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

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

The Railroad, along with its subsidiaries and rail affiliates, 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.

Available Information

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

We base our discussion and analysis of our financial condition and results of operations upon our Condensed Consolidated Financial Statements. The preparation of these financial statements requires estimation and judgment that affect the reported amounts of revenues, 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 Condensed Consolidated Financial Statements may

be material. Our critical accounting policies are available in Item 7 of our 2007 Annual Report on Form 10-K. There have not been any significant changes with respect to these policies during the first nine months of 2008.

RESULTS OF OPERATIONS

Quarterly Summary

We reported earnings of $1.38 per diluted share on net income of $703 million in the third quarter of 2008 compared to earnings of $1.00 per diluted share on net income of $532 million for the third quarter of 2007. Year-to-date 2008 net income was $1.7 billion versus $1.4 billion for the same period in 2007. Yield increases, network management initiatives, improved productivity, and reduced workforce levels more than offset cost increases due to higher fuel prices, inflation, and weather-related expenses during both periods. In addition, volume levels declined in the third quarter due to continued softness in some market sectors and business disruptions resulting from Hurricanes Gustav and Ike.

In September of this year, Hurricanes Gustav and Ike hit the Gulf Coast area. Although our infrastructure did not sustain significant damage from the hurricanes, debris and downed power lines blocked our tracks from Houston to Arkansas and Louisiana, impacting our network. In addition, widespread and lengthy commercial power outages severely limited the ability of our customers in the region from resuming production for several weeks. The Railroad's operations were fully restored in October. The network outages and disruptions resulted in lost revenue and higher operating costs, reducing third quarter earnings by an estimated $0.08 per diluted share.

Operationally, we improved our network fluidity despite the disruptions caused by the hurricanes. As reported to the Association of American Railroads (AAR), average train speed and terminal dwell time improved 10% and 3%, respectively, during the third quarter of 2008 compared to 2007. Terminal processing initiatives and improved asset utilization, combined with reduced volume levels, drove the improvement.

Operating Revenues



                             Three Months Ended                Nine Months Ended
                                  September 30,        %           September 30,        %
   Millions of Dollars        2008         2007   Change         2008       2007   Change
   Freight revenues         $4,630       $3,990       16 %    $13,038    $11,498       13 %
   Other revenues              216          201        7          646        588       10
   Total                    $4,846       $4,191       16 %    $13,684    $12,086       13 %

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

We recognize freight revenues on a percentage-of-completion basis as freight moves from origin to destination. We allocate freight revenues between reporting periods based on the relative transit time in each reporting period and recognize expenses as we incur them. We recognize other revenues as we perform services or meet contractual obligations. As a result of contract negotiations with some of our customers, we have provided incentives for meeting or exceeding specified cumulative volumes or shipping to and from specific locations, which we record as a reduction to freight revenues based on the actual or projected future shipments.

Freight revenue from five of the six commodity groups increased during the third quarter and year-to-date periods of 2008, with particularly strong growth from agricultural and energy shipments. While

revenue generated from chemical and industrial products shipments grew in both periods compared to 2007, Hurricanes Gustav and Ike reduced shipments of these commodities. Revenue generated from automotive shipments declined versus 2007. ARC increased during both periods compared to 2007, driven by greater fuel cost recoveries and core pricing improvement. Fuel cost recoveries include fuel surcharge revenue and the impact of resetting the base fuel price for certain traffic, as described below in more detail. Volume declined in both periods compared to 2007 as fewer automotive, intermodal, chemical and industrial products shipments more than offset growth of agricultural and energy shipments.

Our fuel surcharge programs (excluding index-based contract escalators that contain some provision for fuel) generated $750 million and $1.79 billion in freight revenues in the third quarter and year-to-date periods of 2008. Fuel surcharge revenue is not comparable to prior periods due to the implementation of new mileage-based fuel surcharge programs beginning in April 2007 for regulated traffic. Regulated traffic represents approximately 19% of our current revenue base. We also converted a portion of our non-regulated traffic to mileage-based fuel surcharge programs. Additionally, we reset the base fuel price at which the new mileage-based fuel surcharges take effect. The resetting of the fuel price at which the fuel surcharge begins, in conjunction with rebasing the affected transportation rates to include a portion of what had been in the fuel surcharge, did not materially change our freight revenue, as higher base rates offset lower fuel surcharge revenue.

