Management's discussion and analysis relates to the financial condition and results of operations of Burlington Northern Santa Fe Corporation and its majority-owned subsidiaries (collectively BNSF, Registrant or Company). The principal operating subsidiary of BNSF is the BNSF Railway Company (BNSF Railway) through which BNSF derives substantially all of its revenues. All earnings per share information is stated on a diluted basis.

Company Overview

Through its subsidiaries, BNSF is engaged primarily in the freight rail transportation business. BNSF's primary operating subsidiary, BNSF Railway, operates one of the largest North American rail networks with about 32,000 route miles in 28 states and two Canadian provinces. Through its one operating transportation segment, BNSF Railway transports a wide range of products and commodities including Consumer Products, Industrial Products, Coal and Agricultural Products.

Additional operational information, including weekly intermodal and carload unit reports as submitted to the Association of American Railroads and annual reports submitted to the Surface Transportation Board, are available on the Company's website at www.bnsf.com/investors.

Executive Summary

††† Quarterly earnings were $2.00 per diluted share, which included a $0.09 per share impact related to a favorable tax settlement. Third-quarter 2007 earnings were $1.48 per diluted share.

††† Quarterly freight revenues increased $818 million, or 21 percent, to $4.77 billion compared with the third quarter of 2007.

ü The 21-percent increase in freight revenues was primarily attributable to increased fuel surcharges, driven by higher fuel prices, and improved yields.

††† Operating expenses for the third quarter of 2008 were $3.70 billion compared with third-quarter 2007 operating expenses of $3.07 billion. The $631 million increase in operating expenses was largely driven by a $501 million increase in fuel expense due to significantly higher fuel prices.

††† In spite of the current volatility in the capital markets, BNSF has not experienced significant impacts to liquidity or access to the credit markets, although continued volatility in the capital markets may increase costs associated with borrowing and the accounts receivable sales program. Additionally, the Company has a diverse customer base and has not seen any adverse trends in its accounts receivable aging.

Results of Operations

Three Months Ended September 30, 2008, Compared with Three Months Ended
September 30, 2007

Revenues

The following table presents BNSF's revenue information by business group for
the three months ended September 30, 2008 and 2007.

                                      Revenues               Cars / Units            Average Revenue
                                    (in millions)           (in thousands)           Per Car / Unit
                                  2008        2007         2008        2007         2008         2007

     Consumer Products          $ 1,686     $ 1,455        1,254       1,307     $  1,344      $ 1,113
     Industrial Products          1,124         962          420         431        2,676        2,232
     Coal                         1,047         849          645         627        1,623        1,354
     Agricultural Products          909         682          271         265        3,354        2,574
     Total Freight Revenues       4,766       3,948        2,590       2,630     $  1,840      $ 1,501
     Other Revenues                 140         121
     Total Operating Revenues   $ 4,906     $ 4,069

Freight revenues for the third quarter of 2008 were $4,766 million, up 21 percent compared with the same 2007 period, on a 2-percent decline in unit volumes. Freight revenues included an increase of approximately $570 million in fuel surcharges compared with the same 2007 period. Average revenue per car/unit was up 23 percent in the third quarter of 2008 from the third quarter of 2007 primarily due to fuel surcharges as well as improved pricing.

     Consumer Products

The Consumer Products' freight business
includes a significant intermodal component
and consists of the following three business
areas: international intermodal, domestic
intermodal and automotive.

Consumer Products revenues of $1,686 million  [[Image Removed: graphic]]
for the third quarter of 2008 were $231
million, or 16 percent, greater than the
third quarter of 2007. This reflects
increased fuel surcharges, improved yields
and increased domestic intermodal traffic,
partially offset by lower international
volumes resulting from economic softness.

     Industrial Products

Industrial Products' freight business
consists of five business areas:
construction products, building products,
petroleum products, chemicals and plastic
products and food and beverages.

Industrial Products revenues of $1,124        [[Image Removed: graphic]]
million for the third quarter of 2008 were
$162 million, or 17 percent, greater than
the third quarter of 2007. Higher fuel
surcharges, improved yields and increased
demand for construction products more than
offset the lower unit volumes for both
building products and chemicals and plastic
products.

