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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(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, 2006

- OR -



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



| | For the transition period from  to
| | ----------------------------------

Commission file number 1-6146

UNION PACIFIC RAILROAD COMPANY

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|DELAWARE                                                       |  | 94-6001323                          
|(State or other jurisdiction of 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)

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     ü    NO

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

Large accelerated filer  Accelerated filer  Non-accelerated filer
    ü

Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Act).

YES        NO    ü

As of July 31, 2006, 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 INSTRUCTION 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

UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES

PART I. FINANCIAL INFORMATION



|                                                                                                                   |  |            
|------------------------------------------------------------------------------------------------------------------ |  | -----------
|                                                                                                                   |  | Page Number
|Item 1. Consolidated Financial Statements:                                                                         |  |            
|                                                                                                                   | 
|CONSOLIDATED STATEMENTS OF INCOME (Unaudited)For the Three Months Ended June 30, 2006 and 2005                     |  | 3          
|                                                                                                                   | 
|CONSOLIDATED STATEMENTS OF INCOME (Unaudited)For the Six Months Ended June 30, 2006 and 2005                       |  | 4          
|                                                                                                                   | 
|CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited)At June 30, 2006 and December 31, 2005                    |  | 5          
|                                                                                                                   | 
|CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)For the Six Months Ended June 30, 2006 and 2005                   |  | 6          
|                                                                                                                   | 
|CONSOLIDATED STATEMENT OF CHANGES IN COMMON SHAREHOLDERSEQUITY (Unaudited) For the Six Months Ended June 30, 2006 |  | 7          
|                                                                                                                   | 
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)                                                             |  | 8          
|                                                                                                                   | 
|Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations                      |  | 17         
|                                                                                                                   | 
|Item 3.
Quantitative and Qualitative Disclosures About Market Risk                                                 |  | 25         
|                                                                                                                   | 
|Item 4.
Controls and Procedures                                                                                    |  | 25         
|                                                                                                                  
|PART II. OTHER INFORMATION                                                                                        
|                                                                                                                   | 
|Item 1.
Legal Proceedings                                                                                          |  | 26         
|                                                                                                                   | 
|Item 1A.
Risk Factors                                                                                              |  | 26         
|                                                                                                                   | 
|Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds                                                |  | 26         
|                                                                                                                   | 
|Item 3.
Defaults Upon Senior Securities                                                                            |  | 26         
|                                                                                                                   | 
|Item 4.
Submission of Matters to a Vote of Security Holders                                                        |  | 26         
|                                                                                                                   | 
|Item 5.
Other Information                                                                                          |  | 26         
|                                                                                                                   | 
|Item 6.
Exhibits                                                                                                   |  | 26         
|                                                                                                                   | 
|Signatures                                                                                                         |  | 27         
|                                                                                                                   | 
|Certifications                                                                                                     |  |            



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PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

Union Pacific Railroad Company and Consolidated Subsidiary
Companies



|                                                         |  |   |       |   |  |   |       |  
|-------------------------------------------------------- |  | - | ----- | - |  | - | ----- | -
|Millions of
Dollars, For the Three Months Ended June 30, |  |   | 2006  |   |  |   | 2005  |  
|Operating revenues                                       |  | $ | 3,914 |   |  | $ | 3,335 |  
|                                                         |  |  
|Operating expenses:                                      |  |   |       |   |  |   |       |  
|Salaries, wages, and employee benefits                   |  |   | 1,127 |   |  |   | 1,061 |  
|Fuel and utilities                                       |  |   | 794   |   |  |   | 597   |  
|Equipment and other rents                                |  |   | 370   |   |  |   | 340   |  
|Depreciation                                             |  |   | 307   |   |  |   | 291   |  
|Materials and supplies                                   |  |   | 178   |   |  |   | 128   |  
|Casualty costs                                           |  |   | 111   |   |  |   | 102   |  
|Purchased services and other
costs                       |  |   | 314   |   |  |   | 350   |  
|Total operating
expenses                                 |  |   | 3,201 |   |  |   | 2,869 |  
|Operating income                                         |  |   | 713   |   |  |   | 466   |  
|Other income                                             |  |   | 25    |   |  |   | 30    |  
|Interest expense                                         |  |   | (125  | ) |  |   | (122  | )
|Income before income taxes                               |  |   | 613   |   |  |   | 374   |  
|Income taxes                                             |  |   | (234  | ) |  |   | (137  | )
|Net income                                               |  | $ | 379   |   |  | $ | 237   |  

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



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CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

Union Pacific Railroad Company and Consolidated Subsidiary
Companies



|                                                       |  |   |       |   |  |   |       |  
|------------------------------------------------------ |  | - | ----- | - |  | - | ----- | -
|Millions of
Dollars, For the Six Months Ended June 30, |  |   | 2006  |   |  |   | 2005  |  
|Operating revenues                                     |  | $ | 7,616 |   |  | $ | 6,479 |  
|                                                       |  |  
|Operating expenses:                                    |  |   |       |   |  |   |       |  
|Salaries, wages, and employee benefits                 |  |   | 2,235 |   |  |   | 2,140 |  
|Fuel and utilities                                     |  |   | 1,486 |   |  |   | 1,136 |  
|Equipment and other rents                              |  |   | 737   |   |  |   | 692   |  
|Depreciation                                           |  |   | 610   |   |  |   | 580   |  
|Materials and supplies                                 |  |   | 342   |   |  |   | 263   |  
|Casualty costs                                         |  |   | 220   |   |  |   | 196   |  
|Purchased services and other
costs                     |  |   | 668   |   |  |   | 693   |  
|Total operating
expenses                               |  |   | 6,298 |   |  |   | 5,700 |  
|Operating income                                       |  |   | 1,318 |   |  |   | 779   |  
|Other income                                           |  |   | 32    |   |  |   | 46    |  
|Interest expense                                       |  |   | (250  | ) |  |   | (244  | )
|Income before income taxes                             |  |   | 1,100 |   |  |   | 581   |  
|Income taxes                                           |  |   | (418  | ) |  |   | (215  | )
|Net income                                             |  | $ | 682   |   |  | $ | 366   |  

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



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CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited)

Union Pacific Railroad Company and Consolidated
Subsidiary Companies



|                                                                                            |  |              |   |  |                  |  
|------------------------------------------------------------------------------------------- |  | ------------ | - |  | ---------------- | -
|Millions of Dollars, Except Share and Per Share
Amounts                                     |  | June 30,2006 |   |  | December 31,2005 |  
|Assets                                                                                      |  |              |   |  |                  |  
|Current assets:                                                                             |  |              |   |  |                  |  
|Cash and cash equivalents                                                                   |  | $78          |   |  | $403             |  
|Accounts receivable, net                                                                    |  | 656          |   |  | 666              |  
|Materials and supplies                                                                      |  | 433          |   |  | 331              |  
|Current deferred income taxes                                                               |  | 283          |   |  | 288              |  
|Other current assets                                                                        |  | 150          |   |  | 144              |  
|Total current assets                                                                        |  | 1,600        |   |  | 1,832            |  
|Investments:                                                                                |  |              |   |  |                  |  
|Investments in and advances to affiliated companies                                         |  | 817          |   |  | 789              |  
|Other investments                                                                           |  | 14           |   |  | 17               |  
|Total investments                                                                           |  | 831          |   |  | 806              |  
|Properties:                                                                                 |  |              |   |  |                  |  
|Road                                                                                        |  | 34,785       |   |  | 33,812           |  
|Equipment                                                                                   |  | 7,664        |   |  | 7,675            |  
|Other                                                                                       |  | 180          |   |  | 182              |  
|Total cost                                                                                  |  | 42,629       |   |  | 41,669           |  
|Accumulated
depreciation                                                                    |  | (10,148      | ) |  | (9,711           | )
|Net properties                                                                              |  | 32,481       |   |  | 31,958           |  
|Other assets                                                                                |  | 473          |   |  | 465              |  
|Total assets                                                                                |  | $35,385      |   |  | $35,061          |  
|Liabilities and Common Shareholders
Equity                                                 |  |              |   |  |                  |  
|Current liabilities:                                                                        |  |              |   |  |                  |  
|Accounts payable                                                                            |  | $661         |   |  | $779             |  
|Accrued wages and vacation                                                                  |  | 416          |   |  | 408              |  
|Accrued casualty costs                                                                      |  | 403          |   |  | 403              |  
|Income and other taxes                                                                      |  | 235          |   |  | 241              |  
|Third-party debt due within one year                                                        |  | 141          |   |  | 146              |  
|Equipment rents payable                                                                     |  | 120          |   |  | 130              |  
|Other current
liabilities                                                                   |  | 513          |   |  | 507              |  
|Total current
liabilities                                                                   |  | 2,489        |   |  | 2,614            |  
|Intercompany borrowings from UPC                                                            |  | 5,033        |   |  | 5,083            |  
|Third-party debt due after one year                                                         |  | 1,522        |   |  | 1,597            |  
|Deferred income taxes                                                                       |  | 9,502        |   |  | 9,457            |  
|Accrued casualty costs                                                                      |  | 876          |   |  | 876              |  
|Retiree benefits obligation                                                                 |  | 846          |   |  | 855              |  
|Other long-term liabilities                                                                 |  | 622          |   |  | 602              |  
|Mandatorily redeemable preference shares                                                    |  | 10           |   |  | 11               |  
|Commitments and contingencies (See
note 8)                                                  |  |              |   |  |                  |  
|Total liabilities                                                                           |  | 20,900       |   |  | 21,095           |  
|Common shareholders equity:                                                                |  |              |   |  |                  |  
|Common stock, par value $10.00 per share, 9,200 shares authorized,
4,465 shares outstanding |  | -            |   |  | -                |  
|Class A stock, par value $10.00 per share, 800 shares authorized,
388 shares outstanding    |  | -            |   |  | -                |  
|Paid-in-surplus                                                                             |  | 4,782        |   |  | 4,782            |  
|Retained earnings                                                                           |  | 9,936        |   |  | 9,414            |  
|Accumulated other comprehensive
loss                                                        |  | (233         | ) |  | (230             | )
|Total common shareholders
equity                                                           |  | 14,485       |   |  | 13,966           |  
|Total liabilities and common
shareholders equity                                           |  | $35,385      |   |  | $35,061          |  

