##### Table of Contents

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FORM 10-Q



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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly
period ended June 30, 2005



- OR -



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



For the transition
period from  to



Commission file number 1-6146



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UNION PACIFIC RAILROAD COMPANY

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|DELAWARE                                                       |  | 94-6001323                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



1400 DOUGLAS STREET,
OMAHA, NEBRASKA

(Address of principal executive offices)



68179

(Zip Code)



(402) 544-5000

(Registrants telephone number, including area code)



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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO ̈



Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).    YES ̈NO  x



As of July 31, 2005, the Registrant had outstanding 7,130
shares of Common Stock, $10 par value, and 620 shares of Class A Stock, $10 par value.



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



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##### Table of Contents

TABLE OF CONTENTS

UNION PACIFIC RAILROAD COMPANY



PART I.
FINANCIAL INFORMATION



|               |  |                                                                                                                    |  |            
|-------------- |  | ------------------------------------------------------------------------------------------------------------------ |  | -----------
|               |  |                                                                                                                    |  | Page Number
|Item 1.        |  | Consolidated Financial Statements:                                                                                 |  |            
|               |  |                                                                                                                   
|               |  | CONSOLIDATED STATEMENTS OF INCOME (Unaudited)For the Three Months Ended June 30, 2005 and 2004                     |  | 3          
|               |  |                                                                                                                   
|               |  | CONSOLIDATED STATEMENTS OF INCOME (Unaudited)For the Six Months Ended June 30, 2005 and 2004                       |  | 4          
|               |  |                                                                                                                   
|               |  | CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited)At June 30, 2005 and December 31, 2004                    |  | 5          
|               |  |                                                                                                                   
|               |  | CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)For the Six Months Ended June 30, 2005 and 2004                   |  | 6          
|               |  |                                                                                                                   
|               |  | CONSOLIDATED STATEMENT OF CHANGES IN COMMON SHAREHOLDERS EQUITY(Unaudited) For the Six Months Ended June 30, 2005 |  | 7          
|               |  |                                                                                                                   
|               |  | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)                                                             |  | 8          
|               |  |                                                                                                                   
|Item 2.        |  | Managements Narrative Analysis of the Results of Operations                                                       |  | 16         
|               |  |                                                                                                                   
|Item 3.        |  | Quantitative and Qualitative Disclosures About Market Risk                                                         |  | 24         
|               |  |                                                                                                                   
|Item 4.        |  | Controls and Procedures                                                                                            |  | 24         
|               |  |                                                                                                                   
|               |  | PART II.
OTHER INFORMATION                                                                                         |  |            
|               |  |                                                                                                                   
|Item 1.        |  | Legal Proceedings                                                                                                  |  | 25         
|               |  |                                                                                                                   
|Item 6.        |  | Exhibits                                                                                                           |  | 25         
|               | 
|Signatures     |  | 26                                                                                                                
|               | 
|Certifications |  |                                                                                                                   



2



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##### Table of Contents

PART I.
FINANCIAL INFORMATION



Item 1. Consolidated Financial Statements



Consolidated Statements of Income (Unaudited)



Union Pacific Railroad Company and Consolidated Subsidiary and Affiliate Companies



|                                                        |  |      |       |   |      |   |       |  
|------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|Millions of Dollars For the Three Months Ended June 30, |  | 2005 |       |   | 2004 |  
|Operating revenue                                       |  | $    | 3,335 |   |      | $ | 3,020 |  
|                                                        |  |     
|Operating expenses:                                     |  |      |       |   |      |   |       |  
|Salaries, wages, and employee benefits                  |  |      | 1,061 |   |      |   | 1,032 |  
|Equipment and other rents                               |  |      | 340   |   |      |   | 359   |  
|Depreciation                                            |  |      | 291   |   |      |   | 276   |  
|Fuel and utilities                                      |  |      | 597   |   |      |   | 435   |  
|Materials and supplies                                  |  |      | 128   |   |      |   | 115   |  
|Casualty costs                                          |  |      | 102   |   |      |   | 115   |  
|Purchased services and other costs                      |  |      | 350   |   |      |   | 327   |  
|                                                        |  |      |       |   |      |   |       |  
|Total operating expenses                                |  |      | 2,869 |   |      |   | 2,659 |  
|                                                        |  |      |       |   |      |   |       |  
|Operating income                                        |  |      | 466   |   |      |   | 361   |  
|Other income                                            |  |      | 30    |   |      |   | 9     |  
|Interest expense                                        |  |      | (122  | ) |      |   | (123  | )
|                                                        |  |      |       |   |      |   |       |  
|Income before income taxes                              |  |      | 374   |   |      |   | 247   |  
|Income taxes                                            |  |      | (137  | ) |      |   | (82   | )
|                                                        |  |      |       |   |      |   |       |  
|Net income                                              |  | $    | 237   |   |      | $ | 165   |  
|                                                        |  |      |       |   |      |   |       |  



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



3



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##### Table of Contents

Consolidated Statements of Income (Unaudited)

Union Pacific Railroad Company and Consolidated
Subsidiary and Affiliate Companies



|                                                      |  |      |       |   |      |   |       |  
|----------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|Millions of Dollars For the Six Months Ended June 30, |  | 2005 |       |   | 2004 |  
|Operating revenue                                     |  | $    | 6,479 |   |      | $ | 5,904 |  
|                                                      |  |     
|Operating expenses:                                   |  |      |       |   |      |   |       |  
|Salaries, wages, and employee benefits                |  |      | 2,140 |   |      |   | 2,026 |  
|Equipment and other rents                             |  |      | 692   |   |      |   | 685   |  
|Depreciation                                          |  |      | 580   |   |      |   | 549   |  
|Fuel and utilities                                    |  |      | 1,136 |   |      |   | 824   |  
|Materials and supplies                                |  |      | 263   |   |      |   | 237   |  
|Casualty costs                                        |  |      | 196   |   |      |   | 263   |  
|Purchased services and other costs                    |  |      | 693   |   |      |   | 645   |  
|                                                      |  |      |       |   |      |   |       |  
|Total operating expenses                              |  |      | 5,700 |   |      |   | 5,229 |  
|                                                      |  |      |       |   |      |   |       |  
|Operating income                                      |  |      | 779   |   |      |   | 675   |  
|Other income                                          |  |      | 46    |   |      |   | 28    |  
|Interest expense                                      |  |      | (244  | ) |      |   | (251  | )
|                                                      |  |      |       |   |      |   |       |  
|Income before income taxes                            |  |      | 581   |   |      |   | 452   |  
|Income taxes                                          |  |      | (215  | ) |      |   | (123  | )
|                                                      |  |      |       |   |      |   |       |  
|Net income                                            |  | $    | 366   |   |      | $ | 329   |  
|                                                      |  |      |       |   |      |   |       |  



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



4



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##### Table of Contents

Consolidated Statements of Financial Position (Unaudited)

Union Pacific Railroad Company and Consolidated
Subsidiary and Affiliate Companies



|                                                                   |  |               |        |   |                  |   |        |  
|------------------------------------------------------------------ |  | ------------- | ------ | - | ---------------- | - | ------ | -
|Millions of Dollars                                                |  | June 30, 2005 |        |   | December 31,2004 |  
|Assets                                                             |  |               |        |   |                  |   |        |  
|Current assets:                                                    |  |               |        |   |                  |   |        |  
|Cash and temporary investments                                     |  | $             | 70     |   |                  | $ | 236    |  
|Accounts receivable, net                                           |  |               | 581    |   |                  |   | 517    |  
|Materials and supplies                                             |  |               | 348    |   |                  |   | 309    |  
|Current deferred income taxes                                      |  |               | 347    |   |                  |   | 284    |  
|Other current assets                                               |  |               | 124    |   |                  |   | 179    |  
|                                                                   |  |               |        |   |                  |   |        |  
|Total current assets                                               |  |               | 1,470  |   |                  |   | 1,525  |  
|                                                                   |  |               |        |   |                  |   |        |  
|Investments:                                                       |  |               |        |   |                  |   |        |  
|Investments in and advances to affiliated companies                |  |               | 763    |   |                  |   | 742    |  
|Other investments                                                  |  |               | 22     |   |                  |   | 25     |  
|                                                                   |  |               |        |   |                  |   |        |  
|Total investments                                                  |  |               | 785    |   |                  |   | 767    |  
|                                                                   |  |               |        |   |                  |   |        |  
|Properties:                                                        |  |               |        |   |                  |   |        |  
|Road and other                                                     |  |               | 33,120 |   |                  |   | 32,148 |  
|Equipment                                                          |  |               | 7,712  |   |                  |   | 7,733  |  
|                                                                   |  |               |        |   |                  |   |        |  
|Total cost                                                         |  |               | 40,832 |   |                  |   | 39,881 |  
|Accumulated depreciation                                           |  |               | (9,302 | ) |                  |   | (8,884 | )
|                                                                   |  |               |        |   |                  |   |        |  
|Net properties                                                     |  |               | 31,530 |   |                  |   | 30,997 |  
|                                                                   |  |               |        |   |                  |   |        |  
|Other assets                                                       |  |               | 460    |   |                  |   | 466    |  
|                                                                   |  |               |        |   |                  |   |        |  
|Total assets                                                       |  | $             | 34,245 |   |                  | $ | 33,755 |  
|                                                                   |  |               |        |   |                  |   |        |  
|Liabilities and Common Shareholders Equity                        |  |               |        |   |                  |   |        |  
|Current liabilities:                                               |  |               |        |   |                  |   |        |  
|Accounts payable                                                   |  | $             | 653    |   |                  | $ | 586    |  
|Accrued wages and vacation                                         |  |               | 417    |   |                  |   | 375    |  
|Accrued casualty costs                                             |  |               | 406    |   |                  |   | 410    |  
|Income and other taxes                                             |  |               | 275    |   |                  |   | 208    |  
|Interest payable                                                   |  |               | 65     |   |                  |   | 71     |  
|Debt due within one year                                           |  |               | 139    |   |                  |   | 150    |  
|Equipment rents payable                                            |  |               | 139    |   |                  |   | 130    |  
|Other current liabilities                                          |  |               | 401    |   |                  |   | 370    |  
|                                                                   |  |               |        |   |                  |   |        |  
|Total current liabilities                                          |  |               | 2,495  |   |                  |   | 2,300  |  
|                                                                   |  |               |        |   |                  |   |        |  
|Intercompany borrowings from UPC                                   |  |               | 4,752  |   |                  |   | 4,689  |  
|Third-party debt due after one year                                |  |               | 1,661  |   |                  |   | 1,743  |  
|Deferred income taxes                                              |  |               | 9,554  |   |                  |   | 9,450  |  
|Accrued casualty costs                                             |  |               | 859    |   |                  |   | 884    |  
|Retiree benefits obligation                                        |  |               | 889    |   |                  |   | 893    |  
|Other long-term liabilities                                        |  |               | 574    |   |                  |   | 545    |  
|Redeemable preference shares                                       |  |               | 13     |   |                  |   | 14     |  
|Commitments and contingencies (Note 7)                             |  |               |        |   |                  |   |        |  
|                                                                   |  |               |        |   |                  |   |        |  
|Total liabilities                                                  |  |               | 20,797 |   |                  |   | 20,518 |  
|                                                                   |  |               |        |   |                  |   |        |  
|Common shareholders equity:                                       |  |               |        |   |                  |   |        |  
|Common stock, 9,200 stock authorized, 4,465 issued and outstanding |  |               |       |   |                  |   |       |  
|Class A stock, 800 stock authorized, 388 issued and outstanding    |  |               |       |   |                  |   |       |  
|Paid-in-surplus                                                    |  |               | 4,782  |   |                  |   | 4,782  |  
|Retained earnings                                                  |  |               | 8,902  |   |                  |   | 8,692  |  
|Accumulated other comprehensive loss                               |  |               | (236   | ) |                  |   | (237   | )
|                                                                   |  |               |        |   |                  |   |        |  
|Total common shareholders equity                                  |  |               | 13,448 |   |                  |   | 13,237 |  
|                                                                   |  |               |        |   |                  |   |        |  
|Total liabilities and common shareholders equity                  |  | $             | 34,245 |   |                  | $ | 33,755 |  
|                                                                   |  |               |        |   |                  |   |        |  



