio for 2001 was 80.7%,
compared to 82.3% in 2000. Excluding the work force reduction charge, the
operating ratio for 2000 was 81.2%.

NON-OPERATING ITEMS - Non-operating expense decreased $56 million (12%) compared
to 2000. Real estate sales and net other income increased $48 million (38%).
Interest expense decreased $8 million (1%) as a result of lower weighted-average
debt levels and weighted-average interest rates in 2001. Income taxes increased
$102 million (20%) in 2001 compared to 2000. Excluding the work force reduction
charge in 2000, income tax expense increased $59 million (11%). The increase was
a result of higher pre-tax income levels in 2001 and an increase in the
effective tax rate from 35.6% in 2000 to 36.7% in 2001.

TRUCKING SEGMENT

OPERATING REVENUES - In 2001, trucking revenues rose $30 million (3%) to $1,143
million. The growth resulted from rate increases, new services and $10 million
in incremental revenue due to the acquisition of Motor Cargo. Tonnage for the
year was flat compared to 2000.

OPERATING EXPENSES - Trucking operating expenses rose $29 million (3%) to $1,089
million in 2001. Salaries, wages and employee benefits increased $40 million
(6%) due to a 4% increase in employees as well as wage and benefit inflation and
enhancements. Fuel and utilities costs decreased $5 million (7%), as a result of
lower fuel prices during the year (82 cents per gallon average in 2001 compared
to 90 cents per gallon average in 2000, including transportation costs and
regional pricing spreads, and excluding taxes), partially offset by a 1%
increase in gallons consumed. Overnite did not hedge any fuel volume for the
year ended December 31, 2001. However, as of December 31, 2001, Overnite had
hedged approximately 16% of its expected fuel consumption for 2002 at an average
of 58 cents per gallon, excluding taxes, transportation costs and regional
pricing spreads and had hedged approximately 5% of its expected fuel consumption
for 2003 at an average of 58 cents per gallon excluding taxes, transportation
costs and regional pricing spreads. Equipment and other rents decreased $4
million (4%) due to decreased use of contract transportation during the year.
High utilization of contract transportation in 2000 was necessary due to
Teamsters related work stoppage. Casualty costs increased $7 million (18%) due
to higher bad debt, insurance and cargo loss and damage expenses. Other costs
decreased $11 million (10%) due to lower expenses related to decreased security
(related to Teamsters' matters), legal and employee travel expenses in 2001.

OPERATING INCOME - Trucking operations generated operating income of $54 million
in 2001, compared to $53 million for 2000. The operating ratio increased to
95.3%, compared to 95.2% in 2000.

OTHER PRODUCT LINES

OTHER - Operating losses increased $10 million in 2001 compared to 2000.
Operating revenues declined $4 million year over year. Operating expenses
increased $6 million due to increased spending at Fenix to develop new products
and services.

17

2000 COMPARED TO 1999 RESULTS OF OPERATIONS

CONSOLIDATED

NET INCOME - The Corporation reported net income of $842 million ($3.42 per
basic share and $3.34 per diluted share) in 2000. Excluding the effect of the
$115 million pre-tax ($72 million after-tax) charge related to a work force
reduction plan at the Railroad, net income grew to $914 million ($3.71 per basic
share and $3.61 per diluted share) in 2000 compared to $810 million ($3.28 per
basic share and $3.22 per diluted share) in 1999. The increase in net income was
due primarily to revenue growth, improved service levels and productivity
improvements at the Railroad, partially offset by significantly higher fuel
prices. Net income for 1999 included a one-time after-tax gain of $27 million
($0.11 per basic share and $0.10 per diluted share) from the adjustment of a
liability established in connection with the discontinued operations of a former
subsidiary (see note 3 to the Consolidated Financial Statements, Item 8).

OPERATING REVENUES - Operating revenues increased $641 million (6%) to $11.9
billion in 2000, reflecting higher volumes in five of the six commodity groups
at the Railroad, higher other revenue at the Railroad and a 5% increase in
revenue at Overnite.

OPERATING EXPENSES - Operating expenses increased to $10.0 billion (6%) in 2000
from $9.4 billion in 1999, reflecting the work force reduction charge, higher
fuel prices, inflation, volume-related costs from a 4% increase in carloads at
the Railroad and increased depreciation expense. The increase in fuel prices
added $464 million to operating expenses in 2000 compared to 1999. Productivity
improvements and other cost control measures partially offset the increase in
operating expenses. Excluding the $115 million pre-tax work force reduction
charge, operating expenses increased $427 million (5%) to $9.9 billion.

Salaries, wages and employee benefits increased $26 million (1%) compared
to 1999. Salaries, wages and employee benefits declined $89 million (2%),
excluding the work force reduction charge, as lower employment levels and
improved productivity at the Railroad more than offset higher rail volume and
inflation. Equipment and other rents expense decreased $16 million (1%) as
improved car cycle times and lower rental rates more than offset increased
Railroad volume and higher contract transportation costs at Overnite.
Depreciation expense increased $57 million (5%) as a result of the Railroad's
capital spending in recent years. Fuel and utilities costs were $518 million
(62%) higher than 1999 resulting from significantly higher fuel prices and
increased carloads, partially offset by favorable fuel hedging (see note 4 to
the Consolidated Financial Statements, Item 8). Materials and supplies expense
increased $3 million (1%) primarily due to volume-related increases in car and
locomotive repairs, partially offset by productivity and cost control actions.
Casualty costs decreased $18 million (5%) over 1999 as a result of lower
settlement costs at the Railroad. Other costs decreased $28 million (3%) as
productivity and cost control efforts more than offset volume-related costs and
higher state and local taxes.

OPERATING INCOME - Operating income increased to $1.9 billion in 2000 from $1.8
billion in 1999, as revenue growth and productivity gains at the Railroad more
than offset higher fuel prices, rail volume costs and increased depreciation
expense. Excluding the $115 million pre-tax work force reduction charge,
operating income increased $214 million (12%) to $2.0 billion.

NON-OPERATING ITEMS - Interest expense decreased $10 million (1%) compared to
1999 primarily due to lower average debt levels in 2000. Excluding the income
tax expense associated with the work force reduction charge, income taxes for
2000 increased $92 million (22%) over 1999 as a result of higher income levels
in 2000 and settlements in 1999 related to prior tax years.

KEY MEASURES - Net income as a percentage of operating revenues declined to 7.1%
in 2000 from 7.2% in 1999. Net income as a percentage of operating revenues
excluding the work force reduction charge improved to 7.7% in 2000. In 2000,
return on average common shareholders' equity was 10.1%. Excluding the work
force reduction charge, in 2000, return on average common shareholders' equity
was 10.9%, up from 10.5% in 1999, reflecting strong revenue growth and improved
operations at the Railroad and Overnite. The Corporation's operating ratio was
84.0% in 2000. Excluding the work force reduction charge in 2000, it was 83.0%
compared to 83.9% in 1999.

18

RAIL SEGMENT

NET INCOME - Rail operations reported record net income of $926 million in 2000
compared to net income of $854 million in 1999. The increase in income resulted
primarily from higher commodity and other revenue, improved operations,
productivity gains and lower interest expense, partially offset by significantly
higher fuel prices and volume-related costs. Excluding the work force reduction
charge, net income was $998 million in 2000.

OPERATING REVENUES - Rail operating revenues increased $591 million (6%) over
1999 to a record $10.7 billion. Revenue carloads increased 4% over 1999 with
gains in five of the six commodity groups. Other revenue gains were the result
of higher subsidiary revenues and increased accessorial services.

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 declined 1%, as a 4% decrease in carloads more than
offset a 3% increase in average revenue per car. Carloads decreased primarily
due to reduced export demand for wheat and corn and a lack of producer selling
in anticipation of higher prices. Revenue increased for fresh fruits and
vegetables primarily as a result of new express train service from the Pacific
Northwest and northern California to eastern markets. Beverage revenue increased
due to new wine shipments out of California and higher domestic beer carloads.
Average revenue per car increased primarily due to an increase in longer haul
traffic, particularly domestic corn shuttle shipments to California.

Automotive - Revenue increased 13% as a result of a 15% increase in carloads.
Both revenue and carload totals were all-time records, resulting from strong
demand for finished vehicles and parts, market share gains and improved rail
service. Business volume with Mexico was particularly strong due to increased
vehicle production levels and more reliable and expanded rail service. New
service offerings facilitated the conversion of automotive parts shipments from
truck to the Railroad. Increased container shipments of automotive parts, rather
than boxcar shipments, caused average revenue per car to decrease slightly.

19

Chemicals - A 1% increase in carloads combined with a 2% increase in average
revenue per car led to a 3% increase in revenue. Revenue growth was driven
primarily by an increase in average revenue per car for soda ash, fertilizer,
and liquid and dry commodities due to selected price increases. Year-over-year
carload improvements came mainly in the first half of the year, as a strong
economy and customer plant expansions led to increased market demand for
plastics, liquid and dry chemicals and domestic soda ash. However, a softening
economy late in the year resulted in a 2% decline in fourth-quarter revenue
compared to 1999, with weakness in most areas of the chemical market.

Energy - Energy revenue was down 1% compared to 1999, despite a 3% increase in
carloads for the year. Average revenue per car dropped 4% as a result of
contract pricing provisions with certain major customers. In the first six
months of 2000, carloads declined compared to 1999 due to lower coal demand at
utilities resulting from high inventories caused by mild winter weather and Year
2000 stockpiles. In the second half of 2000, carloads increased over 1999 levels
due to hot summer weather and the combination of cold winter weather late in the
year and a significant increase in the price of alternative fuels. Delays due to
severe winter weather partially offset volume gains in the second half of the
year.

Industrial Products - Revenue increased 5% on a 2% increase in carloads and a 2%
increase in average revenue per car. A strong economy in the first half of 2000
led to a general increase in demand for most business lines. The largest revenue
gains were in steel, lumber, cement and other building materials due to an
expanding construction market, especially in the south and southwest. New rail
services and generally improved service performance also contributed to the
increase in carloads. Starting in the third quarter, a softening in the economy
began to adversely affect business demand. Fourth-quarter revenue and carloads
decreased in nearly all business lines but especially minerals, steel and
hazardous waste. The increase in average revenue per car was due to gains in
higher average revenue per car, steel and lumber carloads and selected price
increases during the year.

