# Table	of	Contents

# UNITED	STATES

# SECURITIES	AND	EXCHANGE	COMMISSION

(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,	2007

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

Commission	File	Number	1-6075

# UNION	PACIFIC	CORPORATION

(Exact	name	of	registrant	as	specified	in	its	charter)

(State	or	other	jurisdiction	of incorporation	or	organization)

(I.R.S.	Employer

Identification	No.)

# 1400	DOUGLAS	STREET,	OMAHA,	NEBRASKA

(Address	of	principal	executive	offices)

(Zip	Code)

(Registrant's	telephone	number,	including	area	code)

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

Name	of	each	exchange	on	which	registered

Indicate	by	check	mark	if	the	registrant	is	a	well-known	seasoned	issuer,	as	defined	in	Rule	405	of	the	Securities	Act.	þ	Yes		¨	No

Indicate	by	check	mark	if	the	registrant	is	not	required	to	file	reports	pursuant	to	Section	13	or	Section	15(d)	of	the	Act.		¨	Yes		þ	No

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.		þ		Yes				¨		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.		þ

Indicate	by	check	mark	whether	the	registrant	is	a	large	accelerated	filer,	an	accelerated	filer,	or	a	non-accelerated	filer	(as	defined	in	Rule	12b-2	of	the	Act):

Large	accelerated	filer		þ				Accelerated	filer		¨					Non-accelerated	filer		¨

Indicate	by	check	mark	whether	the	registrant	is	a	shell	company	(as	defined	in	Rule	12b-2	of	the	Act).		¨		Yes				þ		No

As	of	June	29,	2007,	the	aggregate	market	value	of	the	registrant's	Common	Stock	held	by	non-affiliates	(using	the	New	York	Stock	Exchange	closing	price)	was	$31.7 billion.

The	number	of	shares	outstanding	of	the	registrant's	Common	Stock	as	of	January	31,	2008	was	260,700,527.

Documents	Incorporated	by	Reference	–	Portions	of	the	registrant's	definitive	Proxy	Statement	for	the	Annual	Meeting	of	Shareholders	to	be	held	on	May	1,	2008, are	incorporated	by	reference	into	Part	III	of	this	report.	The	registrant's	Proxy	Statement	will	be	filed	with	the	Securities	and	Exchange	Commission	pursuant	to Regulation	14A.

PART	I

# Item	1.	Business

# GENERAL

Union	Pacific	Corporation	owns	one	of	America's	leading	transportation	companies.	Its	principal	operating	company,	Union	Pacific	Railroad	Company,	links	23	states in	the	western	two-thirds	of	the	country	and	serves	the	fastest-growing	U.S.	population	centers.	Union	Pacific	Railroad	Company's	diversified	business	mix	includes agricultural	products,	automotive,	chemicals,	energy,	industrial	products,	and	intermodal.	It	offers	competitive	long-haul	routes	from	all	major	West	Coast	and	Gulf Coast	ports	to	eastern	gateways.	Union	Pacific	Railroad	Company	connects	with	Canada's	rail	systems	and	is	the	only	railroad	serving	all	six	major	gateways	to	Mexico, making	it	North	America's	premier	rail	franchise.

Union	Pacific	Corporation	was	incorporated	in	Utah	in	1969	and	maintains	its	principal	executive	offices	at	1400	Douglas	Street,	Omaha,	NE	68179.	The	telephone number	at	that	address	is	(402)	544-5000.	The	common	stock	of	Union	Pacific	Corporation	is	listed	on	the	New	York	Stock	Exchange	(NYSE)	under	the	symbol "UNP".

For	purposes	of	this	report,	unless	the	context	otherwise	requires,	all	references	herein	to	"UPC",	"Corporation",	"we",	"us",	and	"our"	shall	mean	Union	Pacific Corporation	and	its	subsidiaries,	including	Union	Pacific	Railroad	Company,	which	we	separately	refer	to	as	"UPRR"	or	the	"Railroad".

Available	Information	–	Our	Internet	website	is	www.up.com.	We	make	available	free	of	charge	on	our	website	(under	the	"Investors"	caption	link)	our	Annual Reports	on	Form	10-K;	our	Quarterly	Reports	on	Form	10-Q;	our	current	reports	on	Form	8-K;	our	proxy	statements;	Forms	3,	4,	and	5,	filed	on	behalf	of	directors	and executive	officers;	and	amendments	to	such	reports	filed	or	furnished	pursuant	to	the	Securities	Exchange	Act	of	1934,	as	amended	(the	Exchange	Act),	as	soon	as reasonably	practicable	after	such	material	is	electronically	filed	with,	or	furnished	to,	the	Securities	and	Exchange	Commission	(SEC).	We	also	make	available	on	our website	previously	filed	SEC	reports	and	exhibits	via	a	link	to	EDGAR	on	the	SEC's	Internet	site	at	www.sec.gov.	Additionally,	our	corporate	governance	materials, including	By-Laws,	Board	Committee	charters,	governance	guidelines	and	policies,	and	codes	of	conduct	and	ethics	for	directors,	officers,	and	employees	are	available on	our	website.	From	time	to	time,	the	corporate	governance	materials	on	our	website	may	be	updated	as	necessary	to	comply	with	rules	issued	by	the	SEC	and	the NYSE	or	as	desirable	to	promote	the	effective	and	efficient	governance	of	our	company.	Any	security	holder	wishing	to	receive,	without	charge,	a	copy	of	any	of	our SEC	filings	or	corporate	governance	materials	should	send	a	written	request	to:	Secretary,	Union	Pacific	Corporation,	1400	Douglas	Street,	Omaha,	NE	68179.

We	have	included	the	Chief	Executive	Officer	(CEO)	and	Chief	Financial	Officer	certifications	regarding	our	public	disclosure	required	by	Section	302	of	the	Sarbanes- Oxley	Act	of	2002	as	Exhibits	31(a)	and	(b)	to	this	report.	Additionally,	we	filed	with	the	NYSE	the	CEO's	certification	regarding	our	compliance	with	the	NYSE's Corporate	Governance	Listing	Standards	(Listing	Standards)	pursuant	to	Section	303A.12(a)	of	the	Listing	Standards,	which	was	dated	May	9,	2007,	and	indicated	that the	CEO	was	not	aware	of	any	violations	of	the	Listing	Standards	by	the	Corporation.

References	to	our	website	address	in	this	report,	including	references	in	Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations, Item	7,	are	provided	as	a	convenience	and	do	not	constitute,	and	should	not	be	deemed,	an	incorporation	by	reference	of	the	information	contained	on,	or	available through,	the	website.	Therefore,	such	information	should	not	be	considered	part	of	this	report.

# OPERATIONS

The	Railroad,	along	with	its	subsidiaries	and	rail	affiliates,	is	our	one	reportable	operating	segment.	Although	revenue	is	analyzed	by	commodity	group,	we	analyze	the net	financial	results	of	the	Railroad	as	one	segment	due	to	the	integrated	nature	of	our	rail	network.	Additional	information	regarding	our	business	and	operations, including	 revenue	 and	 financial	 information	 and	 data	 and	 other	 information	 regarding	 environmental	 matters,	 is	 presented	 in	 Selected	 Financial	 Data,	 Item	 6; Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations,	Item	7;	and	the	Financial	Statements	and	Supplementary	Data,	Item	8.

Operations	 –	UPRR	is	a	Class	I	railroad	operating	in	the	United	States.	We	have 32,205	route	miles,	linking	Pacific	Coast	and	Gulf	Coast	ports	with	the	Midwest	and eastern	 United	 States	 gateways	 and	 providing	 several	 corridors	 to	 key	 Mexican gateways.	We	serve	the	western	two-thirds	of	the	country	and	maintain	coordinated schedules	with	other	rail	carriers	to	move	freight	to	and	from	the	Atlantic	Coast,	the Pacific	Coast,	the	Southeast,	the	Southwest,	Canada,	and	Mexico.	Export	and	import traffic	moves	through	Gulf	Coast	and	Pacific	Coast	ports	and	across	the	Mexican	and Canadian	 borders.	 Our	 freight	 traffic	 consists	 of	 bulk,	 manifest,	 and	 premium business.	Bulk	traffic	is	primarily	coal,	grain,	rock,	or	soda	ash	in	unit	trains	–	trains transporting	a	single	commodity	from	one	source	to	one	destination.	Manifest	traffic is	individual	carload	or	less	than	train-load	business,	including	commodities	such	as lumber,	steel,	paper,	and	food.	The	transportation	of	finished	vehicles	and	intermodal containers	is	part	of	our	premium	business.	In	2007,	we	generated	commodity	revenue totaling	$15.5	billion	from	the	following	six	commodity	groups:

Agricultural	–	Transporting	agricultural	products,	including	whole	grains,	commodities	produced	from	these	grains,	and	food	and	beverage	products,	provided	17%	of our	2007	commodity	revenue.	With	access	to	most	major	grain	markets,	we	provide	a	critical	link	between	the	Midwest	and	western	producing	areas	and	export terminals	in	the	Pacific	Northwest	(PNW)	and	Gulf	ports,	as	well	as	Mexico.	Unit	trains	of	grain	efficiently	shuttle	between	producers	and	export	terminals	or	domestic markets.	We	also	serve	significant	domestic	markets,	including	grain	processors,	animal	feeders,	and	ethanol	producers	in	the	Midwest,	West,	South,	and	Rocky Mountain	states.	Primary	food	commodities	consist	of	a	variety	of	fresh	and	frozen	fruits	and	vegetables,	dairy	products,	and	beverages,	which	are	moved	to	major	U.S. population	centers	for	consumption.	Express	Lane	and	our	Produce	Unit	Train,	our	premium	perishables	services	that	move	fruits	and	vegetables	from	the	PNW	and California	with	priority	service	to	destinations	in	the	East,	compete	with	the	trucking	industry.	We	transport	frozen	meat	and	poultry	to	the	West	Coast	ports	for	export, while	beverages,	primarily	beer,	enter	the	U.S.	from	Mexico.

Automotive	–	We	are	the	largest	automotive	carrier	west	of	the	Mississippi	River,	serving	seven	vehicle	assembly	plants	and	distributing	imported	vehicles	from	six West	Coast	ports	and	Houston.	We	off-load	finished	vehicles	at	38	vehicle	distribution	centers	for	delivery	by	truck	to	all	major	western	U.S.	cities.	In	addition	to transporting	finished	vehicles,	we	provide	expedited	handling	of	automotive	parts	in	both	boxcars	and	intermodal	containers	to	several	assembly	plants.	We	carry automotive	materials	bound	for	assembly	plants	in	Mexico,	the	U.S.,	and	Canada,	and	we	also	transport	finished	vehicles	from	manufacturing	facilities	in	Mexico.	In 2007,	transportation	of	finished	vehicles	and	automotive	materials	accounted	for	9%	of	our	commodity	revenue.

Chemicals	–	Transporting	chemicals	provided	15%	of	our	commodity	revenue	in	2007.	Our	franchise	enables	us	to	serve	the	chemical	producing	areas	along	the	Gulf Coast,	as	well	as	the	Rocky	Mountain	region.	Two-

thirds	of	the	chemicals	business	consists	of	liquid	and	dry	chemicals,	plastics,	and	liquid	petroleum	products.	In	addition	to	transporting	plastics,	customers	also	leverage our	storage-in-transit	yards	for	intermediate	storage	of	plastic	resins.	Soda	ash	shipments	originate	in	southwestern	Wyoming	and	California	destined	primarily	for	glass producing	markets	in	the	East,	the	West,	and	abroad.	Fertilizer	movements	originate	primarily	in	the	Gulf	Coast	region,	as	well	as	the	West	and	Canada,	bound	for	major agricultural	users	in	the	Midwest	and	the	western	U.S.

Energy	–	Coal	transportation	accounted	for	20%	of	our	2007	commodity	revenue.	Our	geographic	network	allows	us	to	transport	coal	destined	for	utilities	and	industrial facilities	in	27	states,	as	well	as	to	the	Gulf	and	rail/barge/ship	facilities	on	the	Mississippi	and	Ohio	Rivers	and	the	Great	Lakes.	We	serve	mines	located	in	the	Southern Powder	River	Basin	of	Wyoming	(SPRB),	Colorado,	Utah,	southern	Wyoming,	and	southern	Illinois.	SPRB	coal	represents	the	largest	growth	segment	of	the	market,	as utilities	continue	to	favor	its	lower	cost	and	low-sulfur	content.

Industrial	Products	–	Our	extensive	network	enables	our	industrial	products	group	to	move	numerous	commodities	between	thousands	of	origin	and	destination	points throughout	North	America.	Lumber	shipments	originate	primarily	in	the	PNW	and	Canada	for	destinations	throughout	the	United	States	for	new	home	construction	and repair	and	remodeling.	Commercial	and	highway	construction	drives	shipments	of	steel	and	construction	products,	consisting	of	rock,	cement,	and	roofing	materials. Paper	and	consumer	goods,	including	furniture	and	appliances,	are	shipped	to	major	metropolitan	areas	for	consumers.	Nonferrous	metals	and	industrial	minerals	are moved	for	industrial	manufacturing.	In	addition,	we	provide	efficient	and	safe	transportation	for	government	entities	and	waste	companies.	In	2007,	transporting industrial	products	provided	20%	of	our	commodity	revenue.

Intermodal	–	Our	intermodal	business,	which	represented	19%	of	our	2007	commodity	revenue,	includes	international,	domestic,	and	premium	shipments.	International business	consists	of	imported	container	traffic	that	arrives	at	West	Coast	ports	via	steamship	for	destinations	throughout	the	United	States.	Domestic	business	includes domestic	container	and	trailer	traffic	for	intermodal	marketing	companies	(primarily	shipper	agents	and	consolidators)	and	truckload	carriers.	Less-than-truckload	and package	carriers	with	time-sensitive	business	requirements	account	for	the	majority	of	our	premium	service.

Seasonality	–	Some	of	the	commodities	we	carry	have	peak	shipping	seasons,	reflecting	either	or	both	the	nature	of	the	commodity,	such	as	certain	agricultural	and	food products	that	have	specific	growing	and	harvesting	seasons,	and	the	demand	cycle	for	the	commodity,	such	as	intermodal	traffic,	which	generally	has	a	peak	shipping season	during	the	third	quarter	to	meet	holiday-related	demand	for	consumer	goods	during	the	fourth	quarter.	The	peak	shipping	seasons	for	these	commodities	can	vary considerably	from	year	to	year	depending	upon	various	factors,	including	the	strength	of	domestic	and	international	economies	and	currencies	and	the	strength	of harvests	and	market	prices	of	agricultural	products.	In	response	to	an	annual	request	delivered	by	the	Surface	Transportation	Board	(STB)	to	all	of	the	Class	I	railroads operating	 in	 the	U.S.,	we	 issue	a	 letter	during	 the	 third	quarter	detailing	our	plans	for	handling	 traffic	during	 the	 third	and	fourth	quarters	and	providing	other information	requested	by	the	STB.

Working	Capital	–	We	currently	have,	and	historically	have	had,	a	working	capital	deficit,	which	is	common	in	our	industry	and	does	not	indicate	a	lack	of	liquidity	or financial	stability.	We	maintain	adequate	resources	to	meet	our	daily	cash	requirements,	and	we	have	sufficient	financial	capacity	to	satisfy	our	current	liabilities.

Competition	–	We	are	subject	to	competition	from	other	railroads,	motor	carriers,	ship	and	barge	operators,	and	pipelines.	Our	main	rail	competitor	is	Burlington Northern	Santa	Fe	Corporation.	Its	rail	subsidiary,	BNSF	Railway	Company	(BNSF),	operates	parallel	routes	in	many	of	our	main	traffic	corridors.	In	addition,	we operate	in	corridors	served	by	other	railroads	and	motor	carriers.	Motor	carrier	competition	is	particularly	strong	for	five	of	our	six	commodity	groups	(excluding energy).	Because	of	the	proximity	of	our	routes	to	major	inland	and	Gulf	Coast	waterways,	barge	competition	can	be	particularly	effective,	especially	for	grain	and	bulk commodities.	In	addition	to	price	competition,	we	face	competition	with	respect	to	transit	times	and	quality	and	reliability	of	service.	While	we	must	build	or	acquire	and maintain	our	rail	system,	trucks	and

barges	are	able	to	use	public	rights-of-way	maintained	by	public	entities.	Any	future	improvements	or	expenditures	materially	increasing	the	quality	or	reducing	the costs	of	these	alternative	modes	of	transportation,	or	legislation	releasing	motor	carriers	from	their	size	or	weight	limitations,	could	have	a	material	adverse	effect	on	our business.

Equipment	Suppliers	–	We	depend	on	two	key	domestic	suppliers	of	locomotives.	Due	to	the	capital	intensive	nature	and	sophistication	of	this	equipment,	potential new	suppliers	face	high	barriers	to	entry	with	respect	to	this	industry.	Therefore,	if	one	of	these	domestic	suppliers	discontinues	manufacturing	locomotives,	we	could experience	a	significant	cost	increase	and	risk	reduced	availability	of	the	locomotives	that	are	necessary	to	our	operations.

Employees	–	Approximately	86%	of	our	50,089	full-time-equivalent	employees	are	represented	by	14	major	rail	unions.	In	January	2005,	the	U.S.	railroads	began	the current	round	of	negotiations	with	 the	unions.	In	June	2007,	 the	Brotherhood	of	Locomotive	Engineers	and	Trainmen,	 the	Brotherhood	of	Maintenance	of	Way Employees,	the	Brotherhood	of	Railway	Signalmen,	the	National	Conference	of	Firemen	and	Oilers,	the	International	Brotherhood	of	Boilermakers	and	Blacksmiths, and	the	Sheet	Metal	Workers	ratified	a	five-year	agreement	that	provides	for	wage	increases	and	increased	employee	health	and	welfare	cost	sharing.	The	annual	wage increases	(including	retroactive	increases)	are	as	follows:	July	2005	2.5%;	July	2006	3.0%;	July	2007	3.0%;	July	2008	4.0%;	July	2009	4.5%.	A	second	bargaining group	consisting	of	the	Transportation	Communications	International	Union,	the	Brotherhood	of	Railway	Carman,	and	the	International	Brotherhood	of	Electrical Workers	ratified	the	same	agreement	in	September	of	2007.	However,	the	International	Association	of	Machinists	(IAM)	failed	to	ratify	this	agreement	in	September. We	also	settled	with	the	American	Railway	and	Airway	Supervisors	Association	in	September.	We	reached	a	tentative	agreement	with	the	United	Transportation	Union in	January	of	2008.	Therefore,	we	remain	in	negotiations	with	the	IAM	and	United	Supervisors	Council	of	America	(Yardmasters).	Existing	agreements	with	these	two unions	continue	in	effect	until	new	agreements	are	reached	or	the	Railway	Labor	Act's	procedures	(which	include	mediation,	cooling-off	periods,	and	the	possibility	of Presidential	intervention)	are	exhausted.	Contract	negotiations	with	the	various	unions	generally	take	place	over	an	extended	period	of	time,	and	we	rarely	experience work	stoppages	during	negotiations.	The	current	agreements	provide	for	periodic	cost	of	living	increases	until	new	agreements	are	reached.

# GOVERNMENTAL	AND	ENVIRONMENTAL	REGULATION

Governmental	Regulation	–	Our	operations	are	subject	to	a	variety	of	federal,	state,	and	local	regulations,	generally	applicable	to	all	businesses	(see	also	the	discussion of	certain	regulatory	proceedings	in	Legal	Proceedings,	Item	3).

The	operations	of	the	Railroad	are	subject	to	the	regulatory	jurisdiction	of	the	STB	of	the	United	States	Department	of	Transportation	(DOT).	The	operations	of	the Railroad	are	also	subject	to	the	regulations	of	the	Federal	Railroad	Administration	of	the	DOT	and	other	federal	and	state	agencies.	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. On	January	26,	2007,	the	STB	issued	a	decision	limiting	the	manner	in	which	U.S.	railroads	can	calculate	fuel	surcharges	on	traffic	regulated	by	the	STB,	and	we	have complied	with	this	regulation.	The	STB	also	has	adopted	new	mechanisms	for	regulating	some	of	our	rates,	adopted	a	new	methodology	for	calculating	the	cost	of	capital for	railroads,	and	expanded	its	review	of	line	sales	and	leases.	Various	appeals	may	affect	these	regulations	prior	to	final	implementation.

DOT,	the	Occupational	Safety	and	Health	Administration,	and	the	Department	of	Homeland	Security,	along	with	other	federal	agencies,	have	jurisdiction	over	certain aspects	of	safety,	movement	of	hazardous	materials,	movement	and	disposal	of	hazardous	waste,	emissions	requirements,	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	–	We	are	subject	to	extensive	federal	and	state	environmental	statutes	and	regulations	pertaining	to	public	health	and	the	environment.	The statutes	and	regulations	are	administered	and	monitored	by	the	Environmental	Protection	Agency	(EPA)	and	by	various	state	environmental	agencies.	The	primary	laws affecting	our	operations	are	the	Resource	Conservation	and	Recovery	Act,	regulating	the	management	and	disposal	of	solid	and	hazardous	wastes;	the	Comprehensive Environmental	Response,	Compensation,	and	Liability	Act,	regulating	the	cleanup	of	contaminated	properties;	the	Clean	Air	Act,	regulating	air	emissions;	and	the	Clean Water	Act,	regulating	waste	water	discharges.

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	–	Critical	Accounting	Policies	–	Environmental,	Item	7.

# Item	1A.	Risk	Factors

The	information	set	forth	in	this	Item	1A	should	be	read	in	conjunction	with	the	rest	of	the	information	included	in	this	report,	including	Item	7,	Management's Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations,	and	Item	8,	Financial	Statements	and	Supplementary	Data.

We	Are	Subject	to	Significant	Governmental	Regulation	–	We	are	subject	to	governmental	regulation	by	a	significant	number	of	federal,	state,	and	local	authorities covering	a	variety	of	health,	safety,	labor,	environmental	(as	discussed	below),	and	other	matters.	Many	laws	and	regulations	require	us	to	obtain	and	maintain	various licenses,	permits,	and	other	authorizations,	and	we	cannot	guarantee	that	we	will	continue	to	be	able	to	do	so.	Our	failure	to	comply	with	applicable	laws	and	regulations could	have	a	material	adverse	effect	on	us.	Governments	may	change	the	legislative	or	regulatory	frameworks	within	which	we	operate	without	providing	us	any recourse	 to	 address	 any	 adverse	 effects	 on	 our	 business,	 including,	 without	 limitation,	 regulatory	 determinations	 or	 rules	 regarding	 dispute	 resolution,	 business relationships	with	other	railroads,	calculation	of	our	cost	of	capital	or	other	inputs	relevant	to	determining	or	estimating	our	revenue	adequacy,	and	costs	and	expenses. Increased	regulation	of	the	rail	industry	likely	would	restrict	our	ability	to	determine	prices	for	certain	rail	services,	affect	our	ability	to	control	traffic	volume,	and reduce	capital	spending	on	our	rail	network,	facilities	and	equipment,	resulting	in	a	material	adverse	effect	on	our	results	of	operations,	financial	condition,	and liquidity.	Additionally,	one	or	more	consolidations	of	Class	I	railroads	could	lead	to	increased	regulation	of	the	rail	industry.

We	May	Be	Affected	by	General	Economic	Conditions	–	Prolonged	negative	changes	in	domestic	and	global	economic	conditions	affecting	the	producers	and	consumers of	the	commodities	we	carry	may	have	a	material	adverse	effect	on	our	results	of	operations,	financial	condition,	and	liquidity.

We	May	Be	Subject	to	Various	Claims	and	Lawsuits	That	Could	Result	in	Significant	Expenditures	–	The	nature	of	our	business	exposes	us	to	the	potential	for	various claims	and	litigation	related	to	labor	and	employment,	personal	injury,	property	damage,	environmental	liability,	and	other	matters.	Any	material	changes	to	litigation trends	or	a	catastrophic	rail	accident	or	series	of	accidents	involving	any	or	all	of	property	damage,	personal	injury,	and	environmental	liability	could	have	a	material adverse	effect	on	our	results	of	operations,	financial	condition,	and	liquidity.

We	Are	Required	to	Transport	Hazardous	Materials 	–	Federal	laws	require	railroads,	including	us,	to	transport	hazardous	materials	regardless	of	risk	or	potential exposure	of	loss.	Any	rail	accident	or	other	incident	or	accident	on	our	network,	at	our	facilities,	or	at	the	facilities	of	our	customers	involving	the	release	of	hazardous materials,	including	toxic	inhalation	hazard	(or	TIH)	materials	such	as	certain	chlorine	compounds,	could	involve	significant	costs	and	claims	for	personal	injury, property	damage,	and	environmental	penalties	and	remediation,	which	could	have	a	material	adverse	effect	on	our	results	of	operations,	financial	condition,	and liquidity.

We	Must	Manage	Both	Significant	Demand	for	Our	Services	and	Network	Capacity	–	We	may	experience	network	difficulties,	including	congestion	and	reduced velocity,	which	may	compromise	the	level	of	service	we

provide	to	our	customers.	This	level	of	demand	may	compound	the	impact	of	weather	and	weather-related	events	on	our	operations	and	velocity.	Although	we	continue to	improve	our	transportation	plan,	add	capacity,	and	improve	operations	at	our	yards	and	other	facilities,	we	cannot	be	sure	that	these	measures	will	fully	or	adequately address	any	service	shortcomings.	We	may	experience	other	difficulties	related	to	network	capacity,	dramatic	and	unplanned	increases	or	decreases	of	demand	for	rail service	with	respect	to	one	or	more	of	our	commodity	groups,	or	other	events	that	could	have	a	negative	impact	on	our	operational	efficiency,	any	of	which	could	have	a material	adverse	effect	on	our	results	of	operations,	financial	condition,	and	liquidity.

Severe	Weather	Could	Result	in	Significant	Business	Interruptions	and	Expenditures	–	Severe	weather	conditions,	events,	and	other	natural	phenomena,	including earthquakes,	hurricanes,	fires,	floods,	mudslides	or	landslides,	extreme	temperatures,	and	significant	precipitation	may	cause	business	interruptions,	including	line outages	on	our	rail	network	that	can	adversely	affect	our	entire	rail	network	and	result	in	increased	costs,	increased	liabilities,	and	decreased	revenue,	which	could	have a	material	adverse	effect	on	our	results	of	operations,	financial	condition,	and	liquidity.

Strikes	or	Work	Stoppages	Could	Adversely	Affect	Our	Operations	as	the	Majority	of	Our	Employees	Belong	to	Labor	Unions	and	Labor	Agreements	–	We	are	a	party to	collective	bargaining	agreements	with	various	labor	unions.	Disputes	with	regard	to	the	terms	of	these	agreements	or	our	potential	inability	to	negotiate	acceptable contracts	with	these	unions	could	result	in,	among	other	things,	strikes,	work	stoppages,	or	other	slowdowns	by	the	affected	workers.	If	unionized	workers	were	to engage	in	a	strike,	work	stoppage,	or	other	slowdown,	or	other	employees	were	to	become	unionized,	we	could	experience	a	significant	disruption	of	our	operations	or higher	ongoing	labor	costs,	either	of	which	could	have	a	material	adverse	effect	on	our	results	of	operations,	financial	condition,	and	liquidity.	Additionally,	future national	labor	agreements,	or	renegotiation	of	labor	agreements	or	provisions	of	labor	agreements,	could	compromise	our	service	reliability	and	significantly	increase our	costs	for	healthcare,	wages,	and	other	benefits,	which	could	have	a	material	adverse	impact	on	our	results	of	operations,	financial	condition,	and	liquidity.

The	Availability	of	Qualified	Personnel	Could	Adversely	Affect	Our	Operations	–	Changes	in	demographics,	training	requirements,	and	the	availability	of	qualified personnel	could	negatively	affect	our	ability	to	meet	demand	for	rail	service.	Unpredictable	increases	in	demand	for	rail	services	and	a	lack	of	network	fluidity	may exacerbate	such	risks,	which	could	have	a	negative	impact	on	our	operational	efficiency	and	otherwise	have	a	material	adverse	effect	on	our	results	of	operations, financial	condition,	and	liquidity.

We	Rely	on	Technology	and	Technology	Improvements	in	Our	Business	Operations 	–	We	rely	on	information	technology	in	all	aspects	of	our	business.	If	we	do	not have	sufficient	capital	to	acquire	new	technology	or	if	we	are	unable	to	implement	new	technology,	we	may	suffer	a	competitive	disadvantage	within	the	rail	industry and	with	companies	providing	other	modes	of	transportation	service,	which	could	have	a	material	adverse	effect	on	our	results	of	operations,	financial	condition,	and liquidity.	Additionally,	if	we	experience	significant	disruption	or	failure	of	one	or	more	of	our	information	technology	systems,	including	computer	hardware,	software, and	communications	equipment,	we	could	experience	a	service	interruption,	safety	failure,	security	breach,	or	other	operational	difficulties,	which	could	have	a	material adverse	impact	on	our	results	of	operations,	financial	condition,	and	liquidity.

We	Are	Subject	to	Significant	Environmental	Laws	and	Regulations	–	Our	operations	are	subject	to	extensive	federal,	state,	and	local	environmental	laws	and	regulations concerning,	among	other	things,	emissions	to	the	air;	discharges	to	waters;	handling,	storage,	transportation,	and	disposal	of	waste	and	other	materials;	and	hazardous material	or	petroleum	releases.	We	generate	and	transport	hazardous	and	non-hazardous	waste	in	our	operations,	and	we	did	so	in	our	former	operations.	Environmental liability	can	extend	to	previously	owned	or	operated	properties,	leased	properties,	and	properties	owned	by	third	parties,	as	well	as	to	properties	we	currently	own. Environmental	liabilities	have	arisen	and	may	also	arise	from	claims	asserted	by	adjacent	landowners	or	other	third	parties	in	toxic	tort	litigation.	We	have	been	and	may be	subject	to	allegations	or	findings	that	we	have	violated,	or	are	strictly	liable	under,	these	laws	or	regulations.	We	could	incur	significant	costs	as	a	result	of	any	of	the foregoing,	and	we	may	be	required	to	incur	significant	expenses	to	investigate

and	remediate	known,	unknown,	or	future	environmental	contamination,	which	could	have	a	material	adverse	effect	on	our	results	of	operations,	financial	condition,	and liquidity.

We	May	Be	Affected	by	Climate	Change	and	Market	or	Regulatory	Responses	to	Climate	Change	–	Climate	change,	including	the	impact	of	global	warming,	could	have a	material	adverse	effect	on	our	results	of	operations,	financial	condition,	and	liquidity.	Restrictions,	caps,	taxes,	or	other	controls	on	emissions	of	greenhouse	gasses, including	diesel	exhaust,	could	significantly	increase	our	operating	costs.	Restrictions	on	emissions	could	also	affect	our	customers	that	(a)	use	commodities	that	we carry	to	produce	energy,	(b)	use	significant	amounts	of	energy	in	producing	or	delivering	the	commodities	we	carry,	or	(c)	manufacture	or	produce	goods	that	consume significant	amounts	of	energy	or	burn	fossil	fuels,	including	chemical	producers,	farmers	and	food	producers,	and	automakers	and	other	manufacturers.	Significant	cost increases,	government	regulation,	or	changes	of	consumer	preferences	for	goods	or	services	relating	to	alternative	sources	of	energy	or	emissions	reductions	could materially	affect	the	markets	for	the	commodities	we	carry,	which	in	turn	could	have	a	material	adverse	effect	on	our	results	of	operations,	financial	condition,	and liquidity.	Government	incentives	encouraging	the	use	of	alternative	sources	of	energy	could	also	affect	certain	of	our	customers	and	the	markets	for	certain	of	the commodities	we	carry	in	an	unpredictable	manner	that	could	alter	our	traffic	patterns,	including,	for	example,	the	impacts	of	ethanol	incentives	on	farming	and	ethanol producers.	Finally,	we	could	face	increased	costs	related	to	defending	and	resolving	legal	claims	and	other	litigation	related	to	climate	change	and	the	alleged	impact	of our	operations	on	climate	change.	Any	of	these	factors,	individually	or	in	operation	with	one	or	more	of	the	other	factors,	or	other	unforeseen	impacts	of	climate	change could	reduce	the	amount	of	traffic	we	handle	and	have	a	material	adverse	effect	on	our	results	of	operations,	financial	condition,	and	liquidity.

Rising	or	Elevated	Fuel	Costs	and	Whether	We	Are	Able	to	Mitigate	These	Costs	with	Fuel	Surcharges	Could	Materially	and	Adversely	Affect	Our	Business	–	Fuel	costs constitute	a	significant	portion	of	our	transportation	expenses.	Diesel	fuel	prices	are	subject	to	dramatic	fluctuations,	and	significant	price	increases	could	have	a	material adverse	effect	on	our	operating	results.	Although	we	currently	are	able	to	recover	a	significant	amount	of	our	increased	fuel	expenses	through	revenue	from	fuel surcharges,	we	cannot	be	certain	that	we	will	always	be	able	to	mitigate	rising	or	elevated	fuel	costs	through	surcharges.	Future	market	conditions	or	legislative	or regulatory	activities	could	adversely	affect	our	ability	to	apply	fuel	surcharges	or	adequately	recover	increased	fuel	costs	through	fuel	surcharges.	International,	political, and	economic	circumstances	affect	fuel	prices	and	supplies.	Weather	can	also	affect	fuel	supplies	and	limit	domestic	refining	capacity.	If	a	fuel	supply	shortage	were	to arise	higher	fuel	prices	could,	despite	our	fuel	surcharge	programs,	have	a	material	adverse	effect	on	our	results	of	operations,	financial	condition,	and	liquidity.

We	Face	Competition from	Other	Railroads	and	Other	Transportation	Providers	 –	We	 face	 competition	 from	 other	 railroads,	 motor	 carriers,	 ships,	 barges,	 and pipelines.	In	addition	to	price	competition,	we	face	competition	with	respect	to	transit	times	and	quality	and	reliability	of	service.	While	we	must	build	or	acquire	and maintain	our	rail	system,	trucks	and	barges	are	able	to	use	public	rights-of-way	maintained	by	public	entities.	Any	future	improvements	or	expenditures	materially increasing	the	quality	or	reducing	the	cost	of	alternative	modes	of	transportation,	or	legislation	releasing	motor	carriers	from	their	size	or	weight	limitations,	could	have	a material	adverse	effect	on	our	results	of	operations,	financial	condition,	and	liquidity.	Additionally,	any	future	consolidation	of	the	rail	industry	could	materially	affect the	competitive	environment	in	which	we	operate.