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



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CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Union Pacific Railroad Company and Consolidated Subsidiary
Companies



|                                                                                  |  |   |        |   |  |   |        |  
|--------------------------------------------------------------------------------- |  | - | ------ | - |  | - | ------ | -
|Millions of Dollars, For the Six Months Ended
June 30,                            |  |   | 2006   |   |  |   | 2005   |  
|Operating Activities                                                              |  |   |        |   |  |   |        |  
|Net income                                                                        |  | $ | 682    |   |  | $ | 366    |  
|Adjustments to reconcile net income to net cash provided by operating
activities: |  |   |        |   |  |   |        |  
|Depreciation                                                                      |  |   | 610    |   |  |   | 580    |  
|Deferred income taxes                                                             |  |   | 69     |   |  |   | 85     |  
|Net gain from non-operating asset sales                                           |  |   | (15    | ) |  |   | (42    | )
|Other, net                                                                        |  |   | (39    | ) |  |   | (63    | )
|Changes in current assets and
liabilities, net                                    |  |   | (218   | ) |  |   | 158    |  
|Cash provided by operating
activities                                             |  |   | 1,089  |   |  |   | 1,084  |  
|Investing Activities                                                              |  |   |        |   |  |   |        |  
|Capital investments                                                               |  |   | (1,130 | ) |  |   | (1,078 | )
|Proceeds from asset sales                                                         |  |   | 37     |   |  |   | 87     |  
|Other investing activities,
net                                                   |  |   | (28    | ) |  |   | (76    | )
|Cash used in investing
activities                                                 |  |   | (1,121 | ) |  |   | (1,067 | )
|Financing Activities                                                              |  |   |        |   |  |   |        |  
|Dividends paid to parent                                                          |  |   | (160   | ) |  |   | (156   | )
|Debt repaid                                                                       |  |   | (83    | ) |  |   | (90    | )
|Intercompany (advances)
borrowings                                                |  |   | (50    | ) |  |   | 63     |  
|Cash used in financing
activities                                                 |  |   | (293   | ) |  |   | (183   | )
|Net change in cash and cash equivalents                                           |  |   | (325   | ) |  |   | (166   | )
|Cash and cash equivalents at
beginning of year                                    |  |   | 403    |   |  |   | 236    |  
|Cash and cash equivalents at end of
period                                        |  | $ | 78     |   |  | $ | 70     |  
|Changes in Current Assets and Liabilities, Net                                    |  |   |        |   |  |   |        |  
|Accounts receivable, net                                                          |  | $ | 10     |   |  | $ | (64    | )
|Materials and supplies                                                            |  |   | (102   | ) |  |   | (39    | )
|Other current assets                                                              |  |   | (6     | ) |  |   | 55     |  
|Accounts, wages and vacation payable                                              |  |   | (110   | ) |  |   | 109    |  
|Other current
liabilities                                                         |  |   | (10    | ) |  |   | 97     |  
|Total                                                                             |  | $ | (218   | ) |  | $ | 158    |  
|Supplemental cash flow information:                                               |  |   |        |   |  |   |        |  
|Cash paid during the period for:                                                  |  |   |        |   |  |   |        |  
|Interest                                                                          |  | $ | (260   | ) |  | $ | (249   | )
|Income taxes, net                                                                 |  |   | (313   | ) |  |   | (44    | )

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



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CONSOLIDATED STATEMENT OF CHANGES IN COMMON SHAREHOLDERS EQUITY (Unaudited)

Union Pacific Railroad
Company and Consolidated Subsidiary Companies



|                                  |  |              |  |               |  |             |  |              |  |                 |  |                  |   |  |                                              |   |  |                           |   |  |                |   |  |         |  
|--------------------------------- |  | ------------ |  | ------------- |  | ----------- |  | ------------ |  | --------------- |  | ---------------- | - |  | -------------------------------------------- | - |  | ------------------------- | - |  | -------------- | - |  | ------- | -
|                                  |  |              |  |               |  |             |  |              |  |                 |  |                  |   |  | Accumulated OtherComprehensive Income/(Loss) |   |  |                           |  
|Millions of
Dollars               |  | CommonShares |  | Class AShares |  | CommonStock |  | Class AStock |  | Paid-in-Surplus |  | RetainedEarnings |   |  | MinimumPensionLiabilityAdj.                  |   |  | ForeignCurrencyTrans.Adj. |   |  | DerivativeAdj. |   |  | Total   |  
|Balance at Jan. 1,
2006           |  | 4,465        |  | 388           |  | $-          |  | $-           |  | $4,782          |  | $9,414           |   |  | $(211                                        | ) |  | $(13                      | ) |  | $(6            | ) |  | $13,966 |  
|Comprehensive income:             |  |              |  |               |  |             |  |              |  |                 |  |                  |   |  |                                              |   |  |                           |   |  |                |   |  |         |  
|Net income                        |  |              |  |               |  | -           |  | -            |  | -               |  | 682              |   |  | -                                            |   |  | -                         |   |  | -              |   |  | 682     |  
|Other comp. income/(loss) [a]     |  |              |  |               |  | -           |  | -            |  | -               |  | -                |   |  | 2                                            |   |  | (5                        | ) |  | -              |   |  | (3      | )
|Total comprehensive income/(loss) |  |              |  |               |  | -           |  | -            |  | -               |  | 682              |   |  | 2                                            |   |  | (5                        | ) |  | -              |   |  | 679     |  
|Dividends declared                |  | -            |  | -             |  | -           |  | -            |  | -               |  | (160             | ) |  | -                                            |   |  | -                         |   |  | -              |   |  | (160    | )
|Balance at June 30,
2006          |  | 4,465        |  | 388           |  | $-          |  | $-           |  | $4,782          |  | $9,936           |   |  | $(209                                        | ) |  | $(18                      | ) |  | $(6            | ) |  | $14,485 |  



|[a] | Net of tax of $(3).
|--- | -------------------



---

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



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UNION PACIFIC RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY 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 and Consolidated Subsidiary Companies.

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, 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 their fair presentation in conformity with accounting principles generally accepted in the United States of America. Our Consolidated Statement of Financial Position at December 31, 2005 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 2005 annual report on Form 10-K. The results of operations for the
three and six months ended June 30, 2006 are not necessarily indicative of the results for the entire year ending December 31, 2006. Certain prior year amounts have been reclassified to conform to the 2006 Consolidated Financial Statement
presentation. These reclassifications were not material, individually or in aggregate.

2.    Stock-Based
Compensation  We participate in the Corporations stock incentive programs. The Corporation has several stock-based compensation plans under which our employees receive stock options, nonvested retention shares, and nonvested stock
units. We refer to the nonvested shares and stock units collectively as retention awards. There were 18 million shares authorized and available for grant as stock-based compensation at June 30, 2006.