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



5



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##### Table of Contents

Consolidated Statements of Cash Flows (Unaudited)

Union Pacific Railroad Company and Consolidated Subsidiary
and Affiliate Companies



|                                                                                  |  |      |        |   |      |   |      |  
|--------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ---- | -
|Millions of Dollars, For the Six Months Ended June 30,                            |  | 2005 |        |   | 2004 |  
|Operating Activities                                                              |  |      |        |   |      |   |      |  
|Net income                                                                        |  | $    | 366    |   |      | $ | 329  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |        |   |      |   |      |  
|Depreciation                                                                      |  |      | 580    |   |      |   | 549  |  
|Deferred income taxes                                                             |  |      | 85     |   |      |   | 135  |  
|Cash paid to fund pension plan                                                    |  |      |       |   |      |   | (50  | )
|Other, net                                                                        |  |      | (105   | ) |      |   | 35   |  
|Changes in current assets and current liabilities, net                            |  |      | 158    |   |      |   | (75  | )
|                                                                                  |  |      |        |   |      |   |      |  
|Cash provided by operating activities                                             |  |      | 1,084  |   |      |   | 923  |  
|                                                                                  |  |      |        |   |      |   |      |  
|Investing Activities                                                              |  |      |        |   |      |   |      |  
|Capital investments                                                               |  |      | (1,078 | ) |      |   | (857 | )
|Proceeds from asset sales                                                         |  |      | 87     |   |      |   | 31   |  
|Other investing activities, net                                                   |  |      | (76    | ) |      |   | (38  | )
|                                                                                  |  |      |        |   |      |   |      |  
|Cash used in investing activities                                                 |  |      | (1,067 | ) |      |   | (864 | )
|                                                                                  |  |      |        |   |      |   |      |  
|Financing Activities                                                              |  |      |        |   |      |   |      |  
|Dividends paid to parent                                                          |  |      | (156   | ) |      |   | (156 | )
|Debt repaid                                                                       |  |      | (90    | ) |      |   | (193 | )
|Advances from affiliated companies                                                |  |      | 63     |   |      |   | 186  |  
|                                                                                  |  |      |        |   |      |   |      |  
|Cash used in financing activities                                                 |  |      | (183   | ) |      |   | (163 | )
|                                                                                  |  |      |        |   |      |   |      |  
|Net change in cash and temporary investments                                      |  |      | (166   | ) |      |   | (104 | )
|Cash and temporary investments at beginning of period                             |  |      | 236    |   |      |   | 154  |  
|                                                                                  |  |      |        |   |      |   |      |  
|Cash and temporary investments at end of period                                   |  | $    | 70     |   |      | $ | 50   |  
|                                                                                  |  |      |        |   |      |   |      |  
|Changes in Current Assets and Current Liabilities, Net                            |  |      |        |   |      |   |      |  
|Accounts receivable, net                                                          |  | $    | (64    | ) |      | $ | (75  | )
|Materials and supplies                                                            |  |      | (39    | ) |      |   | (23  | )
|Other current assets                                                              |  |      | 55     |   |      |   | (53  | )
|Accounts, wages, and vacation payable                                             |  |      | 109    |   |      |   | 80   |  
|Other current liabilities                                                         |  |      | 97     |   |      |   | (4   | )
|                                                                                  |  |      |        |   |      |   |      |  
|Total                                                                             |  | $    | 158    |   |      | $ | (75  | )
|                                                                                  |  |      |        |   |      |   |      |  
|Supplemental cash flow information:                                               |  |      |        |   |      |   |      |  
|Non-cash capital lease financings                                                 |  | $    |       |   |      | $ |     |  
|Cash paid during the period for:                                                  |  |      |        |   |      |   |      |  
|Interest                                                                          |  | $    | (249   | ) |      | $ | (261 | )
|Income taxes, net                                                                 |  |      | (44    | ) |      |   | (16  | )



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



6



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##### Table of Contents

Consolidated Statement of Changes in Common Shareholders Equity (Unaudited)

Union Pacific Railroad
Company and Consolidated Subsidiary and Affiliate Companies



|                                        |  |             |  |              |  |             |   |              |   |                 |  |                  |                                              |  |                             |       |   |                           |   |      |                |  |   |       |   |  |   |    |   |  |   |        |  
|--------------------------------------- |  | ----------- |  | ------------ |  | ----------- | - | ------------ | - | --------------- |  | ---------------- | -------------------------------------------- |  | --------------------------- | ----- | - | ------------------------- | - | ---- | -------------- |  | - | ----- | - |  | - | -- | - |  | - | ------ | -
|                                        |  |             |  |              |  |             |   |              |   |                 |  |                  | Accumulated OtherComprehensive Income/(Loss) |  |                             |       |  
|Millions of Dollars Thousands of Shares |  | CommonStock |  | Class AStock |  | CommonStock |   | Class AStock |   | Paid-in-Surplus |  | RetainedEarnings |                                              |  | MinimumPensionLiabilityAdj. |       |   | ForeignCurrencyTrans.Adj. |   |      | DerivativeAdj. |  |   | Total |  
|Balance at January 1, 2005              |  | 4,465       |  | 388          |  | $           |  |              | $ |                |  | $                | 4,782                                        |  | $                           | 8,692 |   |                           | $ | (212 | )              |  | $ | (18   | ) |  | $ | (7 | ) |  | $ | 13,237 |  
|                                        |  |             |  |              |  |             |   |              |   |                 |  |                  |                                              |  |                             |       |   |                           |   |      |                |  |   |       |   |  |   |    |   |  |   |        |  
|Comprehensive income/(loss):            |  |             |  |              |  |             |   |              |   |                 |  |                  |                                              |  |                             |       |   |                           |   |      |                |  |   |       |   |  |   |    |   |  |   |        |  
|Net income                              |  |             |  |              |  |             |  |              |   |                |  |                  |                                             |  |                             | 366   |   |                           |   |     |                |  |   |      |   |  |   |   |   |  |   | 366    |  
|Other comp. income/(loss) [a]           |  |             |  |              |  |             |  |              |   |                |  |                  |                                             |  |                             |      |   |                           |   | (2   | )              |  |   | 2     |   |  |   | 1  |   |  |   | 1      |  
|                                        |  |             |  |              |  |             |   |              |   |                 |  |                  |                                              |  |                             |       |   |                           |   |      |                |  |   |       |   |  |   |    |   |  |   |        |  
|Total comprehensive income/(loss)       |  |             |  |              |  |             |  |              |   |                |  |                  |                                             |  |                             | 366   |   |                           |   | (2   | )              |  |   | 2     |   |  |   | 1  |   |  |   | 367    |  
|                                        |  |             |  |              |  |             |   |              |   |                 |  |                  |                                              |  |                             |       |   |                           |   |      |                |  |   |       |   |  |   |    |   |  |   |        |  
|Dividends declared                      |  |            |  |             |  |             |  |              |   |                |  |                  |                                             |  |                             | (156  | ) |                           |   |     |                |  |   |      |   |  |   |   |   |  |   | (156   | )
|                                        |  |             |  |              |  |             |   |              |   |                 |  |                  |                                              |  |                             |       |   |                           |   |      |                |  |   |       |   |  |   |    |   |  |   |        |  
|Balance at June 30, 2005                |  | 4,465       |  | 388          |  | $           |  |              | $ |                |  | $                | 4,782                                        |  | $                           | 8,902 |   |                           | $ | (214 | )              |  | $ | (16   | ) |  | $ | (6 | ) |  | $ | 13,448 |  
|                                        |  |             |  |              |  |             |   |              |   |                 |  |                  |                                              |  |                             |       |   |                           |   |      |                |  |   |       |   |  |   |    |   |  |   |        |  



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|[a] | Net of tax of $1.
|--- | -----------------



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



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##### Table of Contents

UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY AND AFFILIATE COMPANIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



For
purposes of this report, unless the context otherwise requires, all references herein to the Company, we, us, and our mean Union Pacific Railroad Company.



