Introduction Home Yellow is Number One Three components. One company. One-Stop Shopping Shareholders' Letter Management's Discussion and Analysis 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   Description of Business   Principles of Consolidation...     Cash and Cash Equivalents     Concentration of Credit Risks     Revenue Recognition     Financial Instruments     Unusual Items     Claims and Insurance Accruals     Stock-Based Compensation     Impairment of Long-Lived Assets     Reclassifications   Preferred Stock   Supplemental Cash Flow Information   Discontinued Operations   Prepaid Expenses and Other   Goodwill and Other Assets   Property and Equipment   Accounts Payable   Other Current and Accrued Liabilities   Claims and Other Liabilities   Debt and Financing     Variable-Rate Debt     Fixed-Rate Debt     Other Debt   Employee Benefits     Retirement Plans     Multi-Employer Plans     401(k) Savings Plans     Performance Incentive Awards     Executive Performance Plan   Stock Compensation Plans   Goodwill and Intangibles   Acquisitions   Income Taxes   Commitments, Contingencies...     Labor Negotiations   Business Segments   Earnings Per Common Share Independent Auditors' Report Supplementary Information Glossary Officers Corporate Information Board of Directors Back Cover

Principles of Consolidation and Summary of Accounting Policies

Notes to Consolidated Financial Statements Yellow Corporation and Subsidiaries Principles of Consolidation and Summary of Accounting Policies The accompanying consolidated financial statements include the accounts of Yellow Corporation and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Management makes estimates and assumptions that affect the amounts reported in the financial statements and footnotes. Actual results could differ from those estimates. Accounting policies refer to specific accounting principles and the methods of applying those principles to fairly present the company's financial position and results of operations in accordance with generally accepted accounting principles. The policies discussed below include those that management has determined to be the most appropriate in preparing the company's financial statements and are not discussed in a separate footnote. Cash and Cash Equivalents Cash and cash equivalents include demand deposits and highly liquid investments purchased with maturities of three months or less. Concentration of Credit Risks The company sells services and extends credit based on an evaluation of the customer's financial condition, without requiring collateral. Exposure to losses on receivables is principally dependent on each customer's financial condition. The company monitors its exposure for credit losses and maintains allowances for anticipated losses. Revenue Recognition 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. Financial Instruments The carrying value of cash and cash equivalents, accounts receivable, accounts payable and shortterm borrowings approximates their fair value due to the short-term nature of these instruments. Effective January 1, 2001, the company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (Statement No. 133). As a result of the adoption of Statement No. 133, the company recognizes all derivative financial instruments as either assets or liabilities at their fair value. In December 2000, the company entered into a three-year interest rate swap agreement (the swap) to hedge a portion of its variable rate debt. Pursuant to the agreement, the company pays a fixed rate of 6.06 percent and receives a variable three-month London interbank offer rate (LIBOR) on a notional amount of $50 million. The company has designated this interest rate contract as a hedge of the company's exposure to a portion of its variable-rate, asset backed securitization (ABS) financing. At December 31, 2002, approximately 40 percent of the company's debt was variable rate with the swap hedged against the entire variable amount. The company recorded a $22 thousand gain in 2002 and a $34 thousand loss in 2001 in other net nonoperating expense representing the ineffectiveness of the correlation between the hedge and the ABS financing rate. At December 31, 2002 and 2001, accumulated other comprehensive loss included a $1.5 million and $2.9 million, respectively, unrealized loss on the interest rate contract. The company recognizes the differential paid under the contract designated as a hedge as adjustments to interest expense. These adjustments approximated $2.1 million in 2002 and $0.8 million in 2001 in additional interest expense. Unusual Items Unusual items included in income from continuing operations for the years ended December 31 are detailed in the following table: (in thousands)   2002     2001     2000   Property (gains) / losses $ 425   $ (186 ) $ (14,372 ) Spin-off charges   6,940     -     -   Reorganization costs   1,026     4,901     -   Other   44     700     -   Total unusual items expense (income)   $ 8,435      $ 5,415      $ (14,372 )  Spin-off charges included bank fees and external legal and accounting services. Reorganization costs were primarily associated with the reorganization of Yellow Transportation and Transportation.com. These charges included employee separation costs and lease termination and rent costs. The net property gains in 2000 primarily consisted of a $20.7 million pretax gain on the sale of real estate property in New York and a $6.5 million pretax loss on obsolete computer aided dispatch technology, both at Yellow Transportation. Claims and Insurance Accruals Claims and insurance accruals, both current and long-term, reflect the estimated cost of claims for workers' compensation, cargo loss and damage, and bodily injury and property damage that insurance does not cover. The company includes these costs in claims and insurance expense except for workers' compensation, which the company includes in salaries, wages, and employees' benefits. The company bases reserves for workers' compensation primarily upon actuarial analyses prepared by independent actuaries. These reserves are discounted to present value using a risk-free rate at the date of occurrence. The risk-free rate is the U.S. Treasury rate for maturities that match the expected payout of workers' compensation liabilities. The process of determining reserve requirements utilizes historical trends and involves an evaluation of accident frequency and severity, claims management, and changes in health care costs, but not certain future administrative costs. The effect of future inflation for costs is implicitly considered in the actuarial analyses. Adjustments to previously established reserves are included in operating results. At December 31, 2002 and 2001, estimated future payments for workers' compensation claims aggregated $98.6 million and $93.9 million, respectively. The present value of these estimated future payments was $80.5 million at December 31, 2002 and $75.4 million at December 31, 2001. Stock-Based Compensation The company has various stock-based employee compensation plans, which are described more fully in the Stock Compensation Plans note. The company accounts for those plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). The company does not reflect compensation cost in net income, as all options that the company granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Option Value Information The pro forma calculations in the table below were estimated using the Black-Scholes option pricing model with the following weighted average assumptions. Dividend yield   - %     - %     - %   Expected volatility   39.0 %   36.8 %   36.2 % Risk-free interest rate   2.6 %   4.2 %   5.9 % Expected option life (years)   3     3     3   Fair value per option    $ 7.81      $ 6.04      $ 4.85   Pro Forma Information The following table illustrates the effect on income from continuing operations, net income and earnings per share if the company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (Statement No. 123). (in thousands except per share data)   2002     2001     2000   Net income (loss) - as reported $ (93,902 ) $ 15,301   $ 68,018   Less: Total stock-based employee compensation   expense determined under fair value based method   for all awards, net of related tax effects   (1,364 )   (2,141 )   (1,741 ) Pro forma net income (loss) $ (95,266 ) $ 13,160   $ 66,277   Basic earnings (loss) per share:   Income from continuing operations - as reported $ 0.86   $ 0.44   $ 2.50     Income from continuing operations - pro forma   0.81     0.35     2.43     Net income (loss) - as reported   (3.35 )   0.63     2.76     Net income (loss) - pro forma   (3.40 )   0.54     2.69   Diluted earnings (loss) per share:   Income from continuing operations - as reported   $ 0.84     $ 0.43     $ 2.49     Income from continuing operations - pro forma   0.79     0.34     2.42     Net income (loss) - as reported   (3.31 )   0.62     2.74     Net income (loss) - pro forma   (3.36 )    0.53      2.67    Impairment of Long-Lived Assets If facts and circumstances indicate that the carrying value of identifiable intangibles and long-lived assets may be impaired, the company would perform an evaluation of recoverability. If an evaluation were required, the company would compare the estimated future undiscounted cash flows associated with the asset to the asset's carrying amount to determine if a write-down is required. Reclassifications The company has made certain reclassifications to the prior year consolidated financial statements to conform to the current presentation.

Principles of Consolidation and Summary of Accounting Policies