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

As a result of the adoption of FAS
123(R), we recognized expense for stock options in the first six months of 2006, in addition to retention awards, which were expensed prior to 2006. Before taxes, stock-based compensation expense included $2 million and $5 million for stock options
and $4 million and $8 million for retention awards for the three and six month periods, respectively.

Prior to the
adoption of FAS 123(R), we applied the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation
expense related to stock option grants was reflected in net income, as all options granted under those plans had a grant price equal to the market value of our common stock on the date of grant. Stock-based compensation expense related to retention
shares, stock units, and other incentive plans was reflected in net income. The following table details the effect on net income had compensation expense for all of our stock-based awards, including stock options, been recorded in the three and six
months ended June 30, 2005 based on the fair value method under FASB Statement No. 123, Accounting for Stock-Based Compensation.



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



|[a] | Stock options for executives granted in 2002 and 2003 included a reload feature. This reload feature allowed executives to exercise their options using shares of
Union Pacific Corporation common stock that they already owned and obtain a new grant of options in the amount of the shares used for exercise plus any shares withheld for tax purposes. The reload feature of these option grants could only be
exercised if the price of our common stock increased at least 20% from the price at the time of the reload grant. During the three and six months ended June 30, 2005, reload option grants represented $0.3 million and $6 million, respectively,
of the pro forma expense noted above. There were no reload option grants during 2006 as stock options exercised after January 1, 2006 are not eligible for the reload feature.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



|                                                          |  |   |       |   |  |   |       |  
|--------------------------------------------------------- |  | - | ----- | - |  | - | ----- | -
|                                                          |  |   | 2006  |   |  |   | 2005  |  
|Risk-free interest rates                                  |  |   | 4.5   | % |  |   | 3.7   | %
|Dividend yield                                            |  |   | 1.4   | % |  |   | 1.9   | %
|Expected lives (years)                                    |  |   | 5.7   |   |  |   | 4.8   |  
|Volatility                                                |  |   | 24.7  | % |  |   | 21.0  | %
|Weighted-average grant-date fair
value of options granted |  | $ | 23.94 |   |  | $ | 12.30 |  

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

A summary of stock option activity during the first six months of 2006 is presented below:



|                                     |  |            |   |  |                               
|------------------------------------ |  | ---------- | - |  | ------------------------------
|                                     |  | Shares     |   |  | Weighted-AverageExercise Price
|Outstanding at January 1, 2006       |  | 8,704,157  |   |  | $59.08                        
|Granted                              |  | 949,650    |   |  | 86.05                         
|Exercised                            |  | (2,158,257 | ) |  | 56.55                         
|Transfers (to)/from UPC              |  | (380,273   | ) |  | 61.74                         
|Forfeited or expired                 |  | (38,700    | ) |  | 62.15                         
|Outstanding at June 30,
2006         |  | 7,076,577  |   |  | $63.31                        
|Options exercisable at June 30,
2006 |  | 6,076,627  |   |  | $59.84                        

The weighted-average remaining contractual terms of options outstanding and
exercisable at June 30, 2006 were 5.8 years and 5.2 years, respectively. The aggregate intrinsic values of options outstanding and exercisable at June 30, 2006 were $209 million and $201 million, respectively.

Stock options are granted at market price on the date of grant, have ten-year contractual terms, and vest no later than three years from
the date of grant. While the majority of the options that were granted in 2006 will vest over a three-year service period, a smaller percentage of options awarded in 2006 and the nonvested options that were awarded in prior years will vest two years
from their grant date. None of the stock options outstanding at June 30, 2006 are subject to performance or market-based vesting conditions.



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At June 30, 2006, there was $19 million of unrecognized compensation expense related
to nonvested stock options, which is expected to be recognized over a weighted-average period of 2.3 years. Additional information regarding stock option exercises appears in the table below:



|                                                        |  |                            |  |                          |  |      |  |     
|------------------------------------------------------- |  | -------------------------- |  | ------------------------ |  | ---- |  | ----
|                                                        |  | Three Months EndedJune 30, |  | Six Months EndedJune 30,
|Millions of
Dollars                                     |  | 2006                       |  | 2005                     |  | 2006 |  | 2005
|Aggregate grant-date fair value of stock options
vested |  | $-                         |  | $-                       |  | $16  |  | $18 
|Intrinsic value of stock options exercised              |  | 22                         |  | 6                        |  | 70   |  | 39  
|UPC tax benefit realized from option
exercises          |  | 7                          |  | 2                        |  | 26   |  | 14  

Retention Awards  The fair value of retention awards is based on the market price of
the stock at the grant date.

Changes in our retention awards during the first six months of 2006 were as follows:



|                             |  |         |   |  |                                      
|---------------------------- |  | ------- | - |  | -------------------------------------
|                             |  | Shares  |   |  | Weighted-AverageGrant-Date Fair Value
|Nonvested at January 1, 2006 |  | 640,140 |   |  | $59.05                               
|Granted                      |  | 319,750 |   |  | 86.05                                
|Vested                       |  | (78,351 | ) |  | 56.12                                
|Forfeited                    |  | (7,849  | ) |  | 71.64                                
|Nonvested at June 30,
2006   |  | 873,690 |   |  | $69.08                               

Retention awards, which UPC grants at no cost to the employee, vest over periods
lasting up to four years. With the exception of the awards granted under the Long Term Plan, which is discussed below, the majority of awards granted in 2006 will vest over a four-year service period. Most nonvested awards that were granted in prior
years also vest over four years.

In January 2006, UPCs Board of Directors approved a new Long Term Plan (LTP). Under
the LTP, selected employees were awarded stock units subject to continued employment through January 2009 and the attainment of certain levels of UPCs return on invested capital (ROIC) as defined in the LTP. Over the course of the 3-year
performance period, the participants can earn up to 50,600 stock units, which had a grant-date fair value of $86.05 each and are included within the granted shares shown in the table above. We will expense the fair value (grant-date stock price) of
the units that are probable of being earned based on UPCs forecasted ROIC over the 3-year performance period.

At
June 30, 2006, there was $31 million of total unrecognized compensation expense related to nonvested retention awards, which is expected to be recognized over a weighted-average period of 1.8 years. A portion of this expense is subject to
achievement of the performance criteria under the LTP.

3.    Operations and Segmentation  We are a Class
I railroad operating in the United States. Our railroad, along with its subsidiaries, is our one reportable business segment. Although revenue is analyzed by commodity, we analyze the net financial results of the railroad as one segment due to the
integrated nature of the rail network.

4.    Transactions with Affiliates At June 30, 2006 and
December 31, 2005, we had $889 million and $782 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. Charges for these services were $31 million and $28 million for the six months ended June 30, 2006 and 2005, respectively.

5.    Financial Instruments

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

Market and Credit Risk  We address market risk by selecting derivative financial 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, 2006 and December 31, 2005, we were not required to provide collateral, nor had we received collateral, relating to our hedging activities.

Interest Rate Cash Flow Hedges We report changes in the fair value of cash flow hedges in accumulated other comprehensive loss until the hedged item affects earnings. At June 30, 2006, we had a
reduction of $6 million recorded as an accumulated other comprehensive loss that is being amortized on a straight-line basis through September 30, 2014. As of June 30, 2006 and December 31, 2005, we had no interest rate cash flow
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 both June 30, 2006 and December 31, 2005. The value of the outstanding undivided interest held by investors under the facility was $600 million at both June 30, 2006 and December 31, 2005. 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 $1,180 million and $1,226 million of accounts receivable held by
UPRI at June 30, 2006 and December 31, 2005, respectively. At June 30, 2006 and December 31, 2005, the value of the interest retained by UPRI was $580 million and $626 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, we do not recognize any servicing asset or liability as the servicing
fees adequately compensate us for our responsibilities. We collected approximately $4 billion and $3 billion during the three months ended June 30, 2006 and 2005, respectively, and $8 billion and $6 billion during the six months ended
June 30, 2006 and 2005, respectively. UPRI used certain of these proceeds to purchase new receivables under the facility.

The costs of the sale of receivables program are included in other income and were $9 million and $6 million for the three months ended June 30, 2006 and 2005, respectively, and $16 million and $10 million for the six months ended
June 30, 2006 and 2005, respectively. The costs include interest, program fees paid to banks, commercial paper issuing costs, and fees for unused commitment availability.



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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. The sale of receivables program expires in August 2006. The facility is in the process of being renewed for an additional year.

6.    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.