1.Responsibilities for Financial Statements  Union
Pacific Railroad Company (the Registrant), a Class I railroad incorporated in Delaware and an indirect wholly owned subsidiary of Union Pacific Corporation (the Corporation or UPC), together with a number of wholly owned and majority owned
subsidiaries and certain affiliates (collectively, UPRR, the Company, or the Railroad), operates various railroad and railroad-related businesses. Our Consolidated Financial Statements are unaudited and reflect all adjustments (consisting only of
normal and recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods presented. Our Consolidated Statement of Financial Position at
December 31, 2004 is derived from audited financial statements. This quarterly report on Form 10-Q should be read in conjunction with our Consolidated Financial Statements and notes thereto contained in our 2004 annual report on Form 10-K. The
results of operations for the three and six months ended June 30, 2005 are not necessarily indicative of the results for the entire year ending December 31, 2005. Certain prior year amounts have been reclassified to conform to the 2005 financial
statement presentation.



2.Stock-Based
Compensation  We participate in UPCs stock incentive programs. The Corporation has several stock-based employee compensation plans, which are described in note 9 to our Consolidated Financial Statements, Item 8, in our 2004 annual
report on Form 10-K. We account for those plans under 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 is 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 is reflected in net income. The following table illustrates the effect on net income if we had applied the fair value recognition provisions of Financial Accounting Standards Board (FASB)
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation. See note 9 to the Consolidated Financial Statements for discussion of FASB Statement No. 123(R).



|                                                                                                                        |  |                             |     |   |                           |   |     |      |  |   |      |   |  |   |     |  
|----------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | --- | - | ------------------------- | - | --- | ---- |  | - | ---- | - |  | - | --- | -
|                                                                                                                        |  | Three Months Ended June 30, |     |   | Six Months Ended June 30, |  
|Millions of Dollars                                                                                                     |  | 2005                        |     |   | 2004                      |   |     | 2005 |  |   | 2004 |  
|Net income, as reported                                                                                                 |  | $                           | 237 |   |                           | $ | 165 |      |  | $ | 366  |   |  | $ | 329 |  
|Stock-based employee compensation expense included in reported net income, net of tax                                   |  |                             | 1   |   |                           |   | 2   |      |  |   | 3    |   |  |   | 3   |  
|Total stock-based employee compensation expense determined under fair value-based method for all awards, net of tax
[a] |  |                             | (5  | ) |                           |   | (6  | )    |  |   | (16  | ) |  |   | (11 | )
|                                                                                                                        |  |                             |     |   |                           |   |     |      |  |   |      |   |  |   |     |  
|Pro forma net income                                                                                                    |  | $                           | 233 |   |                           | $ | 161 |      |  | $ | 353  |   |  | $ | 321 |  
|                                                                                                                        |  |                             |     |   |                           |   |     |      |  |   |      |   |  |   |     |  



---

|[a] | Stock options for executives granted in 2002 and 2003 included a reload feature. This reload feature allows executives to exercise their options using shares
of Union Pacific Corporation common stock that they already own 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 may only be
exercised if the price of our common stock increases at least 20% from the price at the time of the reload grant. During the three and six months ended June 30, 2005, reload option grants represented $0.3 million and $6 million of the pro forma
expense noted above, respectively. There were no reload option grants during 2004. Stock options exercised after the effective date of FAS 123(R) will not be eligible for the reload feature.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model, with the following weighted-average assumptions for options granted during the first three and six months of 2005 and 2004:



|                         |  |      |   |  |      |  
|------------------------ |  | ---- | - |  | ---- | -
|                         |  | 2005 |   |  | 2004 |  
|Risk-free interest rates |  | 3.7  | % |  | 3.3  | %
|Dividend yield           |  | 1.9  | % |  | 1.7  | %
|Expected lives (years)   |  | 4.8  |   |  | 5.6  |  
|Volatility               |  | 21.0 | % |  | 25.9 | %



The weighted-average
fair value of options granted was $14.11 and $14.37 for the three months ended June 30, 2005 and 2004, respectively, and $12.30 and $16.38 for the six months ended June 30, 2005 and 2004, respectively.



3.Transactionswith Affiliates  At June 30, 2005
and December 31, 2004, we had $1,025 million and $775 million working capital deficit balances, respectively, relating to UPCs management of our cash position. As part of UPCs cash management activities, we advance excess cash (cash
available after satisfying all of our obligations and paying dividends to UPC) to UPC. We declare and pay dividends to UPC which typically approximate the dividends that UPC declares to its shareholders; however, there is no formal requirement to do
so. The dividend declaration between UPC and us is determined solely by our Board of Directors. To the extent we require additional cash for use in our operations, UPC makes such funds available to us for borrowing. Transactions with UPC are treated
as net intercompany borrowings in the Consolidated Statements of Financial Position.



The majority of our intercompany borrowings from UPC relate to the acquisitions of the Chicago and North Western Transportation Company and Southern Pacific Rail Corporation, which were funded by
UPC on our behalf. We assumed these acquisition costs in the form of intercompany borrowings from UPC. The intercompany borrowings accrue interest at an annual rate of 7.5%, which may be adjusted from time to time, and are payable on demand. There
are no restrictions on the amount we are able to borrow from UPC. Intercompany borrowings are unsecured and rank equally with all of our other unsecured indebtedness.



UPC provides us with various services, including strategic planning, legal, treasury, accounting, auditing,
insurance, human resources, and corporate affairs. Billings for these services were $11 million and $15 million for the three months ended June 30, 2005 and 2004, respectively. Billings were $28 million and $27 million for the six months ended June
30, 2005 and 2004, respectively.



4.Financial
Instruments



Strategy and Risk  We use
derivative financial instruments in limited instances for other than trading purposes to manage risk related to changes in fuel prices and to achieve our interest rate objectives. We are not a party to leveraged derivatives and, by policy, do not
use derivative financial instruments for speculative purposes. 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, as well as our risk-management objectives, strategies for undertaking the various hedge transactions, and method of
assessing hedge effectiveness. We may use swaps, collars, futures, and/or forward contracts to mitigate the downside risk of adverse price movements and to hedge the exposure to variable cash flows. The use of these instruments also limits future
benefits from favorable movements. The purpose of these programs is to protect our operating margins and overall profitability from adverse fuel price changes or interest rate fluctuations.



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. Credit risk related to derivative financial instruments, which is minimal, is managed by requiring high credit
standards for counterparties and periodic settlements. At June 30, 2005, we have not been required to provide collateral, nor have we received collateral, relating to our hedging activities.



Determination of Fair Value  The fair values of our derivative
financial instrument positions at June 30, 2005 and December 31, 2004 were determined based upon current fair values as quoted by recognized dealers or developed based upon the present value of expected future cash flows discounted at the applicable
U.S. Treasury rate, London Interbank Offered Rates (LIBOR), or swap spread.



Interest Rate Hedges  Changes in the fair value of cash flow hedges are reported in accumulated other comprehensive income until earnings are affected by the hedged item.



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In 2004, we entered into treasury lock transactions that are accounted for as cash flow
hedges. These treasury lock transactions resulted in a payment of $11 million that is being amortized on a straight-line basis over 10 years, ending September 30, 2014. The unamortized portion of the payment is recorded as a $6 million after-tax
reduction to common shareholders equity as part of accumulated other comprehensive loss at June 30, 2005. As of June 30, 2005 and December 31, 2004, we had no interest rate cash flow hedges outstanding.



Fuel Hedges  Fuel costs are a significant portion of our
total operating expenses. In 2005 and 2004, our primary means of mitigating the impact of adverse fuel price changes has been our fuel surcharge program. However, we may use swaps, collars, futures, and/or forward contracts to further mitigate the
impact of adverse fuel price changes. We hedged 120 million gallons of fuel during 2004 using collars with average cap, floor, and ceiling prices of $0.74, $0.64, and $0.86 per gallon, respectively. Our use of fuel hedges decreased fuel expense by
$3 million and $7 million in the three and six-month periods ended June 30, 2004. We did not have any fuel hedges in place during the first six months of 2005, and at June 30, 2005 and December 31, 2004 there were no fuel hedges outstanding.



Sale of Receivables We transfer most of our
accounts receivable to Union Pacific Receivables, Inc. (UPRI), a bankruptcy-remote subsidiary, as part of a sale of receivables facility. UPRI sells, without recourse, 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 June 30, 2005. The value of the outstanding undivided interest held by investors under the facility was $600 million and $590 million at June 30, 2005 and
December 31, 2004, 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 $1,151 million and
$1,089 million of accounts receivable held by UPRI at June 30, 2005 and December 31, 2004, respectively. At June 30, 2005 and December 31, 2004, the value of the interest retained by UPRI was $551 million and $499 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 UPCs 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.



We have been designated to service the sold receivables; however, no servicing asset or liability has been recognized as the servicing fees adequately compensate us for our responsibilities. We collected approximately
$6 billion during each of the six month periods ended June 30, 2005 and 2004, and UPRI used such proceeds to purchase new receivables under the facility.



The costs of the sale of receivables program are included in other income and were $6 million and $2 million for the three months ended
June 30, 2005 and 2004, and $10 million and $4 million for the six months ended June 30, 2005 and 2004, respectively. The costs include interest, program fees paid to banks, commercial paper issuance costs, and fees for unused commitment
availability.



The investors have no recourse
to our other assets except for customary warranty and indemnity claims. Our creditors have no recourse to the assets of UPRI.



On August 4, 2005, we extended our sale of receivables program for approximately one month as we continue the process of renewing the
program for an additional 364-day period.



5. Retirement
Plans



Pension and Other Postretirement Benefits



Pension Plans  We provide
defined benefit retirement income to eligible non-union employees through the Corporations 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 through the Corporations
programs. These benefits are funded as medical claims and life insurance premiums are paid.



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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. With respect to the value of pension 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 immediately, but are deferred and, if necessary, amortized as pension or OPEB expense.