Other revenue increased in the third quarter and year-to-date periods of 2008 versus 2007 driven by higher revenues from both our commuter rail operations and our subsidiary that brokers intermodal services. Accessorial revenues also increased in both periods due to improved collection rates.

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

                            Three Months Ended                 Nine Months Ended
  Freight Revenues               September 30,        %            September 30,        %
  Millions of Dollars        2008         2007   Change          2008       2007   Change
  Agricultural             $  848       $  670       27 %    $  2,382   $  1,886       26 %
  Automotive                  324          348       (7 )       1,039      1,089       (5 )
  Chemicals                   659          586       12         1,916      1,704       12
  Energy                    1,051          824       28         2,827      2,316       22
  Industrial Products         906          789       15         2,556      2,335        9
  Intermodal                  842          773        9         2,318      2,168        7
  Total                    $4,630       $3,990       16 %     $13,038    $11,498       13 %

                            Three Months Ended                 Nine Months Ended
  Revenue Carloads               September 30,        %            September 30,        %
  Thousands                  2008         2007   Change          2008       2007   Change
  Agricultural                243          232        5 %         719        663        8 %
  Automotive                  153          201      (24 )         517        623      (17 )
  Chemicals                   224          238       (6 )         690        701       (2 )
  Energy                      615          600        3         1,758      1,702        3
  Industrial Products         329          339       (3 )         979      1,006       (3 )
  Intermodal                  834          912       (9 )       2,441      2,594       (6 )
  Total                     2,398        2,522       (5 )%      7,104      7,289       (3 )%

                            Three Months Ended                 Nine Months Ended
                                 September 30,        %            September 30,        %
  ARC                        2008         2007   Change         2008        2007   Change
  Agricultural             $3,486       $2,888       21 %     $3,314      $2,846       16 %
  Automotive                2,114        1,729       22        2,010       1,747       15
  Chemicals                 2,951        2,469       20        2,778       2,432       14
  Energy                    1,709        1,374       24        1,608       1,361       18
  Industrial Products       2,747        2,327       18        2,609       2,322       12
  Intermodal                1,010          846       19          950         835       14
  Average                  $1,931       $1,582       22 %     $1,835      $1,577       16 %

Agricultural Products - Price improvements, fuel surcharges, and volume growth generated higher agricultural freight revenue in the third quarter and nine-month periods of 2008 versus 2007. Strong global demand for grain and a weak dollar drove higher shipments of corn and feed grains in both periods and shipments of wheat and food grains for the year-to-date period of 2008. Third quarter wheat and food grain shipments declined versus 2007 due to lower Gulf exports, which reached near record levels in the third quarter of 2007.

Automotive - Double-digit declines in shipments of both finished vehicles and auto parts drove freight revenue lower in the third quarter and year-to-date periods of 2008 compared to 2007. Price improvements and fuel surcharges partially offset these lower volumes in both periods. The major manufacturers experienced poor sales and reduced vehicle production during the third quarter and all of 2008 due to the soft economy, which in turn reduced shipments of finished vehicles and parts. In addition, a major parts supplier strike reduced volume levels for the year-to-date period compared to 2007. Shipments of finished vehicles decreased 25% and 21% in the third quarter and year-to-date periods of 2008 versus 2007.

Chemicals - The primary drivers of higher revenue from chemicals shipments during both the third quarter and year-to-date periods were price improvements and fuel surcharges, which were partially offset by a decrease in volume levels in both periods. Weak market conditions and business interruptions resulting from Hurricanes Gustav and Ike all contributed to lower liquid and dry chemicals shipments. Plastics shipments also declined in both periods due to the effects of the hurricanes.

Energy - Price increases, fuel surcharges, and higher volume produced revenue growth in the third quarter and year-to-date periods of 2008 versus 2007. Shipments from the Southern Powder River Basin of Wyoming were up 7% and 6% in the third quarter and year-to-date periods of 2008 compared to 2007. Mine flooding and network interruptions caused by extensive flooding in the Midwest in June of this year partially offset year-to-date volume levels. Conversely, shipments from the Colorado and Utah mines were down 8% and 3% for the third quarter and year-to-date periods of 2008 versus 2007, due to lower mine production.

Industrial Products - Price improvements and fuel surcharges contributed to higher freight revenue in the third quarter and year-to-date periods of 2008 compared to 2007. Lower volume partially offset these increases. Continued softening of the housing market and weak market conditions resulted in lower lumber shipments in the third quarter and nine-month periods of 2008. In addition, cement shipments declined in both periods due to a weak overall residential and construction market. Business interruptions resulting from the hurricanes also reduced various construction-related shipments, primarily stone. Conversely, we had higher steel shipments in both periods compared to 2007 as the weak dollar increased the cost of steel imports, creating a strong market for domestic steel.