Intermodal - Revenue increased 11% due to a 7% increase in carloads and a 4%
increase in average revenue per car. Carload growth resulted from a strong U.S.
economy in the first half of 2000 and increased demand for imports from Asia.
Improved service performance led to an increase in carloads and revenue for
expedited premium service. New and expanded rail service offerings also
contributed to the gains. The increase in average revenue per car was primarily
the result of price increases and a longer average length of haul in some
markets.

OPERATING EXPENSES - Operating expense increased $510 million (6%) to $8.8
billion in 2000. The higher expenses are primarily the result of significantly
higher fuel prices, inflation, volume costs associated with a 4% increase in
carloads and higher depreciation expense, partially offset by productivity gains
and other cost control measures. Operating expenses increased $395 million (5%)
to $8.7 billion in 2000, excluding the $115 million pre-tax charge for the work
force reduction plan.

Salaries, Wages and Employee Benefits - Salaries, wages and employee benefits
increased $19 million (1%) to $3.6 billion. Costs decreased $96 million (3%),
excluding the $115 million pre-tax work force reduction charge. The primary
driver was productivity improvements that resulted in lower train crew expenses
despite a 4% increase in carload volume. In addition, the average employee count
decreased 4% from 1999 to 2000. Partially offsetting these gains were increased
costs due to greater rail volume and wage and employee benefit inflation.

Equipment and Other Rents - Expenses decreased $20 million (2%) compared to
1999. The improvement was attributable to lower prices for equipment and
improvements in car cycle times, partially offset by higher volume-related
costs.

Depreciation - Depreciation expense increased $55 million (5%) over 1999,
resulting from capital spending in recent years. Capital spending totaled $1.7
billion in 2000 compared to $1.8 billion in 1999 and $2.0 billion in 1998.

Fuel and Utilities - Expenses increased $496 million (63%). The increase was
driven by significantly higher fuel prices (which added $444 million of
additional costs) and higher volume. Fuel prices averaged 90 cents per gallon in
2000 compared to 56 cents per gallon in 1999, including taxes, transportation
costs and regional pricing spreads of 13 cents for each of the years. The
Railroad hedged approximately 10% of its fuel consumption for the year, which
decreased fuel costs by $52 million. As of December 31, 2000, expected fuel
consumption for 2001 was 8% hedged at 68 cents per gallon

20

excluding taxes, transportation costs and regional pricing spreads (see note 4
to the Consolidated Financial Statements, Item 8).

Materials and Supplies - Expenses increased $6 million (1%), reflecting
volume-related increases in car and locomotive repairs, partially offset by
productivity improvements and cost control measures.

Casualty Costs - Costs decreased $15 million (4%) compared to 1999, primarily as
a result of lower settlement costs.

Other Costs - Expenses decreased $31 million (4%) compared to 1999. Cost
control, productivity gains, and lower contract services expenses more than
offset volume-related cost increases and higher state and local taxes.

OPERATING INCOME - Operating income increased $81 million (4%) to $1.9 billion.
Excluding the work force reduction charge, operating income increased $196
million (11%) to a record $2.0 billion. The operating ratio for 2000 was 82.3%.
Excluding the work force reduction charge, the operating ratio was 81.2%, 0.8
percentage points better than 1999's 82.0% operating ratio.

NON-OPERATING ITEMS - Other income increased $11 million (10%), primarily the
result of higher real estate sales. Interest expense decreased $26 million (4%)
primarily as a result of lower average debt levels compared to 1999. Excluding
the effect of the work force reduction charge, income taxes increased $89
million (19%) for the year, reflecting higher income levels and 1999 settlements
related to prior tax years.

TRUCKING SEGMENT

OPERATING REVENUES - In 2000, trucking revenues rose $51 million (5%) to over
$1.1 billion. The growth resulted primarily from yield initiatives, new services
and the impact of a fuel surcharge assessed due to higher fuel prices. Partially
offsetting this growth was a 4% decline in tonnage compared to 1999.

OPERATING EXPENSES - Trucking operating expenses rose $18 million (2%) to $1.1
billion in 2000. Salaries, wages and employee benefits decreased $1 million as
lower volume, lower employment levels and productivity gains offset wage and
benefit inflation. Fuel and utilities costs increased $23 million (47%),
primarily as a result of significantly higher fuel prices (90 cents per gallon
average in 2000 compared to 54 cents per gallon average in 1999, including
transportation costs and regional pricing spreads, and excluding taxes).
Overnite hedged 9% of 2000 fuel consumption at an average price of 39 cents per
gallon excluding taxes, transportation costs, and regional pricing spreads,
which decreased costs by $2 million. As of December 31, 2000, Overnite had not
hedged any of its expected 2001 fuel consumption. Equipment and other rents
increased $2 million (2%) primarily due to an increase in purchased
transportation costs in response to the ongoing Teamsters' activity. Casualty
costs and other costs decreased $7 million (5%), primarily due to lower expenses
related to the Teamsters' activity and also lower cargo loss and damage
expenses.

OPERATING INCOME - Trucking operations generated operating income of $53 million
in 2000, compared to $20 million for 1999. The operating ratio improved to
95.2%, compared to 98.1% in 1999.

OTHER PRODUCT LINES

OTHER - Operating losses increased by $15 million in 2000 compared to 1999.
Operating revenues declined $1 million year over year. Operating expenses
increased $14 million, primarily due to increased spending at Fenix as part of
its overall strategy of developing new products and services.

LIQUIDITY AND CAPITAL RESOURCES

FINANCIAL CONDITION

Cash from operations was $2.0 billion, $2.1 billion and $1.9 billion in 2001,
2000 and 1999, respectively. The decrease from 2000 to 2001 is primarily due to
the timing of large cash payments, including the payments for the work force

21

reduction plan. The increase from 1999 to 2000 reflects higher income from
continuing operations and decreased cash payouts in 2000 for merger-related
expenses and customer claims.

Cash used in investing activities was $1.5 billion in 2001 and $1.6 billion
in 2000 and 1999. The decrease from 2000 to 2001 is due to reduced capital
spending and higher asset sales in 2001, partially offset by the receipt of cash
dividends in 2000.

Cash used in financing activities was $440 million, $486 million and $256
million in 2001, 2000 and 1999, respectively. The decrease from 2000 to 2001
reflects higher debt and other financings in 2001 ($977 million in 2001 versus
$509 million in 2000), partially offset by higher debt repayments ($1.2 billion
in 2001 versus $796 million in 2000). The increase from 1999 to 2000 reflects
higher debt repayments ($796 million in 2000 versus $692 million in 1999) and
lower financings ($509 million in 2000 versus $634 million in 1999).

Including the convertible preferred securities (see note 7 to the
Consolidated Financial Statements, Item 8) as an equity instrument, the ratio of
debt to total capital employed was 42.2%, 45.1% and 47.6% at December 31, 2001,
2000 and 1999, respectively.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

As described in the notes to the Consolidated Financial Statements, Item 8, as
referenced in the tables below, the Corporation has contractual obligations and
commercial commitments that may affect the financial condition of the
Corporation. However, based on management's assessment of the underlying
provisions and circumstances of the material contractual obligations and
commercial commitments of the Corporation, including material sources of
off-balance sheet and structured finance arrangements, there is no known trend,
demand, commitment, event or uncertainty that is reasonably likely to occur
which would have a material effect on the Corporation's financial condition or
results of operations. In addition, the commercial obligations, financings and
commitments made by the Corporation are customary transactions which are similar
to those of other comparable industrial corporations, particularly within the
transportation industry.

The following tables identify material obligations and commitments as of
December 31, 2001:

[a] Excludes capital lease obligations of $1,441 million.

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

22

[a] Includes guaranteed obligations of affiliated operations.

FINANCING ACTIVITIES

CREDIT FACILITIES - On December 31, 2001, the Corporation had $2.0 billion in
revolving credit facilities, of which $1.0 billion expires in March 2002, with
the remaining $1.0 billion expiring in 2005. The facilities, which were entered
into during March 2001, and March of 2000, respectively, are designated for
general corporate purposes and replaced a $2.8 billion facility, which expired
in April 2001. None of the credit facilities were used as of December 31, 2001
or 2000. Commitment fees and interest rates payable under the facilities are
similar to fees and rates available to comparably rated investment-grade
corporate borrowers. The Corporation is reviewing rollover options for the
credit facility that expires in March 2002.

SHELF REGISTRATION STATEMENT - In January 2001, under an existing shelf
registration statement, the Corporation issued $400 million of fixed-rate debt
at 6.65% with a maturity date of January 15, 2011. During May 2001, the
Corporation issued the remaining $200 million of debt securities available under
this shelf registration statement as fixed-rate debt at 5.84% with a maturity
date of May 25, 2004. Simultaneously, the Corporation entered into an interest
rate swap converting the debt, issued in May 2001, from a fixed rate to a
variable rate. The proceeds from the issuance of this debt were used for
repayment of debt and other general corporate purposes.

In June 2001, the Corporation filed a new $1.0 billion shelf registration
statement, which became effective June 14, 2001. Under this shelf registration
statement, the Corporation may issue, from time to time, any combination of debt
securities, preferred stock, common stock or warrants for debt securities or
preferred stock in one or more offerings. The total offering price of these
securities, in the aggregate, can not exceed $1.0 billion. On October 1, 2001,
the Corporation issued $300 million of fixed-rate debt at 5.75% with a maturity
date of October 15, 2007. The proceeds from the issuance of this debt were used
for repayment of debt and other general corporate purposes. At December 31,
2001, the Corporation had $700 million remaining for issuance under the shelf
registration.

On January 17, 2002, the Corporation issued an additional $300 million of
fixed-rate debt at 6.125% with a maturity date of January 15, 2012. The proceeds
from the issuance were also used for repayment of debt and other general
corporate purposes. At January 24, 2002, the Corporation had $400 million
remaining for issuance under the shelf registration. The Corporation has no
immediate plans to issue equity securities under this shelf registration.