The components of the net periodic pension costs were as
follows:



|                                |  |                            |     |   |                          |   |     |      |  |   |      |   |  |   |     |  
|------------------------------- |  | -------------------------- | --- | - | ------------------------ | - | --- | ---- |  | - | ---- | - |  | - | --- | -
|                                |  | Pension                    |    
|                                |  | Three Months EndedJune 30, |     |   | Six Months EndedJune 30, |  
|Millions of Dollars             |  | 2005                       |     |   | 2004                     |   |     | 2005 |  |   | 2004 |  
|Service cost                    |  | $                          | 8   |   |                          | $ | 7   |      |  | $ | 17   |   |  | $ | 15  |  
|Interest cost                   |  |                            | 30  |   |                          |   | 29  |      |  |   | 59   |   |  |   | 58  |  
|Expected return on plan assets  |  |                            | (33 | ) |                          |   | (35 | )    |  |   | (67  | ) |  |   | (69 | )
|Amortization of:                |  |                            |     |   |                          |   |     |      |  |   |      |   |  |   |     |  
|Transition obligation           |  |                            |    |   |                          |   |    |      |  |   |     |   |  |   | (1  | )
|Prior service cost              |  |                            | 2   |   |                          |   | 2   |      |  |   | 4    |   |  |   | 4   |  
|Actuarial loss                  |  |                            | 2   |   |                          |   | 1   |      |  |   | 5    |   |  |   | 2   |  
|                                |  |                            |     |   |                          |   |     |      |  |   |      |   |  |   |     |  
|Total net periodic benefit cost |  | $                          | 9   |   |                          | $ | 4   |      |  | $ | 18   |   |  | $ | 9   |  
|                                |  |                            |     |   |                          |   |     |      |  |   |      |   |  |   |     |  



The components of our net periodic OPEB costs were as follows:



|                                |  |                            |    |   |                          |   |    |      |  |   |      |   |  |   |    |  
|------------------------------- |  | -------------------------- | -- | - | ------------------------ | - | -- | ---- |  | - | ---- | - |  | - | -- | -
|                                |  | OPEB                       |   
|                                |  | Three Months EndedJune 30, |    |   | Six Months EndedJune 30, |  
|Millions of Dollars             |  | 2005                       |    |   | 2004                     |   |    | 2005 |  |   | 2004 |  
|Service cost                    |  | $                          | 2  |   |                          | $ | 2  |      |  | $ | 3    |   |  | $ | 4  |  
|Interest cost                   |  |                            | 6  |   |                          |   | 8  |      |  |   | 13   |   |  |   | 17 |  
|Amortization of:                |  |                            |    |   |                          |   |    |      |  |   |      |   |  |   |    |  
|Prior service cost (credit)     |  |                            | (6 | ) |                          |   | (4 | )    |  |   | (12  | ) |  |   | (9 | )
|Actuarial loss                  |  |                            | 3  |   |                          |   | 4  |      |  |   | 6    |   |  |   | 8  |  
|                                |  |                            |    |   |                          |   |    |      |  |   |      |   |  |   |    |  
|Total net periodic benefit cost |  | $                          | 5  |   |                          | $ | 10 |      |  | $ | 10   |   |  | $ | 20 |  
|                                |  |                            |    |   |                          |   |    |      |  |   |      |   |  |   |    |  



Cash Contributions



We did not contribute to the pension plans during the
first six months of 2005 and the Corporation currently does not have minimum funding requirements as set forth in employee benefit and tax laws. We voluntarily contributed $50 million to the pension plans during the first quarter of 2004.



6.Capital Stock  The number of shares
shown in the Common Stock section of the Consolidated Statement of Changes in Common Shareholders Equity excludes 2,665 shares of Common Stock and 232 shares of Class A Stock owned by Southern Pacific Rail Corporation, an affiliate of the
Registrant, whose results are included in our Consolidated Financial Statements.



|7. | Commitments and Contingencies
|-- | -----------------------------



Unasserted Claims  Various claims and lawsuits are pending against us and certain of our subsidiaries. It is not possible at this time for us
to determine fully the effect of all unasserted claims on our consolidated financial condition, results of operations, or liquidity; however, to the extent possible, where unasserted claims can be estimated and where such claims are considered
probable, 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



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adverse effect on our consolidated financial condition, results of operations, 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 properly measuring the expense and
liability, including unasserted claims. 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.



Our personal injury liability
activity was as follows:



|                                       |      |                          |      |      |  |   |      |  
|-------------------------------------- | ---- | ------------------------ | ---- | ---- |  | - | ---- | -
|Financial Activity Millions of Dollars |      | Six Months EndedJune 30, |     
|                                       | 2005 |                          |      | 2004 | 
|Beginning balance                      |      | $                        | 636  |      |  | $ | 615  |  
|Accruals                               |      |                          | 128  |      |  |   | 182  |  
|Payments                               |      |                          | (145 | )    |  |   | (117 | )
|                                       |      |                          |      |      |  |   |      |  
|Ending balance at June 30              |      | $                        | 619  |      |  | $ | 680  |  
|                                       |      |                          |      |      |  |   |      |  



Our
personal injury liability is discounted to present value using applicable U.S. Treasury rates. At both June 30, 2005 and December 31, 2004, we had $272 million recorded in current liabilities as accrued casualty costs. Personal injury accruals were
higher in 2004 due to a 1998 third-party crossing accident jury verdict upheld in the first quarter of 2004 and a 2004 derailment near San Antonio.



Our personal injury claims activity was as follows:



|                               |  |                          |   |  |        |  
|------------------------------ |  | ------------------------ | - |  | ------ | -
|                               |  | Six Months EndedJune 30, |  
|Claims Activity                |  | 2005                     |   |  | 2004   |  
|Open claims, beginning balance |  | 4,028                    |   |  | 4,085  |  
|New claims                     |  | 2,163                    |   |  | 2,158  |  
|Settled or dismissed claims    |  | (2,302                   | ) |  | (2,179 | )
|                               |  |                          |   |  |        |  
|Open claims, ending balance    |  | 3,889                    |   |  | 4,064  |  
|                               |  |                          |   |  |        |  



Asbestos 
We are a defendant in a number of lawsuits in which current and former employees 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.



The greatest potential for asbestos exposure in the railroad industry existed while steam locomotives were used. The railroad industry, including our predecessors and us, phased out steam locomotives between 1955 and
1960. The use of asbestos-containing products in the railroad industry was substantially reduced after steam locomotives were discontinued, although it was not completely eliminated. Some asbestos-containing products were still manufactured in the
building trade industry and were used in isolated component parts on locomotives and railroad cars during the 1960s and 1970s. By the early 1980s, manufacturers of building materials and locomotive component parts developed non-asbestos alternatives
for their products and ceased manufacturing asbestos-containing materials.



Prior to 2004, we concluded it was not possible to reasonably estimate the cost of disposing of asbestos-related claims that might be filed against us in the future, due to a lack of sufficient comparable history from
which to reasonably estimate unasserted asbestos-related claims. As a result, we recorded a liability for asbestos-related claims only when the claims were asserted.



During 2004, we determined we could reasonably estimate our liability for unasserted asbestos-related claims
because we had sufficient comparable loss data and there was no immediate legislative solution to asbestos litigation. During 2004, we engaged a third-party expert 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



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average claims experience over a multi-year period. As a result, we increased our liability for asbestos-related claims in the fourth quarter of 2004. The
liability for resolving both asserted and unasserted claims was based on the following assumptions:



| |  |  | The number of claims received in 2005 will be consistent with average claims received between 2000 and 2003.
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | The number of claims to be filed against us will decline each year after 2005.
| | - |  | ------------------------------------------------------------------------------



| |  |  | The average settlement values for asserted and unasserted claims will be equivalent to those experienced between 2002 and 2004.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | The percentage of claims dismissed between 2002 and 2004 will continue through 2034.
| | - |  | ------------------------------------------------------------------------------------



Our asbestos-related liability activity was as follows:



|                                       |      |                          |     |      |  |   |    |  
|-------------------------------------- | ---- | ------------------------ | --- | ---- |  | - | -- | -
|Financial Activity Millions of Dollars |      | Six Months EndedJune 30, |    
|                                       | 2004 |                          |     | 2005 | 
|Beginning balance                      |      | $                        | 324 |      |  | $ | 51 |  
|Accruals                               |      |                          |    |      |  |   | 2  |  
|Payments                               |      |                          | (6  | )    |  |   | (2 | )
|                                       |      |                          |     |      |  |   |    |  
|Ending balance at June 30              |      | $                        | 318 |      |  | $ | 51 |  
|                                       |      |                          |     |      |  |   |    |  



Our
liability for asbestos-related claims is not discounted to present value due to the uncertainty surrounding the timing of future payments. At June 30, 2005 and December 31, 2004, $17 million was classified in current liabilities as accrued casualty
costs, while the remainder was classified as long-term accrued casualty costs. Approximately 16% of the recorded liability related to asserted claims, and approximately 84% related to unasserted claims. These claims are expected to be paid out over
the next 30 years. During the second quarter of 2005, we evaluated actual experience compared to forecasted future claims and claim payments and determined that no adjustment to our estimate was necessary. We will obtain annual updates of the study
from a third-party expert and make adjustments to our estimate if necessary.



Our asbestos-related claims activity was as follows:



|                               |  |                          |   |  |       |  
|------------------------------ |  | ------------------------ | - |  | ----- | -
|                               |  | Six Months EndedJune 30, |  
|Claims Activity                |  | 2005                     |   |  | 2004  |  
|Open claims, beginning balance |  | 2,316                    |   |  | 2,560 |  
|New claims                     |  | 506                      |   |  | 260   |  
|Settled or dismissed claims    |  | (332                     | ) |  | (342  | )
|                               |  |                          |   |  |       |  
|Open claims, ending balance    |  | 2,490                    |   |  | 2,478 |  
|                               |  |                          |   |  |       |  



Insurance coverage reimburses us for a portion of the costs incurred to resolve asbestos-related claims and we have recognized an asset for estimated insurance recoveries.



We believe that our liability estimates for asbestos-related claims and the estimated insurance recoveries
reflect reasonable and probable estimates. 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 may also vary due to changes in the litigation environment, federal and state
law governing compensation of asbestos claimants, and the level of payments made to claimants by other defendants.



EnvironmentalCosts  We are subject to federal, state, and local environmental laws and regulations. We have identified approximately 384 sites at which we are or may be
liable for remediation costs associated with alleged contamination or for violations of environmental requirements. This includes 47 sites that are the subject of actions taken by the U.S. government, 26 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



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environmental liability may include costs relating to activities of other parties, in addition to costs relating to our own activities at each site.



When an environmental issue has been
identified with respect to property owned, leased, or otherwise used in the conduct of 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.