Coal

BNSF is one of the largest transporters of low-sulfur coal in the United States. More than 90 percent of all BNSF's coal tons originate from the Powder River Basin of Wyoming and Montana.

Coal revenues rose $198 million, or 23 percent, to $1,047 million for the third quarter of 2008 compared with the same 2007 period as a result of higher fuel surcharges, contractual inflation escalators, increased unit volumes, and improved yields. Strong coal unit volumes were driven by organic growth of existing customers and new eastern conversion.

Agricultural Products

The Agricultural Products' freight business transports agricultural products including corn, wheat, soybeans, bulk foods, ethanol, fertilizer and other products.

Agricultural Products revenues increased $227 [[Image Removed: graphic]] million, or 33 percent, to $909 million for the third quarter of 2008. This increase was primarily due to higher fuel surcharges, improved yields and increased unit volumes in ethanol, corn and feeds.

Other Revenues

Other revenues increased $19 million, or 16 percent, to $140 million for the third quarter of 2008. This was primarily due to an increase of about $15 million, or 30 percent, to about $70 million in BNSF Logistics revenues. The increase in BNSF Logistics revenues was primarily driven by acquisitions. BNSF Logistics is a wholly-owned, third-party logistics company.

Expenses

Total operating expenses for the third quarter of 2008 were $3,699 million, an increase of $631 million, or 21 percent, versus the same period in 2007.

Fuel

Fuel expense is driven by market price, the level of locomotive consumption of diesel fuel and the effects of hedging activities. Substantially all fuel expense consists of fuel used in locomotives for transportation services. Fuel expense also includes non-locomotive fuel-related costs such as fuel used in vehicles (maintenance of way and other vehicles/equipment), fuel used in refrigerated cars, intermodal facilities fuel and fuel-based products used in servicing locomotives.

Fuel expenses of $1,349 million for the third quarter of 2008 were $501 million higher than the third quarter of 2007. The increase in fuel expense was primarily due to an increase in the average all-in cost per gallon of locomotive diesel fuel. The average all-in cost per gallon of locomotive diesel fuel increased by $1.41 to $3.72, resulting in a $492 million increase in expense. The increase in the average all-in cost reflected an increase in the average purchase price per gallon of $1.44, or a $502 million increase in locomotive fuel expense, offset by an increase in the hedge benefit of 3 cents per gallon, or $10 million (third-quarter 2008 benefit of $11 million less third-quarter 2007 benefit of $1 million). Locomotive fuel consumption in the third quarter of 2008 decreased by 4 million gallons to 349 million gallons, when compared with consumption in the same 2007 period.

Compensation and benefits

Compensation and benefits includes expenses for BNSF employee wages, health and welfare, payroll taxes and other related items. The primary factors influencing the expenses recorded are volume, headcount, utilization, wage rates, incentives earned during the period, benefit plan participation and pension expenses.

Compensation and benefits expenses of $1,013 million in the third quarter of 2008 were $76 million, or 8 percent, higher than the same prior year period. This increase was primarily related to higher incentive compensation costs, which covers all non-union and about 25 percent of union employees. Wage inflation was partially offset by improved productivity. The average number of employees decreased 1 percent compared to the third quarter of 2007.

Purchased services

Purchased services expense includes ramping (lifting of containers onto and off of cars); drayage (highway movements to and from railway facilities); maintenance of locomotives, freight cars and equipment; transportation costs over other railroads; technology services outsourcing; professional services; and other contract services provided to BNSF. Purchased services expense also includes purchased transportation costs for BNSF Logistics. The expenses are driven by the rates established in the related contracts and the volume of services required.

Purchased service expenses of $537 million for the third quarter of 2008 were $36 million, or 7 percent, higher than the third quarter of 2007. About 40 percent of the increase was due to purchased transportation costs for BNSF Logistics, which increased about $15 million to about $60 million for the third quarter of 2008. BNSF Logistics revenues, which are recorded in other revenues, were about $10 million higher than these costs. The remainder was due to increased haulage payments for transportation over other railroads as well as higher freight car and locomotive contract maintenance expense.