See note 10 to the Consolidated Financial Statements for discussion of the FASBs project to reconsider the accounting for
postretirement benefits, including pensions.

Expense

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

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



|                                |  |                            |   |  |                          |   |  |      |   |  |      |  
|------------------------------- |  | -------------------------- | - |  | ------------------------ | - |  | ---- | - |  | ---- | -
|                                |  | Pension                    |  
|                                |  | Three Months EndedJune 30, |   |  | Six Months EndedJune 30, |  
|Millions of
Dollars             |  | 2006                       |   |  | 2005                     |   |  | 2006 |   |  | 2005 |  
|Service cost                    |  | $8                         |   |  | $8                       |   |  | $16  |   |  | $17  |  
|Interest cost                   |  | 29                         |   |  | 30                       |   |  | 58   |   |  | 59   |  
|Expected return on plan assets  |  | (34                        | ) |  | (33                      | ) |  | (68  | ) |  | (67  | )
|Amortization of:                |  |                            |   |  |                          |   |  |      |   |  |      |  
|Prior service cost              |  | 2                          |   |  | 2                        |   |  | 4    |   |  | 4    |  
|Actuarial loss                  |  | 4                          |   |  | 2                        |   |  | 9    |   |  | 5    |  
|Total net periodic benefit
cost |  | $9                         |   |  | $9                       |   |  | $19  |   |  | $18  |  

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



|                                |  |                            |   |  |                          |   |  |      |   |  |      |  
|------------------------------- |  | -------------------------- | - |  | ------------------------ | - |  | ---- | - |  | ---- | -
|                                |  | OPEB                       |  
|                                |  | Three Months EndedJune 30, |   |  | Six Months EndedJune 30, |  
|Millions of
Dollars             |  | 2006                       |   |  | 2005                     |   |  | 2006 |   |  | 2005 |  
|Service cost                    |  | $2                         |   |  | $2                       |   |  | $3   |   |  | $3   |  
|Interest cost                   |  | 7                          |   |  | 6                        |   |  | 14   |   |  | 13   |  
|Amortization of:                |  |                            |   |  |                          |   |  |      |   |  |      |  
|Prior service cost (credit)     |  | (7                         | ) |  | (6                       | ) |  | (14  | ) |  | (12  | )
|Actuarial loss                  |  | 4                          |   |  | 3                        |   |  | 8    |   |  | 6    |  
|Total net periodic benefit
cost |  | $6                         |   |  | $5                       |   |  | $11  |   |  | $10  |  



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Cash Contributions

Our policy with respect to funding the qualified plans is to fund at least the minimum required by the Employee Retirement Income Security Act of 1974, as amended, and not more than the maximum amount deductible for
tax purposes. The Corporation does not currently have minimum funding requirements under applicable employee benefit and tax laws. In January 2006, we made a $50 million voluntary contribution to the funded pension plan. The contribution was made
with cash generated from operations.

7.    Capital Stock  The number of shares shown in the Common Stock
section of the Consolidated Statement of Changes in Common Shareholders Equity excluded 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.

8.    Commitments and Contingencies

Asserted and 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 results of operations, financial condition, 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 adverse effect on our consolidated results of
operations, financial condition, or liquidity after taking into account liabilities previously recorded for these matters.

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



|                                |  |                          |   |  |      |  
|------------------------------- |  | ------------------------ | - |  | ---- | -
|                                |  | Six Months EndedJune 30, |  
|Millions of
Dollars             |  | 2006                     |   |  | 2005 |  
|Beginning balance               |  | $614                     |   |  | $636 |  
|Accruals                        |  | 153                      |   |  | 128  |  
|Payments                        |  | (124                     | ) |  | (145 | )
|Ending balance                  |  | $643                     |   |  | $619 |  
|Current portion, ending
balance |  | $271                     |   |  | $272 |  

Our personal injury liability is discounted to present value using applicable U.S.
Treasury rates.

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



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reasonably estimate unasserted asbestos-related claims. As a result, we recorded a liability for asbestos-related claims only when the claims were asserted.

Since 2004, we have used a third party with extensive experience in estimating resolution costs for asbestos-related
claims to assist us in assessing the number and value of these unasserted claims through 2034, based on our average claims experience over a multi-year period. The liability for resolving both asserted and unasserted claims is based on the following
assumptions:



| |  |  | 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:



|                                |  |                          |   |  |      |  
|------------------------------- |  | ------------------------ | - |  | ---- | -
|                                |  | Six Months EndedJune 30, |  
|Millions of
Dollars             |  | 2006                     |   |  | 2005 |  
|Beginning balance               |  | $311                     |   |  | $324 |  
|Accruals                        |  | -                        |   |  | -    |  
|Payments                        |  | (5                       | ) |  | (6   | )
|Ending balance                  |  | $306                     |   |  | $318 |  
|Current portion, ending
balance |  | $16                      |   |  | $17  |  

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, 2006 and December 31, 2005, 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 through 2034. During the third quarter of 2005, our third-party consultants assisted us in reviewing our actual asbestos claim experience through the first half of 2005 compared to the assumptions used in the 2004
estimate, and we determined that no adjustment to our estimate was necessary. We will continue to review actual experience and adjust our estimate as warranted.

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.

Additionally, we have a legal
obligation to properly dispose of asbestos-containing materials. The estimated fair value of this obligation is $5 million at both June 30, 2006 and December 31, 2005, which was recorded as a long-term liability.

Environmental Costs We are subject to federal, state, and local environmental laws and regulations. We have identified approximately 371
sites at which we are or may be liable for remediation costs associated with alleged contamination or for violations of environmental requirements. This includes 39 sites that are the subject of actions taken by the U.S. government, 22 of which are
currently on the Superfund National Priorities List. Certain federal legislation imposes joint and several liability for the remediation of identified sites; consequently, our ultimate environmental liability may include costs relating to activities
of other parties, in addition to costs relating to our own activities at each site.

When an environmental issue has been
identified with respect to the 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



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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:



|                                |  |                          |   |  |      |  
|------------------------------- |  | ------------------------ | - |  | ---- | -
|                                |  | Six Months EndedJune 30, |  
|Millions of
Dollars             |  | 2006                     |   |  | 2005 |  
|Beginning balance               |  | $213                     |   |  | $201 |  
|Accruals                        |  | 15                       |   |  | 21   |  
|Payments                        |  | (20                      | ) |  | (15  | )
|Ending balance                  |  | $208                     |   |  | $207 |  
|Current portion, ending
balance |  | $49                      |   |  | $50  |  

The environmental liability includes costs for remediation and restoration of
sites, as well as for ongoing monitoring costs, but excludes any anticipated recoveries from third parties. Cost estimates are based on information available for each 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. Estimates may also vary due to changes in federal, state, and local laws governing environmental remediation. We do not expect current obligations to have a material adverse effect on our
consolidated results of operations, financial condition, or liquidity.

Guarantees  At June 30, 2006, we were
contingently liable for $432 million in guarantees. We have recorded a liability of $6 million for the fair value of certain of these obligations as of June 30, 2006. We entered into these contingent guarantees in the normal course of business,
and they include guaranteed obligations related to the financing of our headquarters building, equipment financings, and affiliated operations. The final guarantee expires in 2022. We are not aware of any existing event of default that would require
us to satisfy these guarantees. We do not expect that these guarantees will have a material adverse effect on our consolidated results of operations, financial condition, or liquidity.

Income Taxes  As previously reported in note 4 to our Consolidated Financial Statements, Item 8, in our 2005 annual report on Form 10-K, the IRS has completed its examinations
and issued notices of deficiency for tax years 1995 through 2002. Among their proposed adjustments is the disallowance of tax deductions claimed in connection with certain donations of property. In 2005, the IRS national office issued a Technical
Advice Memorandum that left unresolved whether the deductions were proper pending further factual development by the IRS examination team. We continue to dispute the donation issue, as well as many of the other proposed adjustments, and will contest
the associated tax deficiencies through the IRS appeals process, and, if necessary, litigation. We do not expect that the ultimate resolution of these examinations will have a material adverse effect on our operating results, financial condition, or
liquidity. In addition, tax years 2003 and 2004 are currently under examination by the IRS.