Our environmental liability activity was as follows:



|                                       |      |                          |     |      |  |   |     |  
|-------------------------------------- | ---- | ------------------------ | --- | ---- |  | - | --- | -
|Financial Activity Millions of Dollars |      | Six Months EndedJune 30, |    
|                                       | 2005 |                          |     | 2004 | 
|Beginning balance                      |      | $                        | 201 |      |  | $ | 187 |  
|Accruals                               |      |                          | 21  |      |  |   | 15  |  
|Payments                               |      |                          | (15 | )    |  |   | (16 | )
|                                       |      |                          |     |      |  |   |     |  
|Ending balance at June 30              |      | $                        | 207 |      |  | $ | 186 |  
|                                       |      |                          |     |      |  |   |     |  



At
both June 30, 2005 and December 31, 2004, we had $50 million recorded in current liabilities as accrued casualty costs. The 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 site, 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. We do not expect current obligations to have a material adverse effect on our results of operations or financial condition.



Purchase Obligations and Guarantees  We periodically enter into financial and other commitments in connection with our business. We do
not expect that these commitments or guarantees will have a material adverse effect on our consolidated financial condition, results of operations, or liquidity.



At June 30, 2005, we were contingently liable for $429 million in guarantees and $28 million in letters of
credit. We entered into these contingent guarantees in the normal course of business and they include guaranteed obligations of affiliated operations. None of the guarantees individually is significant, and we recorded a liability of $6 million for
the fair value of these obligations as of June 30, 2005. The final guarantee expires in 2022. We are not aware of any existing event of default that would require us to satisfy these guarantees.



Income Taxes  In the second quarter, the Corporation
reached final settlements with the Internal Revenue Service (IRS) related to resolution of tax liabilities for tax years 1986-1994. Federal income tax liabilities, excluding interest, for all years prior to 1995 are now resolved with the IRS.
Settlement with respect to the interest calculations will take more time to resolve.



As a result of the final settlements of tax liabilities for pre-1995 tax years, we have undertaken, but have not yet completed, an analysis of the impact these settlements may have on previously
recorded estimates of deferred tax assets and liabilities. At June 30, 2005, our recorded estimates of deferred tax assets and liabilities represent our best estimates based upon available information at this time. Although we anticipate any change
in our estimates will be recorded as a reduction in both our deferred tax liability and income tax expense, at this time we are unable to reasonably estimate the amount of any adjustment because of the number of years, complexity, and
interrelationship of the numerous issues involved in completing this review.



As previously reported, the IRS has also completed its examination of the Corporations federal income tax returns for years 1995-1998, and has issued a notice of deficiency. Among other adjustments, the IRS
proposes to disallow tax deductions we claimed in connection with certain donations of property during those years. We dispute the proposed adjustments and intend to defend our positions through applicable IRS procedures, and, if necessary,
litigation. We do not expect that the ultimate resolution of this examination will have a material adverse effect on our operating results, financial condition, or liquidity. Tax years 1999-2002 are currently under examination.



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8.Other Income Other income included the following for the three and six months
ended June 30:



|                                             |  |                            |    |   |                          |   |     |      |  |   |      |   |  |   |     |  
|-------------------------------------------- |  | -------------------------- | -- | - | ------------------------ | - | --- | ---- |  | - | ---- | - |  | - | --- | -
|                                             |  | Three Months EndedJune 30, |    |   | Six Months EndedJune 30, |  
|Millions of Dollars                          |  | 2005                       |    |   | 2004                     |   |     | 2005 |  |   | 2004 |  
|Net gain on non-operating asset dispositions |  | $                          | 28 |   |                          | $ | 7   |      |  | $ | 42   |   |  | $ | 21  |  
|Rental income                                |  |                            | 14 |   |                          |   | 13  |      |  |   | 27   |   |  |   | 24  |  
|Interest income                              |  |                            | 1  |   |                          |   | 1   |      |  |   | 4    |   |  |   | 2   |  
|Sale of receivable fees                      |  |                            | (6 | ) |                          |   | (2  | )    |  |   | (10  | ) |  |   | (4  | )
|Other, net                                   |  |                            | (7 | ) |                          |   | (10 | )    |  |   | (17  | ) |  |   | (15 | )
|                                             |  |                            |    |   |                          |   |     |      |  |   |      |   |  |   |     |  
|Total                                        |  | $                          | 30 |   |                          | $ | 9   |      |  | $ | 46   |   |  | $ | 28  |  
|                                             |  |                            |    |   |                          |   |     |      |  |   |      |   |  |   |     |  



9.Accounting Pronouncements In December 2004, the FASB issued Statement No. 123(R), Share-Based Payment.This statement requires that companies recognize compensation expense equal to the fair value of stock options or other
share-based payments. On April 14, 2005, the Securities and Exchange Commission deferred the effective date to January 1, 2006. We will adopt FAS 123(R) on a modified prospective basis, recognizing compensation expense for 1) new awards granted on
or after January 1, 2006, and 2) any portion of awards that have not vested as of that date. Assuming that the level of future option grants remains consistent with prior years, we estimate that the impact of this pronouncement for the Company will
be an annual reduction in net income of approximately $12 million.



In July 2005, the FASB issued an exposure draft, Accounting for Uncertain Tax Positions, an Interpretation of FASB Statement No. 109. If finalized as drafted, the Interpretation will require companies to
recognize the best estimate of the impact of a tax position only if that position is probable of being sustained during a tax audit. The FASB proposes that only tax positions that meet the probable recognition threshold may be recognized as of the
end of the first fiscal year ending after December 15, 2005. We are currently assessing the impact that this proposed interpretation would have on our Consolidated Financial Statements.



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##### Table of Contents

Item 2. Managements Narrative Analysis of the Results of Operations



UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY AND AFFILIATE



Three and Six Months Ended June 30, 2005 Compared to

Three and Six Months Ended June 30, 2004



For purposes of this report, unless the context otherwise requires, all references herein to the Company, we, us, and our mean Union Pacific Railroad Company.



The following discussion should be read in
conjunction with the Consolidated Financial Statements and applicable notes to the Consolidated Financial Statements, Item 1, and other information included in this report.



Union Pacific Railroad Company (the Registrant), a Class I railroad incorporated in Delaware and an indirect
wholly owned subsidiary of Union Pacific Corporation (the Corporation or UPC), together with a number of wholly owned and majority owned subsidiaries and certain affiliates (collectively, UPRR, the Company or Railroad), operates various railroad and
railroad-related businesses.



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; the Corporations proxy statements; and Forms 3, 4, and 5, filed on
behalf of the Corporations 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, UPCs corporate governance materials, including Board Committee charters, governance guidelines and policies, and codes of conduct and ethics for directors, officers, and employees may be found on our website at
www.up.com/investors. 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 New York Stock Exchange 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 these SEC filings or corporate governance materials should send a written request to: Secretary, Union Pacific Railroad Company, 1400 Douglas Street,
Omaha, NE 68179.



References to our website
address and any other references to the website contained in this report, including references in this Item 2, are provided as a convenience and do not constitute, and should not be deemed, an incorporation by reference of the information contained
on the website. Therefore, such information should not be considered part of this report.



Critical Accounting Policies and Estimates



Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial statements requires estimation and judgment that affect the reported amounts of 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. If these estimates differ materially from actual results, the impact on the Consolidated Financial Statements may be material. Our critical accounting policies are available in our 2004 annual report on Form 10-K, Item 7. There have been no
significant changes with respect to these policies during the first six months of 2005.



RESULTS OF OPERATIONS



Summary



We reported net income of $237 million
in the second quarter of 2005 compared to net income of $165 million for the second quarter of 2004. Year-to-date net income was $366 million versus $329 million for the same period in 2004. Operating income grew 29% to $466 million in the second
quarter of 2005 driven by yield increases, fuel surcharges, and modest volume growth, which were partially offset by lower coal shipments from the Wyoming Southern Powder River Basin (SPRB) and higher fuel prices. Shipments were disrupted beginning
in mid-May due to track conditions on the SPRB Joint Line (track jointly owned by Burlington Northern Santa Fe (BNSF) and us but



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##### Table of Contents

maintained by BNSF) and the remedial maintenance program. Operating income improved 15% for the first six months of 2005, as yield increases and fuel
surcharges more than offset the effects of the West Coast storm in January of 2005, lower automotive shipments, higher fuel prices, and reduced SPRB coal shipments.



Two of our three key operating metrics, as reported to the Association of American Railroads, improved in
the second quarter of 2005 versus the second quarter of 2004. Average terminal dwell time improved 11 percent from 30.9 hours to 27.4 hours, and rail car inventory improved 2 percent to 318,434 cars. Average quarterly train speed fell slightly, from
21.3 mph to 21.2 mph. Network velocity declined due to maintenance problems on the SPRB Joint Line, as coal speeds fell from 21.4 mph in the first quarter to 20.4 mph in the second quarter of 2005. Implementation of the Unified Plan continued
throughout the second quarter, with changes to automotive, manifest, and Mexico operations. Changes to our intermodal operations are underway. We continue to refine our network operations utilizing industrial engineering techniques, especially at
our yard and terminal facilities.



Operating Revenue



|                        |      |                             |       |          |   |       |                           |      |          |  |   |       |  |   |       |  |    |  
|----------------------- | ---- | --------------------------- | ----- | -------- | - | ----- | ------------------------- | ---- | -------- |  | - | ----- |  | - | ----- |  | -- | -
|Millions of Dollars     |      | Three Months Ended June 30, |       | % Change |   |       | Six Months Ended June 30, |      | % Change | 
|                        | 2005 |                             | 2004  |          |   | 2005  |                           | 2004 |         
|Commodity revenue       |      | $                           | 3,196 |          | $ | 2,901 |                           | 10   | %        |  | $ | 6,200 |  | $ | 5,678 |  | 9  | %
|Other revenue           |      |                             | 139   |          |   | 119   |                           | 17   |          |  |   | 279   |  |   | 226   |  | 23 |  
|                        |      |                             |       |          |   |       |                           |      |          |  |   |       |  |   |       |  |    |  
|Total operating revenue |      | $                           | 3,335 |          | $ | 3,020 |                           | 10   | %        |  | $ | 6,479 |  | $ | 5,904 |  | 10 | %
|                        |      |                             |       |          |   |       |                           |      |          |  |   |       |  |   |       |  |    |  



Operating revenue
consists of commodity revenue and other revenue. Other revenue consists primarily of subsidiary revenue, revenue from our commuter rail operations, and accessorial revenue earned due to customer retention of Railroad-owned or controlled equipment.
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. We recognize other revenue as
service is performed or contractual obligations are met.