Depreciation and amortization

Depreciation and amortization expenses for the period are determined by using the group method of depreciation, which applies a single rate to the gross investment in a particular class of property. Due to the capital-intensive nature of BNSF's operations, depreciation expense is a significant component of the Company's operating expenses. The full effect of inflation is not reflected in operating expenses because depreciation is based on historical cost.

Depreciation and amortization expenses of $349 million for the third quarter of 2008 were $25 million, or 8 percent, higher than the same period in 2007. This increase in depreciation expense was primarily due to continuing capital expenditures and updated depreciation rates for other roadway property that went into effect in April 2008.

Equipment rents

Equipment rents expense includes long-term and short-term payments primarily for locomotives, freight cars, containers and trailers. The expense is driven primarily by volume, lease and rental rates, utilization of equipment and changes in business mix resulting in equipment usage variances.

Equipment rents expenses of $230 million decreased $5 million, or 2 percent, compared to the third quarter of 2007 due to lower volumes, improved velocity and increased asset utilization.

Materials and other

Material expenses consist mainly of the costs involved to purchase mechanical and engineering materials, in addition to other items for maintenance of property and equipment. Other expenses principally include personal injury claims, environmental remediation and derailments as well as utilities, locomotive overhauls, property and miscellaneous taxes and employee separation costs. The total is offset by gains on land sales and insurance recoveries.

Materials and other expenses of $221 million for the third quarter of 2008 remained relatively flat compared with the third quarter of 2007.

Interest expense

Interest expense of $122 million for the third quarter of 2008 was $10 million, or 8 percent, lower than the third quarter of 2007. This was primarily due to the interest associated with a favorable tax settlement.

Income taxes

The effective tax rate for the three months ended September 30, 2008, was 35.6 percent compared with 38.6 percent for the same prior year period. The decrease in the effective tax rate primarily reflects a favorable tax settlement.

Nine Months Ended September 30, 2008, Compared with Nine Months Ended September 30, 2007

Revenues

  The following table presents BNSF's revenue information by business group for
the nine months ended September 30, 2008 and 2007.

                                  Revenues                Cars / Units            Average Revenue
                                (in millions)            (in thousands)           Per Car / Unit
                              2008         2007         2008        2007         2008         2007

Consumer Products          $  4,643     $  4,167        3,655       3,882     $  1,270      $ 1,073
Industrial Products           3,109        2,758        1,245       1,252        2,497        2,203
Coal                          2,903        2,385        1,868       1,832        1,554        1,302
Agricultural Products         2,603        1,918          817         752        3,186        2,551
Total Freight Revenues       13,258       11,228        7,585       7,718     $  1,748      $ 1,455
Other Revenues                  387          329
Total Operating Revenues   $ 13,645     $ 11,557

Freight revenues for the first nine months of 2008 were $13,258 million, up 18 percent compared with the same 2007 period, while cars/units decreased by 2 percent during this same period. Freight revenues included an increase of approximately $1,250 million in fuel surcharges compared with the same 2007 period. Average revenue per car/unit was up 20 percent in the first nine months of 2008 from the first nine months of 2007 primarily due to fuel surcharges and improved pricing.

Consumer Products

Consumer Products revenues of $4,643 million for the first nine months of 2008 were $476 million, or 11 percent, greater than the first nine months of 2007. This was principally due to higher fuel surcharges, improved yields and increased domestic intermodal traffic, which was partially offset by lower international volumes related to economic softness as well as reduced transpacific service of a large international customer.

Industrial Products

Industrial Products revenues of $3,109 million for the first nine months of 2008 were $351 million, or 13 percent, greater than the first nine months of 2007, due mainly to higher fuel surcharges, improved yields and demand for construction products, which more than offset the decline in building products as a result of weakness in the housing market.