OTHER SIGNIFICANT FINANCINGS - During July 2001, UPRR entered into capital
leases covering new locomotives. The related capital lease obligations totaled
approximately $124 million and are included in the Statements of Consolidated
Financial Position as debt (see note 7 to the Consolidated Financial Statements,
Item 8).

23

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 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 the
Railroad's obligation under this lease.

UPRR will be the construction agent for the lessor. Total building related
costs incurred and drawn from the lease funding commitments as of December 31,
2001, were approximately $10 million. After construction is complete, the lease
has an initial term of five years and 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 renew the lease or purchase the building, the
Railroad has guaranteed a residual value of approximately $220 million. At
December 31, 2001, the Railroad has guaranteed, under certain circumstances, a
residual value of less than $10 million.

OTHER MATTERS

PERSONAL INJURY - The cost of injuries to employees and others on Railroad
property or in accidents involving the trucking segment is charged to expense
based on actuarial estimates of the ultimate cost and number of incidents each
year. In 2001, the Railroad's work-related injuries that resulted in lost job
time declined 7% compared to 2000. In addition, accidents at grade crossings
decreased 6% compared to 2000. Annual expenses for the Railroad's personal
injury-related events were $204 million in 2001, reflecting lower than
anticipated settlement costs, $207 million in 2000 and $228 million in 1999.
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 Corporation generates and transports hazardous and
nonhazardous waste in its current and former operations, and is subject to
federal, state and local environmental laws and regulations. The Corporation has
identified approximately 370 active sites at which it is or may be liable for
remediation costs associated with alleged contamination or for violations of
environmental requirements. This includes 48 sites that are the subject of
actions taken by the U.S. government, 28 of which are currently on the Superfund
National Priorities List. Certain federal legislation imposes joint and several
liability for the remediation of identified sites; consequently, the
Corporation's ultimate environmental liability may include costs relating to
other parties, in addition to costs relating to its own activities at each site.

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

As of December 31, 2001, the Corporation has a liability of $172 million
accrued for future environmental costs. The liability includes future costs for
remediation and restoration of sites, as well as for ongoing monitoring costs,
but excludes any anticipated recoveries from third parties. Cost estimates are
based on information available for each site, financial viability of other
potentially responsible parties, and existing technology, laws and regulations.
The Corporation believes that it has adequately accrued for its ultimate share
of costs at sites subject to joint and several liability. However, the ultimate
liability for remediation is difficult to determine because of the number of
potentially responsible parties involved, site-specific cost sharing
arrangements with other potentially responsible parties, the degree of
contamination by various wastes, the scarcity and quality of volumetric data
related to many of the sites, and/or the speculative nature of remediation
costs. The Corporation expects to pay out the majority of the December 31, 2001,
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 $63 million
in 2001, $62 million in 2000 and $56 million in 1999. The Corporation is also

24

engaged in reducing emissions, spills and migration of hazardous materials, and
spent cash of $5 million, $8 million and $5 million in 2001, 2000 and 1999,
respectively, for control and prevention. In 2002, the Corporation anticipates
spending $60 million for remediation and $5 million for control and prevention.
The impact of current obligations is not expected to have a material adverse
effect on the results of operations or financial condition of the Corporation.

LABOR MATTERS

Rail - Approximately 87% of the Railroad's nearly 48,000 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. The health and welfare cost sharing was a milestone as the BMWE is
the first union to make significant cost contributions to their health and
welfare plan. Contract discussions with the remaining unions are either in
negotiation or mediation. Also during 2001, much of the operating craft unions'
focus was on the proposed merger between the United Transportation Union and the
Brotherhood of Locomotive Engineers (BLE). In a December 2001 re-vote, the BLE
resoundingly rejected the merger. Both operating craft unions have indicated a
desire to complete national negotiations. The Corporation anticipates
significant progress in 2002.

Trucking - Overnite continues to oppose the efforts of the Teamsters to unionize
Overnite service centers. Since the Teamsters began their efforts at Overnite in
1994, Overnite has received 90 petitions for union elections at 66 of its 170
service centers, although there have been only nine elections since August 1997,
and Teamsters representation was rejected in seven of those nine elections.
Twenty-two service centers, representing approximately 14% of Overnite's nearly
13,000 nationwide employee work force, have voted for union representation, and
the Teamsters have been certified and recognized as the bargaining
representative for such employees. Employees at 18 of these 22 locations have
filed decertification petitions since 1999. Elections affecting approximately
400 additional employees are unresolved, and there are no elections currently
scheduled. Additionally, proceedings are pending in certain cases where a
Teamsters' local union lost a representation election. To date, Overnite has not
entered into any collective bargaining agreements with the Teamsters, who began
a job action on October 24, 1999, that has continued into 2002. As of January
19, 2002, 19 Overnite service centers had approximately 369 employees, less than
3% of Overnite's work force, who did not report to work. Despite the work
stoppage, Overnite has managed to improve its revenue and profitability on a
year-over-year basis. Employees at two Motor Cargo service centers located in
North Salt Lake, Utah and Reno, Nevada, representing approximately 11% of Motor
Cargo's total work force at 30 service centers, are covered by two separate
collective bargaining agreements with unions affiliated with the Teamsters.
Although the agreements cover most of the employees at these two facilities,
less than half of these covered employees are actual members of unions.

INFLATION - The cumulative effect of long periods of inflation has significantly
increased asset replacement costs for capital-intensive companies such as the
Railroad, Overnite and Motor Cargo. 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 Corporation and its subsidiaries use
derivative financial instruments, which are subject to market risk, in limited
instances for other than trading purposes to manage risk related to changes in
fuel prices and to achieve the Corporation's interest rate objectives. The
Corporation uses swaps, futures and/or forward contracts to mitigate adverse
price movements and exposure to variable cash flows. The use of these
instruments also limits future gains from favorable movements. The Corporation
uses interest rate swaps to manage its exposure to interest rate changes and
hedge the exposure to fair value changes. The purpose of these programs is to
protect the Corporation's operating margins and overall profitability from
adverse fuel price changes or interest rate fluctuations.

The Corporation may also use fuel swaptions to secure more favorable 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.

25

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

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

At December 31, 2001 and 2000, the Corporation had variable-rate debt
representing approximately 12% and 6%, respectively, of its total debt. If
variable interest rates average 10% higher in 2002 than the Corporation's
December 31, 2001 variable rate, which was approximately 3%, the Corporation's
interest expense would increase by less than $5 million after tax. If variable
interest rates had averaged 10% higher in 2001 than the Corporation's December
31, 2000 variable rate, the Corporation's interest expense would have increased
by less than $5 million after tax. These amounts were determined by considering
the impact of the hypothetical interest rates on the balances of the
Corporation's variable-rate debt at December 31, 2001 and 2000, respectively.

In May and August 2001, the Corporation entered into interest rate swaps on a
total of $598 million of debt with varying maturity dates extending to November
2004. The swaps allowed the Corporation to convert the debt from fixed rates to
variable rates and thereby hedge the risk of changes in the debt's fair value
attributable to the changes in the benchmark interest rate (LIBOR). The swaps
have been accounted for using the short-cut method as allowed by Financial
Accounting Standards Board Statement (FASB) No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133); and therefore, no ineffectiveness
has been recorded within the Corporation's Consolidated Financial Statements.
The effect of a 10% interest rate increase or decrease in 2002 over the December
31, 2001 rates is included in the preceding or succeeding paragraph disclosure,
respectively. The Corporation had not entered into any interest rate swaps at
December 31, 2000.

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, 2001, and amounts to approximately $226 million at December 31,
2001. Market risk resulting from a hypothetical 10% decrease in interest rates
as of December 31, 2000, amounted to approximately $307 million at December 31,
2000. The fair values of the Corporation'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 Corporation's total operating
expenses. As a result of the significance of fuel costs and the historical
volatility of fuel prices, the Corporation's transportation subsidiaries
periodically use swaps, futures and/or forward contracts to mitigate the impact
of adverse fuel price changes. The Corporation at times may use swaptions to
secure more favorable swap prices.

As of December 31, 2001, expected rail fuel consumption for 2002 is 44%
hedged (or swaptions are in place) at 56 cents per gallon excluding taxes,
transportation costs and regional pricing spreads. As of December 31, 2001,
expected rail fuel consumption for 2003 is 5% hedged (or swaptions are in place)
at 56 cents per gallon excluding taxes, transportation costs and regional
pricing spreads. For the Corporation's fuel hedges, if rail fuel prices decrease
10% from the December 31, 2001 level, the corresponding increase in fuel expense
would be approximately $20 million after tax. For the Corporation's swaptions,
if rail fuel prices decrease 10% from the December 31, 2001 level, the
corresponding increase in expense would be approximately $4 million after tax.

As of December 31, 2000, the Corporation had hedged approximately 8% of its
forecasted 2001 fuel consumption at 68 cents per gallon, excluding taxes,
transportation costs and regional pricing spreads. If rail fuel prices had
decreased 10% from the December 31, 2000 level, the corresponding increase in
fuel expense would have been approximately $5 million after tax.

26

As of December 31, 2001, expected trucking fuel consumption for 2002 is 16%
hedged at 58 cents per gallon excluding taxes, transportation costs and regional
pricing spread. As of December 31, 2001, expected trucking fuel consumption for
2003 is 5% hedged at 58 cents per gallon excluding taxes, transportation costs
and regional pricing spreads. If trucking fuel prices decrease 10% from the
December 31, 2001 level, the corresponding increase in fuel expense would be
less than $1 million after tax. As of December 31, 2000, the trucking segment
had not hedged any expected fuel consumption for 2001.

ACCOUNTING PRONOUNCEMENTS - Effective January 1, 2001, the Corporation adopted
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 Corporation
uses for fuel or interest rate hedging purposes be recorded in the Corporation'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 Corporation's operations, income statement
recognition of the ineffective portion of the hedge position may be required.
Also, derivative instruments that do not qualify for hedge accounting treatment
per FAS 133 and FAS 138 may 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, (see note 4 to the Consolidated Financial Statements, Item 8).