Commodity revenue for the second quarter improved in all groups, with particularly strong growth in the industrial products, agricultural, intermodal, and chemical groups. Fuel surcharges, price increases, and
index-based contract escalators contributed to higher average revenue per car (ARC). We recognized $222 million and $64 million in commodity revenue from our fuel surcharge programs in the second quarter of 2005 and 2004, respectively. Although
positive for the quarter, volume growth was negatively impacted by reduced coal shipments from the SPRB Joint Line and lower finished auto shipments.



Year-to-date commodity revenue growth was primarily driven by fuel surcharges, price increases, and index-based contract escalators, which
resulted in an increase in ARC. Revenue carload growth was constrained by the effects of the January West Coast storm, disruptions on the SPRB Joint Line, and lower automotive shipments. For the first six months of 2005 and 2004, our fuel surcharge
programs generated $398 and $103 million in commodity revenue, respectively.



For the second quarter and year-to-date periods in 2005, other revenue increased due to higher subsidiary and accessorial revenue.



17



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##### Table of Contents

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



|                                                       |      |                             |       |          |   |       |                           |      |          |  |   |       |  |   |       |  |    |   
|------------------------------------------------------ | ---- | --------------------------- | ----- | -------- | - | ----- | ------------------------- | ---- | -------- |  | - | ----- |  | - | ----- |  | -- | --
|Commodity Revenue Millions, Except for Percent Changes |      | Three Months Ended June 30, |       | % Change |   |       | Six Months Ended June 30, |      | % Change | 
|                                                       | 2005 |                             | 2004  |          |   | 2005  |                           | 2004 |         
|Agricultural                                           |      | $                           | 463   |          | $ | 399   |                           | 16   | %        |  | $ | 911   |  | $ | 810   |  | 13 | % 
|Automotive                                             |      |                             | 329   |          |   | 326   |                           | 1    |          |  |   | 622   |  |   | 623   |  |   |   
|Chemicals                                              |      |                             | 459   |          |   | 429   |                           | 7    |          |  |   | 900   |  |   | 839   |  | 7  |   
|Energy                                                 |      |                             | 629   |          |   | 597   |                           | 6    |          |  |   | 1,297 |  |   | 1,183 |  | 10 |   
|Industrial products                                    |      |                             | 719   |          |   | 606   |                           | 19   |          |  |   | 1,349 |  |   | 1,169 |  | 15 |   
|Intermodal                                             |      |                             | 597   |          |   | 544   |                           | 10   |          |  |   | 1,121 |  |   | 1,054 |  | 6  |   
|                                                       |      |                             |       |          |   |       |                           |      |          |  |   |       |  |   |       |  |    |   
|Total                                                  |      | $                           | 3,196 |          | $ | 2,901 |                           | 10   | %        |  | $ | 6,200 |  | $ | 5,678 |  | 9  | % 
|                                                       |      |                             |       |          |   |       |                           |      |          |  |   |       |  |   |       |  |    |   
|                                                       |      |                             |       |         
|Revenue Carloads Thousands, Except for Percent Changes |      | Three Months Ended June 30, |       | % Change |   |       | Six Months Ended June 30, |      | % Change | 
|                                                       | 2005 |                             | 2004  |          |   | 2005  |                           | 2004 |         
|Agricultural                                           |      |                             | 215   |          |   | 216   |                           |     | %        |  |   | 431   |  |   | 446   |  | (3 | )%
|Automotive                                             |      |                             | 211   |          |   | 217   |                           | (3   | )        |  |   | 403   |  |   | 420   |  | (4 | ) 
|Chemicals                                              |      |                             | 236   |          |   | 238   |                           | (1   | )        |  |   | 464   |  |   | 462   |  |   |   
|Energy                                                 |      |                             | 525   |          |   | 540   |                           | (3   | )        |  |   | 1,099 |  |   | 1,081 |  | 2  |   
|Industrial products                                    |      |                             | 398   |          |   | 387   |                           | 2    |          |  |   | 756   |  |   | 752   |  | 1  |   
|Intermodal                                             |      |                             | 806   |          |   | 770   |                           | 5    |          |  |   | 1,538 |  |   | 1,495 |  | 3  |   
|                                                       |      |                             |       |          |   |       |                           |      |          |  |   |       |  |   |       |  |    |   
|Total                                                  |      |                             | 2,391 |          |   | 2,368 |                           | 1    | %        |  |   | 4,691 |  |   | 4,656 |  | 1  | % 
|                                                       |      |                             |       |          |   |       |                           |      |          |  |   |       |  |   |       |  |    |   
|                                                       |      |                             |       |         
|Average Revenue Per Car, Except for Percent Changes    |      | Three Months Ended June 30, |       | % Change |   |       | Six Months Ended June 30, |      | % Change | 
|                                                       | 2005 |                             | 2004  |          |   | 2005  |                           | 2004 |         
|Agricultural                                           |      | $                           | 2,152 |          | $ | 1,854 |                           | 16   | %        |  | $ | 2,114 |  | $ | 1,817 |  | 16 | % 
|Automotive                                             |      |                             | 1,565 |          |   | 1,503 |                           | 4    |          |  |   | 1,545 |  |   | 1,482 |  | 4  |   
|Chemicals                                              |      |                             | 1,945 |          |   | 1,799 |                           | 8    |          |  |   | 1,941 |  |   | 1,816 |  | 7  |   
|Energy                                                 |      |                             | 1,198 |          |   | 1,106 |                           | 8    |          |  |   | 1,180 |  |   | 1,095 |  | 8  |   
|Industrial products                                    |      |                             | 1,809 |          |   | 1,566 |                           | 16   |          |  |   | 1,785 |  |   | 1,555 |  | 15 |   
|Intermodal                                             |      |                             | 740   |          |   | 706   |                           | 5    |          |  |   | 728   |  |   | 705   |  | 3  |   
|                                                       |      |                             |       |          |   |       |                           |      |          |  |   |       |  |   |       |  |    |   
|Total                                                  |      | $                           | 1,337 |          | $ | 1,225 |                           | 9    | %        |  | $ | 1,322 |  | $ | 1,220 |  | 8  | % 
|                                                       |      |                             |       |          |   |       |                           |      |          |  |   |       |  |   |       |  |    |   



Agricultural Revenue increases for both the second quarter and year-to-date periods were driven by corn and feed grains and dry feed ingredients, as both commodities saw solid pricing gains and fuel surcharge increases versus 2004. Carloads were
essentially flat during the second quarter, with gains in dry feed, ethanol, and frozen and refrigerated products offset by fewer carloads of wheat and corn. Year-to-date carloads declined largely due to reduced volumes of wheat for export from the
Gulf of Mexico, as well as lower corn and feed shipments. ARC improvement for the three and six-month periods was driven by price increases, fuel surcharges, and the positive impact of a larger percentage of carloads with longer average lengths of
haul.



Automotive Second quarter revenue
increased in 2005 compared to 2004 primarily due to fuel surcharges and price increases despite lower volume levels. Year-to-date revenue was flat, while carloads decreased for the quarter and year-to-date periods due to lower shipments of finished
vehicles. ARC improved in both periods primarily due to fuel surcharges and price increases.



Chemicals Revenue increased for the second quarter and year-to-date due to pricing, fuel surcharges, and our improved ability to handle export potash demand via the Eastport gateway. This was
partially offset by a decline in liquid and dry petroleum shipments. Second quarter carloads were down and year-to-date carloads were flat versus 2004. Quarterly and year-to-date ARC improvement was driven by price increases and fuel surcharges.



Energy Second quarter revenue growth was
driven mainly by shipments of coal from Colorado and Utah, which experienced ARC growth due to fuel surcharges, index-based contract escalators, and the favorable mix impact of more long-haul traffic moving to the East. Second quarter carloadings
decreased versus 2004 resulting primarily



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from a decline in SPRB shipments. Year-to-date revenue, carloadings, and ARC all increased versus 2004 as a result of new SPRB business, fuel surcharges,
index-based contract escalators, and favorable mix.



Industrial Products Revenue increased in both the second quarter and year-to-date periods versus the comparable periods of 2004. Growth in both periods was led by lumber, which benefited from significant ARC growth
year-over-year due to price increases and fuel surcharges, and by higher shipments of stone due to strong construction demand, larger train sizes, and improved car-cycle times. Second quarter revenue gains were also driven by improved pricing and
fuel surcharges on steel shipments. Second quarter and year-to-date carload improvement was driven largely by increased stone shipments, which were partially offset by decreased newsprint and fiber shipments and lower government shipments. ARC
improved in both periods due to price increases and fuel surcharges.



Intermodal Second quarter and year-to-date revenue improved as carloads increased in both periods, resulting from strong imports, primarily from China and the rest of Asia. Year-to-date results were affected by lost
business due to the West Coast storm during the first quarter of 2005. ARC improved in both the three and six-month periods versus 2004 due to price increases, fuel surcharges, and index-based contract escalators.



Mexico Business  Included in the commodity revenue reported
above is revenue from shipments to and from Mexico, which increased 16% to $281 million for the second quarter and 13% to $532 million year-to-date over the comparable periods of 2004. Growth was driven primarily by price increases and fuel
surcharges. Second quarter carloads increased 1% due to increased cement, dry feed, and corn shipments, while year-over-year carloads were flat versus 2004.



