Introduction Home Yellow is Number One Three components. One company. One-Stop Shopping Shareholders' Letter Management's Discussion and Analysis   Overview     Forward-Looking Statements   2002 Highlights     Equity Offering     Meridian IQ Acquisitions     Continued Consolidation Within...     Spin-Off of SCS Transportation, Inc.     Stronger Financial Position   Results of Operations     Consolidated Results     Yellow Transportation Results     Meridian IQ Results   Financial Condition     Liquidity     Capital Expenditures     Contractual Obligations and Other...     Market Risk Position   Critical Accounting Policies     Revenue Reserves     Claims and Insurance     Pension Cost     Property and Equipment   New Accounting Pronouncements     SFAS No. 143     SFAS No. 146     SFAS No. 148   Outlook     Economic Forecast     Labor Negotiations     Regulatory Changes Financial Summary Consolidated Balance Sheets Statements of Consolidated Operations Statements of Consolidated Cash Flows Statements of Shareholders' Equity Statements of Comprehensive Income Notes to Financial Statements Independent Auditors' Report Supplementary Information Glossary Officers Corporate Information Board of Directors Back Cover

Critical Accounting Policies

Management's Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies Preparation of our financial statements requires accounting policies that involve significant estimates and judgments regarding the amounts included in the financial statements and disclosed in the accompanying notes to the financial statements.We continually review the appropriateness of our accounting policies and the accuracy of our estimates. Even with a thorough process, estimates must be adjusted based on changing circumstances and new information. Management has identified the policies described below as requiring significant judgment and having a potential material impact to our financial statements. Revenue Reserves We consider revenue-related reserves critical policies based on their significance in evaluating our financial performance by management and investors.We have an extensive system that allows us to accurately capture, record and control all relevant information necessary to effectively manage our revenue reserves. For shipments in transit, Yellow Transportation records revenue based on the percentage of service completed as of the period end and accrues delivery costs as incurred. Meridian IQ recognizes revenue upon the completion of services. In certain logistics transactions where Meridian IQ acts as an agent, revenue is recorded on a net basis. Net revenue represents revenue charged to customers less third party transportation costs.Where Meridian IQ acts as principal, it records revenue from these transactions on a gross basis, without deducting transportation costs. Management believes these policies most accurately reflect revenue as earned. Our revenue-related reserves involve three primary estimates, shipments in transit, rerate reserves, and uncollectible accounts. Shipments In Transit We assign pricing to bills of lading at the time of shipment based on the weight, general classification of the product, the shipping destination and individual customer discounts. At the end of each period, we estimate the amount of revenue earned on shipments in transit based on actual shipments picked up and scheduled delivery dates.We calculate a percentage of completion using this data and the day of the week on which the period ends. Management believes this provides a reasonable estimation of the revenues actually earned. Revenue deferred for shipments in transit amounted to $22.2 million and $18.8 million at December 31, 2002 and 2001, respectively. Rerate Reserves At various points throughout our process, incorrect ratings could be identified based on many factors, including weight verifications or updated customer discounts. Although the majority of rerating occurs in the same month as the original rating, a portion occurs during the following periods. We accrue a liability for rerating based on historical trends. At December 31, 2002 and 2001, our financial statements included a rerate reserve of $12.0 million and $14.1 million, respectively. Uncollectible Accounts We record an allowance for doubtful accounts primarily based on historical uncollectible amounts. We also take into account known factors surrounding specific customers and overall collection trends. Our process involves performing ongoing credit evaluations of customers, including the market in which they operate and the overall economic conditions. Historical trends are continually reviewed with adjustments made to the allowance for doubtful accounts as appropriate. Our allowance for doubtful accounts totaled $15.7 million and $7.7 million as of December 31, 2002 and 2001, respectively. Claims and Insurance We are self-insured up to certain limits for workers' compensation, cargo loss and damage, property damage and liability claims.We measure the liabilities associated with these claims primarily through actuarial methods performed by an independent third party. Actuarial