We	Are	Subject	to	Legislative,	Regulatory,	and	Legal	Developments	Involving	Taxes	–	Taxes	are	a	significant	part	of	our	expenses.	We	are	subject	to	federal	and	state income,	payroll,	property,	sales	and	use,	fuel,	and	other	types	of	taxes.	Any	or	all	changes	in	tax	rates,	enactment	of	new	tax	laws,	revisions	of	tax	regulations,	and claims	or	litigation	with	taxing	authorities	could	result	in	substantially	higher	taxes	and,	therefore,	could	have	a	material	adverse	effect	on	our	results	of	operations, financial	condition,	and	liquidity.

We	Utilize	Capital	Markets	–	We	rely	on	the	capital	markets	to	provide	some	of	our	capital	requirements,	including	the	issuance	of	long-term	debt	instruments	and commercial	paper	from	time	to	time,	as	well	as	the	sale	of	certain	of	our	receivables.	Significant	instability	of	the	capital	markets	or	deterioration	of	our	financial condition	due	to	internal	or	external	factors	could	restrict	or	prohibit	our	access	to	commercial	paper	and

other	financing	sources	and	reduce	our	credit	ratings	below	investment	grade,	which	would	prohibit	us	from	utilizing	our	sale	of	receivables	program	and	significantly increase	the	costs	associated	with	issuing	both	commercial	paper	and	long-term	debt.

We	Are	Dependent	on	Two	Key	Domestic	Suppliers	of	Locomotives	–	Due	to	the	capital	intensive	nature	and	sophistication	of	locomotive	equipment,	potential	new suppliers	face	high	barriers	to	entry	with	respect	to	this	industry.	Therefore,	if	one	of	these	domestic	suppliers	discontinues	manufacturing	locomotives,	we	could experience	a	significant	cost	increase	and	risk	reduced	availability	of	the	locomotives	that	are	necessary	to	our	operations.

We	May	Be	Affected	by	Acts	of	Terrorism,	War,	or	Risk	of	War 	–	Our	rail	lines,	facilities,	and	equipment,	including	rail	cars	carrying	hazardous	materials,	could	be direct	targets	or	indirect	casualties	of	terrorist	attacks.	Terrorist	attacks,	or	other	similar	events,	any	government	response	thereto,	and	war	or	risk	of	war	may	adversely affect	our	results	of	operations,	financial	condition,	and	liquidity.	In	addition,	insurance	premiums	for	some	or	all	of	our	current	coverages	could	increase	dramatically, or	certain	coverages	may	not	be	available	to	us	in	the	future.

# Item	1B.	Unresolved	Staff	Comments

None.

# Item	2.	Properties

We	employ	a	variety	of	assets	in	the	management	and	operation	of	our	rail	business.	Our	rail	network	links	23	states	in	the	western	two-thirds	of	the	U.S.

Track	–	Our	rail	network	includes	32,205	route	miles.	We	own	26,354	miles	and	operate	on	the	remainder	pursuant	to	trackage	rights	or	leases.	The	following	table describes	track	miles	at	December	31,	2007	and	2006.

|  | 2007 | 2006 |
| :--- | :--- | :--- |
| Route\tmiles | 32,205 | 32,339 |
| Other\tmain\tline | 6,404 | 6,295 |
| Passing\tlines\tand\tturnouts | 3,021 | 2,962 |
| Switching\tand\tclassification\tyard\tlines | 9,270 | 10,000 |
| Total | 50,900 | 51,596 |

Harriman	Dispatching	Center	–	The	Harriman	Dispatching	Center	(HDC),	located	in	Omaha,	Nebraska,	is	our	primary	dispatching	facility.	It	is	linked	to	regional dispatching	and	locomotive	management	facilities	at	various	locations	along	our	network.	The	HDC	moves	locomotives	and	trains,	manages	traffic	on	our	network,	and coordinates	interchanges	with	other	railroads.	Over	700	employees	currently	work	on-site	in	the	facility.

Rail	Facilities	–	In	addition	to	our	track	structure,	we	operate	numerous	facilities,	including	terminals	for	intermodal	and	other	freight;	rail	yards	for	train-building, switching,	 storage-in-transit	 (the	 temporary	 storage	 of	 customer	 goods	 in	 rail	 cars	 prior	 to	 shipment)	 and	 other	 activities;	 offices	 to	 administer	 and	 manage	 our operations;	dispatch	centers	to	direct	traffic	on	our	rail	network;	crew	quarters	to	house	train	crews	along	our	network;	and	shops	and	other	facilities	for	fueling, maintenance,	and	repair	of	locomotives	and	repair	and	maintenance	of	rail	cars	and	other	equipment.	The	following	tables	include	the	major	yards	and	terminals	on	our system:

|  | Avg.	Daily | Avg.	Daily |
| :--- | :--- | :--- |
|  | Car\tVolume | Car\tVolume |
| Top\t10\tClassification\tYards | 2007 | 2006 |
| North\tPlatte,\tNebraska | 2,700 | 2,900 |
| North\tLittle\tRock,\tArkansas | 1,600 | 1,600 |
| Proviso\t(Chicago),\tIllinois | 1,600 | 1,700 |
| Roseville,\tCalifornia | 1,400 | 1,400 |
| Englewood\t(Houston),\tTexas | 1,300 | 1,400 |
| West\tColton,\tCalifornia | 1,300 | 1,300 |
| Livonia,\tLouisiana | 1,300 | 1,400 |
| Pine\tBluff,\tArkansas | 1,300 | 1,300 |
| Fort\tWorth,\tTexas | 1,200 | 1,300 |
| Neff\t(Kansas\tCity),\tMissouri | 1,000 | 1,000 |

|  | Annual	Lifts | Annual	Lifts |
| :--- | :--- | :--- |
| Top\t10\tIntermodal\tTerminals | 2007 | 2006 |
| ICTF\t(Los\tAngeles),\tCalifornia | 719,000 | 725,000 |
| Marion\t(Memphis),\tTennessee | 414,000 | 406,000 |
| East\tLos\tAngeles,\tCalifornia | 360,000 | 329,000 |
| Global\tII\t(Chicago),\tIllinois | 353,000 | 297,000 |
| Global\tI\t(Chicago),\tIllinois | 310,000 | 321,000 |
| Dallas,\tTexas | 292,000 | 284,000 |
| Seattle,\tWashington | 250,000 | 238,000 |
| Yard\tCenter\t(Chicago),\tIllinois | 238,000 | 248,000 |
| Oakland,\tCalifornia | 236,000 | 268,000 |
| Englewood\t(Houston),\tTexas | 214,000 | 206,000 |

Rail	Equipment	–	Our	equipment	includes	owned	and	leased	locomotives	and	rail	cars;	heavy	maintenance	equipment	and	machinery;	other	equipment	and	tools	in	our shops,	offices,	and	facilities;	and	vehicles	for	maintenance,	transportation	of	crews,	and	other	activities.	As	of	December	31,	2007,	we	owned	or	leased	the	following units	of	equipment:

|  |  |  |  | Average |
| :--- | :--- | :--- | :--- | :--- |
| Locomotives | Owned | Leased | Total | Age\t(yrs.) |
| Road | 4,330 | 3,704 | 8,034 | 14.8 |
| Switching | 488 | 32 | 520 | 30.5 |
| Other | 112 | 55 | 167 | 20.6 |
| Total\tlocomotives | 4,930 | 3,791 | 8,721 | N/A |

|  |  |  |  | Average |
| :--- | :--- | :--- | :--- | :--- |
| Freight\tcars | Owned | Leased | Total | Age\t(yrs.) |
| Covered\thopper | 13,864 | 21,573 | 35,437 | 28.7 |
| Open\thoppers | 13,431 | 5,216 | 18,647 | 28.6 |
| Gondolas | 7,639 | 6,141 | 13,780 | 26.6 |
| Boxcars | 8,132 | 4,140 | 12,272 | 27.1 |
| Mechanical\trefrigerated | 3,309 | 5,291 | 8,600 | 22.3 |
| Flat\tcars | 3,687 | 1,149 | 4,836 | 30.2 |
| Other | 127 | 585 | 712 | N/A |
| Total\tfreight\tcars | 50,189 | 44,095 | 94,284 | N/A |

Capital	Expenditures	–	Our	rail	network	requires	significant	annual	capital	investments	for	maintenance,	improvement,	and	expansion.	These	investments	maintain	and enhance	safe	operations,	support	the	transportation	needs	of	our	customers,	and	improve	our	operational	efficiency.	Additionally,	we	add	new	locomotives	and	freight cars	to	our	fleet	to	replace	older,	less	efficient	equipment,	to	support	growth	and	customer	demand,	and	to	reduce	our	impact	on	the	environment	through	the	acquisition of	more	fuel	efficient	and	low	emission	locomotives,	including	yard	engines	that	use	new	hybrid	technology.

2007	Capital	Expenditures	–	During	2007,	we	made	capital	investments	totaling	$3.1	billion,	which	included	cash	spending	of	$2.5	billion	(see	the	capital	expenditures table	in	Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations	–	Liquidity	and	Capital	Resources	–	Financial	Condition,	Item	7).	We also	acquired	259	locomotives	and	150	freight	cars	under	long-term	operating	leases	with	an	aggregate	net	present	value	of	$434	million.	We	procured	an	additional	56 locomotives	and	other	equipment	through	capital	lease	financings	valued	at	$82	million.

Sunset	Corridor	Expansion	–	One	of	our	critical	routes	is	the	Sunset	Corridor,	a	760-mile	route	running	between	Los	Angeles	and	El	Paso,	Texas.	This	heavily traveled	corridor	carries	about	20	percent	of	our	traffic,	including	a	significant	amount	of	intermodal	traffic.	In	2007,	we	added	33	miles	of	double	track	to	the	corridor, which	now	includes	nearly	410	miles	of	double	track	(approximately	54%	of	the	route).

SPRB	Joint-Line	Expansion	–	An	important	part	of	our	franchise	is	our	access	to	the	coal-producing	SPRB	through	a	joint	line,	which	we	own	with	BNSF	(the	Joint Line).	In	addition	to	the	significant	annual	maintenance	required	on	the	Joint	Line	(due	to	the	volume	of	trains,	the	weight	of	loaded	coal	cars,	and	the	impact	of	coal dust	on	rail	beds),	a	capacity	expansion	project	is	underway.	During	2007,	we	completed	the	installation	of	additional	main	line	track	so	the	entire	Joint	Line	now	has triple	track.

2008	Capital	Expenditures	–	In	2008,	we	expect	to	make	capital	investments	of	approximately	$3.1	billion	(which	may	be	revised	if	revenue,	tax,	and	business conditions	require	changing,	or	new	laws	or	regulations	affect	our	ability	to	generate	sufficient	returns	on,	these	investments).	See	discussion	of	our	2008	capital	plan	in Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations	–	2008	Outlook,	Item	7.

Equipment	Encumbrance	–	Equipment	with	a	carrying	value	of	approximately	$2.8	billion	at	both	December	31,	2007	and	2006	serves	as	collateral	for	capital	leases and	other	types	of	equipment	obligations	in	accordance	with	the	secured	financing	arrangements	utilized	to	acquire	such	railroad	equipment.

As	a	result	of	the	merger	of	Missouri	Pacific	Railroad	Company	(MPRR)	with	and	into	UPRR	on	January	1,	1997,	and	pursuant	to	the	underlying	indentures	for	the MPRR	mortgage	bonds,	UPRR	must	maintain	the	same	value	of	assets	after	the	merger	in	order	to	comply	with	the	security	requirements	of	the	mortgage	bonds.	As	of the	merger	date,	the	value	of	the	MPRR	assets	that	secured	the	mortgage	bonds	was	approximately	$6.0	billion.	In	accordance	with	the	terms	of	the	indentures,	this collateral	value	must	be	maintained	during	the	entire	term	of	the	mortgage	bonds	irrespective	of	the	outstanding	balance	of	such	bonds.

Certain	of	our	properties	are	subject	to	federal,	state,	and	local	laws	and	regulations	governing	the	protection	of	the	environment	(see	discussion	of	environmental	issues in	Business	–	Governmental	and	Environmental	Regulation,	Item	1,	and	Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations	– Critical	Accounting	Policies	–	Environmental,	Item	7).

# Item	3.	Legal	Proceedings

From	time	to	time,	we	are	involved	in	legal	proceedings,	claims,	and	litigation	that	occur	in	connection	with	our	business.	Management	routinely	assesses	our	liabilities and	contingencies	in	connection	with	these	matters	based	upon	the	latest	available	information.	Consistent	with	SEC	rules	and	requirements,	we	describe	below	material pending	 legal	 proceedings	 (other	 than	 ordinary	 routine	 litigation	 incidental	 to	 our	 business),	 material	 proceedings	 known	 to	 be	 contemplated	 by	 governmental authorities,	other	proceedings	arising	under	federal,	state,	or	local	environmental	laws	and	regulations	(including	governmental	proceedings	involving	potential	fines, penalties,	or	other	monetary	sanctions	in	excess	of	$100,000)	and	such	other	pending	matters	that	we	may	determine	to	be	appropriate.

# Environmental	Matters

As	we	reported	in	our	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	September	30,	2007,	the	Railroad	received	notice	from	the	Army	Corps	of	Engineers	(the Corps)	that,	during	its	construction	efforts	to	restore	service	to	the	Caliente	Subdivision	after	severe	flooding	in	January	2005,	the	Railroad	may	have	exceeded	its authority	under	emergency	authorizations	and	permits	issued	by	the	Corps.	Subsequently,	the	Corps	referred	the	matter	to	the	EPA,	which	has	demanded	that	the Railroad	repair	claimed	impacts	to	the	adjacent	waterway,	perform	compensatory	mitigation,	and	pay	a	civil	penalty	in	connection	with	this	project	and	related	storm water	issues.	The	Railroad	and	the	EPA	have	discussed	the	scope	of	additional	work	to	be	performed	by	the	Railroad	to	address	alleged	impacts	of	its	construction activities,	as	well	as	compensatory

mitigation	and	potential	penalties.	To	date,	we	have	not	reached	an	agreement	with the	EPA,	and, therefore, the	ultimate	amount	of the	civil	penalty	cannot	be determined.	However,	the	penalty	component	of	the	settlement	will	exceed	$100,000.

As	we	reported	in	our	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	September	30,	2004,	the	Illinois	Attorney	General's	office	filed	an	Agreed	Order	and Complaint	and	a	Complaint	for	Injunctive	and	Other	Relief	on	October	7,	2004,	in	the	Circuit	Court	for	the	Twentieth	Judicial	Circuit	(St.	Clair	County)	against	The Alton	&	Southern	Railway	Company,	a	wholly-owned	subsidiary	of	the	Railroad,	as	a	result	of	a	collision	and	derailment	on	September	21,	2004.	The	State	of	Illinois seeks	to	enjoin	The	Alton	&	Southern	Railway	Company	from	further	violations,	as	well	as	a	monetary	penalty.	The	Railroad	reached	a	tentative	agreement	with	the State	of	Illinois	that	will	require	the	payment	of	a	penalty	in	the	amount	of	$48,000.	The	agreement	should	be	executed	in	the	first	quarter	of	2008.

As	we	reported	in	our	Annual	Report	on	Form	10-K	for	2005,	the	EPA	considers	the	Railroad	a	potentially	responsible	party	for	the	Omaha	Lead	Site.	The	Omaha	Lead Site	consists	of	approximately	12,800	acres	of	residential	property	in	the	eastern	part	of	Omaha,	Nebraska,	allegedly	impacted	by	air	emissions	from	two	former	lead smelters/refineries.	One	refinery	was	operated	by	ASARCO.	The	EPA	identified	the	Railroad	as	a	potentially	responsible	party	because	more	than	60	years	ago	the Railroad	owned	land	that	was	leased	to	ASARCO.	The	Railroad	disputes	both	the	legal	and	technical	basis	of	the	EPA's	allegations.	It	has	nonetheless	engaged	in extensive	negotiations	with	the	EPA.	These	negotiations	reached	an	apparent	impasse.	The	EPA	issued	a	Unilateral	Administrative	Order	with	an	effective	date	of December	16,	2005,	directing	the	Railroad	to	implement	an	interim	remedy	at	the	site	at	an	estimated	cost	of	$50	million.	Failure	to	comply	with	the	order	without	just cause	could	subject	the	Railroad	to	penalties	of	up	to	$32,500	per	day	and	triple	the	EPA's	costs	in	performing	the	work.	The	Railroad	believes	it	has	just	cause	not	to comply	with	the	order,	but	it	offered	to	perform	some	of	the	work	specified	in	the	order	as	a	compromise.	To	date,	the	EPA	has	rejected	all	of	the	Railroad's	offers	to settle	or	resolve	this	matter.	The	Railroad	will	vigorously	contest	liability	and	the	imposition	of	any	penalties.

As	we	reported	in	our	Annual	Report	on	Form	10-K	for	2005,	the	Illinois	Attorney	General's	office	filed	a	complaint	in	the	Circuit	Court	for	the	Twenty-First	Judicial Circuit	(St.	Clair	County)	seeking	injunctive	relief	and	civil	penalties	against	the	Railroad	relating	to	a	collision	between	UPRR	and	Norfolk	Southern	Railway	Company (NS)	trains	near	Momence,	Illinois,	on	November	24,	2005.	The	collision	derailed	approximately	five	locomotives	and	30	railcars.	Two	of	the	UPRR	locomotives	and two	of	the	NS	locomotives	caught	fire,	and	four	of	the	locomotives	released	approximately	16,000	gallons	of	diesel	fuel.	Other	cars	carrying	food	products	derailed	and released	an	unknown	amount	of	product.	The	State	of	Illinois	seeks	a	permanent	injunction	against	the	Railroad	ordering	UPRR	to	continue	remediation.	The	State	of Illinois	seeks	to	enjoin	UPRR	from	further	violations	and	payment	of	a	monetary	penalty.	Union	Pacific	reached	a	tentative	agreement	with	the	State	of	Illinois	that	will require	payment	of	$60,000,	which	includes	a	penalty	payment	and	the	amount	of	the	State's	response	costs.	The	agreement	should	be	executed	in	the	first	quarter	of 2008.

As	we	reported	in	our	Annual	Report	on	Form	10-K	for	2005,	the	Illinois	Attorney	General's	office	filed	a	complaint	in	the	Circuit	Court	for	the	Twentieth	Judicial Circuit	(St.	Clair	County)	for	injunctive	and	other	relief	on	November	28,	2005,	against	the	Railroad,	alleging	a	diesel	fuel	spill	from	an	above-ground	storage	tank	in	a rail	yard	in	Dupo,	St.	Clair	County,	Illinois.	The	State	of	Illinois	seeks	to	enjoin	UPRR	from	further	violations	and	a	monetary	penalty.	The	amount	of	the	proposed penalty	is	uncertain.

As	we	reported	in	our	Annual	Report	on	Form	10-K	for	2003,	the	United	States	Attorney	for	the	Central	District	of	California	notified	the	Railroad	that	the	office intended	to	pursue	criminal	charges	against	the	Railroad	for	alleged	violations	of	federal	environmental	laws,	including	the	federal	Clean	Water	Act,	in	connection	with releases	of	oil	contaminated	wastewater	from	our	Taylor	Yard	in	2001	and	2003.	On	July	31,	2006,	the	United	States	Attorney	filed	criminal	misdemeanor	charges against	us	for	these	releases	in	the	United	States	District	Court	for	the	Central	District	of	California,	and	we	received	the	Summons	from	the	Court	on	August	8,	2006. We	will	vigorously	defend	the	charges.

We	received	notices	from	the	EPA	and	state	environmental	agencies	alleging	that	we	are	or	may	be	liable	under	federal	or	state	environmental	laws	for	remediation	costs at	various	sites	throughout	the	United	States,	including	sites	on	the	Superfund	National	Priorities	List	or	state	superfund	lists.	We	cannot	predict	the	ultimate	impact	of these	proceedings	and	suits	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	the	speculative	nature	of	remediation	costs.

# Other	Matters

As	we	reported	in	our	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	June	30,	2007,	20	small	rail	shippers	(many	of	whom	are	represented	by	the	same	law	firms) filed	virtually	identical	antitrust	lawsuits	in	various	federal	district	courts	against	us	and	four	other	Class	I	railroads	in	the	U.S.	The	original	plaintiff	filed	the	first	of these	claims	in	the	U.S.	District	Court	in	New	Jersey	on	May	14,	2007,	and	the	additional	plaintiffs	filed	claims	in	district	courts	in	various	states,	including	Florida, Illinois,	Alabama,	Pennsylvania,	and	the	District	of	Columbia.	These	suits	allege	that	the	railroads	engaged	in	price-fixing	by	establishing	common	fuel	surcharges	for certain	rail	traffic.

We	received	additional	complaints	during	the	third	and	fourth	quarters	of	2007,	increasing	the	total	number	of	complaints	to	30.	A	few	of	these	suits	involve	plaintiffs alleging	that	they	are	or	were	indirect	purchasers	of	rail	transportation	and	seeking	to	represent	the	class	of	indirect	purchasers	of	rail	transportation	that	paid	fuel surcharges.	These	complaints	have	added	allegations	under	state	antitrust	and	consumer	protection	laws.	All	of	these	"copycat"	lawsuits	(whether	filed	by	direct	or indirect	purchasers	of	rail	transportation)	are	being	filed	by	various	groups	of	plaintiffs'	lawyers	seeking	to	become	lead	counsel	in	a	nationwide	class	action	against	the railroads.	Each	of	the	plaintiffs	requests	certification	of	its	complaint	as	a	class-action.	On	November	6,	2007,	the	Judicial	Panel	on	Multidistrict	Litigation	ordered	that all	of	the	rail	fuel	surcharge	cases	be	transferred	to	the	U.S.	District	Court	in	D.C.	for	coordinated	or	consolidated	pretrial	proceedings.

Additionally,	the	Attorney	General	of	a	state	outside	our	service	area	issued	a	grand	jury	subpoena	to	us	requesting	documents	pertaining	to	our	fuel	surcharge	program. We	met	with	representatives	of	this	Attorney	General's	office,	and	we	plan	to	have	additional	meetings	in	the	future	in	an	effort	to	resolve	that	office's	interest	in	this matter.

We	deny	the	allegations	that	our	fuel	surcharge	program	violates	the	antitrust	laws	or	any	other	laws.	We	believe	that	these	lawsuits	are	without	merit,	and	we	will vigorously	defend	our	actions.	Therefore,	we	currently	believe	that	these	matters	will	not	have	a	material	adverse	effect	on	any	of	our	results	of	operations,	financial condition,	and	liquidity.

# 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	2007.

# Executive	Officers	of	the	Registrant	and	Principal	Executive	Officers	of	Subsidiaries

The	Board	of	Directors	typically	elects	and	designates	our	executive	officers	on	an	annual	basis	at	the	board	meeting	held	in	conjunction	with	the	Annual	Meeting	of Shareholders,	and	they	hold	office	until	their	successors	are	elected.	Executive	officers	also	may	be	elected	and	designated	throughout	the	year,	as	the	Board	of	Directors considers	appropriate.	There	are	no	family	relationships	among	the	officers,	nor	any	arrangement	or	understanding	between	any	officer	and	any	other	person	pursuant	to which	the	officer	was	selected.	The	following	table	sets	forth	certain	information,	as	of	February	15,	2008,	relating	to	the	executive	officers.

| Name | Position | Age | Past	Five	Years |
| :--- | :--- | :--- | :--- |
| James\tR.\tYoung | \t\t Chairman,\tPresident\tand\tChief\tExecutive\tOfficer\tof\tUPC\tand\tthe\tRailroad | 55 | (1) |
| Robert\tM.\tKnight,\tJr. | \t\t Executive\tVice\tPresident\t–\tFinance\tand\tChief\tFinancial\tOfficer\tof\tUPC\tand\tthe\tRailroad | 50 | (2) |
| J.\tMichael\tHemmer | \t\t Senior\tVice\tPresident\t–\tLaw\tand\tGeneral\tCounsel\tof\tUPC\tand\tthe\tRailroad | 58 | (3) |
| Barbara\tW.\tSchaefer | \t\t Senior\tVice\tPresident\t–\tHuman\tResources\tand\tSecretary\tof\tUPC\tand\tthe\tRailroad | 54 | (4) |
| Jeffrey\tP.\tTotusek | \t\t Vice\tPresident\tand\tController\tof\tUPC\tand\tChief\tAccounting\tOfficer\tand\tController\tof\tthe\tRailroad | 49 | (5) |
| Dennis\tJ.\tDuffy | \t\t Executive\tVice\tPresident\t–\tOperations\tof\tthe\tRailroad | 57 | Current\tPosition |
| John\tJ.\tKoraleski | \t\t Executive\tVice\tPresident\t–\tMarketing\tand\tSales\tof\tthe\tRailroad | 57 | Current\tPosition |

(1) Mr.	Young	was	elected	Chief	Executive	Officer	and	President	of	UPC	and	the	Railroad	effective	January	1,	2006.	He	was	elected	to	the	additional	position	of	Chairman	effective	February	1,	2007.	He	was	elected President	and	Chief	Operating	Officer	of	the	Railroad,	effective	February	1,	2004,	and	he	previously	was	Executive	Vice	President	–	Finance	of	UPC	and	Chief	Financial	Officer	of	the	Railroad.

(2) Mr.	Knight	was	elected	to	his	current	position	effective	February	1,	2004.	He	previously	was	Senior	Vice	President	–	Finance	for	UPC	and	the	Railroad.

(3) Mr.	Hemmer	was	elected	to	his	current	position	effective	June	1,	2004.	Mr.	Hemmer	previously	was	Vice	President	–	Law	of	the	Railroad.

(4) Mrs.	Schaefer	has	held	the	position	of	Senior	Vice	President	–	Human	Resources	for	the	past	five	years.	In	addition,	she	was	elected	Secretary	of	UPC	and	the	Railroad	effective	June	1,	2004.

(5) Mr.	Totusek	was	elected	to	his	current	position	effective	January	1,	2008.	He	previously	was	Assistant	Vice	President	–	Financial	Analysis	of	the	Railroad.

# PART	II

# Item	5.	Market	for	the	Registrant's	Common	Equity,	Related	Stockholder	Matters,	and	Issuer	Purchases	of	Equity	Securities

Our	common	stock	is	traded	on	the	NYSE	under	the	symbol	"UNP".	The	following	table	presents	the	dividends	declared	and	the	high	and	low	closing	prices	of	our common	stock	for	each	of	the	indicated	quarters.

| 2007	-	Dollars	Per	Share | Q1 | Q2 | Q3 | Q4 |
| :--- | :--- | :--- | :--- | :--- |
| Dividends | $\t\t\t\t0.35 | $\t\t\t\t0.35 | $\t\t\t\t0.35 | $\t\t\t\t0.44 |
| Common\tstock\tprice: |  |  |  |  |
| High | 105.84 | 122.79 | 129.36 | 137.56 |
| Low | 89.58 | 100.41 | 99.38 | 110.07 |
| 2006\t-\tDollars\tPer\tShare |  |  |  |  |
| Dividends | $\t\t\t\t0.30 | $\t\t\t\t0.30 | $\t\t\t\t0.30 | $\t\t\t\t0.30 |
| Common\tstock\tprice: |  |  |  |  |
| High | 93.73 | 97.49 | 92.96 | 96.16 |
| Low | 77.62 | 83.83 | 78.65 | 86.27 |

At	January	31,	2008,	there	were	260,700,527	shares	of	outstanding	common	stock	and	35,295	common	shareholders	of	record.	At	that	date,	the	closing	price	of	the common	stock	on	the	NYSE	was	$124.76.	We	have	paid	dividends	to	our	common	shareholders	during	each	of	the	past	108	years.	We	declared	dividends	totaling	$396 million	in	2007	and	$323	million	in	2006.	On	November	15,	2007,	we	increased	the	quarterly	dividend	to	$0.44	per	share,	payable	beginning	on	January	2,	2008,	to shareholders	of	record	on	November	29,	2007.	We	are	subject	to	certain	restrictions	regarding	retained	earnings	with	respect	to	the	payment	of	cash	dividends	to	our shareholders.	The	amount	of	retained	earnings	available	for	dividends	increased	to	$11.5	billion	at	December	31,	2007,	from	$7.8	billion	at	December	31,	2006.	See discussion	of	this	restriction	in	Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations	–	Liquidity	and	Capital	Resources,	Item	7.	We do	not	believe	the	restriction	on	retained	earnings	will	affect	our	ability	to	pay	dividends,	and	we	currently	expect	to	pay	dividends	in	2008	comparable	to	2007.

Comparison	Over	One-	and	Three-Year	Periods	–	The	following	table	presents	the	cumulative	total	shareholder	returns,	assuming	reinvested	dividends,	over	one- and	three-year	periods	for	the	Corporation,	a	peer	group	index	(comprised	of	Burlington	Northern	Santa	Fe	Corporation,	CSX	Corporation,	and	Norfolk	Southern Corporation),	the	Dow	Jones	Transportation	Index	(Dow	Jones),	and	the	Standard	&	Poor's	500	Stock	Index	(S&P	500).

|  |  | Peer | Dow | S&P |
| :--- | :--- | :--- | :--- | :--- |
| Period | UPC | Group | Jones | 500 |
| 1\tYear\t(2007) | 37.9% | 12.6% | 1.4% | 5.5% |
| 3\tYear\t(2005-2007) | 94.6 | 74.7 | 24.2 | 28.2 |

Five-Year	Performance	Comparison	–	The	following	graph	provides	an	indicator	of	cumulative	total	shareholder	returns	for	the	Corporation	as	compared	to	the	peer group	index	(described	above),	the	Dow	Jones,	and	the	S&P	500.	The	graph	assumes	that	the	value	of	the	investment	in	the	common	stock	of	Union	Pacific	Corporation and	each	index	was	$100	on	December	31,	2002,	and	that	all	dividends	were	reinvested.

| 2002 | 2003 | 2004 | 2005 | 2006 | 2007 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| 100 | 118 | 116 | 142 | 164 | 227 |
| 100 | 129 | 143 | 150 | 173 | 183 |
| 100 | 125 | 180 | 252 | 282 | 318 |
| 100 | 132 | 168 | 188 | 206 | 209 |

Purchases	of	Equity	Securities	–	During	2007,	we	repurchased	13,266,070	shares	of	our	common	stock	at	an	average	price	of	$115.66.	During	the	first	nine	months	of 2007,	we	repurchased	10,639,916	shares	of	our	common	stock	at	an	average	price	per	share	of	$112.68.	The	following	table	presents	common	stock	repurchases	during each	month	for	the	fourth	quarter	of	2007:

|  | Total |  |  | Maximum	Number	of |
| :--- | :--- | :--- | :--- | :--- |
|  | Number\tof | Average | Total\tNumber\tof\tShares | Shares\tThat\tMay\tYet |
|  | Shares | Price | Purchased\tas\tPart\tof\ta | Be\tPurchased\tUnder |
|  | Purchased | Paid\tper | Publicly\tAnnounced | the\tPlan\tor\tProgram |
| Period | [a] | Share | Plan\tor\tProgram | [b] |
| Oct.\t1\tthrough\tOct.\t31 | 99,782 | $\t\t128.78 | - | 9,774,279 |
| Nov.\t1\tthrough\tNov.\t30 | 540,294 | 124.70 | 528,000 | 9,246,279 |
| Dec.\t1\tthrough\tDec.\t31 | 1,986,078 | 128.53 | 1,869,800 | 7,376,479 |
| Total | 2,626,154 | $\t\t127.75 | 2,397,800 | N/A |

[a] Total	number	of	shares	purchased	during	the	quarter	includes	228,354	shares	delivered	or	attested	to	UPC	by	employees	to	pay	stock	option	exercise	prices,	satisfy	excess	tax	withholding	obligations	for	stock option	exercises	or	vesting	of	retention	units,	and	pay	withholding	obligations	for	vesting	of	retention	shares.

[b] On	January	30,	2007,	our	Board	of	Directors	authorized	us	to	repurchase	up	to	20	million	shares	of	our	common	stock	through	December	31,	2009.	We	may	make	these	repurchases	on	the	open	market	or	through other	transactions.	Our	management	has	sole	discretion	with	respect	to	determining	the	timing	and	amount	of	these	transactions.

# Item	6.	Selected	Financial	Data

The	following	table	presents	as	of,	and	for	the	years	ended,	December	31,	our	selected	financial	data	for	each	of	the	last	five	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	Financial	Statements	and Supplementary	Data,	Item	8.	The	information	below	is	not	necessarily	indicative	of	the	results	of	future	operations.

[a] 2005	net	income	includes	a	$118	million	tax	expense	reduction	to	reflect	a	reduction	in	the	estimated	deferred	income	tax	liability.

[b] 2004	operating	income	and	net	income	includes	a	$247	million	pre-tax	($154	million	after-tax)	charge	for	unasserted	asbestos-related	claims.

[c] Net	income	and	total	assets	include	the	effects	of	the	disposition	of	all	of	our	trucking	interests	in	2003.

[d] Includes	fuel	surcharge	revenue	of	$1,478	million,	$1,619	million,	$963	million,	$292	million,	and	$93	million	for	2007,	2006,	2005,	2004,	and	2003,	respectively,	which	partially	offsets	increased	operating expenses	for	fuel.	2007	fuel	surcharge	revenue	is	not	comparable	to	prior	periods	due	to	implementation	of	new	mileage-based	fuel	surcharge	programs.	See	further	discussion	in	Management's	Discussion	and Analysis	of	Financial	Condition	and	Results	of	Operations	–	Results	of	Operations	–	Operating	Revenue,	Item	7.

[e] Equity	per	common	share	is	calculated	as	follows:	common	shareholders'	equity	divided	by	common	shares	issued	less	treasury	shares	outstanding.

[f] Operating	margin	is	defined	as	operating	income	divided	by	operating	revenue.	Operating	ratio	is	defined	as	operating	expenses	divided	by	operating	revenue.

[g] Debt	to	capital	is	determined	as	follows:	total	debt	divided	by	total	debt	plus	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	Financial	Statements	and	Supplementary Data,	Item	8,	and	other	information	in	this	report,	including	Risk	Factors	set	forth	in	Item	1A	and	Critical	Accounting	Policies	and	Cautionary	Information	at	the	end	of this	Item	7.

The	Railroad,	along	with	its	subsidiaries	and	rail	affiliates,	is	our	one	reportable	operating	segment.	Although	we	analyze	revenue	by	commodity	group,	we	analyze	the net	financial	results	of	the	Railroad	as	one	segment	due	to	the	integrated	nature	of	our	rail	network.