Operating Expenses



|                                       |      |                            |       |          |   |       |                          |      |          |  |   |       |  |   |       |  |     |  
|-------------------------------------- | ---- | -------------------------- | ----- | -------- | - | ----- | ------------------------ | ---- | -------- |  | - | ----- |  | - | ----- |  | --- | -
|Millions, Except for Percent Changes   |      | Three Months EndedJune 30, |       | % Change |   |       | Six Months EndedJune 30, |      | % Change | 
|                                       | 2005 |                            | 2004  |          |   | 2005  |                          | 2004 |         
|Salaries, wages, and employee benefits |      | $                          | 1,061 |          | $ | 1,032 |                          | 3    | %        |  | $ | 2,140 |  | $ | 2,026 |  | 6   | %
|Equipment and other rents              |      |                            | 340   |          |   | 359   |                          | (5   | )        |  |   | 692   |  |   | 685   |  | 1   |  
|Depreciation                           |      |                            | 291   |          |   | 276   |                          | 5    |          |  |   | 580   |  |   | 549   |  | 6   |  
|Fuel and utilities                     |      |                            | 597   |          |   | 435   |                          | 37   |          |  |   | 1,136 |  |   | 824   |  | 38  |  
|Materials and supplies                 |      |                            | 128   |          |   | 115   |                          | 11   |          |  |   | 263   |  |   | 237   |  | 11  |  
|Casualty costs                         |      |                            | 102   |          |   | 115   |                          | (11  | )        |  |   | 196   |  |   | 263   |  | (25 | )
|Purchased services and other costs     |      |                            | 350   |          |   | 327   |                          | 7    |          |  |   | 693   |  |   | 645   |  | 7   |  
|                                       |      |                            |       |          |   |       |                          |      |          |  |   |       |  |   |       |  |     |  
|Total                                  |      | $                          | 2,869 |          | $ | 2,659 |                          | 8    | %        |  | $ | 5,700 |  | $ | 5,229 |  | 9   | %
|                                       |      |                            |       |          |   |       |                          |      |          |  |   |       |  |   |       |  |     |  



Operating expenses
increased in the second quarter of 2005 due to significantly higher fuel prices, inflation, depreciation expense, higher freight car and locomotive contract maintenance costs, and guaranteed wages associated with trainmen employment levels. These
cost increases were partially offset by lower casualty costs, lower car rental expense, and lower relocation costs. Higher relocation costs were recognized in the second quarter of 2004, when we moved various support functions to Omaha, Nebraska.
For the six months ended June of 2005, operating expenses were also impacted by additional training expenses associated with higher trainmen employment levels and clean-up and restoration costs associated with the January 2005 West Coast storm.
Casualty costs were lower due to a 1998 crossing accident verdict upheld in the first quarter of 2004.



Salaries, Wages, and Employee Benefits  Higher 2005 second quarter and year-to-date expenses were driven by wage and benefit inflation, current demand levels, guaranteed wage
expenses associated with an increase in trainmen employment levels, and additional track and mechanical maintenance personnel, partially offset by lower relocation costs. Higher 2005 year-to-date salary and benefit expenses were also driven by
increased use of train crews due to lower system velocity, training expenses associated with an increase in trainmen employment levels, and increased labor expenses associated with the West Coast storm.



Equipment and Other Rents Equipment and other rents
primarily includes rent 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. Expenses decreased in the second quarter
of 2005, primarily driven by lower car rental expense due to an 11% improvement in car cycle times for equipment used in industrial products, chemical and automotive shipments, reduced car lease expense, and lower office rental expense, which were
partially offset by volume-related growth for industrial products and intermodal shipments and a modest increase in locomotive lease costs. Year-to-date expenses were up slightly reflecting the impact of slower first quarter 2005 car cycle times,
volume-related expenses, and higher locomotive lease costs.



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Depreciation  The majority of depreciation relates to track structure, including rail, ties,
and other track material. Depreciation expense increased in the second quarter and year-to-date periods in 2005 compared to 2004, primarily due to a higher depreciable asset base caused by significant capital expenditures and volume growth in recent
years.



Fuel and Utilities Fuel and
utilities include locomotive fuel, utilities other than telephone, and gasoline and other fuels. The increase in the second quarter of 2005 was driven by higher diesel fuel prices, which averaged $1.67 per gallon compared to $1.16 per gallon in the
second quarter of 2004 (including taxes and transportation costs). The higher fuel price contributed $169 million to the increase; however, $158 million of the additional fuel cost was recovered through our fuel surcharge programs and is included in
operating revenue. This was partially offset by a 3% improvement in the fuel consumption rate, saving $13 million in second quarter fuel expense versus 2004. Year-to-date, fuel prices averaged $1.56 in 2005 versus $1.09 during the same period in
2004, resulting in a $317 million increase in fuel expense and a $294 million increase in fuel surcharge revenue. A 3% improvement in the year-to-date consumption rate resulted in $25 million of fuel savings in 2005 versus the same period in 2004,
which was partially offset by a 1% increase in gross ton-miles resulting in $8 million of additional fuel expenses for the year-to-date period in 2005 versus 2004. We did not have any fuel hedges in place during the first six months of 2005. In the
second quarter and year-to-date periods in 2004, our fuel hedges decreased fuel costs by $3 million and $7 million, respectively. Gasoline, utilities, and propane expenses increased $4 million in the second quarter of 2005 and $8 million during the
first six months compared to 2004 due to higher prices.



Materials and Supplies Materials used to maintain our lines, structures, and equipment are the principal component of materials and supplies expense. Office, small tools and other supplies, and the costs of freight
services to ship company materials, are also included. Expenses increased in the second quarter and year-to-date periods in 2005 due to the increased use of locomotive repair materials associated with maintaining a larger fleet that includes older
units not covered by warranties, additional freight car repairs, and higher material costs. Material cost increases were driven primarily by higher prices for freight car wheel sets and lube oil.



Casualty Costs Personal injury expense, freight and
property damage, insurance, and environmental costs are included in casualty costs. Costs in the second quarter and year-to-date periods of 2005 were lower due to the recognition of expense in 2004 as a result of a court ruling on a 1998 crossing
accident and for a June 2004 derailment near San Antonio, partially offset by higher insurance costs in 2005. Lower year-to-date casualty costs in 2005 compared to 2004 were also driven by lower freight loss and damage expense and lower costs for
destruction of foreign equipment. Destruction of foreign equipment expense is incurred when equipment owned by other railroads is damaged while in our possession.



Purchased Services and Other Costs  Purchased services and other costs include the costs of services purchased
from outside contractors, state and local taxes, net costs of operating facilities jointly used by other railroads and us, transportation and lodging for train crew employees, trucking and contracting costs for intermodal containers, leased
automobile maintenance expenses, telephone and cellular expense, employee travel expense, and computer and other general expenses. Expenses increased in the second quarter and year-to-date periods of 2005 as a result of higher contract service and
maintenance expenses, higher state and local taxes, increased trucking expenses for intermodal carriers, and crew transportation and lodging costs. Year-to-date expenses were also driven up by the West Coast storm clean-up and restoration expenses
and lower expenses incurred for jointly-owned operating facilities.



Non-Operating Items



|                    |  |                             |      |   |                           |   |      |      |  |   |      |   |  |   |      |  
|------------------- |  | --------------------------- | ---- | - | ------------------------- | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                    |  | Three Months Ended June 30, |      |   | Six Months Ended June 30, |  
|Millions of Dollars |  | 2005                        |      |   | 2004                      |   |      | 2005 |  |   | 2004 |  
|Other income        |  | $                           | 30   |   |                           | $ | 9    |      |  | $ | 46   |   |  | $ | 28   |  
|Interest expense    |  |                             | (122 | ) |                           |   | (123 | )    |  |   | (244 | ) |  |   | (251 | )
|Income taxes        |  |                             | (137 | ) |                           |   | (82  | )    |  |   | (215 | ) |  |   | (123 | )



Other Income For the second quarter and year-to-date periods in 2005, the increase in other income was primarily a result of higher gains from real estate sales compared to 2004.



Interest Expense The improvement in interest expense in the year-to-date period of 2005 was primarily driven
by lower effective interest rates of 7.5% in 2005 versus 7.7% in 2004. The effective interest rate in both the second quarter of 2005 and 2004 was 7.5%. The weighted average debt level for both year-to-date periods of 2005 and 2004



20



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was $6.5 billion; whereas, the weighted average debt level for the second quarter of 2005 and 2004 was $6.5 billion and $6.6 billion, respectively.



Income Taxes Income tax expense in the second
quarter and year-to-date periods of 2005 increased from the prior year due to higher 2005 pre-tax income combined with a 2004 reduction in the deferred state income tax liability primarily attributable to relocating support operations to Omaha,
Nebraska, and state income tax credits earned in 2004 in connection with the new headquarters building in Omaha.



OTHER OPERATING AND FINANCIAL STATISTICS



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



|                                     |      |                             |      |          |  |      |                           |      |          |  |       |  |    |   
|------------------------------------ | ---- | --------------------------- | ---- | -------- |  | ---- | ------------------------- | ---- | -------- |  | ----- |  | -- | --
|                                     |      | Three Months Ended June 30, |      | % Change |  |      | Six Months Ended June 30, |      | % Change | 
|                                     | 2005 |                             | 2004 |          |  | 2005 |                           | 2004 |         
|Average train speed (miles per hour) |      | 21.2                        |      | 21.3     |  |     | %                         |      | 21.2     |  | 21.6  |  | (2 | )%
|Average terminal dwell time (hours)  |      | 27.4                        |      | 30.9     |  | (11  | )                         |      | 28.4     |  | 30.4  |  | (7 | ) 
|Gross ton-miles (billions)           |      | 260.0                       |      | 260.6    |  |     |                           |      | 518.4    |  | 512.5 |  | 1  |   
|Revenue ton-miles (billions)         |      | 136.8                       |      | 136.1    |  | 1    |                           |      | 274.3    |  | 270.7 |  | 1  |   
|Rail car inventory (thousands)       |      | 318.4                       |      | 325.4    |  | (2   | )                         |      | 320.0    |  | 323.4 |  | (1 | ) 



Average Train
Speed  Continued network inefficiencies, record traffic volume, and disruptions on the SPRB Joint Line hampered efforts to improve our average train speed. Average train speed is calculated by dividing train miles by hours operated on our
main lines between terminals.



Average Terminal Dwell
Time  The 11% improvement in dwell time in the second quarter of 2005 resulted from strategic network management initiatives and directed efforts to more timely deliver rail cars to our interchange partners and customers. Average terminal
dwell time is the average time that a rail car spends at our terminals. Lower average terminal dwell time is favorable.



Gross and Revenue Ton-Miles  For the second quarter of 2005, gross ton-miles were flat with 2004, while revenue ton-miles and carloadings
were up 1%, driven primarily by a decrease in energy and chemical shipments, which are higher density commodity groups. For the year-to-date period, gross and revenue ton-miles grew 1% in correlation to the 1% growth in carloadings as volume growth
in the higher density commodity groups that was experienced in the first quarter decreased year-over-year in the second quarter. 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 based on tariff miles and do not include the weight of freight cars.