9.    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                         |  | 2006                       |   |  | 2005                     |   |  | 2006 |   |  | 2005 |  
|Net gains from non-operating asset sales    |  | $9                         |   |  | $28                      |   |  | $15  |   |  | $42  |  
|Rental income                               |  | 27                         |   |  | 14                       |   |  | 40   |   |  | 27   |  
|Interest income                             |  | 1                          |   |  | 1                        |   |  | 2    |   |  | 4    |  
|Sale of receivables program fees            |  | (9                         | ) |  | (6                       | ) |  | (16  | ) |  | (10  | )
|Non-operating environmental costs and
other |  | (3                         | ) |  | (7                       | ) |  | (9   | ) |  | (17  | )
|Total                                       |  | $25                        |   |  | $30                      |   |  | $32  |   |  | $46  |  



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##### Table of Contents

10.    Accounting Pronouncements In June 2006, the FASB issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48). The interpretation requires us to recognize the largest amount of tax benefit that is more than 50 percent
likely to be realized upon ultimate settlement of a tax position only if that position is more likely than not to be sustained during a tax audit. The interpretation is effective for us beginning in the first quarter of 2007. Any change in accrued
tax assets or liabilities required upon adoption of the interpretation will be an adjustment to beginning retained earnings. We are currently assessing the impact FIN 48 may have on our Consolidated Financial Statements.

In March 2006, the FASB issued an exposure draft for the first phase of its project to reconsider the accounting for postretirement
benefits, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB Statements No. 87, 88, 106, and 132(R). The exposure draft would require us to recognize the difference between the
fair value of plan assets and the benefit obligation in our financial statements as a component of accumulated other comprehensive income/loss. We are currently assessing the impact this exposure draft may have on our Consolidated Financial
Statements. If the exposure draft is finalized, we would be required to adopt these proposed changes in the first fiscal year ending after December 15, 2006.



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##### Table of Contents

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

UNION PACIFIC
RAILROAD COMPANY AND CONSOLIDATED SUBSIDIARY COMPANIES

RESULTS OF OPERATIONS

Three and Six Months Ended June 30, 2006 Compared to

Three and Six Months Ended June 30, 2005

For purposes of this report, unless the context
otherwise requires, all references herein to the Company, we, us, and our shall mean Union Pacific Railroad Company and Consolidated Subsidiary Companies. For purposes of this report, unless the
context otherwise requires, all references herein to the Corporation and UPC shall mean Union Pacific Corporation and its subsidiaries.

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. 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 their fair presentation in
conformity with accounting principles generally accepted in the United States of America (GAAP).

Managements
Discussion and Analysis of Financial Condition and Results of Operations has been omitted in accordance with General Instruction H(1)(a) and (b) of Form 10-Q. In lieu thereof, a narrative analysis is presented.

We are a Class I railroad operating in the United States. Our railroad, along with its subsidiaries, is our one reportable business
segment. Although revenue is analyzed by commodity, we analyze the net financial results of our railroad as one segment due to the integrated nature of the rail network.

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; 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 are on our website. From time to time, the
corporate governance materials on our website may be updated as necessary to comply with rules issued by the SEC and the New York Stock Exchange (NYSE) or as desirable to promote the effective and efficient governance of our company. Any security
holder wishing to receive, without charge, a copy of any of our SEC filings or corporate governance materials should send a written request to: Secretary, Union Pacific Corporation, 1400 Douglas Street, Omaha, NE 68179.

References to our website address in this report, including references in Managements Discussion and Analysis of Financial
Condition and Results of Operations, 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, or available through, 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. 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 Item 7 of our 2005 annual report on Form 10-K. There have been no significant changes with respect to these policies
during the first six months of 2006.



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##### Table of Contents

MANAGEMENTS NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS

QUARTERLY SUMMARY

We reported net
income of $379 million, in the second quarter of 2006 compared to net income of $237 million, for the second quarter of 2005. Year-to-date net income was $682 million versus $366 million for the same period in 2005. Improved yields, fuel surcharges,
and record commodity volume levels drove a 53% and 69% increase in operating income for the second quarter and year-to-date periods, respectively. Substantially higher fuel prices; volume-related expenses; wage, benefit, and materials inflation; and
personal injury costs partially offset the higher revenues. In addition, mild winter weather conditions, network management initiatives, and capacity improvements contributed to improved financial results compared to the first six months of 2005,
which were hampered by the January West Coast storm and operational disruptions on the Southern Powder River Basin (SPRB) Joint Line (track jointly owned by us and BNSF Railway Company (BNSF)). The January West Coast storm reduced net income by
approximately $34 million in the first quarter of 2005, while the SPRB Joint Line disruption, which began in mid-May, reduced net income by approximately $24 million in the second quarter of 2005.

In the second quarter of 2006, we handled record volume, exceeding the same period of 2005 by 5%. For the first time ever, we moved over
200,000 carloads in a seven-day period. Despite record volumes, average train speed held constant, while average terminal dwell time increased slightly compared to the second quarter of 2005. However, through enhanced employee and equipment
productivity, we handled the record volume more efficiently and converted the strong demand and yield increases into improved financial results. This is evident in our record operating income of $713 million and a 4.2 point improvement in our
operating ratio in the second quarter of 2006 versus the second quarter of 2005.

In conjunction with robust demand for our
rail services, we continue to focus on increasing velocity, improving asset utilization, and growing our capacity. In the second quarter of 2005, we began implementation of the Unified Plan, a major initiative to help us achieve these goals by
simplifying our network and reducing car handlings and work events. In the second quarter of 2006 compared to the same period of 2005, we decreased the rate of car handlings or switches at intermediate terminals and the rate of en route work events
by 9% and 17%, respectively, excluding energy carloads. In addition, we have increased the proportion of point-to-point (or direct) trains from 33% to 44% since the inception of the Unified Plan.

During the second quarter of 2006, we focused on operational fluidity and capacity in the Southern Region by, among other things, adding
more run-through trains to and from Mexico and reducing work events on the Sunset Corridor. In support of our Unified Plan efforts, we recently realigned our network operating management by eliminating the Central Region and redistributing that
territory between our Northern and Southern Regions. This move supports the train flows on the northern portion of our railroad by bringing unified management to all Central Corridor routes, as well as the high volume eastern gateways of Chicago and
St. Louis.

Operating Revenue



|                        |  |                            |  |         |  |    |                          |  |         |  |        |  |    |  
|----------------------- |  | -------------------------- |  | ------- |  | -- | ------------------------ |  | ------- |  | ------ |  | -- | -
|                        |  | Three Months EndedJune 30, |  | %Change |  |    | Six Months EndedJune 30, |  | %Change | 
|Millions of
Dollars     |  | 2006                       |  | 2005    |  |    | 2006                     |  | 2005    | 
|Commodity revenue       |  | $3,742                     |  | $3,196  |  | 17 | %                        |  | $7,285  |  | $6,200 |  | 17 | %
|Other revenue           |  | 172                        |  | 139     |  | 24 |                          |  | 331     |  | 279    |  | 19 |  
|Total operating
revenue |  | $3,914                     |  | $3,335  |  | 17 | %                        |  | $7,616  |  | $6,479 |  | 18 | %

Operating revenue includes commodity revenue and other revenue. Other revenue consists primarily
of revenue earned by our subsidiaries, revenue from our commuter rail operations, and accessorial revenue, which we earn when customers retain equipment owned or controlled by us. We recognize commodity revenue on a percentage-of-completion basis as
freight moves from origin to destination. We allocate commodity revenue between reporting periods based on the relative transit time in each reporting period and recognize expenses as incurred. We recognize other revenue as service is performed or
contractual obligations are met.

All six business groups experienced double digit revenue growth during the second quarter
of 2006. Fuel surcharges, price increases, and index-based contract escalators, which are formulas in our shipping contracts that correlate price adjustments to certain economic indexes, all contributed to higher average revenue per car (ARC). Our
fuel surcharge programs (excluding index-based contract escalators that contain some provision for fuel) generated an additional $186 million in commodity revenue compared to the same period in 2005, contributing 6% revenue growth. Volume increased
5% during the second quarter led by substantial growth in energy, intermodal,



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##### Table of Contents

and automotive shipments, which was partially offset by lower industrial products shipments. Energy volume growth contributed 2% of the total volume growth
as 2005 coal shipments were hampered by the SPRB Joint Line disruptions.

Revenue growth during the first half of 2006
resulted from fuel surcharges, higher volumes, and index-based contract escalators in comparison to the same period in 2005. The year-over-year growth is also partially attributable to lower volume in 2005 due to the January West Coast storm and
SPRB Joint Line disruptions. Our fuel surcharge programs generated an additional $377 million in commodity revenue for the first six months of 2006 compared to 2005, contributing 6% revenue growth.