# EXECUTIVE	SUMMARY

•Safety	–	We	operated	a	safer	railroad	in	2007,	improving	safety	for	our	employees,	customers,	and	the	public.	The	employee	injury	incident	rate	per	200,000 man-hours	declined	to	its	lowest	level.	A	continued	focus	on	derailment	prevention	in	2007	resulted	in	a	14%	reduction	in	incidents,	with	associated	costs declining	13%.	In	the	area	of	public	safety,	we	closed	482	grade	crossings	to	reduce	our	exposure	incidents,	and	we	installed	additional	video	cameras	in	our	road locomotives.	As	a	result	of	this	installation	work,	we	now	have	camera-equipped	locomotives	in	the	lead	position	of	over	85%	of	our	road	trains.	These	video cameras	allow	us	to	better	analyze	grade	crossing	incidents,	thereby	increasing	safety	for	our	employees	and	the	public.	The	number	of	grade	crossing	incidents decreased	9%	during	the	year,	despite	the	combination	of	increasing	highway	traffic	and	urban	expansion.	Also,	through	extensive	trespass	reduction	programs, we	were	able	to	reduce	trespasser	incidents	by	21%.	All	of	these	improvements	are	the	result	of	comprehensive	efforts	to	enhance	employee	training,	increase public	education,	make	capital	investments,	and	take	proactive	steps	to	reduce	safety	risks.

•Financial	Performance	–	In	2007,	we	generated	record	operating	income	of	$3.4	billion	despite	lower	volume.	Yield	increases,	network	management	initiatives, and	improved	productivity	drove	the	17%	increase	in	operating	income.	Our	operating	ratio	was	79.3%	for	the	year,	a	2.2	point	improvement	compared	to	2006. Net	income	of	$1.86	billion	also	exceeded	our	previous	milestone,	translating	into	earnings	of	$6.91	per	diluted	share.

•	 Commodity	Revenue	–	Our	commodity	revenue	grew	4%	year-over-year	to	$15.5	billion,	the	highest	level	in	our	history.	We	achieved	record	revenue	levels	in five	of	our	six	commodity	groups,	driven	primarily	by	better	pricing	and	fuel	surcharges.	Since	2004,	we	have	repriced	approximately	75%	of	our	business. Volume	decreased	1%	in	2007	due	to	softening	markets	for	some	of	our	commodities	and	adverse	weather	conditions.

•	 Network	Operations	–	In	2007,	we	significantly	improved	the	fluidity	and	efficiency	of	our	transportation	network.	Continued	focus	on	increasing	velocity, eliminating	work	events,	improving	asset	utilization,	and	expanding	capacity	were	key	drivers	of	our	operational	improvement.	We	reduced	average	terminal dwell	time	by	8%,	improved	car	utilization	by	7%,	and	increased	average	train	speed	by	2%	with	ongoing	enhancements	to	our	Unified	Plan	(an	ongoing	program that	streamlines	segments	of	our	transportation	plan)	and	implementation	of	initiatives	to	make	train	processing	at	our	terminals	more	efficient.	We	completed implementation	of	Customer	Inventory	Management	System,	an	operational	productivity	initiative	that	complements	the	Unified	Plan	by	reducing	the	number	of rail	cars	in	our	terminals	without	adding	capacity.	We	also	expanded	capacity	and	continued	to	use	industrial	engineering	techniques	to	further	improve	network fluidity,	ease	capacity	constraints,	and	improve	asset	utilization.	Our	customer	satisfaction	improved	during	2007,	an	indication	that	efforts	to	improve	network operations	translated	into	better	customer	service.

•Fuel	Prices	–	Crude	oil	prices	increased	at	a	steady	rate	in	2007,	rising	from	a	low	of	$56.58	per	barrel	in	January	to	close	at	nearly	$96.00	per	barrel	at	the	end of	December.	Our	2007	average	fuel	price	increased	by	9%	and	added	$242	million	of	operating	expenses	compared	to	2006.	Our	fuel	surcharge	programs	are designed	to	help	offset	the	impact	of	higher	fuel	prices.	In	addition,	our	fuel	conservation	efforts	allowed	us	to	improve	our	consumption	rate	by	2%.	Locomotive simulator	training,	operating	practices,	and	technology	all	contributed	to	this	improvement,	saving	approximately	21	million	gallons	of	fuel	in	2007.

•Free	Cash	Flow	–	Cash	generated	by	operating	activities	totaled	a	record	$3.3	billion,	yielding	free	cash	flow	of	$487	million	in	2007.	Free	cash	flow	is	defined as	cash	provided	by	operating	activities,	less	cash	used	in	investing	activities	and	dividends	paid.

Free	cash	flow	is	not	considered	a	financial	measure	under	accounting	principles	generally	accepted	in	the	United	States	(GAAP)	by	SEC	Regulation	G	and	Item	10	of SEC	Regulation	S-K.	We	believe	free	cash	flow	is	important	in	evaluating	our	financial	performance	and	measures	our	ability	to	generate	cash	without	additional external	financings.	Free	cash	flow	should	be	considered	in	addition	to,	rather	than	as	a	substitute	for,	cash	provided	by	operating	activities.	The	following	table reconciles	cash	provided	by	operating	activities	(GAAP	measure)	to	free	cash	flow	(non-GAAP	measure):

| Millions	of	Dollars | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Cash\tprovided\tby\toperating\tactivities | $3,277 | $2,880 | $2,595 |
| Cash\tused\tin\tinvesting\tactivities | (2,426) | (2,042) | (2,047) |
| Dividends\tpaid | (364) | (322) | (314) |
| Free\tcash\tflow | $487 | $516 | $234 |

•Safety	–	Operating	a	safe	railroad	benefits	our	employees,	our	customers,	our	shareholders,	and	the	public.	We	will	continue	using	a	multi-faceted	approach	to safety,	utilizing	technology,	risk	assessment,	quality	control,	and	training	for,	and	engaging	with	our	employees.	We	plan	to	implement	Total	Safety	Culture (TSC)	throughout	our	operations.	TSC,	an	employee-focused	initiative	that	has	helped	improve	safety,	is	a	process	designed	to	establish,	maintain,	and	promote safety	 among	 co-workers.	With	 respect	 to	 public	 safety,	 we	 will	 continue	 our	 efforts	 to	 maintain,	 upgrade,	 and	 close	 crossings,	 install	 video	 cameras	 on locomotives,	and	educate	the	public	about	crossing	safety	through	various	internal	and	industry	programs,	along	with	other	activities.

•	 Commodity	Revenue	–	Despite	uncertainty	regarding	the	U.S.	economy,	we	expect	record	revenue	in	2008	based	on	current	economic	indicators,	forecasted demand,	improved	customer	service,	and	additional	opportunities	to	reprice	certain	of	our	business.	Yield	increases	and	fuel	surcharges	will	be	the	primary	drivers of	commodity	revenue	growth	in	2008.	We	expect	that	overall	volume	will	fall	within	a	range	of	1%	higher	to	1%	lower	than	2007,	with	continued	softness	in some	market	sectors.

•	 Transportation	Plan	–	In	2008,	we	will	continue	to	evaluate	traffic	flows	and	network	logistic	patterns	to	identify	additional	opportunities	to	simplify	operations and	improve	network	efficiency	and	asset	utilization.	We	plan	to	maintain	adequate	manpower	and	locomotives,	improve	productivity	using	industrial	engineering techniques,	and	improve	our	operating	margins.

•Fuel	Prices	–	Fuel	prices	should	remain	volatile,	with	crude	oil	prices	and	conversion	and	regional	spreads	fluctuating	throughout	the	year.	On	average,	we	expect fuel	prices	to	increase	15%	to	20%	above	the	average	price	in	2007.	To	reduce	the	impact	of	fuel	price	on	earnings,	we	will	continue	to	seek	recovery	from	our customers	through	our	fuel	surcharge	programs	and	expand	our	fuel	conservation	efforts.

•	 Capital	Plan	–	In	2008,	we	expect	to	make	capital	investments	of	approximately	$3.1	billion	(which	may	be	revised	if	revenue,	tax,	or	business	conditions	require changing,	or	new	laws	or	regulations	affect	our	ability	to	generate	sufficient	returns	on,	these	investments).	Major	investment	categories	include	$1.6	billion	to maintain	and	improve	track	infrastructure;	$840	million	to	increase	network	and	terminal	capacity;	$490	million	to	upgrade	our	locomotive	and	freight	car	fleet, including	the	acquisition	of	175	high-horsepower	locomotives	and	new	covered	hoppers;	and	$170	million	primarily	to	upgrade	information	technology	systems, including	the	testing	of	positive	train	control,	and	other	capital	projects.	We	expect	to	fund	our	2008	cash	capital	investments	through	cash	generated	from operations,	the	sale	or	lease	of	various	operating	and	non-operating	properties,	debt	issuances,	and	cash	on	hand	at	December	31,	2007.	Our	annual	capital	plan	is a	critical	component	of	our	long-term	strategic	plan,	which	we	designed	to	enhance	the	long-term	value	of	the	Corporation	for	our	shareholders	by	providing sufficient	resources	to	(i)	maintain	and	improve	our	existing	track	infrastructure	to	provide	safe	and	fluid	operations,	(ii)	increase	network	efficiency	by	adding	or improving	facilities	and	track,	and	(iii)	make	investments	that	meet	customer	demand	and	take	advantage	of	opportunities	for	long-term	growth.

•Financial	Expectations	–	We	are	cautious	about	the	economic	environment;	however,	we	anticipate	revenue	growth	and	continued	network	improvement	in 2008,	which	should	produce	financial	results	that	exceed	2007.	We	expect	to	generate	earnings	of	$7.75	to	$8.25	per	diluted	share	and	improve	our	operating	ratio and	return	on	invested	capital.

# RESULTS	OF	OPERATIONS

# Operating	Revenue

|  |  |  |  | %	Change | %	Change |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Millions\tof\tDollars | 2007 | 2006 | 2005 | 2007\tv\t2006 | 2006\tv\t2005 |
| Commodity\trevenue | $\t\t15,516 | $\t\t14,862 | $\t\t12,957 | 4% | 15% |
| Other\trevenue | 767 | 716 | 621 | 7 | 15 |
| Total | $\t\t16,283 | $\t\t15,578 | $\t\t13,578 | 5% | 15% |

Operating	revenue	includes	commodity	revenue	and	other	revenue.	The	primary	drivers	of	commodity	revenue	are	volume	(carloads)	and	average	revenue	per	car (ARC).	ARC	varies	with	changes	in	price,	commodity	mix,	and	fuel	surcharges.	Other	revenue	consists	primarily	of	revenue	earned	by	our	subsidiaries,	revenue	from our	commuter	rail	operations,	and	accessorial	revenue,	which	we	earn	when	customers	retain	equipment	owned	or	controlled	by	us	or	when	we	perform	additional services	such	as	switching	or	storage.

We	recognize	commodity	revenue	on	a	percentage-of-completion	basis	as	freight	moves	from	origin	to	destination.	We	allocate	revenue	between	reporting	periods	based on	the	relative	transit	time	in	each	reporting	period	and	recognize	expenses	as	we	incur	them.	We	recognize	other	revenue	as	service	is	performed	or	contractual obligations	are	met.	We	provide	incentives	to	our	customers	for	meeting	or	exceeding	specified	cumulative	volumes	or	shipping	to	and	from	specific	locations,	which	we record	as	a	reduction	to	revenue	based	on	the	actual	or	projected	future	shipments.

Revenue	from	five	of	our	six	commodity	groups	increased	during	2007,	while	revenue	generated	from	industrial	products	shipments	declined.	ARC	increased	6%	during 2007	driven	by	core	price	improvement.	Lower	shipments	of	industrial	and	agricultural	products	drove	volume	down	1%	in	2007,	more	than	offsetting	an	increase	in chemical	shipments.	Our	fuel	surcharge	programs	(excluding	index-based	contract	escalators	that	contain	some	provision	for	fuel)	generated	$1.5	billion	in	commodity revenue	in	2007.	Fuel	surcharge	revenue	is	not	comparable	to	prior	periods	due	to	implementation	of	new	mileage-based	fuel	surcharge	programs	for	certain	traffic.	As previously	disclosed	in	our	2006	Annual	Report	on	Form	10-K,	the	STB	issued	a	decision	limiting	the	manner	in	which	U.S.	railroads	can	calculate	fuel	surcharges	on traffic	regulated	by	the

STB.	Effective	April	26,	2007,	we	implemented	new	fuel	surcharge	programs	covering	this	regulated	traffic,	which	represents	approximately	19%	of	our	current	revenue base.	These	new	programs	use	mileage	(as	opposed	to	percent	of	revenue)	as	the	basis	for	calculating	fuel	surcharges,	and	they	use	the	On-Highway	Diesel	Price	index	– published	by	the	Energy	Information	Administration	–	for	purposes	of	determining	fuel	costs.	The	new	programs	affect	fuel	surcharges	assessed	for	certain	shipments	of agricultural,	chemical,	and	industrial	products,	and,	to	a	lesser	extent,	coal.	In	addition,	we	reset	the	effective	base	fuel	price	at	which	our	new	mileage-based	fuel surcharge	programs	take	effect,	resulting	in	a	higher	starting	point	of	$2.30	per	gallon	versus	$1.35	per	gallon.

All	six	commodity	groups	produced	double-digit	revenue	growth	in	2006,	including	over	20%	growth	of	revenue	from	agricultural	commodities.	Price	increases,	fuel surcharges,	and	index-based	contract	escalators,	which	are	formulas	in	our	shipping	contracts	that	correlate	price	adjustments	to	certain	economic	indices,	all	contributed to	higher	ARC.	Our	fuel	surcharge	programs	(excluding	index-based	contract	escalators	that	contain	some	provision	for	fuel)	generated	an	additional	$656	million	in commodity	revenue	compared	to	2005,	contributing	5%	to	commodity	revenue	growth.	Volume	increased	3%	during	the	year,	led	by	solid	growth	of	intermodal	and energy	shipments,	which	were	partially	offset	by	lower	shipments	of	industrial	products	and	chemicals.	Lower	volume	in	2005	due	to	the	January	West	Coast	storm, SPRB	Joint	Line	disruptions,	Hurricane	Rita	and	the	Kansas	washouts	also	contributed	to	this	year-over-year	growth.

The	following	tables	summarize	the	year-over-year	changes	in	commodity	revenue,	revenue	carloads,	and	ARC	by	commodity	type:

Agricultural	 –	Price increases	were	 the	primary	drivers	of	agricultural	commodity revenue	in	2007,	partially	offset	by	a	decline	in	volume	levels.	Shipments	of	whole grains	used	in	feed	declined	as	barge	operators	captured	more	shipments	destined	for export	from	the	Gulf	Coast	due	to	both	favorable	barge	rates	and	improved	navigation conditions	 on	 the	 Mississippi	 River.	 Conversely,	 wheat	 and	 food	 grain	 shipments improved	as	a	strong	wheat	crop	generated	record	shipments	to	the	Gulf	Coast	for export.	Shipments	of	ethanol,	a	grain	product	used	as	an	alternative	fuel	and	fuel additive,	and	its	co-products	(primarily	livestock	feed)	also	increased	substantially.

Price	increases,	volume	growth,	and	fuel	surcharges	increased	agricultural	commodity revenue	 in	 2006	 versus	 2005.	 Whole	 grains	 increased	 as	 strong	 gulf	 exports	 and higher	 freight	 charges	 for	 barge	 traffic	 shifted	 feed	 grain	 shipments	 to rails.		Shipments			of			ethanol

and	its	co-products	(primarily	livestock	feed)	also	experienced	strong	growth,	reflecting	continued	demand	in	this	growing	industry.	Conversely,	wheat	shipments declined	due	to	extremely	low	crop	production	levels	in	2006	primarily	due	to	drought	conditions	in	wheat	producing	states.	Price	and	fuel	surcharge	increases	improved ARC	in	2006.

Automotive	–	Price	increases	drove	the	growth	in	automotive	revenue,	partially	offset by	lower	finished	vehicle	shipments.	A	decline	in	vehicle	production	levels	primarily drove	 the	 volume	 decline.	 Conversely,	 automotive	 parts	 shipments	 grew	 due	 to increased	volumes	from	domestic	manufacturers,	new	business	acquired	in	the	middle of	2006,	and	our	new	intermodal	train	service	between	Mexico	and	Michigan.

Price	increases,	volume	growth,	and	fuel	surcharges	increased	automotive	commodity revenue	 in	 2006	 over	 2005.	 Shipments	 of	 finished	 vehicles	 grew	 as	 higher manufacturer	inventories	at	the	end	of	2005	translated	into	record	volume	growth	in 2006.	Shipments	remained	relatively	strong	through	the	second	quarter	due	to	the production	 ramp-up	 of	 new	 models	 at	 plants	 served	 by	 us.	 Automotive	 parts shipments	also	grew	due	to	conversion	of	traffic	from	trucks,	new	business	growth, and	production	increases	at	several	assembly	plants	served	by	us.	Fuel	surcharges	and price	increases	drove	the	ARC	improvement.

Chemicals	–	Price	increases	and	volume	growth	drove	the	increase	in	revenue	in	2007 versus	2006.	Strong	demand	for	potash	exports	through	Pacific	Northwest	ports	and	a robust	planting	season	for	corn	 to	supply	ethanol	producers	 increased	demand	for fertilizer	shipments	in	2007.	New	business	acquired	in	June	2007	contributed	to	more shipments	of	plastics.	Soda	ash	volume	increased	as	export	demand	grew	in	the	Gulf area	and	Mexico.	Lower	production	at	Canadian	locations	during	the	year	boosted shipments	of	liquid	and	dry	chemicals	from	U.S.	sources.

Price	 increases,	 fuel	 surcharges,	 and	 index-based	 contract	 escalators	 drove	 the increase	in	revenue	and	ARC	in	2006	versus	2005.	Fewer	fertilizer	shipments	largely drove	 the	 volume	 decrease.	 Wet	 weather	 conditions	 in	 the	 Midwest	 led	 to	 weak demand	during	the	fall	planting	season.	In	addition,	softer	export	markets	for	potash,	a fertilizer	product,	also	led	to	reduced	volumes.	Business	interruptions

in	the	third	quarter	of	2005,	primarily	attributable	to	Hurricane	Rita,	reduced	chemicals	shipments	leading	to	favorable	volume	comparisons	in	2006.

Energy	 –	Price	increases	during	2007	improved	both	revenue	and	ARC	over	2006 levels.	Volume	was	flat,	however,	as	severe	storms	in	the	first	quarter	and	heavy	rains in	May	flooded	coal	pits	in	the	SPRB,	which	closed	several	rail	lines	and	reduced volume	levels.	Shipments	from	the	Colorado	and	Utah	mines	were	down	1%	due	to lower	mine	production,	predominately	in	the	fourth	quarter	of	2007.

Price	increases,	fuel	surcharges,	and	index-based	contract	escalators	primarily	drove the	 increases	 in	 revenue	 and	 ARC	 in	 2006	 over	 2005.	 Volume	 increases	 also contributed	to	revenue	growth	as	coal	shipments	from	the	SPRB	mines	improved	8% during	the	year.	These	increases	in	2006	partially	reflect	lower	volume	levels	in	2005, as	SPRB	Joint	Line	disruptions,	network	disruptions	resulting	from	Hurricane	Rita,

and	 the	 October	 Kansas	 washouts	 hampered	 coal	 shipments	 in	 2005.	 Conversely,

shipments	 from	 the	 Colorado	 and	 Utah	 mines	 declined	 6%	 in	 2006	 due	 to	 mine shutdowns	during

the	first	quarter	of	2006,	along	with	the	impact	of	mining	production	problems	and	network	maintenance	throughout	the	third	quarter	of	2006.

Industrial	 Products	 –	 Volume	 declines	 more	 than	 offset	 price	 increases,	 driving industrial	products	revenue	lower	in	2007	compared	to	2006.	Continued	softening	of the	housing	construction	market,	surplus	inventories,	and	general	market	uncertainty resulted	 in	 lower	 lumber	 shipments.	 Delays	 of	 rail	 expansion	 projects,	 customer production	 problems,	 unfavorable	 weather,	 and	 the	 ongoing	 impact	 of	 a	 weak residential	construction	market	reduced	stone	shipments	during	the	year.

Price	increases	and	fuel	surcharges	improved	revenue	and	ARC	in	2006	over	2005. Volume	levels	declined	due	to	lower	lumber,	paper,	and	newsprint	shipments,	which were	 partially	 offset	 by	 higher	 steel	 shipments.	 The	 softening	 of	 the	 housing construction	market,	lower	production	levels,	and	general	market	uncertainty	drove the	reduction	in	lumber	shipments.	Conversely,	strong	domestic	markets	throughout 	most	of	the	year	drove	the	increase	in

construction-related	steel	material	and	pipe,	particularly	those	materials	used	in	oil	and	gas	drilling.	Hurricane	Rita	reduced	shipment	volumes	of	industrial	products	in 2005,	which	favorably	affected	volume	comparisons	with	2006.

Intermodal	–	Price	increases	improved	intermodal	revenue	in	2007	compared	to	2006. Volume	 was	 flat	 versus	 2006	 as	 increased	 domestic	 traffic	 due	 to	 new	 service offerings	and	increased	business	under	some	of	our	older,	long-term	contracts	were offset	 by	 a	 decrease	 of	 premium	 shipments.	 International	 traffic	 was	 flat	 in	 2007 compared	to	2006	due	to	general	softening	of	imports	from	Asia.

Record	 volume	 growth,	 fuel	 surcharges,	 price	 increases,	 and	 index-based	 contract escalators	 combined	 to	 improve	 revenue	 in	 2006	 over	 2005,	 in	 addition	 to	 the favorable	impact	from	weaker	intermodal	revenue	during	2005	due	to	the	January West	 Coast	 storm.	 Carloadings	 grew	 due	 to	 strong	 imports,	 primarily	 from	Asia, partially	offset	by	decreased	domestic	traffic.	ARC	improved	due	to	price	increases, fuel	surcharges,	and	contract	escalators.

Mexico	Business	–	Each	of	our	commodity	groups	includes	revenue	from	shipments	to	and	from	Mexico.	Revenue	from	Mexico	business	increased	5%	to	$1.44	billion in	2007	compared	to	2006.	Price	increases	and	more	shipments	of	automotive	parts	and	intermodal	containers	drove	revenue	growth	in	2007.	Volume	declines	in cement,	some	agricultural	products,	and	newsprint	shipments	partially	offset	the	increases.

Revenue	from	Mexico	business	increased	23%	to	$1.37	billion	in	2006	compared	to	2005.	Price	increases,	fuel	surcharges,	and	increased	shipments	of	finished	vehicles, automotive	parts,	import	beer,	dry	feed	ingredients,	and	intermodal	drove	revenue	growth	in	2006.	Volume	declines	in	coal,	newsprint,	and	sulfur	shipments	partially offset	the	increases.

# Operating	Expenses

|  |  |  |  | %	Change | %	Change |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Millions\tof\tDollars | 2007 | 2006 | 2005 | 2007\tv\t2006 | 2006\tv\t2005 |
| Salaries,\twages,\tand\temployee\tbenefits | $\t\t\t\t4,591 | $\t\t\t\t4,599 | $\t\t\t\t4,375 | -% | 5% |
| Fuel\tand\tutilities | 3,164 | 3,012 | 2,562 | 5 | 18 |
| Equipment\tand\tother\trents | 1,423 | 1,455 | 1,402 | (2) | 4 |
| Depreciation | 1,321 | 1,237 | 1,175 | 7 | 5 |
| Materials\tand\tsupplies | 714 | 691 | 546 | 3 | 27 |
| Casualty\tcosts | 321 | 410 | 411 | (22) | - |
| Purchased\tservices\tand\tother\tcosts | 1,374 | 1,290 | 1,312 | 7 | (2) |
| Total | $\t\t12,908 | $\t\t12,694 | $\t\t11,783 | 2% | 8% |

Operating	expenses	increased	$214	million	in	2007.	Higher	fuel	prices,	which	rose 9%	during	the	period,	increased	operating	expenses	by	$242	million.	Wage,	benefit and	 materials	 inflation	 and	 higher	 depreciation	 expense	 also	 increased	 expenses during	the	year.	Productivity	improvements,	better	resource	utilization,	and	a	lower fuel	consumption	rate	helped	offset	these	increases.

Operating	expenses	increased	$911	million	in	2006.	Higher	fuel	prices,	which	rose 16%	during	the	period,	accounted	for	$393	million	of	the	increase.	Our	fuel	surcharge programs	helped	offset	these	expenses	in	the	form	of	higher	revenue.	Wages,	benefits, and	materials	and	supplies	 inflation;	a	 larger	workforce;	volume-related	expenses; and	higher	locomotive	and	freight	car	maintenance	and	lease	expenses	accounted	for most	of	the	additional	increase	in	2006.	Settlement	of	all	remaining	insurance	claims

related	to	the	January	2005	West	Coast	storm,	an	improved	fuel	consumption	rate,	and

improved	car	cycle	times	(which	reduced	freight	car		rental

expense)	partially	offset	the	cost	increases.	Additional	clean-up	and	restoration	costs	for	the	January	2005	West	Coast	storm	favorably	affects	comparison	of	2006 operating	expenses	with	those	in	2005.

Salaries,	Wages,	and	Employee	Benefits	–	Operational	improvements	and	lower	volume	levels	led	to	a	1%	decline	in	our	workforce,	saving	$79	million	in	2007.	A smaller	workforce	and	less	need	for	new	train	personnel	reduced	training	costs	during	the	year,	which	contributed	to	the	improvement.	General	wage	and	benefit inflation	mostly	offset	the	reductions,	reflecting	higher	salaries	and	wages	and	the	impact	of	higher	healthcare	and	other	benefit	costs.

General	wage	and	benefit	inflation	increased	expenses	in	2006,	reflecting	higher	salaries	and	wages	and	the	impact	of	higher	healthcare	and	other	benefit	costs.	A	larger workforce,	driven	by	higher	volume	levels,	and	stock	option	expense	required	by	new	accounting	rules	also	contributed	to	higher	expenses.	Conversely,	reduced protection	costs	and	operational	improvements,	boosted	by	network	management	initiatives	and	investment	in	capacity,	partially	offset	these	increases.	Protection	costs represent	the	differential	payment	when	the	wage	earned	for	active	employment	is	lower	than	an	employee's	protected	rate	of	pay.	An	individual's	protected	rate	is imposed	by	the	STB	for	employees	adversely	affected	by	a	merger	or	is	established	by	collective	bargaining	agreements	with	our	labor	unions	in	certain	cases. Additionally,	we	incurred	higher	labor	expenses	in	2005	for	clean-up	and	restoration	of	property	damaged	by	the	January	West	Coast	storm.

Fuel	and	Utilities	–	Fuel	and	utilities	include	locomotive	fuel,	utilities	other	than	telephone,	and	gasoline	and	other	fuels.	Higher	diesel	fuel	prices,	which	averaged $2.24	per	gallon	(including	taxes	and	transportation

costs)	in	2007	compared	to	$2.06	per	gallon	in	2006,	increased	expenses	by	$242	million.	A	2%	improvement	of	our	fuel	consumption	rate	resulting	from	the	use	of newer,	more	fuel-efficient	locomotives	and	our	fuel	conservation	programs	reduced	fuel	expense	by	$43	million,	and	a	2%	decrease	of	gross	ton	miles	reduced	fuel expense	by	an	additional	$53	million.

Higher	diesel	fuel	prices,	which	averaged	$2.06	per	gallon	(including	taxes	and	transportation	costs)	in	2006	compared	to	$1.77	per	gallon	in	2005,	increased	expenses by	$393	million	during	2006.	A	3%	increase	in	gross	ton-miles	resulted	in	$63	million	of	additional	expenses,	which	was	partially	offset	by	a	2%	improvement	in	our fuel	consumption	rate	due	to	the	use	of	newer,	more	fuel-efficient	locomotives	and	our	fuel	conservation	programs.	As	noted	above	(and	described	in	this	Item	7),	we offset	a	significant	portion	of	increased	locomotive	fuel	expenses	through	revenue	from	fuel	surcharges.	Gasoline,	utilities,	and	propane	and	other	fuel	expenses increased	$20	million	in	2006	due	to	higher	prices	and	increased	usage.

Equipment	and	Other	Rents	–	Equipment	and	other	rents	includes	primarily	rental	expense	we	pay	for	freight	cars	owned	by	other	railroads	or	private	companies;	freight car,	intermodal,	and	locomotive	leases;	other	specialty	equipment	leases;	and	office	and	other	rentals.	Fewer	shipments	of	industrial	products,	combined	with	improved car-cycle	times,	which	reflect	operational	improvement	and	better	asset	utilization,	reduced	our	short-term	freight	car	rental	expense	by	$46	million	in	2007	compared	to 2006.	Lower	lease	expenses	for	freight	cars,	intermodal	containers,	and	fleet	vehicles	and	equipment	decreased	costs	by	$20	million	in	2007.	Conversely,	higher locomotive	lease	expense	resulted	in	a	$33	million	increase	in	costs	during	the	year.

Lease	expense	increased	in	2006	compared	to	2005	as	we	leased	more	locomotives	and	freight	cars.	Growth	in	automotive	and	intermodal	shipments	also	increased	our short-term	freight	car	rental	expense.	Improved	car-cycle	times	driven	by	network	management	initiatives	partially	offset	this	increase.

Depreciation	–	The	majority	of	depreciation	relates	to	track	structure,	including	rail,	ties,	and	other	track	material.	A	higher	depreciable	asset	base,	reflecting	higher capital	spending	in	recent	years,	increased	depreciation	expense	in	2007	and	2006.

Materials	and	Supplies	–	Materials	used	to	maintain	our	lines,	structures,	and	equipment	are	the	principal	components	of	materials	and	supplies	expense.	This	expense item	also	includes	small	tools,	office	supplies,	other	materials,	and	the	costs	of	freight	services	to	ship	supplies	and	materials.	Increased	use	of	higher	cost	components	to repair	and	maintain	our	fleet	of	locomotives	(including	a	growing	number	of	units	not	covered	by	warranties)	added	$32	million	to	materials	and	supplies	expense during	2007.	Conversely,	we	used	fewer	parts	for	freight	car	repairs	due	to	program	maintenance	scheduling,	which	lowered	costs	by	$11	million	and	partially	offset	the increase	for	2007.

We	used	more	repair	materials	at	higher	component	costs	to	repair	and	maintain	freight	cars	and	locomotives	in	2006,	including	a	growing	number	of	units	not	covered by	warranties.	In	addition,	we	performed	more	maintenance	on	locomotives	that	were	maintained	internally	and	not	subject	to	maintenance	contracts	with	third-party contractors	compared	to	2005.

Casualty	Costs	–	Personal	injury	costs,	freight	and	property	damage,	insurance,	and	environmental	expense	are	the	primary	components	of	casualty	costs.	Casualty	costs were	lower	in	2007	compared	to	2006	driven	primarily	by	a	reduction	in	personal	injury	expense.	Actuarial	studies	completed	during	2007	resulted	in	a	reduction	in personal	injury	expense	of	approximately	$80	million,	which	was	partially	offset	by	an	adverse	development	with	respect	to	one	claim.

Costs	were	flat	in	2006	compared	to	2005	as	lower	bad	debt	expenses,	lower	freight	damage	expenses,	and	lower	expenses	for	destruction	of	foreign	or	leased	equipment all	offset	increased	personal	injury	costs	and	higher	settlement	expenses.

Purchased	Services	and	Other	Costs	–	Purchased	services	and	other	costs	include	expenses	associated	with	outside	contractors,	state	and	local	taxes,	net	costs	of operating	facilities	jointly	used	with	other	railroads,

transportation	and	lodging	for	train	crew	employees,	trucking	and	contracting	costs	for	intermodal	containers,	leased	automobile	maintenance	expenses,	telephone	and cellular	expense,	employee	 travel	expense,	and	computer	and	other	general	expenses.	Higher	consulting	fees	and	higher	contract	expenses	(including	equipment maintenance)	increased	costs	by	$58	million.	In	addition,	crew	transportation	and	lodging	costs	increased	$17	million	in	2007	due	to	higher	gas	prices	and	rate	inflation. Conversely,	lower	drayage	expense	of	$13	million,	settlement	of	insurance	claims	in	2007	related	to	Hurricane	Rita,	and	higher	equity	income	partially	offset	these increases.	In	addition,	the	year-over-year	comparison	was	affected	by	the	settlement	of	insurance	claims	totaling	$23	million	in	2006	related	to	the	January	2005	West Coast	storm	and	a	$9	million	gain	in	2006	from	the	sale	of	two	Company-owned	airplanes.

Volume-related	expenses,	including	crew	transportation	and	lodging	costs,	increased	in	2006	driven	by	3%	growth	in	carloads.	Higher	state	and	local	taxes	(primarily sales	and	use	taxes	related	to	higher	diesel	fuel	prices)	also	increased	expenses	in	2006	compared	to	2005.	Conversely,	lower	locomotive	contract	maintenance	costs	and lower	expenses	associated	with	jointly-owned	operating	facilities	reduced	expenses	in	2006	compared	to	2005.	Settlement	of	all	remaining	insurance	claims	related	to the	January	2005	West	Coast	storm	and	the	gain	from	the	sale	of	two	airplanes	also	reduced	expenses	in	2006.	Finally,	clean-up	and	restoration	costs	related	to	the January	West	Coast	storm	increased	expenses	in	2005.

# Non-Operating	Items

|  |  |  | %	Change | %	Change |
| :--- | :--- | :--- | :--- | :--- |
| 2007 | 2006 | 2005 | 2007\tv\t2006 | 2006\tv\t2005 |
| $\t\t\t\t\t\t116 | $\t\t\t\t\t\t118 | $\t\t\t\t\t\t145 | (2)% | (19)% |
| (482) | (477) | (504) | 1 | (5) |
| (1,154) | (919) | (410) | 26 | 124 |

Other	Income	–	Lower	net	gains	from	non-operating	asset	sales	(primarily	real	estate)	drove	the	reduction	in	other	income	in	2007.	Recognition	of	rental	income	in	2006 from	the	settlement	of	a	rent	dispute	also	contributed	to	the	year-over-year	decrease	in	other	income.	Cash	investment	returns	increased	$21	million	due	to	larger	cash balances	and	higher	interest	rates.

Lower	net	gains	from	non-operating	asset	sales	(primarily	real	estate)	and	higher	expenses	due	to	rising	interest	rates	associated	with	our	sale	of	receivables	program resulted	in	a	reduction	in	other	income	in	2006,	which	was	partially	offset	by	higher	rental	income	for	the	use	of	our	right-of-way	(including	2006	settlements	of	rate disputes	from	prior	years)	and	cash	investment	returns	due	to	higher	interest	rates.

Interest	Expense	–	Higher	interest	expense	in	2007	was	driven	by	an	increase	in	the	weighted-average	debt	levels	of	$7.3	billion,	compared	to	$7.1	billion	in	2006.	A lower	effective	interest	rate	of	6.6%	in	2007,	compared	to	6.7%	in	2006,	partially	offset	the	effects	of	the	higher	debt	level.