Rail Car Inventory  Our rail car inventory improved 2% in the second quarter and 1% for the year-to-date period as we continued to focus on network management initiatives. Rail car inventory is the number
of freight cars on-line throughout our system. Lower rail car inventory is desirable for network fluidity.



OTHER MATTERS



Transactionswith Affiliates  At June 30, 2005 and December 31, 2004, we had $1,025 million and $775 million working capital deficit balances, respectively, relating to UPCs management of our
cash position. As part of UPCs cash management activities, we advance excess cash (cash available after satisfying all of our obligations and paying dividends to UPC) to UPC. We declare and pay dividends to UPC which typically approximate the
dividends that UPC declares to its shareholders; however, there is no formal requirement to do so. The dividend declaration between UPC and us is determined solely by our Board of Directors. To the extent we require additional cash for use in our
operations, UPC makes such funds available to us for borrowing. Transactions with UPC are treated as net intercompany borrowings in the Consolidated Statements of Financial Position.



The majority of our intercompany borrowings from UPC relate to the acquisitions of the Chicago and North
Western Transportation Company and Southern Pacific Rail Corporation, which were funded by UPC on our behalf. We assumed these acquisition costs in the form of intercompany borrowings from UPC. The intercompany borrowings accrue interest at an
annual rate of 7.5%, which may be adjusted from time to time, and are payable on demand. There are no restrictions on the amount we are able to borrow from UPC. Intercompany borrowings are unsecured and rank equally with all of our other unsecured
indebtedness.



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UPC provides us with various services, including strategic planning, legal, treasury,
accounting, auditing, insurance, human resources and corporate affairs. Billings for these services were $11 million and $15 million for the three months ended June 30, 2005 and 2004, respectively. Billings were $28 million and $27 million for the
six months ended June 30, 2005 and 2004, respectively.



Commitments and Contingencies  Various claims and lawsuits are pending against us and certain of our subsidiaries. We are also subject to various federal, state, and local environmental laws and regulations, pursuant to which
we are currently participating in the investigation and remediation of various sites.



Income Taxes  In the second quarter, the Corporation reached final settlements with the Internal Revenue Service (IRS) related to resolution of tax liabilities for tax years 1986-1994. Federal income tax
liabilities, excluding interest, for all years prior to 1995 are now resolved with the IRS. Settlement with respect to the interest calculations will take more time to resolve.



As a result of the final settlements of tax liabilities for pre-1995 tax years, we have undertaken, but have
not yet completed, an analysis of the impact these settlements may have on previously recorded estimates of deferred tax assets and liabilities. At June 30, 2005, our recorded estimates of deferred tax assets and liabilities represent our best
estimates based upon available information at this time. Although we anticipate any change in our estimates will be recorded as a reduction in both our deferred tax liability and income tax expense, at this time we are unable to reasonably estimate
the amount of any adjustment because of the number of years, complexity, and interrelationship of the numerous issues involved in completing this review.



As previously reported, the IRS has also completed its examination of the Corporations federal income tax returns for years
1995-1998, and has issued a notice of deficiency. Among other adjustments, the IRS proposes to disallow tax deductions we claimed in connection with certain donations of property during those years. We dispute the proposed adjustments and intend to
defend our positions through applicable IRS procedures, and, if necessary, litigation. We do not expect that the ultimate resolution of this examination will have a material adverse effect on our operating results, financial condition, or liquidity.
Tax years 1999-2002 are currently under examination.



Accounting Pronouncements In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123(R), Share-Based Payment.This statement requires that companies recognize compensation expense equal
to the fair value of stock options or other share-based payments. On April 14, 2005, the Securities and Exchange Commission deferred the effective date to January 1, 2006. We will adopt FAS 123(R) on a modified prospective basis, recognizing
compensation expense for 1) new awards granted on or after January 1, 2006, and 2) any portion of awards that have not vested as of that date. Assuming that the level of future option grants remains consistent with prior years, we estimate that the
impact of this pronouncement for the Company will be an annual reduction in net income of approximately $12 million.



In July 2005, the FASB issued an exposure draft, Accounting for Uncertain Tax Positions, an Interpretation of FASB Statement No. 109.If finalized as drafted, the Interpretation will require companies to recognize the best estimate of the impact of a tax position only if that position is probable of being sustained during a tax audit. The FASB proposes that only tax positions
that meet the probable recognition threshold may be recognized as of the end of the first fiscal year ending after December 15, 2005. We are currently assessing the impact that this proposed interpretation would have on our Consolidated Financial
Statements.



Ratio of Earnings to Fixed ChargesFor the three and six months ended July 30, 2005, our ratio of earnings to fixed charges was 3.1 and 2.6, respectively, compared to 2.4 and 2.2 for the three and six months ended June 30, 2004, respectively. The ratio of earnings to fixed
charges was computed on a consolidated basis. Earnings represent net income, less equity earnings net of distributions, plus fixed charges and income taxes. Fixed charges represent interest charges, amortization of debt discount, and an estimated
amount representing the interest portion of rental charges.



CAUTIONARY INFORMATION



Certain statements in
this report, and statements in other material filed or to be filed with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by 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: expectations as to operational or service improvements;
statements concerning expectations of the effectiveness of steps taken or to be taken to improve operations, service, or to stabilize the rail system, including the hiring and training of train crews, acquisition of additional locomotives,
infrastructure improvements, transportation plan



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modifications, and management of customer traffic on the system to meet demand; expectations as to the timing of completion and impact of ongoing track
maintenance and restoration work being performed in the SPRB; expectations as to cost savings, revenue growth, and earnings; the time by which certain objectives will be achieved; statements or information concerning projections, predictions,
expectations, estimates, or forecasts as to our business, financial and operational results, future economic performance, and general economic conditions; statements of managements goals and objectives; proposed new products and services;
estimates of costs relating to environmental remediation and restoration; expectations that claims, lawsuits, environmental costs, commitments, contingent liabilities, labor negotiations or agreements, or other matters will not have a material
adverse effect on our consolidated financial condition, results of operations, 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, including expectations as to operational, service, and network fluidity improvements. 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.



The following important factors, in addition to those discussed in Risk Factors in Item 7 of our 2004 annual report on Form
10-K, 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:



| |  |  | whether we are successful in implementing our financial and operational initiatives, including gaining new customers, retaining existing ones, and containing
operating costs;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | whether we are successful in improving network operations and service by hiring and training additional train crews, acquiring additional locomotives, improving
infrastructure, redesigning our transportation plan, and managing network volume;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | material adverse changes in economic and industry conditions, both within the United States and globally;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | the effects of adverse general economic conditions affecting customer demand and the industries and geographic areas that produce and consume commodities we
carry;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | transportation industry competition, conditions, performance, and consolidation;
| | - |  | --------------------------------------------------------------------------------



| |  |  | legislative and regulatory developments, including possible enactment of initiatives to re-regulate the rail industry;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | legislative, regulatory, or legal developments involving taxation, including enactment of new federal or state income tax rates, revisions of controlling
authority, and the outcome of tax claims and litigation;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in securities and capital markets;
| | - |  | ------------------------------------------



| |  |  | natural events such as severe weather, fire, floods, earthquakes, or other disruptions of our operating systems, structures, and equipment;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | any adverse economic or operational repercussions from terrorist activities and any governmental response thereto;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | war or risk of war;
| | - |  | -------------------



| |  |  | changes in fuel prices;
| | - |  | -----------------------



| |  |  | changes in labor costs, including healthcare cost increases, and labor difficulties, including stoppages affecting either our operations or our customers
abilities to deliver goods to us for shipment; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



Forward-looking statements speak only as of the date the statement was made. 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



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should be drawn that we will make additional updates with respect thereto or with respect to other forward-looking statements.



Item 3. Quantitative and Qualitative Disclosures About Market Risk



There have been no material changes in market risk from the information provided under Quantitative and Qualitative Disclosures about Market Risk in Item 7A of our 2004 annual report
on Form 10-K.



Item 4. Controls and Procedures



As of the end of the period covered by this report, the Company carried out an evaluation under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer (CEO) and
Executive Vice President  Finance and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the Companys disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based upon that
evaluation, the CEO and the CFO concluded that, as of the end of the period covered by this report, the Companys disclosure controls and procedures are effective in alerting them, in a timely manner, to material information relating to the
Company (including its consolidated subsidiary and affiliate companies) required to be included in the Companys periodic SEC filings.



Additionally, the CEO and CFO determined that there have been no significant changes to the Company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 Companys internal control over financial reporting.



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PART II. OTHER INFORMATION



Item 1. Legal Proceedings



None.



Item 6. Exhibits



|            |  |                                                                                                                                                                                                                                
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibits Filed with this Statement                                                                                                                                                                              
|            | 
|12(a)       |  | Ratio of Earnings to Fixed Charges for the Three Months Ended June 30, 2005 and 2004.                                                                                                                                          
|            | 
|12(b)       |  | Ratio of Earnings to Fixed Charges for the Six Months Ended June 30, 2005 and 2004.                                                                                                                                            
|            | 
|31(a)       |  | Certification Pursuant to Rule 13a-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  Richard K.
Davidson.                                                                      
|            | 
|31(b)       |  | Certification Pursuant to Rule 13a-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  Robert M. Knight,
Jr.                                                                     
|            | 
|32          |  | Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  Richard K. Davidson and Robert M. Knight,
Jr.                                                        
|            | 
|            |  | Description of Exhibits Incorporated by Reference                                                                                                                                                                              
|            | 
|3(a)        |  | Amended Certificate of Incorporation of the Registrant, effective as of February 1, 1998, is incorporated herein by reference to Exhibit 3(a) to the Companys Annual
Report on Form 10-K for the year ended December 31, 1998.
|            | 
|3(b)        |  | By-Laws of the Registrant, as amended, effective October 15, 2004, are incorporated herein by reference to Exhibit 3(b) to the Companys Quarterly Report on Form 10-Q
for the quarter ended September 30, 2004.               



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SIGNATURES



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



Dated: August 5, 2005



UNION PACIFIC RAILROAD COMPANY (Registrant)By

/s/ Robert M. Knight, Jr.Robert M. Knight, Jr.,Executive Vice President  Finance andChief Financial Officer(Principal Financial Officer)By

/s/ Richard J. PutzRichard J. Putz,Chief Accounting Officer and Controller(Principal Accounting Officer)




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