In September 2000, the FASB issued Statement No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
(FAS 140), replacing FASB No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" (FAS 125). FAS 140 revises
criteria for accounting for securitizations, other financial asset transfers and
collateral and introduces new disclosures. FAS 140 was effective for fiscal 2000
with respect to the new disclosure requirements and amendments of the collateral
provisions originally presented in FAS 125. All other provisions were effective
for transfers of financial assets and extinguishments of liabilities occurring
after March 31, 2001. The provisions are to be applied prospectively with
certain exceptions. The adoption of FAS 140 did not have a significant impact on
the Corporation's Consolidated Financial Statements.

In July 2001, the FASB issued Statement No. 141, "Business Combinations" (FAS
141). FAS 141 revises the method of accounting for business combinations and
eliminates the pooling method of accounting. FAS 141 was effective for all
business combinations that were initiated or completed after June 30, 2001.
Management believes that FAS 141 will not have a material impact on the
Corporation's Consolidated Financial Statements.

Also in July 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets" (FAS 142). FAS 142 revises the method of accounting for
goodwill and other intangible assets. FAS 142 eliminates the amortization of
goodwill, but requires goodwill to be tested for impairment at least annually at
a reporting unit level. FAS 142 is effective for the Corporation's fiscal year
beginning January 1, 2002. Management believes that FAS 142 will not have a
material impact on the Corporation's Consolidated Financial Statements. In
accordance with FAS 142, the Corporation will eliminate annual goodwill
amortization of $2 million. At December 31, 2001, the Corporation had $50
million of goodwill remaining.

In August 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations" (FAS 143). FAS 143 is effective for the Corporation's
fiscal year beginning January 1, 2003, and requires the Corporation to record
the fair value of a liability for an asset retirement obligation in the period
in which it is incurred. Management is in the process of evaluating the impact
this standard will have on the Corporation's Consolidated Financial Statements.

In addition, in October 2001, the FASB issued Statement No. 144, "Accounting
for the Impairment of Disposal of Long-Lived Assets" (FAS 144). FAS 144 replaces
FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed of" (FAS 121). FAS 144 develops one
accounting model, based on the framework established in FAS 121, for long-lived
assets to be disposed of by sale. The accounting model applies to all long-lived
assets, including discontinued operations, and it replaces the provisions of APB
Opinion No. 30, "Reporting Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for disposal of segments of a business. FAS
144 requires that long-lived assets be measured at the lower of carrying amount
or fair value less cost to sell, whether reported in continuing operations or in
discontinued operations. FAS 144 also broadens the definition of discontinued
operations. FAS 144 is

27

effective for the Corporation's fiscal year beginning January 1, 2002.
Management believes that FAS 144 will not have a material impact on the
Corporation's Consolidated Financial Statements.

COMMITMENTS AND CONTINGENCIES - There are various claims and lawsuits pending
against the Corporation and certain of its subsidiaries. The Corporation is also
subject to various federal, state and local environmental laws and regulations,
pursuant to which it is currently participating in the investigation and
remediation of various sites. A discussion of certain claims, lawsuits,
contingent liabilities and guarantees is set forth in note 12 to the
Consolidated Financial Statements, Item 8.

A LOOK FORWARD

2002 BUSINESS OUTLOOK

RAIL - The Railroad expects to build on the positive momentum generated in the
past several years and continue to grow revenue, earnings and free cash flow.
Free cash flow is defined as cash provided by operating activities less cash
used in investing activities and dividends paid. The impact in 2001 of economic
recession and declining industrial production is expected to subside in the
latter half of 2002. Year-over-year revenue growth is projected in the
economically sensitive intermodal, chemical and industrial products commodity
segments. Agricultural products, notably wheat, is also expected to improve.
Energy revenue is expected to decline slightly from the record setting pace of
2001. Automotive revenue is also expected to decrease; however, new contracts in
the automotive sector are expected to help mitigate this decline, and,
therefore, the automotive sector should continue to be a strong revenue
provider. The Railroad will continue to focus on improving service performance
and developing new, innovative rail service offerings to meet the changing needs
of its customers. Cost control and continuing improvements in productivity
should help drive the operating ratio lower. Fuel prices are expected to be
substantially below the levels of the past two years, but will still be
susceptible to 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.

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.
Although the exact impact is not yet known, the Railroad anticipates that the
phased-in tax reductions will have a beneficial impact on its financial results
in the future.

TRUCKING - Overnite expects financial performance to improve in the second half
of 2002 following difficult economic conditions during the first half of the
year. Operating expenses are projected to be positively impacted by lower fuel
prices, cost control and productivity improvements, which will mitigate the
impact of inflationary pressures. Overnite will continue to offer reliable
on-time performance and quality service, which should enable Overnite to
maintain profitable margins. The addition of Motor Cargo will enable the
trucking segment to provide expanded regional coverage in the western United
States.

2002 CAPITAL INVESTMENTS

The Corporation's 2002 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 Corporation expects that these sources will continue to provide
sufficient funds to meet cash requirements in the foreseeable future. In 2002,
the Railroad expects to spend approximately $1.7 billion on capital
expenditures. These capital expenditures will be used to maintain track and
structures, continue capacity expansions on its main lines, upgrade and augment
equipment to better meet customer needs, build infrastructure and develop and
implement new technologies. Overnite and Motor Cargo will continue to maintain
their truck fleet, expand service centers and enhance technology.

28

CAUTIONARY INFORMATION

Certain statements in this report are, and statements in other material filed or
to be filed with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or to be made by
the Corporation) are, or will be, forward looking within the meaning of 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 its consolidated financial position, results of operations or
liquidity; and statements concerning projections, predictions, expectations,
estimates or forecasts as to the Corporation's and its subsidiaries' business,
financial and operational results, and future economic performance, statements
of management's goals and objectives and other similar expressions concerning
matters that are not historical facts.

Forward-looking statements should not be read as a guarantee of future
performance or results, and will not necessarily be accurate indications of the
times at, or by which, such performance or results will be achieved.
Forward-looking information is based on information available at the time and/or
management's good faith belief with respect to future events, and is subject to
risks and uncertainties that could cause actual performance or results to differ
materially from those expressed in the statements. Important factors that could
cause such differences include, but are not limited to, whether the Corporation
and its subsidiaries are fully successful in implementing their financial and
operational initiatives; industry competition, conditions, performance and
consolidation; legislative and/or regulatory developments, including possible
enactment of initiatives to re-regulate the rail business; natural events such
as severe weather, floods and earthquakes; the effects of adverse general
economic conditions, both within the United States and globally; any adverse
economic or operational repercussions from recent terrorist activities, any
government response thereto and any future terrorist activities; changes in fuel
prices; changes in labor costs; labor stoppages; and the outcome of claims and
litigation.

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information concerning market risk sensitive instruments is set forth under
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Other Matters, Item 7, and note 4 to the Consolidated Financial
Statements, Item 8.

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

29

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

30

MANAGEMENT REPORT ON RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS

The accompanying consolidated financial statements, which consolidate the
accounts of Union Pacific Corporation and its Subsidiary Companies (the
Corporation), have been prepared in conformity with accounting principles
generally accepted in the United States of America.

The integrity and objectivity of data in these consolidated financial
statements and accompanying notes, including estimates and judgments related to
matters not concluded by year end, are the responsibility of management as is
all other information in this report. Management devotes ongoing attention to
review and appraisal of its system of internal controls. This system is designed
to provide reasonable assurance, at an appropriate cost, that the Corporation's
assets are protected, that transactions and events are recorded properly and
that financial reports are reliable. The system is augmented by a staff of
internal auditors; careful attention to selection and development of qualified
financial personnel; programs to further timely communication and monitoring of
policies, standards and delegated authorities; and evaluation by independent
auditors during their audits of the annual consolidated financial statements.

The Audit Committee of the Corporation's Board of Directors, composed
entirely of outside directors, as identified below, meets regularly with
financial management, the corporate auditors and the independent auditors to
review the work of each. The independent auditors and corporate auditors have
free access to the Audit Committee, without management representatives present,
to discuss the results of their audits and their comments on the adequacy of
internal controls and the quality of financial reporting.

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

/s/ James R. Young
- --------------------------------------------------
James R. Young,
Executive Vice President-Finance

/s/ Richard J. Putz
- --------------------------------------------------
Richard J. Putz,
Vice President and Controller

The Corporation's Audit Committee is comprised of the following Directors:

Judith Richards Hope, Chair
Thomas J. Donohue
Spencer F. Eccles
Steven R. Rogel
Richard D. Simmons

31

INDEPENDENT AUDITORS' REPORT

Union Pacific Corporation, its Directors and Shareholders:

We have audited the accompanying consolidated statements of financial position
of Union Pacific Corporation and Subsidiary Companies (the Corporation) as of
December 31, 2001 and 2000, 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, 2001. Our audits also included the
consolidated financial statement schedule listed in the Table of Contents at
Part IV, Item 14. These consolidated financial statements and consolidated
financial statement schedule are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these 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 Corporation and
Subsidiary Companies at December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, 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 24, 2002

32

CONSOLIDATED STATEMENTS OF INCOME
Union Pacific Corporation and Subsidiary Companies

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

33

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Union Pacific Corporation and Subsidiary Companies

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

34

CONSOLIDATED STATEMENTS OF CASH FLOWS
Union Pacific Corporation and Subsidiary Companies

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

35

CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
Union Pacific Corporation and Subsidiary Companies

[a] Common stock $2.50 par value; 500,000,000 shares authorized;
275,499,087 shares issued at the end of 2001; 275,233,975 shares issued
at the end of 2000; 276,294,217 shares issued at the end of 1999.

[b] Balance at end of year, shares at cost: 25,208,819 in 2001; 28,413,483
in 2000; 28,510,907 in 1999.

[c] The Corporation utilized approximately 1.7 million shares of treasury
stock in the acquisition of Motor Cargo Industries, Inc.