Lower	interest	expense	in	2006	was	due	to	a	decline	in	the	weighted-average	debt	level	from	$7.8	billion	in	2005	to	$7.1	billion	in	2006.	A	higher	effective	interest	rate of	6.7%	in	2006,	compared	to	6.5%	in	2005,	partially	offset	the	effects	of	the	declining	debt	level.

Income	Taxes	–	Income	taxes	were	$235	million	higher	in	2007,	due	primarily	to	higher	pre-tax	income	and	the	effect	of	new	tax	legislation	in	the	State	of	Illinois	that changed	how	we	determine	the	amount	of	our	income	subject	to	Illinois	tax.	The	Illinois	legislation	increased	our	deferred	tax	expense	by	$27	million	in	2007.	Our effective	tax	rates	were	38.4%	and	36.4%	in	2007	and	2006,	respectively.

Income	tax	expense	was	$509	million	higher	in	2006	than	2005.	Higher	pre-tax	income	resulted	in	additional	taxes	of	$414	million	and	$118	million	of	the	increase resulted	from	a	reduction	of	deferred	tax	expense	in	2005.	Final	settlements	of	pre-1995	tax	years	and	Internal	Revenue	Service	Examination	Reports	for	1995

# OTHER	OPERATING/PERFORMANCE	AND	FINANCIAL	STATISTICS

We	report	key	Railroad	performance	measures	weekly	to	the	Association	of	American	Railroads	(AAR),	including	carloads,	average	daily	inventory	of	rail	cars	on	our system,	average	train	speed,	and	average	terminal	dwell	time.	We	provide	this	data	on	our	website	at	www.up.com/investors/reports/index.shtml.

# Operating/Performance	Statistics

Railroad	performance	measures	reported	to	the	AAR,	as	well	as	other	performance	measures,	are	included	in	the	table	below:

|  |  |  | %	Change | %	Change |
| :--- | :--- | :--- | :--- | :--- |
| 2007 | 2006 | 2005 | 2007\tv\t2006 | 2006\tv\t2005 |
| 21.8 | 21.4 | 21.1 | 2% | 1% |
| 25.1 | 27.2 | 28.7 | (8)% | (5)% |
| 1,052.3 | 1,072.5 | 1,043.9 | (2)% | 3% |
| 561.8 | 565.2 | 548.8 | (1)% | 3% |
| 79.3 | 81.5 | 86.8 | 2.2pt | 5.3pt |
| 50,089 | 50,739 | 49,747 | (1)% | 2% |
| 79 | 72 | 64 | 7pt | 8pt |

Average	Train	Speed	–	Average	train	speed	is	calculated	by	dividing	train	miles	by	hours	operated	on	our	main	lines	between	terminals.	Ongoing	network	management initiatives	and	capacity	expansion	contributed	to	2%	and	1%	improvements	of	average	train	speed	during	2007	and	2006,	respectively.

Average	Terminal	Dwell	Time	–	Average	terminal	dwell	time	is	the	average	time	that	a	rail	car	spends	at	our	terminals.	Lower	average	terminal	dwell	time	is	favorable. Average	terminal	dwell	improved	8%	and	5%	in	2007	and	2006,	respectively,	as	a	result	of	ongoing	management	initiatives	and	directed	efforts	to	more	timely	deliver rail	cars	to	our	interchange	partners	and	customers.	Average	terminal	dwell	time	was	also	impacted	by	1%	lower	volume	levels	in	2007	and	a	3%	increase	in	volume levels	during	2006.

Gross	and	Revenue	Ton-Miles	–	Gross	ton-miles	are	calculated	by	multiplying	the	weight	of	loaded	or	empty	freight	cars	by	the	number	of	miles	hauled.	Revenue	ton- miles	are	calculated	by	multiplying	the	weight	of	freight	by	the	number	of	tariff	miles.	Revenue	ton-miles	declined	1%	in	relation	to	the	1%	reduction	in	carloadings	in 2007	compared	to	2006.	Gross	ton-miles	decreased	2%	in	2007	driven	by	a	mix	shift	in	freight	shipments.	In	2006,	gross	and	revenue-ton	miles	grew	3%	in	relation	to the	3%	increase	in	carloadings	as	volume	was	balanced	between	the	higher	and	lower	density	commodities.

Operating	Ratio	–	Operating	ratio	is	defined	as	our	operating	expenses	as	a	percentage	of	revenue.	Our	operating	ratio	improved	2.2	points	to	79.3%	in	2007	as	a	result of	yield	increases,	network	management	initiatives,	and	improved	productivity.	In	2006,	our	operating	ratio	improved	5.3	points	to	81.5%	as	a	result	of	solid	demand, yield	increases,	and	improved	operational	efficiency.

Average	Full-Time-Equivalent	Employees	–	Lower	employee	levels	in	2007	versus	2006	resulted	from	fewer	train	and	engine	personnel	due	to	improved	network productivity	and	1%	lower	volume	levels,	partially	offset	by	more	employees	maintaining	our	larger	locomotive	fleet.	The	larger	full-time-equivalent	number	in	2006, included	more	people	to	maintain	our	larger	locomotive	and	freight	car	fleet,	more	employees	needed	for	increased	track	repair	and	maintenance	programs,	more operations	management	personnel	(including	an	expanded	management	training	program),	and	more	train	and	engine	personnel	to	meet	demand	levels.

Customer	Satisfaction	Index	–	The	customer	satisfaction	survey	asks	customers	to	rate	how	satisfied	they	are	with	our	performance	over	the	last	12	months	on	a	variety of	attributes.	A	higher	score	indicates	higher	customer	satisfaction.	The	improvement	in	survey	results	in	2007	and	2006	generally	reflects	customer	recognition	of	our improving	service.

# Return	on	Average	Common	Shareholders'	Equity

ROIC	is	considered	a	non-GAAP	financial	measure	by	SEC	Regulation	G	and	Item	10	of	SEC	Regulation	S-K.	We	believe	this	measure	is	important	in	evaluating	the efficiency	and	effectiveness	of	the	Corporation's	long-term	capital	investments,	and	we	currently	use	ROIC	as	a	performance	criteria	in	determining	certain	elements	of equity	compensation	for	our	executives.	ROIC	should	be	considered	in	addition	to,	rather	than	as	a	substitute	for,	other	information	provided	in	accordance	with	GAAP. A	comparable	GAAP	measure	 is	Return	on	Average	Common	Shareholders'	Equity.	The	 tables	above	provide	a	reconciliation	from	return	on	average	common shareholders'	equity	to	ROIC.

# Debt	to	Capital	/	Adjusted	Debt	to	Capital

Adjusted	debt	to	capital	is	a	non-GAAP	financial	measure	under	SEC	Regulation	G	and	Item	10	of	SEC	Regulation	S-K.	We	believe	this	measure	is	important	to management	and	investors	in	evaluating	the	total	amount	of	leverage	in	our	capital	structure,	including	off-balance	sheet	lease	obligations,	which	we	generally	incur	in connection	with	financing	the	acquisition	of	locomotives	and	freight	cars	and	certain	facilities.	We	monitor	the	ratio	of	adjusted	debt	to	capital	as	we	manage	our	capital structure	to	balance	cost-effective	and	efficient	access	to	the	capital	markets	with	the	Corporation's	overall	cost	of	capital.	Adjusted	debt	to	capital	should	be	considered in	addition	to,	rather	than	as	a	substitute	for,	debt	to	capital.	The	tables	above	provide	a	reconciliation	from	debt	to	capital	to	adjusted	debt	to	capital.	Our	December	31, 2007,	debt	to	capital	ratios	increased	as	a	result	of	a	$902	million	increase	in	debt	from	December	31,	2006,	and	purchases	of	our	common	stock	under	our	share repurchase	program,	partially	offset	by	an	increase	in	retained	earnings	due	to	higher	earnings	in	2007.

# LIQUIDITY	AND	CAPITAL	RESOURCES

As	of	December	31,	2007,	our	principal	sources	of	liquidity	included	cash,	cash	equivalents,	the	sale	of	certain	receivables,	an	uncommitted	line	of	credit,	and	our revolving	credit	facility,	as	well	as	the	availability	of	commercial	paper	and	other	sources	of	financing	through	the	capital	markets.	We	had	$1.9	billion	of	committed credit	available	under	our	credit	facility,	with	no	borrowings	outstanding	as	of	December	31,	2007.	We	did	not	make	any	short-term	borrowings	under	this	facility during	the	year.	We	also	had	a	$75	million	uncommitted	line	of	credit	available,	which	was	not	used	during	the	year.	The	value	of	the	outstanding	undivided	interest	held by	investors	under	the	sale	of	receivables	program	was	$600	million	as	of	December	31,	2007.	The	sale	of	receivables	program	is	subject	to	certain	requirements, including	maintenance	of	an	investment	grade	bond	rating.	If	our	bond	rating	were	to	deteriorate,	it	could	have	an	adverse	impact	on	our	liquidity.	Access	to	commercial paper	as	well	as	other	capital	market	financings	is	dependent	on	market	conditions.	Deterioration	of	our	operating	results	or	financial	condition	due	to	internal	or external	factors	could	negatively	impact	our	ability	to	utilize	commercial	paper	as	a	source	of	liquidity.	Liquidity	through	the	capital	markets	is	also	dependent	on	our financial	stability.

At	December	31,	2007,	and	December	31,	2006,	we	had	working	capital	deficits	of	approximately	$0.4	billion	and	$1.1	billion,	respectively.	A	working	capital	deficit	is common	in	our	industry	and	does	not	indicate	a	lack	of	liquidity.	We	maintain	adequate	resources	to	meet	our	daily	cash	requirements,	and	we	have	sufficient	financial capacity	to	satisfy	our	current	liabilities.

# Financial	Condition

| Millions	of	Dollars | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Cash\tprovided\tby\toperating\tactivities | $\t\t\t3,277 | $\t\t\t2,880 | $\t\t\t2,595 |
| Cash\tused\tin\tinvesting\tactivities | (2,426) | (2,042) | (2,047) |
| Cash\tused\tin\tfinancing\tactivities | (800) | (784) | (752) |
| Net\tchange\tin\tcash\tand\tcash\tequivalents | $\t\t\t\t\t\t\t\t51 | $\t\t\t\t\t\t\t\t54 | $\t\t\t\t\t(204) |

Cash	Provided	by	Operating	Activities	–	We	generated	higher	income	in	2007,	which	was	the	primary	driver	of	the	increase	of	cash	provided	by	operating	activities. Pension	contributions	in	2006	totaling	$150	million	also	contributed	to	the	year-over-year	increase.	These	increases	were	partially	offset	by	cash	payments	representing prior	period	wage	increases	in	accordance	with	recent	union	contract	ratifications	and	higher	income	tax	payments.

Higher	income	in	2006	generated	the	increased	cash	provided	by	operating	activities,	which	was	partially	offset	by	higher	income	tax	payments,	$150	million	in voluntary	pension	contributions,	higher	material	and	supply	inventories,	and	higher	management	incentive	payments.

Cash	Used	in	Investing	Activities	–	Higher	capital	investments	and	work	in	process	balances	drove	the	increase	in	cash	used	in	investing	in	2007.	The	third	quarter	of 2006	included	insurance	settlement	proceeds	for	property	damages	resulting	from	the	2005	West	Coast	storm.

An	insurance	settlement	for	the	January	2005	West	Coast	storm	and	lower	balances	for	work	in	process	decreased	the	amount	of	cash	used	in	investing	activities	in	2006. Higher	capital	investments	and	lower	proceeds	from	asset	sales	partially	offset	this	decrease.

Cash	Used	in	Financing	Activities	–	The	increase	in	cash	used	in	financing	activities	resulted	primarily	from	the	use	of	$1.4	billion	to	repurchase	common	shares, payment	of	higher	dividends,	and	lower	net	proceeds	from	equity	compensation	plans	($71	million	in	2007	compared	to	$160	million	in	2006).	These	increases	were mostly	offset	by	debt	issuances	of	$1.6	billion	in	2007	compared	to	no	issuances	in	2006.	The	increase	in	cash	used	in	financing	activities	in	2006	resulted	primarily	from lower	net	proceeds	from	equity	compensation	plans	($160	million	in	2006	compared	to	$262	million	in	2005).

The	table	below	details	cash	capital	investments	for	the	years	ended	December	31,	2007,	2006,	and	2005.

| Millions	of	Dollars | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Track | $\t\t\t1,593 | $\t\t\t1,487 | $\t\t\t1,472 |
| Capacity\tand\tcommercial\tfacilities | 534 | 510 | 509 |
| Locomotives\tand\tfreight\tcars | 263 | 135 | 98 |
| Other | 106 | 110 | 90 |
| Total | $\t\t\t2,496 | $\t\t\t2,242 | $\t\t\t2,169 |

In	2008,	we	expect	our	total	capital	investments	to	be	approximately	$3.1	billion	(which	may	be	revised	if	revenue,	tax,	or	business	conditions	require	changing,	or	new laws	or	regulations	affect	our	ability	to	generate	sufficient	returns	on,	these	investments).	Major	investment	categories	include	$1.6	billion	to	maintain	and	improve	track infrastructure;	$840	million	to	increase	network	and	terminal	capacity;	$490	million	to	upgrade	our	locomotive	and	freight	car	fleet,	including	the	acquisition	of	175 high-horsepower	locomotives	and	new	covered	hoppers;	and	$170	million	primarily	to	upgrade	information	technology	systems,	including	the	testing	of	positive	train control,	and	other	capital	projects.	We	expect	to	fund	our	2008	cash	capital	investments

through	cash	generated	from	operations,	the	sale	or	lease	of	various	operating	and	non-operating	properties,	debt	issuances,	and	cash	on	hand	at	December	31,	2007.	Our annual	capital	plan	is	a	critical	component	of	our	long-term	strategic	plan,	which	we	designed	to	enhance	the	long-term	value	of	the	Corporation	for	our	shareholders	by providing	sufficient	resources	to	(i)	maintain	and	improve	our	existing	track	infrastructure	to	provide	safe	and	fluid	operations,	(ii)	increase	network	efficiency	by	adding or	improving	facilities	and	track,	and	(iii)	make	investments	that	meet	customer	demand	and	take	advantage	of	opportunities	for	long-term	growth.

For	each	of	the	years	ended	December	31,	2007,	2006,	and	2005,	our	ratio	of	earnings	to	fixed	charges	was	5.1,	4.4,	and	2.9,	respectively.	The	increases	in	2007	and 2006	were	driven	by	higher	net	income.	The	ratio	of	earnings	to	fixed	charges	was	computed	on	a	consolidated	basis.	Earnings	represent	income	from	continuing operations,	less	equity	earnings	net	of	distributions,	plus	fixed	charges	and	income	taxes.	Fixed	charges	represent	interest	charges,	amortization	of	debt	discount,	and	the estimated	amount	representing	the	interest	portion	of	rental	charges.	See	Exhibit	12	for	the	calculation	of	the	ratio	of	earnings	to	fixed	charges.

# Financing	Activities

Credit	Facilities	–	On	December	31,	2007,	$1.9	billion	of	credit	was	available	under	our	revolving	credit	facility	(the	facility),	which	we	entered	into	on	April	20,	2007. The	facility	is	designated	for	general	corporate	purposes	and	supports	the	issuance	of	commercial	paper.	We	did	not	draw	on	the	facility	during	2007.	Commitment	fees and	interest	rates	payable	under	the	facility	are	similar	to	fees	and	rates	available	to	comparably	rated,	investment-grade	borrowers.	The	facility	allows	for	borrowings	at floating	rates	based	on	London	Interbank	Offered	Rates,	plus	a	spread,	depending	upon	our	senior	unsecured	debt	ratings.	The	facility	requires	the	maintenance	of	a	debt to	net	worth	coverage	ratio.	At	December	31,	2007,	we	were	in	compliance	with	this	covenant.	The	facility	does	not	include	any	other	financial	restrictions,	credit	rating triggers	(other	than	rating-dependent	pricing),	or	any	other	provision	that	could	require	us	to	post	collateral.	The	facility,	which	expires	in	April	2012,	replaced	two	$1 billion,	5-year	facilities	with	terms	ending	in	March	2009	and	March	2010.	The	facility	includes	terms	that	are	comparable	with	those	of	the	prior	facilities,	although	the minimum	net	worth	requirement	of	$7.5	billion	in	prior	facilities	was	removed,	and	the	facility	includes	a	change-of-control	provision.

In	addition	to	our	revolving	credit	facility,	a	$75	million	uncommitted	line	of	credit	was	available.	The	line	of	credit	expires	in	April	2008,	and	was	not	used	in	2007. We	must	have	equivalent	credit	available	under	our	five-year	facility	to	draw	on	this	$75	million	line.

At	December	31,	2007,	we	reclassified	as	long-term	debt	approximately	$550	million	of	debt	due	within	one	year	that	we	intend	to	refinance.	This	reclassification reflected	our	ability	and	intent	to	refinance	any	short-term	borrowings	and	certain	current	maturities	of	long-term	debt	on	a	long-term	basis.	At	December	31,	2006,	we did	not	reclassify	any	short-term	debt	as	long-term	debt	as	we	did	not	intend	to	refinance	at	that	time.

Dividends	–	On	November	15,	2007,	we	increased	the	quarterly	dividend	to	$0.44	per	share,	payable	beginning	on	January	2,	2008,	to	shareholders	of	record	on November	29,	2007.	We	expect	to	fund	the	increase	in	the	quarterly	dividend	through	cash	generated	from	operations,	the	sale	or	lease	of	various	operating	and	non- operating	properties,	and	cash	on	hand	at	December	31,	2007.

Dividend	Restrictions	–	Our	revolving	credit	facility	includes	a	debt-to-net	worth	covenant	that,	under	certain	circumstances,	restricts	the	payment	of	cash	dividends	to our	shareholders.	The	amount	of	retained	earnings	available	for	dividends	was	$11.5	billion	and	$7.8	billion	at	December	31,	2007	and	December	31,	2006,	respectively. This	facility	replaced	two	credit	facilities	that	had	minimum	net	worth	covenants	that	were	more	restrictive	with	respect	to	the	amount	of	retained	earnings	available	for dividends	at	December	31,	2006.

Share	Repurchase	Program	–	On	January	30,	2007,	our	Board	of	Directors	authorized	the	repurchase	of	up	to	20	million	shares	of	Union	Pacific	Corporation	common stock	through	the	end	of	2009.	Management's

assessments	of	market	conditions	and	other	pertinent	facts	guide	the	timing	and	volume	of	all	repurchases.	We	expect	to	fund	our	common	stock	repurchases	through cash	generated	from	operations,	the	sale	or	lease	of	various	operating	and	non-operating	properties,	debt	issuances,	and	cash	on	hand	at	December	31,	2007.

During	2007,	we	repurchased	approximately	13	million	shares	under	this	program	at	an	aggregate	purchase	price	of	approximately	$1.5	billion.	These	shares	were recorded	in	treasury	stock	at	cost,	which	includes	any	applicable	commissions	and	fees.

Shelf	Registration	Statement	and	Significant	New	Borrowings	–	Our	Board	of	Directors	authorized	the	issuance	of	up	to	$3	billion	of	debt	securities	pursuant	to	a	new shelf	registration	statement,	which	became	effective	on	March	6,	2007,	replacing	the	$500	million	of	authority	remaining	under	our	shelf	registration	filed	in	December 2003.	Under	the	current	shelf	registration,	we	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.

We	have	issued	the	following	unsecured,	fixed-rate	debt	securities	under	our	current	shelf	registration:

The	net	proceeds	from	these	offerings	are	for	general	corporate	purposes,	including	the	repurchase	of	common	stock	pursuant	to	our	share	repurchase	program.	These debt	securities	include	change-of-control	provisions.	We	have	no	immediate	plans	to	issue	equity	securities;	however,	we	will	continue	to	explore	opportunities	to replace	existing	debt	or	access	capital	through	issuances	of	debt	securities	under	our	shelf	registration,	and,	therefore,	we	may	issue	additional	debt	securities	at	any time.

# Operating	Lease	Activities

During	2007,	the	Railroad,	as	lessee,	entered	into	long-term	operating	lease	arrangements	covering	259	locomotives	and	150	rail	cars,	with	a	total	equipment	cost	of approximately	$538	million.	In	total,	these	new	lease	arrangements	will	provide	for	minimum	rental	payments	of	approximately	$831	million,	with	a	present	value	of approximately	$434	million.

The	lessors	financed	the	purchase	of	the	locomotives	and	freight	cars,	in	part,	by	issuing	equipment	notes	that	are	non-recourse	to	the	Railroad	and	are	secured	by assignments	of	the	underlying	leases	and	security	interests	in	the	equipment.	The	Corporation	and	the	Railroad	do	not	guaranty	payment	of	the	equipment	notes.	The Railroad's	obligations	to	make	operating	lease	payments	under	the	leases	are	recourse	obligations	and	are	not	recorded	in	the	Consolidated	Statements	of	Financial Position.

The	Railroad	has	certain	renewal	and	purchase	options	with	respect	to	the	locomotives	and	freight	cars.	If	the	Railroad	does	not	exercise	these	options,	the	equipment will	be	returned	to	the	lessors	at	the	end	of	the	lease	term.

# Contractual	Obligations	and	Commitments

As	described	in	the	notes	to	the	Consolidated	Financial	Statements	and	as	referenced	in	the	tables	below,	we	have	contractual	obligations	and	commercial	commitments that	 may	 affect	 our	 financial	 condition.	 However,	 based	 on	 our	 assessment	 of	 the	 underlying	 provisions	 and	 circumstances	 of	 our	 contractual	 obligations	 and commercial	commitments,	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	that	would	have	a	material	adverse	effect	on	our	consolidated	results	of	operations,	financial	condition,	or	liquidity.	In addition,	our	commercial	obligations,	financings,	and	commitments	are	customary	transactions	that	are	similar	to	those	of	other	comparable	corporations,	particularly within	the	transportation	industry.

The	following	tables	identify	material	obligations	and	commitments	as	of	December	31,	2007:

|  |  |  |  |  |  |  | After |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Contractual\tObligations\tMillions\tof\tDollars | Total | 2008 | 2009 | 2010 | 2011 | 2012 | 2012 | \t Other |
| Debt\t[a] | $\t\t10,747 | $\t\t\t\t\t974 | $\t\t\t\t\t789 | $\t\t\t\t\t701 | $\t\t\t\t\t750 | $\t\t\t\t\t944 | $\t\t\t\t\t6,589 | $- |
| Operating\tleases | 6,021 | 639 | 600 | 554 | 522 | 417 | 3,289 | - |
| Capital\tlease\tobligations\t[b] | 1,845 | 181 | 179 | 160 | 165 | 106 | 1,054 | - |
| Purchase\tobligations\t[c] | 3,927 | 991 | 649 | 279 | 244 | 223 | 1,541 | - |
| Other\tpost\tretirement\tbenefits\t[d] | 396 | 39 | 40 | 41 | 41 | 41 | 194 | - |
| Income\ttax\tcontingencies\t[e] | 161 | 140 | - | - | - | - | - | 21 |
| Total\tcontractual\tobligations | $\t\t23,097 | $\t\t2,964 | $\t\t2,257 | $\t\t1,735 | $\t\t1,722 | $\t\t1,731 | $\t\t12,667 | $\t\t21 |

[a] Excludes	capital	lease	obligations	of	$1,219	million,	unamortized	discount	of	$(104)	million,	and	market	value	adjustments	of	$2	million	for	debt	with	qualifying	hedges	that	are	recorded	as	liabilities	on	the Consolidated	Statements	of	Financial	Position.	Includes	an	interest	component	of	$4,182	million.

[b] Represents	total	obligations,	including	interest	component	of	$626	million.

[c] Purchase	obligations	include	locomotive	maintenance	contracts;	purchase	commitments	for	locomotives,	ties,	ballast,	and	track;	and	agreements	to	purchase	other	goods	and	services.

[d] Includes	estimated	other	postretirement,	medical,	and	life	insurance	payments	and	payments	made	under	the	unfunded	pension	plan	for	the	next	ten	years.	No	amounts	are	included	for	funded	pension	as	no contributions	are	currently	required.

[e] Future	cash	flows	for	income	tax	contingencies	reflect	the	recorded	liability,	including	interest	and	penalties,	in	accordance	with	FIN	48	as	of	December	31,	2007.	Where	we	can	reasonably	estimate	the	years	in which	these	liabilities	may	be	settled,	this	is	shown	in	the	table.	For	amounts	where	we	can	not	reasonably	estimate	the	year	of	settlement,	they	are	reflected	in	the	Other	column.

[a] The	$75	million	line	of	credit	requires	equivalent	credit	available	under	the	revolving	credit	facility.	None	of	the	credit	facilities	were	used	as	of	December	31,	2007.

[b] $600	million	of	the	sale	of	receivables	program	was	utilized	at	December	31,	2007.

[c] Includes	guaranteed	obligations	related	to	our	headquarters	building,	equipment	financings,	and	affiliated	operations.

[d] None	of	the	letters	of	credit	were	drawn	upon	as	of	December	31,	2007.

# Off-Balance	Sheet	Arrangements

Sale	of	Receivables	–	The	Railroad	transfers	most	of	its	accounts	receivable	to	Union	Pacific	Receivables,	Inc.	(UPRI),	a	bankruptcy-remote	subsidiary,	as	part	of	a	sale of	receivables	facility.	UPRI	sells,	without	recourse	on	a	364-day	revolving	basis,	an	undivided	interest	in	such	accounts	receivable	to	investors.	The	total	capacity	to	sell undivided	interests	to	investors	under	the	facility	was	$600	million	at	both	December	31,	2007	and	2006.	The	value	of	the	outstanding	undivided	interest	held	by investors	under	the	facility	was	$600	million	at	both	December	31,	2007	and	2006,	respectively.	The	value	of	the	outstanding	undivided	interest	held	by	investors	is	not included	in	our	Consolidated	Financial	Statements.	The	value	of	the	undivided	interest	held	by	investors	was	supported	by	$1,071	million	and	$1,158	million	of accounts	receivable	held	by	UPRI	at	December	31,	2007	and	2006,	respectively.	At	December	31,	2007	and	2006,	the	value	of	the	interest	retained	by	UPRI	was	$471 million	and	$558	million,	respectively.	This	retained	interest	is	included	in	accounts	receivable	in	our	Consolidated	Financial	Statements.	The	interest	sold	to	investors	is sold	at	carrying	value,	which	approximates	fair	value,	and	there	is	no	gain	or	loss	recognized	from	the	transaction.

The	value	of	the	outstanding	undivided	interest	held	by	investors	could	fluctuate	based	upon	the	availability	of	eligible	receivables	and	is	directly	affected	by	changing business	volumes	and	credit	risks,	including	default	and	dilution.	If	default	or	dilution	percentages	were	to	increase	one	percentage	point,	the	amount	of	eligible receivables	would	decrease	by	$6	million.	Should	our	credit	rating	fall	below	investment	grade,	the	value	of	the	outstanding	undivided	interest	held	by	investors	would be	reduced,	and,	in	certain	cases,	the	investors	would	have	the	right	to	discontinue	the	facility.

The	Railroad	services	the	sold	receivables;	however,	the	Railroad	does	not	recognize	any	servicing	asset	or	liability	as	the	servicing	fees	adequately	compensate	us	for these	responsibilities.	The	Railroad	collected	approximately	$16.1	billion	and	$15.5	billion	during	the	years	ended	December	31,	2007	and	2006,	respectively.	UPRI used	certain	of	these	proceeds	to	purchase	new	receivables	under	the	facility.

The	costs	of	the	sale	of	receivables	program	are	included	in	other	income	and	were	$35	million,	$33	million,	and	$23	million	for	2007,	2006,	and	2005,	respectively. The	costs	include	interest,	program	fees	paid	to	banks,	commercial	paper	issuing	costs,	and	fees	for	unused	commitment	availability.

The	investors	have	no	recourse	to	the	Railroad's	other	assets	except	for	customary	warranty	and	indemnity	claims.	Creditors	of	the	Railroad	do	not	have	recourse	to	the assets	of	UPRI.	In	August	2007,	the	sale	of	receivables	program	was	renewed	for	an	additional	364-day	period	without	any	significant	changes	in	terms.

Guarantees	–	At	December	31,	2007,	we	were	contingently	liable	for	$465	million	in	guarantees.	We	have	recorded	a	liability	of	$5	million	and	$6	million	for	the	fair value	of	these	obligations	as	of	December	31,	2007	and	2006,	respectively.	We	entered	into	these	contingent	guarantees	in	the	normal	course	of	business,	and	they include	guaranteed	obligations	related	to	our	headquarters	building,	equipment	financings,	and	affiliated	operations.	The	final	guarantee	expires	in	2022.	We	are	not aware	of	any	existing	event	of	default	that	would	require	us	to	satisfy	these	guarantees.	We	do	not	expect	that	these	guarantees	will	have	a	material	adverse	effect	on	our consolidated	financial	condition,	results	of	operations,	or	liquidity.

Inflation	–	The	cumulative	effect	of	long	periods	of	inflation	significantly	increases	asset	replacement	costs	for	capital-intensive	companies.	As	a	result,	assuming	that we	replace	all	operating	assets	at	current	price	levels,	depreciation	charges	(on	an	inflation-adjusted	basis)	would	be	substantially	greater	than	historically	reported amounts.

Derivative	Financial	Instruments	–	We	may	use	derivative	financial	instruments	in	limited	instances	for	other	than	trading	purposes	to	assist	in	managing	our	overall exposure	to	fluctuations	in	interest	rates	and	fuel	prices.	We	are	not	a	party	to	leveraged	derivatives	and,	by	policy,	do	not	use	derivative	financial	instruments	for speculative	purposes.	Derivative	financial	instruments	qualifying	for	hedge	accounting	must	maintain	a

specified	level	of	effectiveness	between	the	hedging	instrument	and	the	item	being	hedged,	both	at	inception	and	throughout	the	hedged	period.	We	formally	document the	nature	and	relationships	between	the	hedging	instruments	and	hedged	items	at	inception,	as	well	as	our	risk-management	objectives,	strategies	for	undertaking	the various	hedge	transactions,	and	method	of	assessing	hedge	effectiveness.	Changes	in	the	fair	market	value	of	derivative	financial	instruments	that	do	not	qualify	for hedge	accounting	are	charged	to	earnings.	We	may	use	swaps,	collars,	futures,	and/or	forward	contracts	to	mitigate	the	risk	of	adverse	movements	in	interest	rates	and fuel	prices;	however,	the	use	of	these	derivative	financial	instruments	may	limit	future	benefits	from	favorable	price	movements.

Market	and	Credit	Risk	–	We	address	market	risk	related	to	derivative	financial	instruments	by	selecting	instruments	with	value	fluctuations	that	highly	correlate	with the	underlying	hedged	item.	We	manage	credit	risk	related	to	derivative	financial	instruments,	which	is	minimal,	by	requiring	high	credit	standards	for	counterparties and	periodic	settlements.	At	December	31,	2007	and	2006,	we	were	not	required	to	provide	collateral,	nor	had	we	received	collateral,	relating	to	our	hedging	activities.

Determination	of	Fair	Value	–	We	determine	the	fair	values	of	our	derivative	financial	instrument	positions	based	upon	current	fair	values	as	quoted	by	recognized dealers	or	the	present	value	of	expected	future	cash	flows.

Sensitivity	Analyses	–	The	sensitivity	analyses	 that	follow	 illustrate	 the	economic	effect	 that	hypothetical	changes	 in interest	rates	could	have	on	our	results	of operations	and	financial	condition.	These	hypothetical	changes	do	not	consider	other	factors	that	could	impact	actual	results.

At	December	31,	2007,	we	had	variable-rate	debt	representing	approximately	3%	of	our	total	debt.	If	variable	interest	rates	average	one	percentage	point	higher	in	2008 than	our	December	31,	2007	variable	rate,	which	was	approximately	7%,	our	interest	expense	would	increase	by	approximately	$3	million.	This	amount	was	determined by	considering	the	impact	of	the	hypothetical	interest	rate	on	the	balances	of	our	variable-rate	debt	at	December	31,	2007.

Market	risk	for	fixed-rate	debt	is	estimated	as	the	potential	increase	in	fair	value	resulting	from	a	hypothetical	one	percentage	point	decrease	in	interest	rates	as	of December	31,	2007,	and	amounts	to	an	increase	of	approximately	$524	million	to	the	fair	value	of	our	debt	at	December	31,	2007.	We	estimated	the	fair	values	of	our fixed-rate	debt	by	considering	the	impact	of	the	hypothetical	interest	rates	on	quoted	market	prices	and	current	borrowing	rates.

Interest	Rate	Fair	Value	Hedges	–	We	manage	our	overall	exposure	to	fluctuations	in	interest	rates	by	adjusting	the	proportion	of	fixed	and	floating	rate	debt instruments	within	our	debt	portfolio	over	a	given	period.	We	generally	manage	the	mix	of	fixed	and	floating	rate	debt	through	the	issuance	of	targeted	amounts	of	each as	debt	matures	or	as	we	require	incremental	borrowings.	We	employ	derivatives,	primarily	swaps,	as	one	of	the	tools	to	obtain	the	targeted	mix.	In	addition,	we	also obtain	flexibility	in	managing	interest	costs	and	the	interest	rate	mix	within	our	debt	portfolio	by	evaluating	the	issuance	of	and	managing	outstanding	callable	fixed-rate debt	securities.

Swaps	allow	us	to	convert	debt	from	fixed	rates	to	variable	rates	and	thereby	hedge	the	risk	of	changes	in	the	debt's	fair	value	attributable	to	the	changes	in	interest	rates. We	account	for	swaps	as	fair	value	hedges	using	the	short-cut	method	pursuant	to	Financial	Accounting	Standards	Board	(FASB)	Statement	No.	133,	 Accounting	for Derivative	Instruments	and	Hedging	Activities;	therefore,	we	do	not	record	any	ineffectiveness	within	our	Consolidated	Financial	Statements.

Interest	Rate	Cash	Flow	Hedges	–	We	report	changes	in	the	fair	value	of	cash	flow	hedges	in	accumulated	other	comprehensive	loss	until	the	hedged	item	affects earnings.	At	December	31,	2007	and	2006,	we	had	reductions	of	$4	million	and	$5	million,	respectively,	recorded	as	an	accumulated	other	comprehensive	loss	that	is being	amortized	on	a	straight-line	basis	through	September	30,	2014.	As	of	December	31,	2007	and	2006,	we	had	no	interest	rate	cash	flow	hedges	outstanding.

Fuel	Swaps	–	Two	fuel	basis	swaps	cover	a	total	of	151	million	gallons	of	diesel	fuel	for	the	period	August	2006	through	July	2008.	These	commodity	basis	swaps require	us	to	make	payments	to,	or	receive	payments	from,	the	counterparty	based	on	the	difference	between	certain	price	indices.	Changes	in	the	fair	value	of	these swaps	are	reflected	in	fuel	expense.	We	reported	a	derivative	asset	of	approximately	$1	million	and	$2	million	at	December	31,	2007	and	2006,	respectively,	which represents	the	fair	value	of	the	swaps.	The	swaps	increased	fuel	expense	for	2007	by	$1	million	and	reduced	fuel	expense	for	2006	by	$3	million.	The	recognition	of	the swaps	in	fuel	expense	included	monthly	net	settlements	with	the	counterparty	and	the	change	in	fair	value.