Subsidiary and accessorial revenue increased other revenue in the second quarter and year-to-date periods of 2006, mainly driven by
higher volumes. In addition, we generated higher subsidiary revenue from Bay Pacific Financial L.L.C. (Bay Pacific), an intermodal equipment leasing entity, as we acquired our joint venture partners interest in Bay Pacific during the third
quarter of 2005.

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



|                                     |  |                            |  |        |  |        |                          |  |        |  |        |  |        |  
|------------------------------------ |  | -------------------------- |  | ------ |  | ------ | ------------------------ |  | ------ |  | ------ |  | ------ | -
|Commodity
Revenue                    |  | Three Months EndedJune 30, |  | %      |  |        | Six Months EndedJune 30, |  | %      | 
|Millions, Except for Percent
Changes |  | 2006                       |  | 2005   |  | Change |                          |  | 2006   |  | 2005   |  | Change |  
|Agricultural                         |  | $565                       |  | $463   |  | 22     | %                        |  | $1,128 |  | $911   |  | 24     | %
|Automotive                           |  | 390                        |  | 329    |  | 18     |                          |  | 751    |  | 622    |  | 21     |  
|Chemicals                            |  | 537                        |  | 458    |  | 17     |                          |  | 1,038  |  | 899    |  | 15     |  
|Energy                               |  | 733                        |  | 629    |  | 16     |                          |  | 1,432  |  | 1,297  |  | 10     |  
|Industrial products                  |  | 823                        |  | 719    |  | 15     |                          |  | 1,598  |  | 1,349  |  | 19     |  
|Intermodal                           |  | 694                        |  | 598    |  | 16     |                          |  | 1,338  |  | 1,122  |  | 19     |  
|Total                                |  | $3,742                     |  | $3,196 |  | 17     | %                        |  | $7,285 |  | $6,200 |  | 17     | %



|                                      |  |                            |  |       |  |        |                          |  |       |  |       |  |        |  
|------------------------------------- |  | -------------------------- |  | ----- |  | ------ | ------------------------ |  | ----- |  | ----- |  | ------ | -
|Revenue
Carloads                      |  | Three Months EndedJune 30, |  | %     |  |        | Six Months EndedJune 30, |  | %     | 
|Thousands, Except for Percent
Changes |  | 2006                       |  | 2005  |  | Change |                          |  | 2006  |  | 2005  |  | Change |  
|Agricultural                          |  | 225                        |  | 215   |  | 5      | %                        |  | 459   |  | 431   |  | 7      | %
|Automotive                            |  | 225                        |  | 211   |  | 7      |                          |  | 435   |  | 403   |  | 8      |  
|Chemicals                             |  | 234                        |  | 235   |  | -      |                          |  | 452   |  | 463   |  | (2     | )
|Energy                                |  | 575                        |  | 525   |  | 9      |                          |  | 1,125 |  | 1,099 |  | 2      |  
|Industrial products                   |  | 387                        |  | 398   |  | (3     | )                        |  | 753   |  | 756   |  | -      |  
|Intermodal                            |  | 864                        |  | 807   |  | 7      |                          |  | 1,679 |  | 1,539 |  | 9      |  
|Total                                 |  | 2,510                      |  | 2,391 |  | 5      | %                        |  | 4,903 |  | 4,691 |  | 5      | %



|                                    |  |                            |  |        |  |        |                          |  |        |  |        |  |        |  
|----------------------------------- |  | -------------------------- |  | ------ |  | ------ | ------------------------ |  | ------ |  | ------ |  | ------ | -
|Average
Revenue                     |  | Three Months EndedJune 30, |  | %      |  |        | Six Months EndedJune 30, |  | %      | 
|Per Car, Except for Percent
Changes |  | 2006                       |  | 2005   |  | Change |                          |  | 2006   |  | 2005   |  | Change |  
|Agricultural                        |  | $2,510                     |  | $2,152 |  | 17     | %                        |  | $2,456 |  | $2,114 |  | 16     | %
|Automotive                          |  | 1,735                      |  | 1,565  |  | 11     |                          |  | 1,729  |  | 1,545  |  | 12     |  
|Chemicals                           |  | 2,285                      |  | 1,946  |  | 17     |                          |  | 2,294  |  | 1,942  |  | 18     |  
|Energy                              |  | 1,273                      |  | 1,198  |  | 6      |                          |  | 1,272  |  | 1,180  |  | 8      |  
|Industrial products                 |  | 2,131                      |  | 1,810  |  | 18     |                          |  | 2,123  |  | 1,785  |  | 19     |  
|Intermodal                          |  | 803                        |  | 740    |  | 9      |                          |  | 797    |  | 729    |  | 9      |  
|Total                               |  | $1,490                     |  | $1,337 |  | 11     | %                        |  | $1,486 |  | $1,322 |  | 12     | %

Agricultural  Price increases, volume growth, and fuel surcharges increased commodity
revenue in the second quarter and six-month periods of 2006 versus 2005. Strong domestic markets in Texas and California drove higher grain shipments, which were partially offset by a decline in the export feed-grain market. Shipments of ethanol and
co-products of ethanol experienced strong growth in the second quarter and year-to-date periods as demand remained positive. Mexico volume was up 11% quarter over quarter driven by strength in northbound shipments of import beer and southbound
shipments of meals, cottonseed, and ethanol co-products. Price and fuel surcharge increases drove ARC improvement in both periods.



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Automotive  Revenue increased in the second quarter of 2006 due to fuel surcharges, volume growth, and price increases. Finished vehicle
shipments grew in both periods as higher manufacturer inventories at the end of 2005 translated into strong demand for transportation in the first half of 2006. Higher shipments of finished vehicles from DaimlerChrysler, Ford, and GM and higher
import volumes from Toyota also drove the volume increase. Automotive parts shipments also grew, but to a lesser extent in the second quarter and year-to-date periods compared to 2005. Fuel surcharges and price increases, coupled with the increase
in higher ARC vehicle shipments, drove the ARC improvement.

Chemicals  Revenue increased in the second quarter and
year-to-date periods of 2006 primarily due to price increases, fuel surcharges, and index-based contract escalators, which also drove ARC improvement. Volume was flat in the second quarter and down year-to-date due to softer export markets for
fertilizer, plastics, and liquid and dry chemicals, offset by strong petroleum products shipments. An agreement providing the BNSF access to certain facilities in the Bayport, Texas area also contributed to the lower plastics shipments.

Energy  Revenue increased in the second quarter due to volume growth, fuel surcharges, price increases, and index-based contract
escalators, which also drove ARC improvement. Carloadings for the quarter increased 9% as 2005 coal shipments were hampered by the SPRB Joint Line disruptions. Conversely, shipments from the Colorado and Utah mines declined 7% due to mine shutdowns
that started in the first quarter of 2006 and continued into the second quarter. Year-to-date carloadings increased 2% as a result of increased coal shipments over the SPRB Joint Line that were partially offset by the mine shutdowns in Colorado and
Utah.

Industrial Products  Price increases, fuel surcharges, and the positive mix impact of transporting more shipments with
a higher average ARC generated revenue growth in the second quarter and six-month periods of 2006. Volume levels decreased in the second quarter due to lower newsprint and fiber, lumber, and recyclable shipments, which were partially offset by
higher steel and stone shipments. Strong domestic markets for construction materials and pipe fueled growth in steel shipments. Demand, larger trains, and cycle time improvements drove the increase in stone shipments. Year-to-date volume was
compared to 2005 as growth in stone, steel, and cement shipments was offset by lower newsprint and fiber and recyclable moves, leading to the favorable ARC impact.

Intermodal  Strong volume growth, fuel surcharges, price increases and index-based contract escalators led to higher revenue in the second quarter and year-to-date periods of 2006. Carloadings during both
periods grew due to strong imports, primarily from Asia. Domestic traffic volume declined slightly in the second quarter of 2006 due to softness in the eastbound market from Los Angeles and all outbound markets from New Orleans, which have not
recovered from the impact of Hurricane Katrina. However, traffic volume was up year-to-date as the January West Coast storm limited first quarter volume levels in 2005. ARC in the second quarter and year-to-date periods of 2006 improved due to fuel
surcharges, price increases, and index-based contract escalators.

Mexico Business  Each commodity group discussed above
includes revenue from shipments to and from Mexico. Revenue from Mexico business increased 22% to $340 million in the second quarter of 2006 and 24% to $653 million for the first half of 2006 versus 2005. Price increases, fuel surcharges, and volume
growth in finished vehicles, automotive parts, import beer, dry feed ingredients, and plastics drove revenue growth in both the quarterly and year-to-date periods.