Coal

Coal revenues of $2,903 million for the first nine months of 2008 increased $518 million, or 22 percent, compared with the same 2007 period. The increase was primarily driven by improved yields, contractual inflation escalators, higher fuel surcharges and higher unit volumes. Strong coal unit volumes were driven by organic growth of existing customers as well as new eastern conversion.

Agricultural Products

Agricultural Products revenues of $2,603 million for the first nine months of 2008 were $685 million, or 36 percent, higher than revenues for the first nine months of 2007. This increase was primarily due to improved yields, higher fuel surcharges and strong unit volumes in ethanol, corn and wheat.

Other Revenues

Other revenues increased $58 million, or 18 percent, to $387 million for the first nine months of 2008. This was primarily due to an increase of about $35 million, or 25 percent, to about $175 million in BNSF Logistics revenues and an increase in demurrage charges. The increase in BNSF Logistics revenues was primarily driven by acquisition activities. BNSF Logistics is a wholly-owned, third-party logistics company.

Expenses

Total operating expenses for the first nine months of 2008 were $10,849 million, an increase of $1,828 million, or 20 percent, versus the same 2007 period.

Fuel

Fuel expenses of $3,685 million for the first nine months of 2008 were $1,353 million, or 58 percent, higher than the first nine months of 2007. The increase in fuel expense was primarily due to an increase in the average all-in cost per gallon of locomotive diesel fuel. The average all-in cost per gallon of locomotive diesel fuel increased by $1.24 to $3.33, resulting in a $1,318 million increase in expense. The increase in the average all-in cost reflected an increase in the average purchase price per gallon of $1.26, or a $1,337 million increase in locomotive fuel expenses, offset by an increase in the hedge benefit of 2 cents per gallon, or $19 million (first nine months 2008 benefit of $44 million less first nine months 2007 benefit of $25 million). Locomotive fuel consumption was relatively flat as compared with consumption in the same 2007 period.

Compensation and benefits

Compensation and benefits expenses of $2,947 million for the first nine months of 2008 were $153 million, or 5 percent, higher than the same prior year period. This increase was primarily related to higher incentive compensation costs, which covers all non-union and about 25 percent of union employees. Wage inflation was partially offset by improved productivity. The average number of employees decreased 1 percent compared to the first nine months of 2007.

Purchased services

Purchased services expenses of $1,602 million for the first nine months of 2008 were $92 million, or 6 percent, higher than the same 2007 period. This increase was partially due to purchased transportation costs for BNSF Logistics, which increased about $30 million to about $145 million. Haulage payments for transportation over other railroads and locomotive and freight car contract maintenance expense contributed to the increase as well.

Depreciation and amortization

Depreciation and amortization expenses of $1,039 million for the first nine months of 2008 were $86 million, or 9 percent, higher than the same period in 2007. This increase in depreciation expense was primarily due to continuing capital expenditures, updated depreciation rates for locomotives that went into effect in April 2007 and updated depreciation rates for other roadway property that went into effect in April 2008.

Equipment rents

Equipment rents expenses of $683 million for the first nine months of 2008 were $21 million, or 3 percent, lower than the first nine months of 2007 due to lower volumes, improved velocity and increased asset utilization.

Materials and other

Materials and other expenses of $893 million for the first nine months of 2008 were $165 million, or 23 percent, higher than the first nine months of 2007. The increase was primarily due to higher environmental costs.

Interest expense

Interest expense of $396 million for the first nine months of 2008 was $11 million, or 3 percent, higher than the same 2007 period. This was primarily due to a higher average debt balance, offset by the interest associated with a favorable tax settlement.

Income taxes

The effective tax rate for the nine months ended September 30, 2008, was 37.2 percent compared with 38.5 percent for the same prior year period. The decrease in the effective tax rate primarily reflects a favorable tax settlement.

Liquidity and Capital Resources

Liquidity is a company's ability to generate cash flows to satisfy current and future obligations. Cash generated from operations is BNSF's principal source of liquidity. BNSF generally funds any additional liquidity requirements through debt issuance, including commercial paper, through leasing of assets and through the sale of a portion of its accounts receivable.