Accounting	Pronouncements	–	In	September	2006,	the	FASB	issued	Statement	No.	157,	Fair	Value	Measurements	(FAS	157).	FAS	157	defines	fair	value,	establishes a	framework	for	measuring	fair	value	 in	accordance	with	generally	accepted	accounting	principles	and	expands	disclosures	about	fair	value	measurements.	This statement	does	not	require	any	new	fair	value	measurements;	rather,	it	applies	under	other	accounting	pronouncements	that	require	or	permit	fair	value	measurements. The	provisions	of	FAS	157	are	effective	for	us	beginning	in	2008.	We	expect	this	new	standard	will	result	in	increased	disclosures	but	will	not	have	a	significant	impact on	our	financial	position	or	results	of	operations.

In	 February	 2007,	 the	 FASB	 issued	 Statement	 No.	 159,	The	Fair	Value	Option for	Financial	Assets	and	Financial	Liabilities	 (FAS	 159).	The	 fair	 value	 option established	by	FAS	159	permits,	but	does	not	require,	all	entities	to	choose	to	measure	eligible	items	at	fair	value	at	specified	election	dates.	An	entity	would	report unrealized	gains	and	losses	on	items	for	which	the	fair	value	option	has	been	elected	in	earnings	at	each	subsequent	reporting	date.	FAS	159	is	effective	for	us	beginning in	2008.	We	do	not	currently	intend	to	elect	the	fair	value	option	for	any	eligible	items	and	do	not	expect	this	standard	to	have	a	significant	impact	on	our	financial position	or	results	of	operations.

In	December	2007,	the	FASB	issued	Statement	No.	141	(Revised	2007),	Business	Combinations	(FAS	141R).	FAS	141R	will	change	the	accounting	for	business combinations.	Under	FAS	141R,	an	acquiring	entity	will	be	required	to	recognize	all	the	assets	acquired	and	liabilities	assumed	in	a	transaction	at	the	acquisition-date fair	value	with	limited	exceptions.	FAS	141R	will	also	change	the	accounting	treatment	and	disclosures	with	respect	to	certain	specific	items	in	a	business	combination. FAS	141R	applies	to	us	prospectively	for	business	combinations	occurring	on	or	after	January	1,	2009.	Accordingly,	any	business	combinations	we	engage	in	will	be recorded	and	disclosed	following	existing	GAAP	until	January	1,	2009.	We	expect	FAS	141R	will	have	an	impact	on	accounting	for	business	combinations,	but	the effect	will	be	dependent	upon	any	potential	future	acquisitions.

In	December	2007,	the	FASB	issued	Statement	No.	160,	Noncontrolling	Interests	in	Consolidated	Financial	Statements	–	An	Amendment	of	ARB	No.	51	(FAS	160). FAS	160	establishes	new	accounting	and	reporting	standards	for	the	noncontrolling	interest	in	a	subsidiary	and	for	the	deconsolidation	of	a	subsidiary.	FAS	160	is effective	for	us	beginning	in	2009.	We	are	still	assessing	the	potential	impact,	if	any,	of	the	adoption	of	FAS	160	on	our	consolidated	financial	position,	results	of operations	and	cash	flows.

In	December	2007,	the	FASB	ratified	the	consensus	reached	on	Emerging	Issues	Task	Force	(EITF)	Issue	No.	07-1,	Collaborative	Arrangements	(EITF	07-1),	which defines	collaborative	arrangements	and	establishes	reporting	and	disclosure	requirements	for	transactions	between	participants	in	a	collaborative	arrangement.	The requirements	of	this	EITF	will	be	applied	to	collaborative	arrangements	in	existence	on	or	after	January	1,	2009.	We	are	still	assessing	the	potential	impact,	if	any,	of	the adoption	of	EITF	07-1	on	our	consolidated	financial	position,	results	of	operations	and	cash	flows.

Asserted	and	Unasserted	Claims	–	Various	claims	and	lawsuits	are	pending	against	us	and	certain	of	our	subsidiaries.	We	cannot	fully	determine	the	effect	of	all asserted	and	unasserted	claims	on	our	consolidated	results	of	operations,	financial	condition,	or	liquidity;	however,	to	the	extent	possible,	where	asserted	and	unasserted claims	are	considered	probable	and	where	such	claims	can	be	reasonably	estimated,	we	have	recorded	a	liability.	We	do	not	expect	that	any	known	lawsuits,	claims, environmental	costs,	commitments,	contingent	liabilities,	or	guarantees	will	have	a	material	adverse	effect	on	our	consolidated	results	of

operations,	financial	condition,	or	liquidity	after	taking	into	account	liabilities	previously	recorded	for	these	matters.

Indemnities	–	Our	maximum	potential	exposure	under	indemnification	arrangements,	including	certain	tax	indemnifications,	can	range	from	a	specified	dollar	amount to	an	unlimited	amount,	depending	on	the	nature	of	the	transactions	and	the	agreements.	Due	to	uncertainty	as	to	whether	claims	will	be	made	or	how	they	will	be resolved,	we	cannot	reasonably	determine	the	probability	of	an	adverse	claim	or	reasonably	estimate	any	adverse	liability	or	the	total	maximum	exposure	under	these indemnification	arrangements.	We	do	not	have	any	reason	to	believe	that	we	will	be	required	to	make	any	material	payments	under	these	indemnity	provisions.

Climate	Change	–	Although	climate	change	could	have	an	adverse	impact	on	our	operations	and	financial	performance	in	the	future	(see	Risk	Factors	under	Item	1A), we	are	currently	unable	to	predict	the	manner	or	severity	of	such	impact.	However,	we	continue	to	take	steps	and	explore	opportunities	to	reduce	the	impact	of	our operations	on	the	environment,	including	investments	in	new	technologies,	using	training	programs	to	reduce	fuel	consumption,	and	changing	our	operations	to	increase fuel	efficiency.

# CRITICAL	ACCOUNTING	POLICIES

Our	Consolidated	Financial	Statements	have	been	prepared	in	accordance	with	GAAP.	The	preparation	of	these	financial	statements	requires	estimation	and	judgment that	affect	the	reported	amounts	of	revenue,	expenses,	assets,	and	liabilities.	We	base	our	estimates	on	historical	experience	and	on	various	other	assumptions	that	are believed	to	be	reasonable	under	the	circumstances,	the	results	of	which	form	the	basis	for	making	judgments	about	the	carrying	values	of	assets	and	liabilities	that	are not	readily	apparent	from	other	sources.	The	following	critical	accounting	policies	are	a	subset	of	our	significant	accounting	policies	described	in	note	1	to	the	Financial Statements	and	Supplementary	Data,	Item	8.	These	critical	accounting	policies	affect	significant	areas	of	our	financial	statements	and	involve	judgment	and	estimates.	If these	estimates	differ	significantly	from	actual	results,	the	impact	on	our	Consolidated	Financial	Statements	may	be	material.

Asbestos	–	We	are	a	defendant	in	a	number	of	lawsuits	in	which	current	and	former	employees	and	other	parties	allege	exposure	to	asbestos.	During	2004,	we	engaged	a third	party	with	extensive	experience	in	estimating	resolution	costs	for	asbestos-related	claims	to	assist	us	in	assessing	our	potential	liability.	During	2007,	we	updated our	potential	liability	to	include	actual	claim	experience	since	2004.	As	a	result	of	this	reassessment,	we	decreased	our	liability	by	$20	million	in	2007	for	both	asserted and	unasserted	asbestos-related	claims	through	2034.	This	liability	excludes	future	defense	and	processing	costs.	The	liability	for	resolving	both	asserted	and	unasserted claims	was	based	on	the	following	assumptions:

•The	number	of	future	claims	received	would	be	consistent	with	historical	averages.

•The	number	of	claims	filed	against	us	will	decline	each	year.

•The	average	settlement	values	for	asserted	and	unasserted	claims	will	be	equivalent	to	historical	averages.

•The	percentage	of	claims	dismissed	in	the	future	will	be	equivalent	to	historical	averages.

Our	asbestos-related	liability	activity	was	as	follows:

| Millions	of	Dollars | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Beginning\tbalance | $\t\t302 | $\t\t\t\t\t311 | $\t\t\t\t\t324 |
| Accruals/(credits) | (20) | - | - |
| Payments | (17) | (9) | (13) |
| Ending\tbalance\tat\tDecember\t31 | $\t\t265 | $302 | $311 |
| Current\tportion,\tending\tbalance\tat\tDecember\t31 | $\t\t\t\t11 | $13 | $16 |

Approximately	13%	of	the	recorded	liability	related	to	asserted	claims	and	approximately	87%	related	to	unasserted	claims.	These	claims	are	expected	to	be	paid	out over	the	next	27	years.	In	conjunction	with	the	liability	update	performed	in	2007,	we	also	reassessed	estimated	insurance	recoveries.	We	have	recognized	an	asset	for estimated	insurance	recoveries	at	December	31,	2007	and	2006.	We	will	continue	to	review	actual	experience	and	adjust	our	estimate	as	warranted.

Our	asbestos-related	claims	activity	was	as	follows:

|  | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Open\tclaims,\tbeginning\tbalance | 2,277 | 2,435 | 2,316 |
| New\tclaims | 269 | 316 | 741 |
| Settled\tor\tdismissed\tclaims | (460) | (474) | (622) |
| Open\tclaims,\tending\tbalance\tat\tDecember\t31 | 2,086 | 2,277 | 2,435 |

We	believe	that	our	estimates	of	liability	for	asbestos-related	claims	and	insurance	recoveries	are	reasonable	and	probable.	The	amounts	recorded	for	asbestos-related liabilities	and	related	insurance	recoveries	were	based	on	currently	known	facts.	However,	future	events,	such	as	the	number	of	new	claims	to	be	filed	each	year,	average settlement	costs,	and	insurance	coverage	issues	could	cause	the	actual	costs	and	insurance	recoveries	to	be	higher	or	lower	than	the	projected	amounts.	Estimates	also may	vary	in	the	future	if:	strategies,	activities,	and	outcomes	of	asbestos	litigation	materially	change;	federal	and	state	laws	governing	asbestos	litigation	increase	or decrease	the	probability	or	amount	of	compensation	of	claimants;	and	there	are	material	changes	with	respect	to	payments	made	to	claimants	by	other	defendants.

Environmental	–	We	are	subject	 to	federal,	state,	and	 local	environmental	 laws	and	regulations.	We	 identified	339	sites	at	which	we	are	or	may	be	 liable	for remediation	costs	associated	with	alleged	contamination	or	for	violations	of	environmental	requirements.	This	includes	41	sites	that	are	the	subject	of	actions	taken	by the	 U.S.	 government,	 22	 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,	our	ultimate	environmental	liability	may	include	costs	relating	to	activities	of	other	parties,	in	addition	to	costs	relating	to our	own	activities	at	each	site.	Our	environmental	liability	activity	was	as	follows:

| Millions	of	Dollars | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Beginning\tbalance | \t\t $\t\t210 | $\t\t213 | $\t\t201 |
| Accruals | 41 | 39 | 45 |
| Payments | (42) | (42) | (33) |
| Ending\tbalance\tat\tDecember\t31 | \t\t $\t\t209 | $\t\t210 | $\t\t213 |
| Current\tportion,\tending\tbalance\tat\tDecember\t31 | \t\t $\t\t\t\t63 | $\t\t\t\t54 | $\t\t\t\t46 |

Our	environmental	site	activity	was	as	follows:

|  | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Open\tsites,\tbeginning\tbalance | 367 | 370 | 384 |
| New\tsites | 72 | 50 | 56 |
| Closed\tsites | (100) | (53) | (70) |
| Open\tsites,\tending\tbalance\tat\tDecember\t31 | 339 | 367 | 370 |

When	we	identify	an	environmental	issue	with	respect	to	property	owned,	leased,	or	otherwise	used	in	our	business,	we	and	our	consultants	perform	environmental assessments	on	the	property.	We	expense	the	cost	of	the	assessments	as	incurred.	We	accrue	the	cost	of	remediation	where	our	obligation	is	probable	and	we	can reasonably	estimate	such	costs.	We	do	not	discount	our	environmental	liabilities	when	the	timing	of	the	anticipated	cash	payments	is	not	fixed	or	readily	determinable.

The	liability	includes	future	costs	for	remediation	and	restoration	of	sites,	as	well	as	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	 ultimate	 liability	 for	 remediation	 is	 difficult	 to	 determine	 because	 of	 the	 number	 of	 potentially	 responsible	 parties,	 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	the	speculative	nature	of	remediation	costs.	Estimates	of	liability	may	vary	over	time	due	to	changes	in	federal,	state,	and	local	laws	governing	environmental remediation.	Current	obligations	are	not	expected	to	have	a	material	adverse	effect	on	our	consolidated	results	of	operations,	financial	condition,	or	liquidity.

Personal	Injury	–	The	cost	of	personal	injuries	to	employees	and	others	related	to	our	activities	is	charged	to	expense	based	on	estimates	of	the	ultimate	cost	and number	of	incidents	each	year.	We	use	third-party	actuaries	to	assist	us	in	measuring	the	expense	and	liability,	including	unasserted	claims.	The	Federal	Employers' Liability	Act	(FELA)	governs	compensation	for	work-related	accidents.	Under	FELA,	damages	are	assessed	based	on	a	finding	of	fault	through	litigation	or	out-of-court settlements.	We	offer	a	comprehensive	variety	of	services	and	rehabilitation	programs	for	employees	who	are	injured	at	work.

Our	personal	injury	liability	is	discounted	to	present	value	using	applicable	U.S.	Treasury	rates.	Approximately	89%	of	the	recorded	liability	related	to	asserted	claims, and	approximately	11%	related	to	unasserted	claims.	Estimates	can	vary	over	time	due	to	evolving	trends	in	litigation.	Our	personal	injury	liability	activity	was	as follows:

| Millions	of	Dollars | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Beginning\tbalance | $\t\t631 | $\t\t619 | $\t\t639 |
| Accruals | 165 | 240 | 247 |
| Payments | (203) | (228) | (267) |
| Ending\tbalance\tat\tDecember\t31 | $\t\t593 | $\t\t631 | $\t\t619 |
| Current\tportion,\tending\tbalance\tat\tDecember\t31 | $\t\t204 | $\t\t233 | $\t\t274 |

Our	personal	injury	claims	activity	was	as	follows:

|  | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Open\tclaims,\tbeginning\tbalance | 4,126 | 4,197 | 4,028 |
| New\tclaims | 4,133 | 4,190 | 4,584 |
| Settled\tor\tdismissed\tclaims | (4,175) | (4,261) | (4,415) |
| Open\tclaims,\tending\tbalance\tat\tDecember\t31 | 4,084 | 4,126 | 4,197 |

Depreciation	–	The	railroad	industry	is	capital	intensive.	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	lives	are	calculated	using	a	separate	composite	annual	percentage	rate	for	each	depreciable	property	group, based	on	the	results	of	internal	depreciation	studies.	We	are	required	to	submit	a	report	on	depreciation	studies	and	proposed	depreciation	rates	to	the	STB	for	review	and approval	every	three	years	for	equipment	property	and	every	six	years	for	road	property.	The	cost	(net	of	salvage)	of	depreciable	railroad	property	retired	or	replaced	in the	ordinary	course	of	business	is	charged	to	accumulated	depreciation,	and	no	gain	or	loss	is	recognized.	A	gain	or	loss	is	recognized	in	other	income	for	all	other property	upon	disposition	because	the	gain	or	loss	is	not	part	of	rail	operations.	The	cost	of	internally	developed	software	is	capitalized	and	amortized	based	on	estimated service	lives	of	the	software.

Significant	capital	spending	in	recent	years	increased	the	total	value	of	our	depreciable	assets.	Cash	capital	spending	totaled	$2.5	billion	for	the	year	ended	December	31, 2007.	For	the	year	ended	December	31,	2007,	depreciation	expense	was	$1.3	billion.	We	use	various	methods	to	estimate	useful	lives	for	each	group	of	depreciable property.	Due	to	the	capital	intensive	nature	of	the	business	and	the	large	base	of	depreciable	assets,	variances	to	those	estimates	could	have	a	material	effect	on	our Consolidated	Financial	Statements.	If	the	estimated	useful	lives	of	all	depreciable	assets	were	increased	by	one	year,	annual	depreciation	expense	would	decrease	by approximately	$47	million.	If	the	estimated	useful	lives	of	all	assets	to	be	depreciated	were	decreased	by	one	year,	annual	depreciation	expense	would	increase	by approximately	$50	million.

Income	Taxes	–	As	required	under	FASB	Statement	No.	109,	Accounting	for	Income	Taxes,	we	account	for	income	taxes	by	recording	taxes	payable	or	refundable	for the	current	year	and	deferred	tax	assets	and	liabilities	for	the	expected	future	tax	consequences	of	events	that	have	been	recognized	in	our	financial	statements	or	tax returns.	These	expected	future	consequences	are	measured	based	on	provisions	of	 tax	 law	as	currently	enacted;	 the	effects	of	future	changes	 in	 tax	 law	are	not anticipated.	Future	tax	law	changes,	such	as	a	change	in	the	corporate	tax	rate,	could	have	a	material	impact	on	our	financial	condition	or	results	of	operations.	For example,	a	1%	increase	in	the	federal	income	tax	rate	would	increase	our	deferred	tax	liability	by	approximately	$250	million.

When	appropriate,	we	record	a	valuation	allowance	against	deferred	tax	assets	to	offset	future	tax	benefits	that	may	not	be	realized.	In	determining	whether	a	valuation allowance	is	appropriate,	we	consider	whether	it	is	more	likely	than	not	that	all	or	some	portion	of	our	deferred	tax	assets	will	not	be	realized,	based	on	management's judgments	regarding	the	best	available	evidence	about	future	events.	Based	on	that	analysis,	there	was	no	valuation	allowance	at	December	31,	2007	or	2006.

When	we	have	claimed	tax	benefits	that	may	be	challenged	by	a	tax	authority,	these	uncertain	tax	benefits	are	accounted	for	under	FASB	Interpretation	No.	48, Accounting	for	Uncertainty	in	Income	Taxes,	an	Interpretation	of	FASB	Statement	No.	109	(FIN	48).	We	adopted	FIN	48	beginning	January	1,	2007.	Prior	to	2007, income	tax	contingencies	were	accounted	for	under	FASB	Statement	No.	5,	Accounting	for	Contingencies.

Under	FIN	48,	we	recognize	tax	benefits	only	for	tax	positions	that	are	more	likely	than	not	to	be	sustained	upon	examination	by	tax	authorities.	The	amount	recognized is	measured	as	the	largest	amount	of	benefit	that	is	greater	than	50	percent	likely	to	be	realized	upon	settlement.	A	liability	for	"unrecognized	tax	benefits"	is	recorded for	any	tax	benefits	claimed	in	our	tax	returns	that	do	not	meet	these	recognition	and	measurement

standards.	For	additional	information	on	the	adoption	of	FIN	48,	see	note	4	to	the	Consolidated	Financial	Statements.

Pension	and	Other	Postretirement	Benefits	–	We	use	third-party	actuaries	to	assist	us	in	properly	measuring	the	liabilities	and	expenses	associated	with	providing pension	and	defined	contribution	medical	and	life	insurance	benefits	(OPEB)	to	eligible	employees.	In	order	to	use	actuarial	methods	to	value	the	liabilities	and	expenses we	must	make	several	assumptions.	The	critical	assumptions	used	to	measure	pension	obligations	and	expenses	are	the	discount	rate	and	expected	rate	of	return	on pension	assets.	For	OPEB,	the	critical	assumptions	are	the	discount	rate	and	healthcare	cost	trend	rate.

We	evaluate	our	critical	assumptions	at	least	annually,	and	selected	assumptions	are	based	on	the	following	factors:

•	 Discount	rate	is	based	on	a	hypothetical	portfolio	of	high	quality	corporate	bonds	(rated	AA	by	a	recognized	rating	agency)	for	which	the	timing	and	amount	of cash	flows	matches	our	plan's	expected	benefit	payments.

•Expected	return	on	plan	assets	is	based	on	our	asset	allocation	mix	and	our	historical	return,	taking	into	consideration	current	and	expected	market	conditions.

•	 Healthcare	cost	trend	rate	is	based	on	our	historical	rates	of	inflation	and	expected	market	conditions.

The	following	tables	present	the	key	assumptions	used	to	measure	pension	and	OPEB	expense	for	2007	and	the	estimated	impact	on	2007	pension	and	OPEB	expense relative	to	a	change	in	those	assumptions:

| Millions	of	Dollars | Pension | OPEB |
| :--- | :--- | :--- |
| 0.25%\tdecrease\tin\tdiscount\trate | $\t\t\t6 | $\t\t\t2 |
| 0.25%\tincrease\tin\tsalary\tscale | $\t\t\t2 | N/A |
| 0.25%\tdecrease\tin\texpected\treturn\ton\tplan\tassets | $\t\t\t4 | N/A |
| 1%\tincrease\tin\thealthcare\tcost\ttrend\trate | N/A | $\t\t\t5 |

# CAUTIONARY	INFORMATION

Certain	statements	in	this	report,	and	statements	in	other	reports	or	information	filed	or	to	be	filed	with	the	SEC	(as	well	as	information	included	in	oral	statements	or other	written	statements	made	or	to	be	made	by	us),	are,	or	will	be,	forward-looking	statements	as	defined	by	the	Securities	Act	of	1933	and	the	Securities	Exchange	Act of	1934.	These	forward-looking	statements	include,	without	limitation,	statements	regarding	dividends	in	Item	5	and	statements	and	information	set	forth	under	the caption	"2008	Outlook"	in	this	Item	7,	and	any	other	statements	or	information	in	this	report	(including	information	incorporated	herein	by	reference)	regarding: expectations	 as	 to	 operational	 or	 service	 improvements;	 expectations	 regarding	 the	 effectiveness	 of	 steps	 taken	 or	 to	 be	 taken	 to	 improve	 operations,	 service, infrastructure	improvements,

transportation	plan	modifications,	and	management	of	customer	traffic	on	the	system	to	meet	demand	(including	statements	set	forth	in	Item	2	regarding	expectations related	to	our	capital	expenditures);	expectations	as	to	cost	savings,	revenue	growth,	and	earnings;	the	time	by	which	goals,	targets,	or	objectives	will	be	achieved; projections,	predictions,	expectations,	estimates,	or	forecasts	as	to	our	business,	financial	and	operational	results,	future	economic	performance,	and	general	economic conditions;	 proposed	 new	 products	 and	 services;	 estimates	 of	 costs	 relating	 to	 environmental	 remediation	 and	 restoration;	 expectations	 that	 claims,	 litigation, environmental	costs,	commitments,	contingent	liabilities,	labor	negotiations	or	agreements,	or	other	matters	will	not	have	a	material	adverse	effect	on	our	consolidated results	of	operations,	financial	condition,	or	liquidity	and	any	other	similar	expressions	concerning	matters	that	are	not	historical	facts.

Forward-looking	statements	should	not	be	read	as	a	guarantee	of	future	performance	or	results,	and	will	not	necessarily	be	accurate	indications	of	the	times	that,	or	by which,	such	performance	or	results	will	be	achieved.	Forward-looking	information	is	subject	to	risks	and	uncertainties	that	could	cause	actual	performance	or	results	to differ	materially	from	those	expressed	in	the	statements.

Forward-looking	statements	and	information	reflect	the	good	faith	consideration	by	management	of	currently	available	information,	and	may	be	based	on	underlying assumptions	believed	to	be	reasonable	under	the	circumstances.	However,	such	information	and	assumptions	(and,	therefore,	such	forward-looking	statements	and information)	are	or	may	be	subject	to	variables	or	unknown	or	unforeseeable	events	or	circumstances	over	which	management	has	little	or	no	influence	or	control.	The Risk	Factors	in	Item	1A	of	this	report	could	affect	our	future	results	and	could	cause	those	results	or	other	outcomes	to	differ	materially	from	those	expressed	or	implied in	the	forward-looking	statements.

Forward-looking	statements	speak	only	as	of	the	date	the	statement	was	made.	We	assume	no	obligation	to	update	forward-looking	information	to	reflect	actual	results, changes	in	assumptions	or	changes	in	other	factors	affecting	forward-looking	information.	If	we	do	update	one	or	more	forward-looking	statements,	no	inference	should be	drawn	that	we	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.

# Item	8.	Financial	Statements	and	Supplementary	Data

| Item	8.	Financial	Statements	and	Supplementary	Data |  |
| :--- | :--- |
| Index\tto\tConsolidated\tFinancial\tStatements | Page |
| Report\tof\tIndependent\tRegistered\tPublic\tAccounting\tFirm | 47 |
| Consolidated\tStatements\tof\tIncome\nFor\tthe\tYears\tEnded\tDecember\t31,\t2007,\t2006,\tand\t2005 | 48 |
| Consolidated\tStatements\tof\tFinancial\tPosition\nAt\tDecember\t31,\t2007\tand\t2006 | 49 |
| Consolidated\tStatements\tof\tCash\tFlows\nFor\tthe\tYears\tEnded\tDecember\t31,\t2007,\t2006,\tand\t2005 | 50 |
| Consolidated\tStatements\tof\tChanges\tin\tCommon\tShareholders'\tEquity\nFor\tthe\tYears\tEnded\tDecember\t31,\t2007,\t2006,\tand\t2005 | 51 |
| Notes\tto\tthe\tConsolidated\tFinancial\tStatements | 52 |

# REPORT	OF	INDEPENDENT	REGISTERED	PUBLIC	ACCOUNTING	FIRM

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,	2007	and	2006,	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,	2007.	Our	audits	also	included	the	financial	statement	schedule	listed	in	the	Table	of	Contents	at	Part	IV,	Item	15.	These	financial statements	and	financial	statement	schedule	are	 the	responsibility	of	 the	Corporation's	management.	Our	responsibility	 is	 to	express	an	opinion	on	 the	financial statements	and	financial	statement	schedule	based	on	our	audits.

We	conducted	our	audits	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States).	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	as	of	December	31,	2007	and	2006,	and	the	results	of	their	operations	and	their	cash	flows	for	each	of	the	three	years	in	the	period	ended	December	31,	2007, in	conformity	with	accounting	principles	generally	accepted	in	the	United	States	of	America.	Also,	in	our	opinion,	such	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.

As	discussed	in	Note	7	to	the	consolidated	financial	statements,	in	2006	the	Corporation	adopted	Statement	of	Financial	Accounting	Standards	No.	158,	Employers' Accounting	for	Defined	Benefit	Pension	and	Other	Postretirement	Plans.

We	have	also	audited,	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States),	the	Corporation's	internal	control	over financial	reporting	as	of	December	31,	2007,	based	on	the	criteria	established	in	Internal	Control	—	Integrated	Framework	issued	by	the	Committee	of	Sponsoring Organizations	of	the	Treadway	Commission	and	our	report	dated	February	15,	2008	expressed	an	unqualified	opinion	on	the	Corporation's	internal	control	over	financial reporting.

Omaha,	Nebraska

# Consolidated	Statements	of	Income

# Union	Pacific	Corporation	and	Subsidiary	Companies

| for	the	Years	Ended	December	31, | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Operating\trevenue | $\t\t16,283 | $\t\t15,578 | $\t\t13,578 |
| Operating\texpenses: |  |  |  |
| Salaries,\twages,\tand\temployee\tbenefits | 4,591 | 4,599 | 4,375 |
| Fuel\tand\tutilities | 3,164 | 3,012 | 2,562 |
| Equipment\tand\tother\trents | 1,423 | 1,455 | 1,402 |
| Depreciation | 1,321 | 1,237 | 1,175 |
| Materials\tand\tsupplies | 714 | 691 | 546 |
| Casualty\tcosts | 321 | 410 | 411 |
| Purchased\tservices\tand\tother\tcosts | 1,374 | 1,290 | 1,312 |
| Total\toperating\texpenses | 12,908 | 12,694 | 11,783 |
| Operating\tincome | 3,375 | 2,884 | 1,795 |
| Other\tincome | 116 | 118 | 145 |
| Interest\texpense | (482) | (477) | (504) |
| Income\tbefore\tincome\ttaxes | 3,009 | 2,525 | 1,436 |
| Income\ttaxes | (1,154) | (919) | (410) |
| Net\tincome | $\t\t\t\t1,855 | $\t\t\t\t1,606 | $\t\t\t\t1,026 |
| Share\tand\tPer\tShare\t(note\t9): |  |  |  |
| Earnings\tper\tshare\t–\tbasic | $\t\t\t\t\t\t6.97 | $\t\t\t\t\t\t5.96 | $\t\t\t\t\t\t3.89 |
| Earnings\tper\tshare\t–\tdiluted | $\t\t\t\t\t\t6.91 | $\t\t\t\t\t\t5.91 | $\t\t\t\t\t\t3.85 |
| Weighted\taverage\tnumber\tof\tshares\t–\tbasic | 265.9 | 269.4 | 263.4 |
| Weighted\taverage\tnumber\tof\tshares\t–\tdiluted | 268.4 | 272.0 | 266.5 |
| Dividends\tdeclared\tper\tshare | $\t\t\t\t\t\t1.49 | $\t\t\t\t\t\t1.20 | $\t\t\t\t\t\t1.20 |

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

# Consolidated	Statements	of	Financial	Position

| Millions	of	Dollars,	as	of	December	31, | 2007 | 2006 |
| :--- | :--- | :--- |
| Assets |  |  |
| Current\tassets: |  |  |
| Cash\tand\tcash\tequivalents | $\t\t\t\t\t\t\t\t878 | $\t\t\t\t\t\t\t\t827 |
| Accounts\treceivable,\tnet | 632 | 679 |
| Materials\tand\tsupplies | 453 | 395 |
| Current\tdeferred\tincome\ttaxes | 336 | 319 |
| Other\tcurrent\tassets | 295 | 191 |
| Total\tcurrent\tassets | 2,594 | 2,411 |
| Investments: |  |  |
| Investments\tin\tand\tadvances\tto\taffiliated\tcompanies | 912 | 865 |
| Other\tinvestments | 11 | 12 |
| Total\tinvestments | 923 | 877 |
| Properties: |  |  |
| Road | 37,661 | 35,634 |
| Equipment | 7,818 | 7,637 |
| Other | 175 | 177 |
| Total\tcost | 45,654 | 43,448 |
| Accumulated\tdepreciation | (11,496) | (10,575) |
| Net\tproperties | 34,158 | 32,873 |
| Other\tassets | 358 | 354 |
| Total\tassets | $\t\t\t38,033 | $\t\t\t36,515 |
| Liabilities\tand\tCommon\tShareholders'\tEquity |  |  |
| Current\tliabilities: |  |  |
| Accounts\tpayable | $\t\t\t\t\t\t\t\t732 | $\t\t\t\t\t\t\t\t684 |
| Accrued\twages\tand\tvacation | 394 | 412 |
| Accrued\tcasualty\tcosts | 371 | 409 |
| Income\tand\tother\ttaxes | 343 | 279 |
| Dividends\tand\tinterest | 284 | 238 |
| Debt\tdue\twithin\tone\tyear | 139 | 780 |
| Equipment\trents\tpayable | 103 | 108 |
| Other\tcurrent\tliabilities | 675 | 629 |
| Total\tcurrent\tliabilities | 3,041 | 3,539 |
| Debt\tdue\tafter\tone\tyear | 7,543 | 6,000 |
| Deferred\tincome\ttaxes | 10,050 | 9,696 |
| Accrued\tcasualty\tcosts | 799 | 868 |
| Retiree\tbenefits\tobligation | 462 | 504 |
| Other\tlong-term\tliabilities | 553 | 596 |
| Commitments\tand\tcontingencies\t(note\t10) |  |  |
| Total\tliabilities | 22,448 | 21,203 |
| Common\tshareholders'\tequity: |  |  |
| Common\tshares,\t$2.50\tpar\tvalue,\t500,000,000\tauthorized;\t276,162,141\tand\t275,962,411 |  |  |
| issued;\t260,869,647\tand\t270,172,290\toutstanding,\trespectively | 690 | 690 |
| Paid-in-surplus | 3,926 | 3,943 |
| Retained\tearnings | 12,667 | 11,215 |
| Treasury\tstock | (1,624) | (394) |
| Accumulated\tother\tcomprehensive\tloss | (74) | (142) |
| Total\tcommon\tshareholders'\tequity | 15,585 | 15,312 |
| Total\tliabilities\tand\tcommon\tshareholders'\tequity | $\t\t\t38,033 | $\t\t\t36,515 |