Operating Expenses



|                                       |  |                            |  |        |  |        |                          |  |        |  |        |  |        |  
|-------------------------------------- |  | -------------------------- |  | ------ |  | ------ | ------------------------ |  | ------ |  | ------ |  | ------ | -
|                                       |  | Three Months EndedJune 30, |  | %      |  |        | Six Months EndedJune 30, |  | %      | 
|Millions, Except for Percent
Changes   |  | 2006                       |  | 2005   |  | Change |                          |  | 2006   |  | 2005   |  | Change |  
|Salaries, wages, and employee benefits |  | $1,127                     |  | $1,061 |  | 6      | %                        |  | $2,235 |  | $2,140 |  | 4      | %
|Fuel and utilities                     |  | 794                        |  | 597    |  | 33     |                          |  | 1,486  |  | 1,136  |  | 31     |  
|Equipment and other rents              |  | 370                        |  | 340    |  | 9      |                          |  | 737    |  | 692    |  | 7      |  
|Depreciation                           |  | 307                        |  | 291    |  | 5      |                          |  | 610    |  | 580    |  | 5      |  
|Materials and supplies                 |  | 178                        |  | 128    |  | 39     |                          |  | 342    |  | 263    |  | 30     |  
|Casualty costs                         |  | 111                        |  | 102    |  | 9      |                          |  | 220    |  | 196    |  | 12     |  
|Purchased services and other
costs     |  | 314                        |  | 350    |  | (10    | )                        |  | 668    |  | 693    |  | (4     | )
|Total                                  |  | $3,201                     |  | $2,869 |  | 12     | %                        |  | $6,298 |  | $5,700 |  | 10     | %

Operating expenses increased $332 million and $598 million in the second quarter and six-month
periods of 2006 versus the comparable periods in 2005, respectively. A 29% increase in locomotive fuel prices for both periods accounted for $166 million and $311 million of this increase, respectively. Our fuel surcharge programs helped



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##### Table of Contents

offset these expenses in the form of higher revenue, recovering approximately 80% and 86% of the additional expense incurred above the base fuel price of
$0.75 per gallon for the second quarter and year-to-date periods of 2006, respectively. A majority of our fuel surcharges are based on U.S. average diesel fuel prices two months prior. The recovery percentage declined from 92% in the first quarter
of 2006 due to the effect of this two-month timing lag during a period of rising fuel prices. Inflation of wages, benefits, and materials and supplies; a larger workforce; volume-related expenses; higher locomotive and freight car maintenance and
lease expenses; personal injury costs; and increased management compensation costs accounted for most of the additional increase. Lower training costs, an improved fuel consumption rate, and improved car cycle times (which reduced freight car rental
expense) partially offset these costs. Finally, the comparability of the year-to-date operating expenses is affected by the January 2005 West Coast storm, which resulted in additional clean-up and restoration costs.

Salaries, Wages, and Employee Benefits General wage and benefit inflation increased expenses in the second quarter and year-to-date periods
of 2006, reflecting higher salaries and wages and the impact of higher healthcare and other benefit costs. A larger workforce, driven by higher volume levels, and higher management compensation costs (in part driven by stock compensation expense)
drove higher expenses. Conversely, lower crew training costs, reduced protection costs, and operational improvements boosted by network management initiatives and investment in capacity partially offset these costs. Protection costs represent the
differential payment when the wage earned for active employment is lower than an employees protected rate of pay. An individuals protected rate is imposed by the Surface Transportation Board for employees adversely affected by a merger
or is established by collective bargaining agreements with our labor unions in certain cases. Year-to-date expenses were also comparatively lower as the first quarter of 2005 included higher labor expenses associated with the January West Coast
storm.

Fuel and Utilities  Fuel and utilities include locomotive fuel, utilities other than telephone, and gasoline and other
fuels. Higher diesel fuel prices, which averaged $2.15 per gallon (including taxes and transportation costs) in the second quarter of 2006 compared to $1.67 per gallon in the same period in 2005, increased expenses by $166 million. A 5% increase in
gross ton-miles resulted in $25 million of additional expenses. However, we improved our consumption rate by 2% through both fuel conservation programs and the use of newer, more fuel-efficient locomotives, which provided a $6 million reduction in
expense compared to 2005. Gasoline, utilities, and propane and other fuel expenses increased $12 million in the second quarter of 2006 due to higher prices. Year-to-date, higher diesel prices of $2.01 compared to $1.56 in 2005 contributed to $311
million of increased expense. A 3% increase in gross ton-miles added $33 million, which was partially offset by a 2% improvement in our consumption rate, which reduced expenses by $12 million.

Equipment and Other Rents  Equipment and other rents primarily includes rental expense that 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. In the second quarter and year-to-date periods of 2006 compared to 2005, the number of leased locomotives and freight cars increased, resulting in
additional lease expense. Strong automotive and intermodal volume growth also increased our short-term freight car rental expense. Improved car cycle times driven by network management initiatives partially offset these increases, which lowers
short-term freight car rental expense.

Depreciation  A majority of depreciation relates to track structure, including rail,
ties, and other track material. A higher depreciable asset base, reflecting higher capital spending in recent years, increased depreciation expense in the second quarter and first six months of 2006.

Materials and Supplies  Materials used to maintain our lines, structures, and equipment are the principal component of materials and
supplies expense. This expense item also includes small tools, office supplies, other materials, and the costs of freight services to ship our materials. During the second quarter and year-to-date periods of 2006, materials and supplies expense
increased, primarily due to locomotive and freight car maintenance. We used more materials at higher component costs to repair and maintain freight cars and our fleet of locomotives, including a growing number of units not covered by warranties.
Also, in the second quarter of 2006, we performed significantly more maintenance on locomotives that were serviced internally and not subject to maintenance contracts with third-party contractors compared to the second quarter of 2005. We also paid
higher prices for freight car wheel sets and lube oil.

Casualty Costs  Personal injury expense, freight and property damage,
insurance, and environmental costs are the primary components of casualty costs. Higher personal injury expense drove the second quarter and year-over-year increases, mainly due to adverse developments on a small number of claims. Lower freight loss
and damage expense and lower costs for destruction of foreign or leased equipment partially offset these higher costs. We incur expense for destruction of foreign equipment when equipment owned by other railroads is damaged while in our possession.
In addition, higher premiums for insurance coverage also increased expenses for the year-to-date period of 2006 compared to 2005.



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##### Table of Contents

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 us and other railroads, transportation and lodging for train crew employees, trucking and contracting costs for intermodal
containers, leased automobile maintenance expenses, telephone and cellular expense, employee travel expense, and computer and other general expenses. Lower expenses associated with jointly-owned operating facilities, lower freight car and locomotive
contract maintenance costs, and the gain from the sale of a Company-owned airplane reduced expenses in the second quarter of 2006 from expenses in the same period of 2005. In addition, increased repair work on privately and foreign owned freight
cars, which was reimbursed by third parties, also reduced second quarter expenses. Conversely, volume-related expenses associated with crew transportation, as well as trucking services provided by intermodal carriers increased in the second quarter
and year-to-date periods driven by 5% carloading growth in both periods. In addition, higher state and local taxes (primarily property, sales and use taxes) drove expenses higher in the year-to-date period compared to 2005. Additionally, clean-up
and restoration costs related to the January West Coast storm added expenses in the first half of 2005, which reduced the year-over-year increase of expenses.

Non-Operating Items



|                                     |  |                            |   |  |      |   |  |                          |    |  |      |   |  |      |   |  |        |   
|------------------------------------ |  | -------------------------- | - |  | ---- | - |  | ------------------------ | -- |  | ---- | - |  | ---- | - |  | ------ | --
|                                     |  | Three Months EndedJune 30, |   |  | %    |   |  | Six Months EndedJune 30, |    |  | %    |  
|Millions, Except for Percent
Changes |  | 2006                       |   |  | 2005 |   |  | Change                   |    |  | 2006 |   |  | 2005 |   |  | Change |   
|Other income                         |  | $25                        |   |  | $30  |   |  | (17                      | )% |  | $32  |   |  | $46  |   |  | (30    | )%
|Interest expense                     |  | (125                       | ) |  | (122 | ) |  | 2                        |    |  | (250 | ) |  | (244 | ) |  | 2      |   
|Income taxes                         |  | (234                       | ) |  | (137 | ) |  | 71                       |    |  | (418 | ) |  | (215 | ) |  | 94     |   

Other Income Other income in the second quarter of 2006 decreased compared to 2005
as lower net gains from non-operating asset sales and higher expenses due to rising interest rates associated with our sale of receivables program were partially offset by higher rental income for the use of our right-of-way that included a
settlement with a specific renter of a rate dispute covering the period from 1994 to 2003. For the year-to-date period, lower net gains from non-operating asset sales, lower interest income, and higher expenses due to rising interest rates
associated with our sale of receivables program more than offset the right-of-way rental income.