Intermodal - Price increases and fuel surcharges generated the revenue improvement in the third quarter and year-to-date periods of 2008, partially offset by lower volume levels. International traffic declined 14% and 9% in both periods of 2008 versus 2007, reflecting a general softening of imports from China. Notably, the peak intermodal shipping season, which usually starts in the third quarter, was particularly weak this year. Additionally, continued weakness in domestic housing and automotive sectors translated

into weak demand in large sectors of the international intermodal market, which also contributed to lower volumes. Domestic traffic increased 2% in the third quarter due to growth of our legacy contract business and some share gain from trucks. Year-to-date, domestic traffic declined slightly compared to 2008 due to the loss of a customer contract and lower volumes from less-than-truckload shippers. Additionally, the flood-related embargo on traffic in the Midwest during the second quarter hindered intermodal volume levels in the year-to-date period.

Mexico Business - The results for each commodity group include shipments to and from Mexico. Revenue from Mexico business increased 16% to $422 million in the third quarter and 14% to $1.2 billion in the year-to-date period of 2008 compared to 2007. Price improvements and fuel surcharges contributed to these increases in both periods, partially offset by 8% and 3% declines in volume during the third quarter and year-to-date periods.

Operating Expenses



                                              Three Months Ended                Nine Months Ended
                                                   September 30,        %           September 30,        %
Millions of Dollars                            2008         2007   Change          2008      2007   Change
Compensation and benefits                    $1,123       $1,095        3 %     $ 3,356    $3,405       (1 )%
Fuel                                          1,135          786       44         3,251     2,201       48
Purchased services and materials                481          479       -          1,444     1,400        3
Depreciation                                    348          332        5         1,034       984        5
Equipment and other rents                       326          342       (5 )       1,006     1,035       (3 )
Other                                           218          152       43           659       550       20
Total                                        $3,631       $3,186       14 %     $10,750    $9,575       12 %

Operating expenses increased $445 million and $1.2 billion in the third quarter and nine-month periods of 2008 versus the comparable periods in 2007. Fuel price per gallon rose 59% and 56% during the third quarter and year-to-date periods, increasing operating expenses by $411 million and $1.15 billion, compared to 2007. Wage, benefit, and materials inflation, higher depreciation and casualty expense, and costs associated with the January Cascade mudslide and Hurricanes Gustav and Ike also increased expenses in both periods. Cost savings from productivity improvements, better resource utilization, and lower volume-related costs in both periods helped offset these increases.

Compensation and Benefits - Compensation and benefits include wages, payroll taxes, health and welfare costs, pension costs, other postretirement benefits, and incentive costs. General wage and benefit inflation and higher pension and postretirement benefits increased expenses in the third quarter and year-to-date periods, reflecting higher salaries and wages. Also, in the third quarter of 2007, we incurred lower backpay expenses associated with the 2007 labor contract ratifications and reduced long-term disability costs, further increasing the year-over-year variance. Conversely, productivity initiatives in all areas, combined with lower volume, led to a 3% and 4% decline in our workforce for the third quarter and nine-month periods of 2008, saving $43 million and $146 million, respectively, compared to 2007.

Fuel - Fuel includes locomotive fuel and gasoline for highway and non-highway vehicles and heavy equipment. Diesel fuel prices, which averaged $3.70 per gallon (including taxes and transportation costs) in the third quarter of 2008 compared to $2.32 per gallon in the same period in 2007, increased expenses by $411 million. A 7% improvement in our fuel consumption rate resulted in $54 million of cost savings due to the use of newer, more fuel efficient locomotives; our fuel conservation programs; improved network operations; and a shift in commodity mix, primarily due to growth in bulk shipments. Volume, as measured by gross ton-miles, decreased 3% in the third quarter, lowering expenses by $19 million compared to 2007. Year-to-date, diesel fuel prices averaged $3.36 per gallon (including taxes and transportation costs) compared to $2.15 per gallon in the same period in 2007, increasing expenses by $1.15 billion. A 4% improvement in our fuel consumption rate and a 1% decrease in gross-ton-miles reduced expenses by $97 million and $24 million, compared to 2007.