# Consolidated	Statements	of	Cash	Flows

| for	the	Years	Ended	December	31, | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Operating\tActivities |  |  |  |
| Net\tincome | $\t\t\t1,855 | $\t\t\t1,606 | $\t\t\t1,026 |
| Adjustments\tto\treconcile\tnet\tincome\tto\tcash\tprovided\tby\toperating\tactivities: |  |  |  |
| Depreciation | 1,321 | 1,237 | 1,175 |
| Deferred\tincome\ttaxes\tand\tunrecognized\ttax\tbenefits | 332 | 235 | 320 |
| Stock-based\tcompensation\texpense | 44 | 35 | 21 |
| Net\tgain\tfrom\tasset\tsales | (52) | (72) | (135) |
| Other\toperating\tactivities,\tnet | (251) | (175) | 37 |
| Changes\tin\tcurrent\tassets\tand\tliabilities,\tnet | 28 | 14 | 151 |
| Cash\tprovided\tby\toperating\tactivities | 3,277 | 2,880 | 2,595 |
| Investing\tActivities |  |  |  |
| Capital\tinvestments | (2,496) | (2,242) | (2,169) |
| Proceeds\tfrom\tasset\tsales | 122 | 133 | 185 |
| Acquisition\tof\tequipment\tpending\tfinancing | (621) | (536) | (872) |
| Proceeds\tfrom\tcompleted\tequipment\tfinancings | 621 | 536 | 872 |
| Other\tinvesting\tactivities | (52) | 67 | (63) |
| Cash\tused\tin\tinvesting\tactivities | (2,426) | (2,042) | (2,047) |
| Financing\tActivities |  |  |  |
| Common\tshare\trepurchases\t(note\t12) | (1,375) | - | - |
| Dividends\tpaid | (364) | (322) | (314) |
| Debt\trepaid | (792) | (657) | (699) |
| Debt\tissued | 1,581 | - | - |
| Net\tproceeds\tfrom\tequity\tcompensation\tplans | 71 | 160 | 262 |
| Excess\ttax\tbenefits\tfrom\tequity\tcompensation\tplans | 76 | 29 | - |
| Other\tfinancing\tactivities | 3 | 6 | (1) |
| Cash\tused\tin\tfinancing\tactivities | (800) | (784) | (752) |
| Net\tchange\tin\tcash\tand\tcash\tequivalents | 51 | 54 | (204) |
| Cash\tand\tcash\tequivalents\tat\tbeginning\tof\tyear | 827 | 773 | 977 |
| Cash\tand\tcash\tequivalents\tat\tend\tof\tyear | $\t\t\t\t\t\t878 | $\t\t\t\t\t\t827 | $\t\t\t\t\t\t773 |
| Changes\tin\tCurrent\tAssets\tand\tLiabilities,\tNet\tof\tAcquisitions |  |  |  |
| Accounts\treceivable,\tnet | $47 | $68 | $\t\t\t\t\t(201) |
| Materials\tand\tsupplies | (58) | (64) | (22) |
| Other\tcurrent\tassets | (104) | (21) | 12 |
| Accounts,\twages,\tand\tvacation\tpayable | 30 | (102) | 224 |
| Other\tcurrent\tliabilities | 113 | 133 | 138 |
| Total | $\t\t\t\t\t\t\t\t28 | $\t\t\t\t\t\t\t\t14 | $\t\t\t\t\t\t151 |
| Supplemental\tCash\tFlow\tInformation |  |  |  |
| Non-cash\tactivity: |  |  |  |
| Capital\tinvestments\taccrued\tbut\tnot\tyet\tpaid | $\t\t\t\t\t\t126 | $\t\t\t\t\t\t106 | $\t\t\t\t\t\t103 |
| Capital\tlease\tfinancings | 82 | 16 | - |
| Common\tshares\trepurchased\tbut\tnot\tyet\tpaid | 82 | - | - |
| Cash\tdividends\tdeclared\tbut\tnot\tyet\tpaid | 112 | 80 | 78 |
| Cash\tpaid\tduring\tthe\tyear\tfor: |  |  |  |
| Interest,\tnet\tof\tamounts\tcapitalized | $\t\t\t\t\t(467) | $\t\t\t\t\t(492) | $\t\t\t\t\t(510) |
| Income\ttaxes,\tnet\tof\trefunds | (839) | (549) | (29) |

# Consolidated	Statements	of	Changes	in	Common	Shareholders'	Equity

|  |  |  |  |  |  |  | Accumulated |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  |  |  |  |  | Other |  |
|  |  |  |  | Paid- |  |  | Comprehensive |  |
| Millions\tof\tDollars | Common | Treasury | Common | in- | Retained | Treasury | Income/(Loss) |  |
| Thousands\tof\tShares | Shares | Shares | Shares | Surplus | Earnings | Stock | (note\t13) | Total |
| Balance\tat\tJanuary\t1,\t2005 | 275,695 | (15,175) | $689 | $3,917 | $9,222 | $(936) | $(237) | $12,655 |
| Comprehensive\tincome: |  |  |  |  |  |  |  |  |
| Net\tincome |  |  | - | - | 1,026 | - | - | 1,026 |
| Other\tcomp.\tincome |  |  | - | - | - | - | 7 | 7 |
| Total\tcomp.\tincome\t(note\t13) |  |  | - | - | 1,026 | - | 7 | 1,033 |
| Conversion,\tstock\toption\texercises,\tforfeitures,\tand\tother | 104 | 6,011 | - | (2) | - | 337 | - | 335 |
| Dividends\tdeclared\t($1.20\tper\tshare) | - | - | - | - | (316) | - | - | (316) |
| Balance\tat\tDecember\t31,\t2005 | 275,799 | (9,164) | $689 | $3,915 | $9,932 | $(599) | $(230) | $13,707 |
| Comprehensive\tincome: |  |  |  |  |  |  |  |  |
| Net\tincome |  |  | - | - | 1,606 | - | - | 1,606 |
| Other\tcomp.\tincome |  |  | - | - | - | - | 167 | 167 |
| Total\tcomp.\tincome\t(note\t13) |  |  | - | - | 1,606 | - | 167 | 1,773 |
| FAS\t158\tadoption\t(note\t7) | - | - | - | - | - | - | (79) | (79) |
| Conversion,\tstock\toption\texercises,\tforfeitures,\tand\tother | 163 | 3,374 | 1 | 28 | - | 205 | - | 234 |
| Dividends\tdeclared\t($1.20\tper\tshare) | - | - | - | - | (323) | - | - | (323) |
| Balance\tat\tDecember\t31,\t2006 | 275,962 | (5,790) | $690 | $3,943 | $11,215 | $(394) | $(142) | $15,312 |
| Cumulative\teffect\tof\tadoption\tof\tFIN\t48\t(note\t4) | - | - | - | - | (7) | - | - | (7) |
| Balance\tat\tJanuary\t1,\t2007 | 275,962 | (5,790) | $690 | $3,943 | $11,208 | $(394) | $(142) | $15,305 |
| Comprehensive\tincome: |  |  |  |  |  |  |  |  |
| Net\tincome |  |  | - | - | 1,855 | - | - | 1,855 |
| Other\tcomp.\tincome |  |  | - | - | - | - | 68 | 68 |
| Total\tcomp.\tincome\t(note\t13) |  |  | - | - | 1,855 | - | 68 | 1,923 |
| Conversion,\tstock\toption\texercises,\tforfeitures,\tand\tother | 200 | 3,122 | - | (17) | - | 227 | - | 210 |
| Share\trepurchases\t(note\t12) | - | (12,624) | - | - | - | (1,457) | - | (1,457) |
| Dividends\tdeclared\t($1.49\tper\tshare) | - | - | - | - | (396) | - | - | (396) |
| Balance\tat\tDecember\t31,\t2007 | 276,162 | (15,292) | $690 | $3,926 | $12,667 | $(1,624) | $(74) | $15,585 |

# NOTES	TO	THE	CONSOLIDATED	FINANCIAL	STATEMENTS

For	purposes	of	this	report,	unless	the	context	otherwise	requires,	all	references	herein	to	the	"Corporation",	"UPC",	"we",	"us",	and	"our"	mean	Union	Pacific Corporation	and	its	subsidiaries,	including	Union	Pacific	Railroad	Company,	which	will	be	separately	referred	to	herein	as	"UPRR"	or	the	"Railroad".

# 1.				Significant	Accounting	Policies

Principles	of	Consolidation	–	The	Consolidated	Financial	Statements	include	the	accounts	of	Union	Pacific	Corporation	and	all	of	its	subsidiaries.	Investments	in affiliated	companies	(20%	to	50%	owned)	are	accounted	for	using	the	equity	method	of	accounting.	All	significant	intercompany	transactions	are	eliminated.	The Corporation	evaluates	its	less	than	majority-owned	investments	for	consolidation	pursuant	to	Financial	Accounting	Standards	Board	(FASB)	Interpretation	No.	46 (Revised	 2003),	Consolidation	of	Variable	Interest	Entities,	an	Interpretation	of	Accounting	Research	Bulletin	No.	51	(FIN	46(R)).	We	currently	have	no	less	than majority-owned	investments	that	require	consolidation	under	FIN	46(R).

Cash	and	Cash	Equivalents	–	Cash	equivalents	consist	of	investments	with	original	maturities	of	three	months	or	less.

Materials	and	Supplies	–	Materials	and	supplies	are	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,	and	no	gain	or	loss	is	recognized.	A	gain	or	loss	is	recognized	in	other	income	for	all	other	property	upon	disposition	because	the	gain	or	loss	is	not	part	of rail	operations.	The	cost	of	purchased	and	internally	developed	software	is	capitalized	and	amortized	based	on	estimated	service	lives	of	the	software.

Impairment	of	Long-lived	Assets	–	We	review	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	–	We	recognize	commodity	revenue	on	a	percentage-of-completion	basis	as	freight	moves	from	origin	to	destination.	The	allocation	of	revenue between	reporting	periods	is	based	on	the	relative	transit	time	in	each	reporting	period	with	expenses	recognized	as	incurred.	Other	revenue	is	recognized	as	service	is performed	or	contractual	obligations	are	met.	Customer	incentives,	which	are	primarily	provided	for	shipping	a	specified	cumulative	volume	or	shipping	to/from	specific locations,	are	recorded	as	a	reduction	to	operating	revenue	based	on	actual	or	projected	future	customer	shipments.

Translation	of	Foreign	Currency	–	Our	portion	of	the	assets	and	liabilities	related	to	foreign	investments	are	translated	into	U.S.	dollars	at	the	exchange	rates	in	effect at	the	balance	sheet	date.	Revenue	and	expenses	are	translated	at	the	average	rates	of	exchange	prevailing	during	the	year.	Unrealized	adjustments	are	reflected	within common	shareholders'	equity	as	accumulated	other	comprehensive	income	or	loss.

Financial	Instruments	–	The	carrying	value	of	our	non-derivative	financial	instruments	approximates	fair	value.	The	fair	value	of	financial	instruments	is	generally determined	by	reference	to	market	values	as	quoted	by	recognized	dealers	or	developed	based	upon	the	present	value	of	expected	future	cash	flows.

We	periodically	use	derivative	financial	instruments,	for	other	than	trading	purposes,	to	manage	risk	related	to	changes	in	fuel	prices	and	interest	rates.

Stock-Based	Compensation	–	We	have	several	stock-based	compensation	plans	under	which	employees	and	non-employee	directors	receive	stock	options,	nonvested retention	shares,	and	nonvested	stock	units.	We	refer	to	the	nonvested	shares	and	stock	units	collectively	as	"retention	awards".	We	issue	treasury	shares	to	cover	option exercises	and	stock	unit	vestings,	while	new	shares	are	issued	when	retention	shares	vest.

We	adopted	FASB	Statement	No.	123(R),	Share-Based	Payment	(FAS	123(R)),	on	January	1,	2006.	FAS	123(R)	requires	us	to	measure	and	recognize	compensation expense	for	all	stock-based	awards	made	to	employees	and	directors,	including	stock	options.	Compensation	expense	is	based	on	the	calculated	fair	value	of	the	awards as	measured	at	the	grant	date	and	is	expensed	ratably	over	the	service	period	of	the	awards	(generally	the	vesting	period).	The	fair	value	of	retention	awards	is	the	closing stock	price	on	the	date	of	grant,	while	the	fair	value	of	stock	options	is	determined	by	using	the	Black-Scholes	option	pricing	model.	We	elected	to	use	the	modified prospective	transition	method	as	permitted	by	FAS	123(R)	and	did	not	restate	financial	results	for	prior	periods.	We	did	not	make	an	adjustment	for	the	cumulative	effect of	estimated	forfeitures,	as	the	impact	was	not	material.

As	a	result	of	the	adoption	of	FAS	123(R),	we	recognized	expense	for	stock	options	in	2007	and	2006,	in	addition	to	retention	awards,	which	were	expensed	prior	to 2006.	Information	regarding	stock-based	compensation	appears	in	the	table	below:

| Millions	of	Dollars | 2007 | 2006 |
| :--- | :--- | :--- |
| Stock-based\tcompensation,\tbefore\ttax: |  |  |
| Stock\toptions | $\t\t21 | $\t\t14 |
| Retention\tawards | 23 | 21 |
| Total\tstock-based\tcompensation,\tbefore\ttax | $\t\t44 | $\t\t35 |
| Total\tstock-based\tcompensation,\tafter\ttax | $\t\t27 | $\t\t22 |

Prior	to	the	adoption	of	FAS	123(R),	we	applied	the	recognition	and	measurement	principles	of	Accounting	Principles	Board	Opinion	No.	25,	Accounting	for	Stock Issued	to	Employees,	and	related	interpretations.	No	stock-based	employee	compensation	expense	related	to	stock	option	grants	was	reflected	in	net	income,	as	all options	granted	under	those	plans	had	a	grant	price	equal	to	the	market	value	of	our	common	stock	on	the	date	of	grant.	Stock-based	compensation	expense	related	to retention	shares,	stock	units,	and	other	incentive	plans	was	reflected	in	net	income.

The	following	table	details	the	effect	on	net	income	and	earnings	per	share	had	compensation	expense	for	all	of	our	stock-based	awards,	including	stock	options,	been recorded	in	the	year	ended	December	31,	2005	based	on	the	fair	value	method	under	FASB	Statement	No.	123,	Accounting	for	Stock-Based	Compensation.

[a] Stock	options	for	executives	granted	in	2003	and	2002	included	a	reload	feature.	This	reload	feature	allowed	executives	to	exercise	their	options	using	shares	of	Union	Pacific	Corporation	common	stock	that	they already	owned	and	obtain	a	new	grant	of	options	in	the	amount	of	the	shares	used	for	exercise	plus	any	shares	withheld	for	tax	purposes.	The	reload	feature	of	these	option	grants	could	only	be	exercised	if	the price	of	our	common	stock	increased	at	least	20%	from	the	price	at	the	time	of	the	reload	grant.	During	the	year	ended	December	31,	2005,	reload	option	grants	represented	$19	million	of	the	pro	forma	expense noted	above.	There	were	no	reload	option	grants	during	2007	and	2006	as	stock	options	exercised	after	January	1,	2006	are	not	eligible	for	the	reload	feature.

Earnings	Per	Share	–	Basic	earnings	per	share	are	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	stock-based	awards	where	the	conversion	of	such	instruments	would	be	dilutive.

Use	 of	 Estimates	 –	Our	Consolidated	Financial	Statements	include	estimates	and	assumptions	regarding	certain	assets,	liabilities,	revenue,	and	expenses	and	the disclosure	of	certain	contingent	assets	and	liabilities.	Actual	future	results	may	differ	from	such	estimates.

Income	Taxes	–	As	required	under	FASB	Statement	No.	109,	Accounting	for	Income	Taxes,	we	account	for	income	taxes	by	recording	taxes	payable	or	refundable	for the	current	year	and	deferred	tax	assets	and	liabilities	for	the	expected	future	tax	consequences	of	events	that	have	been	recognized	in	our	financial	statements	or	tax returns.	These	expected	future	tax	consequences	are	measured	based	on	provisions	of	tax	law	as	currently	enacted;	the	effects	of	future	changes	in	tax	laws	are	not anticipated.	Future	tax	law	changes,	such	as	a	change	in	the	corporate	tax	rate,	could	have	a	material	impact	on	our	financial	condition	or	results	of	operations.

When	appropriate,	we	record	a	valuation	allowance	against	deferred	tax	assets	to	offset	future	tax	benefits	that	may	not	be	realized.	In	determining	whether	a	valuation allowance	is	appropriate,	we	consider	whether	it	is	more	likely	than	not	that	all	or	some	portion	of	our	deferred	tax	assets	will	not	be	realized,	based	on	management's judgments	regarding	the	best	available	evidence	about	future	events.

When	we	have	claimed	tax	benefits	that	may	be	challenged	by	a	tax	authority,	these	uncertain	tax	positions	are	accounted	for	under	FASB	Interpretation	No.	48, Accounting	for	Uncertainty	in	Income	Taxes,	an	Interpretation	of	FASB	Statement	No.	109	(FIN	48).	We	adopted	FIN	48	beginning	January	1,	2007.	Prior	to	2007, income	tax	contingencies	were	accounted	for	under	FASB	Statement	No.	5,	Accounting	for	Contingencies.

Under	FIN	48,	we	recognize	tax	benefits	only	for	tax	positions	that	are	more	likely	than	not	to	be	sustained	upon	examination	by	tax	authorities.	The	amount	recognized is	measured	as	the	largest	amount	of	benefit	that	is	greater	than	50	percent	likely	to	be	realized	upon	settlement.	A	liability	for	"unrecognized	tax	benefits"	is

recorded	for	any	tax	benefits	claimed	in	our	tax	returns	that	do	not	meet	these	recognition	and	measurement	criteria.	For	additional	information	on	the	adoption	of	FIN 48,	see	note	4	to	the	Consolidated	Financial	Statements.

Pension	and	Postretirement	Benefits	–	We	incur	certain	employment-related	expenses	associated	with	pensions	and	postretirement	health	benefits.	In	order	to	measure the	expense	associated	with	these	benefits,	we	must	make	various	assumptions	including	discount	rates	used	to	value	certain	liabilities,	expected	return	on	plan	assets used	to	fund	these	expenses,	salary	increases,	employee	turnover	rates,	anticipated	mortality	rates,	and	expected	future	healthcare	costs.	The	assumptions	used	by	us	are based	on	our	historical	experience	as	well	as	current	facts	and	circumstances.	We	use	third-party	actuaries	to	assist	us	in	properly	measuring	the	expense	and	liability associated	with	these	benefits.

Personal	Injury	–	The	cost	of	injuries	to	employees	and	others	on	our	property	is	charged	to	expense	based	on	estimates	of	the	ultimate	cost	and	number	of	incidents each	year.	We	use	third-party	actuaries	to	assist	us	in	properly	measuring	the	expense	and	liability.	Our	personal	injury	liability	is	discounted	to	present	value	using applicable	U.S.	Treasury	rates.	Legal	fees	and	incidental	costs	are	expensed	as	incurred.

Environmental	–	When	environmental	issues	have	been	identified	with	respect	to	property	currently	or	formerly	owned,	leased,	or	otherwise	used	in	the	conduct	of	our business,	we	and	our	consultants	perform	environmental	assessments	on	such	property.	We	expense	the	cost	of	the	assessments	as	incurred.	We	accrue	the	cost	of remediation	where	our	obligation	is	probable	and	such	costs	can	be	reasonably	estimated.	We	do	not	discount	our	environmental	liabilities	when	the	timing	of	the anticipated	cash	payments	is	not	fixed	or	readily	determinable.	Legal	fees	and	incidental	costs	are	expensed	as	incurred.

Asbestos	–	We	estimate	a	liability	for	asserted	and	unasserted	asbestos-related	claims	based	on	an	assessment	of	the	number	and	value	of	those	claims.	We	use	an external	consulting	firm	to	assist	us	in	properly	measuring	the	expense	and	liability.	Our	liability	for	asbestos-related	claims	is	not	discounted	to	present	value	due	to	the uncertainty	surrounding	the	timing	of	future	payments.	Legal	fees	and	incidental	costs	are	expensed	as	incurred.

# 2.				Operations	and	Segmentation

We	are	a	Class	I	railroad	that	operates	in	the	United	States.	We	have	32,205	route	miles,	linking	Pacific	Coast	and	Gulf	Coast	ports	with	the	Midwest	and	eastern	United States	gateways	and	providing	several	corridors	to	key	Mexican	gateways.	We	serve	the	western	two-thirds	of	the	country	and	maintain	coordinated	schedules	with other	rail	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.

The	Railroad,	along	with	its	subsidiaries	and	rail	affiliates,	is	our	one	reportable	operating	segment.	Although	revenue	is	analyzed	by	commodity	group,	we	analyze	the net	financial	results	of	the	Railroad	as	one	segment	due	to	the	integrated	nature	of	our	rail	network.	The	following	table	provides	revenue	by	commodity	group:

| Millions	of	Dollars | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Agricultural | $\t\t\t\t2,597 | $\t\t\t\t2,395 | $\t\t\t\t1,971 |
| Automotive | 1,469 | 1,438 | 1,273 |
| Chemicals | 2,293 | 2,098 | 1,848 |
| Energy | 3,136 | 2,953 | 2,578 |
| Industrial\tProducts | 3,110 | 3,168 | 2,814 |
| Intermodal | 2,911 | 2,810 | 2,473 |
| Total\tcommodity\trevenue | $\t\t15,516 | $\t\t14,862 | $\t\t12,957 |
| Other\trevenue | 767 | 716 | 621 |
| Total\toperating\trevenue | $\t\t16,283 | $\t\t15,578 | $\t\t13,578 |

# 3.				Financial	Instruments

Strategy	and	Risk	–	We	may	use	derivative	financial	instruments	in	limited	instances	for	other	than	trading	purposes	to	assist	in	managing	our	overall	exposure	to fluctuations	in	interest	rates	and	fuel	prices.	We	are	not	a	party	to	leveraged	derivatives	and,	by	policy,	do	not	use	derivative	financial	instruments	for	speculative purposes.	Derivative	financial	instruments	qualifying	for	hedge	accounting	must	maintain	a	specified	level	of	effectiveness	between	the	hedging	instrument	and	the	item being	hedged,	both	at	inception	and	throughout	the	hedged	period.	We	formally	document	the	nature	and	relationships	between	the	hedging	instruments	and	hedged items	at	inception,	as	well	as	our	risk-management	objectives,	strategies	for	undertaking	the	various	hedge	transactions,	and	method	of	assessing	hedge	effectiveness. Changes	in	the	fair	market	value	of	derivative	financial	instruments	that	do	not	qualify	for	hedge	accounting	are	charged	to	earnings.	We	may	use	swaps,	collars,	futures, and/or	forward	contracts	to	mitigate	the	risk	of	adverse	movements	in	interest	rates	and	fuel	prices;	however,	the	use	of	these	derivative	financial	instruments	may	limit future	benefits	from	favorable	price	movements.

Swaps	allow	us	to	convert	debt	from	fixed	rates	to	variable	rates	and	thereby	hedge	the	risk	of	changes	in	the	debt's	fair	value	attributable	to	the	changes	in	interest	rates. We	account	for	swaps	as	fair	value	hedges	using	the	short-cut	method	pursuant	to	FASB	Statement	No.	133,	Accounting	for	Derivative	Instruments	and	Hedging Activities;	therefore,	we	do	not	record	any	ineffectiveness	within	our	Consolidated	Financial	Statements.

The	following	is	a	summary	of	our	interest	rate	derivatives	qualifying	as	fair	value	hedges:

| Millions	of	Dollars,	Except	Percentages | 2007 | 2006 |
| :--- | :--- | :--- |
| Amount\tof\tdebt\thedged | $\t\t\t\t250 | $\t\t500 |
| Percentage\tof\ttotal\tdebt\tportfolio | 3% | 7% |
| Gross\tfair\tvalue\tasset/(liability)\tposition | $\t\t\t\t\t\t\t\t2 | $\t\t\t(14) |

Earnings	Impact	–	Our	use	of	derivative	financial	instruments	had	the	following	impact	on	pre-tax	income	for	the	years	ended	December	31:

| Millions	of	Dollars | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| (Increase)/decrease\tin\tinterest\texpense\tfrom\tinterest\trate\thedging | $\t\t\t(8) | $\t\t\t(8) | $\t\t\t5 |
| (Increase)/decrease\tin\tfuel\texpense\tfrom\tfuel\tderivatives | (1) | 3 | - |
| Increase/(decrease)\tin\tpre-tax\tincome | $\t\t\t(9) | $\t\t\t(5) | $\t\t\t5 |

Fair	Value	of	Debt	Instruments	–	The	fair	value	of	our	short-	and	long-term	debt	was	estimated	using	quoted	market	prices,	where	available,	or	current	borrowing rates.	At	December	31,	2007	and	2006,	the	fair	value	of	total	debt	exceeded	the	carrying	value	by	approximately	$96	million	and	$273	million,	respectively.	At December	31,	2007	and	2006,	approximately	$164	million	and	$165	million,	respectively,	of	fixed-rate	debt	securities	contained	call	provisions	that	allowed	us	to	retire the	debt	instruments	prior	to	final	maturity,	with	the	payment	of	fixed	call	premiums,	or	in	certain	cases,	at	par.

Components	of	income	tax	expense/(benefit)	were	as	follows	for	the	years	ended	December	31:

As	reported	in	our	Forms	10-Q	for	the	quarters	ended	June	30,	2005	and	September	30,	2005,	the	final	settlements	of	income	tax	examinations	for	pre-1995	tax	years, along	with	the	Internal	Revenue	Service	(IRS)	Examination	Reports	for	tax	years	1995	through	2002,	among	other	things,	were	considered	in	a	re-evaluation	of	our estimated	deferred	tax	assets	and	liabilities.	This	resulted	in	a	reduction	of	deferred	tax	liabilities	and	income	tax	expense	of	$118	million	in	the	third	quarter	of	2005.

Deferred	income	tax	liabilities/(assets)	were	comprised	of	the	following	at	December	31:

| Millions	of	Dollars | 2007 | 2006 |
| :--- | :--- | :--- |
| Net\tcurrent\tdeferred\tincome\ttax\tasset | $\t\t\t\t\t\t(336) | $\t\t\t\t\t\t(319) |
| Property | $\t\t\t\t9,467 | $\t\t\t\t9,356 |
| State\ttaxes,\tnet\tof\tfederal\tbenefits | 691 | 617 |
| Other | (108) | (277) |
| Net\tlong-term\tdeferred\tincome\ttax\tliability | $\t\t10,050 | $\t\t\t\t9,696 |
| Net\tdeferred\tincome\ttax\tliability | $\t\t\t\t9,714 | $\t\t\t\t9,377 |

In	June	2006,	the	FASB	issued	FIN	48.	We	adopted	FIN	48	on	January	1,	2007.	Under	FIN	48,	tax	benefits	are	recognized	only	for	tax	positions	that	are	more	likely than	not	to	be	sustained	upon	examination	by	tax	authorities.	The	amount	recognized	is	measured	as	the	largest	amount	of	benefit	that	is	greater	than	50	percent	likely	to be	realized	upon	settlement.	Unrecognized	tax	benefits	are	tax	benefits	claimed	in	our	tax	returns	that	do	not	meet	these	recognition	and	measurement	standards.

At	adoption,	our	total	liabilities	for	unrecognized	tax	benefits	were	$227	million	pre-tax,	or	$173	million	after	including	tax	benefits	for	the	deductibility	of	interest	and state	taxes.	Of	this	amount,	$7	million	was	recorded	as	a	decrease	to	beginning	retained	earnings	for	the	cumulative	effect	of	adopting	FIN	48.	The	remaining	$166 million	had	been	previously	accrued	under	either	FASB	Statement	No.	5,	Accounting	for	Contingencies,	or	FASB	Statement	No.	109,	Accounting	for	Income	Taxes.	The entire	$173	million	was	classified	as	non-current	in	the	Consolidated	Statement	of	Financial	Position.

A	reconciliation	of	changes	in	pre-tax	unrecognized	tax	benefits	liabilities/(assets)	from	the	beginning	to	the	end	of	the	reporting	period	is	as	follows:

| Millions	of	Dollars | 2007 |
| :--- | :--- |
| Unrecognized\tTax\tBenefits\tat\tadoption\ton\tJanuary\t1,\t2007 | $\t\t227 |
| Increases\tfor\tpositions\ttaken\tin\tcurrent\tyear | 15 |
| Increases\tfor\tpositions\ttaken\tin\tprior\tyears | 7 |
| Decreases\tfor\tpositions\ttaken\tin\tprior\tyears | (45) |
| Decreases\tfor\tpositions\texpected\tto\tbe\ttaken\tin\tfuture\tyears | (41) |
| Settlements\twith\ttaxing\tauthorities | (1) |
| Increases\t(decreases)\tfor\tinterest\tand\tpenalties | 3 |
| Other\tincreases\t(decreases) | (4) |
| Unrecognized\ttax\tbenefits\tat\tDecember\t31,\t2007 | $\t\t161 |

Included	in	the	$161	million	balance	at	December	31,	2007	and	the	$227	million	balance	at	adoption	were	$142	million	and	$182	million,	respectively,	of	unrecognized tax	benefits	that,	if	recognized,	would	reduce	our	effective	tax	rate.	The	remaining	unrecognized	tax	benefits	related	to	tax	positions	for	which	ultimate	deductibility	is highly	certain,	but	for	which	there	is	uncertainty	about	the	timing	of	such	deductibility.	Recognition	of	these	tax	benefits	would	reduce	our	effective	tax	rate	only through	a	reduction	of	accrued	interest	and	penalties.

We	recognize	interest	and	penalties	as	part	of	income	tax	expense.	Total	accrued	pre-tax	liabilities	for	interest	and	penalties	were	$78	million	($47	million	after-tax)	at December	31,	2007	and	$75	million	($45	million	after-tax)	at	adoption.

For	all	federal	income	tax	years	prior	to	1995,	the	IRS	examinations	have	been	completed	and	the	statute	of	limitations	bars	any	additional	assessments	by	the	IRS.	We have	filed	interest	refund	claims	for	years	1986

through	1994,	which	may	be	disputed	by	the	IRS.	The	IRS	has	completed	its	examinations	and	issued	notices	of	deficiency	for	tax	years	1995	through	2004,	and	we	are in	different	stages	of	the	IRS	appeals	process	for	these	years.	The	IRS	is	examining	our	tax	returns	for	tax	years	2005	and	2006.	In	the	third	quarter	of	2007,	we	believe that	we	reached	an	agreement	in	principle	with	the	IRS	to	resolve	all	of	the	issues,	except	interest,	related	to	tax	years	1995	through	1998,	including	the	previously reported	dispute	over	certain	donations	of	property.	We	anticipate	signing	a	closing	agreement	in	2008.	Once	formalized,	we	anticipate	that	this	agreement	will	result	in an	immaterial	reduction	of	income	tax	expense.

Upon	resolution	of	the	federal	income	tax	examinations	described	above,	we	will	report	any	changes	to	our	taxable	income	to	state	and	local	taxing	authorities	in compliance	with	state	and	local	requirements.	Additionally,	several	state	taxing	authorities	are	currently	examining	our	state	income	tax	returns	for	tax	years	2001 through	2005.

In	the	third	quarter	of	2007,	the	State	of	Illinois	enacted	new	tax	legislation	that	changed	how	we	determine	the	amount	of	our	income	subject	to	Illinois	tax.	This legislation	caused	an	increase	to	our	deferred	tax	expense	by	$27	million	in	the	third	quarter.	In	addition,	because	the	legislation	reduced	uncertainty	about	determining future	income	subject	to	Illinois	tax,	$41	million	pre-tax	($26	million	after-tax)	of	deferred	taxes	are	no	longer	considered	part	of	unrecognized	tax	benefits.	In	January of	2008,	Illinois	enacted	technical	corrections	legislation	that	made	additional	changes	in	how	we	determine	the	amount	of	our	income	subject	to	Illinois	tax.	This technical	corrections	legislation	will	result	in	a	reduction	of	deferred	tax	expense	of	approximately	$14	million	in	the	first	quarter	of	2008.

We	expect	that	the	amount	of	unrecognized	tax	benefits	will	change	significantly	during	the	next	12	months.	Of	the	$161	million	balance	at	December	31,	2007,	$140 million	is	classified	as	current	in	the	Consolidated	Statement	of	Financial	Position,	primarily	due	to	the	anticipated	settlement	for	tax	years	1995	through	1998	described above.	It	is	also	reasonably	possible	that	we	may	resolve	the	interest	claims	for	1986	through	1994	described	above,	which	would	likely	result	in	an	immaterial	change to	unrecognized	tax	benefits.

Total	debt	as	of	December	31,	2007	and	2006,	net	of	interest	rate	swaps	designated	as	hedges,	is	summarized	below:

| Millions	of	Dollars | 2007 | 2006 |
| :--- | :--- | :--- |
| Notes\tand\tdebentures,\t3.0%\tto\t7.4%\tdue\tthrough\t2054\t[a] | $\t\t5,968 | $\t\t4,803 |
| Capitalized\tleases,\t4.7%\tto\t9.3%\tdue\tthrough\t2026 | 1,219 | 1,236 |
| Medium-term\tnotes,\t9.2%\tto\t10.0%\tdue\tthrough\t2020 | 61 | 362 |
| Equipment\tobligations,\t6.2%\tto\t8.1%\tdue\tthrough\t2031 | 291 | 232 |
| Mortgage\tbonds,\t4.8%\tdue\tthrough\t2030 | 59 | 59 |
| Tax-exempt\tfinancings,\t5.0%\tto\t5.7%\tdue\tthrough\t2026 | 188 | 191 |
| Unamortized\tdiscount | (104) | (103) |
| Total\tdebt\t[a] | $\t\t7,682 | $\t\t6,780 |
| Less\tcurrent\tportion\t[b] | (139) | (780) |
| Total\tlong-term\tdebt | $\t\t7,543 | $\t\t6,000 |

[a] 2007	included	a	write-up	of	$2	million	while	2006	included	a	collective	write-down	of	$14	million	due	to	market	value	adjustments	for	debt	with	qualifying	hedges	that	are	recorded	on	the	Consolidated Statements	of	Financial	Position.

[b] 2006	included	a	write-down	of	$4	million	due	to	short-term	market	value	adjustments	for	debt	with	qualifying	hedges	that	are	recorded	on	the	Consolidated	Statements	of	Financial	Position.

Debt	Maturities	–	The	following	table	presents	aggregate	debt	maturities	as	of	December	31,	2007,	excluding	market	value	adjustments.

| Millions	of	Dollars |  |
| :--- | :--- |
| 2008 | $\t\t\t\t\t689 |
| 2009 | 542 |
| 2010 | 462 |
| 2011 | 550 |
| 2012 | 720 |
| Thereafter | 4,717 |
| Total\tdebt | $\t\t7,680 |

Mortgaged	Properties	–	Equipment	with	a	carrying	value	of	approximately	$2.8	billion	at	both	December	31,	2007	and	2006	serves	as	collateral	for	capital	leases	and other	types	of	equipment	obligations	in	accordance	with	the	secured	financing	arrangements	utilized	to	acquire	such	railroad	equipment.

Dividend	Restrictions	–	Our	revolving	credit	facility	includes	a	debt-to-net	worth	covenant	that,	under	certain	circumstances,	would	restrict	the	payment	of	cash dividends	to	our	shareholders.	The	amount	of	retained	earnings	available	for	dividends	was	$11.5	billion	and	$7.8	billion	at	December	31,	2007	and	December	31,	2006, respectively.	This	facility	replaced	two	credit	facilities	that	had	minimum	net	worth	covenants	that	were	more	restrictive	with	respect	to	the	amount	of	retained	earnings available	for	dividends	at	December	31,	2006.

We	lease	certain	locomotives,	freight	cars,	and	other	property.	The	Consolidated	Statement	of	Financial	Position	as	of	December	31,	2007	and	2006	included	$2,062 million,	net	of	$887	million	of	amortization,	and	$1,982	million,	net	of	$800	million	of	amortization,	respectively,	for	properties	under	capital	leases.	A	charge	to income	resulting	from	the	amortization	of	assets	recorded	under	capital	leases	is	included	within	depreciation	expense	in	our	Consolidated	Statements	of	Income.	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,	2007	were	as follows:

|  | Operating | Capital |
| :--- | :--- | :--- |
| Millions\tof\tDollars | Leases | Leases |
| 2008 | $\t\t\t\t\t639 | $\t\t\t\t\t181 |
| 2009 | 600 | 179 |
| 2010 | 554 | 160 |
| 2011 | 522 | 165 |
| 2012 | 417 | 106 |
| Later\tYears | 3,289 | 1,054 |
| Total\tminimum\tlease\tpayments | $\t\t6,021 | $\t\t1,845 |
| Amount\trepresenting\tinterest | N/A | (626) |
| Present\tvalue\tof\tminimum\tlease\tpayments | N/A | $\t\t1,219 |

Rent	expense	for	operating	leases	with	terms	exceeding	one	month	was	$810	million	in	2007,	$798	million	in	2006,	and	$728	million	in	2005.	When	cash	rental payments	are	not	made	on	a	straight-line	basis,	we

recognize	variable	rental	expense	on	a	straight-line	basis	over	the	lease	term.	Contingent	rentals	and	sub-rentals	are	not	significant.