Interest Expense Higher
interest expense in the second quarter and six-month periods of 2006 was primarily due to rising weighted-average debt levels of $6.7 billion compared to $6.5 billion in both the second quarter and year-to-date periods of 2005. A lower effective
interest rate of 7.4% in the year-to-date period of 2006 versus 7.5% in the comparable period of 2005 partially offset the effects of the higher debt levels. The quarter-over-quarter interest rates were unchanged at 7.5%.

Income Taxes Income taxes were greater in the second quarter and year-to-date periods of 2006 primarily due to higher 2006 pre-tax income.
Our effective tax rate was 38.2% and 38.0% in the second quarter and year-to-date periods of 2006, respectively, compared to 36.6% and 37.0% in the corresponding periods of 2005.

OTHER OPERATING AND FINANCIAL STATISTICS

We report key performance measures
weekly to the Association of American 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 EndedJune 30, |  | %      |  |        | Six Months EndedJune 30, |  | %      | 
|                                       |  | 2006                       |  | 2005   |  | Change |                          |  | 2006   |  | 2005   |  | Change |  
|Average train speed (miles per hour)   |  | 21.2                       |  | 21.2   |  | -      | %                        |  | 21.3   |  | 21.2   |  | -      | %
|Average terminal dwell time (hours)    |  | 27.6                       |  | 27.4   |  | 1      |                          |  | 28.3   |  | 28.4   |  | -      |  
|Gross ton-miles (billions)             |  | 272.1                      |  | 260.0  |  | 5      |                          |  | 535.1  |  | 518.4  |  | 3      |  
|Revenue ton-miles (billions)           |  | 143.4                      |  | 136.8  |  | 5      |                          |  | 282.7  |  | 274.3  |  | 3      |  
|Average full-time equivalent
employees |  | 50,718                     |  | 49,671 |  | 2      |                          |  | 50,313 |  | 49,274 |  | 2      |  

Average Train Speed Average train speed is calculated by dividing train miles by
hours operated on our main lines between terminals. In the second quarter and year-to-date periods of 2006, ongoing network management initiatives created additional capacity in our network, allowing us to move 5% more volume in both periods, while
maintaining an average train speed comparable to 2005.



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##### Table of Contents

Average Terminal Dwell Time Average terminal dwell time is the average time that a rail car
spends at our terminals. Lower average terminal dwell time is favorable. Although average terminal dwell increased slightly in the second quarter of 2006 due to record volume levels, year-to-date results improved versus 2005 as a result of ongoing
network management initiatives and directed efforts to more timely deliver rail cars off-line to our interchange partners and customers.

Gross and Revenue Ton-Miles Gross ton-miles are calculated by multiplying the weight of loaded or empty freight cars by the number of miles hauled. Revenue ton-miles are based on tariff miles and do not include the
weight of freight cars. In the second quarter of 2006, gross and revenue ton-miles grew 5% in relation to the 5% increase in carloadings as volume growth was balanced between the higher and lower density commodities. In the six-month period of 2006,
both gross and revenue ton-miles grew 3%, while carloadings increased 5%. Stronger volume growth in the lower density commodity groups of intermodal and automotive, combined with negative to modest volume growth in the higher density commodities of
chemicals, industrial products, and energy, impacted growth rates of gross and revenue ton-miles in relation to carloading growth.

Average Full-Time Equivalent Employees Employee levels in the second quarter and year-to-date periods of 2006 include more employees to maintain our larger locomotive and freight car fleet, the addition of employees
needed to complete increased track repair and replacement programs, the hiring of operations management personnel, including an expanded management training program, and train and engine personnel to manage current demand.

Ratio of Earnings to Fixed Charges For the three and six months ended June 30, 2006, our ratio of earnings to fixed charges was 4.3
and 3.1, respectively, compared to 3.9 and 2.6 for the three and six months ended June 30, 2005, 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.

OTHER MATTERS

Transactions with
Affiliates At June 30, 2006 and December 31, 2005, we had $889 million and $782 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. Charges for these services were $31 million and $28
million for the six months ended June 30, 2006 and 2005, respectively.

Capital Expenditures Outlook We expect our 2006
capital expenditures to be approximately $2.8 billion, including $500 million of long-term leases. We are evaluating plans to increase our total capital expenditures for 2007 by about 15% to approximately $3.2 billion, including long-term leases.
The additional spending would target capacity expansion to support growth opportunities for commodities with strong demand forecasts and expected financial returns, including intermodal, coal, and agricultural products. We currently expect that cash
generated from operations will support this additional spending. However, we will continue to monitor our performance and may adjust capital expenditures as necessary.

Asserted and 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 results of operations, financial condition, 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



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expect that any known lawsuits, claims, environmental costs, commitments, contingent liabilities, or guarantees will have a material adverse effect on our
consolidated results of operations, financial condition, or liquidity after taking into account liabilities previously recorded for these matters.

Accounting Pronouncements In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109
(FIN 48). The interpretation requires us to recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement of a tax position only if that position is more likely than not to be sustained
during a tax audit. The interpretation is effective for us beginning in the first quarter of 2007. Any change in accrued tax assets or liabilities required upon adoption of the interpretation will be an adjustment to beginning retained earnings. We
are currently assessing the impact FIN 48 may have on our Consolidated Financial Statements.

In March 2006, the FASB
issued an exposure draft for the first phase of its project to reconsider the accounting for postretirement benefits, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB Statements
No. 87, 88, 106, and 132(R). The exposure draft would require us to recognize the difference between the fair value of plan assets and the benefit obligation in our financial statements as a component of accumulated other comprehensive
income/loss. We are currently assessing the impact this exposure draft may have on our Consolidated Financial Statements. If the exposure draft is finalized, we would be required to adopt these proposed changes in the first fiscal year ending after
December 15, 2006.

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, infrastructure improvements, transportation plan
modifications, and management of customer traffic on the system to meet demand; 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 improvement of 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 1A of our 2005 annual report on Form 10-K, filed with the SEC on February 24, 2006, 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, increasing prices
for our services, and containing operating costs;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | whether we are successful in improving network operations and service by improving infrastructure; reviewing, assessing, and, as necessary, redesigning our
transportation plan; managing network volume, and undertaking other efficiency and productivity initiatives;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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| |  |  | any adverse economic or operational repercussions related to the transportation of hazardous materials, which we are required to transport under federal law;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | the impact of ongoing track maintenance and restoration in the Southern Powder River Basin of Wyoming;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | changes in fuel prices, including price increases caused by the effects of severe weather, other events, or disruptions of domestic refining capacity;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | adverse 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;
| | - |  | --------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| |  |  | terrorist activities, or other similar events, and any governmental response thereto; war or risk of war.
| | - |  | ---------------------------------------------------------------------------------------------------------

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

None.

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. In designing and evaluating the disclosure controls and procedures, management recognized that any
controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based upon that evaluation, the CEO and the CFO concluded that, as of the end of the period covered
by this report, the Companys disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified by the SEC, and that such information is accumulated and communicated to management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Additionally, the CEO and CFO determined that there have been no 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

Environmental Matters

As we reported in our Annual Report on Form 10-K for 2005, the State of Washington Department of Ecology notified us on October 25, 2005, that it
assessed a penalty of $106,000 against us for a November 15, 2003, incident near Kelso, Washington. In that incident, our train collided with a BNSF train, derailing three of our locomotives. The Department of Ecology contends that diesel fuel
and lube oil from the derailed locomotives entered waters of the State of Washington. We asked the state to reconsider the penalty amount. On April 10, 2006, the Department of Ecology notified us that our request had been denied, and the amount
of the penalty was affirmed. We appealed the penalty.

Item 1A. Risk Factors

There were no material changes from the risk factors previously disclosed in our
2005 annual report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

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

None.

Item 5. Other Information

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, 2006 and 2005.                                                                                                                                          
|            | 
|12(b)       |  | Ratio of Earnings to Fixed Charges for the Six Months Ended June 30, 2006 and 2005.                                                                                                                                            
|            | 
|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  James R.
Young.                                                                           
|            | 
|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  James R. Young 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 4, 2006

UNION PACIFIC RAILROAD COMPANY (Registrant)By

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

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




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