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

36

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Union Pacific Corporation and Subsidiary Companies

SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION - The Consolidated Financial Statements include the
accounts of Union Pacific Corporation (UPC or the Corporation) and all of its
subsidiaries. Investments in affiliated companies (20% to 50% owned) are
accounted for using the equity method of accounting. All material 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 Corporation 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 Corporation 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 material.

FINANCIAL INSTRUMENTS - The carrying value of the Corporation's non-derivative
financial instruments approximates fair value, except for differences with
respect to long-term, fixed-rate debt and certain differences relating to cost
method investments and other financial instruments that are not significant. 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 U.S.
Treasury rate, London Interbank Offered Rates (LIBOR) or swap spread.

The Corporation periodically uses derivative financial instruments to manage
risk related to changes in fuel prices and interest rates.

EARNINGS PER SHARE - Basic earnings per share (EPS) is calculated on the
weighted-average number of common shares outstanding during each period. Diluted
earnings per share include shares issuable upon exercise of outstanding stock
options and the potential conversion of the preferred securities where the
conversion of such instruments would be dilutive.

USE OF ESTIMATES - The Consolidated Financial Statements of the Corporation
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.

37

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

ENVIRONMENTAL - When environmental issues have been identified with respect to
the property owned, leased or otherwise used in the conduct of the Corporation's
business, the Corporation and its consultants perform environmental assessments
on such property. The Corporation expenses the cost of the assessments as
incurred. The Corporation 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 2001 Consolidated Financial Statement presentation. These
reclassifications had no effect on previously reported operating income or net
income.

1. OPERATIONS AND SEGMENTATION

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

RAIL SEGMENT

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, UPC completed its
integration of Southern Pacific's rail operations.

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.

EMPLOYEES - Approximately 87% of the Railroad's nearly 48,000 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. The health and welfare cost sharing was a milestone as the BMWE is
the first union to make significant cost

38

contributions to their health and welfare plan. Contract discussions with the
remaining unions are either in negotiation or mediation. Also during 2001, much
of the operating craft unions' focus was on a proposed merger between the United
Transportation Union and the Brotherhood of Locomotive Engineers (BLE). In a
December 2001 re-vote, the BLE resoundingly rejected the merger. Both operating
craft unions have indicated a desire to complete national negotiations. The
Corporation anticipates significant progress in 2002.

TRUCKING SEGMENT

OPERATIONS - The trucking segment includes the operations of Overnite and Motor
Cargo. Overnite is a major interstate trucking company specializing in
less-than-truckload (LTL) shipments. Overnite serves all 50 states and portions
of Canada and Mexico through 170 service centers located throughout the United
States providing regional, inter-regional and long haul service. Overnite
transports a variety of products including machinery, tobacco, textiles,
plastics, electronics and paper products. Motor Cargo is a western regional LTL
carrier that provides comprehensive service throughout 10 western states. Motor
Cargo transports general commodities, including consumer goods, packaged
foodstuffs, industrial and electronic equipment and auto parts. Overnite and
Motor Cargo experience intense service and price competition from regional,
inter-regional and national LTL carriers and, to a lesser extent, from truckload
carriers, railroads and overnight delivery companies. Major competitors include
USFreightways and CNF Inc. Overnite and Motor Cargo believe they are able to
compete effectively in their markets by providing high quality, customized
service at competitive prices.

EMPLOYEES - Overnite continues to oppose the efforts of the International
Brotherhood of Teamsters (Teamsters) to unionize Overnite service centers. Since
the Teamsters began their efforts at Overnite in 1994, Overnite has received 90
petitions for union elections at 66 of its 170 service centers, although there
have been only nine elections since August 1997, and Teamsters representation
was rejected in seven of those nine elections. Twenty-two service centers,
representing approximately 14% of Overnite's nearly 13,000 nationwide employee
work force, have voted for union representation, and the Teamsters have been
certified and recognized as the bargaining representative for such employees.
Employees at 18 of these 22 locations have filed decertification petitions since
1999. Elections affecting approximately 400 additional employees are unresolved,
and there are no elections currently scheduled. Additionally, proceedings are
pending in certain cases where a Teamsters' local union lost a representation
election. To date, Overnite has not entered into any collective bargaining
agreements with the Teamsters, who began a job action on October 24, 1999, that
has continued into 2002. As of January 19, 2002, 19 Overnite service centers had
approximately 369 employees, less than 3% of Overnite's work force, who did not
report to work. Despite the work stoppage, Overnite has managed to improve its
revenue and profitability on a year-over-year basis. Employees at two Motor
Cargo service centers located in North Salt Lake, Utah and Reno, Nevada,
representing approximately 11% of Motor Cargo's total work force at 30 service
centers, are covered by two separate collective bargaining agreements with union
affiliated with the Teamsters. Although the agreements cover most of the
employees at these two facilities, less than half of these covered employees are
actual members of unions.

OTHER PRODUCT LINES

OTHER - Included in the other product lines are the results of the corporate
holding company, Fenix, self-insurance activities, and all appropriate
consolidating entries.

The following table details reportable financial information for the
Corporation's segments and other product lines for the years ended December 31,
2001, 2000 and 1999:

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

[b] Included the $115 million pre-tax ($72 million after-tax) work force
reduction charge in 2000.

[c] The Railroad has equity interests in several railroad-related and other
businesses.

[d] "Other" included the $43 million pre-tax ($27 million after-tax)
adjustment of a liability related to the discontinued operations of a
former subsidiary in 1999 (note 3).

2. 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 were converted into UPC common stock, and the remaining
40% of the outstanding shares was acquired

40

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.

Merger Consolidation Activities - In connection with the acquisition and
integration of UPRR and Southern Pacific's rail operations, UPC completed the
elimination of 5,200 duplicate positions in 2001 in accordance with the original
merger plan. UPC also completed the relocation of 4,700 positions, merging or
disposing of redundant facilities and disposing of certain rail lines. In
addition, the Corporation canceled and settled the remaining uneconomical and
duplicative SP contracts, including payroll-related contractual obligations in
accordance with the original merger plan.

Merger Liabilities - In 1996, UPC recognized a $958 million pre-tax liability in
the SP purchase price allocation for costs associated with SP's portion of these
activities. Merger liability activity reflected cash payments for merger
consolidation activities and reclassification of contractual obligations from
merger liabilities to contractual liabilities. The fair value allocation of SP's
purchase price to fixed assets was reduced by $50 million as costs for certain
merger activities were less than anticipated in the original plan. Where merger
related costs were greater than what was anticipated in the plan, those costs
were charged to expense in the period incurred. Where the merger implementation
caused the Corporation to incur more costs than were envisioned in the original
merger plan, such costs were charged to expense in the period incurred. Merger
liability activity was $89 million, $10 million and $45 million in 2001, 2000
and 1999, respectively.

The components of the merger liability as of December 31, 2001 were as
follows:

3. DIVESTITURES

ADJUSTMENT TO 1994 LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS - Net income for
1999 included a one-time $43 million gain ($27 million after-tax) from the
adjustment of a liability established in connection with the discontinued
operations of a former subsidiary.

4. FINANCIAL INSTRUMENTS

ADOPTION OF STANDARD - Effective January 1, 2001, the Corporation 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 Corporation uses for fuel or interest rate
hedging purposes be recorded in the Corporation'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
Corporation's operations, income statement recognition of the ineffective
portion of the hedge position may be required. Also, derivative instruments that
do not qualify for hedge accounting treatment per FAS 133 and FAS 138 may
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 Corporation and its subsidiaries use derivative
financial instruments, which are subject to market risk, in limited instances
for other than trading purposes to manage risk related to changes in fuel prices
and to achieve the Corporation's interest rate objectives. The Corporation uses
swaps, futures and/or forward contracts to mitigate adverse price and rate
movements and exposure to variable cash flows. The use of these instruments also
limits future

41

gains from favorable movements. The Corporation uses interest rate swaps to
manage its exposure to interest rate changes. The purpose of these programs is
to protect the Corporation's operating margins and overall profitability from
adverse fuel price changes or interest rate fluctuations.

The Corporation may also use fuel swaptions to secure more favorable 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 Corporation addresses market risk related to
derivative financial instruments by selecting instruments whose value
fluctuations 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. The
Corporation has not been required to provide collateral; however, the
Corporation may receive collateral relating to its hedging activity where the
concentration of credit risk was substantial.

In addition, the Corporation 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 Corporation generally is not
permitted to sell or repledge the collateral unless the debtor defaults.

DETERMINATION OF FAIR VALUE - The fair values of the Corporation's derivative
financial instrument positions at December 31, 2001 and 2000, were determined
based upon current fair values as quoted by recognized dealers or developed
based upon the present value of expected future cash flows discounted at the
applicable U.S. Treasury rate, London Interbank Offered Rates (LIBOR) or swap
spread.

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

In May and August 2001, the Corporation entered into interest rate swaps on a
total of $598 million of debt with varying maturity dates extending to November
2004. The swaps allowed the Corporation to convert the debt from fixed rates to
variable rates and thereby hedge the risk of changes in the debt's fair value
attributable to the changes in the benchmark interest rate (LIBOR). The swaps
have been accounted for using the short-cut method as allowed by FAS 133; and
therefore, no ineffectiveness has been recorded within the Corporation's
Consolidated Financial Statements.

FUEL STRATEGY - As a result of the significance of the Corporation's fuel costs
and the historical volatility of fuel prices, the Corporation's transportation
subsidiaries periodically use swaps, futures and/or forward contracts to
mitigate adverse fuel price changes. In addition, the Corporation at times may
use fuel swaptions to secure more favorable swap prices. The following is a
summary of the Corporation's derivative financial instruments at December 31,
2001 and 2000:

[a] Rail fuel hedges which were in effect during 2001. Rail fuel hedges
include the swap portion of a swaption with a base term within 2001,
and they exclude the option portion of the swaption to extend the swap
past 2001.

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

[c] Rail fuel hedges which are in effect during 2002. These hedges expire
December 31, 2002. Rail fuel hedges include the swap portions of the
swaptions with base terms within 2002, and they exclude the option
portions of the swaptions to extend the swaps past 2002.