# 7.				Retirement	Plans

# Pension	and	Other	Postretirement	Benefits

Pension	Plans	–	We	provide	defined	benefit	retirement	income	to	eligible	non-union	employees	through	qualified	and	non-qualified	(supplemental)	pension	plans. Qualified	and	non-qualified	pension	benefits	are	based	on	years	of	service	and	the	highest	compensation	during	the	latest	years	of	employment,	with	specific	reductions made	for	early	retirements.

Other	Postretirement	Benefits	(OPEB)	–	We	provide	defined	contribution	medical	and	life	insurance	benefits	for	eligible	retirees.	These	benefits	are	funded	as	medical claims	and	life	insurance	premiums	are	paid.

# Funded	Status

We	adopted	FASB	Statement	No.	158,	Employers'	Accounting	for	Defined	Benefit	Pension	and	Other	Postretirement	Plans	(FAS	158),	at	the	end	of	2006,	which required	us	to	separately	recognize	the	overfunded	or	underfunded	status	of	our	pension	and	OPEB	plans	as	an	asset	or	liability.	The	funded	status	represents	the difference	between	the	projected	benefit	obligation	(PBO)	and	the	fair	value	of	the	plan	assets.	The	PBO	is	the	present	value	of	benefits	earned	to	date	by	plan participants,	including	the	effect	of	assumed	future	salary	increases.	The	PBO	of	the	OPEB	plan	is	equal	to	the	accumulated	benefit	obligation,	as	the	present	value	of	the OPEB	liabilities	is	not	affected	by	salary	increases.	Plan	assets	are	measured	at	fair	value.	We	use	a	December	31	measurement	date	for	plan	assets	and	obligations	for all	our	retirement	plans.

Changes	in	our	PBO	and	plan	assets	are	as	follows	for	the	years	ended	December	31:

| Funded	Status | Pension | Pension | OPEB | OPEB |
| :--- | :--- | :--- | :--- | :--- |
| Millions\tof\tDollars | 2007 | 2006 | 2007 | 2006 |
| Projected\tBenefit\tObligation |  |  |  |  |
| Projected\tbenefit\tobligation\tat\tbeginning\tof\tyear | $\t\t2,113 | $\t\t2,065 | $\t\t\t374 | $\t\t\t476 |
| Service\tcost | 34 | 35 | 3 | 4 |
| Interest\tcost | 124 | 117 | 20 | 21 |
| Plan\tamendments | - | - | (10) | (38) |
| Actuarial\tloss\t(gain) | (33) | 16 | (34) | (58) |
| Gross\tbenefits\tpaid | (126) | (120) | (27) | (31) |
| Projected\tbenefit\tobligation\tat\tend\tof\tyear | $\t\t2,112 | $\t\t2,113 | $\t\t\t326 | $\t\t\t374 |
| Plan\tAssets |  |  |  |  |
| Fair\tvalue\tof\tplan\tassets\tat\tbeginning\tof\tyear | $\t\t1,989 | $\t\t1,707 | $\t\t\t\t\t\t\t\t\t- | $\t\t\t\t\t\t\t\t- |
| Actual\treturn\ton\tplan\tassets | 183 | 243 | - | - |
| Voluntary\tfunded\tpension\tplan\tcontributions | - | 150 | - | - |
| Non-qualified\tplan\tbenefit\tcontributions | 12 | 9 | 27 | 31 |
| Gross\tbenefits\tpaid | (126) | (120) | (27) | (31) |
| Fair\tvalue\tof\tplan\tassets\tat\tend\tof\tyear | $\t\t2,058 | $\t\t1,989 | $\t\t\t\t\t\t\t\t\t- | $\t\t\t\t\t\t\t\t- |
| Funded\tstatus\tat\tend\tof\tyear | $\t\t\t\t(54) | $\t\t(124) | $\t(326) | $ \t(374) |

Amounts	recognized	in	the	statement	of	financial	position	as	of	December	31,	2007	and	2006	consist	of:

|  | Pension | Pension | OPEB | OPEB |
| :--- | :--- | :--- | :--- | :--- |
| Millions\tof\tDollars | 2007 | 2006 | 2007 | 2006 |
| Noncurrent\tassets | $\t\t\t\t\t120 | $\t\t\t\t\t45 | $\t\t\t\t\t\t\t\t\t- | $\t\t\t\t\t\t\t\t- |
| Current\tliabilities | (11) | (12) | (27) | (27) |
| Noncurrent\tliabilities | (163) | (157) | (299) | (347) |
| Net\tamounts\trecognized\tat\tend\tof\tyear | $\t\t\t\t\t\t(54) | $\t\t(124) | $\t\t(326) | $\t\t(374) |

Pre-tax	amounts	recognized	in	accumulated	other	comprehensive	income/(loss)	as	of	December	31,	2007	consist	of:

| Millions	of	Dollars | Pension		 OPEB | Pension		 OPEB | Total |
| :--- | :--- | :--- | :--- |
| Prior\tservice\t(cost)/credit | $\t\t\t\t(18) | $\t\t137 | $\t\t\t119 |
| Net\tactuarial\tloss | (158) | (85) | (243) |
| Total | $\t\t(176) | $\t\t\t\t52 | $\t\t(124) |

| Millions	of	Dollars | Pension		 OPEB | Pension		 OPEB | Total |
| :--- | :--- | :--- | :--- |
| Prior\tservice\t(cost)/credit | \t\t $\t\t\t\t(24) | $\t\t161 | $\t\t\t137 |
| Net\tactuarial\tloss | (249) | (126) | (375) |
| Total | $\t\t(273) | $\t\t\t\t35 | $\t\t(238) |

Other	pre-tax	changes	recognized	in	other	comprehensive	income	during	2007	were	as	follows:

| Millions	of	Dollars | Pension		 OPEB | Pension		 OPEB | Total |
| :--- | :--- | :--- | :--- |
| Prior\tservice\tcredit\tarising\tduring\tthe\tyear | $\t\t\t\t\t\t\t- | $\t\t(10) | $\t\t\t\t(10) |
| Net\tactuarial\t(gain)/loss\tarising\tduring\tthe\tyear | (73) | (32) | (105) |
| Amortization\tof\tprior\tservice\t(cost)/credit | (6) | 33 | 27 |
| Amortization\tof\tactuarial\tgain/(loss) | (18) | (8) | (26) |
| Total | $\t\t\t(97) | $\t\t(17) | $\t\t(114) |

Amounts	included	in	accumulated	other	comprehensive	income	expected	to	be	amortized	into	net	periodic	cost	(benefit)	during	2008:

| Millions	of	Dollars | Pension		 OPEB | Pension		 OPEB | Total |
| :--- | :--- | :--- | :--- |
| Prior\tservice\tcost\t(credit) | $\t\t\t\t6 | $\t\t(33) | $\t\t(27) |
| Net\tactuarial\tloss | 5 | 6 | 11 |
| Total | $\t\t11 | $\t\t(27) | $\t\t(16) |

Underfunded	Accumulated	Benefit	Obligation	–	The	accumulated	benefit	obligation	(ABO)	is	the	present	value	of	benefits	earned	to	date,	assuming	no	future	salary growth.	The	underfunded	accumulated	benefit	obligation	represents	the	difference	between	the	ABO	and	the	fair	value	of	plan	assets.	At	December	31,	2007,	the	only pension	plan	that	was	underfunded	was	our	non-qualified	(supplemental)	plan,	which	is	not	funded	by

design.	The	non-qualified	(supplemental)	plan	is	funded	with	cash	from	operations	as	benefits	are	paid	to	plan	participants.	Each	of	our	qualified	plans	was	fully	funded at	December	31,	2007.	The	PBO,	ABO,	and	fair	value	of	plan	assets	for	pension	plans	with	accumulated	benefit	obligations	in	excess	of	the	fair	value	of	the	plan	assets were	as	follows	for	the	years	ended	December	31:

| Underfunded	Accumulated	Benefit	Obligation<br>Millions	of	Dollars | 2007 | 2006 |
| :--- | :--- | :--- |
| Projected\tbenefit\tobligation | $\t\t(175) | $\t\t(169) |
| Accumulated\tbenefit\tobligation | $\t\t(172) | $\t\t(168) |
| Fair\tvalue\tof\tplan\tassets | - | - |
| Underfunded\taccumulated\tbenefit\tobligation | $\t\t(172) | $\t\t(168) |

The	ABO	for	all	defined	benefit	pension	plans	was	$2.0	billion	and	$2.1	billion	at	December	31,	2007	and	2006,	respectively.

Assumptions	–	The	weighted-average	actuarial	assumptions	used	to	determine	benefit	obligations	at	December	31:

# Expense

Both	pension	and	OPEB	expense	are	determined	based	upon	the	annual	service	cost	of	benefits	(the	actuarial	cost	of	benefits	earned	during	a	period)	and	the	interest	cost on	those	liabilities,	less	the	expected	return	on	plan	assets.	The	expected	long-term	rate	of	return	on	plan	assets	is	applied	to	a	calculated	value	of	plan	assets	that recognizes	changes	in	fair	value	over	a	five-year	period.	This	practice	is	intended	to	reduce	year-to-year	volatility	in	pension	expense,	but	it	can	have	the	effect	of delaying	the	recognition	of	differences	between	actual	returns	on	assets	and	expected	returns	based	on	long-term	rate	of	return	assumptions.	Differences	in	actual experience	in	relation	to	assumptions	are	not	recognized	in	net	income	immediately,	but	are	deferred	and,	if	necessary,	amortized	as	pension	or	OPEB	expense.

The	components	of	our	net	periodic	pension	and	OPEB	cost/(benefit)	were	as	follows	for	the	years	ended	December	31:

|  | Pension | Pension | Pension | OPEB | OPEB | OPEB |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Millions\tof\tDollars | 2007 | 2006 | 2005 | 2007 | 2006 | 2005 |
| Net\tPeriodic\tBenefit\tCost: |  |  |  |  |  |  |
| Service\tcost | \t\t $\t\t\t34 | $\t\t\t35 | $\t\t\t28 | $\t\t\t3 | $\t\t\t4 | $\t\t\t\t4 |
| Interest\tcost | 124 | 117 | 115 | 20 | 21 | 25 |
| Expected\treturn\ton\tplan\tassets | (144) | (134) | (134) | - | - | - |
| Amortization\tof: |  |  |  |  |  |  |
| Prior\tservice\tcost/(credit) | 6 | 7 | 7 | (33) | (33) | (30) |
| Actuarial\tloss | 18 | 21 | 5 | 8 | 13 | 14 |
| Net\tperiodic\tbenefit\tcost/(benefit) | \t\t $\t\t\t38 | $\t\t\t46 | $\t\t\t21 | $\t\t(2) | $\t\t\t5 | $\t\t13 |

Assumptions	–	The	weighted-average	actuarial	assumptions	used	to	determine	expense	were	as	follows	for	the	years	ended	December	31:

|  | Pension | Pension | Pension | OPEB | OPEB | OPEB |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Percentages | 2007 | 2006 | 2005 | 2007 | 2006 | 2005 |
| Discount\trate | 6.00% | 5.75% | 6.00% | 6.00% | 5.75% | 6.00% |
| Expected\treturn\ton\tplan\tassets | 8.00 | 8.00 | 8.00 | N/A | N/A | N/A |
| Salary\tincrease | 3.00 | 2.75 | 3.00 | N/A | N/A | N/A |

The	discount	rate	is	based	on	a	hypothetical	portfolio	of	high	quality	corporate	bonds	with	cash	flows	matching	our	plans'	expected	benefit	payments.	The	expected return	on	plan	assets	is	based	on	our	asset	allocation	mix	and	our	historical	return,	taking	into	account	current	and	expected	market	conditions.	The	actual	return	on pension	plan	assets,	net	of	fees,	was	approximately	9%	in	2007,	14%	in	2006,	and	7%	in	2005.	Our	historical	annualized	ten-year	rate	of	return	on	plan	assets	is approximately	8%.

Assumed	healthcare	cost	trend	rates	have	a	significant	effect	on	the	expense	and	liabilities	reported	for	healthcare	plans.	The	assumed	healthcare	cost	trend	rate	is	based on	historical	rates	and	expected	market	conditions.	A	one-percentage	point	change	in	the	assumed	healthcare	cost	trend	rates	would	have	the	following	effects	on	OPEB:

|  | One	%	pt. | One	%	pt. |
| :--- | :--- | :--- |
| Millions\tof\tDollars | Increase | Decrease |
| Effect\ton\ttotal\tservice\tand\tinterest\tcost\tcomponents | $\t\t\t\t2 | $\t\t\t(2) |
| Effect\ton\taccumulated\tbenefit\tobligation | 25 | (21) |

# Cash	Contributions

The	following	table	details	our	cash	contributions	for	the	years	ended	December	31,	2007	and	2006,	and	the	expected	contributions	for	2008:

Our	policy	with	respect	to	funding	the	qualified	plans	is	to	fund	at	least	the	minimum	required	by	the	Pension	Protection	Act	of	2006	and	not	more	than	the	maximum amount	deductible	for	tax	purposes.	All	contributions	made	to	the	qualified	pension	plans	in	2006	were	voluntary	and	were	made	with	cash	generated	from	operations. At	December	31,	2007,	our	qualified	pension	plans	were	fully	funded.	No	required	contributions	are	expected	in	2008.

The	OPEB	plans	are	not	funded	and	are	not	subject	to	any	minimum	regulatory	funding	requirements.	Benefit	payments	for	each	year	represent	claims	paid	for	medical and	life	insurance,	and	we	anticipate	our	2008	OPEB	payments	will	be	made	from	cash	generated	from	operations.

# Benefit	Payments

The	following	table	details	expected	benefit	payments	for	the	years	2008	though	2017:

| Millions	of	Dollars | Pension | OPEB |
| :--- | :--- | :--- |
| 2008 | $\t\t125 | $\t\t\t\t27 |
| 2009 | 128 | 28 |
| 2010 | 131 | 29 |
| 2011 | 137 | 29 |
| 2012 | 142 | 29 |
| Years\t2013\t–\t2017 | 795 | 139 |

# Asset	Allocation	Strategy

Our	pension	plan	asset	allocation	at	December	31,	2007	and	2006,	and	target	allocation	for	2008,	are	as	follows:

| Our	pension	plan	asset	allocation	at	December	31,	2007	and	2006,	and	target	allocation	for	2008,	are	as	follows: |  |  |  |
| :--- | :--- | :--- | :--- |
|  | Target | Percentage\tof\tPlan\tAssets | Percentage\tof\tPlan\tAssets |
|  | Allocation | December\t31, | December\t31, |
|  | 2008 | 2007 | 2006 |
| Equity\tsecurities | 60%\tto\t70% | 68% | 70% |
| Debt\tsecurities | 20%\tto\t30% | 23 | 26 |
| Real\testate | 2%\tto\t8% | 4 | 2 |
| Commodities | 4%\tto\t6% | 5 | 2 |
| Total |  | 100% | 100% |

The	investment	strategy	for	pension	plan	assets	is	to	maintain	a	broadly	diversified	portfolio	designed	to	achieve	our	target	of	an	average	long-term	rate	of	return	of	8%. While	we	believe	we	can	achieve	a	long-term	average	rate	of	return	of	8%,	we	cannot	be	certain	that	the	portfolio	will	perform	to	our	expectations.	Assets	are strategically	allocated	among	equity,	debt,	and	other	instruments	in	order	to	achieve	a	diversification	level	that	mitigates	wide	swings	in	investment	returns.	Asset allocation	target	ranges	for	equity,	debt,	and	other	portfolios	are	evaluated	at	least	every	three	years	with	the	assistance	of	an	independent	external	consulting	firm. Actual	asset	allocations	are	monitored	monthly,	and	rebalancing	actions	are	executed	at	least	quarterly,	if	needed.

Plan	assets	are	valued	at	fair	value.	Investments	in	securities	traded	on	national	security	exchanges	are	valued	at	their	closing	market	prices	on	the	valuation	date;	where no	sale	was	made	on	the	valuation	date,	the	security	is	valued	at	its	bid	price.	Securities	traded	in	the	over-the-counter	market	are	valued	at	their	last	sale	or	bid	price. Investments	in	mortgage-backed	securities	are	carried	at	estimated	fair	value	based	on	the	characteristics	of	the	underlying	mortgages.	Certain	short-term	investments are	carried	at	cost,	which	approximates	fair

value.	Venture	capital	funds,	where	no	quoted	market	prices	are	available,	are	valued	at	their	estimated	fair	values	as	determined	by	the	investment	manager.	Investments in	limited	partnerships	are	valued	at	estimated	fair	value	based	on	their	proportionate	share	of	the	partnerships'	fair	value.	The	partnerships	invest	primarily	in	readily marketable	securities.

The	majority	of	the	plan's	assets	are	invested	in	equity	securities,	because	equity	portfolios	have	historically	provided	higher	returns	than	debt	and	other	asset	classes over	extended	time	horizons,	and	are	expected	to	do	so	in	the	future.	Correspondingly,	equity	investments	also	entail	greater	risks	than	other	investments.	The	risk	of	loss in	the	plan's	equity	portfolio	is	mitigated	by	investing	in	a	broad	range	of	equity	types.	Equity	diversification	includes	large-capitalization	and	small-capitalization companies,	growth-oriented	and	value-oriented	investments,	and	U.S.	and	non-U.S.	securities.

Equity	risks	are	further	balanced	by	investing	a	significant	portion	of	the	plan's	assets	in	high	quality	debt	securities.	The	average	quality	rating	of	the	debt	portfolio exceeded	AA	as	of	December	31,	2007	and	2006.	The	debt	portfolio	is	also	broadly	diversified	and	invested	primarily	in	U.S.	Treasury,	mortgage,	and	corporate securities	with	an	intermediate	average	maturity.	The	weighted-average	maturity	of	the	debt	portfolio	was	6.4	years	at	both	December	31,	2007	and	2006,	respectively.

The	investment	of	pension	plan	assets	in	our	securities	is	specifically	prohibited	for	both	the	equity	and	debt	portfolios,	other	than	through	index	fund	holdings.

# Other	Retirement	Programs

Thrift	Plan	–	We	provide	a	defined	contribution	plan	(thrift	plan)	to	eligible	non-union	employees	and	make	matching	contributions	to	the	thrift	plan.	We	match	50	cents for	each	dollar	contributed	by	employees	up	to	the	first	six	percent	of	compensation	contributed.	Our	thrift	plan	contributions	were	$14	million	in	2007,	$13	million	in 2006,	and	$12	million	in	2005.

Railroad	Retirement	System	–	All	Railroad	employees	are	covered	by	the	Railroad	Retirement	System	(the	System).	Contributions	made	to	the	System	are	expensed	as incurred	and	amounted	to	approximately	$616	million	in	2007,	$615	million	in	2006,	and	$595	million	in	2005.

Collective	Bargaining	Agreements	–	Under	collective	bargaining	agreements,	we	provide	certain	postretirement	healthcare	and	life	insurance	benefits	for	eligible	union employees.	Premiums	under	the	plans	are	expensed	as	incurred	and	amounted	to	$40	million	in	both	2007	and	2006,	and	$41	million	in	2005.

# 8.				Stock	Options	and	Other	Stock	Plans

We	have	600,793	options	outstanding	under	the	1993	Stock	Option	and	Retention	Stock	Plan	of	Union	Pacific	Corporation	(1993	Plan).	There	are	3,570	restricted shares	outstanding	under	the	1992	Restricted	Stock	Plan	for	Non-Employee	Directors	of	Union	Pacific	Corporation.	We	no	longer	grant	options	or	awards	of	retention shares	and	units	under	these	plans.

The	UP	Shares	Stock	Option	Plan	of	Union	Pacific	Corporation	(UP	Shares	Plan)	was	approved	by	our	Board	of	Directors	on	April	30,	1998.	The	UP	Shares	Plan reserved	12,000,000	shares	of	our	common	stock	for	issuance.	The	UP	Shares	Plan	was	a	broad-based	option	program	that	granted	options	to	purchase	200	shares	of	our common	stock	at	$55.00	per	share	to	eligible	active	employees	on	April	30,	1998.	All	options	granted	were	non-qualified	options	that	became	exercisable	on	May	1, 2001,	and	remain	exercisable	until	April	30,	2008.	If	an	optionee's	employment	terminates	for	any	reason,	the	option	remains	exercisable	for	a	period	of	one	year	after the	date	of	termination,	but	no	option	is	exercisable	after	April	30,	2008.	No	further	options	may	be	granted	under	the	UP	Shares	Plan.	As	of	December	31,	2007,	there were	432,689	options	outstanding	under	the	UP	Shares	Plan.

In	April	2000,	the	shareholders	approved	the	Union	Pacific	Corporation	2000	Directors	Plan	(Directors	Plan)	whereby	550,000	shares	of	our	common	stock	were reserved	for	issuance	to	our	non-employee	directors.	Under	the	Directors	Plan,	each	non-employee	director,	upon	his	or	her	initial	election	to	the	Board	of	Directors, receives	a	grant	of	1,000	shares	of	retention	shares	or	retention	stock	units.	Additionally,	each	non-employee	director	receives	annually	an	option	to	purchase	at	fair value	a	number	of	shares	of	our	common	stock,	not	to	exceed	5,000	shares	during	any	calendar	year,	determined	by	dividing	60,000	by	1/3	of	the	fair	market	value	of one	share	of	our	common	stock	on	the	date	of	such	Board	of	Directors	meeting,	with	the	resulting	quotient	rounded	up	or	down	to	the	nearest	50	shares.	After December	31,	2007,	non-employee	directors	will	not	receive	these	annual	options.	As	of	December	31,	2007,	7,000	restricted	shares	were	outstanding	under	the Directors	Plan	and	155,500	options	were	outstanding	under	the	Directors	Plan.

The	Union	Pacific	Corporation	2001	Stock	Incentive	Plan	(2001	Plan)	was	approved	by	the	shareholders	in	April	2001.	The	2001	Plan	reserved	12,000,000	shares	of	our common	stock	for	issuance	to	eligible	employees	of	the	Corporation	and	its	subsidiaries	in	the	form	of	non-qualified	options,	incentive	stock	options,	retention	shares, stock	units,	and	incentive	bonus	awards.	Non-employee	directors	were	not	eligible	for	awards	under	the	2001	Plan.	As	of	December	31,	2007,	2,963,203	options	and 86,250	retention	shares	and	stock	units	were	outstanding	under	the	2001	Plan.	We	no	longer	grant	any	stock	options	or	other	stock	or	unit	awards	under	this	plan.

The	Union	Pacific	Corporation	2004	Stock	Incentive	Plan	(2004	Plan)	was	approved	by	shareholders	in	April	2004.	The	2004	Plan	reserved	21,000,000	shares	of	our common	stock	for	issuance,	plus	any	shares	subject	to	awards	made	under	the	2001	Plan	and	the	1993	Plan	that	were	outstanding	on	April	16,	2004,	and	became available	for	regrant	pursuant	to	the	terms	of	the	2004	Plan.	Under	the	2004	Plan,	non-qualified	options,	stock	appreciation	rights,	retention	shares,	stock	units,	and incentive	bonus	awards	may	be	granted	to	eligible	employees	of	the	Corporation	and	its	subsidiaries.	Non-employee	directors	are	not	eligible	for	awards	under	the	2004 Plan.	As	of	December	31,	2007,	3,471,156	options	and	1,020,420	retention	shares	and	stock	units	were	outstanding	under	the	2004	Plan.

Stock	Options	–	We	estimate	the	fair	value	of	our	stock	option	awards	using	the	Black-Scholes	option	pricing	model.	Groups	of	employees	and	non-employee	directors that	have	similar	historical	and	expected	exercise	behavior	are	considered	separately	for	valuation	purposes.	The	table	below	shows	the	annual	weighted-average assumptions	used	for	valuation	purposes:

| Weighted-Average	Assumptions | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Risk-free\tinterest\trate | 4.9% | 4.5% | 3.8% |
| Dividend\tyield | 1.4% | 1.4% | 1.9% |
| Expected\tlife\t(years) | 4.7 | 6.0 | 4.8 |
| Volatility | 20.9% | 25.3% | 20.6% |
| Weighted-average\tgrant-date\tfair\tvalue\tof\toptions\tgranted | $\t\t22.38 | $\t\t24.97 | $\t\t12.92 |

The	risk-free	rate	is	based	on	the	U.S.	Treasury	yield	curve	in	effect	at	the	time	of	grant;	the	dividend	yield	is	calculated	as	the	ratio	of	dividends	paid	per	share	of common	stock	to	the	stock	price	on	the	date	of	grant;	the	expected	life	is	based	on	historical	and	expected	exercise	behavior;	and	volatility	is	based	on	the	historical volatility	of	our	stock	price	over	the	expected	life	of	the	option.

A	summary	of	stock	option	activity	during	2007	is	presented	below:

|  |  | Weighted- | Weighted-Average | Aggregate |
| :--- | :--- | :--- | :--- | :--- |
|  | Shares | Average | Remaining | Intrinsic\tValue |
|  | (thous.) | Exercise\tPrice | Contractual\tTerm | (millions) |
| Outstanding\tat\tJanuary\t1,\t2007 | 10,044 | $\t\t64.22 | 6.0\tyrs. | $\t\t279 |
| Granted | 1,103 | 96.94 | N/A | N/A |
| Exercised | (3,542) | 58.61 | N/A | N/A |
| Forfeited\tor\texpired | (42) | 79.18 | N/A | N/A |
| Outstanding\tat\tDecember\t31,\t2007 | 7,563 | $\t\t71.53 | 6.0\tyrs. | $\t\t409 |
| Vested\tor\texpected\tto\tvest\tat\tDecember\t31,\t2007 | 7,501 | $\t\t71.36 | 6.0\tyrs. | $\t\t407 |
| Options\texercisable\tat\tDecember\t31,\t2007 | 5,487 | $\t\t63.88 | 5.0\tyrs. | $\t\t339 |

Stock	options	are	granted	at	the	closing	price	on	the	date	of	grant,	have	ten-year	contractual	terms,	and	vest	no	later	than	three	years	from	the	date	of	grant.	None	of	the stock	options	outstanding	at	December	31,	2007	are	subject	to	performance	or	market-based	vesting	conditions.

At	December	31,	2007,	there	was	$26	million	of	unrecognized	compensation	expense	related	to	nonvested	stock	options,	which	is	expected	to	be	recognized	over	a weighted-average	period	of	1.3	years.	Additional	information	regarding	stock	option	exercises	appears	in	the	table	below:

| Millions	of	Dollars | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Intrinsic\tvalue\tof\tstock\toptions\texercised | $\t\t208 | $\t\t124 | $\t\t142 |
| Cash\treceived\tfrom\toption\texercises | 132 | 177 | 296 |
| Tax\tbenefit\trealized\tfrom\toption\texercises | 78 | 44 | 55 |
| Aggregate\tgrant-date\tfair\tvalue\tof\tstock\toptions\tvested\t[a] | 11 | 26 | 62 |

[a] Stock	options	for	executives	granted	in	2003	and	2002	included	a	reload	feature.	This	reload	feature	allowed	executives	to	exercise	their	options	using	shares	of	Union	Pacific	Corporation	common	stock	that	they already	owned	and	obtain	a	new	grant	of	options	with	immediate	vesting	in	the	amount	of	the	shares	used	for	exercise	plus	any	shares	withheld	for	tax	purposes.	The	reload	feature	of	these	option	grants	could only	be	exercised	if	the	price	of	our	common	stock	increased	at	least	20%	from	the	price	at	the	time	of	the	reload	grant.	During	the	year	ended	December	31,	2005,	reload	option	grants	represented	$31	million	of the	aggregate	grant-date	fair	value	of	stock	options	vested.	There	were	no	reload	option	grants	during	2007	and	2006	as	stock	options	exercised	after	January	1,	2006	are	not	eligible	for	the	reload	feature.

Retention	Awards	–	The	fair	value	of	retention	awards	is	based	on	the	closing	price	of	the	stock	at	the	grant	date.	Dividend	equivalents	are	paid	to	participants	during the	vesting	periods.

Changes	in	our	retention	awards	during	2007	were	as	follows:

| Changes	in	our	retention	awards	during	2007	were	as	follows: |  |  |
| :--- | :--- | :--- |
|  | Shares | Weighted-Average |
|  | (thous.) | Grant-Date\tFair\tValue |
| Nonvested\tat\tJanuary\t1,\t2007 | 778 | $\t\t71.72 |
| Granted | 306 | 97.01 |
| Vested | (253) | 61.66 |
| Forfeited | (19) | 81.80 |
| Nonvested\tat\tDecember\t31,\t2007 | 812 | $\t\t84.09 |

Retention	awards	are	granted	at	no	cost	to	the	employee	or	non-employee	director	and	vest	over	periods	lasting	up	to	four	years.	At	December	31,	2007,	there	was	$38 million	of	total	unrecognized	compensation	expense	related	to	nonvested	retention	awards,	which	is	expected	to	be	recognized	over	a	weighted-average	period	of	2.1 years.

Performance	Retention	Awards	–	In	January	2007,	our	Board	of	Directors	approved	performance	stock	unit	grants.	Other	than	raising	the	performance	targets,	the basic	terms	of	these	performance	stock	units	are	identical	to	those	granted	in	January	2006,	including	annual	return	on	invested	capital	(ROIC)	as	the	performance measure.	Stock	units	awarded	to	selected	employees	under	these	grants	are	subject	to	continued	employment	for	37	months	and	the	attainment	of	certain	levels	of	ROIC. We	will	expense	the	fair	value	of	the	units	that	are	probable	of	being	earned	based	on	our	forecasted	ROIC	over	the	3-year	performance	period.	We	measure	the	fair value	of	these	performance	stock	units	based	upon	the	closing	price	of	the	underlying	common	stock	as	of	the	date	of	grant,	reduced	by	the	present	value	of	estimated future	dividends.	Dividend	equivalents	are	paid	to	participants	only	after	the	units	are	earned.

The	assumptions	used	to	calculate	the	present	value	of	estimated	future	dividends	are	as	follows:

Changes	in	our	performance	retention	awards	during	2007	were	as	follows:

|  | Shares | Weighted-Average |
| :--- | :--- | :--- |
|  | (thous.) | Grant-Date\tFair\tValue |
| Nonvested\tat\tJanuary\t1,\t2007 | 122 | $\t\t86.05 |
| Granted | 173 | 93.72 |
| Vested | - | - |
| Forfeited | (1) | 93.72 |
| Nonvested\tat\tDecember\t31,\t2007 | 294 | $\t\t90.53 |

At	December	31,	2007,	there	was	$15	million	of	total	unrecognized	compensation	expense	related	to	nonvested	performance	retention	awards,	which	is	expected	to	be recognized	over	a	weighted-average	period	of	1.7	years.	A	portion	of	this	expense	is	subject	to	achievement	of	the	ROIC	levels	established	for	the	performance	stock unit	grants.

# 9.				Earnings	Per	Share

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

| Millions	of	Dollars,	Except	Per	Share	Amounts | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Net\tincome | $\t\t1,855 | $\t\t1,606 | $\t\t1,026 |
| Weighted-average\tnumber\tof\tshares\toutstanding: |  |  |  |
| Basic | 265.9 | 269.4 | 263.4 |
| Dilutive\teffect\tof\tstock\toptions | 2.1 | 2.1 | 1.5 |
| Dilutive\teffect\tof\tretention\tshares\tand\tunits | 0.4 | 0.5 | 1.6 |
| Diluted | 268.4 | 272.0 | 266.5 |
| Earnings\tper\tshare\t–\tbasic | $\t\t\t\t6.97 | $\t\t\t\t5.96 | $\t\t\t\t3.89 |
| Earnings\tper\tshare\t–\tdiluted | $\t\t\t\t6.91 | $\t\t\t\t5.91 | $\t\t\t\t3.85 |

Common	stock	options	totaling	0.4	million,	1.4	million,	and	1.4	million	for	2007,	2006,	and	2005,	respectively,	were	excluded	from	the	computation	of	diluted	earnings per	share	because	the	exercise	prices	of	these	options	exceeded	the	average	market	price	of	our	common	stock	for	the	respective	periods,	and	the	effect	of	their	inclusion would	be	anti-dilutive.

# 10.				Commitments	and	Contingencies

Asserted	and	Unasserted	Claims	–	Various	claims	and	lawsuits	are	pending	against	us	and	certain	of	our	subsidiaries.	We	cannot	fully	determine	the	effect	of	all asserted	and	unasserted	claims	on	our	consolidated	results	of	operations,	financial	condition,	or	liquidity;	however,	to	the	extent	possible,	where	asserted	and	unasserted claims	are	considered	probable	and	where	such	claims	can	be	reasonably	estimated,	we	have	recorded	a	liability.	We	do	not	expect	that	any	known	lawsuits,	claims, environmental	costs,	commitments,	contingent	liabilities,	or	guarantees	will	have	a	material	adverse	effect	on	our	consolidated	results	of	operations,	financial	condition, or	liquidity	after	taking	into	account	liabilities	previously	recorded	for	these	matters.

Personal	Injury	–	The	cost	of	personal	injuries	to	employees	and	others	related	to	our	activities	is	charged	to	expense	based	on	estimates	of	the	ultimate	cost	and number	of	incidents	each	year.	We	use	third-party	actuaries	to	assist	us	in	measuring	the	expense	and	liability,	including	unasserted	claims,	on	a	semi-annual	basis. Compensation	for	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.

As	a	result	of	improvements	in	our	safety	experience,	lower	estimated	ultimate	settlement	costs,	and	the	completion	of	actuarial	studies,	we	reduced	personal	injury expense	by	approximately	$80	million	in	2007.	These	adjustments	were	partially	offset	by	adverse	development	with	respect	to	one	claim.	Our	personal	injury	liability activity	was	as	follows:

| Millions	of	Dollars | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Beginning\tbalance | $\t\t\t631 | $\t\t\t619 | $\t\t\t639 |
| Accruals | 165 | 240 | 247 |
| Payments | (203) | (228) | (267) |
| Ending\tbalance\tat\tDecember\t31 | $\t\t\t593 | $\t\t\t631 | $\t\t\t619 |
| Current\tportion,\tending\tbalance\tat\tDecember\t31 | $\t\t\t204 | $\t\t\t233 | $\t\t\t274 |

Our	personal	injury	liability	is	discounted	to	present	value	using	applicable	U.S.	Treasury	rates.	Because	of	the	uncertainty	surrounding	the	ultimate	outcome	of	personal injury	claims,	it	is	reasonably	possible	that	future	costs	to	settle	these	claims	may	range	from	approximately	$593	million	to	$641	million.	We	believe	that	the	$593 million	liability	recorded	at	December	31,	2007,	is	the	best	estimate	of	the	present	value	of	the	future	settlement	costs	of	personal	injury	claims.