Purchased Services and Materials - Purchased services and materials expense includes the costs of services purchased from outside contractors; materials used to maintain the Railroad's lines, structures, and equipment; costs of operating facilities jointly used by UPRR and other railroads; transportation and lodging for train crew employees; trucking and contracting costs for intermodal containers; leased automobile maintenance expenses; and tools and supplies. Costs associated with the September hurricanes increased expenses approximately $11 million, but were mostly offset by lower locomotive contract repairs and reduced consulting fees. Year-to-date, higher contract costs (including restoration costs related to the January Cascade mudslide, June Midwest flooding, and September hurricanes) increased expenses $35 million compared to 2007. Higher material costs for freight car wheel sets during the year and an increase in the number of wheel sets required to repair flood damaged freight cars during the third quarter also contributed to higher materials expense in both periods. Conversely, rail scrap proceeds associated with our rail replacement program partially offset these increases in both periods.

Depreciation - The majority of depreciation relates to track structure, including rail, ties, and other track material. A higher depreciable asset base, reflecting higher capital spending in recent years, increased depreciation expense in the third quarter and year-to-date periods of 2008.

Equipment and Other Rents - Equipment and other rents expense primarily includes rental expense that the Railroad pays for freight cars owned by other railroads or private companies; freight car, intermodal, and locomotive leases; other specialty equipment leases; and office and other rentals. Fewer shipments of finished vehicles, industrial products and intermodal containers combined with improved cycle times, which reflect operational improvement and better asset utilization, reduced our short term freight car rental expense by $17 million and $37 million in the third quarter and year-to-date periods of 2008 compared to 2007. In addition, lower lease expense for freight cars and intermodal containers decreased costs in both periods. Conversely, lease expense for fleet vehicles and other equipment increased costs in the third quarter of 2008 compared to 2007.

Other - Other costs include personal injury costs, freight and property damage, insurance, environmental expense, state and local taxes, utilities, telephone and cellular expenses, employee travel expense, and computer software and other general expenses. Other costs were higher in the third quarter and nine-month period of 2008 compared to the same periods of 2007, primarily due to an increase in personal injury expenses. We reduced personal injury expense by $30 million and $47 million in the first and third quarters of 2007 as a result of two actuarial studies, which produced unfavorable comparisons for the third quarter and year-to-date periods ended September 30, 2008. Increased property damage expense, state and local taxes, and higher utility costs in the third quarter and year-to-date periods of 2008 also drove the year-over-year increase.

Non-Operating Items



                            Three Months Ended                    Nine Months Ended
                                 September 30,          %             September 30,          %
 Millions of Dollars       2008           2007     Change          2008        2007     Change
 Other income             $  23          $  25         (8 )%      $  67       $  76        (12 )%
 Interest expense          (130 )         (124 )        5          (384 )      (357 )        8
 Income taxes              (405 )         (374 )        8          (940 )      (866 )        9

Other Income - Other income decreased in the third quarter and year-to-date periods of 2008 compared to 2007 due to lower gains from real estate sales and decreased returns on cash investments reflecting lower interest rates. Higher environmental expense with respect to our non-operating properties also drove the decline in other income for the year-to-date period versus 2007. Higher rental and licensing income in the third quarter and year-to-date periods partially offset the decreases.

Interest Expense - Interest expense increased in the third quarter and year-to-date periods of 2008 versus 2007 due to higher weighted-average debt levels. In the third quarter, the weighted-average debt level was

$8.4 billion, compared to $7.6 billion in 2007. Year-to-date, the weighted-average debt level was $8.2 billion, compared to $7.2 billion in 2007. A lower effective interest rate of 6.2% and 6.3% in the third quarter and year-to-date periods of 2008, respectively, compared to 6.5% and 6.6% in both periods of 2007 partially offset the higher weighted-average debt levels in both periods.

Income Taxes - Income taxes were higher in the third quarter and year-to-date periods of 2008 compared to 2007, driven by higher pre-tax income. Our effective tax rates for the third quarter and year-to-date periods of 2008 were 36.6% and 35.9% compared to 41.3% and 38.8% for the corresponding periods of 2007. The lower effective tax rates in 2008 result from several reductions in tax expense related to federal audits and state tax law changes. In addition, the effective tax rates in 2007 were increased by Illinois legislation that increased deferred tax expense in the third quarter of 2007.

OTHER OPERATING/PERFORMANCE AND FINANCIAL STATISTICS

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

Operating/Performance Statistics

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



. . .