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

The fair value asset and liability positions of the Corporation's
outstanding derivative financial instruments at December 31, 2001 and 2000 were
as follows:

Rail fuel hedging positions will be reclassified from accumulated other
comprehensive income to fuel expense over the life of the hedge as fuel is
consumed. During 2002, the Corporation expects fuel expense to increase $11
million from this reclassification. Rail fuel swaption positions will be
reflected in the Consolidated Statements of Income as fuel expense over the life
of the swap and as other income as the fair value of the outstanding option
fluctuates.

The Corporation's use of derivative financial instruments had the following
impact on pre-tax income for the years ended December 31, 2001, 2000 and 1999:

FAIR VALUE OF DEBT INSTRUMENTS - The fair value of the Corporation's long- and
short-term debt has been estimated using quoted market prices or current
borrowing rates. At December 31, 2001 and 2000, the fair value of total debt
exceeded the carrying value by approximately $254 million and $56 million,
respectively. At December 31, 2001 and December 31, 2000, approximately $850
million and $1.3 billion, respectively, of fixed-rate debt securities contain
call provisions

43

that allow the Corporation 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 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. At December
31, 2001 and 2000, accounts receivable are presented net of $600 million of
receivables sold.

5. PROPERTIES

At December 31, 2001 and 2000, major property accounts were as follows:

At December 31, 2001 and 2000, major accumulated depreciation accounts were
as follows:

6. INCOME TAXES

Components of income tax expense, excluding discontinued operations, were as
follows for the years ended December 31, 2001, 2000 and 1999:

44

Deferred income tax liabilities (assets) were comprised of the following at
December 31, 2001 and 2000:

At December 31, 2001, the Corporation has a deferred income tax asset
reflecting the benefits of $442 million in net operating loss carryforwards,
which expire between 2009 and 2018. The Internal Revenue Code limits a
corporation's ability to utilize net operating loss carryforwards. The
Corporation does not expect these limits to impact its ability to utilize its
carryforwards. The Corporation has analyzed its deferred income tax assets and
believes a valuation allowance is not necessary.

For the years ending December 31, 2001, 2000 and 1999, a reconciliation
between statutory and effective tax rates of continuing operations is as
follows:

The Internal Revenue Service is currently examining the Corporation's tax
returns for 1986 through 1998. All years prior to 1986 are closed. The
Corporation believes it has adequately provided for federal and state income
taxes.

7. DEBT

Total debt as of December 31, 2001 and 2000, is summarized below:

45

DEBT MATURITIES - Aggregate debt maturities as of December 31, 2001, are as
follows:

MORTGAGED PROPERTIES - At December 31, 2001 and 2000, approximately $9.4 billion
and $9.6 billion, respectively, of Railroad properties secure outstanding
equipment obligations and mortgage bonds.

CREDIT FACILITIES - On December 31, 2001, the Corporation had $2.0 billion in
revolving credit facilities, of which $1.0 billion expires in March 2002, with
the remaining $1.0 billion expiring in 2005. The facilities, which were entered
into during March 2001, and March 2000, respectively, are designated for general
corporate purposes and replaced a $2.8 billion facility which expired in April
2001. None of the credit facilities were used as of December 31, 2001 or 2000.
Commitment fees and interest rates payable under the facilities are similar to
fees and rates available to comparably rated investment-grade corporate
borrowers. The Corporation is reviewing rollover options for the credit facility
that expires in March 2002. To the extent the Corporation has long-term credit
facilities available, commercial paper borrowings and other current maturities
of long-term debt of $674 million and $663 million as of December 31, 2001 and
2000, respectively, have been reclassified as long-term debt maturing in the
years 2003 and 2002, respectively. This reclassification reflects the
Corporation's intent to refinance these short-term borrowings and current
maturities of long-term debt on a long-term basis through the issuance of
additional commercial paper or new long-term financings, or by using the
currently available long-term credit facility if alternative financing is not
available.

CONVERTIBLE PREFERRED SECURITIES - Union Pacific Capital Trust (the Trust), a
statutory business trust sponsored and wholly owned by the Corporation, issued
$1.5 billion aggregate liquidation amount of 6.25% Convertible Preferred
Securities (the CPS) in April 1998. Each of the CPS has a stated liquidation
amount of $50 and is convertible, at the option of the holder, into shares of
UPC's common stock, par value $2.50 per share (the Common Stock), at the rate of
0.7257 shares of Common Stock for each of the CPS, equivalent to a conversion
price of $68.90 per share of Common Stock, subject to adjustment under certain
circumstances. The CPS accrues and pays cash distributions quarterly in arrears
at the annual rate of 6.25% of the stated liquidation amount. The Corporation
owns all of the common securities of the Trust. The proceeds from the sale of
the CPS and the common securities of the Trust were invested by the Trust in
$1.5 billion aggregate principal amount of the Corporation's 6.25% Convertible
Junior Subordinated Debentures due April 1, 2028 (the Debentures). The
Debentures represent the sole assets of the Trust. The principal amount of the
Debentures held by the Trust at December 31, 2001, was $1.5 billion.

The Debentures accrue and pay interest quarterly in arrears at the annual
rate of 6.25%. The Debentures mature on April 1, 2028, unless previously
redeemed or repurchased in accordance with the terms of the indenture (the
Indenture). The proceeds from the issuance of the Debentures were used by the
Corporation for repayment of corporate borrowings.

The Corporation has guaranteed, on a subordinated basis, distributions and
other payments due on the CPS (the Guarantee). Considered together, the
Corporation's obligations under the Debentures, the Indenture, the Guarantee and
the Amended and Restated Declaration of Trust governing the Trust provide a full
and unconditional guarantee by the Corporation of the Trust's obligations under
the CPS.

For financial reporting purposes, the Corporation has recorded distributions
payable on the CPS as an interest charge to earnings in the Consolidated
Statements of Income.

SHELF REGISTRATION STATEMENT AND OTHER SIGNIFICANT FINANCINGS - In January 2001,
under an existing shelf registration statement, the Corporation issued $400
million of 6.65% fixed-rate debt with a maturity date of January 15, 2011.
During

46

May 2001, the Corporation issued the remaining $200 million of debt securities
available under this shelf registration statement as 5.84% fixed-rate debt with
a maturity date of May 25, 2004. Simultaneously, the Corporation entered into an
interest rate swap converting the debt, issued in May 2001, from a fixed rate to
a variable rate. The proceeds from the issuance of this debt were used for
repayment of debt and other general corporate purposes.

In June 2001, the Corporation filed a new $1.0 billion shelf registration
statement, which became effective June 14, 2001. Under this shelf registration
statement, the Corporation may issue, from time to time, any combination of debt
securities, preferred stock, common stock or warrants for debt securities or
preferred stock in one or more offerings. The total offering price of these
securities, in the aggregate, can not exceed $1.0 billion. On October 1, 2001,
the Corporation issued $300 million of 5.75% fixed-rate debt with a maturity
date of October 15, 2007. The proceeds from the issuance of this debt were used
for repayment of debt and other general corporate purposes. At December 31,
2001, the Corporation had $700 million remaining for issuance under the shelf
registration.

On January 17, 2002, the Corporation issued an additional $300 million of
6.125% fixed-rate debt with a maturity date of January 15, 2012. The proceeds
from the issuance were also used for repayment of debt and other general
corporate purposes. At January 24, 2002, the Corporation had $400 million
remaining for issuance under the shelf registration. The Corporation has no
immediate plans to issue equity securities under this shelf registration.

During July 2001, UPRR entered into capital leases covering new locomotives.
The related capital lease obligations totaled approximately $124 million and are
included in the Statements of Consolidated Financial Position as debt.

DIVIDEND RESTRICTIONS - The Corporation is subject to certain restrictions
related to the payment of cash dividends. The amount of retained earnings
available for dividends under the most restrictive test was $4.1 billion and
$3.2 billion at December 31, 2001 and 2000, respectively.

8. LEASES

The Corporation 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, 2001 were as follows:

Rent expense for operating leases with terms exceeding one month was $668
million in 2001, $652 million in 2000 and $707 million in 1999. Contingent
rentals and sub-rentals are not significant.

9. RETIREMENT PLANS

BENEFIT SUMMARY - The Corporation provides defined benefit retirement income to
eligible non-union employees through qualified and non-qualified (supplemental)
pension plans. In addition, the Corporation provides a defined contribution plan
(thrift plan) to eligible non-union employees. All non-union and certain of the
Corporation's union employees participate in defined contribution medical and
life insurance programs for retirees. All Railroad employees are covered by the
Railroad Retirement System (the System).

47

FUNDING AND BENEFIT PAYMENTS - 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. The Corporation has settled a portion of the non-qualified unfunded
supplemental plan's accumulated benefit obligation by purchasing annuities.
Corporation contributions into the thrift plan are based on 50% of the
participant's contribution, limited to 3% of the participant's base salary.
Corporation thrift plan contributions were $21 million, $20 million and $20
million for the years ended December 31, 2001, 2000, and 1999, respectively. The
Corporation also provides medical and life insurance benefits on a cost sharing
basis for qualifying employees. These costs are funded as incurred. In addition,
contributions made to the System are expensed as incurred and amounted to
approximately $429 million in 2001, $430 million in 2000 and $426 million in
1999.

Changes in the Corporation's projected benefit obligation are as follows for
the years ended December 31, 2001 and 2000:

As part of the work force reduction plan, discussed in note 15, the
Corporation 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 Corporation's benefit plan assets are as follows for the years
ended December 31, 2001 and 2000:

The components of funded status of the benefit plans for the years ended
December 31, 2001 and 2000 were as follows:

48

At December 31, 2001 and 2000, $37 million and $30 million, respectively of
the total pension and other post-retirement liability were classified as a
current liability.