Asbestos	–	We	are	a	defendant	in	a	number	of	lawsuits	in	which	current	and	former	employees	and	other	parties	allege	exposure	to	asbestos.	Additionally,	we	have received	claims	for	asbestos	exposure	that	have	not	been	litigated.	The	claims	and	lawsuits	(collectively	referred	to	as	"claims")	allege	occupational	illness	resulting from	exposure	to	asbestos-containing	products.	In	most	cases,	the	claimants	do	not	have	credible	medical	evidence	of	physical	impairment	resulting	from	the	alleged exposures.	Additionally,	most	claims	filed	against	us	do	not	specify	an	amount	of	alleged	damages.

During	2004,	we	engaged	a	third	party	with	extensive	experience	in	estimating	resolution	costs	for	asbestos-related	claims	to	assist	us	in	assessing	the	number	and	value of	these	unasserted	claims	through	2034,	based	on	our	average	claims	experience	over	a	multi-year	period.	During	2007,	we	updated	our	potential	liability	to	include actual	claim	experience	since	2004.	As	a	result,	we	decreased	our	liability	by	$20	million	in	2007	for	asbestos-related	claims.	The	liability	for	resolving	both	asserted and	unasserted	claims	was	based	on	the	following	assumptions:

| Millions	of	Dollars | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Beginning\tbalance | \t\t $\t\t302 | $\t\t311 | $\t\t324 |
| Accruals/(credits) | (20) | - | - |
| Payments | (17) | (9) | (13) |
| Ending\tbalance\tat\tDecember\t31 | \t\t $\t\t265 | $\t\t302 | $\t\t311 |
| Current\tportion,\tending\tbalance\tat\tDecember\t31 | \t\t $\t\t\t\t11 | $\t\t\t\t13 | $\t\t\t\t16 |

Our	liability	for	asbestos-related	claims	is	not	discounted	to	present	value	due	to	the	uncertainty	surrounding	the	timing	of	future	payments.	Approximately	13%	of	the recorded	liability	related	to	asserted	claims,	and	approximately	87%	related	to	unasserted	claims.	These	claims	are	expected	to	be	paid	out	over	the	next	27	years.	We will	continue	to	review	actual	experience	and	adjust	our	estimate	as	warranted.

We	have	insurance	coverage	for	a	portion	of	the	costs	incurred	to	resolve	asbestos-related	claims,	and,	as	a	result	of	the	2004	assessment,	we	increased	our	receivable	for insurance	recoveries	related	to	asbestos	during	2004.	In	conjunction	with	the	liability	update	performed	in	2007,	we	also	reassessed	estimated	insurance	recoveries.	We have	recognized	an	asset	for	estimated	insurance	recoveries	at	December	31,	2007	and	2006.

We	believe	that	our	estimates	of	liability	for	asbestos-related	claims	and	insurance	recoveries	are	reasonable	and	probable.	The	amounts	recorded	for	asbestos-related liabilities	and	related	insurance	recoveries	were	based	on	currently	known	facts.	However,	future	events,	such	as	the	number	of	new	claims	filed	each	year,	average settlement	costs,	and	insurance	coverage	issues,	could	cause	the	actual	costs	and	insurance	recoveries	to	be	higher	or	lower	than	the	projected	amounts.	Estimates	also may	vary	in	the	future	if:	strategies,	activities,

and	 outcomes	 of	 asbestos	 litigation	 materially	 change;	 federal	 and	 state	 laws	 governing	 asbestos	 litigation	 increase	 or	 decrease the	 probability	 or	 amount	 of compensation	of	claimants;	and	there	are	material	changes	with	respect	to	payments	made	to	claimants	by	other	defendants.

Environmental	Costs	–	We	are	subject	to	federal,	state,	and	local	environmental	laws	and	regulations.	We	have	339	projects	with	which	we	are	or	may	be	liable	for remediation	costs	associated	with	alleged	contamination	or	for	violations	of	environmental	requirements.	This	includes	41	projects	that	are	the	subject	of	actions	taken by	the	U.S.	government,	22	of	which	are	currently	on	the	Superfund	National	Priorities	List.	Certain	federal	legislation	imposes	joint	and	several	liability	for	the remediation	of	identified	projects;	consequently,	our	ultimate	environmental	liability	may	include	costs	relating	to	activities	of	other	parties,	in	addition	to	costs	relating to	our	own	activities	with	each	project.

When	 an	 environmental	 issue	 has	 been	 identified	 with	 respect	 to	 property	 owned,	 leased,	 or	 otherwise	 used	 in	 our	 business,	 we	 and	 our	 consultants	 perform environmental	assessments	on	the	property.	We	expense	the	cost	of	the	assessments	as	incurred.	We	accrue	the	cost	of	remediation	where	our	obligation	is	probable	and such	costs	can	be	reasonably	estimated.	We	do	not	discount	our	environmental	liabilities	when	the	timing	of	the	anticipated	cash	payments	is	not	fixed	or	readily determinable.	At	December	31,	2007,	approximately	13%	of	our	environmental	liability	was	discounted	at	4.15%,	while	approximately	14%	of	our	environmental liability	was	discounted	at	5.34%	at	December	31,	2006.

Our	environmental	liability	activity	was	as	follows:

| Millions	of	Dollars | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Beginning\tbalance | \t\t $\t\t\t\t210 | $\t\t\t\t213 | $\t\t\t\t201 |
| Accruals | 41 | 39 | 45 |
| Payments | (42) | (42) | (33) |
| Ending\tbalance\tat\tDecember\t31 | \t\t $\t\t\t\t209 | $\t\t\t\t210 | $\t\t\t\t213 |
| Current\tportion,\tending\tbalance\tat\tDecember\t31 | \t\t $\t\t\t\t\t\t63 | $\t\t\t\t\t\t54 | $\t\t\t\t\t\t46 |

The	environmental	liability	includes	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	project,	financial	viability	of	other	potentially	responsible	parties,	and	existing	technology,	laws, and	regulations.	We	believe	that	we	have	adequately	accrued	for	our	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	the	speculative	nature	of remediation	costs.	Estimates	of	liability	may	vary	over	time	due	to	changes	in	federal,	state,	and	local	laws	governing	environmental	remediation.	We	do	not	expect current	obligations	to	have	a	material	adverse	effect	on	our	results	of	operations	or	financial	condition.

Indemnities	–	Our	maximum	potential	exposure	under	indemnification	arrangements,	including	certain	tax	indemnifications,	can	range	from	a	specified	dollar	amount to	an	unlimited	amount,	depending	on	the	nature	of	the	transactions	and	the	agreements.	Due	to	uncertainty	as	to	whether	claims	will	be	made	or	how	they	will

be	resolved,	we	cannot	reasonably	determine	the	probability	of	an	adverse	claim	or	reasonably	estimate	any	adverse	liability	or	the	total	maximum	exposure	under	these indemnification	arrangements.	We	do	not	have	any	reason	to	believe	that	we	will	be	required	to	make	any	material	payments	under	these	indemnity	provisions.

Income	Taxes	–	As	discussed	in	note	4,	the	IRS	has	completed	its	examinations	and	issued	notices	of	deficiency	for	tax	years	1995	through	2004,	and	we	are	in different	stages	of	the	IRS	appeals	process	for	these	years.	The	IRS	is	examining	our	tax	returns	for	tax	years	2005	and	2006.	In	the	third	quarter	of	2007,	we	believe	that we	reached	an	agreement	in	principle	with	the	IRS	to	resolve	all	of	the	issues,	except	interest,	related	to	tax	years	1995	through	1998,	including	the	previously	reported dispute	over	certain	donations	of	property.	We	anticipate	signing	a	closing	agreement	in	2008.	At	December	31,	2007,	we	have	recorded	a	current	liability	of	$140 million	for	tax	payments	in	2008	related	to	federal	and	state	income	tax	examinations.	We	do	not	expect	that	the	ultimate	resolution	of	these	examinations	will	have	a material	adverse	effect	on	our	Consolidated	Financial	Statements.

Other	income	included	the	following	for	the	years	ended	December	31:

| Millions	of	Dollars | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Rental\tincome | \t\t $\t\t\t\t\t\t68 | $\t\t\t\t\t\t83 | $\t\t\t\t\t\t59 |
| Net\tgain\ton\tnon-operating\tasset\tdispositions | 52 | 72 | 135 |
| Interest\tincome | 50 | 29 | 17 |
| Sale\tof\treceivables\tfees | (35) | (33) | (23) |
| Non-operating\tenvironmental\tcosts\tand\tother | (19) | (33) | (43) |
| Total | \t\t $\t\t\t\t116 | $\t\t\t\t118 | $\t\t\t\t145 |

# 12.				Share	Repurchase	Program

On	January	30,	2007,	our	Board	of	Directors	authorized	the	repurchase	of	up	to	20	million	shares	of	Union	Pacific	Corporation	common	stock	through	the	end	of	2009. Management's	assessments	of	market	conditions	and	other	pertinent	facts	guide	the	timing	and	volume	of	all	repurchases.	We	expect	to	fund	our	common	stock repurchases	 through	 cash	 generated	 from	 operations,	 the	 sale	 or	 lease	 of	 various	 operating	 and	 non-operating	 properties,	 debt	 issuances,	 and	 cash	 on	 hand	 at December	31,	2007.

# 13.				Comprehensive	Income/(Loss)

Comprehensive	income/(loss)	was	as	follows:

| Millions	of	Dollars | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Net\tincome | $\t\t1,855 | $\t\t1,606 | $\t\t1,026 |
| Other\tcomprehensive\tincome: |  |  |  |
| Defined\tbenefit\tplans | 65 | 170 | 1 |
| Foreign\tcurrency\ttranslation | 2 | (4) | 5 |
| Derivatives | 1 | 1 | 1 |
| Total\tother\tcomprehensive\tincome/(loss)\t[a] | 68 | 167 | 7 |
| Total\tcomprehensive\tincome | $\t\t1,923 | $\t\t1,773 | $\t\t1,033 |

The	after-tax	components	of	accumulated	other	comprehensive	loss	were	as	follows:

|  | Dec.	31, | Dec.	31, |
| :--- | :--- | :--- |
| Millions\tof\tDollars | 2007 | 2006 |
| Defined\tbenefit\tplans | $\t\t\t\t\t\t(55) | $\t\t\t\t(120) |
| Foreign\tcurrency\ttranslation | (15) | (17) |
| Derivatives | (4) | (5) |
| Total | $\t\t\t\t\t\t(74) | $\t\t\t\t(142) |

# 14.				Accounting	Pronouncements

In	September	2006,	the	FASB	issued	Statement	No.	157,	Fair	Value	Measurements	(FAS	157).	FAS	157	defines	fair	value,	establishes	a	framework	for	measuring	fair value	in	accordance	with	generally	accepted	accounting	principles	and	expands	disclosures	about	fair	value	measurements.	This	statement	does	not	require	any	new	fair value	measurements;	rather,	it	applies	under	other	accounting	pronouncements	that	require	or	permit	fair	value	measurements.	The	provisions	of	FAS	157	are	effective for	us	beginning	in	2008.	We	expect	this	new	standard	will	result	in	increased	disclosures	but	will	not	have	a	significant	impact	on	our	financial	position	or	results	of operations.

# 15.				Selected	Quarterly	Data	(Unaudited)

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

# Item	9A.	Controls	and	Procedures

As	of	the	end	of	the	period	covered	by	this	report,	the	Corporation	carried	out	an	evaluation,	under	the	supervision	and	with	the	participation	of	the	Corporation's management,	 including	 the	 Corporation's	 Chief	 Executive	 Officer	 (CEO)	 and	 Executive	 Vice	 President	 –	 Finance	 and	 Chief	 Financial	 Officer	 (CFO),	 of	 the effectiveness	of	the	design	and	operation	of	the	Corporation's	disclosure	controls	and	procedures	pursuant	to	Exchange	Act	Rules	13a-15	and	15d-15.	In	designing	and evaluating	the	disclosure	controls	and	procedures,	management	recognized	that	any	controls	and	procedures,	no	matter	how	well	designed	and	operated,	can	provide only	reasonable	assurance	of	achieving	the	desired	control	objectives.	Based	upon	that	evaluation,	the	CEO	and	the	CFO	concluded	that,	as	of	the	end	of	the	period covered	by	this	report,	the	Corporation's	disclosure	controls	and	procedures	were	effective	to	provide	reasonable	assurance	that	information	required	to	be	disclosed	in our	Exchange	Act	reports	is	recorded,	processed,	summarized	and	reported	within	the	time	periods	specified	by	the	SEC,	and	that	such	information	is	accumulated	and communicated	to	management,	including	the	CEO	and	CFO,	as	appropriate,	to	allow	timely	decisions	regarding	required	disclosure.

Additionally,	the	CEO	and	CFO	determined	that	there	have	been	no	changes	to	the	Corporation's	internal	control	over	financial	reporting	(as	defined	in	Exchange	Act Rules	13a-15(f)	and	15d-15(f))	during	the	last	fiscal	quarter	that	have	materially	affected,	or	are	reasonably	likely	to	materially	affect,	the	Corporation's	internal	control over	financial	reporting.

# Item	9B.	Other	Information

# MANAGEMENT'S	ANNUAL	REPORT	ON	INTERNAL	CONTROL	OVER	FINANCIAL	REPORTING

The	management	of	Union	Pacific	Corporation	and	Subsidiary	Companies	(the	Corporation)	is	responsible	for	establishing	and	maintaining	adequate	internal	control over	financial	reporting	(as	defined	in	Exchange	Act	Rules	13a-15(f)	and	15d-15(f)).	The	Corporation's	internal	control	system	was	designed	to	provide	reasonable assurance	to	the	Corporation's	management	and	Board	of	Directors	regarding	the	preparation	and	fair	presentation	of	published	financial	statements.

All	internal	control	systems,	no	matter	how	well	designed,	have	inherent	limitations.	Therefore,	even	those	systems	determined	to	be	effective	can	provide	only reasonable	assurance	with	respect	to	financial	statement	preparation	and	presentation.

The	Corporation's	management	assessed	the	effectiveness	of	the	Corporation's	internal	control	over	financial	reporting	as	of	December	31,	2007.	In	making	this assessment,	 it	used	 the	criteria	set	forth	by	 the	Committee	of	Sponsoring	Organizations	of	 the	Treadway	Commission	(COSO) in	Internal	 Control	 –	 Integrated Framework.	Based	on	our	assessment	management	believes	that,	as	of	December	31,	2007,	the	Corporation's	internal	control	over	financial	reporting	is	effective	based on	those	criteria.

The	Company's	independent	registered	public	accounting	firm	has	issued	an	attestation	report	on	the	effectiveness	of	the	Company's	internal	control	over	financial reporting.	This	report	appears	on	page	80.

We	have	audited	the	internal	control	over	financial	reporting	of	Union	Pacific	Corporation	and	Subsidiary	Companies	(the	Corporation)	as	of	December	31,	2007,	based on	 criteria	 established in	Internal	 Control	 — Integrated	 Framework issued	 by	 the	 Committee	 of	 Sponsoring	 Organizations	 of	 the	 Treadway	 Commission.	 The Corporation's	management	is	responsible	for	maintaining	effective	internal	control	over	financial	reporting	and	for	its	assessment	of	the	effectiveness	of	internal	control over	financial	reporting,	included	in	the	accompanying	Management's	Annual	Report	on	Internal	Control	Over	Financial	Reporting.	Our	responsibility	is	to	express	an opinion	on	the	Corporation's	internal	control	over	financial	reporting	based	on	our	audit.

We	conducted	our	audit	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States).	Those	standards	require	that	we	plan	and perform	the	audit	to	obtain	reasonable	assurance	about	whether	effective	internal	control	over	financial	reporting	was	maintained	in	all	material	respects.	Our	audit included	obtaining	an	understanding	of	internal	control	over	financial	reporting,	assessing	the	risk	that	a	material	weakness	exists,	testing	and	evaluating	the	design	and operating	effectiveness	of	internal	control	based	on	the	assessed	risk,	and	performing	such	other	procedures	as	we	considered	necessary	in	the	circumstances.	We	believe that	our	audit	provides	a	reasonable	basis	for	our	opinion.

A	company's	internal	control	over	financial	reporting	is	a	process	designed	by,	or	under	the	supervision	of,	the	company's	principal	executive	and	principal	financial officers,	or	persons	performing	similar	functions,	and	effected	by	the	company's	board	of	directors,	management,	and	other	personnel	to	provide	reasonable	assurance regarding	the	reliability	of	financial	reporting	and	the	preparation	of	financial	statements	for	external	purposes	in	accordance	with	generally	accepted	accounting principles.	A	company's	internal	control	over	financial	reporting	includes	those	policies	and	procedures	that	(1)	pertain	to	the	maintenance	of	records	that,	in	reasonable detail,	accurately	and	fairly	reflect	the	transactions	and	dispositions	of	the	assets	of	the	company;	(2)	provide	reasonable	assurance	that	transactions	are	recorded	as necessary	to	permit	preparation	of	financial	statements	in	accordance	with	generally	accepted	accounting	principles,	and	that	receipts	and	expenditures	of	the	company are	being	made	only	in	accordance	with	authorizations	of	management	and	directors	of	the	company;	and	(3)	provide	reasonable	assurance	regarding	prevention	or timely	detection	of	unauthorized	acquisition,	use,	or	disposition	of	the	company's	assets	that	could	have	a	material	effect	on	the	financial	statements.

Because	of	the	inherent	limitations	of	internal	control	over	financial	reporting,	including	the	possibility	of	collusion	or	improper	management	override	of	controls, material	misstatements	due	to	error	or	fraud	may	not	be	prevented	or	detected	on	a	timely	basis.	Also,	projections	of	any	evaluation	of	the	effectiveness	of	the	internal control	over	financial	reporting	to	future	periods	are	subject	to	the	risk	that	the	controls	may	become	inadequate	because	of	changes	in	conditions,	or	that	the	degree	of compliance	with	the	policies	or	procedures	may	deteriorate.

In	our	opinion,	the	Corporation	maintained,	in	all	material	respects,	effective	internal	control	over	financial	reporting	as	of	December	31,	2007,	based	on	the	criteria established	in	Internal	Control	—	Integrated	Framework	issued	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission.

We	have	also	audited,	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States),	the	consolidated	financial	statements	and financial	statement	schedule	as	of	and	for	the	year	ended	December	31,	2007	of	the	Corporation	and	our	report	dated	February	15,	2008	expressed	an	unqualified	opinion on	those	consolidated	financial	statements	and	financial	statement	schedule	and	included	an	explanatory	paragraph	regarding	the	Corporation's	adoption,	in	2006,	of Statement	of	Financial	Accounting	Standards	No.	158,	Employers'	Accounting	for	Defined	Benefit	Pension	and	Other	Postretirement	Plans.

# PART	III

# Item	10.	Directors,	Executive	Officers,	and	Corporate	Governance

# (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.

Information	concerning	our	Audit	Committee	and	the	independence	of	its	members,	along	with	information	about	the	audit	committee	financial	expert(s)	serving on	the	Audit	Committee,	is	set	forth	in	the	Audit	Committee	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.

(d) Code	of	Ethics	for	Chief	Executive	Officer	and	Senior	Financial	Officers	of	Registrant.

The	Board	of	Directors	of	UPC	has	adopted	the	UPC	Code	of	Ethics	for	the	Chief	Executive	Officer	and	Senior	Financial	Officers	(the	Code).	A	copy	of	the Code	may	be	found	on	the	Internet	at	our	website	www.up.com/investors.	We	intend	to	disclose	any	amendments	to	the	Code	or	any	waiver	from	a	provision	of the	Code	on	our	website.

# Item	11.	Executive	Compensation

Information	concerning	compensation	received	by	our	directors	and	our	named	executive	officers	is	presented	in	the	Compensation	Discussion	and	Analysis,	Summary Compensation	Table,	Grants	of	Plan-Based	Awards	in	Fiscal	Year	2007,	Outstanding	Equity	Awards	at	2007	Fiscal	Year-End,	Option	Exercises	and	Stock	Vested	in Fiscal	Year	2007,	Pension	Benefits	at	2007	Fiscal	Year-End,	Nonqualified	Deferred	Compensation	at	2007	Fiscal	Year-End,	Potential	Payments	Upon	Termination	or Change	in	Control	and	Director	Compensation	in	Fiscal	Year	2007	segments	of	the	Proxy	Statement	and	is	incorporated	herein	by	reference.	Additional	information regarding	compensation	of	directors,	including	Board	committee	members,	is	set	forth	in	the	By-Laws	of	UPC	and	the	Stock	Unit	Grant	and	Deferred	Compensation Plan	 for	 the	 Board	 of	 Directors,	 both	 of	 which	 are	 included	 as	 exhibits	 to	 this	 report.	 Information	 regarding	 the	 Compensation	 Committee	 is	 set	 forth	 in	 the Compensation	Committee	Interlocks	and	Insider	Participation	and	Compensation	Committee	Report	segments	of	the	Proxy	Statement	and	is	incorporated	herein	by reference.

# Item	12.	Security	Ownership	of	Certain	Beneficial	Owners	and	Management	and	Related	Stockholder	Matters

Information	as	to	the	number	of	shares	of	our	equity	securities	beneficially	owned	by	each	of	our	directors	and	nominees	for	director,	our	named	executive	officers,	our directors	and	executive	officers	as	a	group,	and

certain	beneficial	owners	is	set	forth	in	the	Security	Ownership	of	Certain	Beneficial	Owners	and	Management	segment	of	the	Proxy	Statement	and	is	incorporated herein	by	reference.

The	following	table	summarizes	the	equity	compensation	plans	under	which	Union	Pacific	Corporation	common	stock	may	be	issued	as	of	December	31,	2007.

|  |  |  | Number	of	securities |
| :--- | :--- | :--- | :--- |
|  | Number\tof\tsecurities | Weighted-average | remaining\tavailable\tfor |
|  | to\tbe\tissued\tupon | exercise\tprice\tof | future\tissuance\tunder |
|  | exercise\tof | outstanding | equity\tcompensation\tplans |
|  | outstanding\toptions, | options,\twarrants | (excluding\tsecurities |
|  | warrants\tand\trights | and\trights | reflected\tin\tcolumn\t(a)) |
| Plan\tCategory | (a) | (b) | (c) |
| Equity\tcompensation\tplans\tapproved\tby\tsecurity\tholders | 7,670,459[1] | $\t\t\t\t72.54[2] | 19,300,864 |
| Equity\tcompensation\tplans\tnot\tapproved\tby\tsecurity\tholders\t[3] | 432,689 | 55.00 | - |
| Total | 8,103,148 | $\t\t\t\t71.53 | 19,300,864 |

[1] Includes	539,678	retention	units	that	do	not	have	an	exercise	price.	Does	not	include	577,562	retention	shares	that	are	actually	issued	and	outstanding.

[2] Does	not	include	the	retention	units	or	retention	shares	described	above	in	footnote	[1].

[3] The	UP	Shares	Stock	Option	Plan	(UP	Shares	Plan)	is	the	only	equity	compensation	plan	not	approved	by	shareholders.	The	UP	Shares	Plan	was	approved	by	our	Board	of	Directors	on	April	30,	1998	and reserved	12,000,000	shares	of	common	stock	for	issuance.	The	UP	Shares	Plan	was	a	broad-based	option	program	that	granted	each	active	employee	on	April	30,	1998	non-qualified	options	to	purchase	200 shares	of	common	stock	at	$55.00	per	share.	Options	became	exercisable	on	May	1,	2001	and	expire	on	April	30,	2008.	If	an	optionee's	employment	terminates	for	any	reason,	the	option	remains	exercisable	for	a period	of	one	year	after	the	date	of	termination,	but	no	option	is	exercisable	after	April	30,	2008.	No	further	options	may	be	granted	under	the	UP	Shares	Plan.

# Item	13.	Certain	Relationships	and	Related	Transactions,	and	Director	Independence

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.	We	do	not	have	any	relationship	with	any	outside	third	party	that	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.

Information	regarding	the	independence	of	our	directors	is	set	forth	in	the	Director	Independence	segment	of	the	Proxy	Statement	and	is	incorporated	herein	by reference.

# Item	14.	Principal	Accountant	Fees	and	Services

Information	concerning	the	fees	billed	by	our	independent	registered	public	accounting	firm	and	the	nature	of	services	comprising	the	fees	for	each	of	the	two	most recent	fiscal	years	in	each	of	the	following	categories:	(i)	audit	fees,	(ii)	audit—related	fees,	(iii)	tax	fees,	and	(iv)	all	other	fees,	is	set	forth	in	the	Independent	Registered Public	Accounting	Firm's	Fees	and	Services	segment	of	the	Proxy	Statement	and	is	incorporated	herein	by	reference.

Information	 concerning	 our	Audit	 Committee's	 policies	 and	 procedures	 pertaining	 to	 pre-approval	 of	 audit	 and	 non-audit	 services rendered	 by	 our independent registered	public	accounting	firm	is	set	forth	in	the	Audit	Committee	segment	of	the	Proxy	Statement	and	is	incorporated	herein	by	reference.

# PART	IV

# Item	15.	Exhibits,	Financial	Statement	Schedules

# (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	the	Financial	Statements	and	Supplementary	Data,	Item	8,	on	page	46.

# (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	Financial	Statements	and	Supplementary	Data,	Item	8,	or	notes	thereto.

# (3) Exhibits

Exhibits	are	listed	in	the	exhibit	index	beginning	on	page	86.	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.

# 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	28th	day	of	February,	2008.

By /s/	James	R.	Young

James	R.	Young,

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	28th	day	of	February,	2008,	by	the	following	persons	on behalf	of	the	registrant	and	in	the	capacities	indicated.

# PRINCIPAL	EXECUTIVE	OFFICER

AND	DIRECTOR:

# PRINCIPAL	FINANCIAL	OFFICER:

DIRECTORS:

Andrew	H.	Card,	Jr.* Erroll	B.	Davis,	Jr.* Thomas	J.	Donohue* Archie	W.	Dunham* Judith	Richards	Hope*

*	By /s/	Thomas	E.	Whitaker

	 Thomas	E.	Whitaker,	Attorney-in-fact

/s/	James	R.	Young

/s/	Jeffrey	P.	Totusek Jeffrey	P.	Totusek, Vice	President	and	Controller

Charles	C.	Krulak* Michael	W.	McConnell* Thomas	F.	McLarty	III* Steven	R.	Rogel*

| Millions	of	Dollars,	for	the	Years	Ended	December	31, | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Allowance\tfor\tdoubtful\taccounts: |  |  |  |
| Balance,\tbeginning\tof\tperiod | \t\t $\t\t\t\t\t\t99 | $\t\t\t\t126 | $\t\t\t\t107 |
| Charges/(reduction)\tto\texpense | (7) | (7) | 2 |
| Net\trecoveries/(write-offs) | (17) | (20) | 17 |
| Balance,\tend\tof\tperiod | \t\t $\t\t\t\t\t\t75 | $\t\t\t\t\t\t99 | $\t\t\t\t126 |
| Allowance\tfor\tdoubtful\taccounts\tare\tpresented\tin\tthe |  |  |  |
| Consolidated\tStatements\tof\tFinancial\tPosition\tas\tfollows: |  |  |  |
| Current | \t\t $\t\t\t\t\t\t\t\t3 | $\t\t\t\t\t\t\t\t6 | $\t\t\t\t\t\t16 |
| Long-term | 72 | 93 | 110 |
| Balance,\tend\tof\tperiod | \t\t $\t\t\t\t\t\t75 | $\t\t\t\t\t\t99 | $\t\t\t\t126 |
| Accrued\tcasualty\tcosts: |  |  |  |
| Balance,\tbeginning\tof\tperiod | \t\t $\t1,277 | $\t1,354 | $\t1,303 |
| Charges\tto\texpense | 328 | 417 | 409 |
| Cash\tpayments\tand\tother\treductions | (435) | (494) | (358) |
| Balance,\tend\tof\tperiod | \t\t $\t1,170 | $\t1,277 | $\t1,354 |
| Accrued\tcasualty\tcosts\tare\tpresented\tin\tthe\tConsolidated |  |  |  |
| Statements\tof\tFinancial\tPosition\tas\tfollows: |  |  |  |
| Current | \t\t $\t\t\t\t371 | $\t\t\t\t409 | $\t\t\t\t478 |
| Long-term | 799 | 868 | 876 |
| Balance,\tend\tof\tperiod | \t\t $\t1,170 | $\t1,277 | $\t1,354 |

# Exhibit	Index

# Incorporated	by	Reference

		3(a) By-Laws	of	UPC,	as	amended,	effective	October	1,	2007,	are	incorporated	herein	by	reference	to	Exhibit	3	to	the	Corporation's	Current	Report	on Form	8-K	dated	October	2,	2007. 		3(b) 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.

		4(a) Indenture,	dated	as	of	December	20,	1996,	between	UPC	and	Wells	Fargo	Bank,	National	Association,	as	successor	to	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	Bank	of	New	York,	as	successor	to	JP	Morgan	Chase	Bank,	formerly	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).

		4(d) Form	of	Debt	Security	(Note)	is	incorporated	by	reference	to	Exhibit	4.1	to	UPC's	Current	Report	of	Form	8-K,	dated	April	18,	2007.

		4(e) Form	of	Debt	Security	(Debenture)	is	incorporated	by	reference	to	Exhibit	4.2	to	the	Corporation's	Current	Report	of	Form	8-K,	dated	April	18, 2007.

		4(f) Form	of	Debt	Security	(Note)	is	incorporated	by	reference	to	Exhibit	4.1	to	the	Corporation's	Current	Report	of	Form	8-K,	dated	August	24,	2007.

		4(g) Form	of	Debt	Security	(Note)	is	incorporated	by	reference	to	Exhibit	4.1	to	the	Corporation's	Current	Report	of	Form	8-K,	dated	October	30,	2007.

		4(h) Form	of	Debt	Security	(Note)	is	incorporated	by	reference	to	Exhibit	4.1	to	the	Corporation's	Current	Report	of	Form	8-K,	dated	February	5,	2008.

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(c) UPC	2000	Directors	Stock	Plan,	as	amended	November	16,	2006	and	January	30,	2007,	is	incorporated	herein	by	reference	to	Exhibit	10(b)	to	the Corporation's	Annual	Report	on	Form	10-K	for	the	year	ended	December	31,	2006.

10(d) UP	Shares	Stock	Option	Plan	of	UPC,	as	amended	November	16,	2006,	is	incorporated	herein	by	reference	to	Exhibit	10(c)	to	the	Corporation's Annual	Report	on	Form	10-K	for	the	year	ended	December	31,	2006.

10(e) The	1993	Stock	Option	and	Retention	Stock	Plan	of	UPC,	as	amended	November	16,	2006,	is	incorporated	herein	by	reference	to	Exhibit	10	to	the Corporation's	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	March	31,	2007.

10(f) UPC	2001	Stock	Incentive	Plan,	as	amended	November	16,	2006,	is	incorporated	herein	by	reference	to	Exhibit	10(e)	to	the	Corporation's	Annual Report	on	Form	10-K	for	the	year	ended	December	31,	2006.

10(g) UPC	2004	Stock	Incentive	Plan,	as	amended	November	16,	2006,	is	incorporated	herein	by	reference	to	Exhibit	10(f)	to	the	Corporation's	Annual Report	on	Form	10-K	for	the	year	ended	December	31,	2006.

10(h) 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(i) 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

10(j) 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(k) 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(l) 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(m) 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(n) 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(o) 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(p) 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(q) 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(r) Form	of	Non-Qualified	Stock	Option	Agreement	for	Executives	is	incorporated	herein	by	reference	to	Exhibit	10(a)	to	the	Corporation's	Quarterly Report	on	Form	10-Q	for	the	quarter	ended	September	30,	2004.

10(s) Form	of	Stock	Unit	Agreement	for	Executives	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,	2004.

10(t) Form	of	Stock	Unit	Agreement	for	Executive	Incentive	Premium	Exchange	Program	is	incorporated	herein	by	reference	to	Exhibit	10(c)	to	the Corporation's	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	September	30,	2004.

10(u) Form	of	Non-Qualified	Stock	Option	Agreement	for	Directors	is	incorporated	herein	by	reference	to	Exhibit	10(d)	to	the	Corporation's	Quarterly Report	on	Form	10-Q	for	the	quarter	ended	September	30,	2004.

10(v) Form	of	Stock	Unit	Agreement	for	Executives,	is	incorporated	herein	by	reference	to	Exhibit	10(b)	to	the	Corporation's	Annual	Report	on	Form	10- K	for	the	year	ended	December	31,	2005.

10(w) Form	of	Non-Qualified	Stock	Option	Agreement	for	Executives,	is	incorporated	herein	by	reference	to	Exhibit	10(c)	to	the	Corporation's	Annual Report	on	Form	10-K	for	the	year	ended	December	31,	2005.

10(x) Form	of	2006	Long	Term	Plan	Stock	Unit	Agreement	is	incorporated	herein	by	reference	to	Exhibit	10(a)	to	the	Corporation's	Annual	Report	on Form	10-K	for	the	year	ended	December	31,	2005.

10(y) Form	of	2007	Long	Term	Plan	Stock	Unit	Agreement	is	incorporated	herein	by	reference	to	Exhibit	10(a)	to	the	Corporation's	Annual	Report	on Form	10-K	for	the	year	ended	December	31,	2006.

10(z) UPC	Executive	Incentive	Plan,	effective	May	5,	2005,	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,	2005.

	10(aa) Supplemental	Thrift	Plan	of	UPC,	as	amended	December	21,	2005,	is	incorporated	herein	by	reference	to	Exhibit	10(e)	to	the	Corporation's	Annual Report	on	Form	10-K	for	the	year	ended	December	31,	2005.

	10(bb) The	Supplemental	Pension	Plan	for	Officers	and	Managers	of	UPC	and	Affiliates,	as	amended	December	21,	2005,	is	incorporated	herein	by reference	to	Exhibit	10(f)	to	the	Corporation's	Annual	Report	on	Form	10-K	for	the	year	ended	December	31,	2005.

	10(cc) Executive	Incentive	Plan	(2005)	–	Deferred	Compensation	Program,	dated	December	21,	2005,	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,	2005.



Question: what was change in millions of free cash flow from 2005 to 2006?
Calculation:    free_cash_flow_change = 516 - 234
 answer = free_cash_flow_change
Answer: 282