methods include estimates for the undiscounted liability for claims reported and for claims incurred but not reported. These estimates are based on historical loss experience and judgments about the present and expected levels of costs per claim and the time required to settle claims. Actual claims may vary from these estimates due to a number of factors, including but not limited to, accident frequency and severity, claims management, changes in healthcare costs and overall economic conditions. For workers' compensation claims, we discount the actuarial calculations to present value based on the U.S. Treasury rate, at the date of occurrence, for maturities that match the expected payout of the liabilities. As of December 31, 2002 and 2001, we had $115.2 million and $110.3 million accrued for claims and insurance, including a present value for workers' compensation claims of $80.5 million and $75.4 million, respectively. Pension Cost Yellow and Yellow Transportation sponsor defined benefit pension plans for employees not covered by collective bargaining agreements. Meridian IQ does not offer a defined benefit pension plan and instead offers retirement benefits through a contributory 401(k) savings plan.We account for pension benefits using actuarial methods based on numerous estimates, including employee turnover, mortality and retirement ages, expected return on plan assets, discount rates, and future salary increases. The most critical of these factors, due to their potential impact on pension cost, are discussed in more detail below. Return on Plan Assets The return on plan assets represents a long-term assumption of our portfolio performance that can impact our pension expense and cash funding requirements.With $249 million of plan assets, a 50- basis-point decrease in the return rate would increase annual pension expense by approximately $1.4 million and increase cash funding requirements by $31.0 million over a five year period. We believe our 2002 expected rate of return of 9.0% accurately represents our investment portfolio that has performed to this level over time. Although plan investments are subject to short-term market volatility, we believe they are well diversified and closely managed. Our asset allocation as of December 31, 2002 consisted of 65 percent in equities, including 50 percent domestic and 15 percent international, and 35 percent in fixed-income securities. This allocation is consistent with the long-term asset allocation for the plan.We will continue to review our expected long-term rate of return on an annual basis and revise appropriately. Refer to our discussion of "Nonunion Pension Obligations" under the Financial Condition section for details of actual and anticipated pension charges. Discount Rate The discount rate refers to the interest rate used to discount the estimated future benefit payments earned to their present value, also referred to as the benefit obligation. The discount rate allows us to calculate what it would cost to settle the pension obligations as of the measurement date, December 31, and impacts the following year's pension cost.We determine the discount rate based on high-grade corporate bonds with principal payments and maturities that approximate our expected benefit payments. Although the discount rate used requires little judgment, changes in the rate can significantly impact our pension cost. For example, a 50-basis-point decrease in our discount rate would increase annual pension expense by approximately $6.4 million, assuming all other factors remain constant. Changes in the discount rate do not have a direct impact on cash funding requirements. The discount rate can fluctuate considerably over periods depending on overall economic conditions that impact long-term corporate bond yields. As of December 31, 2002 and 2001, we used a discount rate of 6.75 percent and 7.25 percent, respectively. Future Salary Increases We make assumptions of future salary increases for plan participants based on general inflation and cost of living expectations. As pension benefits are based on participants earned wages, estimated levels of our future performance also factor into the calculation.We believe these increases require less judgment than other pension estimates but can have a significant impact on our future pension cost. Our 2002 assumed rate of future annual increases of 4.5 percent reflects our recent experience and remains consistent with prior years. Property and Equipment We capitalize property and equipment in accordance with current accounting standards, including replacements and improvements when such costs extend the useful life of the asset. Maintenance and repairs are charged to expense as incurred. Depreciation on capital assets is computed using the straight-line method and ranges from 3 to 40 years. Management makes assumptions regarding future conditions in determining estimated useful lives and potential salvage values. These assumptions impact the amount of depreciation expense recognized in the period and any gain or loss once the asset is disposed.

Critical Accounting Policies