Amounts recognized for the benefit plan liabilities in the Consolidated
Statements of Financial Position for December 31, 2001 and 2000 consisted of:

The components of the Corporation's net periodic pension costs (income) for
the years ended December 31, 2001, 2000 and 1999 were as follows:

At December 31, 2001 and 2000, approximately 32% 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,
2001, 2000 and 1999 were as follows:

49

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:

10. STOCK OPTIONS AND OTHER STOCK PLANS

OPTIONS - The Corporation applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its stock plans. Pursuant to the
Corporation's stock incentive plans for officers, key employees and non-employee
directors, 12,461,025; 6,089,561; and 4,809,408 common shares were available for
grant at December 31, 2001, 2000 and 1999, respectively. Options are granted at
fair value on the grant date and are outstanding for a period of 10 years from
the grant date. Options generally become exercisable no earlier than one year
after grant.

DETERMINATION OF FAIR VALUE OF OPTIONS - The fair value of each stock option
granted is estimated for the determination of pro forma expense using a
Black-Scholes option-pricing model. The following table details the number of
options granted, weighted-average exercise price of the options granted,
weighted-average assumptions utilized in determining the pro forma expense and
the weighted-average fair value of options for the years ended December 31,
2001, 2000 and 1999:

The expense impact of the option grant is determined as of the date of the
grant and is reflected in pro forma results over the options' vesting period.

Pro forma net income and earnings per share (EPS) for 2001, 2000 and 1999,
including compensation expense for options that vested in each year, were as
follows:

During 1998, the Corporation implemented a broad-based option program that
granted each active employee the option to purchase 200 shares of UPC common
stock at $55.00 per share. This program resulted in 11,236,400 new options in
1998 and generated an after-tax pro forma compensation expense of $7 million in
2001 and $28 million in both 2000 and 1999. The conversion of these options will
be effected with treasury shares as the options were not issued under the stock
option plan for officers and key employees.

50

Changes in common stock options outstanding were as follows:

Stock options outstanding at December 31, 2001 were as follows:

Stock options exercisable at December 31, 2001 were as follows:

OTHER INCENTIVE PLANS - The Corporation's plans provide for awarding retention
shares of common stock or stock units (the right to receive shares of common
stock) to eligible employees. These awards are subject to forfeiture if
employment terminates during the prescribed retention period, generally three
years, or, in some cases, if a certain prescribed stock price or other financial
criteria are 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, 2001, 387,540 retention shares,
restricted shares and stock units were issued at a weighted-average fair value
of $49.95. During 2000, 283,059 retention shares, restricted shares and stock
units were issued at a weighted-average fair value of $41.21. During 1999,
26,300 retention shares and stock units were issued at a weighted-average fair
value of $52.41. A portion of the retention awards issued in 1999 were subject
to stock price or performance targets. The cost of retention and restricted
awards is amortized to expense over the retention period.

In November 2000, the Corporation approved the 2001 Long Term Plan (LTP).
The LTP includes certain performance criteria and a retention requirement.
During the year ended December 31, 2001, 1,019,500 performance retention shares
and stock units were issued at a weighted-average fair value of $50.07. The cost
of the LTP is expensed over the performance period which ends January 31, 2004.

51

The Corporation adopted the Executive Stock Purchase Incentive Plan (ESPIP)
effective October 1, 1999, in order to encourage and facilitate ownership of
common stock by officers and other key executives of the Corporation and its
subsidiaries. Under the ESPIP, the participants purchased a total of 1,008,000
shares of the Corporation's common stock with the proceeds of 6.02%
interest-bearing, full recourse loans from the Corporation. Loans totaled $47
million. Deferred cash payments will be awarded to the participants to repay
interest and the loan principal if certain performance and retention criteria
are 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 until certain performance criteria are met. The
first performance criterion was satisfied in March 2001 and, accordingly
thereafter, the dividends on the purchased shares are now paid directly to the
participants, and a deferred cash payment equal to the net accrued interest will
be paid to the participants at the expiration of the 40-month period. The cost
of the ESPIP is amortized to expense over the 40-month period.

During the years ended December 31, 2001, 2000 and 1999, UPC expensed $18
million, $18 million and $5 million, respectively, related to the other
incentive plans described above.

11. EARNINGS PER SHARE

The following table provides a reconciliation between basic and diluted earnings
per share for the years ended December 31, 2001, 2000 and 1999:

12. COMMITMENTS AND CONTINGENCIES

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

ENVIRONMENTAL - The Corporation generates and transports hazardous and
nonhazardous waste in its current and former operations, and is subject to
federal, state and local environmental laws and regulations. The Corporation has
identified approximately 370 active sites at which it is or may be liable for
remediation costs associated with alleged contamination or for violations of
environmental requirements. This includes 48 sites that are the subject of
actions taken by the U.S. government, 28 of which are currently on the Superfund
National Priorities List. Certain federal legislation imposes joint

52

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

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

As of December 31, 2001, the Corporation has a liability of $172 million
accrued for future environmental costs. The liability includes future costs for
remediation and restoration of sites, as well as for ongoing monitoring costs,
but excludes any anticipated recoveries from third parties. Cost estimates are
based on information available for each site, financial viability of other
potentially responsible parties, and existing technology, laws and regulations.
The Corporation believes that it has adequately accrued for its ultimate share
of costs at sites subject to joint and several liability. However, the ultimate
liability for remediation is difficult to determine because of the number of
potentially responsible parties involved, site-specific cost sharing
arrangements with other potentially responsible parties, the degree of
contamination by various wastes, the scarcity and quality of volumetric data
related to many of the sites, and/or the speculative nature of remediation
costs. The Corporation expects to pay out the majority of the December 31, 2001,
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
Corporation.

PURCHASE OBLIGATIONS AND GUARANTEES - The Corporation and its subsidiaries
periodically enter into financial and other commitments in connection with their
businesses. At December 31, 2001, the Corporation had unconditional purchase
obligations of $547 million for the purchase of locomotives as part of the
Corporation's multi-year capital asset acquisition plan. In addition, the
Corporation was contingently liable for $270 million in guarantees and $45
million in letters of credit at December 31, 2001. These contingent guarantees
were entered into in the normal course of business and include guaranteed
obligations of affiliated operations. The Corporation is not aware of any
existing event of default which would require it to satisfy these guarantees.

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 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 the
Railroad's obligation under this lease.

UPRR will be the construction agent for the lessor. Total building related
costs incurred and drawn from the lease funding commitments as of December 31,
2001, were approximately $10 million. After construction is complete, the lease
has an initial term of five years and 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 renew the lease or purchase the building, the
Railroad has guaranteed a residual value of approximately $220 million. At
December 31, 2001, the Railroad has guaranteed, under certain circumstances, a
residual value of less than $10 million.

RISK FACTORS - The Corporation's future results may be affected by changes in
the economic environment, fluctuations in fuel prices, operational repercussions
from any terrorist activities or government response thereto and external
factors such as weather. Several of the commodities transported by both the
Railroad and trucking segments come from industries with cyclical business
operations. As a result, prolonged negative changes in the U.S. and global
economic conditions can have an adverse effect on the Corporation's operating
results. In addition, to the extent that diesel fuel costs are not recovered
through increased revenue, improved fuel conservation or mitigated by hedging
activity, operating results for the Railroad and trucking segments can also be
adversely affected.

53

13. OTHER INCOME

Other income included the following:

14. ACCOUNTING PRONOUNCEMENTS

In September 2000, the FASB issued Statement No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" (FAS 140),
replacing FASB No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" (FAS 125). FAS 140 revises criteria
for accounting for securitizations, other financial asset transfers and
collateral and introduces new disclosures. FAS 140 was effective for fiscal 2000
with respect to the new disclosure requirements and amendments of the collateral
provisions originally presented in FAS 125. All other provisions were effective
for transfers of financial assets and extinguishments of liabilities occurring
after March 31, 2001. The provisions are to be applied prospectively with
certain exceptions. The adoption of FAS 140 did not have a significant impact on
the Corporation's Consolidated Financial Statements.

In July 2001, the FASB issued Statement No. 141, "Business Combinations"
(FAS 141). FAS 141 revises the method of accounting for business combinations
and eliminates the pooling method of accounting. FAS 141 was effective for all
business combinations that were initiated or completed after June 30, 2001.
Management believes that FAS 141 will not have a material impact on the
Corporation's Consolidated Financial Statements.

Also in July 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets" (FAS 142). FAS 142 revises the method of accounting for
goodwill and other intangible assets. FAS 142 eliminates the amortization of
goodwill, but requires goodwill to be tested for impairment at least annually at
a reporting unit level. FAS 142 is effective for the Corporation's fiscal year
beginning January 1, 2002. Management believes that FAS 142 will not have a
material impact on the Corporation's Consolidated Financial Statements. In
accordance with FAS 142, the Corporation will eliminate annual goodwill
amortization of $2 million. At December 31, 2001, the Corporation had $50
million of goodwill remaining.

In August 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations" (FAS 143). FAS 143 is effective for the Corporation's
fiscal year beginning January 1, 2003, and requires the Corporation to record
the fair value of a liability for an asset retirement obligation in the period
in which it is incurred. Management is in the process of evaluating the impact
this standard will have on the Corporation's Consolidated Financial Statements.

In addition, in October 2001, the FASB issued Statement No. 144,
"Accounting for the Impairment of Disposal of Long-Lived Assets" (FAS 144). FAS
144 replaces FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of" (FAS 121). FAS
144 develops one accounting model, based on the framework established in FAS
121, for long-lived assets to be disposed of by sale. The accounting model
applies to all long-lived assets, including discontinued operations, and it
replaces the provisions of APB Opinion No. 30, "Reporting Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
disposal of segments of a business. FAS 144 requires that long-lived assets be
measured at the lower of carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations. FAS 144
also broadens the definition of discontinued operations. FAS 144 is effective
for the Corporation's fiscal year beginning January 1, 2002. Management believes
that FAS 144 will not have a material impact on the Corporation's Consolidated
Financial Statements.

54

15. WORK FORCE REDUCTION PLAN

Prompted by signs of an economic slowdown, 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. In December 2001, the Plan was completed with positions eliminated
through a combination of subsidized early retirements, involuntary layoffs and
attrition. The Plan affected both agreement and non-agreement employees across
the entire 23-state Railroad system. As of December 31, 2001, 2,021 positions
had been eliminated in accordance with the Plan. Of those eliminations, 1,051
were made through subsidized early retirements and involuntary layoffs with the
remaining coming through attrition.