Operating Activities

Net cash provided by operating activities was $3,303 million for the nine months ended September 30, 2008, compared with $2,465 million for the nine months ended September 30, 2007. The increase was primarily the result of changes in working capital, including $378 million related to increased utilization of the Company's accounts receivable sales program, as well as higher income before depreciation and amortization.

Investing Activities

Net cash used for investing activities was $2,381 million for the nine months ended September 30, 2008, compared with $2,111 million for the nine months ended September 30, 2007. The increase in cash used for investing activities primarily reflects an increase in other investing activities due to the timing of equipment financing activities, partially offset by a decrease in cash capital expenditures. The following table presents a breakdown of cash capital expenditures for the nine months ended September 30, 2008 and 2007 (in millions):

          Nine Months Ended September 30,                 2008        2007
          Engineering                                   $ 1,207     $ 1,088
          Mechanical                                        116         102
          Other                                             100          74
          Total Replacement Capital                       1,423       1,264
          Information Services                               71          49
          New Locomotive and Freight Car Acquisitions         8           -
          Terminal and Line Expansion                       210         462
          Total                                         $ 1,712     $ 1,775

The table above does not include expenditures for equipment financed through operating leases (principally related to rolling stock).

Financing Activities

Nine Months Ended September 30, 2008

Net cash used for financing activities during the first nine months of 2008 was $776 million, primarily related to common stock repurchases of $878 million, including $60 million to satisfy tax withholding obligations for stock option exercises, and dividend payments of $334 million, which were partially offset by net debt borrowings of $215 million, excess tax benefits from equity compensation plans of $90 million, proceeds from stock options exercised of $87 million and proceeds from a facility financing obligation of $50 million.

Aggregate debt due to mature within one year was $403 million. BNSF's ratio of net debt to total capitalization was 41.5 percent at September 30, 2008, compared with 41.2 percent at December 31, 2007. The Company's adjusted net debt to total capitalization was 51.6 percent at September 30, 2008, compared with 51.8 percent at December 31, 2007. BNSF's adjusted net debt to total capitalization is a non-GAAP measure and should be considered in addition to, but not as a substitute for or preferable to, the information prepared in accordance with GAAP. However, management believes that adjusted net debt to total capitalization provides meaningful additional information about the ability of BNSF to service long-term debt and other fixed obligations and to fund future growth.

The following table presents a reconciliation of the calculation of adjusted net debt to total capitalization percentage:

                                                                     September             December
                                                                        30,                  31,
                                                                       2008                  2007
Net debt to total capitalization a                                        41.5 %               41.2 %
Adjustment for long-term operating leasesb                                 9.8                 10.5
Adjustment for other debt equivalents c                                    0.6                  0.5
Adjustment for unfunded pension and retiree health and
welfare liability                                                          0.7                  0.7
Adjustment for junior subordinated notes d                                (1.0 )               (1.1 )
Adjusted net debt to total capitalization                                 51.6 %               51.8 %

In March 2008, BNSF issued $650 million of 5.75 percent notes due March 15, 2018. The net proceeds from the sale of the notes are being used for general corporate purposes including, but not limited to, working capital, capital expenditures, repurchase of our common stock pursuant to our share repurchase program and repayment of commercial paper.

In April 2008, the Board authorized an additional $850 million of debt securities that may be issued through the SEC debt shelf registration process, for a total of $1 billion authorized to be issued as of September 30, 2008.

The Company has commenced the construction of an intermodal facility that it intends to sell to a third party and subsequently lease back. Once construction of the facility is complete and all improvements have been sold to the third party, BNSF will lease the facility from the third party for 20 years. Construction is expected to be completed in 2009 with an approximate cost of $160 million. During the first nine months of 2008, the Company sold $50 million of completed improvements, bringing the total sold to date to $91 million. This sale leaseback transaction is being accounted for as a financing obligation due to continuing involvement. The outflows from the construction of the facility are classified as investing activities, and the inflows from the associated financing proceeds are classified as financing activities in the Company's Consolidated Statements of Cash Flows.

. . .