The Corporation 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 Corporation's 2000
Consolidated Statements of Income. Plan liability activity in 2001 includes $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 Corporation's Consolidated
Statements of Income.

16. SELECTED QUARTERLY DATA

Selected unaudited quarterly data are as follows:

[a] Included $115 million pre-tax ($72 million after-tax) work force reduction
charge (see note 15).

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

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

None.

55

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(a) Directors of Registrant.

Information as to the names, ages, positions and offices with UPC,
terms of office, periods of service, business experience during the
past five years and certain other directorships held by each director
or person nominated to become a director of UPC is set forth in the
Election of Directors segment of the Proxy Statement and is
incorporated herein by reference.

(b) Executive Officers of Registrant.

Information concerning the executive officers of UPC and its
subsidiaries is presented in Part I of this Report under Executive
Officers of the Registrant and Principal Executive Officers of
Subsidiaries.

(c) Section 16(a) Compliance.

Information concerning compliance with Section 16(a) of the Securities
Exchange Act of 1934 is set forth in the Section 16(a) Beneficial
Ownership Reporting Compliance segment of the Proxy Statement and is
incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Information concerning compensation received by UPC's directors and certain
executive officers is presented in the Compensation of Directors, Report on
Executive Compensation, Summary Compensation Table, Security Ownership of
Management, Option/SAR Grants Table, Aggregated Option/SAR Exercises in Last
Fiscal Year and FY-End Option/SAR Values Table, Defined Benefit Plans and
Change-in-Control Arrangements segments of the Proxy Statement and is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information as to the number of shares of UPC's equity securities beneficially
owned as of February 8, 2002, by each of its directors and nominees for
director, its five most highly compensated executive officers, its directors and
executive officers as a group and certain beneficial owners is set forth in the
Election of Directors, Security Ownership of Management and Security Ownership
of Certain Beneficial Owners segments of the Proxy Statement and is incorporated
herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information on related transactions is set forth in the Certain Relationships
and Related Transactions and Compensation Committee Interlocks and Insider
Participation segments of the Proxy Statement and is incorporated herein by
reference. The Corporation does not have any relationship with any outside third
party which would enable such a party to negotiate terms of a material
transaction that may not be available to, or available from, other parties on an
arm's-length basis.

56

PART IV

ITEM 14. 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 30.

(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 60. The
exhibits include management contracts, compensatory plans and
arrangements required to be filed as exhibits to the Form 10-K
by Item 601 (10) (iii) of Regulation S-K.

(b) Reports on Form 8-K

On October 16, 2001, UPC filed a Current Report on Form 8-K announcing
the Agreement and Plan of Merger by and among Motor Cargo Industries,
Inc., Union Pacific Corporation and Motor Merger Co.

On October 18, 2001, UPC filed a Current Report on Form 8-K announcing
UPC's financial results for the third quarter of 2001.

On January 24, 2002, UPC filed a Current Report on Form 8-K announcing
UPC's financial results for the fourth quarter of 2001.

57

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 4th day of March,
2002.

UNION PACIFIC CORPORATION

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below, on this 4th day of March, 2002, 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,
President, Chief Executive
Officer and Director

PRINCIPAL FINANCIAL OFFICER:

/s/ James R. Young
------------------------------------
James R. Young,
Executive Vice President-Finance

PRINCIPAL ACCOUNTING OFFICER:

/s/ Richard J. Putz
------------------------------------
Richard J. Putz,
Vice President and Controller

DIRECTORS:

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

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

58

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Union Pacific Corporation and Subsidiary Companies

59

UNION PACIFIC CORPORATION
EXHIBIT INDEX

Exhibit No. Description

Filed with this Statement

12 Ratio of Earnings to Fixed Charges.

21 List of the Corporation's significant subsidiaries
and their respective states of incorporation.

23 Independent Auditors' Consent.

24 Powers of attorney executed by the directors of UPC.

Incorporated by Reference

3(a) Revised Articles of Incorporation of UPC, as amended
through April 25, 1996, are incorporated herein by
reference to Exhibit 3 to the Corporation's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1996.

3(b) By-Laws of UPC, as amended effective as of November
19, 1998, are incorporated herein by reference to
Exhibit 3.1 to the Corporation's Current Report on
Form 8-K filed November 25, 1998.

4(a) Indenture, dated as of December 20, 1996, between UPC
and Citibank, N.A., as Trustee, is incorporated
herein by reference to Exhibit 4.1 to UPC's
Registration Statement on Form S-3 (No. 333-18345).

4(b) Indenture, dated as of April 1, 1999, between UPC and
The Chase Manhattan Bank, as Trustee, is incorporated
herein by reference to Exhibit 4.2 to UPC's
Registration Statement on Form S-3 (No. 333-75989).

4(c) Form of Debt Security is incorporated herein by
reference to Exhibit 4.3 to UPC's Registration
Statement on Form S-3 (No. 33-59323).

Certain instruments evidencing long-term indebtedness
of UPC are not filed as exhibits because the total
amount of securities authorized under any single such
instrument does not exceed 10% of the Corporation's
total consolidated assets. UPC agrees to furnish the
Commission with a copy of any such instrument upon
request by the Commission.

10(a) Amended and Restated Anschutz Shareholders Agreement,
dated as of July 12, 1996, among UPC, UPRR, The
Anschutz Corporation (TAC), Anschutz Foundation (the
Foundation) and Mr. Philip F. Anschutz, is
incorporated herein by reference to Annex D to the
Joint Proxy Statement/Prospectus included in
Post-Effective Amendment No. 2 to UPC's Registration
Statement on Form S-4 (No. 33-64707).

60

10(b) Amended and Restated Registration Rights Agreement,
dated as of July 12, 1996, among UPC, TAC and the
Foundation is incorporated herein by reference to
Annex H to the Joint Proxy Statement/Prospectus
included in Post-Effective Amendment No. 2 to UPC's
Registration Statement on Form S-4 (No. 33-64707).

10(c) Amended and Restated Registration Rights Agreement,
dated as of July 12, 1996, among UPC, UP Holding
Company, Inc., Union Pacific Merger Co. and Southern
Pacific Rail Corporation (SP) is incorporated herein
by reference to Annex J to the Joint Proxy
Statement/Prospectus included in Post-Effective
Amendment No. 2 to UPC's Registration Statement on
Form S-4 (No. 33-64707).

10(d) Agreement, dated September 25, 1995, among UPC, UPRR,
Missouri Pacific Railroad Company (MPRR), SP,
Southern Pacific Transportation Company (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).

10(f) UPC 2001 Stock Incentive Plan, dated April 20, 2001,
is incorporated herein by reference to Exhibit 99 to
the UPC's Current Report on Form 8-K dated March 8,
2001.

10(g) UP Shares Stock Option Plan of UPC, effective April
30, 1998, is incorporated herein by reference to
Exhibit 4.3 to UPC's Registration Statement on Form
S-8 (No. 333-57958).

10(h) The Executive Incentive Plan of UPC, as amended May
31, 2001, is incorporated herein by reference to
Exhibit 10(b) to the Corporation's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2001.

10(i) The Executive Stock Purchase Incentive Plan of UPC,
as amended November 16, 2000, is incorporated herein
by reference to Exhibit 10(g) to the Corporation's
Annual Report on Form 10-K for the year ended
December 31, 2000.

10(j) Written Description of Premium Exchange Program
Pursuant to 1993 Stock Option and Retention Stock
Plan of UPC is incorporated herein by reference to
Exhibit 10(b) to the Corporation's Quarterly Report
on Form 10-Q for the quarter ended September 30,
1999.

10(k) The Supplemental Pension Plan for Officers and
Managers of UPC and Affiliates, as amended and
restated, is incorporated herein by reference to
Exhibit 10(d) to the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1993.

10(l) The 1988 Stock Option and Restricted Stock Plan of
UPC, as amended November 16, 2000, is incorporated
herein by reference to Exhibit 10(l) to the
Corporation's Annual Report on Form 10-K for the year
ended December 31, 2000.

10(m) The 1993 Stock Option and Retention Stock Plan of
UPC, as amended January 25, 2001, is incorporated
herein by reference to Exhibit 10(m) to the
Corporation's Annual Report on Form 10-K for the year
ended December 31, 2000.

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10(n) UPC 2000 Directors Stock Plan is incorporated herein
by reference to Exhibit 99 to UPC's Current Report on
Form 8-K filed March 9, 2000.

10(o) UPC Key Employee Continuity Plan dated November 16,
2000, is incorporated herein by reference to Exhibit
10(o) to the Corporation's Annual Report on Form 10-K
for the year ended December 31, 2000.

10(p) The Pension Plan for Non-Employee Directors of UPC,
as amended January 25, 1996, is incorporated herein
by reference to Exhibit 10(w) to the Corporation's
Annual Report on Form 10-K for the year ended
December 31, 1995.

10(q) The Executive Life Insurance Plan of UPC, as amended
October 1997, is incorporated herein by reference to
Exhibit 10(t) to the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1997.

10(r) The UPC Stock Unit Grant and Deferred Compensation
Plan for the Board of Directors, as amended May 27,
2001, is incorporated herein by reference to Exhibit
10(a) to the Corporation's Quarterly Report on Form
10-Q for the quarter ended June 30, 2001.

10(s) Charitable Contribution Plan for Non-Employee
Directors of Union Pacific Corporation is
incorporated herein by reference to Exhibit 10(z) to
the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1995.

10(t) Written Description of Other Executive Compensation
Arrangements of Union Pacific Corporation is
incorporated herein by reference to Exhibit 10(q) to
the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1998.

10(u) Form of 2001 Long Term Plan Stock Unit and Cash Award
Agreement dated January 25, 2001, is incorporated
herein by reference to Exhibit 10(u) to the
Corporation's Annual Report of Form 10-K for the year
ended December 31, 2000.

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